Johns Hopkins University v. Hutton

FRANK A. KAUFMAN, District Judge.

The Johns Hopkins University (Hopkins) seeks summary judgment over the vigorous opposition of defendants. The record is voluminous; the cast of characters is numerous; and the narration of the opposing versions of an unusual financial tale could easily outlast several double features. Defendants contend that the case is too complex for summary judgment. The answer to that contention, however, is easily discerned after the material, undisputed facts are culled from the massive record and are permitted to stand alone. In such posture they compel, against the background of

*1172

applicable law, only one conclusion: This case is ripe for summary judgment for plaintiff.

The defendants are James M. Hutton, Jr., et al., copartners, doing business as W. E. Hutton & Co. (Hutton), a stock brokerage firm with its principal place of business in New York City, and with numerous branch offices, including one in Baltimore. Hopkins alleges that Hutton violated duties which it owed to Hopkins under the Securities Act of 1933 (the ’33 Act), the Securities and Exchange Act of 1934 (the ’34 Act) and the common law. Specifically, Hopkins alleges that Hutton made misrepresentations of, and omitted to disclose, material facts, and also engaged in fraudulent and negligent conduct. The controversy arises out of the purchase by Hopkins on March 1, 1961, of an oil and gas production payment for $1,300,000 from Trice Production Company (Trice) in connection with which transaction Hutton received a commission from Trice.

Since Hopkins began this suit on November 1, 1963, the parties have indefatigably engaged in discovery, legal and factual argument, and motion hearings. Before oral argument on Hopkins’ motion for summary judgment, Hutton’s chief counsel stated in his main affidavit that Hutton had deposed eleven, and Hopkins twelve, witnesses, involving 7,401 pages of testimony; that Hutton had marked as exhibits approximately 818 documents and Hopkins had so marked about 212 documents, or a total of 1,030 documents; that Hutton had served upon Hopkins two sets of interrogatories and two sets of requests for admissions and that Hopkins had served upon Hutton thirteen sets of interrogatories and seven sets of requests for admissions, embodying a total of more than 2,083 separate inquiries in such interrogatories and requests for admissions. This Court calculates that the pleadings, the motions, the discovery documents, the main and supplementary affidavits of Hutton’s .chief counsel, and other factual and legal memoranda and commentary to the Court exceed 12,000 pages.

There have been lengthy hearings and conferences, involving several scores of days before this Court and before a special Master who was at one time appointed with regard to objections to discovery interposed by both sides. After Hopkins filed its original complaint, Hutton answered and prayed a jury trial, Hopkins later was granted leave to file an amended complaint, Hutton answfered, and Hutton later sought to file a third-party complaint against Ragnar D. Naess, et al., co-partners doing business as Naess & Thomas, Hopkins’ investment counsel, for contribution as joint tortfeasors, charging Naess with statutory and common law violations. Chief Judge Thomsen of this Court denied Hutton leave to file the third-party complaint, “primarily because of the complication of issues which would result from the filing of the third party complaint, but also because of the delay and expense to Hopkins, the unreasonable expense to Naess, and the laches of Hutton.” Johns Hopkins University v. Hutton, 40 F.R.D. 338 (D.Md.1966).

Hopkins’ amended complaint is set forth in seven counts: (1) Section 12(2) of the ’33 Act; (2) Section 10(b) of the ’34 Act and Rule 10b-3 of the Securities and Exchange Commission (S.E.C.); (3) Section 10(b) of the ’34 Act and Rule 10b-5 of the S.E.C.; (4) Section 15(c) (1) of the ’34 Act; (5) Section 17(a) of the ’33 Act; and (6) and (7) under the common law for (a) false representation and fraudulent conduct and (b) making false representations negligently and with reckless indifference as to their truth.

Hopkins’ motion for summary judgment was presented with regard to each of the first five or statutory counts. Near the close of his rebuttal, during oral argument on Hopkins’ motion for summary judgment, Hopkins’ counsel stated that if the Section 12(2) equitable relief sought by Hopkins under count one of the amended complaint should be granted, Hopkins would consider itself fully satisfied (Tr. 458-463). Therefore, since summary judgment will

*1173

be granted to Hopkins under count one, the issues raised by the other counts are moot.

1

Hopkins’ Amended Complaint was summarized by Judge Thomsen at 40 F.R.D. 338, 340-341 , supra, as follows:

In 1960, Hutton was employed by Trice to act as its adviser, broker and agent in the sale of production payments carved out of certain oil and gas properties owned by Trice. Hutton offered for sale and sold three such production payments, including the one offered for sale and sold to Hopkins, and Trice paid Hutton commissions amounting to 2% of the sales price obtained.

Pursuant to that arrangement, Hutton and Trice offered to sell to Hopkins a production payment out of certain oil and gas properties of Trice located in Texas, Oklahoma and Louisiana, described in a brochure prepared by Hutton and Trice and delivered by them to the Treasurer of Hopkins. The brochure stated that Trice desired to sell production payments in the amount of $2,700,000; that a commitment for approximately $1,400,000 had been received from a bank as a separate first production payment from certain properties; that a second production payment of approximately $1,-300,000 from the same properties and from five additional properties (which would be subordinate to the bank’s production payment except as to the five additional properties) would also provide for certain net profits interests; and that, based on stated esti

*1174

mates of the value and rate of realization of the oil and gas reserves in the properties subject to the second production payment, the purchaser thereof would realize a substantial sum in excess of its cost.

Hutton represented to Hopkins, as a further material inducement to purchase the production payment, that the estimates of future net revenues and rate of realization from the oil and gas reserves set forth in the brochure were the estimates of independent engineers who had studied each of the properties.

Hutton also recommended to Hopkins and to Naess, Hopkins’ financial adviser, that they select Chester L. Brown, Vice-president of Petroleum Consultants, Inc., to make a study of the reserves and a cheek of said estimates on behalf of Hopkins, at Trice’s expense. In making this recommendation Hutton did not reveal that the employee of Hutton who was dealing with Hopkins had been for many years an intimate friend and associate of Brown, had recently encouraged him to form his consulting engineering company and had indicated to Brown that Hutton would employ him in connection with this production payment. In early 1961, without the knowledge of Hopkins, Hutton employed Brown, at the joint expense of Hutton and Trice, to make a study and estimate of said reserves not for Hopkins but for Hutton and Trice; instructed Brown to make a report which would omit details; concealed from Brown that Hopkins had been led by Hutton to believe that Brown was an independent engineer acting for Hopkins; concealed from Brown the existence of the reports and estimates that had been made by independent engineers for Trice concerning which Hutton had made representations to Hopkins; and failed to request Brown to make any check of such reports or estimates.

While Brown was making his study and estimates for Hutton and Trice, Hutton represented to Hopkins that Brown was making the study and estimate as Hopkins’ ‘independent reservoir engineer’, and, acting as such, was checking the earlier reports and estimates of said reserves made by the independent engineers. Hutton represented to Hopkins that Brown’s study and estimates showed that the figures previously presented by Hutton were conservative and that Hopkins could expect repayment of its investment with interest in a shorter time and could expect a greater return from its net profits interest than had been estimated by the original independent engineers. Hutton forwarded to Hopkins Brown’s report which confirmed those representations.

Relying to a material degree on each of said material representations made by Hutton, Hopkins purchased for $1,300,000 the production payment and net profits interests on March 1, 1961.

On October 15, 1962, Trice filed in the United States District Court for the Eastern District of Texas, Tyler Division, a Petition for Reorganization under Chapter X of the Bankruptcy Act. In early 1963, Hopkins received a report disclosing that the reserves of oil and gas in the properties included in the $1,300,000 production payment purchased by Hopkins were substantially less than as represented by Hutton. Also in 1963, within one year prior to the filing of the original complaint herein, Hopkins learned for the first time that the alleged representations made by Hutton were false, and learned for the first time of the alleged skulduggery in connection with Brown’s report.

In their answer to the amended complaint, defendants, among other things:

1. Admitted that all of the individual defendants, excluding defendants Joseph A. W. Iglehart and Benjamin D. Williams who were limited partners, were con

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ducting business under the name of W. E. Hutton & Co. (Hutton);

2. Admitted that the defendants maintained an office in the District of Maryland;

3. Conceded that this Court has jurisdiction ;

4. Admitted that in 1960 Trice was a Delaware corporation having its principal place of business in Texas;

5. Admitted that in 1960 Hutton performed certain services in connection with the sale by Trice of certain production payments carved out of certain oil and gas properties of Trice; and that Hutton was paid commissions by Trice amounting to 2% of the face amount of each of three production payments sold by Trice, including the one sold by Trice to the plaintiff on or about March 1,1961;

6. Admitted that Cliff Trice, President of Trice, and Gilbert LaPiere, an agent and employee of Hutton, met in Baltimore on September 21, 1960, with Henry Baker, Treasurer and Financial Vice President of Hopkins, at which time a $1,300,000 production payment carved out of certain oil and gas properties of Trice located in Texas, Oklahoma and Louisiana was discussed;

7. Admitted that Hutton had in their possession on December 8, 1965, a writing entitled “General Comments Pertaining to Purchase of Oil and Gas Production Payment” dated September 16, 1960; that Trice prepared that brochure; that that brochure, or a- copy thereof, was delivered to Baker by Cliff Trice on or about September 21, 1960, during a conference at Hopkins in Baltimore arranged by Naess; and that Naess had received a copy of that brochure;

8. Specifically denied that that brochure was prepared by Hutton either in whole or in part;

9. Admitted that LaPiere wrote a letter to Baker, dated February 3, 1961, in which a reference is made to “my brochure of September 16, 1960”; defendants contend that the word “my” was incorrectly or inadvertently used, although not intentionally so;

10. Alleged that Petroleum Consultants, Inc. and particularly Brown were selected by Hopkins to make an independent expert study of certain properties of Trice, an estimate of the reserves therein and future profits therefrom; and that LaPiere, at the request of Hopkins, wrote a letter to Petroleum Consultants, Inc., dated January 5, 1961;

11. Admitted that LaPiere knew Brown prior to January 5,1961;

12. Admitted that LaPiere, or someone on his behalf, wrote letters to Mark Harriman of Naess and Thomas and to Baker dated' respectively January 16, 1961, and February 3,1961;

13. Admitted that Hopkins accepted an offer made by Trice that Hopkins purchase for $1,300,000 a production payment and net profits interest carved out of certain oil and gas properties of Trice located in Texas, Oklahoma and Louisiana; and that that purchase was consummated in Texas on or about March 1, 1961;

14. Alleged that Naess and Thomas were investment counsel for Hopkins for over twenty years and in pursuance thereof, Walton Canedy, the Baltimore partner of Naess and Thomas, attended every meeting of the Hopkins Finance Committee between January 1, 1960 and the date Hopkins commenced this action;

15. Alleged that Naess was a friend and acquaintance of Cliff Trice since at least 1957; that in 1958 Naess made personal investments in Trice’s oil drilling ventures; and that Naess recommended to his clients that they invest in participations in such ventures of Trice;

16. Alleged that on August 30, 1960, Trice wrote a letter to Naess and enclosed a Trice brochure dated August 8, 1960;

17. Alleged that on September 14, 1960, Cliff Trice personally called on Naess in New York and proposed the

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purchase of an oil production payment by Hopkins;

18. Alleged that Trice sent Naess a Trice brochure dated September 16, 1960, the substance of which Naess communicated to his partner Canedy, asking the latter to pass it on to Baker; and that Baker indicated to Canedy he was interested ;

19. Alleged that Naess arranged the meeting with Baker on September 21, 1960 at Hopkins (referred to in 7 above), attended by Cliff Trice, Canedy, and LaPiere, at which meeting Cliff Trice delivered to Baker a copy of Trice’s September 16, 1960 brochure;

20. Alleged that during the Fall of 1960, Gordon Meeks, a friend of Naess, told Naess he was forming a new petroleum consulting firm with Brown, known as Petroleum Consultants, Inc. and that thereafter Naess selected Brown as Hopkins’ own independent oil consultant to check the oil and gas reserves in the Trice production payment offered by Trice to Hopkins;

21. Alleged that in October, 1960, Bankers Trust Company of New York City (Bankers Trust or Bankers) purchased a 11,375,000 payment from Trice through Bankers’ nominee, Oilco, Inc., under which Bankers occupied a primary position with respect to approximately 18 of the 23 wells in the production payment under consideration by Hopkins, pursuant to which the latter would occupy a primary position as to 5 wells and a secondary position to Bankers as to the aforesaid 18 wells;

22. Alleged that Naess and Thomas and Hopkins gave consideration to Hopkins’ investment policy in July or August, 1960, and steps to restate that policy were taken by Hopkins Finance Committee in October, 1960; that on November 25, 1960, that Committee adopted a restatement of its investment policy pursuant to which Hopkins was authorized to invest up to 10% of its endowment funds in certain types of investments including the type offered by Trice to Hopkins; and that on January 27, 1961, that Committee met and formally considered Trice’s proposal but did not at that meeting conclude consideration of that proposal;

23. Alleged that on February 1, 1961, Hopkins’ legal counsel made a written analysis of the Trice production payment, which analysis indicated,

inter alia,,

the speculative nature and risks involved in the Trice production payment; that on February 1, 1961, such counsel advised Baker to obtain certain reports of independent engineers, namely, those of DeGolyer & MaeNaughton (D & M), Schafer and Brown, and that on February 1, 1961 such counsel told Baker they “must see” those three reports before the purchase was consummated;

24. Alleged that on February 7, 1961, at a meeting in Baltimore at the office of Hopkins’ legal counsel, attended by Mitchell and Worth McCauley of Trice, Baker, and Dandridge and Cooper, members of the law firm representing Hopkins, but not LaPiere or any other Hutton representative, a February 3, 1961, Trice brochure was delivered to Baker;

25. Alleged that no representative of Hopkins, Naess & Thomas nor Hopkins’ legal counsel, ever at any time prior to March 1, 1961, obtained the engineering reports of D & M, Schafer or Mercantile National Bank of Dallas;

26. Alleged that Brown, “Hopkins own consultant selected by Naess,” made an independent evaluation of the properties involved in the Trice production payment and set forth his opinion in a report delivered to Hopkins, Naess and Thomas, and to Hopkins’ legal counsel;

27. Alleged that Naess studied the Brown report, advised Hopkins that he had contacted Baker and the Mercantile National Bank and on February 14, 1961, wrote a letter to Hopkins recommending the purchase, which letter was read at the Hopkins Finance Committee meeting

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on February 24, 1961, and made part of the minutes of that meeting. At that meeting the Committee approved the purchase of the Trice production payment and the purchase was thereafter consummated on or about March 1, 1961, at which closing Hopkins was represented by its Texas legal counsel, and at which neither LaPiere nor anyone from Hutton was present;

28. Alleged that Hopkins did not rely upon Hutton or any other defendant but upon Naess, Canedy, others in the firm of Naess & Thomas, Brown, Petroleum Consultants, Inc., Trice, Mitchell, Mc-Cauley, others in the Trice Company, Hopkins’ general legal counsel in Baltimore, and its special legal counsel in Dallas;

29. Admitted that Trice, on or about October 15, 1962, filed in the United -States District Court for the Eastern District of Texas, Tyler Division, a petition for reorganization under Chapter X of the Bankruptcy Act;

30. Denied each and every other allegation in plaintiff’s complaint;

31. Stated that the amended complaint failed to state a claim upon which relief could be granted;

32. Alleged that “[i]f any representations were made to Hopkins on behalf of these defendants which included any untrue statement of a material fact or omitted to make the statements in the light of the circumstances under which they were made not misleading, defendants did not know, and in the exercise of reasonable care, could not have known of such untruth or omissions.”;

33. Alleged that such material changes and modifications in the Trice production payment purchased by Hopkins on March 1, 1961, had been made since March 1, 1961, that Hopkins had failed to tender back, and was unable to tender back, as required by Section 12(2) of the ’33 Act;

34. Pled the one year statute of limitations (See Section 13 of the ’33 Act, quoted

verbatim,

supra);

35. Set out defenses numbered Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh and Twelfth which have no application to the first or Section 12(2) count.

On December 22, 1966, Hutton sought leave to amend its answer to the amended complaint and thereby to file a Thirteenth Defense. Over Hopkins’ opposition, this

Court

2

permitted that additional defense, pertaining to all counts of the complaint, including the first or 12(2) count to be filed. That defense alleges contributory negligence and assumption of risk by Hopkins and states that Hopkins’ Finance Committee, its agents and representatives, failed to conform to the standards required of fiduciaries and trustees of an educational institution in approving the purchase of the Trice production payment.

Whether “summary judgment is appropriate in any case is one to be decided upon the particular facts of that case.” First National Bank of Arizona v. Cities Service Co., 391 U.S. 253 , 88 S.Ct. 1575 , 20 L.Ed.2d 569 (1968).

