Petition for Writ of Certiorari — Taylor v. First Union Corp.

a Supreme Court, U.S.

88-1216 ») BILED

JAN 18 1989

JOSEPH E. SPANIOL,

6.

IN THE SUPREME COURT OF THE UNITED STATES

October Term 1988

PATRICIA B. TAYLOR, Petitioner,

versus

FIRST UNION CORPORATION OF SOUTH CAROLINA

[FORMERLY SOUTHERN BANCORPORATION, INC. }, et al.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

J. KENDALL FEW

850 Wade Hampton Blvd.

Post Office Box 10085

Greenville, S.C. 29603

(803) 232-6456

Counsel of for Petitioner

JOHN P. FREEMAN

236 North Stonehedge Drive

Columbia, S.C 29210

(803) 777-7224

Counsel of Record

January 18, 1989

QUESTIONS PRESENTED

1. Where defendants’ fraudulent activities precipitate

the plaintiff’s sale of a security, can it be said that, as a

matter of law, defendants’ fraud is not “in connection” with

plaintiff’s sale within the coverage of Rule 10b-5?

2. Is a conspiracy to defraud an investor in connection

with her sale of stock actionable under Rule 10b-5?

3. In the face of a jury verdict for a plaintiff selling

shareholder, is nondisclosure that the company purchasing

the shareholder’s stock has become “pinned” to the issuer,

preparatory to later acquisition, neither material nor mis-

leading as a matter of law where, prior to the sale, the issuer’s

securities counsel, speaking on behalf of the issuer, notified

the buying company that the issuer believed disclosure of the

“pinning” was required by the securities laws?

LIST OF PARTIES

The parties to the proceedings below were petitioner

Patricia B. Taylor and the respondents, First Union Corpora-

tion of South Carolina [formerly Southern Bancorporation,

Inc.] and First Union Corporation.

il

TABLE OF CONTENTS

QUESTIONS PRESENTED ................0..0000-

LIST OF PARTIES ...............00cccecceecceees ii

Operon BELOW ............0........00..0cccc0ce 1

ioc caccessncassccecevsees 1

STATUTE INVOLVED.................0cccecceeeee 2

STATEMENT OF THE CASE ..................000- 3

REASONS FOR GRANTING THE WRIT ........... 7

I. The Fourth Circuit’s restrictive reading of the “in

connection with” requirement of Rule 10b-5 is at

odds with the teaching of this Court and the law of

EE ele ccecke cee cd wie knees ese 7

II. Conspiracies to defraud are actionable under Rule

10b-5 and petitioner proved one. ................ 10

III. The Fourth Circuits’ decision is irreconcilable with

Levinson v. Basic, Inc., 108 S.Ct. 978 (1988). ..... 13

eed Leh holed bounces sansa bas <e 15

APPENDIX (Opinion and Judgment of the Court of

Appeals, Order of the District Court on Re-

spondent’s Post-trial Motions and Order of the

Court of Appeals denying petition for rehearing.) la

TABLE OF AUTHORITIES

Cases

Chiarella v. United States,

er gis & Re 7,9

First Federal Sav. and Loan Ass’n v. Oppenheim, Appel,

Dixon & Co., 629 F. Supp. 427, 440 (S.D.N.Y. 1986) 8

Halperin v. Jasper, 1987 WL 20192 (E.D. Pa. 1987) ... 8

Hochfelder v. Ernst & Ernst, 425 U.S. 185, 191-92 n.7

CE bab i vacdwessetchetsbamsarss cert eraaekis. 10

Hunt v. Robinson, 852 F.2d 786, 787-88 (4th Cir. 1988) 8, 9

Island Car Wash, Inc. v. Norris, 292 S.C. 595, 599, 358

S.26 1660, 168 (Ct. Age. 1907) .....2..55-....5.. 12

LaMotte v. Punch Line, 296 S.C. 66, 370 S.E.2d 711

SE EEE Gato ka sess Venu tecdoeed ab canbe de swar 13

Lehman Brothers v. Schein, 416 U.S. 368, 94 S.Ct. 1741, 40

See ED .G.40yshbaee dein eed ce ddes cases 13

Levinson v. Basic, Inc., 108 S.Ct. 978, 988 (1988) ...... 13

Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456

ED cc obacaesucenawe edencs seuss 10

Rochelle v. Marine Midland Grace Trust Co., 535 F.2d

A I 3 oh Se ae ere sds dedeeeas aes 7

Rose v. Arkansas Valley Environmental & Utility Au-

thority, 562 F.Supp. 1180, 1211-12 (W.D. Mo. 1983) 10

Rush v. South Carolina National Bank, 288 S.C. 560, 343

ee Se es TR, To i ss vise a cee eeiticss 12, 13

SEC v. Seaboard Corp., 677 F.2d 1297, 1299

SG EE £2 ce weldns badwia dd beeen tesa cann 10

SEC v. Texas Gulf Sulphur, 401 F.2d 833 (2d Cir. 1968),

cert. denied, 394 U.S. 976 (1969) ................. 14

Smallwood v. Pearl Brewing Co., 489 F2d 579, 595 (5th

6 eee rer eer ee 8

Steele v. Victory Savings Bank, 295 S.C. 290, 368 S.E.2d

Oe ee oo ae esa wane pee ndus sees 13

Superintendent of Insurance v. Bankers Life and Casu-

alty Co., 404 U.S. 6,12 (1971) .........2.022002. 7,8

Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 194 (3d

ye | Sa RR eed ee A PN aly oe 4 a Cours gt )

Miscellaneous

2 Bromberg & Lowenfels, Securities Fraud & Com-

modities Fraud § 4.7(574)(3), at 88.34 (1982). .....

Note, The Pendulum Swings Farther: The “In Connec-

tion With” Requirement and Pretrial Dismissals of

Rule 10b-5 Private Claims for Damages, 56 Tez. L.

Be TU Nis ca cnekin kidd wuneeee tees ree 8

es EE eel sevcccocteunseckseenauae 2

Rule 10b-5, 17 C.F.R. § 240.10b-5 ............. 2, 3, 8, 9, 10

Securities Exchange Act

section 10(b), 16 U.S.C. §$10(b) ..........cccccccens 7

Securities Exchange Act

A es ee es dc hc necanvncsscaacdsen 1

South Carolina Code § 33-13-150 (1987) .............. 13

South Carolina Supreme Court Rule 46 .............. 13

V

IN THE SUPREME COURT OF THE UNITEDSTATES

October Term 1988

PATRICIA B. TAYLOR, Petitioner,

versus

FIRST UNION CORPORATION OF SOUTH CAROLINA

[FORMERLY SOUTHERN BANCORPORATION, INC} et al

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

The petitioner Patricia B. Taylor respectfully prays that

a writ of certiorari issue to review the judgment and opinion

of the United States Court of Appeals for the Fourth Circuit,

entered in the above-entitled proceeding on September 22,

1988.

OPINIONS BELOW

The opinion of the Court of Appeals from the Fourth

Circuit is reported at 857 F.2d 240, and is reprinted in the

Appendix hereto, p. la, infra. The order of the United States

District Court for the District of Columbia (Ross Anderson,

D.J.) has not been reported. It is reprinted in the appendix

hereto, p. léa, infra. The Fourth Circuit’s Order denying the

Petition for Rehearing with suggestion for Rehearing In

Banc is reprinted in the Appendix hereto, p. 19a, infra.

JURISDICTION

Invoking jurisdiction under section 27 of the Securities

Exchange Act, 15 U.S.C. § 78aa, petitioner brought this suit

in the District Court for South Carolina. On November 11,

1987, the jury returned verdicts against both defendants on

plaintiff’s count alleging a violation of Rule 10b-5, 17 C.F.R.

§ 240.10b-5, and on the count alleging a corporate breach of

fiduciary duty to a minority shareholder. On December 28,

1987, the District Court denied respondents’ motions for

judgment notwithstanding the verdict and in the alternative

for a new trial. See p. 18a, infra.

On respondents’ appeal, the Fourth Circuit on Sep-

tember 22, 1988, entered a judgment and an opinion reversing

the judgment entered below. A petition for rehearing was

filed and was denied by the Fourth Circuit on October 21,

1988. See p. 19a, infra.

The jurisdiction of this Court to review the judgment of

the Fourth Circuit is invoked under 28 U.S.C. § 1254(1).

STATUTE AND REGULATION INVOLVED

15 U.S.C. § 783(b). Regulation of Manipulative and Deceptive

Devices.

