author: BUTZNER, Circuit Judge: FIELD, Circuit Judge

text:
    Johnnie Edward JOYNER, Individually and as Editor-in-Chief of the Campus Echo; Harvey Lee White, Individually and as President of the Student Government Association; and both of them in behalf of all persons similarly situated, Appellants, v. Albert N. WHITING, President of North Carolina Central University, individually and in his official capacity, Appellee.
    No. 72-1630.
    United States Court of Appeals, Fourth Circuit.
    Argued Nov. 2, 1972.
    Decided April 10, 1973.

      Professor Daniel H. Pollitt, Chapel Hill, N. C. (Norman B. Smith, Smith, Patterson, Follin & Curtis, Greensboro, N. C., James V. Rowan, and Paul, Keenan & Rowan, Durham, N. C., on brief), for appellants.
    Burley B. Mitchell, Jr., Asst. Atty. Gen. (Robert Morgan, Atty. Gen. of North Carolina, on brief), for appellee.
    John R. Jordan, Jr., Raleigh, N. C. (Jordan, Morris & Hoke, Raleigh, N. C., on brief), amicus curiae, Board of Governors of University of North Carolina; Professor William W. Van Alstyne, Durham, N. C., amicus curiae.
    Before HAYNSWORTH, Chief Judge, and BUTZNER and FIELD, Circuit Judges.
   BUTZNER, Circuit Judge:

Johnnie Edward Joyner, editor of the Campus Echo, the official student newspaper of North Carolina Central University, and Harvey Lee White, president of the university’s student government association, appeal from an order of the district court, which (a) denied their application for declaratory and injunctive relief to secure reinstatement of financial support for the Echo, and (b) permanently enjoined Albert N. Whiting, president of the university, and his successors in office, from granting future financial support to any campus newspaper. Joyner v. Whiting, 341 F.Supp. 1244 (M.D.N.C.1972). Joyner and White assert that the decree violates the First and Fourteenth Amendments. President Whiting urges affirmance on the ground that the paper’s segregationist editorial policy and racially discriminatory practices violate the Fourteenth Amendment and the Civil Rights Act of 1964. We reverse because the president’s irrevocable withdrawal of financial support from the Echo and the court’s decree reinforcing this action abridge the freedom of the press in violation of the First Amendment.

I

EDITORIAL COMMENT

The first issue of the Echo under Joyner’s editorship published a banner headline on the front page that asked, “Is NCCU Still a Black School,” and an article entitled, “Look and You Shall See,” which stated in part:

“There is a rapidly growing white papulation on our campus.
. . . .
“We want to know why they are here. How many are here? Why more and more come every year (by the hundreds)?
. . . .
“But I think that the reason we will be taken over so quickly and so easily is our fault.
“Black students on this campus have never made it clear to those people that we are indeed separate from them, in so many ways, and wish to remain so. And until we assume the role of a strong, proud people we will continue to be co-opted. Until we chose to make this clear, by any means necessary, the same thing will continue to happen ....
“I maintain that we must pick up the cry of Frantz Fanan who has said, ‘Each generation must discover its mission, fulfill it or betray it.’ And the words of H. Rap Brown, T do what I must out of the love for my people. My will is to fight. Resistance is not enough. Aggression is the order of the day.’ And more over that we take nothing from the oppressor, but only in turn get that which is ours.
“Now will you tell me, whose institution is NCCU? Theirs? Or ours?”

In addition, the paper contained a survey of student opinion which reflected strong opposition to the admission of white students.

President Whiting responded with the following letter to Joyner:

“In my view the September 16 issue of the Campus Echo does not meet standard journalistic criteria nor does it represent fairly the full spectrum of views on this campus. Because of this, I am writing to advise that funds for the publication of additional issues will be withheld until agreement can be reached regarding the standards to which further publications will adhere.
“If consensus cannot be established then this University will not sponsor a campus newspaper. That portion of remaining funds collected or allocated to the Campus Echo budget will accrue to the credit of all contributing students for this school year.”

Despite a meeting to resolve the differences, no agreement could be reached. The president’s counsel then advised him that because North Carolina Central University is a state institution he could not constitutionally refuse to financially support the newspaper if his refusal was contingent on the paper’s meeting journalistic standards or other subjective criteria. Accordingly, acting on advice of counsel, the president irrevocably terminated the paper’s financial support and refunded to each student the pro rata share of the activities fee previously allocated to the Echo. The president took no action to bar Joyner, or any other student, from publishing and circulating a privately funded newspaper on the campus. Indeed, several issues of the Echo were published without the university’s financial support, but it became apparent that the paper could not survive unless it received its usual subsidy from the student activities fees;

Fortunately, we travel through well charted waters to determine whether the permanent denial of financial support to the newspaper because of its editorial policy abridged the freedom of the press. The First Amendment is fully applicable to the states, Gitlow v. New York, 268 U.S. 652, 666, 45 S.Ct. 625, 69 L.Ed. 1138 (1925); Stromberg v. California, 283 U.S. 359, 368, 51 S.Ct. 532, 75 L.Ed. 1117 (1931), and precedent establishes “that state colleges and universities are not enclaves immune from [its] sweep.” A college, acting “as the instrumentality of the State, may not restrict speech . simply because it finds the views expressed by any group to be abhorrent.” Healy v. James, 408 U.S. 169, 180, 187, 92 S.Ct. 2338, 2345, 2349, 33 L.Ed.2d 266 (1972); see Wright, The Constitution on the Campus, 22 Vand.L.Rev. 1027, 1037 (1969). It may well be that a college need not establish a campus newspaper, or, if a paper has been established, the college may permanently discontinue publication for reasons wholly unrelated to the First Amendment. But if a college has a student newspaper, its publication cannot be suppressed because college officials dislike its editorial comment. Panarella v. Birenbaum, 37 A.D.2d 987, 327 N.Y.S.2d 755, 757 (1971); cf. Danskin v. San Diego Unified School Dist., 28 Cal.2d 536, 171 P.2d 885, 892 (1946). This rule is but a simple extension of the precept that freedom of expression may not be infringed by denying a privilege. Sherbert v. Verner, 374 U.S. 398, 404, 83 S.Ct. 1790, 10 L.Ed.2d 965 (1963).

The principles reaffirmed in Healy have been extensively applied to strike down every form of censorship of student publications at state-supported institutions. Censorship of constitutionally protected expression cannot be imposed by suspending the editors, suppressing circulation, requiring imprimatur of controversial articles, excising repugnant material, withdrawing financial support, or asserting any other form of censorial oversight based on the institution’s power of the purse.

But the freedom of the press enjoyed by students is not absolute or unfettered. Students, like all other citizens, are forbidden advocacy which “is directed to inciting or producing imminent lawless action and is likely to incite or produce such action.” See Brandenburg v. Ohio, 395 U.S. 444, 447, 89 S.Ct. 1827, 1829, 23 L.Ed.2d 430 (1969). Tinker v. Des Moines Ind. Community School Dist., 393 U.S. 503, 513, 89 S.Ct. 733, 740, 21 L.Ed.2d 731 (1969), expressly limits the free and unrestricted expression of opinion in schools to instances where it does not “materially and substantially interfere with the requirements of appropriate discipline in the operation of the school.” We previously considered these limitations in Quarterman v. Byrd, 453 F.2d 54, 58 (4th Cir. 1971):

“Specifically, school authorities may by appropriate regulation, exercise prior restraint upon publications distributed on school premises during school hours in those special circumstances where they can ‘reasonably “forecast substantial disruption of or material interference with school activities” ’ on account of the distribution of such printed material.”

In his brief President Whiting acknowledges that there does not appear to have been any danger of physical violence or disruption at the university because of the publication of the Echo. The record, of course, does disclose that the paper’s message of racial devisiveness and antagonism was distasteful to the president, and it may well have offended other members of the university community. However, no white faculty members or students complained that the paper’s editorial policy incited anybody at the university to harass or interfere with them. The case, therefore, does not present a situation that Brandenburg, Tinker, and Quarterman recognize as justifying restriction of free expression.

