Appendix — Piper v. Chris-Craft Industries, Inc.
Supreme Court brief1977
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APPENDIX
Suprene Court of the United States
October Term, 1975
No. 75-353
No. 75-354
No. 75-355
Howarp Pirer, Tuomas F. Piper anp Wituiam T. Prreer, Je.
Pe titione age
OP
Curis-Crart Inpustrigs, Inc.,
Ry sponde nt.
——— _
Tue First Boston Corporation,
Petitioner,
vy.
Curis-Crart Ixpustrigs, Inc.,
Respondent.
Bancor Punta Corporatiox, Nicotas M. Saco
AND Davin W. WALLACE.
Petitioners,
v.
Curis-Crart Inpustrigs, INc.,
Re sponde nt.
ON WRITS OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE SECOND CIRCUIT
PETITIONS FOR CERTIORARI FILED SEPTEMBER 5, 1975
CERTIORARI GRANTED APRIL 5, 1976
INDEX
Relevant Docket Entries -_------_---------------
Opinion of the Court of Appeals on Liability, 480
F.2d 341 (2d Cir. 1973), cert. denied, 414 U.S. 910
|
Opinion of the District Court on Liability, 337
F.Supp. 1128 (S.D.N.Y¥. 1971) -....-----------
Opinion of the Court of Appeals on Relief, 516 F. 2d
172 (2d Cir. 1975) cert. granted, April 5, 1976 ___-
Opinion of the District Court on Relief, 384 F.Supp.
ff 888 a ee
~ Memorandum of District Court on Settlement of
Judgment, November 22, 1974 __________________
Final Judgment and Decree of District Court on
a nue aia
Opinion of ‘the Court of ‘Appeshe on ‘Preliminary
Injunction, 426 F.2d 569 (2d Cir. 1970) _________
Opinion of the District Court on Preliminary Injunc-
tion, 303 F.Supp. 191 (S.D.N.Y. 1969) _.._-_-_-
Opinion of the District Court in Securities and
Exchange Commission v. Bangor Punta Corpora-
tion, 331 F.Supp. 1154 (S.D.N.Y. 1971) _... __ -__-
Memorandum of District Court in SEC case, Sep-
gk FE Ae ee ce ena
Memorandum of District Court in SEC case, Novem-
Ne ait ia i ea ae ee
Opinion of the District Court i in Bangor Punta Cor-
poration v. Chris-Craft Industries, Inc., 337
F.Supp. 1147 (S.D.N.Y. 1971) _...-----
Final Judgment of Court of Appeals _..._.________
Orders of the Court of Appeals denying rehearing
ee ae ee
Orders of Court of Appeals denying rehearing in
gg Gf Eee ee
Interlocutory Judgment of Court of Appeals _______
Orders of Court of Appeals denying rehearing on
interlocutory judgment _____---_____--_--.
Orders of Court of Appeals denying —— in
banc on interlocutory judgment
PAGE
Second Amended Complaint in Chris-Craft Indus-
tries, Inc. v. Piper Aircraft Corporation, et al. ---
Answer and Counterclaim of Piper Defendants to
Second Amended Complaint —~_-----------------
Answer of First Boston Defendants to Second
Amended Complaint --------------------------
Reply to Counterclaim of Chris-Craft Industries,
ccxtecneemeanenentnannanetepenmentnnnn ae
Answer of Bangor Punta Defendants to Second
Amended Complaint --------------------------
First Amended Complaint in Bangor Punta Corpo-
ration v. Chris-Craft Industries, Inc., et al, _-----
Answer of Chris-Craft Industries, Inc. to First
Amended Complaint -.....---.----------------
Answer of Loeb, Rhoades & Co. and Shields & Co.
Inc. to First Amended Complaint ~-.-----------
Complaint in Securities and Exchange Commission
v. Bangor Punta Corporation ____--------------
Answer of Bangor Punta Corporation to Complaint
PAGE
Relevant Docket Entries
United States District Court
for the Southern District of New York
May 22, 1969—Filed complaint and issued summons.
July 23, 1969—Filed memorandum in support of Chris-
Craft’s raotion for a pre, inj.
August 19, 1969—Filed Opinion #36107. Tenney, J. * * *
For the foregoing reasons, plaintiff’s motion is in all
respects denied. So ordered (mailed notice).
September 4, 1969—Filed Notice of Appeal by Chris-Craft
Industries, Inc. (mailed copy).
June 16, 1970—Filed true copy of order from the USCA:
Order of District Court is affirmed and that the action
be and it hereby is remanded to said Distriet Court for
further proceedings not inconsistent with the opinion of
this court with costs to be taxed against the appellant.
Clerk
June 22, 1970—Filed pltff’s second amended complaint.
February 6, 1971—Trial Begun: Before Pollack, J.—Non-
Jury Trial. Adjourned Sine Die.
March 9, 1971—Trial continued.
March 19, 1971—Trial continued and concluded—Defts’
Bangor Punta, N. Salgo and D. Wallace rest and renew
the motions made previously to dismiss the complaint—
Decision Reserved. Defts First Boston, P. Miller and
N. Bayard rest and renew motion to dismiss—Decision
Reserved. Ptff. Chris-Craft moves to dismiss the counter-
claim of Piper Aircraft—Devision Reserved. Pollack, J.