It shall be unlawful for any person, directly or indi-

rectly, by the use of any means or instrumentality of

interstate commerce or of the mails, or of any facility of

any national securities exchange—

(b) To use or employ, in connection with the purchase

or sale of any security registered on a national securities

exchange or any security not so registered, any manip-

ulative or deceptive device or contrivance in contraven-

tion of such rules and regulations as the Commission

may prescribe as necessary or appropriate in the public

interest or for the protection of investors.

Rule 10b-5, 17 C_.F.R. 240.10b-5. Employment of Manipulative

and Deceptive Devices.

It shall be unlawful for any person, directly or indi-

rectly, by the use of any means or instrumentality of

interstate commerce, or of the mails, or of any facility of

any national securities exchange,

(1) to employ any device, scheme, or artifice to

defraud, 1

(2) tomake any untrue statement of a material fact or

to omit to state a material fact necessary in order to

make the statements made, in the light of the circum-

stances under which they were made, not misleading, or

(3) to engage in any act, practice, or course of dealing

which operates or would operate as a fraud or deceit

upon any person,

in connection with the purchase or sale of any security.

STATEMENT OF THE CASE

Petitioner is the wife of Bennie Taylor, formerly the

largest shareholder of Southern Bancorporation. [JA 403

(7-10); 441 (13-15); 609 (9-11)]. Southern was a South Carolina

bank holding company which owned all of the common stock

of Southern Bank and Trust Company and World Acceptance

Corporation. [JA 297 (13) - 298 (2)]. Mr. Taylor had founded

World Acceptance. [JA 292 (19-21)]. In February, 1984 he was

its Chief Executive Officer [JA 601 (6-7)] and a member of

Southern’s Board of Directors and Executive Committee. [JA

297 (7-14); 608 (3-8)]. Mr. and Mrs. Taylor together held 4.9

percent of Southern’s stock. [JA 616 (13-17); 629 (18-22).

In March of 1983 Mr. Taylor had an operation to ease pain

derived from a previously amputated leg. [JA 560 (7-10)].

Complications from that operation left him a paraplegic [JA

402 (5-11)], confined him to a wheelchair, and eaused him

substantial discomfort. [JA 401 (18-19); 430 (23-25); 518 (5-7)].

He was also experiencing financial problems. [JA 506(5-8);

506(17) - 507(2)]. Southern was aware of Mr. Taylor’s “pre-

carious financial position.” [JA 506(18), (21-22)].

On January 11, 1984, a meeting was held between high-

level representatives of Southern and First Union Corpora-

tion. [EA 1-5]. This meeting was convened at the invitation of

the Chief Executive Officer of First Union. [EA 1]. In atten-

dance were the Board Chairman, President, Chief Financial

Officer and legal counsel for First Union and the Chief Exec-

3

utive Officer, Vice Chairman, Vice President, Secretary and

chief securities lawyer for Southern. [JA 275(25) - 276(26); 394

(19-20); 395 (12-22)]. At this meeting, First Union expressed

an interest in acquiring the maximum amount of Southern

stock they could at the time under Federal Reserve Regula-

tions, which was 4.99 percent [JA 278(15-17); 622 (11-21)],

approximately the same number of shares held by the Tay-

lors. [JA 629 (18- 22)].

At that meeting First Union’s Chief Executive Officer

announced his company’s interest in “developing a rela-

tionship similar to pinning as that term was used in the social

context 30 years ago or so.” [EA 1]. This pinning relationship

was to look forward to First Union’s eventual acquisition of

Southern once approval of interstate banking occurred. [EA

5; JA 282 (2-11)]. According to the report of the meeting by

Southern’s SEC counsel, First Union’s representatives an-

nounced its intention to buy Southern stock “on the basis of a

gentleman’s agreement of approval by Southern,” [EA 1], and

noted “that First Union has never owned any stock of any

bank for take-over purposes heretofore.” Id. (Emphasis

added.) First Union also raised the “likely possibility” that it

would fund Southern’s acquisition of other South Carolina

banks, id., thereby enhancing First Union’s market penetra-

tion in South Carolina once interstate banking was permissi-

ble. Southern’s lawyer’s notes make clear that at the January

11, 1984 meeting, speaking on behalf of Southern, he in-

formed First Union that, under the circumstances, “it ap-

peared to us that disclosure was required.” Jd. That same

lawyer’s notes on the January 11 meeting refer both to a

“contract to accomplish a merger when allowed by applicable

law,” id., and to an agreement “in principle to merge when

interstate banking was permissible.” [EA 5; JA 232 (2-11)].

First Union’s plan to acquire Southern’s stock was

blessed by Southern’s Executive Committee, [JA 569

(12-16)]], and on February 2, 1984, First Union was notified

that it could commence acquiring its nearly 5 percent stake in

Southern stock, [EA 22; JA 630(9-16)]], a stake nearly identi-

cal to that held by petitioner and her husband.

Southern’s Chief Executive Officer testified at trial that

he had a “real strong motive to see this transaction take

place,” [JA 637(19) - 638(2)], that he knew petitioner and her

husband held “approximately the same number of shares

[First Union] wanted to buy,” [JA 608(18-20)], and that peti-

tioner’s husband had previously stated that he would sell his

stock if he ever ceased to be employed by World Acceptance,

Southern’s subsidiary [JA 609(12) - 610(1); 629(8-22)]. Four

days after Southern gave First Union the go-ahead on the

“pinning” relationship, petitioner’s husband was fired at a

meeting he was tricked into attending based on an inten-

tionally falsified agenda. [JA 306 (3-9)]. As Southern had

anticipated, petitioner’s husband immediately indicated at

the meeting his desire to sell his stock. [JA 296 (8-11); 607

(21-22); 616(12)]. Two days later he was notified by Southern

that if he did not agree to sell his Southern stock by February

19, within two weeks, his salary and all of his disability

benefits would be terminated. [EA 26].

A Goldman Sachs representative subsequently was able

to get petitioner’s husband to commit to a price of $18.00 per

share for his stock. [JA 443 (1-2)]. The prospective buyer was

represented by the Goldman Sachs agent to be “out on a

yacht fishing.” [JA 413(23) - 414(2)]. In reality, it was First

Union. [JA 414 (13-15); 478(15-19)]. First Union’s involvement

was not disclosed until after petitioner’s husband had com-

mitted himself on a price of $18.00 per share and taken a

position on selling his block of stock, [JA 489 (1-9)], which

included petitioner’s stock as “part of the deal - part of the

package.” [JA 551(18) - 552(1)]. The cooperative behavior of

Southern and First in divesting petitioner and her husband

of their stock is evidenced by various facts in the record,

including a provision in Mr. Taylor’s agreement with South-

ern settling his employment claims requiring that he sell “all

[Southern] stock owned directly and indirectly by him to

First Union.” [EA 64, 3]. Additionally, there was evidence

that respondents conspired to keep one of Mr. Taylor’s fellow

board members from bidding for his stock. [EA 33, 42. JA

364(16) - 365(24); 271(20-25); 294(16) - 296(23); 589(4) - 590(3)].

After the purchase of petitioner’s stock by First Union

was consummated, Southern’s press release continued the

conspiracy of silence about the secret pinning and “gen-

tleman’s agreement” with First Union, stating: “It is impor-

tant to make clear that there are no commitments or under-

standings between our companies.” [EA 67].

Subsequently, fourteen days after interstate banking

became permitted in South Carolina in 1986, Southern’s

shareholders approved a merger with First Union. [EA 101;

92, 1]. First Union acquired Southern by merger at $33.00

per share. [JA 811(17)]. No public disclosure of the banks’

January 1984 “pinning” was ever made.

The theory of petitioner’s complaint was that re-

spondents had conspired to violate her rights as an investor

in violation of Rule 10b-5 and in violation of South Carolina

state law based on a conspiracy to violate a fiduciary duty

owed to a minority shareholder. The jury was expressly

instructed that nondisclosure under Rule 10b-5 only is ac-

tionable in the face of a duty to disclose which can be estab-

lished due to a relationship of trust and confidence. [JA

804(22) - 805(4)]. The jury was also fully instructed on aider

and abettor liability [JA 807(16)-(25)] and on civil conspiracy

[JA 807(25) - 809(14)]. The jury was also instructed that only

Southern could be directly liable on the fiduciary duty claim

under state law. [JA 810(23) - 811(3)]. The jury was instructed

that First Union’s potential liability on the state law claim

rested solely on petitioner’s conspiracy allegations. [JA

811(4-11)]. The jury’s findings for petitioner on both the 10b-5

and state law claim against both defendants thus shows the

jury found aconspiracy between First Union and Southern to

injure petitioner.