As a foundation for its decree, the district court fashioned a unique exception to the well established body of law dealing with censorship of college newspapers. Describing the Echo as a state agency, the court upheld the termination of its funding by the university on the ground that the Fourteenth Amendment and Civil Rights Act of 1964 bar a state agency from spending state funds to discourage racial integration of the university “by a program of harassment, discourtesy, and indicia of unwelcome.”

Censorship of the paper cannot be sustained on the court’s theory. The record contains no proof that the editorial policy of the paper incited harassment, violence, or interference with white students and faculty. At the most, the editorial comments advocated racial segregation contrary to the Fourteenth Amendment and the Civil Rights Act of 1964. The court’s rationale disregards the distinction between the First Amendment’s clause prohibiting the establishment of religion and its clause protecting freedom of the press. Neither federal nor state governments may expend funds to establish a religion. The First Amendment, however, contains no similar ban against speech or press. Both governments may spend money to publish the positions they take on controversial subjects. The speeches and publications that originate in government offices attest to the diversity of views that are freely expounded. But under the rule that President Whiting urges us to affirm, no state official could use his office to criticize, as the editor of the Echo did, government policy on race relations with which he disagrees. We need not decide whether the Echo is a state agency; it is enough to say that even if it were, it would not be prohibited from expressing its hostility to racial integration. The Fourteenth Amendment and the Civil Rights Act proscribe state action that denies the equal protection of the laws, not state advocacy. To be sure, the line between action and advocacy may sometimes be difficult to draw, but it is clear that nothing written in the Echo crossed it.

A college newspaper’s freedom from censorship does not necessarily imply that its facilities are the editor’s private domain. When a college paper receives a subsidy from the state, there are strong arguments for insisting that its columns be open to the expression of contrary views and that its publication enhance, not inhibit, free speech. Cf. Red Lion Broadcasting Co., Inc. v. FCC, 395 U.S. 367, 390, 89 S.Ct. 1794, 23 L.Ed.2d 371 (1969). However, this case provides no occasion for formulating a principle akin to the fairness doctrine for the college press. The record does not disclose that Joyner rejected any articles that were opposed to his editorial policy, and President Whiting does not claim the paper refused to publish his pro-integration plea.

The president, emphasizing that the students are still free to publish and circulate a newspaper on the campus without university support, protests that the denial of financial support cannot be considered censorship because it is permanent. Permanency, he suggests, does not link the ebb and flow of funds with disapproval or approval of editorial policy. Absent this correlation, he claims, there is no censorship. But this argument overlooks the fact that one of the reasons for the president’s withdrawal of funds was his displeasure with the paper’s editorial policy. The abridgement of freedom of the press is nonetheless real because it is permanent. Freedom of the press cannot be preserved, as Mr. Justice Frankfurter noted, by prohibitions calculated “to burn the house to roast the pig.” Butler v. Michigan, 352 U.S. 380, 383, 77 S.Ct. 524, 526, 1 L.Ed. 2d 412 (1957). The president has failed to carry the “heavy burden of showing justification for the imposition of” a prior restraint on expression. Organization for a Better Austin v. Keefe, 402 U.S. 415, 419, 91 S.Ct. 1575, 29 L.Ed.2d 1 (1971). He has proved only that he considers the paper’s editorial comment to be abhorrent, contrary to the university’s policy, and inconsistant with constitutional and statutory guarantees of equality. This is plainly insufficient. Healy v. James, 408 U.S. 169, 187, 92 S.Ct. 2338, 33 L.Ed.2d 266 (1972); cf. Brandenburg v. Ohio, 395 U.S. 444, 449, 89 S.Ct. 1827, 23 L.Ed.2d 430 (1969).

Similarly, the district court’s permanent injunction against the university’s funding of the paper cannot stand. The court’s grant of the injunction was intended to protect the student press by eliminating the inducement of future financial support “as a possible method for censorship.” But the proper remedy against censorship is restraint of the censor, not suppression of the press. A court, no less than the executive and the legislature, must defer to the First Amendment. Twice in the history of the nation the Supreme Court has reviewed injunctions that imposed prior restraints on the publication of newspapers, and twice the Court has held the restraints to be unconstitutional. New York Times Co. v. United States, 403 U.S. 713, 91 S.Ct. 2140, 29 L.Ed.2d 822 (1971); Near v. Minnesota, 283 U.S. 697, 51 S.Ct. 625, 75 L.Ed. 1357 (1931). In both instances the proof was insufficient to overcome the presumption of unconstitutionality under which prior restraint of expression labors. Because this case is marked by the same defect, the injunction must be dissolved.

II

DISCRIMINATORY PRACTICES

Early in September of 1971, Joyner, who had been elected editor the previous spring, told the Echo’s faculty advisor that the paper would be black-oriented and that neither whites nor foreigners would be allowed to serve as staff members. The first edition of the paper under Joyner’s editorship, published later in the month, contained a notice that the paper would not carry advertising for white merchants.

The president asserts that the Echo is an agency of the state, and that continued financial support of the paper despite its discriminatory practices would violate the equal protection clause of the Fourteenth Amendment and Title VI of the Civil Rights Act of 1964. In contrast, the Board of Governors of the University of North Carolina takes the position that the Echo is not an agency of the state, but it justifies the president’s withholding of funds as a permissible means of enforcing a valid campus regulation proscribing racial discrimination.

We need not choose between these theories. Under both of them, the president was justified in prohibiting racial discrimination in staffing the newspaper and accepting advertising. The equal protection clause forbids racial discrimination in extracurricular activities of a state-supported institution. United States v. Jefferson County Bd. of Educ., 372 F.2d 836, 899 (5th Cir. 1966), cert. denied, 389 U.S. 840, 88 S.Ct. 67, 19 L.Ed.2d 103 (1967), and freedom of the press furnishes no shield for discrimination in advertising. United States v. Hunter, 459 F.2d 205, 211 (4th Cir.), cert. denied, 409 U.S. 934, 93 S.Ct. 235, 34 L.Ed.2d 189 (1972); cf. Lee v. Board of Regents, 441 F.2d 1257 (7th Cir. 1971). Even if the Echo is not, strictly speaking, an agency of North Carolina, the president was not powerless to act. Campus organizations claiming First Amendment rights must comply with valid campus regulations, Healy v. James, 408 U.S. 169, 191, 92 S.Ct. 2338, 33 L.Ed.2d 266 (1972), and the state, acting through the president, possesses adequate power to promulgate and enforce rules prohibiting discrimination. Railway Mail Ass’n v. Corsi, 326 U.S. 88, 65 S.Ct. 1483, 89 L.Ed. 2072 (1945).

It does not follow, however, that the appropriate remedy for the paper’s racial discrimination was the permanent cessation of financial support. During a meeting with the president after suspension of financing, Joyner disavowed his black only staff policy. Moreover, the second issue of the Echo carried a notice repudiating its statement that it would not accept any more business from white advertisers. Henceforth, the notice said, the Echo will “only accept ads from white businesses that employ on an equal opportunity basis.”

We cannot accept the contention pressed by Joyner and the Board of Governors that the issues of discrimination in staffing and advertising are now moot. Neither the president nor the district court were required to give credence to the disavowal of the discriminatory practices, and, as the president points out, the paper is still free to take ads from black businesses which are not equal opportunity employers. Therefore, on remand, the president should be afforded an opportunity to amend his pleadings to apply for relief against discriminatory practices in staffing and advertising. If he does, the district court should determine whether “there exists some cognizable danger of recurrent violation.” United States v. W. T. Grant Co., 345 U.S. 629, 633, 73 S.Ct. 894, 898, 97 L.Ed. 1303 (1953). If the court finds that this danger exists, it may enjoin these discriminatory practices.

The permanent withdrawal of funds, however, is not an appropriate remedy. While the state may suppress speech when it is thoroughly enmeshed with unlawful conduct, Milk Wagon Drivers’ Union v. Meadowmoor Dairies, Inc., 312 U.S. 287, 61 S.Ct. 552, 85 L.Ed. 836 (1941), this record fails to disclose that the discriminatory staffing and advertising policies are inextricably related to the news and editorial content of the paper. To comply with the First Amendment, the remedy must be narrowly drawn to rectify only the discrimination in staffing and advertising. Cf. Youngdahl v. Rainfair, Inc., 355 U.S. 131, 78 S.Ct. 206, 2 L.Ed.2d 151 (1957).