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The duty of the trial court, in considering such a motion, is not to decide any factual issue but rather to determine whether any factual issue exists which requires determination by the factfinder. National Screen Service Corp. v. Poster Exchange, Inc., 305 F.2d 647, 651 (5th Cir. 1962); Byrnes v. Mutual Life Insurance of New York, 217 F.2d 497, 500 (9th Cir. 1954). In this case Hopkins urges this Court to make many findings of fact which this court specifically declines to do in this summary judgment context. But that does not relieve this Court of the obligation to examine the record before it under Rule 56 and to determine if there is lacking any genuine dispute with regard to material facts which in and of themselves provide an undisputed basis upon which plaintiff is entitled to summary judgment relief under Section 12(2) of the ’33 Act. Such an examination requires a careful classification of those material facts which qualify as undisputed under Rule 56 standards.

3

FINDINGS OF UNDISPUTED MATERIAL FACTS

Based upon an exhaustive review of the entire record in this case this Court finds that the following facts are material and that there is no genuine dispute with regard to any of them.

4

1. LaPiere was employed by Hutton, as Manager of its Oil and Gas Department, on March 1, 1957, and resigned from this position in July 1961.

2. The New York Stock Exchange notified Hutton, on or about September 20, 1957, that the Exchange had approved LaPiere’s application to act as a duly qualified Registered Representative.

3. In his capacity for Hutton, as Manager of the Oil and Gas Department and as a Registered Representative, LaPiere, among other duties, was authorized to solicit underwritings and other financing from a number of oil companies, to administer from day-to-day the interests of participants in “various” oil drilling programs, to contact the public with regard to purchases or sales of stocks and bonds and investment banking relationships, and to screen and add what information he might have to programs presented by the various oil operators who approached Hutton.

4. Trice Production Co., in early August 1960, mailed copies of the first Schafer report, dated March 27, 1960, the second Schafer report, dated June 8, 1960, and the D & M (April 1, 1960) report, dated June 11, 1960, to LaPiere.

5. The $1,300,000 production payment purchased by Johns Hopkins University, on March 1, 1961, covered a combination of 23 oil and gas wells.

6. The twenty-three wells under this $1,300,000 production payment purchas

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ed by Hopkins, and the estimates of their future net revenue contained in the first and second Schafer and the D & M reports are as follows:

1st Schafer 2nd Schafer

Well D & M Estimate Estimate Estimate

R. D. McDonald #1 $1,699,536 None None

Milne #1 361,223 None None

Dugger #1 119,742 $ 72,858 None

Younger #1 50,473 30,938 None

Dollar #1 11,829 None None

Barham-Knox #1 8,918 None None

Noland #2 27,761)

5

None None

Noland #3 46,256)

5

None None

Noland #4 38,351)

5

71,402)6

94,234)

6

None

Windle 259,861 56

7

None None

Weatherford 102,028

8

None None

Dennis 91,045

9

None None

Nunez “A” #1 670,667 350,841)

10

618,696)

10

None

J. R. Clayton #2 4,193 37,230 None

Woodworth #1 95,871 406,912)

11

43,009)

11

$411,696

Harvey Jones #1 93,351 None 292,626

Swinney #5 23,954 57,646 58,451

Tipps #1 316,802 None None

Hester #1 None None None

Dumas #1 Skiles #1 None None None None None None

Vera Roney #2 None None None

Hughes #1 None None None

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7. Trice Production Co. mailed Trice Production Schedules II and III, dated August 7, 1960, to LaPiere. Schedule II showed, among other things, the following estimates of future net revenues:

Nunez A-l $670,667

Jones 292,626

Woodworth 411,696

Dumas 265,541

Hester 478,704

Swinney 58,451

Hughes 79,513

Dollar 11,829

Dugger 72,858

Tipps 327,794

Weatherford 116,604

Windle 121,128

Skiles 53,958

Barham Knox 8,918

J. R. Clayton 4,193

Roney #2, $ 16,518

Noland #2, ¡#3, #4 124,897

Younger 50,473

Milne 361,223

R. D. MacDonald 1,699,536

Dennis 128,618

The total estimated future net revenue shown for the above 23 wells — those 23 wells which comprised the $1,300,000 production payment purchased by Hopkins — is $5,355,744. Schedule III is virtually the same as Schedule II, but it includes estimates for six additional properties — six “minor interest” properties which LaPiere asked Trice Production Co. to strike from the schedule — and a total estimate for future net revenues of $5,367,523.

8. Trice Production Co. mailed to LaPiere a “Schedule I” dated August 7,

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1960. That schedule showed, among other things, the following for each of the 23 wells in the $1,300,000 production payment purchased by Hopkins:

Well Available Analyses Sources of Extension and Reserves

Nunez A-l D&M D&M

Jones D&M, Schafer Schafer

Woodworth D&M, Schafer Schafer

Dumas None TPC

*

Hester None TPC

*

Swinney D&M, Schafer Schafer

Hughes None TPC

*

Dollar D&M D&M

Dugger D&M, Schafer Schafer

Tipps D&M D&M

Weatherford D&M D&M

Windle D&M D&M

Skiles None TPC

*

Barham Knox D&M D&M

J. R. Clayton D&M D&M

Roney i#2 None TPC

*

Noland #2, #3, i#4 D&M D&M

Younger D&M D&M

Milne D&M D&M

R. D. MacDonald D&M D&M

Dennis D&M D&M

9. Trice Production Co. mailed to LaPiere the brochure dated August 8, 1960, entitled “Proposal for Purchase of Oil & Gas Production Payment.” Among other things, this brochure included estimates of future net revenue for the same 29 wells covered by Schedule III, supra, (including the 23 covered by the $1,300,000 production payment purchased by Hopkins), and this brochure shows a total future net revenue figure for the wells of $5,083,773.

10. On or about August 5, 1960, LaPiere asked Bankers Trust, through Keteham, to finance a $2,500,000 Trice production payment, which Bankers turned down.

11. LaPiere then, on or about August 8, 1960, called Keteham again and offered Bankers Trust a counter-proposal in which William Hutton agreed to reduce the amount of broker’s loan which Hutton had from Bankers if Bankers agreed to take part in the Trice financing. Bankers decided to go ahead with this proposal.

12. In August, 1960, Keteham of Bankers received from LaPiere a copy of the D&M report, the second Schafer report and the Trice Production Co. “Schedule II”. Keteham prepared a resume of the D&M report, and a schedule recapitulating net revenue figures from the D&M and first and second Schafer reports.

13. Bednar, a technical consultant to Bankers Trust, reviewed the D&M and Schafer reports and expressed to Ketch-am his preference for the D & M estimates, rather than those of Schafer which seemed to Bednar to take the high road.

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14. Ford, of Trice, wrote Ketcham, in a letter dated August 27, 1960, among other things, that certain variations existed between Trice figures and the D & M report estimates for the Weatherford #1, Lee Tipps #1, Bert Dennis ,#1 and Emma Windle #1 wells. Ford explained that the D & M estimates, which were made before the Trice figures were assembled, were lower than the Trice figures because the D & M figures reflected a deduction of certain estimated capital expenditures; that the latter were not deducted for the Trice figures because subsequent to the date of the D & M report these four wells had been completed and those expenditures made.

15. Barnett of Trice wrote LaPiere a letter, dated August 25, 1960, which, among other things, described a possible sales pitch for putting together a syndicate to take a portion of the production payment deal, and informed LaPiere that he would receive a memo by Wood, of Peat, Marwick & Mitchell, with regard to the tax aspects of such a deal.

16. On August 30, 1960, LaPiere contacted Rowen, a partner in the law firm of Sherman, Sterling and Wright, of New York City, and asked Rowen to comment on the proposed $1,300,000 Trice production payment, especially with regard to tax matters. Rowen performed approximately 14 hours of work with regard to the Trice Production Co. matter.

17. Rowen received a letter, dated September 10, 1960, from McCauley of Trice, which letter explained that enclosed with it was a copy of a McCauley-to-LaPiere letter of the same date and a draft of a proposed production payment, which McCauley desired LaPiere and Rowen to discuss. Rowen talked with McCauley about this material in a phone call on September 15, 1960.

18. Rowen received from McCauley more production payment documents with a letter, dated October 4, 1960, which letter stated McCauley’s understanding that LaPiere had obtained a committal on approximately all of the $1,300,000 production payment, and that within the next few days the first production payment (to Bankers) would be concluded.

19. McCauley also communicated, by letter dated September 12, 1960, with counsel for Bankers Trust Company (Cahill, Gordon, Reindel & Ohl, of New York City) concerning documents covering the Bankers Trust part of the Trice . production payment transaction. Among other things, McCauley expressed his view that the instruments were the usual provisions in transactions such as those proposed with Bankers Trust and the Gilbert LaPiere group.

20. Ketcham wrote a memo for the Bankers credit file dated September 16, 1960, which related that Constable of Bankers Trust had spent time with D & M and with Trice reviewing the D & M engineering work, and which stated that Bankers was waiting for a revised report on the Windle well and that Bankers had told LaPiere that Bankers would make the loan and would draw papers for an amount in excess of $1,300,000 and would advance additional funds as soon as satisfactory engineering determined a loan value for the Windle well.

21. Because of Bankers’ dissatisfaction with the D & M report on the Windle well, Bankers asked Bednar to make a report on that well, and the Bednar report on Windle, dated September 27, 1960, stated among other things, a net revenue figure of $193,264.

22. Ketcham wrote to LaPiere, a letter dated September 28,1960, in which he stated that Bankers desired to limit the amount of the production payment to $1,300,000 plus the loan value of the Windle lease, and that he expected Bednar’s answer on the Windle in the very near future.

23. Constable wrote a memorandum to the Bankers credit file, dated October 14, 1960, in which he stated, among other things, that Bankers loaned on that date $1,375,000 to Oilco Inc., Bankers’ dummy corporation, for the purpose

*1183

of purchasing the production payment, and that this financing was done at the request of LaPiere of W. E. Hutton for their customer, Cliff Trice of Trice Production Co.

24. LaPiere, by letter dated October 17,1960, wrote to Ketcham and expressed his appreciation for the completion of the Bankers’ oil payment deal, and enclosed a $75,000 check of W. E. Hutton Co. to open a new account with Bankers for W. E. Hutton’s Oil and- Gas. Department.

25. Ketcham, in a credit file memo, dated October 18, 1960, stated, among other things, that the Hutton account was opened as a partial reward to Bankers for having purchased the $1,375,000 production payment.

26. Hutton received from Trice a $27,500 gross commission for placing this production payment; LaPiere received 40% of this commission payment, or $11,000.

27. By letter to Ragnar Naess dated August 30, 1960, Cliff Trice presented Trice Production Co. plans to sell carved-out production payments in order to secure financing. In this letter, Trice stated, among other things, that LaPiere indicated Hutton’s interest in securing monies for a production payment series amounting to $2,700,000 and that Trice agreed to pay Hutton a 2% finder’s fee in connection with this sale; explained the mechanics of the production payment ; and stated that the payments had been evaluated by the competent and conservative engineering firms of D & M and Schafer; explained Hutton’s attempts to sell the $2,700,000 payment in two payments, one to a bank and another to a proposed syndicate; suggested the attractiveness of production payments as an institutional investment; asked Naess to recommend production payments to some of his clients; and enclosed a brochure, dated August 8, 1960, prepared in connection with the $2,700,000 production payment, which showed an estimated total future net revenue figure of $5,083,773.

28. On September 14, 1960, Cliff Trice and Gilbert LaPiere met with Ragnar Naess in the latter’s office at which time Trice presented a production payment proposal concerning which he wanted to interest Naess’ client, Johns Hopkins University; and during which meeting Naess spoke, by way of long distance, interstate telephone with his Baltimore partner, Canedy, and with Baker, the Treasurer of Hopkins, concerning the proposal, outlined the proposal to Baker and arranged for a meeting between Baker and Trice and LaPiere in Baltimore.

29. Thomas of Trice, by letter dated September 13, 1960, wrote to LaPiere a letter which included electric logs for four wells covered by the secondary production payment and enclosed a brief summary in connection with the $2,700,-000 production payment and asked LaPiere to get in touch with Trice Production Co. if he needed anything else that would assist him. The enclosed summary explained that the $5,083,773 estimated net revenue figure set forth in the brochure was a minimum figure compiled by independent engineering firms, and that additional data which had become available indicated that future revenue would amount to approximately $7,200,-000.

30. Trice Production Co. sent to LaPiere’s secretary a letter dated September 21, 1960, transmitting twelve copies of a brochure dated September 16, 1960, entitled “Proposal for Purchase of Oil and Gas Production Payment,” and by letter, dated September 23, 1960, twelve additional copies of this September 16 brochure were sent to LaPiere, and another twenty copies were sent to LaPiere on October 4, 1960.

31. Naess also received a copy of this September 16, 1960 brochure.

32. This September 16, 1960, brochure included comments on the proposed $2,700,000 production payments and an outline of the economic results, and stated a total future net revenue figure of $6,560,000 with eight years said to be the time required to retire principal and

*1184

interest on the $2,700,000 production payment, and estimated a return

12

of $2,905,174 to holders of the $1,300,000 production payment.

33. Trice, LaPiere and Canedy attended a meeting in Baker’s office on September 21, 1960, at which time Baker received a copy of the September 16, 1960 brochure containing the $6,560,000 net revenue figure and at which time he received the calling cards of Trice and LaPiere.

34. LaPiere received a letter, dated September 23, 1960, from Ford of Trice which stated that it included a schedule showing the “8/8 reserves” (estimated total production in barrels or gas units) for each of the 23 wells covered by the $2,700,000 production payment and suggested that this schedule be included in LaPiere’s and Cliff Trice’s copy of the brochure to talk from, but that it was felt that those reserve figures should not be made an inclusion in all of the brochures.

35. Canedy wrote to Naess and other Naess & Thomas officials a memo, dated September 22, 1960, in which, among other things, he mentioned the September 21 meeting in Baker’s office, and in which he included a suggestion to Naess that Naess and Thomas find an expert to advise Hopkins on the deal and that Baker had agreed to compensate Naess & Thomas for the added expense of such a consultant.

36. After receiving this memo, Naess expressed his satisfaction with Canedy’s suggestion to him, but stated that Hopkins, and not Naess & Thomas, should employ the consultant.

37. In the first half of October, 1960, Naess had discussions with Baker in which he stated the advantages of the production payment and recommended that Hopkins employ Petroleum Consultants, Inc. to check the reserve estimates of D & M and Schafer on the wells included in the production payment which Hopkins was considering.

38. At the meeting of the Johns Hopkins University Finance Committee, on October 14, 1960, Baker outlined the production payment proposal, which the Committee decided not to pursue at that time, but which it indicated might be considered at a future date.

39. In October, 1960, Arthur Wiesenberger, a New York investment banker, wrote letters and enclosed therewith copies of the September 16, 1960, brochure, to at least five of his investment clients. The letters explained a possible Trice production payment program total-ling $1,300,000 and stated that the production payment business had been brought to Wiesenberger by Gilbert LaPiere of W. E. Hutton & Co. ■ None of Wiesenberger’s clients purchased Trice production payments.

40. On October 4, 1960, Cliff Trice wrote to LaPiere at W. E. Hutton & Co., and stated to LaPiere that he had prepared (and enclosed) a list of possible participants for a production payment syndicate; that he was confident that with LaPiere’s continued efforts they would be successful in selling production payments totalling $1,300,000; and that he deeply appreciated everything LaPiere had done for him and for Trice Production Co. The eleven names on the enclosed list of possible syndicate members were about evenly distributed between institutions and individuals.

41. During October, November and December, 1960, LaPiere and Trice negotiated with Bankers Trust for the sale of a $720,000 production payment to Oilco, which sale was ultimately made on January 6, 1961, and for which sale Hutton received a 2% commission, or $14,400,

*1185

from which latter amount LaPiere received $3,600 (25% of the $14,400).

42. On November 25, 1960, the Johns Hopkins University Finance Committee issued a statement of its investment policy which, among other things, set forth a new position, namely, that in the fixed income portion of Hopkins’ endowment portfolio (which portion comprised approximately 50% of that portfolio), there could be “up to 10% of portfolio in other investments” providing higher current return than from investments such as high-grade bonds or mortgages, and/or the probability of capital gain. The statement explained that such investments could include convertible bonds, leasebacks, oil payments, and certain other properties.

43. In November, 1960, I. W. Iglehart, a Registered Representative of Hutton, had phone discussions with his father-in-law, Charles F. Garland, the President of Hopkins’ Board of Trustees, with regard to the disposition of Hopkins’ Finance Committee toward the production payment proposal.

44. On December 7, 1960, Naess, during a meeting between Trice and himself, contacted Baker to ascertain if Johns Hopkins had any then present interest in the $1,300,000 production payment and also whether LaPiere should appear before the Finance Committee on January 27, 1961. During this December 7, 1960, meeting Naess also learned that Trice would pay the cost of the University’s independent oil consultant.

45. At its December 23, 1960, meeting the Johns Hopkins University Finance Committee again discussed the production payment proposal and at that time learned that Trice Production Co. was willing to pay the cost of the University’s independent oil consultant. The Committee decided to discuss the production payment at its January 27, 1961 meeting at which Naess and a representative of W. E. Hutton & Co. were to be present.