December 10, 1971—Filed Opinion #38096. The counter-
claim of Piper against Chris-Craft is dismissed for fail-
ure to sustain the burden of proof thereof. The foregoing
shall constitute the findings and conclusions required by
F.R. Civ. P. 52(a). So ordered. Pollack, Jr. Judg, Ent.
Clerk Ent. 12-1.
Relevant Docket Entries
December 14, 1971—Filed plaintiff’s notice of appeal to
U.S.C.A.—Mailed copies.
June 15, 1973—-Filed True Copy of Mandate from U.S.C.A.
with copy of opinion. Ordered that judgment of District
Court is reversed and that the action be and it is re-
manded to the District Court for further proceedings in
accordance with the opinion of this Court with costs to be
taxed against the appellee. No bill of costs or statement
attached. Mansfield, Timbers and Gurfein, J. (to all
attorneys).
April 22, 1974-Non-jury trial begun before Judge Pollack.
April 25, 1974—Trial continued and concluded. Decision
reserved, Pollack J.
November 22, 1974—Filed Final Judgment and Decree
+74,903—Ordered, ete. that Chris-Craft shall recover of
defendants, Howard Piper, Thomas F. Piper, T. Piper,
Jr., Bangor Punta Corp., Nicholas M. Salgo, David M.
Wallace and The First Boston Corp., jointly and sev-
erally, the sum of $1,673,988, plus interest in the amount
of $599,010.89 with costs to be taxed by the Clerk, Pollack,
J. Judgment entered 11/25/74. Clerk.
November 25, 1974—Filed Plaintiff’s notice of appeal to
the U.S.C.A. from final judgment entered on 11-22-74.
Mailed copies to Webster, Sheffield, Fleischmann (Hitch-
cock & Brookfield—Chadbourne, Parke, Whiteside &
Wolff—Sullivan & Cromwell.
il
em
Relevant Docket Entries
United States Court of Appeals
for the Second Circuit
September 19, 1969—Argument heard (by: Lumbard,
Waterman, Kaufman, CJJ)
November 6, 1969—Judgment Affirmed and Action remand-
ed, Waterman, CJ
January 12, 1970—Filed order granting petition for rehear-
ing in bane
April 28, 1970—On Petition for Rehearing in banc—Order
affirmed and Remanded, Waterman, CJ
August 14, 1972—Argument heard (by: Mansfield, Timbers,
CJJ & Gurfein, D.J.) & in 72-1064, 72-1120, 72-1140)
March 16, 1973—Judgment Affirmed in Part; reversed and
remanded in part, Timbers, CJ
April 25, 1973—Filed order denying petitions for rehearing
(Piper, Bangor Punta & First Boston) and in 72-1064,
72-1120, 72-1140 but amending opinion
April 25, 1973—Filed order denying petition for rehearing
in bane (Piper)
April 25, 1973—Filed order denying petition for rehearing
in bane (Bangor Punta)
April 25, 1973—Filed order denying petition for rehearing
in bane (First Boston)
May 8, 1973—Filed order denying petition for rehearing
(S.E.C.) (& in 72-1064, 72-1120, 72-1140)
May 8, 1973—Filed order denying petition for rehearing
in bane (S.E.C.) (& in 72-1064, 72-1120, 72-1140)
October 19, 1973—Filed certified copy of order of Supreme
Court denying petition for writ of certiorari (First
Boston Corporation)
ill
Relevant Docket Entries
October 19, 1973—Filed certified copy of order of Supreme
Court denying petition for writ of certiorari (Bangor
Punta Corporation, et al.)
October 19, 1973—Filed certified copy of order of Supreme
Court denying petition for writ of certiorari (Howard
Piper, et al.)
October 19, 1973—Filed certified copy of order of Supreme
Court denying petition for writ of certiorari (S.E.C.)
(& in 72-1064, 72-1120, 72-1140)
February 24, 1975—Argument heard (By: Mansfield, Oakes,
Timbers, CJJ)
April 11, 1975—Judgment affirmed in part; reversed and
vacated in part; and remanded with instructions, Tim-
bers, CJ (& in 75-003)
May 15, 1975—Filed memorandum by S.E.C. in support of
petition for rehearing of First Boston Corp.
May 15, 1975—Filed order granting leave to Securities
Industry Association to file a brief amicus curiae in sup-
port of petition for rehearing or rehearing en banc of
the First Boston Corp.; it is further ordered that the
affidavit of Arthur L. Liman, Esq., sworn to April 28,
1975 also is ordered to be filed and distributed to the
active judges of the Court
June 9, 1975—Filed order denying petition for rehearing
(First Boston Corp.)
June 9, 1975—Filed order denying petition for rehearing
en bane (First Boston Corp.)
June 9, 1975—Filed order denying petition for rehearing
(Howard Piper)
June 9, 1975—Filed order denying petition for rehearing
en bane (Howard Piper)
June 9, 1975—Filed order denying petition for rehearing
(Bangor)
iv
Relevant Docket Entries
June 9, 1975—Filed order denying petition for rehearing
en bane (Bangor)
April 14, 1976—Filed certified copy of order from Supreme
Court granting writ of certiorari (Bangor Punta)
April 14, 1976—Filed certified copy of order from Supreme
Court granting writ of certiorari (First Boston)
April 14, 1976—Filed certified copy of order from Supreme
Court granting writ of certiorari (Piper)
A.
PAGE
Opinion of the Court of Appeals on Liability, 480 F.