In reversing, the Fourth Circuit held that First Union

and Southern’s silence about their pinning relationship was

neither misleading nor deceptive as a matter of law. Silence

was actionable, held the court, only when silence would make

other statements misleading or false. See pp. 5a-6a infra.

Implicit in its ruling was the judgment that the identity of a

buyer of stock is not a material fact that might be made

misleading by nondis- closure of such a circumstance as a

pre-existing “pinning” relationship.

The Fourth Circuit also held there was no basis for a jury

question on the issue of materiality. See pp. 6a-8a, infra.

Totally absent from the circuit court’s opinion is any refer-

ence to the notes written by Southern’s SEC counsel, admit-

ted into evidence, which reported his admonition at the

January 11, 1984, meeting: “Speaking on behalf of Southern

Bancorporation, I indicated that it appeared to us that dis-

closure was required.” [EA 1].

The Fourth Circuit also held that any misrepresenta-

tions made by respondents were “in connection” with Mr.

Taylor’s firing, and “only tangentially and incidentally re-

lated to the sale of plaintiff’s stock.” See pp. 8a-lla, infra.

Absent from the appellate court’s opinion is any reference to

the fact established at trial that Southern knew of Mr. Tay-

lor’s commitment that he would sell his Southern stock if he

ceased to be employed by World. [JA 609(18) - 610(1);

629(10)-(17)].

REASONS FOR GRANTING THE WRIT

I.

The Fourth Circuit’s restrictive reading of the “in

connection with” requirement of Rule 10b-5 is at

odds with the teaching of this Court and the law of

other circuits.

This Court, in Superintendent of Insurance v. Bankers

Life and Casualty Co., 404 U.S. 6, 12 (1971), cautioned that

“Section 10(b) must be read flexibly, not technically and

restrictively.” In Rochelle v. Marine Midland Grace Trust

Co., 535 F.2d 523 (9th Cir. 1976), the circuit court called

attention to:

[T]he roomy language of Superintendent of Insur-

ance v. Bankers Life and Casualty Co. (1971) 404

U.S. 6, 92 S.Ct. 165, 30 L.Ed2d 128. Although Section

10(b) was not meant to cover “internal mismanage-

ment,” “(t]he crux of the present case is that Man-

hattan suffered an injury as a result of deceptive

practices touching its sale of securities as an inves-

tor.” (Jd. at 12-13, 92 S.Ct. at 169, 30 L.Ed.2d at 134).

Bankers Life was undoubtedly intended to prevent

courts from reading the phrase “in connection

with” grudgingly.

Id at 529.

The Ninth Circuit’s interpretation of the Supreme Court’s

intent in Bankers Life is mirrored by other decisions. E.g.,

Smallwood v. Pearl Brewing Co., 489 F2d 579, 595 (5th Cir.

1974) (observing the Court had made it clear that “a direct or

close relation between the fraud and the securities transac-

tion was not required” and noting that in Bankers Life the

Court permitted a purchase by the plaintiff in one transac-

tion to create standing to allege a 10b-5 violation in another

transaction when both transactions were alleged to be part of

the same scheme); Halperin v. Jasper, 1987 WL 20192 (E.D.

Pa. 1987) (equating the “in connection with” requirement

with a “but for” test); First Federal Sav. and Loan Ass’n v.

Oppenheim, Appel, Dixon & Co., 629 F. Supp. 427, 440

(S.D.N.Y. 1986) (referring to the “broad ‘touch’ test enunci-

ated in Superintendent.”). A leading treatise on § 10(0) and

Rule 10b-5 suggests that the “connection” between fraud and

a securities transaction “can be very tenuous,” 2 Bromberg &

Lowenfels, Securities Fraud & Commodities Fraud

§ 4.7(574)(3), at 88.34 (1982). See also Note, The Pendulum

Swings Farther: The “In Connection With” Requirement and

Pretrial Dismissals of Rule 10b-5 Private Claims for Dam-

ages, 56 Tex. L. Rev. 62 (1977).

In holding that the “in connection” test had not been

satisfied, Judge Wilkinson, writing for the Fourth Circuit

panel, relied on two cases. The first was on his own recent

ruling in Hunt v. Robinson, 852 F.2d 786, 787-88 (4th Cir.

1988), wherein he postulated that the “goal [of section 10(b)]

is not furthered by bringing within the ambit of § 10(b)

claims amounting to... common law fraud which have long

been the staple[] of state law.” This political statement col-

lides directly with the entire recent thrust of Supreme Court

decisions interpreting Rule 10b- 5 to require proof of fraud in

the classic common law sense. E.g., Chiarella v. United States,

445 U.S. 222, 234-35 (1980) (observing that “{slection 10(b) is

aptly described as a catchall provision but what it catches

must be fraud.”). In any event, Hunt is distinguishable be-

cause the wrong there was purely in refusing to issue stock

under the terms of a contract. There was no clear evidence in

Hunt that, as here, the making of the stock sale contract itself

was tainted by fraud. To claim, as did the Fourth Circuit,

“that the controversy here related primarily to the unpleas-

ant circumstances surrounding Bennie Taylor’s termina-

tion,” ignores the evidence in the record that termination and

stock sale were intertwined due to Mr. Taylor’s commitment

to sell the stock if he left World Acceptance. It also ignores

the proof that Southern itself admitted, through its se-

curities counsel, that disclosure was required for the protec-

tion of investors.

The only other case relied on by Judge Wilkinson, Tully

v. Mott Supermarkets, Inc., 540 F.2d 187, 194 (3d Cir. 1976),

simply required that “there be some causal connection be-

tween the alleged fraud and the purchase or sale of stock.” Jd.

It has been questioned whether T'ully’s “causal connection”

requirement is the same as 10b-5’s “in connection with”

requirement. Ketchum v. Green, 557 F.2d 1022, 1028 (3d Cir.

1977). In any event, even if a “but for” test is required, it is

satisfied on the present facts, for petitioner and her husband

were victims of deception as to his dismissal and also as to the

crucial relation between First Union and Southern at the

time of the stock sale.

II.

Conspiracies to defraud are actionable under Rule

10b-5 and petitioner proved one.

Rule 10b-5 makes it “unlawful for any person, directly or

indirectly” to engage in the prohibited conduct. 17 C.F.R.

240.10b-5. Numerous lower courts have upheld claims pre-

mised on conspiracies to violate rule 10b-5. See, e.g., SEC v.

Seaboard Corp., 677 F.2d 1297, 1299 (9th Cir. 1982):

Fringe participants in illegal securities transac-

tions have been brought within the scope of the

securities laws with the application of criminal and

tort theories of liability. Alleged coconspirators

have been held liable for the acts of direct violators

of §10(b) and Rule 10b-5, when they knew of the

fraud and assisted the overall scheme. See, e.g..

Dasho v. Susquehanna Corp., 380 F.2d 262 (7th Cir.),

cert. denied, 389 U.S. 977, 88 S.Ct. 480, 19 L.Ed.2d 470

(1967); Texas Continental Life Ins. Co. v. Dunne, 307

F.2d 242 (6th Cir. 1962); Kardon v. National Gypsum

Co., 69 F.Supp. 512 (E.D.Pa.1946).

See also Rose v. Arkansas Valley Environmental & Utility

Authority, 562 F.Supp. 1180, 1211-12 (W.D. Mo. 1983). In

Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S.

358, 394 (1982), this Court held that those who conspire to

violate the Commodities Exchange Act can be held account-

able under the act. However, the Court in Hochfelder v. Ernst

& Ernst, 425 U.S. 185, 191-92 n.7 (1976), expressly reserved the

question whether indirect liability under Rule 10b-5 could be

imposed on aiders and abettors, and this Court has never held

that 10b-5 reaches coconspirators.

The jury in this case was instructed on conspiracy and

unquestionably found a conspiracy to defraud. The appellate

court expressed its disdain for conspiracy theory by suggest-

ing that “[f]Jederal securities law was not intended to...

substitute for the more general state claims of . . . conspiracy

10

[or] fraud....” See pp. 10a-1la, infra. The court then pro-

ceeded to proclaim that “[wJhere companies have complied

with the requirements of § 10(b), we decline to interpret state

corporate law to find aconspiracy. . . .” See pp. 1la-12a, infra.

The unfair Catch-22 problem for petitioner is obvious.

The record is strewn with facts supporting petitioner’s

conspiracy theory. Both the trial judge and respondents’

counsel well understood they were trying a conspiracy case.!