46. By letter to Harriman of Naess & Thomas, dated January 4, 1961, LaPiere explained the nature of an oil payment of the type proposed to Hopkins; explained that the seller creates a payment from the properties in an amount equivalent to the financing the properties can support, in this case, $2,700,000; and stated that the amount that the properties can support is determined by independent engineers who had estimated the reserves and income on the properties.

47. By letter to Petroleum Consultants, Inc. dated January 5, 1961, LaPiere stated that W. E. Hutton & Co. and Trice Production Co. would like Petroleum Consultants, Inc. to make a study and to estimate future net oil and gas reserves and cash projections in connection with certain properties of Trice Production Co., and requested that work be started, if possible, on January 9, and that statements be sent to LaPiere at Hutton’s address.

48. Harriman, by letter dated January 10, 1961, requested that LaPiere answer certain questions raised by Baker on the production payment deal, and stated that he believed a memorandum to Harriman containing these answers would- make easier LaPiere’s visit to the Finance Committee meeting on January 27.

49. LaPiere then called Worth Mc-Cauley, General Counsel of Trice and conveyed these questions to McCauley and requested that McCauley write the answers to these questions in a letter to LaPiere.

50. By letter, dated January 12, 1961, Worth McCauley replied to LaPiere’s request in question-answer form.

13

*1186

51. By letter, dated January 16, 1961, LaPiere replied to Harriman’s January 10 request in question-answer form.

14

52. The question-answer portion of the LaPiere-to-Harriman letter of January 16 was identical to the McCauley-to-

*1187

LaPiere January 12 correspondence, but for the additions noted below. Among other things, LaPiere stated that the buyer was purchasing a production payment of so many dollars payable out of oil to be produced and the then existing

*1188

reservoir engineer studies of what said properties would produce (this statement was also contained in the McCauley letter) ; explained that the buyer would get returns in terms of net revenues from production as arrived at by the buyer’s independent reservoir engineers; and stated that the first estimates had been made by D & M and were then being checked by Chester Brown of Petroleum Consultants, Inc (see n. 14, question and answer 1; the McCauley letter to LaPiere included no mention of the earlier D & M estimates); that the

only

experts who had been engaged were D & M, who had made the original estimate, and Brown, who was presently checking such estimates (see n. 14, question and answer 3; the McCauley answer did not mention D & M); that Sherman, Sterling & Wright, counsel to W. E. Hutton & Co., had checked all titles and agreements to their satisfaction (see n. 14, question and answer 5; the McCauley answer did not include this reference to Sherman, Sterling & Wright).

53. The January 16 LaPiere-to-Harriman letter was forwarded by Harriman to Baker.

54. By letter dated January 24, 1961, Baker transmitted to members of the Finance Committee the LaPiere-to-Harriman January 16 letter, and the September 16 brochure, but the brochure was conveyed without the original cover page bearing the date September 16, 1960.

55. LaPiere attended that portion of the January 27, 1961, Johns Hopkins University Finance Committee meeting which related to the production payment.

56. At the January 27, 1961, Finance Committee meeting, Baker stated that based on D & M estimates of production Hopkins would receive during the first four years interest at 6% on funds invested and amortization of the principal in the total amount of about 3%; that during the next four years Hopkins would receive interest at 6% on the declining investment and return of the remainder of the principal of its original investment; that, in the next approximately ten years Hopkins would receive profits from 50% of the production from the wells until a total of $641,000 had been received; and that after the above approximately eighteen years Hopkins would receive 25% of the net profits from these properties during their remaining lifetimes; and that the total receipts, in addition to principal and interest at 6% thereon, were estimated to be $1,138,000. At this same meeting, LaPiere stated that the original D & M estimates with regard to the properties in question were now being checked by Brown of Petroleum Consultants who had been selected by Naess and whose fee would be paid by Trice Production Co. LaPiere further reported, among other things, that Brown’s study indicated that the University might produce a total return of $3,005,000 instead of the original D & M estimate of $2,905,000, and that the difference in connection with those figures was due to Brown’s estimate of $1,243,000 for the Residual Net Profits Interest — an increase of $100,000 over prior estimates for that interest; that Mr. Brown estimated interest and principal repayment in 6.6,

*1189

rather than 8.8 years: that the proposed production payment properties included 17 oil wells and 6 gas wells, and that Hopkins would have a first lien on five of those 23 wells; that all estimates were based on then current prices for oil and gas; that at least 6% current interest was guaranteed to Hopkins, and that if production would not be sufficient to keep this current, other provisions would be made; and that other universities had substantial investments in oil payments, although not of this particular kind.

57. At its meeting of January 27, 1961, the Finance Committee of Johns Hopkins University approved the investment of ■ $1,300,000 in the Trice production payment and approved an appropriation of $3,000 for expenses related thereto.

58. At the end of January, 1961, Baker called Cooper of Venable, Baetjer & Howard, counsel to Hopkins, and requested him to look over certain papers regarding the production payment and to offer his comments to Baker.

15

59. Cooper wrote a memo to the Venable, Baetjer & Howard file on the production payment, dated January 27, 1961, in which he commented on different aspects of the production payment deal and noted certain risks involved therein, but he did not give this memo to Baker.

60. Cooper, after he prepared the memo, called Baker and stated, among other things, that Hopkins should obtain the reports of D & M, Schafer, and Brown, and that it would be helpful if Hopkins would obtain the documents which Bankers Trust had used in connection with its production payment purchase from Trice.

61. After another request from Cooper to get the experts’ reports, Baker, on February 6, 1961, telephoned LaPiere and requested that he send Baker the reports.

62. On or about February 2, 1961, LaPiere wrote to Cliff Trice that Johns Hopkins University had agreed to purchase the $1,300,000 production payment at the Finance Committee meeting on January 27, 1961; that Baker or his attorney would shortly contact Trice; and that Baker had instructed him that any questions which Trice might have should be directed to LaPiere at W. E. Hutton & Co.

63. Baker received from LaPiere a letter, dated February 3, 1961, in which LaPiere stated, among other things, a summary of the Petroleum Consultants, Inc. report which included a total future net revenue figure of $7,394,000 and a return to the holder of the $1,300,000 production payment of $3,005,000, and in which LaPiere compared those figures with those in the September 16, 1960, brochure and stated that he was gratified to know that the figures presented in what he referred to in this letter as his brochure of September 16, 1960, were conservative.

64. At a meeting in Baltimore on February 7, 1961, attended by Baker, Dandridge of Venable, Baetjer & Howard and for a time by Cooper, and also by Worth McCauley and Mitchell of Trice, Mitchell gave to Baker a brochure dated February 3, 1961, entitled “Data Pertinent to Johns Hopkins Production Payment.”

65. The February 3, 1961, brochure given by Mitchell to Baker stated, among other things, that some of the twenty-three wells included in the Johns Hopkins production payment had been evaluated by one consulting firm and some by another; that eight wells were evaluated by the engineering staff of Mercantile

*1190

National Bank and explained the method by which the figures for the eight wells evaluated by Mercantile were calculated; stated that LaPiere had reviewed the technical data for each and every well and concluded that the reserves supporting this proposed production payment were conservative; and, that it was understood that Brown, as a result of his study, felt the reserves utilized in supporting the production payment were conservative. This brochure also showed the following list of net revenue figures and. consultants for each well:

Net Rev. to Reserves based on

Trice Prod. Co. Following Consultants

Reserves

Nunez A i#l $ 672,465 D&M

Harry Jones #1 334,497 Schafer

Woodworth #1 516,111 Schafer

Swinney #1 104,674 Mercantile

Dollar #1 15,085 D&M

Dugger #1 196,676 D&M

Tipps #1 304,377 Mercantile

Weatherford !#1 91,469 D&M

Windle #1 394,319 Mercantile

Barham-Knox #1 40,219 D&M

J. R. Clayton ;#2 36,062 Schafer

Noland #2, #3, ¡#4 179,760 Schafer

Younger i#l 32,833 Schafer

Milne #1 220,981 D&M

R. D. McDonald #1 2,041,979 D&M

Bert Dennis ¡'#1 123,757 D&M

Vera Roney #2 19,140 Mercantile

Dumas #1 385,500 Mercantile

Hughes #1 79,435 Mercantile

Skiles #1 47,525 Mercantile

Hester #1 723,136 Mercantile

$6,560,000

66. At the February 10, 1961, meeting of the Johns Hopkins University Finance Committee, it was reported, among other things, that Hopkins, through Venable, Baetjer & Howard, had retained the law firm of Carrington, Johnson & Stephens of Dallas, Texas for certain work with regard to the production payment purchase; that reserves for each of the wells had been analyzed first by either D&M, Schafer, or the Mercantile engineering staff, second by LaPiere of Hutton, and third by Brown of Petroleum Consultants (selected by the University’s investment counsel to make a report); and that it was planned to have Naess make further investigations with Bankers Trust and to study the Brown report, and then make recommendations to the University.

67. By letter to Baker dated February 14, 1961, Naess stated that Mercantile National Bank in Dallas held Cliff Trice in high regard; that he had found the assumptions in the Brown report to be reasonable; that he had spoken with Ketcham and had learned that Trice came highly recommended; that Constable of Bankers had spent some time going over the D&M reports, but had not personally made independent estimates; that the number of leases underlying the

*1191

Bankers loan was less in number than those underlying the Hopkins loan; that Naess had known Trice for quite a few years and held him in high regard; and, that considering everything, Hopkins should purchase the production payment.

68. LaPiere received a letter from Baker dated February 14, 1961, with enclosures. In that letter Baker stated that he was enclosing excerpts from the Hopkins Finance Committee meetings of October 14, 1960, December 23, 1960, January 27,1961, and February 10, 1961, having to do with Hopkins’ proposed production payment purchase through LaPiere. Also, in that letter, Baker asked LaPiere to let him know if there was anything in those excerpts which indicated a different understanding on Hopkins’ part than LaPiere and Trice Production Co. had in mind.

16

69. By letter dated February 24, 1961, LaPiere conveyed to Baker a balance sheet as of November 30, 1960, and explained the Trice financial picture, and also stated that Hopkins would look to the oil and gas reserves for its guarantee, for no matter who operated the properties, Hopkins’ call would be on the reserves.

70. At the February 24, 1961, meeting of the Johns Hopkins University Finance Committee, the Naess letter of February 14, 1961, recommending the purchase by Hopkins was read, mechanical details relating to expenses of the purchase were discussed, and the Treasurer (Baker) was authorized to make the investment which it was understood would be settled for by about March 1, 1961.

71. On March 1, 1961, the closing for the purchase by Johns Hopkins University of the $1,300,000 Trice production payment was held at the offices of Hopkins’ Texas counsel. The production payment agreement between Hopkins and Trice is included in the record in this case.

72. Hopkins’- Texas counsel, at about the time of settlement, received a letter from Trice Production Co. dated February 23, 1961, which stated, among other things, that Trice guaranteed 6% interest per annum on the unpaid monthly balance of $1,300,000 until the Oilco production payment would be liquidated and terminated; that Hopkins would be reimbursed for certain state income taxes and for the Dollar well, should it not go into production; and that that Trice undertaking was in consideration of Hopkins’ purchase of the production payment and net profit overriding royalty interests.

73. By letter to William Hutton of W. E. Hutton & Co. dated March 6, 1961, Cliff Trice stated his belief that Hutton had received Trice Production Co.’s $26,-000 check for commissions on the $1,300,-000 oil payment sale to Johns Hopkins University and expressed his appreciation to Hutton, W. E. Hutton

&

Co. and to LaPiere for helping Trice with its problems in converting short-term debt to long-term.

74. W. E. Hutton & Co. received a $26,000 check from Trice Production Co., dated March 7, 1961, and this check contained a description which stated that it was for a commission in connection with placement of Trice’s $1,300,000 production payment with Johns Hopkins University by LaPiere.

75. Hutton’s Customer’s Ledger, “Prepaid Expense Trice Oil Payment Syndicate #1” itemizes as follows ex

*1192

penses totalling $5,479.80 which Hutton subtracted from the gross commission of $26,000 in order to arrive at a net corn-mission of $20,520.20:

Expenses incurred through Dec. 21, 1960 $1,933.31

1/24/61 Tel. Calls 126.72

1/26/61 Amer. Airlines 399.19

2/ 3/61 Hilton Credit 59.60

2/ 8/61 Tel. calls, Oil Dept. 229.79

2/14/61 G. LaPiere travel 16.70

2/21/61 ^ Pet. Cons. Inc. [$3429.00 3/ 8/61 I Minus Ck. Trice Prod. $1,714.50] 1,714.50 3/ 9/61 f Fee paid to I. D. (sic) Iglehart oil commission 1,000.00

$5,479.81

76. LaPiere was paid by Hutton 25% of the net from the $26,000 commission which Hutton received from Trice, so that after deductions for expenses, LaPiere received $5,130.05 in connection with the sale of the $1,300,000 production payment to Johns Hopkins University.

77. By letter to Pelley of Bankers Trust, with a copy to Ketcham, dated February 27, 1961, William Hutton stated that Hutton had been engaged through LaPiere in a refinancing program for Trice over the preceding four months; that in addition to the two prior production payments purchased by Bankers Trust, LaPiere had discussed a third deal involving approximately one million dollars, with Bankers; that Hutton was disappointed that Bankers did not wish to refinance the whole Trice picture; that Hutton continued to have confidence in Trice and would go forward in refinancing Trice; that it would be helpful to Hutton if Bankers would further consider the proposed one million dollar payment; and that Hutton would thus be allowed more time to direct its attention to-other institutions to assist it in the overall financing.

78. Bankers refused to participate in further Trice financing because of irregularities found by Constable of Bankers on a visit to Trice on or about March 2 or 3, 1961, and Ketcham and others from Bankers communicated this decision to William Hutton at a meeting on March 9, 1961, at which meeting they also expressed warnings to Hutton to treat the Trice Production Company situation and LaPiere with great care.

79. During the years 1956-1962, partners and relatives of partners of W. E. Hutton & Co. invested over $1,000,000 in Trice Production Co., oil drilling programs, and clients and customers of W. E. Hutton

&' Co.

invested over $2,000,000 in such programs.

80. After receiving a letter, dated March 28, 1961, from LaPiere requesting that he prepare a report for Trice and W. E. Hutton & Co. on certain wells with regard to a proposed new production payment, Brown prepared the report and billed Trice $6,865 for this work, half of which amount was paid by Hutton and half by Trice Production Co.

81. On April 11, 1961, Keusch and LaPiere of Hutton attended a meeting at which Trice presented to Bristol, financial advisor to Princeton University, a proposed production payment for sale to Princeton University, and at which meeting Bristol received a pamphlet, dated March 13, 1961, which described, among other things, Hutton’s prior assistance to Trice in the sale of three production payments and Hutton’s view of the advantages of a production pay

*1193

ment investment. Princeton did not purchase this proposed production payment because of, among other reasons, an existing defect in Trice working capital.

82. Trice proposed a similar production payment to Guardian Life Insurance Co. and by letter to Trice dated May 31, 1961, LaPiere explained the delays in completing the proposed Princeton and Guardian purchases of payments and also a proposed University of Pennsylvania production payment purchase, as being caused by the necessity of taking time to indoctrinate financial officials of those institutions in the ways of oil payments.

83. In a letter to Trice dated June 15, 1961, LaPiere further explained Guardian’s delay in making a purchase by stating that it was necessary to educate Guardian on the principles of an oil payment which, as had been the case with Johns Hopkins University, would be a long tedious matter. Guardian ultimately did not purchase a Trice production payment.

84. LaPiere left the employ of W. E. Hutton & Co. in July, 1961.

85. After he left Hutton’s employ, LaPiere, by letter to Trice dated July 19, 1961, described Hopkins’ satisfaction at their payment purchase which “we” had presented.

86. By letter to McCauley dated April 12, 1961, Baker stated, among other things, that he understood Trice remittances to Hopkins were first to be credited to the interest due account, that the balance was to be applied to the principal account, and that Hopkins would at least receive the 6% interest payments.

87.

By letter to Baker, dated April 19, 1961, McCauley confirmed Baker’s understanding stated in the Baker-toMcCauley letter of April 12, 1961.

88. In reply to a letter dated August 3, 1961, from Patterson of Hopkins, Thomas of Trice by letter dated August 14, 1961, presented a schedule which showed that interest owed by Trice to Hopkins was in arrears by over $4,000 through April 25, 1961; and that by June 26, 1961, when interest was no longer in arrears, $569.19 of the payments made to Hopkins had been applied to reduction of principal.

89. By letter to Patterson dated September 18, 1961, Thomas stated that insufficiencies in interest designated on a Trice schedule for April, May, June and August were due to the fact that several of the leases dedicated to the production payment had been underproduced due to a maritime strike, but that this underproduction would be made up in the future.

90. While Hopkins received slightly more than the $6,497.15 interest due to it for the period June 27, 1961, to July 26, 1961, it received almost $200 less than the $6,496.97 interest due it for the period July 27, 1961, to August 25, 1961.