2d 341 (2d Cir. 1973) cert. denied 414 U.S. 910
(1973 a fasta ._ Al
Opinion of the District Court on Liability, 337 I.
Supp. 1128 (S.D.N.Y. 1971) __ Al2d
A-1
Court of Appeals Opinion on Liability
UNITED STATES COURT OF APPEALS
For tHe Seconp Circuit
+>
Nos. 805-08—September Term, 1971.
(Argued August 14, 1972 Decided March 16, 1975.;
Docket Nos. 72-1053, 72-1064, 72-1120, 72-1140
—-or
Docket No. 72-1064
Curis-Crart Inpvustries, Inc.,
Plaintiff-A ppellant,
Vv.
Piper Arrcrart Corporation, Howarp Piper, THomas F.
Piper, Wriu1aM T. Pirer, Jn., Baxncor Punta Corpora-
tion, Nicotas M. Sateo, Davin W. Watuace, THe F'rmst
Boston Corporation, Paut L. Mitter and Nicuowas H.
Bavaro,
Defendants-Appellees.
+o
Docket No. 72-1120
Banoor Punta Corporation,
Plaintiff-Appellant,
Vv.
Curis-Crart Ivpvstries, Inc.,
Defendant-Appellee.
A-2
Court of Appeals Opinion on Liability
Docket Nos. 72-1053 and 72-1140
Securities anp Excuance ComMiIssion,
Plaintiff-Appellant-A ppellee,
v.
Bancor Punta CorporaTIon,
Defendant-Appellee-Appellant.
<9 — —__
Before:
Mansrietp and Timspers, Circuit Judges, and
Gurretn, District Judge.*
—_~o
Appeals from judgments entered after non-jury trials
of three separate but related civil actions in the Southern
District of New York, Milton Pollack, District Judge, in-
volving alleged violations of the antifraud provisions of
the federal securities laws in connection with the contest
between Chris-Craft Industries, Ine. and Bangor Punta
Corporation for control of Piper Aircraft Corporation.
Affirmed in part; reversed and remanded in part.
ii
“
ArtHur L. Limax, New York, N.Y. (Stuart Ro-
binowitz, Joseph J. Ackell, Jack C. Auspitz,
Anthony M. Radice and Paul, Weiss, Rif-
kind, Wharton & Garrison, New York, N.Y.,
on the brief), for Chris-Craft Industries,
Inc. (Plaintiff-Appellant in No. 72-1064; De-
fendant-Appellee in No. 72-1120).
° Of the United States District Court for the Southern District of New
York, sitting by designation.
ee er |
ete eee Ae tre»
reser: sas ites wets es ae he
A-3
Court of Appeals Opinion on Liability
Zacuary Summer, New York, N.Y. (Paul G.
Pennoyer, Jr., Irene C. Warshauer and
Chadbourne, Parke, Whiteside & Wolff, New
York, N.Y., on the brief), for Piper Aircraft
Corporation, Howard Piper, Thomas F.
Piper and William T. Piper, Jr. (Defend-
ants-Appellees in No. 72-1064).
James V. Ryan, New York, N.Y. (William L. D.
Barrett, C. Kenneth Shank, Jr. and Webster
Sheffield Fleischmann Hitcheock & Brook-
field, New York, N.Y., on the brief), for
Bangor Punta Corporation (Defendant-Ap-
pellee in No. 72-1604; Plaintiff-Appellant in
No. 72-1120; Defendant-Appellee-Appellant
in Nos. 72-1053 and 72-1140) and for Nicolas
M. Salgo and David W. Wallace (Defen-
dant-Appellees in No. 72-1064).
Joux F. Arnine, New York, N.Y. (Roger L.
Waldman, Charles W. Sullivan, and Sul-
livan & Cromwell, New York, N.Y., on the
brief), for The First Boston Corporation,
Paul L. Miller and Nicholas H. Bayard
(Defendants-Appellees in No, 72-1064).
Rocvert FE. Kusuner, Assistant General Counsel,
SEC, Washington, D.C. (G. Bradford Cook,
General Counsel, David Ferber, Solicitor,
and James J. Sexton, Attorney, SEC, Wash-
ington, D.C., on the brief), for Securitics
and Exchange Commission (amicus curiae
in No. 72-1064; Plaintiff-Appellant-A ppellee
in Nos. 72-1053 and 72-1104).
—-er
A-4
Court of Appeais Opinion on Liability
INDEX
PRELIMINARY STATEMENT ......................... esi H-6
. EVENTS LEADING TO INSTANT LITIGA-
BE veiscaviaciihidioniahieeiabienmmeanaiacmabiamiia seldieemnidaetenieil H-7
. CHRIS-CRAFT INDUSTRIES, INC. vy.