Ill

Two other matters require but brief comment. The parties have argued about the right of a student to resist having a part of his student activities fee allocated to the Echo. Cf. International Ass’n of Machinists v. Street, 367 U.S. 740, 81 S.Ct. 1784, 6 L.Ed.2d 1141 (1961). This issue is speculative. No student has protested that he was compelled to subscribe to the paper. We, therefore, express no opinion concerning this aspect of the case.

The second issue which we do not reach is the contention that the students have been denied the equal protection of the laws because eleven other state supported universities in North Carolina sponsor college newspapers. In view of our disposition of the case, we find it unnecessary to consider this alternative ground for relief.

The judgment of the district court is reversed, and the injunction which- it entered is dissolved. This ease is remanded for the entry of a declaratory judgment consistent with this opinion. In the exercise of its sound discretion, the district court may grant or withhold injunctive relief. See Antonelli v. Hammond, 308 F.Supp. 1329, 1338 (D.Mass.1970).

FIELD, Circuit Judge

(dissenting in part):

The high regard I have for my brothers of the majority makes me somewhat hesitant to dissent, but I simply do not see this case as they apparently do. No one would now question that the eonstitutional freedoms of speech and press guaranteed by the First Amendment protect the students of our colleges and universities from unreasonable administrative interference, and the school authorities may not restrict the students’ freedom of speech merely because they find the views expressed to be abhorrent. Healy v. James, 408 U.S. 169, 92 S.Ct. 2338, 33 L.Ed.2d 266 (1972), and the related authorities in this area cited by the majority solidly support this principle. However, as pointed out by Professor Van Alstyne in his amicus brief, the issue in this case does not involve the more familiar form of abridgment by restriction of expression of opinion by the students as individuals either on or off the campus of NCCU, nor does it present the case where financial support of the college newspaper was temporarily withheld for the purpose of inducing editorial policies acceptable to the administration. Cf. Antonelli v. Hammond, 308 F.Supp. 1329 (D.C.Mass.1970).

The issue as I see it is whether President Whiting had the right if not, indeed, the duty to terminate the University’s subsidy of the Echo when he had reasonable grounds to believe that the newspaper was engaged in conduct which was violative of the Constitution and laws of the United States and which, under the circumstances, jeopardized the University’s participation in the various federal funding programs necessary to its operation. I submit that President Whiting’s decision on this basis to irrevocably discontinue the subsidy to avoid future involvement in the terms of the school’s possible responsibility for the editorial content of the Echo, coupled with the express disavowal on his part that the subsidy might be renewed in the event the newspaper would accede to acceptable “journalistic standards” or other subjective criteria, violated no First Amendment rights of the plaintiffs, and that the conclusion of the district court on the primary issue in this ease was correct.

Referring to the action of the district judge in upholding the termination of the subsidy on the theory that the racist editorial policy of Joyner was violative of the Fourteenth Amendment and the Civil Rights Act of 1964, the majority suggests that he “fashioned a unique exception to the well established body of law dealing with censorship of college newspapers” which cannot be sustained. In all deference, I suggest that there was nothing unique about the rationale of the district court’s decision and that it finds solid support in law and in fact.

For almost two decades since Brown v. Board of Education, 347 U.S. 483, 74 S.Ct. 686, 98 L.Ed 873 (1954), the school authorities of this country have been “clearly charged with the affirmative duty to take whatever steps might be necessary to convert to a unitary system in which racial discrimination would be eliminated root and branch.” Green v. County School Board, 391 U.S. 430 (1968) at 437-438, 88 S.Ct. 1689 at 1694, 20 L.Ed.2d 716. It is an understatement to say that the transition from segregated schools to a non-raeial system of public education has not been a simple task, and this is especially true for an educator in the position of President Whiting confronted with the delicate responsibility of converting a previously all black university into an integrated educational facility.

The constitutional responsibility to eliminate racial discrimination articulated by the courts has received substantial support from the Congress of the United States, and the national policy against support for segregated education emerged in provisions adopted by the Congress in the Civil Rights Act of 1964. Title VI, Section 601 of the Act, 42 U.S.C. § 2000d, provides that “[n]o person in the United States shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance.” Section 602 of the Act, 42 U.S.C. § 2000d-1 directs each federal agency administering programs of financial assistance to take action by rule, regulation or order to effectuate the principles of Section 601, and to effect compliance with those requirements under this section an agency is authorized to terminate or refuse to grant assistance under a program to any recipient as to whom there has been a finding of a failure to comply with such requirements.

It is in the context of this background that President Whiting’s action should properly be appraised. The majority states that Joyner’s message of racial divisiveness and hostility was distasteful to Whiting. This may well be true, but the record clearly shows that the reason for the termination of the subsidy was not President Whiting’s personal displeasure with the editorial policy of the Echo but his fear, based upon the advice of the Attorney General of North Carolina, that continued support of the student newspaper could be construed as “state action” in the context of the various civil rights acts passed by the Congress as well as the Federal Constitution. Whiting's apprehension that continued subsidization might jeopardize the University’s federal funding was well founded for the federal agencies have not hesitated to act pursuant to Section 602 of the Civil Rights Act and terminate federal assistance where the authorities of a state have failed to take affirmative action to eliminate discrimination in its schools. State of Georgia v. Mitchell, 450 F.2d 1317 (C.A.D.C. 1971); see also, Green v. Connally, 330 F.Supp. 1150 (D.C.D.C.1971), aff’d per curiam sub nom., Coit et al. v. Green et al., 404 U.S. 997, 92 S.Ct. 564, 30 L.Ed. 2d 550 (1971).

Unquestionably the activities of the Echo, subsidized as it was by the University, constituted “state action” in the area of civil rights, Lee v. Board of Regents of State Colleges, 441 F.2d 1257 (7 Cir. 1971); Zucker v. Panitz, 299 F.Supp. 102 (S.D.N.Y.1969); Panarella v. Birenbaum, 37 A.D.2d 987, 327 N.Y.S.2d 755 (1971), and if its editorial content was violative of Federal Constitutional or statutory proscriptions, the responsibility necessarily would fall squarely on NCCU. It should be borne in mind that we are not dealing here with a “letter to the editor” nor a casual news article or student poll. What we have before us is the lead editorial in the first issue of the subsidized house organ of NCCU greeting the matriculating students with a clear and violent statement of policy which the district court found to be designed to discourage racial integration of the University “by a program of harassment, discourtesy and indicia of unwelcome.” The majority disposes of this finding, however, with the observation that the record fails to show that the editorial policy incited harassment, violence or interference with white students. Conceding that the editorial advocated racial segregation contrary to the Fourteenth Amendment and the Civil Rights Act of 1964, my brothers would countenance it on the ground that it was not proscribed “state action” but was acceptable “state advocacy.” I must confess I find the import of this statement somewhat obscure and, assuredly, of questionable validity on the issue before us.

In Smith v. St. Tammany Parish School Board, 316 F.Supp. 1174 (D.C.E.D.La.1970), aff’d, 448 F.2d 414 (5 Cir. 1971), the district court ordered all Confederate flags as well as other symbols of racism removed from the schools with this observation at page 1176:

“In this connection, the principal of the Covington High School understands today’s symbolism of the Confederate battle flag as well as he understands the symbolism of a Black Panther or a Black Power flag. But none of these flags are constitutionally permissible in a unitary school system where both white and black students attend school together. At the moment, the Covington principal insists on the display of the Confederate battle flag; but the display of the flag is an affront to every Negro student in the school, just as the display of the Black Panther flag would be an affront to every white student in a school whose principal was a Negro. * * * The retention of Confederate flags in a unitary school system is no way to eliminate racial discrimination ‘root and branch’ from the system.”