91. With the exception of the period from November 27, 1961, to December 26, 1961 (when it did not receive more than $250 of the interest due it), Hopkins received between approximately $60 and $1500 more than the interest due it for each monthly period from August 26, 1961 to January 26, 1962.

92. As of December 31, 1961, Hopkins had not yet received any revenue from “Pone Gas Unit #1,” and from the Dollar well (which had been plugged and abandoned since April 1961), two of the wells covered by its $1,300,000 production payment. Of the wells covered by this payment, nine were either underproducing or not producing as of this time.

93. On January 15, 1962, Trice Production Co. began to negotiate directly with Hopkins for the sale of a second production payment in the amount of $1,000,000.

94. During these negotiations Hopkins and Naess became aware of certain insufficiencies, some substantial, in Trice payments on the Bankers Trust production payment, and that more wells in that payment had underproduced than

*1194

overproduced as compared with the engineering estimates furnished to Bankers prior to purchase. Trice’s financial situation including the possibility of a Trice bankruptcy was also discussed.

95. Hopkins also became aware, during these negotiations, that the time of payment for both the Bankers and Hopkins production payments would be delayed six months beyond the time estimated for payout.

96. During this period of negotiations, Hopkins also received reports and information disclosing the need of Trice Production Co. for cash and revealing Trice Production Co.’s current assets to be between 3.1 and 3.2 million dollars, and current liabilities to range from approximately 7.7 to approximately 21 million dollars, the latter amount including approximately 13 million dollars in Trice Production Co. notes payable (which notes were represented as having a three-five year maturity period).

97. On February 14, 1962, Hopkins purchased the $1,000,000 production payment from Trice Production Co.

17

98. From January 27, 1962 to June 26, 1962, Hopkins received amounts in excess of the interest due Hopkins on its $1,300,000 production payment for each of the five monthly accounting periods during this time. Those amounts ranged from approximately $430 to approximately $1900 in excess of the interest due Hopkins.

99. From February 26, 1962 to June 26, 1962, Hopkins received $1991.72 in revenue from its second, or $1,000,000, production payment, and on June 29, 1962, Hopkins received $26,147.06 on this payment.

100. In the first half of June, 1962, Hopkins received from Trice Production Co. two checks totalling in excess of $24,000, as payments on its first and second production payments, and both of these checks were returned for want

of sufficient Trice funds after Hopkins had attempted to put them through for payment.

101. On July 13, 1962, Hopkins elected to have Trice Production Co. segregate the funds due Hopkins on the two production payments in an escrow bank account established for Hopkins, rather than implementing a procedure which would have had purchasers of oil and gas from wells covered by the Hopkins production payments make payment directly to Hopkins for their purchases attributable to wells underlying the Hopkins production payments.

102. In July, August and September, 1962, Hopkins was aware that the “Pone Gas Unit #1” of its first production payment, and that the Henry and Carpenter wells of its second production payment, were not then producing.

103. Hopkins was aware in October, 1962, that it had received no revenue from the Butler well of its second production payment.

104. At the July 13, 1962 Hopkins Finance Committee meeting it was reported that Hutton believed that Hopkins’ investment was safe but that Hutton recommended that Hopkins arrange for purchasers of production from wells covered by Hopkins’ production payments to pay the purchase price for such production directly to Hopkins. At that meeting it was also disclosed the University’s investment and legal counsel and Baker were disposed not to implement such a direct payment method at that time but to have Trice immediately deposit Hopkins’ share of receipts into an escrow bank account.

105. For the five monthly accounting periods from June 27, 1962, to November 26, 1962, Hopkins received an amount equal to or more than the interest due it on its first production payment for only one of those periods, and substantially less than the amount due to it in

*1195

connection with that payment during the other four.

106. Hopkins received less than the amount of interest due it on its second production payment for monthly periods beginning July 1962 and ending October 1962.

107. Hopkins received no revenue for the months of July and August, 1962, from sales from the Hughes and Roney wells covered by its first production payment, and Hopkins was aware of this situation prior to the end of October, 1962.

108. Hopkins was named as a defendant in a suit brought by Strawn Drilling Co. against Trice on July 27, 1962, in which suit Strawn asserted a mechanics’ lien for approximately $10,000 of drilling costs with respect to the Butler lease under Hopkins’ second production payment; and for which Trice Production Co. agreed to pay the legal costs incurred by Hopkins in this suit.

109. Hopkins received a letter dated August 24, 1962, from a Mr. Loeb, an investor in one or more of Trice’s ventures, who informed Hopkins of trouble he was having with regard to his investment in Trice programs, which among other things, included the return of Trice checks marked “No Funds.”

110. Hopkins received a letter dated August 27, 1962, from its Texas counsel, which letter advised Hopkins, among other things, to watch the Trice situation closely.

111. On September 7, 1962, Hopkins learned from Hutton representatives that Cliff Trice had formed a finance committee with some of his creditors which would meet on September 10, 1962; that Hopkins should be represented at that meeting in order to protect itself; and that the possibility existed of certain Trice creditors forcing Trice Production Co. into a reorganization or bankruptcy.

112. After the September 10 meeting, Hopkins was informed by its Texas counsel, on September 12, 1962, that a committee of certain Trice Production Co. creditors had taken voting control of Trice Production Co. through a voting trust from Cliff Trice, and that the committee intended to cut down Trice expenses; that Hopkins should not be seated on the committee but should stay in close touch with it; and, that Trice would need approximately $1,000,000 to work out of its problems.

113. Hopkins received a Dun & Bradstreet Analytic Report, dated September 11, 1962, which stated, among other things, that a financial committee, composed of representatives of four major Trice suppliers, an attorney, and three principal investors and/or directors of Trice had been formed; that Trice’s financial condition appeared to be deteriorating, with heavy debt well in excess of worth; that suits were outstanding against Trice; and that at least one supplier was holding N.S.F. (not sufficient funds) checks.

114. At the Hopkins Finance Committee meeting on September 14, 1962, it was reported, among other things, that arrangements were then being completed for all purchasers of oil and gas from wells covered by Hopkins’ production payments to implement the direct payment method; that a finance committee had been formed to improve the Trice financial position; that Hopkins had received all interest due it through July, 1962; that there would be delays in return of Hopkins’ principal beyond original estimates because of late starts in runs to purchasers; that Hopkins was going to keep more detailed records with regard to each well and expected to get a new schedule from its oil consultant predicting the approximate times when it could look forward to receiving estimated principal repayments; and that, while the Trice investments were requiring a great deal of time to supervise, it. was believed that they would work out satisfactorily for Hopkins and that the returns would justify the effort and risk.

115. On October 15, 1962, Patterson of Hopkins wrote to Helvenston, revenue accountant of Trice, and, among other

*1196

things, requested that the latter explain the wide variations of revenue from individual wells under both production payments.

116. During the latter part of September and much of October, 1962, Hopkins received communications and correspondence advising it of the precariousness of Trice Production Co.’s financial situation, of various law suits brought against Trice, of an involuntary petition in bankruptcy filed against Trice, and of a petition filed by Trice for a Federal Bankruptcy Act Chapter X reorganization, this last communication being part of a Dun & Bradstreet report received by Baker on October 16, 1962.

18

117. By mid-December, 1962, the Hopkins Finance Committee had learned that it would probably not recover the full principal and interest on its production payments; that the Trustee of Trice Production Co. was seeking to have- Trice creditors, participants, and production payment owners agree to remit, for a period of six months, 20% of the proceeds attributable to their respective interests to enable the Trustee to continue his operation of Trice Pro-' duction Co.; and, that Hopkins had agreed to this arrangement on the condition that the other parties would so agree.

118. By signing, on January 16, 1963, a “Supplement to Assignments of Production Payment,” Baker agreed for Hopkins, among other things, that approximately 20% rather than 10% of the proceeds attributable to Hopkins under its production payments would be payable to the Trustee of Trice Production Co. as payment for its conducting Trice operations; that Hopkins would be liable for certain expenses involved in the Trice operation, and the amount of such expenses incurred by Hopkins would be added on to the principal amount of Hopkins’ production payment; that Hopkins waived its right to operate properties covered by its production payments; that Hopkins would have the

*1197

power to veto unitization and abandonment decisions; and that this agreement would last for a period of six months.

119. Bankers Trust and its dummy corporation, Oilco, Inc., executed a substantially similar agreement in January of 1963.

120. Baker agreed for Hopkins to the unitization of the Dugger well, which was one of the wells underlying Hopkins’ first production payment, with other wells in the Shamburger Lake Unit Field by executing, on January 22, 1963, a ratification agreement which ratified a Unit Agreement and Unit Operating Agreement which affected the unitization.

121. Another one of the wells covered by Hopkins’ first production payment, the Nunez, was unitized with other wells in the Theall Field Unit, Louisiana, in April of 1962.

122. The Nunez well was abandoned in early 1963, and in the place of production from Nunez, Hopkins took production from other wells in the Theall Field Unit.

123. After a hearing, which Hopkins’ representatives did not attend, an Oklahoma State Commission ordered that the Jones, Woodworth, Dumas and Hester wells covered by the March 1, 1961 payment would be unitized along with ninety-two other wells into the Joiner City Unit, effective May 1, 1965, and on May 19, 1965, Hopkins executed a document ratifying, adopting, and confirming division orders for the Joiner City Unit.

124. The Dollar well of Hopkins’ first production payment was plugged and abandoned in April 1961. If Hopkins had timely made claim against Trice for recoupment of $1,500 under the terms of the Trice guarantee, Hopkins could have required Trice to pay that amount to it.

125. The Dennis well of Hopkins’ first production payment was plugged and abandoned on January 29, 1962.

126. On July 1, 1965, the Clayton well of Hopkins’ first production payment was plugged and abandoned.

127. The following is taken from one or more of the above 126 findings of fact:

SUMMARY OF CERTAIN OF THE OMISSIONS AND MISSTATEMENTS MADE BY LAPIERE TO HOPKINS

A.

Omissions by LaPiere

1. D & M estimates for 18 wells totalling $4,021,860.

2. One set Schafer estimates covering 7 of the above referred to 18 wells and totalling $1,783,766; total D & M estimates for those same 7 wells was $1,-003,251.

3. Another set of Schafer estimates covering 3 of the above referred to 18 wells and totalling $762,773; total D & M estimates for those same 3 wells was $213,176.

4. A Trice schedule dated August 7, 1960, stating a total estimated future net revenue figure of $5,355,744.

5. Another Trice schedule dated August 7, 1960, showing that the estimates were made solely by D & M for 14 wells, by both D & M and Schafer for 4 wells, and no available analyses for 5 wells.

6. A Trice brochure dated August 8, 1960, showing a total future net revenue figure of $5,083,773 for 29 wells, 23 of which were included in the production payment purchased by Hopkins on March 1, 1961.

B.

Misstatements by LaPiere

1.

By

letter dated January 16, 1960, that the only experts that had been engaged were D & M, who had made the original estimates, and later Chester Brown.

2. By oral communication on January 27, 1961, that D & M estimated a return of $2,905,000 as Hopkins’ share of the revenue to be produced from the 23 wells.

SUMMARY JUDGMENT

The core question before this Court is whether plaintiff is entitled, upon the undisputed facts, to summary judgment un

*1198

der Section 12(2) of the ’33 Act. The answer to that question requires consideration of (1) Rule 56 of the Federal Rules of Civil Procedure, and (2) Section 12(2) of the ’33 Act.

19

After carefully reviewing the record in this case, this Court concludes under Rule 56 that there are undisputed facts which entitle Hopkins, as a matter of law, to the relief it seeks under Section' 12(2). To be sure, many of Hopkins’ claims of undisputed fact, in the amended complaint, in motions and in written and oral argument, cannot, in this Court’s opinion, be so classified when one carefully examines the record in this case.

20

Such facts, not being undisputed, do not and cannot form any part of the basis of the grant of summary judgment herein. But, regardless of how a jury would dispose of those claims, and even if a jury were to find, upon special interrogatories, for instance, against Hopkins with regard to each and every one of Hopkins’ said disputable factual contentions, the facts which in this case are undisputed would nevertheless require judgment, as a matter of law, for Hopkins. In this case no genuine issue, with regard to facts necessary and material to a decision under Section 12(2), remains for trial. As the Supreme Court stated in Poller v. Columbia Broadcasting System, 368 U.S. 464 , 82 S.Ct. 486 , 7 L.Ed.2d 458 (1962):

Summary judgment should be entered only when the pleadings, depositions, affidavits, and admissions filed in the case “show that [except as to the amount of damages] there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Rule 56(e), Fed.Rules Civ.Proc. This rule authorizes summary judgment “only where the moving party is en

*1199

titled to judgment as a matter of law, where it is quite clear what the truth is, * * * [and where] no genuine issue remains for trial * * * [for] the purpose of the rule is not to cut litigants off from their right of trial by jury if they really have issues to try.” [citation omitted, 368 U.S. at 468 , 82 S.Ct. at 488 ].

In

Poller ,

a five-to-four decision, the Supreme Court reversed the grant of summary judgment by the District Court, and affirmance thereof by the Court of Appeals for the District of Columbia. The plaintiff, in

Poller ,

charged that defendants had entered into an unlawful conspiracy to eliminate a radio station from the broadcasting field in Milwaukee. The question before the Supreme Court was whether plaintiff’s treble damage suit, based on alleged Sherman Act violations, should have been disposed of by granting defendants’ motion for summary judgment. Writing for the majority, Mr. Justice Clark stated:

* * * We look at the record on summary judgment in the light most favorable to Poller, the party opposing the motion, and conclude here that it should not have been granted. We believe that summary procedures should be used sparingly in complex antitrust litigation where motive and intent play leading roles, the proof is largely in the hands of the alleged conspirators, and hostile witnesses thicken the plot, [footnote and citations omitted]. It is only when the witnesses are present and subject to cross-examination that their credibility and the weight to be given their testimony can be appraised. Trial by affidavit is no substitute for trial by jury which so long has been the hallmark of “even handed justice.” [ 368 U.S. at 473 , 82 S.Ct. at 491 ].

Dissenting on behalf of himself, and Justices Frankfurter, Whittaker and Stewart, Mr. Justice Harlan, after noting the considerable amount of pre-trial discovery, wrote:

This crucial issue, therefore, turns on proof of the respondents’ motives. Had petitioner proceeded to trial and introduced no more evidence of motive than was revealed by the pretrial deppositions and affidavits, the case, in my opinion, could not well have been permitted to go to the jury. There being no extrinsic evidence of an unlawful purpose, and CBS’ executives having unequivocally denied any purpose to eliminate petitioner as a competitor, the jury would be left with no affirmative evidence of any intent to restrain trade. The possibility that the jury might disbelieve the respondents’ assertions of innocence is not enough to forestall the entry of summary judgment in their favor, [citation omitted].

Despite the ample opportunity afforded him by the availability of pretrial discovery procedures, petitioner, as will be shown, was able to produce no evidence to support his charges that a conspiracy, narrow or far-reaching, had been hatched. He should not be permitted to proceed to trial just on the hope that in the more formal atmosphere of the courtroom witnesses will revise their testimony or that a clever trial tactic will produce helpful evidence. Courts do not exist to afford opportunities for such litigating gambles. * * * [ 368 U.S. 479 -480, 82 S.Ct. 494 -495].

The most recent pronouncement in depth by the Supreme Court concerning the use of Rule 56 is set forth in First National Bank of Arizona v. Cities Service Co., 391 U.S. 253 , 88 S.Ct. 1575 , 20 L.Ed.2d 569 (1968), a five-to-three decision involving a civil anti-trust treble damage action instituted eleven years before reaching the.Supreme Court. Cities Service, one of the defendants, was granted summary judgment in the District Court because no genuine issue existed as to any material fact, 38 F.R.D. 170 . The Second Circuit affirmed, 361 F.2d 671 , as did the Supreme Court. The plaintiff bank complained not only of the alleged improper application of Rule 56 but also because, after eleven years, defendant Cities Service had not filed a

*1200

formal answer, and because plaintiff had not been permitted sufficient discovery opportunities. Commenting on

Poller ,

Mr. Justice Marshall, for the majority in

Cities Service,

wrote:

* * * This Court held [in Poller] that where there was substantial factual evidence tending to show the existence of a conspiracy to eliminate a competitor and where the crucial question was motive, summary judgment was prematurely granted against the plaintiff, notwithstanding the fact that there was also substantial evidence tending to show the nonexistence of conspiratorial behavior.

At first glance the present case seems to present substantial similarities to the situation in

Poller

in that the issue as to Cities’ motive in failing to conclude a deal with petitioner is likewise basic to the litigation here. However, there are crucial differences between the two cases. In

Poller

the competitive relationship between CBS and the plaintiff was such that it was plausible for the plaintiff to argue that CBS had embarked on a plan to drive him out of business. In this case, as Waldron has admitted right along, the business relationship between him, Cities, and the other defendants was such that it is much more plausible 'to believe that Cities’ interests coincided, rather than conflicted, with those of petitioner. * * * [ 391 U.S. at 285 , 88 S.Ct. at 1591 ].