Apart from the highly incriminating notes of Southern’s SEC

counsel, which were never mentioned by the appellate court,

there was ample evidence of a conspiracy presented at trial.

Southern’s Press Release issued upon First Union’s purchase

of the Taylors’ stock declared, falsely: “{I}t is important to

make it clear that there are no commitments or understand-

ings between our companies.” [EA 67].2 However, notes writ-

ten by a First Union Senior Vice President are to the contrary

[JA 68-83]. The First Union executive who negotiated the

Taylor stock purchase refers to an “agreement in principle”

[EA 74], an “agreement to merge,” [EA 73], and to the con-

spiracy of silence: “Basic strategy—low key the transaction

as a ‘non event.’ [EA 72]. First Union’s take-over of South-

ern was approved within two weeks after interstate banking

became effective in South Carolina. [EA 92]. This is addi-

tional evidence that there was, in fact, an agreement in

principle to merge as soon as interstate banking was

permitted.

1 MR. CALHOUN: Your Honor, may I be heard because this is exceed-

ingly important to—

THE COURT: I'll listen to you, but—

MR. CALHOUN: Sir?

THE COURT: I'll listen to you, but you’re trying a conspiracy case.

MR. CALHOUN: Yes sir.

2Tf, as the Fourth Circuit held, the existence of the pinning rela-

tionship agreement was not a material fact, then why did Southern at-

tempt in its release to deny (falsely) the existence of such an agreement?

Clearly, Southern thought news of the existence of an understanding

between it and First Union would be important to investors.

11

Additional evidence of conspiracy is found in the legal

opinion of Southern’s counsel dated February 28, 1984, [EA

55-60]. It states that it is based on “information that [South-

ern] have furnished us.” [EA 56]. It further states that Mr.

Taylor was fired based on “substantial disputes” which arose

“fijn early February 1984” [EA 58]. Mr. Taylor was fired on

Monday, February 6, 1984 [EA 26]. This means that the

“substantial disputes” had to have arisen over the first few

days of February, but there is no evidence whatever in the

record of any such disputes during that period. The Taylor

firing occurred shortly after the January 11 meeting at which

First Union sought to acquire 4.9 percent of Southern’s stock,

exactly what the Taylors held. Southern knew Taylor would

sell his stocks if he was terminated [JA 609(14) - 610(1); 629

(8-22)] and lied to him to induce him to attend the meeting at

which he was fired [JA 306(3- 9)]. The Fourth Circuit admit-

ted petitioner had proved an “agreement” between First

Union and Southern prior to her sale. See p. 7a, infra. Pre-

viously this was denied by Southern in the press release it put

out immediately after petitioner’s sale to First Union, ad-

monishing that, “It is important to make clear that there are

no commitments or understandings between our companies.”

[EA 67]. (Emphasis added.)

The foregoing evidence was in the record and the jury

was instructed on conspiracy. There was ample evidence to

support liability based on either a conspiracy to violate the

federal securities laws or to breach fiduciary duties owed

under state law.’ Absent from the appellate court’s opinion is

3’The appellate court’s ruling that there was not a fiduciary bond

between petitioner and Southern, see p. 12a, infra, was clearly wrong.

South Carolina’s courts have traditionally viewed the concept of a fidu-

ciary relationship, or a relationship of trust and confidence, very flexibly.

They have been “careful to not define fiduciary relationships so as to

exclude new cases that may give rise to the relationship.” Jsland Car Wash,

Inc. v. Norris, 292 S.C. 595, 599, 358 S.E.2d 150, 152 (Ct. App. 1987). South

Carolina’s Court of Appeals has held that a fiduciary relationship could

arise between a bank and one of its customers. Rush v. South Carolina

12

any justification for its reversal of the jury’s conspiracy

liability determination.

III.

The Fourth Circuit’s decision is irreconcilable with

Levinson v. Basic, Inc., 108 S.Ct. 978 (1988).

In Basic this Court held that a “fact specific” inquiry

was called for in order to determine when merger discussions

became so material as to require disclosure. Levinson v.

Basic, Inc., 108 S.Ct. 978, 988 (1988). The Court called atten-

tion to the need “to look to indicia of interest in the transac-

tion at the highest corporate levels.” Jd. at 987. In particular,

the court noted factors such as “board resolutions, instruc-

tions to investment bankers and actual negotiations between

principals” as serving as indicia of interest. Jd. Here, the

National Bank, 288 S. C. 560, 343 S.E.2d 667 (Ct. App. 1986). See also Steele

v. Victory Savings Bank, 295 S.C. 290, 368 S. E.2d 91 (Ct. App. 1988). If a

bank can owe a fiduciary duty to a customer, it can naturally be viewed as in

a fiduciary relationship with one of its own shareholders, as the lower court

held. See pp. 17a-18a, infra. This is particularly so in South Carolina, given

that shareholders are express, direct beneficiaries of a statutory duty of

good faith owed by the directors of South Carolina corporations, such as

Southern. See South Carolina Code § 33-13-150 (1987). No other state has

such a statutory provision. Petitioner was not just a Southern shareholder,

however. Her husband was a Southern fiduciary. The Fourth Circuit’s

ruling on the fiduciary duty issue is clear error in applying South Carolina

law. Moreover, even if a fiduciary duty was absent, the civil conspiracy was

per se actionable under controlling South Carolina authority. See LaMotte

v. Punch Line, 296 S.C. 66, 370 S.E.2d 711 (1988) (actionable civil conspiracy

may exist even though all elements of another wrong are not present). A

reasonable way to rectify the error is for this Court to follow the procedure

it used in Lehman Brothers v. Schein, 416 U.S. 368, 94 S.Ct. 1741, 40 L.Ed.2d

215 (1974), and remand the case to the Fourth Circuit with a suggestion

that it consider use of South Carolina Supreme Court Rule 46, the Rule for

Certification of Questions of Law. That rule is available for use by “any

federal court of the United States.” Jd.

13

record reflects that, immediately prior to petitioner’s stock

sale, there was approval of the “gentleman’s agreement” by

Southern’s Executive Committee, participation by invest-

ment banker Goldman Sachs on behalf of First Union in

obtaining the sought-after 4.9 percent stake in Southern

from petitioner and her husband, and actual negotiations

between the principals. Not just was every base mentioned in

Basic touched, but Southern’s securities counsel, speaking on

behalf of Southern, announced to First Union that, under the

circumstances, “it appeared to us that disclosure was re-

quired.” All the jury did was agree with Southern. Clearly a

material fact, the “gentleman’s agreement,” was withheld

from petitioner, and disclosure of that material fact was

needed to make the fact that was known, the buyer’s identity,

not misleading.

Perhaps most telling on the materiality issue is the fact

that Southern’s press release, issued immediately following

petitioners’ sale, stated it was “important to make clear there

are no understandings between our companies.” [EA 67]

(Emphasis added.) The press release was never mentioned by

the Fourth Circuit. The release raises a good question, how-

ever, in light of the Fourth Circuit’s finding of an agreement

between First Union and Southern. The question is, if the

absence of an agreement is an “important” (i.e., material)

fact, as the Southern press release stated, then how can the

existence of an agreement be immaterial as a matter of law?

The appellate court’s application of Basic is clearly wrong

and ill-serves the investing public.

Missing from the appellate court’s analysis is any recog-

nition that this case presents classic insider trading, invok-

ing the disclose-or-abstain rule that has been unchallenged

since the landmark case of SEC v. Texas Gulf Sulphur, 401

F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969).

14

CONCLUSION

For these various reasons, this petition for certiorari

should be granted.

Respectfully submitted,

J. KENDALL FEW

850 Wade Hampton Blvd.

Post Office Box 10085

Greenville, S.C. 29603

(803) 232-6456

Counsel for Petitioner

JOHN P. FREEMAN

236 North Stonehedge Drive

Columbia, S.C 29210

(803) 777-7224

Counsel of Record

15

APPENDIX

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Patricia B. TAYLOR, Plaintiff-Appellee,

versus

FIRST UNION CORPORATION OF SOUTH CAROLINA,

formerly Southern Bancorporation, Inc.;

First Union Corporation, Defendants-Appellants.

No. 88-2503.

Appeal from the United States District Court for the

District of South Carolina, at Greenville. G. Ross Anderson,

Jr., District Judge. (CA-87-459).

Argued June 9, 1988.

Decided Sept. 22, 1988.