I respectfully suggest that Mr. Joyner’s editorial policy was at least as much of an affront to the white minority of NCCU as the Confederate flag was to the black students of St. Tammany Parish. Whether we label it “advocacy” or “action,” the Echo’s editorial policy was violative of the Fourteenth Amendment and the Civil Rights Act of 1964, and President Whiting acted reasonably and responsibly in irrevocably terminating the subsidy and removing the imprimatur of the University from Joyner’s racist views.

I, of course, am in agreement with the views expressed by the majority relative to the discriminatory staffing and advertising policies of the Echo under Joyner’s leadership. I also agree that the district court’s permanent injunction against the future funding of any newspaper at NCCU was improper. While this action of the court was designed to eliminate the possibility of the use of such support in the future “as a possible • method of censorship,” such an anticipatory measure was neither necessary nor appropriate in the disposition of this case. Accordingly, I would affirm the court below in its denial of declaratory and injunctive relief to the plaintiffs, and remand the case with directions to dissolve the permanent injunction against possible future funding.

      . The president also circulated the following memorandum to all members of the university community:
      “By now I am certain that most of you have read the September 16 issue of the Campus Echo. Because of the very pronounced critical position taken in this paper regarding integration in the University Community, I feel it my duty as President to indicate clearly and unequivocally what the official policy of the Institution is and will continue to be in accordance with the present law of the land and the State of North Carolina. North Carolina Central University has always been opposed to any policies and practices which deprive any individual of a right or a privilege because of race, color, creed, or national origin. It will not extend recognition to or knowingly affiliate with and condone any group, organization, or association, espousing policies which discriminate on such bases.
      “Because of historical circumstances issuing out of the shameful segregated past this institution is and will continue to be in the foreseeable future predominantly Black or Negro (whichever word one chooses to use here is a.matter of personal' choice). It has had a prideful and heroic educational tradition and in its various forms, from the date of its founding, has contributed significantly and effectively to the development and well-being of those who have had the good fortune to attend. Because of relatively recent social changes, integration on all college and university campuses and, as a matter of fact, in all legitimate schools has become more visible. This is no longer a reversible trend and it is sheer folly to think otherwise. Presently, at North Carolina Central University we have an array of ethnic and racial types but in actuality only a statistically insignificant number of non-Negroes. This notwithstanding, the point that I wish to make is that as a State-Supported Institution especially, but also in terms of what is morally and legally right, this institution is not a ‘Black University’ and does not intend to become one.
      “To those who find this assertion and this fact uncomfortable and/or intolerable I wish to make it perfectly clear that they must, while here, operate within the framework of the University policies regarding this. If this is not possible, then my advice is to seek enrollment and/or employment in institutions where such attitudes are acceptable.
      “In line with this point of view, I am herewith announcing that all funds for the publication of the Campus Echo have been temporarily suspended until consensus can be established regarding the journalistic standards to which this paper will adhere and its role on this campus. If consensus cannot be developed, then the university will no longer sponsor a campus newspaper and that proportion of funds collected and allocated to the budget of the Campus Echo will accrue to the credit of all contributing students for this school' year.”

      . In Danskin, Mr. Justice Traynor dealt with the validity of a school board rule requiring persons seeking use of a school auditorium for meetings, to take an oath renouncing the overthrow of the government by force or unlawful means. In holding that such a requirement violated the First Amendment, he wrote:
      “It is true that the state need not open the doors of a school building as a forum and may at any time choose to close them. Once it opens the doors, however, it cannot demand tickets of admission in the form of convictions and affiliations that it deems acceptable.” 171 P.2d at 892.

      . Scoville v. Board of Educ. of Joliet Tp. H. S. Dist. 204, 425 F.2d 10 (7th Cir.), cert. denied, 400 U.S. 826, 91 S.Ct. 51, 27 L.Ed.2d 55 (1970); Sullivan v. Houston Ind. School Dist., 307 F.Supp. 1328 (S.D.Tex.1969); Dickey v. Alabama State Bd. of Educ., 273 F.Supp. 613 (M.D.Ala.1967).

      . Channing Club v. Board of Regents, 317 F.Supp. 688 (N.D.Tex.1970).

      . Quarterman v. Byrd, 453 F.2d 54 (4th Cir. 1971); Eisner v. Stamford Bd. of Educ., 440 F.2d 803 (2d Cir. 1971); Trujillo v. Love, 322 F.Supp. 1266 (D.Colo.1971); Panarella v. Birenbaum, 37 A.D.2d 987, 327 N.Y.S.2d 755 (1971).

      . Korn v. Elkins, 317 F.Supp. 138 (D.Md. 1970); Zucker v. Panitz, 299 F.Supp. 103 (S.D.N.Y.1969).

      . Korn v. Elkins, 317 F.Supp. 138 (D.Md. 1970); Antonelli v. Hammond, 308 F.Supp. 1329 (D.Mass.1970).

      . Trujillo v. Love, 322 F.Supp. 1266 (D.Colo.1971); Korn v. Elkins, 317 F.Supp. 138 (D.Md.1970); Antonelli v. Hammond, 308 F.Supp. 1329 (D.Mass.1970); Dickey v. Alabama State Bd. of Educ., 273 F.Supp. 613 (M.D.Ala.1967); Panarella v. Birenbaum, 37 A.D.2d 987, 327 N.Y.S.2d 755 (1971); see Developments in the Law-Academic Freedom, 81 Harv.L.Rev. 1045, 1130 (1968): “[Sitate finaneial support alone is not enough to prevent application of the first amendment to student newspapers.”

      . The Board is the governing body of the University of North Carolina system, which includes North Carolina Central University. It filed a brief amicus curiae.

      . The majority apparently recognizes, however, that a university has no constitutional responsibility to establish a campus newspaper. See Dickey v. Alabama State Board of Education, 273 F.Supp. 613, 618 (M.D.Ala.1967); Cf. Danskin v. San Diego Unified School District, 28 Cal.2d 53, 171 P.2d 885, 892 (1946).

      . Neither Joyner nor anyone else was subjected to suspension, expulsion, or any other reprisal; nor as stated by the majority, was there any attempt by President Whiting to suppress the publication or circulation of any privately funded newspaper on the campus. These factors are sufficient to distinguish this case from practically all of the authorities cited by the majority.

      . It should be noted that in a post-subsidy issue of the Echo, Joyner wrote an article relative to the institution of this litigation in the district court which carried the utterly tasteless and offensive headline “So, We took Jm ass to court.” Demonstrating commendable restraint and respect for Joyner’s First Amendment rights of expression, President Whiting took no punitive or repressive action against either Joyner or the publication.

      . The nub of the present controversy becomes more readily apparent if we reverse the circumstances. Suppose that incident to a program of integration, the advent of black students on the campus of a previously all white state-supported university in North Carolina or elsewhere had been greeted by a similar message in the subsidized university newspaper denouncing the admission of blacks to the institution. I submit that this court or any court would have had little difficulty in finding such “advocacy” to be state action which was violative of the law of the land.

      . Even should it be assumed wrguendo that the Echo’s editorial policy was not violative of the law, the record clearly supports the conclusion that President Whiting acted in the reasonable belief that Joyner’s conduct was illegal and, under these circumstances, termination of the subsidy could well be sustained under the rationale of Sellers v. Regents of University of California, 432 F.2d 493 (9 Cir. 1970).


source: Caselaw Access Project

author: GOLDBERG, Circuit Judge:

license: Public Domain

text:
    J. William WOLF et al., Plaintiffs-Appellants-Cross Appellees, v. Robert R. FRANK et al., Defendants-Appellees-Cross Appellants.
    No. 72-2534.
    United States Court of Appeals, Fifth Circuit.
    April 24, 1973.
    Rehearing and Rehearing En Banc Denied June 5, 1973.