PIPER AIRCRAFT CORPORATION, ET
pS I eee . H-18
(A) Fesction or Private Action ror DamMaces
IN ENFORCEMENT OF FEDERAL SECURITIES
Recaro aed ne eet a torte ELE AIR H-21
(B) VIOLATIONS OF ANTIFRAUD PROVISIONS OF
Section 14(e) oF 1934 Act ....0000...00. ee. H-24
(1) Standing of CCI to Sue for Damages }1-24
(2) Defendants’ Violations of Section
SUN | dcincicchaidemeiahnabiseiagndbiiapleanaiaiedaaidennhinaad H-33
(a) Controlling Principles In Deter-
mining Section 14(e) Violations }.33
OF). 4 xR H-37
(c) BPC And Its Officers .......000....... H-41
(d) First Boston And Its Officers ...... H-48
re a ed os ceeeueainbeniades H-5)
(C) Vurovations or Rue 10b-6 Unper 1934 Act H-63
(D) Revier To Be GranTED FOR VIOLATIONS OF
Section 14(e) ann Rue 10b-6 H-67
OE tama Rin renee eA ire OIE H-6s8
NTE TIO H-69
Te ee a ee ee
=
7
;
A-5
Court of Appeals Opinion on Liability
PAGE
Il]. BANGOR PUNTA CORPORATION v. CHRIS-
CRAFT INDUSTRIES, INC. (No. 72-1120)... H-70
(A) Cxamm or Manipunation or Prices or CCI
IRA ee eaeL SERN as tent an tec erate atmo H-71
(B) Cua or ILLecaL WAREHOUSING .................. H-76
IV. SEC v. BANGOR PUNTA CORPORATION
(Nos. 72-1053 and 72-1140) ...............0.-<:.0<..-cses0-s0+0 H-77
CD IE BD scctiiccitiecsisctssenccaicisiaicsienicisinai H-78
(1) Erroneous Standard .....................0....- H-79
(2) Requirement of Intent ......................-. H-80
(3) Injunction to Protect Public Interest 9.82
(4) BPC’s Past Violations .......................... H-84
(5) BPC as a Conglomerate ........................ H-85
(6) Abuse of Discrettom .2............ecccccceeeeeeee H-86
(7) Mischievous Precedent ~.................0.-.. H-29
Ce I GI eiceescetcternnictereennnineis H.39
SE RERSNeoe eon oe Ie rN aT H-93
A-6
Court of Appeals Opinion on Liability
Trmpens, Circuit Judge:
PRELIMINARY STATEMENT
These consolidated appeals present important questions,
some of first impression, involving the antifraud provisions
of the federal securities laws in their application to a con-
test for acquisition of a controlling stock interest in a tar-
get corporation. Among the questions presented are those
involving the scope of liability and relief under Section
14(e) of the Securities Exchange Act of 1934 and the type
of relief necessary, in an SEC enforcement proceeding,
to e®ectuate the broad remedial purposes of the federal
securities laws.
The appeals are from judgments entered after non-jury
trials of three separate but related civil actions in the
Southern District of New York before Milton Pollack, Dis-
trict Judae.
In Chris-Craft Industries, Inc. v. Piper Aircraft Cor-
poration, et al. (No. 72-1064), Chris-Craft appeals from
the district court's dismissal after trial of its complaint
against all defendants, 337 F.Supp. 1128 (S.D.N.Y. 1971),
essentially on the grounds that many of the alleged se-
curities laws violations had not been proven, that those
proven had not cansed injury to Chris-Craft and that
Chris-Craft had failed to prove its claim for damages.
We reverse and remand.
In Bangor Punta Corporation vy. Chris-Craft Industries,
Inc. (No, 72-1120), Bangor Punta appeals from the dis-
trict court’s dismissal after trial of its complaint, 337
F.Supp. 1147 (S.D.N.Y. 1971), on the ground of insuf-
ficient evidence to support Bangor Punta’s claims that
Chris-Craft had violated the securities laws or that such
violations had caused injury to Bangor Punta. We affirm.
In SEC vy. Bangor Punta Corporation (Nos. 72-1053 and
72-1140), the SEC appeals from those provisions of the
iis sa
A-7
Court of Appeals Opinion on Liability
district court’s judgment after trial, 331 F.Supp. 1154
(S.D.N.Y. 1971), which denied a permanent injunction
against further violations of the securities laws and which
imposed a condition upon Bangor Punta’s rescission offer
to former Piper shareholders. On the SEC’s appeal, to
the extent the judgment is appealed from, we affirm in
part, and reverse and remand in part. On Bangor Punta’s
cross-appeal, we affirm.
I,
EVENTS LEADING TO INSTANT LITIGATION
Before turning to the issues raised on appeal in each of
the three actions, we shall set forth a narrative of the
events, beginning in the latter part of 1968 and during
1969 in connection with the contest for control of Piper
Aircraft Corporation, which culminated in the instant liti-
gation. Facts having specific bearing upon the issues in
each of the three appeals will be discussed in more detail
in connectien with our rulings below on those issues in each
case.) Our task on these appeals has been greatly facil-
itated by Judge Pollack’s detailed, comprehensive findings
of fact, and particularly by his evaluation of the facts
as found. While we disagree with certain of his conelu-
sions, as will appear below, we take this occasion to com-
1 The facts are substantially undisputed.
We shall assume familiarity with the detailed statements of facts set
forth in the prior reported opinions involving this contest for control
of Piper. In addition to the three opinions of Judge Pollack referred
to above (337 F.Supp. 1128, 337 F.Supp. 1147, 331 F.Supp. 1154),
there was an earlier opinion by Judge Tenney denying Chris-Craft’s
motion for a preliminary injunction (303 F.Supp. 191 (8.D.N.Y. 1969)),
and an en bane opinion by this Cowt affirming the denial of the pre-
liminary injunction, indicating certain violations of the securities laws
and remanding to the district court for further proceedings not incon-
sistent with this Court’s opinion. Chris-Craft Industries, Inc. v. Bangor
Punta Corp., 426 F.2d 569 (2 Cir. 1970) (en bane).