Before RUSSELL and WILKINSON, Circuit Judges, and

NIEMEYER, United States District Judge for the District of

Maryland, sitting by designation.

John Thompson Allred, Charlotte, N.C. (Kenneth S.

Broun, J. Anthony Penry, Petree, Stockton & Robinson, Win-

ston-Salem, N.C., O.G. Calhoun, William M. Grant, Jr.,

Haynsworth, Marion, McKay & Guerard, Greenville, S.C.,

Francis C. Clark, Legal Div., First Union Corp., Winston-

Salem, N.C., on brief), for defendants-appellants. John Pat-

rick Freeman, Columbia, S.C., J. Kendall Few, Greenville,

S.C., for plaintiff-appellee.

la

WILKINSON, Circuit Judge:

In February 1984, plaintiff Patricia Taylor and her hus-

band, Bennie Taylor, sold their stock in Southern Bancor-

poration, Inc. to First Union Corporation for $18 a share. In

September 1985, Southern and First Union entered into a

merger agreement, and First Union offered to purchase all

outstanding stock in Southern for $33 a share. Plaintiff filed

suit against Southern and First Union alleging violations of

§ 10(b) of the Securities Exchange Act of 1934 and breach of

fiduciary duty in connection with defendants’ failure to dis-

close their merger discussions and their conduct surrounding

the purchase of her stock. A jury returned a verdict in favor

of plaintiff on both the state and federal claims and awarded

her damages based on the difference between her selling

price and the later acquisition price of the Southern stock.

Because § 10(b) imposed no obligation on defendants to

disclose highly tentative merger discussions prior to plain-

tiff’s sale of her stock and because defendants’ conduct did

not constitute deception in connection with the sale of stock

or a breach of any fiduciary duty owed to plaintiff, we reverse

and remand for entry of judgment in favor of defendants.

I.

Southern Bancorporation (Southern) was a South Caro-

lina bank holding company that owned all of the common

stock of Southern Bank & Trust Co. and World Acceptance

Corp. Plaintiff, Patricia Taylor, and her husband, Bennie

Taylor, owned 4.9% of the stock in Southern. In February

1984, Bennie Taylor was the Chief Executive Officer of World

Acceptance and a member of the board of directors and

executive committee of Southern. Bennie Taylor underwent

surgery in March of 1983 which left him a paraplegic and

resulted in serious emotional complications.

On January 11, 1984, representatives of First Union, a

North Carolina bank holding company, met with represen-

tatives of Southern to discuss the possibility of the two

companies developing a “relationship.” Bennie Taylor was

2a

———e.. eee

not present at this meeting. The evidence indicates that First

Union raised the possibility of a merger with Southern in the

event interstate banking became legal. First Union also ex-

pressed an interest in acquiring 4.99% of Southern’s stock.

Southern’s board of directors met on January 31, 1984. Bennie

Taylor was present at that meeting. After the board meeting,

Southern’s executive committee approved First Union’s ac-

quisition of Southern’s stock. First Union then began acquir-

ing stock on the market at the prevailing market price of $16

per share.

On February 6, 1984, a special executive committee of

Southern’s board sought Bennie Taylor’s resignation, al-

legedly because his deteriorating physical and mental condi-

tion made him unable to fulfill his responsibilities to the

company, prompting the resignation of three senior officers

and executives of World Acceptance. When Bennie Taylor

refused to resign, he was terminated. Taylor apparently indi-

cated at that time that he intended to sel! his stock in

Southern, and he subsequently retained an attorney to nego-

tiate a sale. On February 8, 1984, Southern sent a letter to

Taylor offering to pay his salary and benefits through De-

cember 31, 1984 if Taylor would agree to resign all offices and

directorships at Southern and World Acceptance, to sell his

stock in Southern to the company for fair market value, and

to release Southern and World Acceptance from all claims

arising from his employment and termination. The letter

indicated that if Taylor did not accept the offer by February

19, 1984, his salary and all benefits would terminate on

February 29, 1984.

Bennie Taylor subsequently offered to sell his stock to

Southern for $18 per share, approximately $2 per share above

market value. Southern declined to purchase the stock at that

price and Taylor’s attorney subsequently negotiated a sale of

the stock to First Union for $18 per share. On February 28,

1984, Bennie Taylor executed a settlement memorandum pre-

pared by Southern stating that he would sell all stock in

Southern owned directly or indirectly by him to First Union

for $18 per share. This agreement anticipated as well the sale

3a

of the stock owned by plaintiff, Patricia Taylor. Plaintiff was

persuaded by Bennie Taylor and his attorney to sell her stock

to First Union.

In June 1985, the Supreme Court, in Northeast Bancorp,

Inc. v. Board of Governors of the Federal Reserve System, 472

U.S. 159, 105 S.Ct. 2545, 86 L.Ed.2d 112 (1985), held that

interstate banking was constitutional. Subsequent state en-

abling legislation authorized the merger of North Carolina

and South Carolina banks as of January 1, 1986. On Sep-

tember 15, 1985, Southern’s president met with represen-

tatives of First Union to discuss a proposed merger. An

agreement was negotiated authorizing First Union to pur-

chase all of Southern’s common stock for $33 per share.

Southern’s executive committee recommended acceptance of

First Union’s offer on September 20, 1985. The boards of

Southern and First Union subsequently approved the merger

and the merger took place, effective April 1, 1986.

Patricia Taylor filed suit in the United States District

Court for the District of South Carolina. Her husband, Ben-

nie Taylor, subsequently filed a companion suit on an appar-

ently similar theory. Bennie Taylor’s suit has been stayed

pending the outcome of this appeal. Patricia Taylor’s com-

plaint alleged that Southern and First Union had conspired

to withhold from her and her husband information concern-

ing the proposed merger between the two companies in order

to acquire their stock at less than its true value. This, plain-

tiff claims, violated § 10(b) of the Securities Exchange Act

and breached the fiduciary duty owed to her by defendants.

The action resulted in a mistrial on October 12, 1987, and was

retried before a jury on November 16, 1987. The jury returned

a verdict against both defendants on both claims in the

amount of $165,975 plus interest and costs. Defendants’ mo-

tion for judgment n.o.v. or for a new trial was denied and

defendants appeal.

4a

II.

Section 10(b) of the Securities Exchange Act of 1934 and

Rule 10b-5 thereunder makes it unlawful for any person

(a) To employ any device, scheme, or artifice to

defraud,

(b) To make any-untrue statement of a material fact or

to omit to state a material fact necessary in order to

make the statements made, in the light of the circum-

stances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business

which operates or would operate as a fraud or deceit

upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. 240.10b-5; see 15 U.S.C. § 78)(b).

We hold, as a matter of law, that plaintiff’s allegations

failed to state a claim under any prong of Rule 10b-5.

A.

Plaintiff contends that First Union and Southern vio-

lated Rule 10b-5 by failing to disclose that, at their January

11, 1984 meeting, they agreed to establish a relationship,

described as similar to “pinning” as that term was used

socially thirty years ago, and agreed in principle to merge

when interstate banking became permissible. We disagree.

To be actionable under Rule 10b-5(b), a statement or omis-

sion must be both material and misleading. See Basic, Inc. v.

Levinson, US , 108 S.Ct. 978, 986-88, 99 L.Ed.2d 194

(1988); Parsons v. Hornblower & Weeks-Hemphill, Noyes, 447

F.Supp. 482, 489-90 (M.D.N.C.1977), aff'd, 571 F.2d 203 (4th

Cir.1978). Because their silence was neither material nor

misleading, First Union and Southern were under no obliga-

tion to disclose to the Taylors their January 11, 1984 discus-

sions of the possibility of a future merger.

The Supreme Court has recognized that “{s]ilence, ab-

sent a duty to disclose, is not misleading under Rule 10b-5.”

Basic, 108 S.Ct. at 987 n. 17; see Jordan v. Duff & Phelps, Inc.,

5a

815 F.2d 429, 431 (7th Cir. 1987) (“a law designed to prevent

frauds on investors tolerates silence that yields benefits for

investors as a group”). Rule 10b-5 imposes such a duty to

disclose only when silence would make other statements

misleading or false. Parsons, 447 F.Supp. at 490; Wessel v.

Buhler, 437 F.2d 279, 283 (9th Cir.1971). Plaintiff has failed to

identify any statement made misleading by the defendants’

nondisclosure of their merger discussions. There is no alle-

gation that defendants had previously denied the possibility

of a merger at some future time. In fact, in its 1980 annual

report, Southern was identified as a potential acquisition

target should interstate banking become legal.