Concluding his discussion of the summary judgment issue in

Cities Service,

Mr. Justice Marshall stated:

Rule 56(e) of the Federal Rules of Civil Procedure states that “when a motion for summary judgment is made and supported * * * an adverse party may not rest upon the mere allegations or denials of his pleading, but his response * * * must set forth specific facts showing that there is a genuine issue for trial.” Petitioner contends that the lower courts misapplied Rule 56(e) in this case and erroneously placed the burden on him to show that there was a material issue of fact for trial, rather than first requiring respondent Cities Service, the movant, to demonstrate the absence of a “genuine issue as to any material fact” under Rule 56(c). However, it should be noted that the decisions below did not purport to discuss burden of proof at all. Therefore petitioner must demonstrate that, regardless of what was specifically held, the effect of the decisions below was to so shift the burden of proof.

It is true that the issue of material fact required by Rule 56(c) to be present to entitle a party to proceed to trial is not required to be resolved conclusively in favor of the party asserting its existence; rather, all that is required is that sufficient evidence supporting the claimed factual dispute be shown to require a jury or judge to resolve the parties’ differing versions of the truth at trial. The case at hand presents peculiar difficulties because the crucial issue of fact to petitioner’s case is also an issue of law, namely the existence of a conspiracy. What Rule 56(e) does make clear is that a party cannot rest on the allegations contained in his complaint in opposition to a properly supported summary judgment motion made against him. [footnote omitted]. Yet the analysis of the facts undertaken above demonstrates that, due to the absence of probative force of Cities’ failure to deal with Waldron as being in itself evidence of conspiracy, petitioner’s position is, in effect, that he is entitled to rest on the allegations of conspiracy contained in his pleadings. Thus petitioner repeatedly states that Cities has never disproved its participation in the alleged conspiracy, despite the fact that the only evidence of such participation is his allegation that the failure to deal resulted from conspiracy.

Essentially all the lower courts held in this case was that Rule 56(e) placed upon Waldron the burden' of producing evidence of the conspiracy he al

*1201

leged only after respondent Cities Service conclusively showed that the facts upon which he relied to support his allegation were not susceptible to the interpretation which he sought to give them. That holding was correct. To the extent that petitioner’s burden-of-proof argument can be interpreted to suggest that Rule 56(e) should, in effect, be read out of antitrust cases and permit plaintiffs to get to a jury on the basis of the allegations in their complaints, coupled with the hope that something can be developed at trial in the way of evidence to support those allegations, we decline to accept it. While we recognize the importance of preserving litigants’ rights to a trial on their claims, we are not prepared to extend those rights to the point of requiring that anyone who files an antitrust complaint setting forth a valid cause of action be entitled to a full-dress trial notwithstanding the absence of any significant probative evidence tending to support the complaint. [ 391 U.S. at 288-290 , 88 S.Ct. at 1592-1593 ].

Mr. Justice Black’s dissent in

Cities Service,

on behalf of himself, Mr. Chief Justice Warren and Mr. Justice Brennan, states that the majority’s judgment therein “cannot possibly be reconciled with”

Poller ,

and emphasizes disagreement with the grant of summary judgment against a plaintiff who was afforded “very limited” discovery opportunities over an eleven year period of litigation as contrasted with those which the defendant was permitted to enjoy. ( 391 U.S. at 299-307 , 88 S.Ct. 1575 ). This latter problem is not present in this case, in which Hutton, opposing summary judgment, has been afforded every opportunity for discovery. Both sides have put this case through the wringer, over and over again, and all relevant evidence has seemingly been obtained, except from one key character in the drama, namely Gilbert LaPiere. Each side could well say that the other could have deposed, or otherwise discovered from, LaPiere, or perhaps have obtained an affidavit from him. The record reveals no reason to believe he is or was at any time unavailable for the taking of his deposition. But while no inference whatsoever is drawn by this Court against Hutton because it did not depose LaPiere, or otherwise discover from him, or obtain his affidavit, Hutton is not entitled to a denial of Hopkins’ motion for summary judgment merely because LaPiere might be available to testify and controvert at trial any of the facts which are at this time undisputed on the record. Cf.

Cities Service,

supra.

The situation with regard to LaPiere is not too unlike that which existed in H. B. Zachry Co. v. O’Brien, 378 F.2d 423 (10th Cir. 1967), where the Tenth Circuit affirmed summary judgment for plaintiff, in a construction subcontract action, insofar as issues of liability were concerned. In

Zachry,

the Court noted that two persons, defendant’s superintendent and plaintiff’s managing partner, had entered into a contractual arrangement ; and that only the two of them had the required knowledge of the material facts necessary to resolve the one genuine issue in the case, i. e., whether defendant’s superintendent had authority to bind defendant and what he had told or not told plaintiff’s managing partner in this regard. The latter’s deposition was taken. On the other hand, the defendant’s superintendent gave no testimony, either by deposition, interrogatories or affidavit, and was absent in South America (preparing a job for defendant) during the discovery period and also at the time of the summary judgment hearing. The Court, after noting the answer of one of defendant’s officers to an interrogatory in which that officer stated that he was advised by defendant’s superintendent that the latter was without authority to enter any contract on behalf of defendant, in effect held that such an answer does not meet Rule 56 standards and does not create a genuine factual dispute. The Court cited Bumgarner v. Joe Brown Company, Inc., 376 F.2d 749 (10th Cir. 1967), cert. den., 389 U.S. 831 , 88 S.Ct.

*1202

99, 19 L.Ed.2d 90 (1967),

21

in which it was stated:

* * * Neither conclusionary allegations nor general denials perpetuate an issue of fact under Rule 56, and if such undisputed facts effectively pierce the sham of false generality of claims, the case is ripe for summary disposition. [citations omitted]. Nothing contained in Poller v. Columbia Broadcasting System, Inc., [citation omitted] is to the contrary and appellants’ [plaintiffs’] reliance thereon is misplaced. [ 376 F.2d at 750 ].

Despite the complex nature of this litigation, there is no “genuine issue” to be tried in order to accomplish “even handed justice” (See Poller v. Columbia Broadcasting System, 368 U.S. at 473 , 82 S.Ct. 486 ), and no such issue arises as a result of the “conclusionary” allegations and denials contained in the pleadings and papers filed by defendants. In classifying certain facts as undisputed, and in refusing so to classify other facts, this Court has followed the dictates of the Supreme Court in United States v. Diebold, Inc., 369 U.S. 654, at 655 , 82 S.Ct. 993 , 8 L.Ed.2d 176 (1962), and, in refusing to find certain facts to be undisputed, has drawn all possible factual inferences in favor of defendants. See also: Phoenix Savings and Loan, Inc. v. Aetna Casualty & Surety Co., 381 F.2d 245 (4th Cir. 1967); Pierce v. Ford Motor Co., 190 F.2d 910 (4th Cir. 1951). The facts which this Court is classifying in this opinion as undisputed are established almost entirely by documentary evidence or by non-hostile, non-party witnesses. Where an issue of credibility or of motive is involved or connected with •any fact classified as undisputed, this Court is satisfied that the factor of credibility or of motive is minimal. Further, no fact classified as undisputed which is connected in any way with credibility or motive is in any way controlling. Cf. Poller v., Columbia Broadcasting System, supra; Cram v. Sun Insurance Office, Ltd., 375 F.2d 670 (4th Cir. 1967).

Hutton’s continued assertions that there are disputed facts does not make undisputed facts into disputed facts. In Zoby v. American Fidelity Company, 242 F.2d 76 (4th Cir. 1957), summary judgment granted by Judge Hoffman, D.C., 137 F.Supp. 38 in a breach of contract action involving complicated facts was affirmed by the Fourth Circuit. On appeal the plaintiff-appellant contended, among other things, that there was a genuine issue of fact whether defendants had an economic interest in the subject matter of the suit, and that, assuming that they had such interest, there was a genuine issue of fact whether defendants’ conduct was motivated by wrongful and fraudulent intentions. Noting this contention, Judge Sobeloff wrote in

Zoby :

* * * It is well settled, however, that to resist a motion for summary judgment, the party against whom it is sought must present some evidence to indicate that the facts are in dispute, where the moving party’s evidence has shown otherwise; [footnote omitted] and as to the foregoing matters, the record reveals no such evidence. His bare contention that the issue is disputable will not suffice. [ 242 F.2d at 80 ],

In this case, Hutton’s “bare contention” that there are disputed facts, no matter how often repeated, does not suffice to block summary judgment.

Prior to its decision in

Zoby

the Fourth Circuit had expressed its views numerous times with regard to the appropriate and inappropriate use of Rule 56. In Stevens v. Howard D. Johnson Co., 181 F.2d 390 (4th Cir. 1950), plaintiff appealed from a summary judgment for defendant in an action to recover damages for breach of

*1203

a rental contract. The Fourth Circuit held

that there were substantial issues of fact in this case upon which plaintiff was entitled to trial by jury and that the summary judgment for defendant must be reversed and the case remanded for further proceedings not inconsistent herewith. [ 181 F.2d at 394 ].

In so holding, the Court stated:

A number of questions arise, not only in connection with the breach of the contract, but also in connection with its proper interpretation and the damages recoverable for breach. These, however, should be decided in the light of the evidence which may be adduced upon a trial, not upon the affidavits presented on a motion to dismiss. It must not be forgotten that, in actions at law, trial by jury of disputed questions of fact is guaranteed by the Constitution, and that even questions of law arising in a case involving questions of fact can be more satisfactorily decided when the facts are fully before the court than is possible upon pleadings and affidavits. The motion for summary judgment, authorized by rule 56 Federal Rules of Civil Procedure, 28 U.S.C.A., which in effect legalizes the “speaking” demurrer, has an important place in providing a prompt disposition of cases which have no possible merit and in preventing undue delays in the trial of actions to which there is no real defense; but it should be granted only where it is perfectly clear that no issue of fact is involved and inquiry into the facts is not desirable to clarify the application of the law. [ 181 F.2d at 393-394 ].

The year following the

Stevens

decision, in Pierce v. Ford Motor Co., 190 F.2d 910 (4th Cir. 1951), the Fourth Circuit considered the grant of summary judgment to defendant in a damage action resulting from the blowout of a tire on a new Ford automobile. In

Piercer

like

Stevens ,

the Fourth Circuit reversed and found that “substantial issues of fact [were] involved”, and that ‘ so far as can be judged from the pleadings, examinations and affidavits, they are issues that will have to be passed upon by a jury.” Amplifying this statement, Chief Judge Parker wrote:

From what we have said, it is clear that there were issues in the cases for a jury to decide, and it was error to enter summary judgments for defendant for that reason. It is only where it is perfectly clear that there are no issues in the case that a summary judgment is proper. Even in eases where the judge is of opinion that he will have to direct a verdict for one party or the other on the issues that have been raised, he should ordinarily hear the evidence and direct the verdict rather than attempt to try the case in advance on a motion for summary judgment, which was never intended to enable parties to evade jury trials or have the judge weigh evidence in advance of its being presented. [ 190 F.2d at 915 ],

Several years after its decision in

Zoby ,

the Fourth Circuit discussed the use of summary judgment in Clarke v. Montgomery Ward & Company, Inc., 298 F.2d 346 (4th Cir. 1962), in which the Court affirmed summary judgment for defendant in a malicious prosecution suit. After stating what it termed the “strict” standard of summary judgment applied in

Stevens

and

Pierce ,

the Court held that the pleadings, depositions, admissions, and affidavits did not raise a material issue of fact as to the existence of probable cause for criminal prosecution, the basis of defendant’s defense in that malicious prosecution action. Chief Judge Sobeloff stated that “what constitutes probable cause is a question of law for the judge to decide” and that “summary judgment may properly be entered if the facts which are undisputed make out the defense of probable cause.” 298 F.2d at 348 . Commenting upon a conclusory statement by plaintiff in an affidavit, Judge Sobeloff wrote that such a “bald allegation”, did not raise a genuine issue in a summary judgment context. 298 F.2d at 349 .

*1204

In Williams v. Howard Johnson’s Inc of Washington, 323 F.2d 102 (4th Cir 1963), which was decided by the Fourth Circuit a year after

Clarke ,

the plaintiff, Williams, sought damages against the defendant restaurant, under certain civil rights statutes, alleging that defendant refused to serve Williams because he was a Negro. The plaintiff moved for summary judgment and the defendant cross-moved to dismiss the complaint. The District Court dismissed the complaint. On appeal, the Fourth Circuit noted that a good faith misunderstanding as to the nature of the hearing in the District Court had led to unpreparedness on the part of both counsel at the hearing in the District Court, and that there was question as to what part of the record was to be considered by the District Court. The Court of Appeals vacated the dismissal, rather than affirm or reverse, in order to give the parties an opportunity for a full hearing in the District Court on the merits after proper notice. With regard to summary judgment, Judge Sobeloff restated the “no genuine issue as to any material fact” standard and wrote:

* * * Where the record is such that the court is in doubt, it has the discretion to postpone consideration of the motion for summary judgment until after a hearing on the merits. The principles governing summary judgment procedure should be applied in a common sense manner to the realities of the litigation at hand. Particularly is this true where the trial 'court is called upon to decide a constitutional question on summary judgment on a potentially inadequate factual presentation, [footnotes omitted, 323 F.2d at 105 ].

The factual presentation to the Court in the case at bar has been more than adequate to reveal that all facts material to a decision are not in dispute. Unlike the situation in

Williams ,

it is clear here that the parties have been properly notified, fully heard, and have been given every opportunity to complete the record.

Phoenix Savings and Loan, Inc. v. Aetna Casualty & Surety Company, 381 F.2d 245 (4th Cir. 1967), involved an action by a successor corporation against the insurer of its predecessor for losses alleged to have been suffered by the predecessor corporation because of fraudulent acts of the latter’s officers, employees, agents and/or directors. The District Court granted summary judgment to the defendant insurer and concluded that the knowledge of the fraudulent nature of certain transactions on the part of certain persons who had substantially controlled the predecessor corporation had to be imputed to the plaintiff, and therefore the insurer should be discharged from any liability. The Fourth Circuit reversed, holding that the record disclosed that the question of whether the “three malefactors were employees or whether they had ‘substantial control’ of Phoenix, at all crucial times when the alleged frauds were perpetrated, is a question of fact in dispute bétween the parties.” The Court noted that “a substantial doubt existed as to the actual amount of the various classes of common stock” owned by the alleged three malefactors. ( 381 F.2d at 250 ).

Writing for the Fourth Circuit, District Judge Simons stated:

It is well settled that summary judgment should not be granted unless the entire record shows a right to judgment with such clarity as to leave no room for controversy and establishes affirmatively that the adverse party cannot prevail under any circumstances. Neither should summary judgment be granted if the evidence is such that conflicting inferences may be drawn therefrom, or if reasonable men might reach different conclusions. 3 Barron & Holtzoff, Federal Practice & Procedure § 1234 (Rules ed. 1958). Burden is upon party moving for summary judgment to demonstrate clearly that there is no genuine issue of fact, and any doubt as to the existence of such an issue is resolved against him. 3 Barron & Holtzoff, Federal Practice

*1205

& Procedure § 1235 (Rules ed. 1958). [ 381 F.2d at 249 ].

Judge Simons cited Kirkpatrick v. Consolidated Underwriters, 227 F.2d 228 (4th Cir. 1955) and Pierce v. Ford Motor Co., supra, for the proposition that summary judgment “should be granted only when it is perfectly clear that no issue of fact is involved and inquiry into the facts is not desirable to clarify the application of the law”; and he cited Cram v. Sun Insurance Office, Ltd., 375 F.2d 670, 674 (4th Cir. 1967) and American Fidelity and Cas. Co. v. London & Edinburgh Ins. Co., 354 F.2d 214, 216 (4th Cir. 1965), for the proposition that, as stated in

Cram ,

the “party opposing a motion for summary judgment is entitled to all favorable inferences which can be drawn from the evidence.” 375 F.2d at 674 . In

American Fidelity

and in

Cram ,

ambiguities in the respective contractual instruments therein in question required factual determinations. Near the end of its opinion in

Phoenix,

the Court stated that summary judgment was not the “proper method to dispose of the complex issues of this controversy, inasmuch as there are disputes or controversies as to the historic facts and the inference to be drawn therefrom.” 381 F.2d at 252 .

Less than a year after

Phoenix,

Judge Simons granted summary judgment for a defendant in an anti-trust action, Ayers v. Pastime Amusement Co., 283 F.Supp. 773 (D.C.S.C., Charleston Div., 1968). The history and record of that case bear striking similarity to the situation in this case. During the “ten year period” of the pendency of the

Ayers

case “numerous depositions, exhibits, and affidavits [had], * * * been filed by the parties, which indeed constitute [d] a voluminous record.” In addition, “numerous motions [had] * * * been made and considered by the court, and orders entered which deal[t] with varied aspects of the litigation,” 283 F.Supp. at 778-779 .