‘
A-8
Court of Appeals Opinion on Liability
mend him upon the clarity of his opinions in these complex
cases.
C.ris-Craft Industries, Inc. (CCI) is a Delaware cor-
~oration. It is a diversified manufacturer of recreational
products. Its securities, common and preferred stock and
sonvertible debentures, are traded on the New York Stock
Exchange (NYSE).
Piper Aircraft Corporation (Piper) is a Pennsylvania
corporation. It is one of the nation’s leading manufac-
turers of light aircraft. Its 1,644,890 shares of issued and
outstanding stock were traded (during periods relevant to
these appeals) on the NYSE from October 1, 1968 to Au-
gust 11, 1969 and then on the Philadelphia-Baltimore-Wash-
ington Stock Exchange. The three individual Piper defen-
dants (referred to herein as the “Piper family”) were of-
ficers and directors of Piper and owned about 325,000
of the 1,644,890 outstanding Piper shares.
Bangor Punta Corporation (BPC) is a Delaware cor-
poration. It is a conglomerate with holdings in diversified
fields. Its securities are traded on the NYSE. Defendants
Nicolas M. Salgo and David W. Wallace are principal of-
ficers and directors of BPC.
The First Boston Corporation (First Boston) is a Mas-
sachusetts corporation. It is an investment banking firm
and also a registered broker-dealer. In connection with
the events involved herein, it served as investment adviser
to Piper and as underwriter for BPC. Defendant Paul L.
*:}ler is president of First Boston and defendant Nicholas
". Bayard is a vice president in its underwriting depart-
ment
Tn the latter part of 1968, CCI undertook a large financing
program designed to produce excess cash that could be used
primarily for acquisitions. On October 30, 1968, CCI filed
a registration statement and preliminary prospectus for
A-9
Court of Appeals Opinion on Liability
an offering of 6% convertible debentures up to $26 million
in principal amount. The offer was made to shareholders
and executives of CCI. It was largely successful, pro-
ducing over $25 million in excess cash. At about the same
time, Herbert Siegel, CCI’s president and chief executive
officer, discussed with the Philadelphia National Bank the
obtaining of a revolving line of credit of up to $15 million.
Such credit was granted and was drawn upon in February
1969 when needed. |
CCI made its first purchase of Piper stock on December
30, 1968.2 The purchase totalling 5200 shares was made
through a confidential numbered account at Mitchell,
Hutchins & Co., Inc., a member of the NYSE and a regis-
tered broker-dealer retained primarily by institutional in-
vestors. Additional purchases of Piper stock were made
through Mitchell, Hutchins shortly thereafter in 1969:
January 3 36,100 shares (34,200 from Madison Fund
at $54)
January 6 22,000
January 7 700
January 8 30,900 (all but 200 from Keystone Growth
Fund)
CCI also made market purchases of Piper stock in the fol-
lowing amounts through other brokers:
January 14 3,700 shares
January 20 800
January 21 3,200
2 CCI as of this date apparently had not yet decided to seek a con-
trolling interest in Piper. Mr. Siegel testified that he had decided to
buy the 5200 shares only a few days in advance and that he had not
yet determined that an attempt to take over Piper would be advisable.
The Board of Directors of CCI did not openly discuss the acquisition
of Piper until its January 23, 1969 board meeting.
A-10
Court of Appeals Opinion on Liability
On January 22, CCI negotiated the purehase of 101,100
shares of Piper stock from Technology Fund, Ine. at $65
per share. This brought its total holdings in Piper to over
20,000 shares, approximately 153% of the outstanding
Piper shares. .
Up to this point, CCI had not officially informed Piper
of its extensive purchases of Piper stock, nor had a public
announcement been made.? On the morning of January 23,
Mr. Siegel telephoned Mr. W. T. Piper, Jr., then President
of Piper, and informed him that CCI would be announcing
that day a cash tender offer for the purchase of Piper stock
and that CCI had tentative plans to acquire a majority
shareholder interest in Piper. In a statement released
to the press that-day, CCI announced a cash tender offer
beeinning immediately and ending on February 3 for up
to 300,000 shares of Piper at $65 per share. The price of
Piper stock on the NYSE at the close of January 22 was
«52.50, CCT also revealed in its press release of January 23°
that it was purchasing the stock for investment with a view
to control of Piper, but that it did not presently have any
specific plan or proposal with respect to the future of
Piper.
The first response of the Piper management (essentially
the Piper family) to the tender offer was to calla meeting
on January 23 of representatives of First Boston (Piper's
‘yyestment adviser}, Chadbourne, Parke, Whiteside and
Wolff (Piper’s legal counsel), and Arthur Young & Co.
(Piper's auditors). The next day, January 24, the Piper
family decided to oppose CCTs bid for control of Piper.
First Boston was asked to contact cther companies to
3 Section 12/4) 41
£78 (d)(1) (1970
cha
of the Securities Exchange Act of 1934, 15 U.S.C.
_ requires that certain reports be filed by a pur-
cer when he has acquired more than 10% of the outstanding stock
if a company. CCT sati-fied this requirement hy filing a Schedule 13D
with the SEC along with its tender offer materials.
——
ee ee es
A-11
Court of Appeals Opinion on Liabuity
solicit proposals which might be preferable to a CCI take-
over. BPC was one of the companies contacted. It showed
considerable interest. But Piper did not follow up at that
time.