In addition to not being deceptive, the omission com-

plained of here was not material. In the proxy solicitation

context, “[a]n omitted fact is material if there is a substantial

likelihood that a reasonable shareholder would consider it

important in deciding how to vote.” TSC Industries, Inc. v.

Northway, Inc., 426 U.S. 488, 449, 96 S.Ct. 2126, 2132, 48

L.Ed.2d 757 (1976); Basic, 108 S.Ct. at 983. The materiality of

merger discussions depends on the surrounding facts and

circumstances. Basic, 108 S.Ct. at 987-88. Merger negotia-

tions in Basic had progressed to a stage well beyond that

presented here and the prospect of a merger there was far

more concrete. The Federal Trade Commission had removed

regulatory barriers to Basic’s merger with Combustion En-

gineering in 1976. During the next two years Basic and Com-

bustion engaged in meetings, discussions, and negotiations

concerning a future merger. Jd. at 981. The Sixth Circuit

noted that attorneys had prepared analyses and evaluations

for use in the merger negotiations and investment bankers

had been engaged to facilitate the merger. Levinson v. Basic,

Inc., 786 F.2d 741, 743-45 (6th Cir.1986), vacated and re-

manded, ___ U.S. ____ , 108 S.Ct. 978, 99 L.Ed.2d 194 (1988).

In that time, in response to heavy trading in its stock, Basic

issued three public denials of any knowledge of merger dis-

cussions. Basic, 108 S.Ct. at 981. Even on these facts, the

Supreme Court refused to hold that disclosure was required

and instead remanded the case for reconsideration of the

6a

materiality question. Jd. at 988.

In contrast to the circumstances of Basic, the evidence

indicates that the discussions at issue here were preliminary,

contingent, and speculative. At best, the merger discussions

culminated in a vague “agreement” to establish a rela-

tionship. There was no agreement as to the price or structure

of the deal. While, after Basic, this alone is not dispositive of

the question of materiality, it is certainly not irrelevant to

the totality of the circumstances test articulated in that case.

Furthermore, neither the factual nor the legal predicates for

a merger were in place. There is no evidence of board resolu-

tions, actual negotiations, or instructions to investment

bankers to facilitate a merger. See Basic, 108 S.Ct. at 987. A

merger between First Union and Southern was contingent on

events beyond the control of the parties. At the time First

Union purchased plaintiff’s stock, the Supreme Court had yet

to rule on the constitutionality of interstate banking, and no

merger could take place until enabling legislation was en-

acted both in North Carolina and South Carolina. The evi-

dence also suggests that First Union sought unsuccessfully to

acquire either of two other South Carolina banks, South

Carolina National Bank and C & S of South Carolina, before

merging with Southern.

In sum, any “pinning” relationship between First Union

and Southern at the time of the purchase of plaintiff’s stock

was of a fickle and changeable character. Those in business

routinely discuss and exchange information on matters

which may or may not eventuate in some future agreement.

Not every such business conversation gives rise to legal obli-

gations. We recognize, of course, the unique significance of a

merger in the life of a corporation and do not hold that the

high mortality rate of proposed mergers absolves manage-

ment of all duty to disclose. See Basic, 108 S.Ct. at 987; SEC v.

Geon Industries, Inc., 531 F.2d 39, 47-48 (2d Cir.1976). The

element of materiality, required by the express terms of Rule

10b-5, serves, however, to define the limits of disclosure

under federal securities law. See TSC Industries, 426 U.S. at

448-49, 96 S.Ct. at 2131-32. The materiality of information

Ta

concerning a proposed merger is directly related to the like-

lihood the merger will be accomplished; the more tentative

the discussions the less useful such information will be to a

reasonable investor in reaching a decision. Information of

speculative and tentative discussions is of dubious and mar-

ginal significance to that decision. To hold otherwise would

result in endless and bewildering guesses as to the need for

disclosure, operate as a deterrent to the legitimate conduct of

corporate operations, and threaten to “bury the shareholders

in an avalanche of trivial information”; the very perils that

the limit on disclosure imposed by the materiality require-

ment serves to avoid. See id.; Susquehanna Corp. v. Pan

American Sulphur Co., 423 F.2d 1075, 1085-86 (5th Cir.1970).

B.

Plaintiff’s claim that First Union and Southern violated

Rule 10b-5 by employing a “device, scheme, or artifice to

defraud,” and by engaging in an “act, practice, or course of

business which operate(d]... as a fraud or deceit upon any

person” is likewise without merit.

Claims for violations of §10(b) that do not involve a

material misrepresentation or nondisclosure must include

some element of deception. See Santa Fe Industries, Inc. v.

Green, 430 U.S. 462, 473-77, 97 S.Ct. 1292, 1300-03, 51 L.Ed.2d

480 (1977). The district court concluded that there was “suffi-

cient evidence of deception by Defendants to satisfy this

rule.” In addition to the nondisclosure of the “pinning agree-

ment,” the district court pointed to evidence indicating that

Southern lied to plaintiff’s husband about the purpose of the

meeting at which the company sought his resignation, that

Southern threatened to terminate Bennie Taylor’s benefits

unless he agreed to sell his stock, that First Union’s broker

misrepresented the identity of his principal until Bennie

Taylor committed to a sales price of $18 per share, and that

Southern knew but did not disclose that a member of its

board had expressed an interest in purchasing the Taylors’

stock.

The district court, however, did not address the addi-

tional requirement of Rule 10b-5, that the scheme, artifice,

fraud, or deceit complained of must occur “in connection with

the purchase or sale of [a] security.” Defendants’ conduct,

however characterized, cannot fairly be said to have been “in

connection with” the stock sale. Hunt v. Robinson, 852 F.2d

786, 787 (4th Cir.1988); Tully v. Mott Supermarkets, Inc., 540

F.2d 187, 194 (8rd Cir.1976).

An examination of the separate points relied upon by

the district court supports the conclusion that the contro-

versy here related primarily to the unpleasant circumstances

surrounding Bennie Taylor’s termination rather than to any

claim cognizable under the federal securities laws. The al-

leged acts of deception here most directly involve the circum-

stances of that termination and are only tangentially and

incidentally related to the sale of plaintiff’s stock.

Taking the inferences, as we must, in favor of the pre-

vailing party below, any misrepresentations concerning the

purpose of the meeting at which Taylor was terminated were

plainly not in connection with the stock sale, but rather, in

connection with the discharge. As for Southern’s alleged

failure to disclose that a member of its board had expressed

an interest in purchasing the Taylors’ stock, we note that

§ 10b-5 [sic] imposes on a prospective purchaser no obligation

to disclose to a seller the identity of every other potentially

interested party. The so called “threat” to terminate Taylor’s

benefits, involved nothing more than negotiations over the

terms and conditions of his departure and involved no fraud

in connection with the sale of a security. Southern’s letter to

Taylor, rather than relating to disability benefits which all

concede were vested, spoke in addition to benefits generally

in terms of salary, perquisites, office space, secretarial as-

sistance, and matters which would have to be addressed in

any discussion of the terms of a departure. There is, in fact,

little to distinguish it from customary negotiations over an

officer’s or director’s severance arrangements. Finally, any

misrepresentation by the broker of the identity of his prin-

cipal is insufficient to transform the character of this entire

9a

controversy into one of fraud under § 10(b). There was no

misrepresentation of the value of the stock. While Bennie

Taylor claims that he was too far committed to the deal at the

time, he did learn prior to any consummation of the sale that

First Union was the purchaser. Moreover, the broker appar-

ently misinformed Taylor that he could not accept the offer

because “his principal was out on a yacht fishing” only after

Taylor, over his attorney’s advice not to commit, quoted a

price of $18 per share. The plaintiff was not misled in her

investment decision by the nondisclosure of material infor-

mation nor was she deceived about the value of the stock or

the potential value of the company. Thus, the requisite nexus

between the sale and any fraud or deception is simply lacking.

While not dispositive of plaintiff’s claim under § 10(b), it

is, nonetheless, significant that Bennie Taylor was a sophisti-

cated investor and a member of the board of directors of

Southern. Bennie Taylor was not unknowledgeable about the

company and the banking industry and was aware of the

implications of interstate banking for the company. The

evidence indicates that he attended the director’s meeting at

which First Union’s investment in Southern was approved.

He knew that Southern presented an attractive acquisition

target should interstate banking become legal. See, e.g.,

Seibert v. Sperry Rand Corp., 586 F.2d 949, 952 (2d Cir.1978).