In granting defendant’s motion for summary judgment, the

Ayers

opinion notes that the plaintiffs did not offer enough evidence, either direct or circumstantial, of a conspiracy among defendant and others; that plaintiffs did not raise an issue of material fact as to lack of substantial competition between certain of its theatres and those of defendants; and that plaintiffs did not raise a sufficient issue as to the reasonableness of certain motion picture “clearances” granted defendant by certain film distributors or that such clearances were used pursuant to a conspiracy. The opinion also points out that certain affidavits and depositions presented by plaintiffs in opposition to the defendant’s summary judgment motion were conclusory and were totally unsupported by recitation in them of any facts supporting such opinions.

In summarizing his view of the case, insofar as summary judgment is concerned, Judge Simons wrote:

During the extended period of this litigation the parties have made full use of the discovery procedures granted under the Federal Rules. Depositions of most available witnesses have been taken, and countless exhibits and affidavits have been filed. Nevertheless, plaintiffs have failed in their efforts to make out a

prima facie

case against Pastime. Applying the guidelines established by Amended Rule 56 of the Federal Rules of Civil Procedure, it is concluded that plaintiffs have failed to raise a genuine issue of material fact sufficient to defeat Pastime’s motion for summary judgment. The evidence construed most favorably in behalf of plaintiffs would require a directed verdict against them, and accordingly the Court should enter summary judgment for defendant in each action, [citations omitted]. A jury is permitted to draw only those inferences of which the evidence is reasonably susceptible, and may not be permitted to resort to speculation. A mere scintilla of evidence is not enough to create an issue. There must be evidence upon which a jury may reasonably rely; and a party may not escape summary judgment on the mere

*1206

hope that something will turn up at the trial. [ 283 F.Supp. at 792-793 ].

See also Dressler v. M. V. Sandpiper, 331 F.2d 130 (2nd Cir. 1964), in which Judge Irving R. Kaufman wrote that if the respondent “were permitted to avoid summary judgment”, the attempt of summary judgment procedure “to screen out sham issues of fact would become devoid of practical significance”, and “litigants would be enabled to postpone the inevitable to another day — precisely what summary judgment was intended to avoid.” 331 F.2d at 133.

22

*1207

In an earlier anti-trust action set in summary judgment context, Bond Distributing Co. v. Carling Brewing Co., 325 F.2d 158 (4th Cir. 1963), the Fourth Circuit affirmed Chief Judge Thomsen’s grant of summary judgment to defendant on an anti-trust count which was one of five counts in the complaint. In his opinion ( 32 F.R.D. 409 (D.Md.1963)) which the Fourth Circuit stated “should be read in connection” with its Per Curiam affirmance, Judge Thomsen stated that plaintiff’s bare contention that an issue is disputable would not forestall a grant of summary judgment, and he then wrote with regard to

PoUer,

supra:

Although the Supreme Court in Poller v. Columbia Broadcasting, 368 U.S. 464, 473 , 82 S.Ct. 486 , 7 L.Ed.2d 458 , has recently stated that summary judgments are to be used sparingly in complex antitrust litigation where motive and intent play leading roles, this would seem to be an appropriate case for even a sparing use of summary procedures, [citations omitted, 32 F.R.D. at 415 ].

In Walpert v. Bart, et al., 390 F.2d 877 (1968), the Fourth Circuit, in a

Per Curiam

Order, affirmed Judge Northrop’s grant of summary judgment to defendants. 280 F.Supp. 1006 (D.Md. 1967). The complaint in that ease purported to state a derivative cause of action under the ’34 Act, and charged the use of a false and misleading proxy statement.

23

Judge Northrop found that

*1208

none of the affidavits submitted by plaintiff created any genuine issue of disputed material fact and that defendants had “produced impressive and numerous * * * affidavits and exhibits attesting to their version of the facts.” 280 F.Supp. at 1011 . Judge Northrop held that plaintiff was barred by laches. Then, after noting plaintiff’s contention that summary judgment should not be granted under the views expressed by the Supreme Court in Sartor v. Arkansas National Gas, 321 U.S. 620, 628 , 64 S.Ct. 724 , 88 L.Ed. 967 (1941), because all of the affidavits relied upon by defendants were their own affidavits, Judge Northrop pointed out that plaintiff had the duty under Rule 56(e) “to show the court that at trial he will be able to produce some fact to shake the credibility of the affiants. Mere hopes are not enough.” 280 F.Supp. at 1013 . See 6 J. Moore, Fed.Prac. j[ 56.15 [4] 2d ed. 1966.

24

A review of the law of summary judgment convinces this Court that the grant of summary judgment for plaintiff is proper on the basis of the undisputed facts in this case.

The same basic principles that apply generally to all actions * * * rule the grant or denial of summary judgment in the private * * * type of action [under the Securities Acts]. Only a word need be added. When there is no genuine issue of material fact underlying liability, an interlocutory summary judgment as to liability may be rendered although there is a genuine factual issue as to the amount of damages that necessitates an appropriate trial of damages. [6 Moore’s Federal Practice (2d Ed.) Section 56.17 [54], Page 2667 under the heading: “Securities Act; Securities Exchange Act.”]

As the Court must do in each individual action, this Court has determined that there is no triable issue of material fact in this particular case. Cf. Byrnes v. Mutual Life Insurance Co., 217 F.2d 497, 501 (9th Cir. 1954). Furthermore, additional “inquiry into the facts is not desirable to clarify the application of the law” (Zoby v. American Fidelity Co., 242 F.2d 76 (4th Cir. 1957)), since defendants, under the undisputed facts, cannot prevail in this case under any circumstances.

SECTION 12(2)

The legal conclusion reached in this case becomes inescapable upon analysis of the requirements of Section 12(2) of the ’33 Act and upon application of the latter to the undisputed facts in this case. Hutton violated Section 12(2) if, as a broker, it offered or sold to Hopkins, a security as defined by Section 2(1) of the ’33 Act using the mails, or an instrument of, or communication in, interstate commerce to accomplish the same, by means of an untrue statement of material fact or by omitting to state a material fact necessary in order to render the statements Hutton made not misleading under the circumstances in which the

*1209

statements were made; provided that Hopkins did not know of such untruth or omission, that Hutton knew, or in the exercise of reasonable care, could have known of such untruth or omission, and that Hopkins instituted this suit within the Section 13 limitations period. Hopkins’ right to rescission rests on whether it has made a tender as required by Section 12(2) and is still in a position to consummate an exchange within such tender requirements.

Persons Liable

Hutton admits that Hopkins purchased the Trice production payment. Hutton contends that Hutton played a part, but only a minor part, in making the sale to Hopkins. The undisputed facts speak eloquently to the contrary. Hutton, through LaPiere, took

k

leading role both in offering and in selling Trice production payments to Bankers Trust Company and to Hopkins. For its part in bringing about Hopkins’ March 1, 1961, purchase, Hutton received from Trice a 2% commission on $1,300,000, or $26,000. After deducting expenses (including Hutton’s $1,714.50 portion of a fee paid to Petroleum Consultants, Inc. and a $1,000 commission to Iglehart), Hutton paid to LaPiere a commission of $5,130.05, or 25% of the net Trice commission paid to Hutton. Beyond the shadow of any doubt Hutton, through LaPiere, was the selling or offering broker of the $1,300,000 production payment purchased by Hopkins. And as stated by Judge Magruder in Cady v. Murphy, 113 F.2d 988, 990 (1940), cert. den. 311 U.S. 705 , 61 S.Ct. 175 , 85 L.Ed. 458 (1940), Section “12(2) imposes a liability for misrepresentation not only upon principals, but also upon brokers when selling securities owned by other persons.” See also First Trust'and Savings Bank of Lanesville, Ohio v. Fidelity-Philadelphia Trust Co., 214 F.2d 320 (3d Cir. 1954); III Loss, Securities Regulation, 1713 (2d ed. 1961). Hence, Hutton was a “person who offers or sells a security,” within the language of Section 12(2), insofar as the transaction involving the production payment purchased by Hopkins on March 1, 1961 is concerned.

In two interrogatories posed to Hutton, Hopkins has asked first, whether LaPiere had “general authority” to write certain letters with regard to the sale of the $1,300,000 Trice production payment (Int. No. 19, 2d Set, Docket No. 33, Aug. 11, 1964), and second, whether he had such authority to make statements ascribed to him in the minutes of January 27, 1961, of the Hopkins Finance Committee (Int. No. 21, 2d Set, Docket No. 33, Aug. 11, 1964). Hutton’s answers to these interrogatories were as follows:

In connection with his general authority to find or assist in finding purchasers or prospective purchasers of oil production payments and to perform certain services incident to any sale of an oil production payment

such as those services indicated in defendants’ Answer to Interrogatory 18 above,

LaPiere had general authority from defendant to write the letters ascribed to him in defendants’ Answer to Plaintiff’s Interrogatory 10 served on April 22, 1964

in so far as there are no inaccuracies contained in said letters.

As

to such possible inaccuracies, defendants have no present knowledge except that reference is made in a letter, dated February 3, 1961, sent by LaPiere to Hopkins to: “my brochure of September 16, 1960.” Defendants believe that reference may be misleading although not intentionally so. For, on information and belief, Trice prepared the brochure of September 16, 1960 and it or a copy thereof was delivered to Henry S. Baker, Treasurer of Hopkins, by Cliff W. Trice, on or about September 21, 1960 during a conference at Hopkins arranged by Ragnar Naess, of Naess & Thomas, Hopkins’ investment consultants, who introduced Trice to Hopkins.

Further, on information and belief, a copy of the same or substantially the same brochure was transmitted by

*1210

Cliff W. Trice to Ragnar Naess and received by Mm with a letter from Cliff W. Trice to Ragnar Naess dated August 80, I960.

[Ans. to Int. 19, Dkt. 39, Sept. 29, 1964].

In connection with his general authority to find or assist in finding purchasers or prospective purchasers of oil production payments and to perform certain services incident to any sale of an oil production payment

such as those services indicated in defendants’ Answer to Interrogatory 18 above,

LaPiere had general authority to make statements of the general character ascribed to him in the excerpts of the minutes of the meeting of the Finance Committee of Hopkins of January 27, 1961

provided he used reasonable care in ascertaining the truth and completeness of such statements made by him, which defendants believe that he did.

But defendants have no knowledge of the accuracy of the statements as specifically ascribed to him by Hopkins in the excerpts of the minutes of the meeting of the Finance Committee of Hopkins of January 27,1961. [Ans. to Int. 21, Dkt. 39, Sept. 29, 1964].

The interrogatories, letters and services referred to in the above answers relate to the first Trice production payment purchased by Hopkins.

Hopkins objected to the underlined qualifying words in those answers as argumentative, and moved to strike them. This Court denied that motion. However, a principal cannot escape liability for his agent’s “apparently authorized” acts simply because the agent acted tortiously without the authorization of the principal so to act and without the principal’s knowledge. (Restatement, Agency, Second, § 257 and Comment b thereto). This case is not unlike Murphy v. Cady, 30 F.Supp. 466 (D.C.Me., S.D. 1939), aff’d.

sub nom.

113 F.2d 988 (1st Cir. 1940), cert. den. 311 U.S. 705 , 61 S.Ct. 175 (1940), where liability under Section 12(2) was imposed on defendants, fifteen in number, who constituted a brokerage firm, because of certain false material statements made by their head trader who was an employee and not a partner.

25

This is not a case like Kamen & Co. v. Paul H. Aschkar & Co., 382 F.2d 689 (9th Cir. 1967) cert. granted, 390 U.S. 942 , 88 S.Ct. 1021 , 19 L.Ed.2d 1129 (March 4, 1968), cert. dism. 393 U.S. 801 , 89 S.Ct. 40 , 21 L.Ed.2d 85 , in which the Ninth Circuit reversed the District Court’s holding of ostensible authority and quoted from and relied upon Restatement, Agency, Second, § 258, Comment c for the proposition that “[a] principal is not liable in deceit for unauthorized representations made to a person who has reason to believe that they are not of the sort authorized * * The facts in

Kamen

would seem to have called for the application of the principle enunciated in that Restatement Comment, for the Court stated as a fact that the purchaser did not act as a

reasonably prudent person in concluding, and asserting his belief, that the purported agents were possessed with the ostensible authority to offer to him the transaction and promises which they did. The proposed guaranteed profit sales so far departed from propriety and were patently of a sufficiently unusual nature in the light of Asehkar’s knowledge and experience as to put him on warning and require him to take some steps to inquire into the extent of authority of the agent. We are constrained to hold that the finding that the agents had ostensible authority was clearly erroneous. We reverse. [ 382 F.2d at 696 ].

The Court made the above-quoted statement in holding that the defendant brok

*1211

erage house was not liable for the acts of its employees under rules of common law agency.

Kamen,

however, involved a second and additional issue in connection with which the Ninth Circuit sustained the refusal of the trial court — and dismissed plaintiff’s cross-appeal from that refusal — to grant relief for violations of Section 12 (2) of the ’33 Act and certain sections of the ’34 Act. With regard to Section 12 (2), the Ninth Circuit, referring to Section 15 of the ’33 Act and its ’34 Act counterpart, stated in

Kamen

that no liability under 12(2) existed because the employer was not “a participant” in the fraudulent activities of the employees, nor did it have “any reasonable grounds for believing that such activity was taking place.” 382 F.2d at 696-698 .

26

While this Court accepts the factual analysis set forth in

Kamen,

this Court respectfully does not believe that Section 15, relating to “controlling” persons applies to the employer (brokerage house)- — employee relationship.

Section 15, as originally enacted in 1933, read as follows:

Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or

771

of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable. [15 U.S.C.A. § 77o].

In 1934 the following words were added to Section 15:

* * * unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist. [15 U.S.C.A. § 77o].

What legislative history there is does not indicate that Congress intended Section 15, originally or as amended, to serve as a limitation on liability.

27

The

*1212

section would seem, on the other hand, to have been intended to establish a “controlling person” liability which would supplement, and extend beyond, common law principles of agency and

respondeat superior.

Insofar as the liability of a brokerage house for its employees is concerned, it is interesting to note that Mr. Justice (then Professor) Douglas, and Professor Bates, in their article, The Federal Securities Act of 1933, 43 Yale L.J. 171 (1933), discussed Section 15 in the context of the liability of issuers but in commenting on the liability of brokers made no mention of or reference to Section 15.

Nor do any of the cases, other than

Kamen,

in which Section 15 is mentioned, indicate in any way that Section 15, and more particularly the “unless” provision thereof, have any application to the liability of a brokerage house for acts or omissions of its employees. Rather, Section 15 has been applied in other contexts. For instance, Whittaker v. Wall, 226 F.2d 868 (8th Cir. 1955), imposed liability on a sales representative of an issuer corporation and on the president of that corporation; and Hawkins v. Merrill, Lynch et al., 85 F.Supp. 104, 123 (W.D.Ark.1949), applied Section 15 and held Merrill, Lynch, et al. liable for activities of one of its Alabama “correspondents.”

The legislative history and case law, to the extent there is any, would appear to buttress a construction of Section 15 to exclude application of the latter to an employment relationship. A contrary conclusion would in effect give blessing to a hear-no-evil, see-no-evil approach by partners of a brokerage house which is hardly in keeping with the remedial purposes of the ’33 Act — purposes which the Congress and the courts have steadily stressed from 1933 to date.

28

The facts in

Kamen

may well have been such as to preclude liability under 12(2), because the rather preposterous nature of the statements made to the purchaser (plaintiff) by the two employees of the brokerage house who engaged in the skulduggery was self-evident. But such is not the case herein. LaPiere’s departure from the bounds of propriety were limited to material misstatements and material omissions. LaPiere was not engaged in selling the Brooklyn Bridge, or in a preposterous venture. Rather, he was promoting what seemed not only to Hopkins, but also to Bankers Trust, to be a reasonable opportunity to invest in a reputable company, i. e., Trice. In this connection, the undisputed facts in this case disclose that members of the Hutton family invested more than $1,000,000 in Trice’s ventures during the 1957-1962 period.

If Hutton, as the defendant in this ease, is not liable under Section 12 (2) for the activities of LaPiere, the manager of its oil and gas department, because, as provided in Section 15, the Hutton partners “had no knowledge of or reasonable ground to believe in the existence of” the D & M and Schafer reports and of LaPiere’s statements to, and omission to state to, Hopkins, then the

*1213

partners in Hutton and in other brokerage houses like it can seemingly escape all liability under 12(2) by the simple expedient of making certain “not to know or have reasonable grounds to believe in the existence of the facts by reason of which the liability” of LaPiere or a person like him “is alleged to exist.” Such a construction of Section 12(2) and 15 would in effect mean that the partners in a brokerage house who kept their eyes and ears closed to the fraudulent conduct of one of their registered representatives, could reap the harvest of that employee’s conduct with impunity. Such a result would leave investors with much shallower protection than was intended by Congress in its passage of the ’33 Act and the 1934 amendment to Section 15. Congress could hardly have intended to leave a defrauded investor with the impotent remedy of a 12(2) action against a relatively insubstantial employee when his employer-brokerage house would be invulnerable to suit. Congress, by the 1934 amendment to Section 15, did apparently intend to give a degree of protection to issuers or other selling parties for the wrongdoings of other persons including wrongdoing brokers, but it certainly did not intend to limit a brokerage house’s duty to supervise its employees to a passive role based on information which comes or should come to the attention of its partners. Assuming, as this Court does in this opinion, that the Hutton partners “acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action” in this case, the ’33 Act, nevertheless, in this Court’s opinion, makes them responsible for LaPiere’s acts and omissions. While this Court notes the absence of any contention by Hutton’s counsel that the “unless” provision of Section 15 provides a defense for Hutton, this Court is herein treating the Section 15 question at length in view of the statements in

Kamen,

supra, particularly since those statements apparently form the basis for the petition for certiorari in

Kamen

and the grant of same by the Supreme Court.