The Piper family’s resistance to the CCl ‘ander offer
took several forms. On January 25, the Pipe: Board
adopted a resolution that CCI’s offer was not in the vest
interests of the Piper shareholders and decided that this
resolution should be sent to them. Letters were sent out
the same day asking Piper shareholders to delay accepting
the CCI offer until the Piper management could adequately
respond to it. This was followed by a letter dated January
97 over the signature of W. T. Piper, Jr.* The letter
stated, among other things, that the Piper Board “has
carefully studied this offer and is convinced that it is in-
adequate and not in the best interests of Piper’s share-
holders.”
Also on January 25, Piper officers met with officers of
Grumman Aircraft Engineering Corporation (Grumman)
to discuss the sale of 300,000 unissued but authorized Piper
shares to Grumman at $65 per share. An agreement was
entered into on January 98 under which Grumman agreed
to purchase 300,000 Piper shares at ¢65 per share; Piper
agreed to seek approval from the NYSE for the listing of
the new shares; and Grumman agreed to tender a check for
$19,500,000 at a closing to be held within 3 days of the
NYSE approval. The agreement was entered into with
“the intention of Grumman and Piper to explore the de-
sirability of a merger of their two corporations”. Under
the agreement, Grumman was given an option to put the
shares back to Piper after six months at Grumman’s cost
plus 314% interest per annum running from the closing
a This letter was prepared by D. F. King & Co. It was reviewed by
the Piper family, by its legal counsel and by Mr. Bayard of First
Boston.
A-12
Court of Appeals Opinion on Liability
date. In order to guarantee the option, Piper was re-
quired to maintain the proceeds of the sale in a fund
separate from its other assets and free of liens. A press
release was issued by Piper on January 29 announcing
that Grumman “has agreed to purchase” 300,000 shares
of Piper subject to the approval of the Boards of both
companies. The release further stated that the agreement
was also conditioned on the shares being listed with the
NYSE, on there being no material adverse change in
Piper’s business, and on there being no change in the
management of Piper. A letter tracking the language of
the release was sent to Piper shareholders on the same day.
There was no mention of the “put” arrangement in either
the press release or the letter to shareholders. The Grum-
man agreement was terminated by mutual consent on
March 19 after the NYSE advised the parties that it would
not list the new shares.
Returning to CCI’s program for purchasing Piper stock,
its tender offer resulted in its acquiring an additional
304.606 shares of Piper. This boosted CCI’s total holdings’
to 547,106 shares, or approximately 33% of the outstanding
shares of Piper as of February 3. To obtain the additional
17% necessary for control, CCI decided to make an ex-
change offer. On February 14, the Board of CCI approved
the making of an exchange offer without determining its
terms. On February 27, CCI filed with the SEC an S-1
registration statement and a preliminary prospectus for
an exchange offer to acquire a minimum of 80,000 and a
maximum of 300,000 Piper shares. CCI issued a press
release on May 7 announcing the specific package of CCI
cecurities to be exchanged for Piper shares. First Boston
5 While the tender offer was outstanding, CCI continued to purchase
Piper stock on the market. On January 24, 16,200 shares were pur-
chased. Between January 27 and February 3, another 22,600 shares
were purchased.
——oeertttt i _its™S:—s—iSSCS
eet
Pit nth
A-13
Court of Appeals Opinion on Liability
estimated that the package was worth $70-74 per Piper
share. On May 12 and 16, the Board of CCI adopted reso-
lutions approving the exchange offer and increased the
value of the package by adding $10 cash.
Between March 18 and April 7, CCT had issued orders to
Mitchell, Hutchins to continue purchases of Piper stock
for CCI’s account. CCT actually purchased 9100 shares
while its exchange offer was being processed. On April 7,
however, Mr. Siegel met with the SEC which warned him
that such purchases violated Rule 10b-6 as the SEC inter-
preted it. Mr. Siegel informed the SEC that CCI would
cancel all outstanding orders and it did.
In the meantime, the Piper management continued to
search for an effective maneuver to defeat CC). On March
99 Piper entered into an agreement with United States
Concrete Pipe Company of Florida to acquire all the out-
standing shares of Concrete Pipe in exchange for 320,000
authorized but unissued Piper shares. On the same day,
Piper agreed to acquire 99.466% of the shares of Southply,
Inc. in exchange for 149,199 authorized but unissued shares
of Piper. Piper apparently hoped that, by increasing the
number of Piper shares outstanding, CCI would find Piper
less attractive. The NYSE refused to list the new shares
because the Piper family had failed to obtain the approval
of Piper shareholders for the deals. When Piper itself
issued the stock certificates, an extremely unconventional
procedure, the NYSE suspended trading in Piper stock
beginning April 7 and ‘nitiated delisting procedures. Piper
rescinded the agreements on April 14.
Going back for a moment to CCI’s program for purchas-
ing Piper stock, its tender offer between January 23 and
February 3 had resulted in its bringing its total holdings
of Piper shares to 547,106 or roughly one-third of Piper's
outstanding shares (including those privately purchased).
Pursuant to its February 27 exchange offer (which termi-
A-14
Court of Appeals Opinion on Liability
nated July 24), CCI acquired 39,826 additional Piper
shares. And pursuant to its July 24 exchange offer (an-
nounced on May 7, approved by the CCI Board on fay
12 and 16, and terminated on August 4), CCI acquired
112.089 additional Piper shares—thus bringing its total
holdings of Piper shares to 668,295 or 41% of Piper’s
outstanding shares.