      Richard B. Marx, Miami Beach, Fla., Irving M. Wolff, Miami, Fla., for defendants-appellees.
    Howard W. Mazloff, Eugene C. Heiman, Miami, Fla., for plaintiffs-appellants.
    Before RIVES, GOLDBERG and MORGAN, Circuit Judges.
   GOLDBERG, Circuit Judge:

This is an appeal and cross-appeal from a judgment of the United States District Court for the Southern District of Florida awarding plaintiffs, J. William Wolf and Pearl M. Wolf, shareholders of Industrial-Guaranty Bancorp (hereinafter “IGB”), individual and derivative relief from defendants, IGB, Robert R. Frank, Jack H. Stein, and John W. Roberts, Jr., for violations of the Securities Act of 1933, 15 U.S.C. § 77a et seq., and of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. Although not an overly complicated securities ease, its presentation sometimes gives the appearance that the geometry of the case would defy the law that a straight line is the shortest distance between two points. Both plaintiffs and defendants appeal from numerous substantive and procedural aspects of the District Court’s judgment, which deviate from the essentials of the decision. The only claim we find meritorious, however, is plaintiffs’ argument that Mills v. Electric Auto-Lite Co., 1970, 396 U.S. 375, 90 S.Ct. 616, 24 L. Ed.2d 593, entitles them to be reimbursed by IGB for the cost of maintaining this derivative claim. The District Court’s order is therefore affirmed in all things but the denial of plaintiffs’ plea for reimbursement for the costs of maintaining this action.

I. THE OPERATIVE FACTS

The District Court made numerous and detailed findings of fact and conclusions of law that have greatly aided this Court in its resolution of this complex appeal. Not all of these findings and conclusions are involved in this appeal; thus, we here summarize only those matters necessary for an understanding of our disposition of the case.

In early 1969, plaintiff J. William Wolf began discussing with defendants Robert R. Frank and Jack H. Stein the possibility of his investing in IGB, a Florida corporation with its principal place of business in Florida. Defendants Frank, Stein, and Roberts organized IGB with the intention of making it a bank holding company, and they served at all relevant times as officers and directors of IGB. Plaintiff repeatedly met with defendants, in various combinations, to discuss IGB. Prior to plaintiffs’ initial purchase, defendants Stein and Frank represented to plaintiff that they were going to allow not more than fifteen of their friends to purchase shares in IGB before making a proposed public offering: They represented that everyone would pay $2.00 cash per share and that there would be no free stock or fringe benefits. In reliance upon these and other representations concerning (1) an application by IGB to the Federal Reserve Board for approval as a bank holding company, (2) the acquisition plans of IGB, and (3) the progress of registration of IGB shares with the Florida Securities Commission, plaintiffs purchased 37,500 shares of IGB stock for $75,000.00 between July 28, 1969 and October 8, 1969. No registration statement was then in effect as to those securities.

As early as July 24, 1969, prior to the initial purchase of IGB stock, plaintiff began inquiring among his friends about resales to them of the IGB stock that was to be purchased. During the six-month period beginning in late July, 1969, plaintiffs sold at least 23,000 of their 37,500 shares to approximately fourteen persons in various parts of the United States at prices ranging from $2.00 to $5.00 per share. In these transactions plaintiffs realized a total of $95,000.00, some $20,000 more than they had paid for all of their IGB stock.

In fact, an application for approval as a bank holding company was never filed on behalf of IGB. Furthermore, defendants did not pay $2.00 cash per share when they acquired their own stock interest in IGB. First, in September, 1969, defendants exchanged 19,826 shares of stock in the National Industrial Bank [hereinafter NIB] with IGB for 346,995 newly issued shares- of IGB stock, pursuant to an exchange ratio computed by defendant Roberts. At the exchange value of $2.00 per share, the IGB stock acquired in the exchange by defendants was worth $693,910.00. The NIB stock that the corporation received from defendants in exchange was worth considerably less. It had been purchased by defendants in January, 1968 for $198,260.00, or $10.00 per share, and was selling for $10.00 per share in October, 1969. Second, on January 16, 1970, defendants received 184,935 shares of IGB stock in exchange for non-interest bearing, unsecured promissory notes in the amount of $369,870.00 due in 1973.

A voting trust agreement reflects that defendants controlled 1,336,391 voting shares of IGB and were at all material times in control of the company. Although IGB’s Certificate of Incorporation requires the directors to fix the value of any property received by the corporation in exchange for stock, this was •not done in conjunction with the transfer by defendants of their 19,826 shares of their NIB stock for 346,995 shares of IGB stock [hereinafter the “NIB-IGB stock exchange”]. In that exchange, a ratio of 17t4 to 1 was the basis used, and the value of the IGB stock was calculated at its par of $1.00 per share. Under this ratio, defendants received the equivalent of $17.50 per share for their NIB stock. If the transaction had been based on payment of $2.00 per share for the IGB stock, the sum that defendants had represented would be paid and that everyone else did in fact pay, then defendants actually received what amounted to $35.00 per share for their NIB stock, which was worth no more than $10.00 per share. The required valuation was also neglected in connection with the issuance of stock to defendants in exchange for their promissory notes.

At a directors meeting held on January 16, 1970, defendants, acting as directors, elected three additional directors. The new directors, with defendants abstaining, authorized defendants to purchase the aforementioned 184,935 shares of IGB stock by executing non-interest bearing, unsecured notes in the total amount of $369,870. At the same time that these non-interest bearing and unsecured notes of defendants were outstanding, IGB borrowed greater sums from banks at interest rates varying from 7i/2 percent to 9y2 percent per annum. Such loans were fully secured by part of the assets of IGB. The newly constituted board of directors, with defendants voting, “ratified” the NIB-IGB stock exchange and all other actions taken on previous occasions by defendants as directors. No annual or special meeting of stockholders of which plaintiffs received notice was held until January 21, 1971.

II. ACTION BELOW

Soon after the meeting of January 21, 1971, plaintiffs brought this action both individually and derivatively as stockholders of IGB against defendants. The complaint charged that: (1) misrepresentations, omissions, and acts of defendants constituted a manipulative and deceptive device and contrivance and a scheme and artifice to defraud in connection with the sale of securities of IGB to plaintiffs, all of which was in violation of Rule 10b-5; (2) sale by defendants to plaintiffs of the IGB stock constituted a violation of Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e, because no registration covering the securities had been declared effective by the United States Securities and Exchange Commission; (3) defendants committed common-law fraud in connection with plaintiffs’ purchase of IGB stock.

Relying on Rekant v. Desser, 5 Cir. 1970, 425 F.2d 872, the District Court found that plaintiffs had established a derivative Rule 10b-5 violation by defendants in that defendants’ activities in the NIB-IGB stock exchange constituted a fraudulent issuance of stock to insiders for grossly inadequate consideration. The District Court found that the NIB stock was worth $198,260.00 and that therefore defendants paid approximately $.57 per share of IGB stock issued to them, or $1.43 less than the $2.-00 per share that defendants represented that they would pay for their IGB purchase. The Court ordered defendants to reimburse IGB $1.43 per share of IGB received in the fraudulent transaction. The District Court also found, however, that plaintiffs were not entitled to individual relief under Rule 10b-5 because they failed to show any actual individual damages in connection with the sale or purchase of IGB stock, since through their own sales of IGB stock they had made a profit of approximately $20,000.-00 in addition to the value of the IGB shares they retained.

The District Court relied on Hill York Corp. v. American International Franchises, Inc., 5 Cir. 1971, 448 F.2d 680, in finding that defendants had violated Section 5 of the Securities Act of 1933 and in granting the individual plaintiffs the option of rescinding their purchase of 14,000 shares of IGB stock. The Court also held that Section 5 of the 1933 Act did not authorize derivative relief for the corporate entity.

Finally, the District Court found that defendants breached their fiduciary duty on January 16, 1970 by paying for IGB stock with non-interest bearing notes. The Court ordered defendants to pay IGB 7i/2 percent back-interest on the $369,870.00 note, from January 16, 1970 to the date of the judgment.

The District Court, however, refused to find that plaintiffs were entitled to be reimbursed for the costs of maintaining a derivative action for IGB. The Court also refused to appoint a receiver or to grant other equitable relief sought by plaintiffs.

On cross-appeal, defendants contend that the District Court erred by: (A) failing to recognize plaintiffs’ unclean hands and to take appropriate remedial actions against plaintiffs; (B) failing to rule that the derivative Rule 10b-5 claim was barred by the statute of limitations; (C) allowing plaintiffs to maintain a derivative action; (D) failing to give proper weight to defendants’ evidence concerning the value of the NIB stock exchanged for IGB stock; and (E) substituting its business judgment for that of the IGB stockholders and directors who ratified defendants’ activities.