29

Inter-State

It is clear and undisputed that LaPiere utilized interstate telephone lines and interstate travel facilities as well as the mails in communicating with Hopkins with regard to the Trice production payment, and in making misrepresentations and omissions with regard thereto. Such conduct clearly constituted a “use of any means or instruments of transportation or communication in interstate commerce or of the mails * * ” as provided in Section 12(2). MacClain v. Bules, 275 F.2d 431 (8th Cir. 1960); Blackwell v. Bentsen, 206 F.2d 690 (5th

*1214

Cir. 1953); Schillner v. H. Vaughn Clarke & Co., 134 F.2d 875 (2d Cir. 1943). This is true even on the basis of the narrower interpretation of the provision in Kemper v. Lohnes, 173 F.2d 44 (7th Cir. 1944), requiring that the misrepresentations, or representations containing omissions, be themselves máde via interstate facilities or the mails.

Security

There is no dispute as to the content of the production payment agreement between Hopkins and Trice. That agreement, entitled “Assignment of Production Payment and Net Profit Overriding Royalty Interest Dated February 23, 1961”, has been submitted by both parties as an exhibit on this motion.

Nevertheless, Hutton contends that Hopkins did not purchase a “security” within the meaning of Section 12(2). In so arguing, Hutton offered the following definition of production payment:

A

production payment

* * * represents an interest in oil and gas reserves in the ground to be extracted from known wells. It is purchased for a lump sum ■ in a single transaction. The seller-operator extracts the oil and gas from the ground and pays the proceeds over to the owner of the production payment. [Hutton’s Answering Brief in Opposition to Hopkins’ Motion for Summary Judgment, at footnote on Page 99].

In its consideration of whether the $1,-300,000 production payment purchased by Hopkins constitutes a “security”, this Court, for purposes of this motion, accepts the above statement set forth by Hutton.

Hopkins’ production payment, giving to it an interest in certain oil and gas reserves to be extracted from the ground by Trice, is similar to the “investment contract” in citrus groves discussed by the Supreme Court in S.E.C. v. W. J. Howey Co., 328 U.S. 293 , 66 S.Ct. 1100 , 90 L.Ed. 1244 (1946), involving an injunction action brought by the S.E.C. for violation of Section-12(1) of the ’33 Act. In

Howey,

the Court held that a combination of a land sales contract and a service contract covering units of a citrus grove development constituted an “investment contract” which is one of the definitions of a “security” in Section 2(1) of the ’33 Act. Under the sales contract the investors (largely individuals without skill in the citrus growing business) purchased plots of land containing citrus trees. Under the service contract the seller retained a leasehold interest in the-plots and took charge of cultivating and harvesting the land, marketing the production, and remitting the net proceeds to the investor.

In discussing that total arrangement Mr. Justice Murphy, for the Court, defined an “investment contract” to be

a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise. Such a definition * * * permits the fulfillment of the statutory purpose of compelling full and fair disclosure relative to the issuance of “the many types of instruments that in our commercial world fall within the ordinary concept of a security.” H. Rep. No. 85, 73d Cong. 1st Sess. p. 11. It embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits. [ 328 U.S. 298 -299, 66 S.Ct. 1103 ].

In reversing the Fifth Circuit, the Supreme Court rejected the Circuit Court’s suggestion

that an investment contract is necessarily missing where the enterprise is not speculative or promotional in character and where the tangible interest which is sold has intrinsic value independent of the success of the enterprise as a whole. The test is whether the scheme involves an investment of

*1215

money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value. See S.E.C. v. C. M. Joiner Leasing Corp., supra, 320 U.S. [344] 352, 64 S.Ct. 120 , 88 L.Ed. 88 . The statutory policy of affording broad protection to investors is not to be thwarted by unrealistic and irrelevant formulae. [ 328 U.S. at 301 , 66 S.Ct. at 1104 ].

In S.E.C. v. C. M. Joiner Leasing Co., 320 U.S. 344 , 64 S.Ct. 120 , 88 L.Ed. 88 (1943), relied upon by the Court in

Howey,

the Supreme Court held that the sale of oil leasehold subdivisions by parcels, as part of a well-drilling undertaking, were sales of securities within the meaning of Section 2(1) of the ’33 Act. The Court held that the case involved the sale of “investment contracts”, if not undivided interests in oil and gas rights and leases, and that the ’33 Act was remedial in nature and should be liberally construed. The Court recognized that the statutory terminology, “fractional undivided interest in oil, gas or other mineral rights,” might well bear a narrow interpretation, and possibly not cover the type of interest involved in

Joiner.

Nevertheless, the Court emphasized that it did

not think the draftsmen thereby immunized other forms of contracts and offerings which are proved as matter of fact to answer to such descriptive terms as “investment contracts” and “securities.” [ 320 U.S. at 352 , 64 S.Ct. at 124].

And in reply to the point that the leasehold interests in the case were real estate interests, the Court stated that

[i]n applying acts of this general purpose, the courts have not been guided by the nature of the assets back of a particular document or offering. [ 320 U.S. at 352 , 64 S.Ct. at 124].

In Tcherepnin v. Knight, 389 U.S. 332 , 88 S.Ct. 548 , 19 L.Ed.2d 564 (1967), the Supreme Court, in a unanimous opinion written by Mr. Chief Justice Warren, held “a withdrawable capital share in an Illinois savings and loan association” to be a security within the meaning of the ’34 Act. Mr. Chief Justice Warren noted that Section 2(1) of the 1933 Act “contains a definition of security virtually identical to that contained in the 1934 Act” ( 389 U.S. at 335-336 , 88 S.Ct. at 553) and cited and relied upon

Joiner

and

Howey.

As the Court did in those cases, the Chief Justice again stressed the remedial policies underlying the Securities and Securities Exchange Acts, and emphasized the need, in considering the term security, to construe such remedial legislation “broadly to effectuate its purpose,” and stated that in so doing “form should be disregarded for substance and the emphasis should be on economic reality.” ( 389 U.S. at 336 , 88 S.Ct. at 553).

The broad remedial policies of the Securities Act would be defeated if this Court were to construe Hopkins’ $1,300,-000 production payment as anything but a security. Hopkins and Bankers Trust both purchased Trice production payments, each of which to a large extent covered identical wells. From their investments, each expected a return of its purchase price plus interest and, in the case of Hopkins, additional profits as well. A reading of the production payment agreement (see especially Art. Ill, Subsection 1) reveals that, as a practical matter, this return would be derived solely from the efforts of Trice, which also retained an interest in a percentage of the reserves covered by the production payment agreement. This is not a case like Woodward v. Wright, 266 F.2d 108 (1959), in which the Tenth Circuit held that although the interests in-involved were “fractional undivided interests in oil and gas,” they were not “investment contracts” because the purchasers of the interests did not look to the management and efforts of others for a return of and on their investment. Rather, this “transaction contemplates the conduct of a business enterprise by others than the purchasers, the profits or

*1216

proceeds of which the purchasers were to share.” S.E.C. v. Payne, 35 F.Supp. 873, 878 (S.D.N.Y.1940). The production payment transaction disclosed by the undisputed facts in this case may reveal the sale of an unusual kind of investment device. Nevertheless, this Court holds as a matter of law that the transaction in question involved the sale of an “investment contract”' and therefore a security within the meaning of the Securities Act. In so holding, this Court follows the dictates of

Howey,

supra, 328 U.S. at 299 , 66 S.Ct. at 1103 , and applies “a flexible rather than static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of money of others on the promise of profits.” Cf. Continental Marketing Corporation v. S. E.C., 387 F.2d 466, 471 (10th Cir. 1967). See also, S.E.C. v. Crude Oil Corp. of America, 93 F.2d 844 (7th Cir. 1937); Blackwell v. Bentsen, 206 F.2d 690 (5th Cir. 1953)

In contending that Hopkins’ production payment was not a “security,” defendants have depicted the production payment transaction as a “ ‘one shot’ bilateral contractual arrangement.” Hutton supports this characterization by urging that the particular package which Hopkins purchased was offered only to Hopkins. (Hutton’s Answering Brief in Opposition to Hopkins’ Motion for Summary Judgment, pp. 96-97). But this contention ignores 'the fact that during the year prior to the purchase by Hopkins of its $1,300,000 production payment on March 1, 1961, a Trice production payment covering eighteen of the same wells included in Hopkins’ production payment was purchased by Bankers Trust for $1,375,000 and another smaller production payment was purchased by Bankers Trust for $720,000. And almost a year after the closing for Hopkins’ $1,300,000 production payment, Hopkins purchased a second production payment for $1,000,-000. In addition, during this span of years, Trice, and sometimes Hutton, engaged in discussions with regard to possible sales of Trice production payments with certain other individuals and institutions. While a number of those discussions were conducted directly by Trice with prospective purchasers, it is to be noted that, insofar as the $1,300,000 production payment eventually purchased by Hopkins is concerned, at least forty-four copies of the September 16, 1960, Trice brochure, outlining that payment, were sent by Trice to LaPiere. Although this Court does not accept the argument that mere numbers should answer the question of what constitutes a “security,” it does view the Trice program of financing through production payments as being of sufficient magnitude to entitle purchasers to the investor protections afforded by the Securities Act. That Trice also gave Hopkins a guarantee with regard to interest, in its letter dated February 23, 1961, does not alter the investment contract nature of Hopkins’ $1,300,000 production payment agreement. Hopkins’ clear intention, supported by the emphasis placed by LaPiere and Trice throughout this transaction, was that Hopkins was making an investment in oil and gas “reserves,” which investment would return principal, interest, and additional profits to Hopkins. The Trice guarantee gave Hopkins additional rights, but it in no way lessened the “security” character or investment objectives of the production payment. In S.E.C. v. Payne, 35 F.Supp. 873 (S.D.N.Y.1940), the Court held that contracts for the sale and care of foxes which contained a guarantee as to minimum pup production and against certain types of damage, were investment contracts. Although the guarantee in

Payne

was of a more limited duration than that in this case, this Court holds that the guarantee by Trice does not alter the clear investment contract character of the production payment or make it into something other than a “security.”

As the Supreme Court noted in S.E.C. v. C. M. Joiner Leasing, supra, 320 U.S. at 350, 351 , 64 S.Ct. at 124 , the fact that the Hopkins production payment is an “investment contract” does not exclude the possibility that it may also

*1217

be a “fractional undivided interest in oil, gas or other mineral rights,” see Ouachita v. Willingham, 179 F.Supp. 493 (W.D.Ark., Hot Springs Div. 1959),

30

or even a “profit sharing plan.” See S.E.C. v. Addison, 194 F.Supp. 709 (N.D.Tex. 1961). In any event, it is clearly a “security” within the terms of Section 2(1) of the ’33 Act.

Type of Investor

Hutton also argues that Hopkins is not the type of investor which the federal Securities Acts are intended to protect. But the cases are replete with instances in which sophisticated investors have been permitted to recover. And nothing in the ’33 Act, in its legislative history, or in the case law, suggests that a brokerage firm can withstand liability to an educational institution, whose Finance Committee was composed of leaders in the financial world with limited oil experience (or even with great oil experience), if the manager of the oil department of that brokerage house erroneously states, or omits to state, material facts concerning oil reserves underlying interests which that oil department manager, as an employee of the brokerage firm, takes part in selling to the educational institution.

Materiality and Misrepresentation

To recover under the ’33 Act, Hopkins has the burden of proving that LaPiere misrepresented material facts or omitted to disclose material facts necessary to prevent LaPiere’s statements from being misleading under the circumstances. The Summary, at page 1197, supra, shows the material facts which, beyond any doubt, LaPiere knew, or should and could have known, from the information provided to him, and the material misstatements or omissions of this information which he made to Hopkins. This is true whether or not any importance is attached to LaPiere’s use of the word "my” in his letter of February 3, 1961, to Baker with regard to the September 16, 1960 brochure. LaPiere, with all of the information and data available to him, had'an affirmative duty to be certain that that brochure did not, when considered with all other information made available to Hopkins, misrepresent or omit material facts, regardless of the authorship of that brochure.

The misrepresentations and half-truths that LaPiere communicated to Hopkins are clear and undisputed. LaPiere’s written communications speak for themselves. The minutes of the Hopkins Finance Committee, containing accounts of LaPiere’s statements to the Committee, were submitted to LaPiere by Baker for LaPiere’s check. Baker’s notation on his file copy of his covering letter forwarding the submitted minutes to LaPiere indicates that LaPiere found those minutes to be accurate. Even if an attack is made on Baker’s credibility, i. e., either that he falsified his notation when he made it in February 1961, or that he added it at a later date to make a case out against Hutton, LaPiere still had a duty under 12(2) to let Baker know if LaPiere knew of any material untruth or omission in the minutes. In fact, such a duty was imposed on LaPiere if, in the exercise of reasonable care, he should have known of any material untruth in or omission from the minutes. Indeed, Hutton does not offer or proffer or even allege that Hopkins' ever was informed by LaPiere, through oral or written communication, of anything which would indicate that the said minutes contained any material untruth or omission. Hutton cannot avoid summary judgment and

*1218

be permitted to go to a jury against the background of such a record.

The materiality of the untruths and omissions is clear. For instance, Wilson, in his Main Affidavit (at pp. 88-89)

31

states:

* * * (.Hopkins’ Finance Committee and its agents and representatives failed, in September 1960 and at all times prior to the purchase on March 1, 1961, to obtain and examine any of the reports and estimates made by DeGolyer & MacNaughton or Schafer Engineering. [footnotes omitted]. Had Hopkins done so, it would have been apparent, at the threshold, that DeGolyer & MacNaughton and Schafer Engineering had made no estimates of future net revenue for more than

20%

of the 23 wells under Payment No. 1. Hopkins would then, undoubtedly, have terminated further consideration of the purchase, forthwith.

This Court treats the Wilson Affidavits only as argument and therefore does not view any statements therein as admissions. Nevertheless, even treating the above only as a concession for purposes of argument in connection with the Thirteenth Defense or other defenses of Hutton, this Court finds that the statement does, at the very least, illustrate the materiality of the information possessed by LaPiere with regard to the various reports of estimates on wells covered by the production payment. Similarly, the other facts noted as misstated and omitted in The Summary, supra, are clearly material. This finding is bolstered by the fact that in considering a purchase for a Trice production payment covering eighteen of the wells included in the Hopkins $1,300,-000 payment, Keteham of Bankers Trust prepared a resume of information contained in the D & M and Schafer reports and also included similar information in a memorandum to the Bankers credit file. “An omission is material if the undisclosed information concerns ‘matters as to which an average prudent investor ought reasonably to be informed before purchasing the security registered.’ ” Demarco v. Edens, 390 F.2d 836, 840 (2d Cir. 1968), citing 17 C.F.R. § 230 .-405(1).

In List v. Fashion Park, Inc., 340 F.2d 457 , 462 (1957), the Second Circuit defined the materiality requirement, with regard to Rule 10b-5, on the basis of Restatement, Torts, § 538(2) (a) as follows: “The basic test of ‘materiality’ * * * is whether ‘a reasonable man would attach importance [to the fact misrepresented] in determining his choice of action in the transaction in question.’ ” See also, III Loss, Securities Regulation, p. 1431 (2d ed. 1961). Clearly, the facts omitted and misrepresented by LaPiere are those which a reasonably prudent investor would desire to know before purchasing the production payment, and which a reasonable man would consider important in deciding his course of action in the transaction.

32

Hopkins alleges that there are other alleged omitted or misrepresented facts with regard to who selected Chester Brown, the latter’s instructions when employed, and Brown’s report, which allegations are sworn to by Brown. If Brown be believed, those facts would almost surely convince twenty bishops that Hutton violated Section 12(2). But because those alleged facts rest, to a not inconsiderable extent, upon Brown’s credibility, this Court cannot and does not consider them in granting summary judgment. If there were not undisputed material facts in this case, unrelated to Brown, establishing material misrepresentations and omissions, this Court would consider the Brown issue as one which should go to the jury.