BPC's first contact with the contest for control of Piper
came ou January 24+ when First Boston spoke to Nicolas
M. Salgo, BPC’s Chairman of the Board, about the possi-
bility of a deal between Piper and BPC. Mr. Salgo showed
some interest but Piper broke off contact until February
2+ when there was a meeting of Piper and BPC repre-
sentatives concerning a merger of the two companies. BPC
officials demanded that the Piper family sell to BPC all
its holdings in Piper, which amounted to 31% of the out-
standing shares. The Piper family gave no answer at that
time. Further meetings were held on April 18 and 20.
The Piper family did not decide to sell until late April or
early May.
n May 8, a formal agreement was entered into between
BPC and the Piper family. BPC made a “limited exchange
offer” of specified BPC steck, warrants, and debentures
(valued by First Boston at $70-72 per Piper share), for
the total Piper family holdings of Piper stock, 501,090
shares. BPC also promised to use its best efforts to ac-
quire additional stock to bring its holdings up to more
than 50% of the outstanding Piper stock by a “further
exchange offer” of “Bangor Punta securities and/or cash
having a value, in the written opinion of the First Boston
Corporation, of $80 or more per Piper share”. It was
further agreed that if BPC were successful in gaining
control of Piper, and if First Boston determined that the
package of securities received by the Piper family were
valued at less than $80 on the opening day of the general
et at nen te Bilin ahaa be Nts —
ee a Ae) tow: oa heen Sita ittin tubal
ans -_ —_
A-15
Court of Appeals Opinion on Liability
exchange offer, the Piper family would be given stock
and/or cash to make up the difference.
On May 8, a statement was released to the press by
both Piper and BPC disclosing that BPC was acquiring
the Piper family’s stock holdings through an cxchange
offer for a package of BPC securities. The release con-
tained a statement that BPC would effer to the remain-
ing Piper shareholders a package of BPC securities to be
valued in the judgment of First Boston “at not less than
¢80 per Piper share”. This $80 valuation was repeated
by David W. Wallace, President of BPC, to a reporter
for the Wall Street Journal on May 16.
On May 26, the SEC brought an action against Piper
and BPC in the District Court for the District of Colum-
bia charging that the May 8 press release violated 65(c)
of the Securities Act of 1933, 15 U.S.C. 677e(e) (1970),
and Rule 135, 17 C.F.R. 6230.135 (1972), in that the re-
lease constituted an offer to seil securities before any
registration statement had been filed, the $80 valuation
having overstepped the Rule 135 exemption (a contention
with which our Court agreed in its earlier en bane deci-
sion, 426 F.2d at 574). Both defendants consented to a
permanent injunction without admitting any of the alle-
gations of the complaint.
On May 16, BP filed with the NYSE and the SEC a
Schedule 13D deseribing the May 8 agreement. On May
29, BPC filed an S-1 registration statement for both of
the exchange offers, and also filed a preliminary prospectus
for the “further exchange offer”, The May 29 offering,
described as a tentative offering, was as follows:
1 share of BPC common
Series C warrants expiring 3-51-81 to purchase 3.25
shares of BPC common at $55
$15 principal amount of new 5'%% convertible sub-
ordinate debentures, due 1994, convertible at $55
A-16
Court of Appeals Opinion on Liability
A-17
While awaiting SEC action on the exchange offer, BPC
negotiated cash purchases of a total of 120,200 shares of
Piper stock in the following private transactions: On May
14, BPC purchased 78,600 Piper shares from Fund of
Funds Proprietary Fund, Inc. in Nassau at $79.25 per
share. On May 15, BPC purchased an additional 20,000
Piper shares for $74.25 per share from American Securi-
ties Corporation. On May 16, 20 and 23, in three sep-
arate transactions, BPC purchased from Bay Securities
Corporation the following Piper shares at the prices indi-
cated:
May 16 2,300 $76
700 75.95
May 20 11,200 76.25
May 23 2,200 76.37
5,200 78,37
All these purchases were made in disregard of SEC
Exchange Act Release No. 8595, issued May 5, 1969, an-
nouncing proposed Rule 10b-13. This Rule, when adopted,
would specifically prohibit BPC’s purchases because they
were made during the pendency of an exchange offer for
the purchased shares. The Release stated that “[t]his
provision is, in effect, a codification of existing interpre-
tations under Rule 10b-6.”
The Piper family naturally supported the BPC exchange
offer and took several steps to ensure its success. On June
4. a letter over the signature of W. T. Piper, Jr. was sent
to all Piper shareholders urging them to read and study
carefully the preliminary prospectus on the BPC exchange
offer. Another shareholder letter was sent on June 20 ex-
tensively criticising the CCI exchange offer and suggest-
ing that the offer “is not in your best interests”. Finally,
on July 25, a week after the BPC offer had become effec-
Court of Appeals Opinion on Liability
tive, W .T. Piper, Jr. sent another letter to shareholders
strongly recommending the BPC offer; it stated that the
Piper management had been impressed with the BPC man-
agement and operations and that a combination with BPC
would be in the best interests of all shareholders.