Plaintiffs contend on direct appeal that the District Court erred by: (A) refusing to grant plaintiffs individual relief pursuant to Rule 10b-5; (B) not granting interest to IGB on the judgment recovered from defendants; (C) dismissing plaintiffs’ derivative Section 5 claim; (D) failing to grant further equitable relief to correct defendants’ wrongdoing; and (E) denying plaintiffs’ request for reimbursement for the costs of attorneys’ fees and expert witness fees incurred in maintaining the derivative claim.

■ III. DEFENDANTS’ APPEAL

The defendants’ briefs and arguments are predicated upon facts and inferences and conclusions that the trial court neither found nor was compelled to find. In the welter of charges and counter charges the ensuing obfuscation can be visioned away by the application of a relatively few simple legal propositions, the most elementary principle being that appellate courts are governed by the “clearly erroneous” test of Rule 52(a) of the Federal Rules of Civil Procedure when they review District Court fact findings. In applying this test, we have said:

“The question is not simply whether the reviewing court would have found otherwise but whether the trial court could permissibly find as it did. The reviewing court should upset a finding only when it ‘is convinced on the whole record that the finding does not reflect the truth and right of the case.’ Wright, Federal Courts § 96, at 432.”

Movible Offshore, Inc. M/V Wilken A. Falgout, 5 Cir. 1973, 471 F.2d 268, 271. Defendants’ brief oftentimes totally fails to evidence an awareness, much less an understanding, of this controlling principle of appellate jurisprudence.

A. Equitable Defenses

Defendants contend that the facts clearly establish that plaintiffs were manipulating market-makers who violated applicable statutes and Securities and Exchange Commission rules by selling IGB stock before actually acquiring it. Claiming that this factual contention gives rise to a defense of “unclean hands.” defendants' urge that the District Court erred by: (1) finding that defendants violated Section 5 of the Securities Act of 1933 and thereupon granting plaintiffs an option to rescind pursuant to the remedial provisions of Section 12 of the Securities Act of 1933 ; (2) not creating a constructive trust on behalf of the parties who purchased IGB stock from plaintiffs; and (3) not requiring plaintiffs to rescind their purchase of IGB stock.

Without passing on the merits of defendants’ factual contentions, we deem it sufficient to say that defendants’ arguments are misguided. While the defense of “unclean hands” is available in securities actions in this Circuit, Kuehnert v. Texstar Corp., 5 Cir. 1969, 412 F.2d 700, its application rests within the sound discretion of the District Court. Whether the defense is allowed should be determined by ascertaining whether the application or non-application of the defense will better promote the objectives of the securities laws by increasing the protection afforded the investing public. Id. The District Court did not abuse its discretion in refusing to bar plaintiffs from maintaining a suit to enforce the requirements of Section 5 of the Securities Act of 1933.

After carefully considering the record, we have determined that no party in the Court below ever took the position, by pleadings or otherwise, that a constructive thrust should be imposed in favor of those who purchased from plaintiffs. Without deciding the question of defendants’ standing to seek such relief in the District Court, we conclude that because defendants did not in fact seek such relief below they cannot now raise a new theory that was not presented to the District Court. Hill York Corp. v. American Internat’l Franchises, Inc., 5 Cir. 1971, 448 F.2d 680, 690; Overmyer Co. v. Loflin, 5 Cir. 1971, 440 F. 2d 1213, cert. denied, 1971, 404 U.S. 851, 92 S.Ct. 87, 30 L.Ed.2d 90.

Finally, we find that the District Court properly declined to find that plaintiffs were required to accept the remedy of rescission afforded with regard to their remaining shares. Plaintiffs invoked the jurisdiction of the federal court both under Section 5 of the Securities Act of 1933 and under Rule 10b-5, and were not required to elect the remedy of rescission proffered in settlement by defendants prior to trial, since that election would have been inconsistent with plaintiffs’ capacity to maintain their derivative Rule 10b-5 complaint. United States v. Borin, 5 Cir. 1954, 209 F.2d 145, cert. denied, 1954, 348 U.S. 821, 75 S.Ct. 33, 99 L.Ed. 647; Breeding v. Massey, 8 Cir. 1967, 378 F.2d 171.

B. Statute of Limitations

Defendants argue that the District Court erred in not ruling that plaintiffs’ individual and derivative Rule 10b-5 claims were barred by the statute of limitations. In actions for relief brought pursuant to Rule 10b-5 the applicable statute of limitations is that of the state in which the federal court sits. Hooper v. Mountain State Securities Corp., 5 Cir. 1960, 282 F.2d 195, cert. denied, 1961, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693. Defendants nevertheless contend that even though plaintiffs filed this action within the two-year Florida statute of limitations, which defendants argue is applicable under F.S.A. § 517.-21, plaintiffs are barred because they failed to tender their securities to defendants as required by F.S.A. § 517.21. Plaintiffs reply that Florida’s three-year statute of limitations for actions brought for relief on the ground of fraud, F.S.A. § 95.11, is applicable and that they fall well within that time period.

Defendants’ argument misconceives the issue. This suit was maintained in the District Court under Rule 10b-5, not under pendent jurisdiction of a state claim. When applying the forum’s statute of limitations to actions brought under the federal securities laws, federal courts borrow only the chronometric aspects and not the procedural or substantive nuances of the law of the forum. We therefore find it unnecessary to determine whether the applicable statute of limitations is the two-year limitation embodied in Section 517.21 or the three-year limitation of Section 95.11 because plaintiffs commenced this action well within either period of limitation.

C. Plaintiffs’ Standing to Maintain the Derivative Claim

Defendants next maintain that the District Court erred in allowing plains tiffs to maintain the derivative Rule 10b-5 claim on behalf of IGB because at no time material to the occurrences complained of were plaintiffs stockholders of IGB entitled to maintain a derivative stockholders’ .suit. See Fed.R.Civ.P. 23.-1. Defendants contention, supported more by invective and vituperation than by scholarly analysis or citation of authority, is apparently based on a belief that: (1) plaintiffs’ allegedly unclean hands bar them from maintaining a derivative suit; or (2) the fact that plaintiffs made a profit in excess of their original investment divests them of stockholder status, even though plaintiffs at all relevant times retained approximately 14,000 shares of IGB stock; or (3) the District Court was “clearly erroneous” in finding that plaintiffs at all times retained 14,000 shares of IGB.

We hold that the District Court did not err in allowing plaintiffs to maintain the derivative Rule 10b-5 claim. Defendants are purblind to the fact that this is not a case of a brigand seeking to recover his loot. Plaintiffs’ actions, alleged to be illegal, were in no way involved with the transactions for which the District Court granted derivative relief. Furthermore, although defendants contend that plaintiffs are economic pirates disqualified because of their piracy from representing an innocent corporation, the District Court made no such finding and in fact found that only defendants were picaroons. Whether plaintiffs were or were not knights in shining armor is irrelevant under Rule 23.1 of the Federal Rules of Civil Procedure, so long as they fairly and adequately represented the shareholders in enforcing the rights of IGB. Assuming, without deciding, that unclean hands might bar plaintiffs from maintaining a derivative Rule 10b-5 claim, we find that the District Court exercised its discretion properly when it refused to find plaintiffs barred under the doctrine.

We next find that the fact that plaintiffs made a profit on their original investment in no way alters their status as stockholders or their standing to bring a derivative claim. That plaintiffs’ stock represented a profit to them does not alter its status as stock for the purposes of Rule 23.1 of the Federal Rules of Civil Procedure. As long as plaintiffs actually owned stock at the time of the challenged actions, then plaintiffs have standing to maintain a non-collusive Rule 10b-5- claim under the provisions of Rule 23.1.

Finally, we hold that the District Court’s finding that plaintiffs resold all but 14,000 of their shares of IGB was not clearly erroneous. Neither by selectively reading the record, nor by isolating words and phrases, can defendants establish that plaintiffs were not shareholders at the critical and crucial times. The transcript and record, when fairly and comprehensively examined in their entirety, amply support the District Court’s finding that plaintiffs were stockholders at the time of the occurrences they attack.