Although he was in poor health, Bennie Taylor negotiated the

stock sale through an attorney who testified that he advised

caution in the sale and informed Taylor of the possibility of a

First Union-Southern merger.

The fundamental purpose of the Securities Exchange

Act is to implement a “philosophy of full disclosure,” Santa

Fe Industries, 430 U.S. at 477-78, 97 S.Ct. at 1302-03, by

ensuring that the reasonable investor receives the informa-

tion necessary to make informed investment decisions. See

Hunt, 852 F.2d at 787; O’Brien v. Continental Illinois Nat.

Bank & Trust, 593 F.2d 54, 60 (7th Cir.1979). Federal se-

curities law was not intended to provide a federal forum for

every intracorporate squabble or to substitute for the more

general state claims of wrongful discharge, conspiracy,

10a

fraud, or duress which may, of course, be litigated in state

court. The securities law does not authorize and its goals are

not furthered by the scrutiny of the background of every

factional struggle among directors or shareholders simply

because the sale of stock happens to have taken place. This

action is brought by Patricia Taylor in her capacity as a

shareholder of Southern, and whatever state law actions

Bennie Taylor may seek to bring for wrongful discharge or

breach of fiduciary duty in his capacity as director are, of

course, not before us.

III.

The evidence does not support the conclusion that, under

South Carolina law, defendants breached any fiduciary duty

owed to plaintiff, as a stockholder in Southern.

Under South Carolina law, “officers and directors of a

corporation stand in a fiduciary relationship to the indi-

vidual stockholders and in every instance must make a full

disclosure of all relevant facts when purchasing shares of

stock from a stockholder.” Jacobson v. Yaschik, 249 S.C. 577,

155 S.E.2d 601, 605 (1967). The fiduciary obligation estab-

lished by South Carolina law is quite specific. This fiduciary

duty runs from the officers and directors of a corporation to

the shareholders of their corporation. This relationship re-

quires full disclosure of all material information when the

officer or director seeks to acquire the company’s stock from

a shareholder. See id. 155 S.E.2d at 605-06; Black v. Simpson,

94 S.C. 312, 77 S.E. 1023, 1025 (1913); see also S.C. Code Ann.

§ 33-13-150 (1976). As such, the extent of the fiduciary obliga-

tion is both settled and predictable, and not subject to spec-

ulative expansion whenever some third party is involved.

Here, we do not address the case of a corporate officer or

director (or even the corporation itself) purchasing the stock

of one of its own shareholders. Rather we have one corpora-

tion, First Union, purchasing the stock of a second corpora-

tion, Southern, from a shareholder of that corporation.

Where companies have complied with the requirements of

lla

§ 10(b), we decline to interpret state corporate law to find a

conspiracy in every business interaction. Similarly, we de-

aline to extend South Carolina law to impose a fiduciary

obligation on a corporation with respect to the purchase of its

shareholder’s stock by a second corporation, or on a corpora-

tion purchasing stock from the shareholder of another corpo-

ration, simply because the two corporations have had some

prior business dealings or negotiations.

IV.

The securities markets are not meant to be risk-free.

Patricia Taylor sold her stock in 1984 for $18 a share, $2 a

share above its fair market value. She now seeks, and the jury

has awarded her, damages in excess of $165,000, the dif-

ference between the price she received from First Union and

the enhanced value of the securities two years hence.

A verdict based on these facts undermines the proper

operation of the securities markets. Sales of securities re-

main market transactions. The seller receives cash for the

stock, thereby ridding herself of the risk of a decrease in its

value and simultaneously assuming the risk that its value

might increase. The vital congressional purpose in protecting

investors against uninformed decision-making is not intend-

ed to simultaneously eliminate all risk that the stock may

increase by providing a cause of action against the corpora-

tion in that eventuality. Neither federal securities law nor

the South Carolina law of fiduciary duty provides a remedy

for a shareholder who, in hindsight, simply wishes that she

had held onto her stock.

The judgment of the district court is

REVERSED.

12a

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF SOUTH CAROLINA

GREENVILLE DIVISION

Patricia B. Taylor, C/A #: 6:87-459-3

Plaintiff,

vs.

First Union Corporation

of

South Carolina (formerly ORDER

Southern Bancorporation,

Inc.) and First Union

Corporation,

Defendants.

This is an action for violation of SEC Rule 10b-5 and for

breach of fiduciary duty. The jury found for the Plaintiff and

the Defendants moved for judgment notwithstanding the

verdict and in the alternative for a new trial. For the reasons

set forth below, the motion is denied.

Plaintiff claims that she and her husband were forced to

sell their stock in Southern Bancorporation to First Union as

a result of a series of events involving conspiracy, coercion

and fraud. She alleged that the Defendants met secretly in

January, 1984, and agreed in principle to merge as soon as

interstate banking was permitted. She further alleged that

the existence of this meeting and agreement were concealed

from herself and her husband even though her husband was a

member of the Executive Committee and Board of Directors

of Southern Bancorporation. She further alleged that her

husband was precipitously terminated by Southern Bancor-

poration and threatened with a termination of his disability

benefits unless she and he agreed to sell all of their stock to

First Union at $18.00 per share. She further alleged that the

fact that another member of the Board of Directors desired to

purchase their stock was concealed from them.

13a

THE ROYALTY NOTES

As a part of her case, Plaintiff introduced a series of

typed and handwritten notes from Southern Bancorpora-

tion’s SEC compliance attorney. These notes were produced

by the Defendants and authenticated by the deposition testi-

mony of the author introduced by the Plaintiff at trial.

Plantiff’s Exhibit #1 consisted of the attorney’s typed and

handwritten notes of the allegedly secret January, 1984,

meeting between the Defendants. Plaintiff’s Exhibit #8 con-

sisted of the attorney’s handwritten notes of a series of

interstate telephone calls to the Defendants concerning the

termination of Plaintiff's husband and the acquisition of

their stock by First Union.

Among other things, Plaintiff's Exhibit #1 contained

evidence that the Defendants had discussed “possible invest-

ment alternatives” at the January, 1984, meeting, including

to “agree in principle to merge when interstate banking is

permissible.” [Exhibit #1, p. 5]. These notes further indicate

that during this meeting, the Chief Executive Officer of First

Union “said that First Union had an interest in developing a

relationship [with Southern Bancorporation] similar to

‘pinning’ as that term was used in social context 30 years or so

ago.” [Exhibit #1, p. 1]. Following what was referred to as a

“gentlemen’s agreement of approval by Southern Bancor-

poration,” these notes show that Southern Bancorporation,

speaking through its attorney, “indicated that it appeared to

us that disclosure was required.” [Exhibit #1, p. 2].

Exhibit #8 consisted of the attorney’s notes of a series of

interstate telephone calls between the attorney and others,

including the Chairman of the Board and other officers of

Southern Bancorporation and the inside General Counsel

and other officers of First Union. Among other things, these

notes show that sometime after February 14, 1984, the at-

torney “learned that Southern Bancorporation would prefer

to buy Taylor’s stock as opposed to having First Union buy

it.” [Exhibit 8, p. 2, emphasis added]. Other notes indicate

that Southern Bancorporation wanted to buy the Taylors’

stock and to “keep First Union in the market.” [Exhibit #8, p.

l4a

ee eee ke ae

4]. They show knowledge on the part of Southern Bancorpora-

tion of a fellow board member’s undisclosed desire to pur-

chase the Taylor stock [Exhibit #8, pp. 7 and 16]. And they

further show that on February 24, 1984, the Southern Ban-

corporation SEC compliance attorney telephoned the inside

General Counsel for First Union to “encourage them to pur-

sue [Plaintiff’s husband] on their own.” [Exhibit #8, p. 22].

These two exhibits were properly authenticated by the

deposition testimony of their author and they both contain

evidence that is clearly relevant to the issues of compliance

with Rule 10b-5, breach of fiduciary duty and conspiracy.

However, Defendants contend that they should have been

excluded under the Hearsay Rule.

It is clear that these two exhibits contain statements

admissible under Federal Rule of Evidence 801(d)2 both

as admissions by the agent of a party opponent under

801(d)2(D) or as statements of a co-conspirator under

801(d)2(E).1 Statements contained in these two exhibits also

may be admissible under Federal Rules of Evidence 803(1) as

a present sense impression,” under Rule 803(3) as statements

1 See, generally, 28 U.S.C.S. (Lawyer’s Edition) Rule 801, notes 10.12, 16

and 18. For admissions by a co-conspirator, see, U.S. v. Panza, 750 F.2d

1141 (2d Cir. 1984); U.S. v. Broome, 732 F.2d 363 (4th Cir. 1984); U.S. v.