*1219

Scienter

The holding that Hutton through LaPiere violated Section 12(2) does not require the conclusion that LaPiere was guilty of fraud in the common law sense or that he acted with any evil or improper motive. “ * * * [I]t is not necessary [under Section 12(2)] for the vendee in maintaining an action for the recovery of consideration to prove that the vendor intended to deceive him as at common law. It is sufficient if the vendor did deceive the vendee even though the vendor had no such intent.” Pennsylvania Co. for Insurances, etc. v. Deckert, 123 F.2d 979, 985 (3d Cir. 1941).

In Thiele v. Shields, 131 F.Supp. 416 (S.D.N.Y.1955), plaintiff brought an action under Section 17(a) of the ’33 Act and Rule 10b-5 issued pursuant to Section 10(b) of the ’34 Act, to rescind the purchase of certain municipal bonds made in reliance upon false and misleading matter. Defendants moved to dismiss, alleging,

inter alia,

that since Section 12(2) of the ’33 Act is subject to a municipal bond exemption, it would be inconsistent to permit civil remedies under 17(a) and 10(b). In denying the motion, Judge Irving Kaufman, then a District Judge, highlighted the breadth of the standard with regard to defendants’ state of mind under Section 12(2) when he wrote:

* * * [T]he potential civil liability for

misrepresentations

under Section 12(2) appears to be much broader than that implied from Section 17(a) (2). All that a plaintiff-purchaser need prove under Section 12(2) is that a statement in a prospectus or oral communication is

in fact

false or is a misleading omission, and that he did not know of such untruth or omission. The section expressly provides that the defendant must “sustain the burden of proof that he did not know,

and in the exercise of reasonable care covld not have known,

of such untruth or omission”. (Italics supplied.) On the other hand, Sections 17(a) and 10(b) (Rule X-10B-5) do not, on their face, purport to apply to a negligent misrepresentation nor, without an express provision as under 12(2), should they be construed to shift the burden of proving intention, knowledge, or negligence (if applicable) to the defendant. Cf. Fischman v. Raytheon Mfg. Co., 2 Cir., 1951, 188 F.2d 783, 786 . But see First Trust & Savings Bank of Zanesville v. Fidelity-Philadelphia Trust Co., D.C.E.D.Pa.1953, 112 F.Supp. 761, 770 ; Sections 10(b), 17 and 12. Therefore even assuming plaintiff’s allegations are based

solely

on a “prospectus or oral communication” within the municipal bond exemption to the stringent liability imposed by Section 12(2), a claim under Sections 17(a) and 10(b) would still be sustainable if knowing or intentional misrepresentation with regard to municipal bonds were alleged (and proven) by the plaintiff. That Congress intended to exempt a seller of municipal bonds from liability for failure to prove that he exercised reasonable care in investigating the truth of a representation is not inconsistent with the subjection to civil liability of the same seller after the purchaser proves that he knowingly misrepresented a fact. Cf. Fischman v. Raytheon Mfg. Co., supra. [ 131 F.Supp. at 419-420 ],

In other words, the buyer under Section 12(2) does not have to prove that the seller had a subjectively evil state of mind in making false statements or omissions. Further, in order to avoid liability, if all of the other elements of a 12(2) cause of action exist, a seller must show that he did not know of the misstatements or omissions, or could not have known of them, in the exercise of reasonable care. Woodward v. Wright, 266 F.2d 108, 116 (10th Cir. 1959); see also Wilko v. Swan, 346 U.S. 427, 431 , 74 S.Ct. 182 , 98 L.Ed. 168 (1953).

The standards of 12(2) are clear when it comes to ascertaining whether LaPiere’s conduct is actionable. What did LaPiere know? What could

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he have known in the exercise of reasonable care? The undisputed facts speak loudly and clearly as to what information LaPiere had in his possession. There is no evidence in the record that LaPiere did not have, or that it would be possible to prove that he did not have, such information in his possession and that LaPiere did not know and could not have known with the exercise of reasonable diligence that he made material misstatements and material omissions in- his communications to Hopkins. See Murphy v. Cady, supra, 30 F.Supp. 466 at 468 ; Winter v. D. J. & M. Investment & Construction Corp., 185 F.Supp. 943, 947 (S.D.Cal.Cent’l Div.1960)

Purchaser’s Knowledge

Similarly, Hopkins has shown that it is beyond dispute that it, the purchaser of the production payment, did not know of such untruth or omission. There is no dispute that Hopkins did not see the D & M and Schafer reports, and that Hopkins did not see the various tables and schedules, based in part on those reports, which were in LaPiere’s possession. There is no dispute that Hopkins did not receive or obtain reports or estimates of independent engineers which would have revealed a net revenue total for the wells covered by its $1,300,000 production payment lower than the $6,560,000 figure projected to it in the September 16 brochure.

Hutton does allege that Naess, as an individual, and that Naess & Thomas, as a firm, knew of the August 1960 brochure and its $5,083,773 net reserve estimate, and that Naess therefore should have been put on guard when he and his firm received the September 16, 1960 brochure with the higher $6,-560,000 figure. Assuming without holding that since Naess was Hopkins’ investment counsellor for many years, any information known by Naess, or his firm, including information given to Naess in August, 1960, at a time when Trice and LaPiere were trying to get Naess to interest Naess’ client, Hopkins, in the purchase of a Trice production payment, was information which is attributable to Hopkins, Hopkins still was never given any information indicating that the $6,-560,000 figure was not entirely that of independent engineers. From the time LaPiere and Trice visited with Baker in Baltimore on September 21, 1960, at which time Baker received the September 16, 1960, brochure containing the $6,560,-000 estimate, Hopkins received no further information other than that the figure was conservative and was fully justified by the reports of competent engineers. Furthermore, it was not until Baker received the February 3, 1961, brochure from Trice that Hopkins might have learned, though even then through inaccurately reported estimates, that D & M and Schafer had not estimated all of the wells, and that Mercantile National Bank of Dallas had supplied the estimates for five of the wells. While that brochure, despite its estimate misrepresentations, may have conveyed a closer view of the basis for the $6,560,000 net revenue figure, it certainly cannot be considered a correction of the type that would obviate all prior misrepresentations and omissions with regard to the amount and basis of the estimates made to Hopkins. Cf. Loss, III Securities Regulation, 1703-04 (2d ed. 1961).

Hutton has contended that although Hopkins did not have certain information, such as the reports of D & M and Schafer, Hopkins could and should have obtained such information. Section 12(2), however, does not put upon the purchaser, a duty to investigate. Instead, the Securities Act “relieves the purchaser from the common law obligation of using reasonable prudence * * Murphy v. Cady, supra, 30 F.Supp. 466 at 469 . Cf. Athas v. Day, 161 F.Supp. 916, 918-919 (D.Colo.1958). The language of Section 12(2) makes that clear when it uses the words “not knowing of such untruth or omission” with regard to the position the purchaser must have been in at the time of purchase in order later to sustain an action under Section 12(2). Those words assume additional importance when contrasted with

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the use of the words, “did not know, and in the exercise of reasonable care could not have known, of such untruth or omission” which are the words used with respect to the position the seller must have been in at the time of purchase in order later to resist liability under Section 12 (2). Congress, in enacting Section 12 (2), put a burden on the seller to investigate but no such burden upon the buyer. See, Restatement of Torts, § 538, Comment on Subsection 3:(k), and § 540 with regard to absence of the purchaser’s duty to investigate. See also Tentative Draft No. 11, April 15, 1965, of that Restatement on § 540.

In Dale v. Rosenfeld, 229 F.2d 855 (2d Cir. 1956), the issue of duty to investigate arose. In that case the Court found that the prospectus in question misrepresented that an underwriter had agreed to undertake a “firm commitment” to underwrite when in fact it had only agreed to use its “best efforts” to sell certain shares. The Second Circuit held that the misrepresentation was a violation of Section 12(2). In response to the defendant’s contention that plaintiff had a duty to investigate, Judge Swan, for the Court, wrote:

Nor can we accept the argument that the statement in the prospectus that “A copy of the Underwriting Agreement may be examined at the offices of the Underwriter” imposes on a purchaser the necessity of examining it to see whether it may supply information the omission of which made the prospectus misleading. Nothing in the words of the prospectus suggested such necessity. If an issuer or underwriter could so simply avoid the risk of a misleading prospectus, the legislative purpose of requiring full disclosure would be defeated and the statute would have little utility.

5

Availability elsewhere of truthful information cannot excuse untruths or misleading omissions in the prospectus. “Readiness and willingness to disclose are not equivalent to disclosure.”

6

This is not a case like Ouachita Industries, Inc. v. Willingham, supra, 179 F.Supp. 493 , in which the Court found that the plaintiff had examined all of the records pertinent to the oil interest which plaintiff was purchasing, and that the plaintiff “knew prior to the execution of the assignment * * * the true status of the property of defendants’ partnership.” ( 179 F.Supp. at 506 ). In the case at bar, even though Naess had purchased interests in, and/or had acquired knowledge of, Trice oil ventures prior to September, 1960, including the Trice production payment which Hopkins purchased in March 1961, and even if it is assumed that Naess and anyone connected with his firm are the same as officers of Hopkins, still neither Naess nor anyone connected with his firm, nor anyone in the Hopkins group, ever was given the D & M or Schafer reports, or the Trice schedules — the key pieces of information relating to the reserve estimates communicated to Hopkins. At the suggestion of Hopkins’ legal counsel, Baker asked LaPiere for these reports. LaPiere did not supply them to Hopkins, nor did Hopkins see them prior to a year before the commencement of this action. Hutton is not relieved of liability because Hopkins did not press LaPiere harder to produce the reports as requested. On the contrary, LaPiere’s failure to do so constituted another material omission.

The Thirteenth Defense of Hutton would attempt to bar Hopkins on the basis of Hopkins having contributed by its own negligence to its failure to uncover whatever, if any, misstatements or omissions were made by LaPiere. The defenses of contributory negligence or of assumption of risk, however, are not available to a defendant at common law with regard to actions of deceit, and certainly are not available to a defendant under Section 12(2) of the ’33 Act. In fact, as discussed infra, the only

*1222

defense under Section 12(2) based specifically on the conduct of the plaintiff is that plaintiff did have knowledge of the untruth or omission. Having induced Hopkins to buy and having made material misstatements and omissions, Hutton clearly cannot be permitted in this case' to defend by saying that the other information which Hopkins received, or the speculative nature of the transaction, adds up to Hopkins having known of the untruths or omissions.

Reliance

Furthermore, reliance need not be proved by the plaintiff in order to maintain an action under Section 12(2). Demarco v. Edens, 390 F.2d 836, 841 (2d Cir. 1968); Athas v. Day, 161 F.Supp. 916, 918-919 (D.Colo.1958); III Loss, Securities Regulation 1702-03, 1705-06, n. 72 (2d. ed. 1961).

*

*

* The Congress intended * * * to “throw the burden of disproving responsibility for reprehensible acts of omission or commission on those who purport to issue statements for the public’s reliance” [citation omitted]; and it did not impose the burden of proving reliance on the false statement as a condition of recovery. [Woodward v. Wright, 266 F.2d 108 at 116 (10th Cir. 1959)].

The absence of reliance as an element of a 12(2) case clearly makes such a case more susceptible to disposition by summary judgment.

In Rogen v. Ilikon Corp., 361 F.2d 260 (1st Cir. 1966), plaintiff sued defendant corporation and others under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, claiming that as a result of a concealment of material facts he sustained damages in the sale to defendant corporation of stock he had held in that corporation. The District Court, 250 F.Supp. 712 , granted a motion by defendants for summary judgment on the grounds that there was not, taking the evidence most favorably to plaintiff, any material misrepresentation or non-disclosure and that there was no reliance by plaintiff on such non-disclosure. The First Circuit reversed, holding that a trier of the facts could have found, on the evidence most favorable to plaintiff, both material nondisclosure by defendants and reliance thereon by plaintiff. In so doing, the Court commented:

We doubt that a case such as this is ordinarily well adapted to disposition on summary judgment procedure. The delicate field of fiduciary relationships where the import of non-action must be assessed in the light of surrounding circumstances may well indicate a preference for the antennae of the fact finder over the cruder instrument of summary judgment. In any event, a period of almost four years is hardly “summary”. Nevertheless, we reverse reluctantly. We are cognizant at the time and effort invested by the parties, counsel, and the court. We are impressed by the marshalling of facts and argument in the district court’s opinion. But the standard of review is a rigorous one and not even one chink in the armor of decision can be vulnerable to the question: taking the facts and inferences most favorable to the losing party, would a trier of fact nevertheless have to find against him? [footnote omitted, 361 F.2d at 265-266].

Unlike

Rogen ,

this case, brought under Section 12(2) of the ’33 Act, does not involve the issue of reliance and the varying factual inferences which the element of reliance often raises. Woodward v. Wright, 266 F.2d 108, 116 (10th Cir. 1959). In the case at bar, plaintiff need only show that it did not know of the misstatement or omission upon which it bases the within 12(2) action. Athas v. Day, 161 F.Supp. 916, 918-919 (D.Colo. 1958). In further contrast to

Rogen ,

in this case, as discussed above, it is clear that the misstatements or omissions were material because a jury could only find that reasonable men in plaintiff’s position would, in determining whether to purchase the production payments, have attached importance to the fact that the D & M and Schafer estimates over

*1223

lapped and, in at least some instances, presented vastly different reserve estimates for the same well.

Limitations

While Section 12(2) “does not require that the innocent,

before

entering into the transaction, use due diligence to investigate the facts misrepresented by the defrauder,” Section 13 of the ’33 Act, setting forth the statute of limitations applicable to Section 12(2), does require “that reasonable diligence be used toward discovering the fraud

after

the transaction is completed.” Rosenberg v. Hano, 121 F.2d 818, 821 (3d Cir. 1941). (emphasis supplied). See also Section 13 of the ’33 Act, supra.

In this case, there is not one word in all of the pleadings, affidavits and discovery materials, other than the bare assertions of Hutton, to support a finding that prior to November 1, 1962, Hopkins, “by the exercise of reasonable diligence,” could or should have discovered LaPiere’s untruths and omissions. Indeed, prior to that date, the undisputed facts reveal that plaintiff was not “possessed of sufficient information to reveal” an even partial glimpse of the false and misleading nature of LaPiere's communications, let alone the “entire picture” of his misrepresentations. Cf. Gould v. Tricon, Inc., 272 F.Supp. 385 (S.D.N.Y., 1967).

In Azalea Meats, Inc. v. Muscat, 386 F.2d 5 (1967), the Fifth Circuit warned, in the context of the applicability of a state statute of limitations in a Section 10b-5 action:

Inevitably the factual issue of due diligence involves, to some extent at least, the state of mind of the person whose conduct is to be measured against this test and it is simply not feasible to resolve such an issue on motion for summary judgment. In the landmark case of Alabama Great Southern RR. Co. v. Louisville and Nashville RR., 224 F.2d 1 , 50 A.L.R.2d 1302 (5th Cir. 1955), Judge Hutcheson, as the organ of the court, wrote: “ * * * where motive, intent, subjective feelings and reactions, consciousness and conscience were to be searched, an examination and cross-examination were necessary instruments in obtaining the truth, we have pointed out that and why the issues may not be. disposed of on summary judgment.”

Although appellees vigorously insist that appellant’s own testimony convicted it of a lack of due diligence, nevertheless there are facts in the record, and appellant assures us there will be more, which indicate that appellant in fact relied upon misrepresentations made by appellees and that its failure to file its suit prior to September 29, 1964, resulted from these untruths rather than from a lack of due diligence on its part. [ 386 F.2d at 10 ].

In

Azalea,

the Fifth Circuit reversed summary judgment below for defendant-seller, holding that there were facts in the record which could have, with regard to the limitations issue, sustained a finding of the exercise of due diligence by plaintiff-purchaser. In

Azalea,

the Court found that facts had to be developed with regard to whether certain of defendants stood in a confidential relationship with plaintiff and, if so, the impact of such relationship on plaintiff’s duty to exercise due diligence. ( 386 F.2d at 9 ). While the language in

Azalea

is strong in its reversal of summary judgment, the decision must be read in the light of the facts of that case. For Rule 56 “permits summary judgment in any case [where there is a lack of any genuine issue of material fact], and the inquiry must be whether such a judgment is appropriate in the particular case, a question which cannot be resolved by some broad judicial gloss on the rule.” Wright, Federal Courts, § 99, p. 387 (1963).

In Morris v. Feldman, Fed.Sec.L.Rep. ¶ 91,427 (S.D.N.Y.1964), Judge Tenney denied plaintiff’s motion for summary judgment on the basis of the existence of a disputed question of fact with regard to whether purchasers of securities,

*1224

seeking 12(2) rescission of a sale, had complied with Section 13’s limitations requirements. In so holding, Judge Tenney stated that the dispute is

as to what information was actually in plaintiffs’ possession, or could have been obtained by the exercise of reasonable diligence, and when.

In this case, as discussed infra, there is no dispute concerning whether plaintiff possessed any of the D & M, Schafer or Mercantile reports or any of the relevant Trice schedules. Further, the facts are clear that plaintiff did not possess such reports or such knowledge as would have required it to obtain such reports after March 1, 1962, and before November 1, 1962.

Whether reaso

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