D. Valuation of the NIB Stock

Defendants assert that the District Court erred in valuating the 19,826 shares of NIB stock that they exchanged for 346,995 shares of IGB stock in the NIB-IGB stock exchange. More specifically, defendants insist that the' Court did not give proper weight to general trade practices concerning controlling stock and to other evidence in support of defendants’ belief that the exchange rate was not detrimental or unfavorably harmful to IGB. We cannot agree. The District Court, the finder of fact, held: “Under any measure of value, the NIB stock was greatly overvalued in the exchange.” We have considered the record before us, and under the limited factual review open to us, see Fed.R.Civ.P. 52(a); Movible Offshore, Inc. v. M/V Wilken A. Falgout, 5 Cir. 1973, 471 F.2d 268, 271, we are unable to say that the District Court’s valuation of NIB stock was clearly erroneous.

E. Stockholder and Director “Ratification”

Defendants contend that the District Court wrongfully substituted its business judgment for that of the Board of Directors of IGB. Defendants urge that this is especially so in light of the fact that the IGB stockholders allegedly ratified the corporate directors’ actions. The problem with this contention is that defendants have failed to adduce adequate evidence that in any way shows that the stockholders of IGB made a knowing ratification of either the NIB-IGB stock exchange or of the sale of IGB stock for unsecured, noninterest bearing notes. We therefore refuse to hold that the stockholders of IGB ratified the activities found by the District Court to be fraudulent.

The only action that we have discovered in the record that arguably constitutes a ratification of defendants’ action is that taken by the newly constituted Board of Directors on January 16, 1970. At that time, the defendants themselves elected three new members to the IGB Board, and the newly constituted Board, with all three defendants participating, then held two different votes to ratify defendants’ past actions as directors. The newly elected directors, with defendants abstaining, also voted to sell defendants additional IGB stock for unsecured, non-interest bearing notes. We are mindful of the Florida rule that “[i]t cannot be disputed that a board of directors of a corporation is without power to ratify that which it cannot do directly or that which it could not authorize to be done initially. It has no power to ratify a' void or illegal act.” Flight Equipment & Engineering Corp. v. Shelton, 103 So. 2d 615, 621 (citations omitted) (1958). We also recognize the general rule that “[Ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract.” Fletcher Cyc. Corp. § 761, p. 1067. Guided by the rule of Flight Equipment & Engineering Corp. v. Shelton, supra, we hold that the votes of the newly elected directors could not legally authorize defendants to breach their fiduciary duties by accepting IGB stock for unsecured, non-interest bearing notes at the same time that IGB was borrowing money at interest rates varying from 7% percent to 9% percent per annum. Moreover, the votes of the newly constituted Board of Directors, in which defendants participated, could not constitute a valid ratification of defendants’ illegal activities.

We find that the fact that the fraud was committed by a director of IGB in no way provides these defendants with an impenetrable “business judgment” shield. See Bankers L. & C. Co., 1971, 404 U.S. 6, 10, 92 S.Ct. 165, 30 L.Ed.2d 128, 133. There could “be no more effective way to emasculate the policies of the federal securities laws then to deny relief solely because a fraud was committed by a director rather than by an outsider.” Ruckle v. Roto American Corp., 5 Cir. 1964, 339 F.2d 24, 29. As the District Court, held, and as this Court stated in Rekant v. Desser, supra, 425 F.2d at 882:

“[W]hen officers and directors have defrauded a corporation by causing it to issue securities for grossly inadequate consideration to themselves or others in league with them or the one controlling them, the corporation has a federal cause of action under § 10b and Rule 10b-5. . . .”

Defendants’ arguments to the contrary are meritless.

IV. PLAINTIFFS’ APPEAL

A. Plaintiffs’ Individual Rule 10b-5 Claim

The District Court dismissed plaintiffs’ individual Rule 10b-5 claim because plaintiffs were unable to show any actual damages inasmuch as the dilution of their equity interest was not a cognizable element of damages for a violation of Rule 10b-5. Plaintiffs argue that Swanson v. American Consumer Industries, Inc., 7 Cir. 1969, 415 F.2d 1326, and Boggess v. Hogan, N.D.Ill. 1971, 328 F.Supp. 1048, establish that the dilution of a shareholder’s equity interest is a cognizable element of damages for violation of Rule 10b-5 and that their equity interest was in fact diluted by (1) the NIB-IGB stock exchange, and (2) defendants’ misrepresentations and omissions, which greatly altered the composite picture of the corporation from that represented to plaintiffs at the time of their initial purchase of IGB stock.

In Swanson v. American Consumer Industries, Inc., supra, the Seventh Circuit held that the dilution of equity interest is an appropriate measure of damages where dilution was caused by fraud in connection with a purchase or sale in which the claimants participated. Boggess v. Hogan, supra, held that individual stockholders could maintain Rule 10b-5 claims when fraud in connection with a purchase or sale in which their corporation participated diluted the equity position of the corporation, and thus does support plaintiffs’ argument. This Circuit, however, has already rejected the result reached there. In Herpich v. Wallace, 5 Cir. 1970, 430 F.2d 792, we refused to allow shareholders of a corporation to maintain an individual Rule 10b-5 claim arising out of a fraudulent purchase by their corporation. We held that: “we are of the opinion that only purchasers and sellers of securities involved in an alleged Rule 10b-5 violation — that is, securities in connection with which fraud has allegedly been committed — can show injury of the type the rule is meant to prevent.” Id., 430 F.2d at 806. In short, a reading of Swanson with Herpich establishes that plaintiffs do not have standing to seek individual damages for the dilution of equity interest caused by the NIB-IGB stock exchange because plaintiffs were neither purchasers nor sellers in connection with that transaction.

Plaintiffs also contend that their equity interest was diluted by defendants’ failure to fulfill the promises that had induced plaintiffs to purchase IGB stock. The District Court held that because plaintiffs had already made a profit of approximately $20,000 on their IGB stock, they were unable to show any damages arising out of their purchase. Typically in Rule 10b-5 damage actions:

“[d]efrauded buyers who have prevailed on the merits have recovered their purchase price on a recission measure of damages, whether or not formally suing for recission. In an appropriate situation, e. g., if the scurities are not worthless, a buyer can keep them and recover damages for the difference between the price paid and the real value when bought. This is an out of pocket rule not covering expected speculative profit.”

2 A. Bromberg, Securities Law: Fraud, § 9.1, p. 226, at nn. 2-4 (emphasis added) (1971). We find that this is the appropriate measure of damages. Therefore, in light of the facts that: (1) the District Court award plaintiffs the option to rescind the purchase of their remaining shares of IGB; (2) plaintiffs have already made a $20,000 profit on their original purchase of IGB stock; and (3) Rule 10b-5 only provides for recovery of actual damages, 15 U.S.C. § 78bb, and not for loss of speculative profits, Schaefer v. First National Bank of Lincolnwood, N.D.Ill.1970, 326 F.Supp. 1186, 1193, appeal dismissed, 7 Cir. 1972, 465 F.2d 234; Ross v. Licht, S.D.N.Y.1967, 263 F.Supp. 395, 410, plaintiffs are unable to show that they suffered any damages compensable under Rule 10b-5.

B. Prejudgment Interest

Plaintiffs’ contend that the District Court erred in not granting interest on the moneys that the Court ordered defendants to reimburse to IGB in connection with the NIB-IGB stock exchange. Relying on Joseph E. Bennet Co. v. Trio Industries, Inc., 1 Cir. 1962, 306 F.2d 546, plaintiffs claim that the right to recover interest on a claim is a state question and that Florida law requires that IGB recover interest on the judgment entered in its favor.