Kiefer, 694 F.2d 1109, 1112-13 (8th Cir. 1982); and U. S. v. Gibson, 690 F.2d

697 (9th Cir. 1982). See, also, Annotation: 44 A.L.R. Fed. 627 (1979). For

admissions both as agent and co-conspirator, see, U. S. v. Ramsey, 785 F.2d

184, 191 (7th Cir. 1986). For admissions by an agent, see, Rule v. Interna-

tional Association, 568 F.2d 558 (8th Cir. 1978); Pino v. Protection Maritime

Ins. Co., 599 F.2d 10 (1st Cir. 1979), certiorari denied, 444 U.S. 900, 100 S.Ct.

210, 62 L.Ed.2d 136 [statement by a broker]; Nekolny v. Painter, 653 F.2d

1164 (8th Cir. 1981); Marshane Corp. v. St. Paul Fire & Machine, 10 Fed.

Evid. Rep. 1232 (4th Cir. 1982) [statements by an insurance claims repre-

sentative]; Materials Research Corp. v. BOC Group, Inc., 19 Fed. Rule Serv.

1167, 4 F.R.Serv.3d 85 (D.N.J. 1986) [statements by a consultant}; and U. S.

v. Young, 736 F.2d 565 (10th Cir. 1983), reserved on other grounds, 470 U.S.

1, 105 S.Ct. 1038 (1985) [statements by an accountant].

2 See, Annotation: 60 A.L.R. Fed. 524 (1982); U. S. v. Margiotta, 688 F.2d

108 (2nd Cir. 1982); Brown v. Tard, 552 F.Supp. 1341 (D.N.J. 1982); and

Coremaster v. U.S., 584 F.Supp. 1406 (N.D.Cal. 1984).

15a

of the declarant’s existing state of mind concerning intent,

plan, motive and design,’ under Rule 803(5) as a memoran-

dum of recorded recollections,* under Rule 304(b)(2) as a

statement of recent perception and under Rule 804(b)(4) as

statements against interest.® In addition, both exhibits are

admissible in the Court’s discretion under Rule 803(24) and

804(b)(6) as “having comparable circumstantial guarantees

of trustworthiness.”® In this connection, I find that these

notes were material, trustworthy and more probative than

any other evidence which Plaintiff could procure through

reasonable efforts concerning the January, 1984, meeting and

the subsequent telephone calls between representatives of

Southern Bancorporation and First Union.’

SUFFICIENCY OF EVIDENCE AS TO S.E.C. RULE 10b-5

There was evidence that Plaintiff and her husband

owned the precise amount of stock which First Union sought

to purchase. Southern Bancorporation’s Chief Executive Of-

ficer testified that Plaintiff's husband had previously stated

that if he were ever terminated, he would sell his stock. There

was evidence that the January, 1984, meeting and its result-

ing “pinning” agreement were concealed from him even

though he was a member of the Executive Committee and the

Board of Directors.

Southern Bancorporation notified First Union of its ap-

proval of their intended stock purchase on February 2, 1984

{Plaintiff's Exhibit #3A]. A representative of Southern Ban-

corporation admitted that he deliberately lied to Plaintiff’s

3 See, Annotation: 75 A.L.R. Fed. 170 (1985).

' See, U.S. v. Ray, 768 F.2d 991 (8th Cir. 1985).

5 See, U.S. v. Brainard, 690 F.2d 1117, 1123-25 (4th Cir. 1982).

6 See, Cooperweld Steel Co. v. Demag-Mannesmann-Bohler, 578 F.2d

953, 963-64 (8rd Cir. 1978); U. S. v. Howard, 774 F.2d 838, 845-46 (7th Cir.

1985); U.S. v. Carlson, 547 F.2d 1346 (8th Cir. 1976); and Turbyfell v.

International Harvester, 486 F.Supp. 232 (E.D.Mich. 1980). See, also, An-

notations in 36 A.L.R. Fed. 742 (1978) and 51 A.L.R.4th 999 (1987).

7 See, Cooperweld Steel, supra Note 6, 578 F.2d 964, Headnotes 9 and 10,

and U.S. v. Howard, supra Note 6, 774 F.2d 846.

l6a

Bt

een a

aoe LS HN

pasate wath Bebe Price

husband concerning the purpose of the meeting, only four

days later, at which he was precipitously fired. Then, only

two days after his termination, Southern Bancorporation’s

Chief Executive Officer wrote to Plaintiff’s husband stating

that, unless he agreed to sell his stock, all of his benefits

would be terminated [Plaintiff's Exhibit #7].

There was evidence that a broker, calling on behalf of

First Union, misrepresented the identity of his principal.

There was evidence that First Union’s identity as the actual

purchaser was concealed until Plaintiff’s husband had com-

mitted to the $18.00 per share sales price. In addition, there

was evidence that Southern Bancorporation knew, but did

not disclose to Plaintiff or her husband, the fact that a fellow

board member wanted to purchase their stock. From the

evidence, the jury could have concluded that Southern Ban-

corporation discouraged him from contacting the Taylors.

In their argument on this issue, the Defendants sought

to isolate each claimed act of misrepresentation or dis-

closure. However, the jury could well have concluded that

Defendants’ acts of coercion, misrepresentation and non-

disclosure were all part of a single scheme to coerce, manipu-

late and defraud Plaintiff and her husband into a sale of their

stock to First Union at a price dictated by the Defendants.

In Sante Fe Industries v. Green,? the Supreme Court

stated that where a plaintiff bases his or her claim for

violation of Rule 10b-5 on manipulative devices and schemes

not primarily involving misrepresentation and non-dis-

closure, the plaintiff must also show that there was some

element of deception on the part of the defendant used to

mislead the plaintiff. Here, there was certainly sufficient

evidence of deception by the Defendants to satisfy this rule.

BREACH OF FIDUCIARY DUTY

Plaintiff and her husband were shareholders in South-

ern Bancorporation and, under South Carolina law, officers

8 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977).

17a

and directors of a corporation clearly have a fiduciary duty to

the corporation’s shareholders.’ There was evidence from

which the jury could have concluded that Southern Bancor-

poration’s officers and directors breached their fiduciary

duty to Plaintiff and her husband. Under the Doctrine of

Respondeat Superior, Southern Bancorporation would have

been responsible for the breach of fiduciary duty of its of-

ficers and directors committed within the course of their

agency relationship.’ In addition, I have concluded that the

Supreme Court of South Carolina would hold that, under

South Carolina law, the corporation itself has a fiduciary

duty to its shareholders."! Therefore, Southern Bancorpora-

tion’s position on this point is without merit.

As to First Union, Plaintiff’s claim for breach of fidu-

ciary duty was based upon her claim that First Union con-

spired with Southern Bancorporation to breach Southern

Bancorporation’s fiduciary duty to the Plaintiff. There was

ample evidence to support the jury’s conclusion that such a

conspiracy existed.

The remaining grounds argued in support of Defendants’

motion are without merit and the motion is therefore denied.

G. Ross Anderson, Jr.

United States District Judge

Greenville, South Carolina

December 28, 1987

9 See, e.g., South Carolina Code, § 33-15-150.

10 See, e.g., Diamond v. Oreamuno, 24 N.Y.2d 494, 301 N.Y.Supp.2d 78,

248 N.E.2d 910 (1969).

1! See, e.g., Kohler v. Kohler, 319 F.2d 634, 638, 7 A.L.R.3d 486 (7th Cir.

1963); Wright v. Bayly Corp., 41 Colo.App. 313, 587 P.2d 799 (1978); and

Yeaman v. Galveston City Co., 106 Tex. 389, 167 S.W. 710, 723 (1914).

18a

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 88-2503

Patricia B. Taylor, Plaintiff-Appellee,

versus

First Union Corporation of

South Carolina, et al, Defendants-Appellants.

On Petition for Rehearing with Suggestion

for Rehearing in Banc

The appellee’s petition for rehearing and suggestion for

rehearing in banc were submitted to this Court. As no mem-

ber of this Court or the panel requested a poll on the sug-

gestion for rehearing in banc, and

As the panel considered the petition for rehearing and is

of the opinion that it should be denied.

IT IS ORDERED that the petition for rehearing and

suggestion for rehearing in banc are denied.

Entered at the direction of Judge Wilkinson, with the

concurrence of Judge Russell and Judge Niemeyer, United

States District Judge sitting by designation.

For the Court

John M. Greacen

CLERK

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