Plaintiffs reliance on Joseph E. Bennet Co. v. Trio Industries, Inc., supra, is erroneous. Bennet was a diversity case where state substantive law clearly would be controlling, and it is thus of no weight in an action brought pursuant to the federal securities laws. In determining whether prejudgment interest is allowed on damages awarded pursuant to Rule 10b-5, federal law governs. Ross v. Licht, supra, 263 F.Supp. at 411. Rule 10b-5, like Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), “being a federal right, its remedial aspects also are a matter of federal law.” Gilson v. Chock Full O’Nuts Corp., 2 Cir. 1964, 331 F.2d 107, 109. Under federal law, whether prejudgment interest should be awarded on a damage recovery in a Rule 10b-5 action is a question of fairness resting within the District Court’s sound discretion. Blau v. Lehman, 1962, 368 U.S. 403, 414, 82 S.Ct. 451, 7 L.Ed.2d 403, 411; Wessels v. Buhler, 9 Cir. 1971, 437 F.2d 279, 284; Norte & Co. v. Huffines, 2 Cir. 1969, 416 F.2d 1189, 1191, 1192, cert. denied sub nom., Muscat v. Norte & Co., 1970, 397 U.S. 989, 90 S.Ct. 1121, 25 L.Ed.2d 396. We perceive no abuse of discretion in the District Court’s denying IGB prejudgment interest in the instant case.

C. The Derivative § 5 Claim

The District Court awarded defendants summary judgment on plaintiffs’ derivative claim seeking damages for violations of Section 5 of the Securities Act of 1933, which was brought pursuant to the remedial provisions of Section 12 of that Act. The Court below reasoned that “Section 12 affords a remedy to the purchaser alone where thére has been noncompliance with Section 5. It is not argued that the Section 5 violation here resulted in injury to the issuer.” Plaintiffs contend that this ruling was erroneous because defendants had not carried their burden of proof on a motion for summary judgment. This argument misses the point. Section 12, in terms, provides a remedy for violations of Section 5 only to purchasers of securities, Schoenbaum v. Firstbrook, S. D.N.Y.1967, 268 F.Supp. 385, 396, aff’d, 2 Cir. 1968, 405 F.2d 200, rev’d en banc on other grounds, 2 Cir. 1968, 405 F.2d 215, cert, denied, 1969, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219, or to one who stands in the shoes of a purchaser. American Bank & T. Co. v. Barad Shaff Securities Corp., S.D.N.Y.1972, 335 F.Supp. 1276. Plaintiffs’ derivative Section 5 claim does not involve any purchase of securities by IGB and therefore was properly dismissed.

D. Equitable Belief

Plaintiffs next argue that the District Court erred in failing to enjoin defendants from voting their shares of IGB until the shares were fully paid for. In determining whether further equitable relief was necessary, the District Court exercised its discretion to fashion a remedy that would most fully comport with the purposes of the applicable federal securities law. We cannot say that the District Court abused its equitable discretion by refusing to order additional injunctive relief.

E. Costs of the Derivative Suit

Finally, plaintiffs urge that the District Court erred in holding that plaintiffs had failed to establish a basis for reimbursement. of their reasonable attorneys’ fees and expert witness fees incurred in maintaining this action. In Mills v. Electric Auto-Lite Co., 1970, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593, the Supreme Court held that attorneys’ fees could be awarded in private suits brought to enforce the Securities Exchange Act of 1934. The Court held that “petitioners, who have established a violation of the securities laws by their corporation and its officials, should be reimbursed by the corporation or its survivors for the costs of establishing the violation.” Id., 396 U.S. at 389, 390, 90 S.Ct. at 624, 24 L.Ed.2d at 605.

We hold that the District Court erred in finding that plaintiffs had established no basis for reimbursement of the cost of maintaining the derivative claim. By their efforts in acting as “private attorney generals,” plaintiffs established violations of the securities laws and created a substantial fund for the benefit of IGB. The reimbursing of plaintiffs’ costs for attorneys’ fees and expert witness fees is supported both by the policy of encouraging enforcement of the securities laws and by well established equitable principles. “[P]rivate stockholders’ actions of this sort ‘involve corporate therapeutics,’ and furnish a benefit to all shareholders by providing an important means of enforcement of the . statute. Id., 396 U.S. at 396, 90 S.Ct. at 628, 24 L.Ed.2d at 609 (footnotes omitted). Moreover, in the instant suit plaintiffs have created a substantial fund benefitting IGB, and plaintiffs are equitably entitled to be reimbursed by IGB. Sprague v. Ticonic Nat’l Bank, 1939, 307 U.S. 161, 59 S.Ct. 777, 83 L.Ed. 1184; Central R. R. & Banking Co. v. Pettus, 1885, 113 U.S. 116, 5 S.Ct. 387, 28 L.Ed. 915, Trustees v. Greenough, 1882, 105 U.S. 527, 26 L. Ed. 1157. On remand, the District Court should determine the amount of attorneys’ fees and expert witness fees reasonably incurred by plaintiffs in maintaining the derivative claims on behalf of IGB, and the Court should order IGB to reimburse plaintiffs in that amount.

V. CONCLUSION

Both in the District Court and in this Court, plaintiffs have vindicated the rights of IGB by enforcing the federal securities laws. Both the policy of the federal securities laws and notions of fair play require that plaintiffs be reimbursed for the costs of maintaining IGB’s derivative claim. The District Court conducted the trial below in an admirable manner and we have been greatly benefitted by its thoughtful and incisive rulings. We affirm it in all things but the denial of plaintiffs’ attorneys’ fees and expert witness fees. Costs to be taxed against defendants-appellees-cross appellants.

Affirmed in part, reversed in part, and remanded with instructions.

      . In this opinion Robert R. Frank, Jack H. Stein, and John W. Roberts, Jr. will be referred to as “defendants” and J. William Wolf will be referred to as “plaintiff.”

      . Although defendant Roberts was present when some of these representations were made, the District Court found that there was no credible evidence that he made any affirmative representations.

      . Rule 10b-5 was adopted by the United States Securities and Exchange Commission pursuant to Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j.

      . It was stipulated that the activities complained of were accomplished by the use of means and instrumentalities of interstate commerce and the mails.

      . Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e provides :
      “(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—
      (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or
      (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.
      “ (b) It shall be unlawful for any person, directly or indirectly — ■
      (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to carry or transmit any prospectus relating to any security with respect to which a registration statement has been filed under this sub-chapter, unless such prospectus meets the requirements of section 77j of this title; or
      (2) to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of section 77j of this title.
      “(c) It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any jrablic proceeding or examination under section 77h of this title.”

      . Plaintiffs elected not to rescind their purchase of the remaining shares of IGB stock.

      . Section 12 of the Securities Act of 1933, 15 U.S.C. § 77l, provides in relevant part:
      “Any person who — (1) offers or sells a security in violation of section 77e of this title [§ 5] . . . shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.”

      . Rule 23.1 provides :
      “In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege (1) that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law, and (2) that the action is not a collusive one to confer jurisdiction on a court of the United States which it would not otherwise have. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The' action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to slxareholders or members in such manner as the court directs.”

      . See Section A, supra.

      . We have carefully examined the documents cited by defendants as supporting this argument. We find no support in them for the notion that the IGB stockholders ratified either of the transactions in question.

      . Although Southern Ice Co. v. Morris, 5 Cir. 1915, 219 F. 551, has been cited by the Seventh Circuit in Estate Counselling Service v. Merrill, Lynch, Pierce, Fenner 6 Smith, Inc., 7 Cir. 1962, 303 F.2d 527, 533, as holding that speculative profits are recoverable in Rule 10b-5 actions, we think that Southern Ice Go., which was decided prior to the passage of both the Securities Act of 1933 and the Securities Exchange Act of 1934, is not controlling authority for that position.

      . See note 6 supra.

      . For a valuable discussion of the ramifications of Mills v. Electric Auto-Lite Co., see Comment, The Allocation of Attorney’s Fees After Mills v. Electric Auto-Lite Co., 38 U.Chi.L.Rev. 316 (1971). See also Comment, Attorneys’ Fees in Shareholder Derivative Suits: The Substantial Benefit Rule Reexamined, 60 Calif.L.Rev. 164 (1972); Note, Mills v. Electric Auto-Lite Company; Proxy Violations — The Causation Question and the Award of Attorney’s Fees, 65 Nw.U.L. Rev. 854 (1970).