BPC did not fix the final terms of its exchange package
until July 18, the day it became effective. The final offer
consisted of the following securities:
1.2 shares of BPC common
Warrants for 3.5 shares of BPC common
$31 principal amount of new 814% convertible sub-
ordinate debentures, due 1994, convertible at $55
On July 18, First Boston sent to BPC an opinion letter
which valued the combination of BPC securities at not
less than $80 per Piper share based on market and other
conditions existing prior to the opening of business on
that day. Neither the preliminary nor the final prospectus
on the BPC exchange offer—nor the First Boston opinion
letter—referred to BPC’s negotiations with another com-
pany for the sale of the Bangor and Aroostook Railroad,
a major asset of BPC, for $5 million, which was $13.5
million less than the amount at which it was carried on
the books. We shall discuss this more fully below.
To summarize CCI’s publie offers, on January 23, CCI
had made vits first tender offer for 300,000 Piper shares.
By February 3, these efforts, together with its negotiated
purchases, had gained CCI approximately 33% of the then
outstanding Piper shares. On February 27, CCI filed with
the SEC a registration statement and proposed prospectus
for an exchange offer for a minimum of 80,000, a maximum
of 300,000, additional Piper shares; after the period of
this exchange offer had been extended six times, it finally
was withdrawn on July 24 when CCT failed to obtain the
minimum 80,000 shares. Still another exchange offer was
A-18
Court of Appeals Opinion on Liability
announced by CCI on May 7, adding substantially more
value to its earlier package; a new registration statement
for this exchange offer was filed with the SEC on July 22;
and a new prospectus was filed on July 24, the effective
date of the offer.
The BPC exchange offer expired on July 29 with BPC
acquiring 111,628 shares. CCI’s second offer expired on
August and produced 112,089 shares.
The contest for control was not yet over, however, be-
cause after the expiration of both offers CCI and BPC
owned only 41% and 45%, respectively, of the outstanding
Piper shares. CCI made additional purchases of 29,200
shares between August 12 and 18, and then virtually with-
drew from the struggle. BPC, on the other hand, con-
tinued to purchase for cash on the NYSE until August 11,
und then purchased on the PBWSE until September 5. By
September 5, it had acquired another 100,614 shares, enough
to achieve a majority stockholder position in Piper (839,306
shares or 51%).
(Cl had lost the battle for control after investing more
than $44 million—$38,295,238 in cash and $6,333,029 in
other forms of consideration such as stocks and warrants.
II.
CHRIS-CRAFT INDUSTRIES, INC. v. PIPER
AIRCRAFT CORPORATION, ET AL.
(NO. 72-1064)
On May 22, 1969, while the contest for control of Piper
was still being waged, CCI brought this action in the
District Court for the Southern District of New York.
The amended complaint alleged violations of Section 5(c)
of the Securities Act of 1933, 15 U.S.C. 477e(e) (1970),
and Rule 125 promulgated under the 1933 Act, 17 C.F.R.
9°) 125 (1972): it also alleged violations of Sections 9,
ee ee ee Le 2 ae ae
ee ee ae ee. ee rs
A-19
Court of Appeals Opinion on Jaability
10(b) and 14(e) of the Securities Exchange Act of 1934,
15 U.S.C. §$78i, 78}(b) and 78n(e) (1970), and Rules 10b-5
and 10b-6 promulgated under the 1934 Act, 17 C.F.R.
§§240.10b-5 and 240.10b-6 (1972). The complaint sought
damages and equitable relief.
On July 22, CCI moved for a preliminary injunction to
prevent BPC from gaining and exercising control of Piper.
Judge Tenney denied CCI’s motion for a preliminary in-
junction on the grounds that CCI had failed to establish
either irreparable injury if the motion were denied or
unlawful conduct on the part of BPC. 303 F.Supp. 191.
An expedited appeal froin Tenney’s order resulted in
an en bane decision by this Court. Chris-Craft Industries,
Inc. Vv. Bangor Punta Corp., 426 F.2d 569 (2 Cir. 1970).
We held, in an opinion written by Judge Waterman, that
a preliminary injunction was not required because BPC
had stipulated upon oral argument not to effect a merger
before the end of the litigation and we could perceive no
other irreparable harm. We also ruled on the district
court’s alternative holding that the securities laws had
not been violated, “for it [was] clear that this ruling be-
low would determine the outcome of the trial on the
merits.” Jd. at 573. We held that the May 8 press release
violated §5(c) of the 1933 Act and Rule 135;* and that
BPC’s cash purchases of larse blocks of Piper stock in
May violated Rule 10b-6, but we made no determination
whether the latter transactions were exempi under Rule
10b-6(a) (3) (2), which we discuss more fully at pages 4959-
4963, infra. We remanded to the district court for pro-
ceedings not inconsistent with our opinion.
6 The release was. an “offer to sell” because it contained a statement
of value and it was unlawfully issued prior to the filing of a registra-
tion statement.
A-20
Court of Appeals Opinion on Liability
On remand, CCI limited its claim for relief to damages,
foregoing any claim for equitable relief.** After trial on
the merits before Judge Pollack, the district court filed an
opinion. 337 F.Supp. 1128. The court found no merit in
CCI’s contentions that the Piper management misled the
public by its January 23 letter which stated that CCI’s
cash tender offer was “inadequate”, that the announcement
ot the Grumman agreement was deceptive because it failed
to disclose the “put” provision, or that other Jannary com-
munications were misleading. The court rejected CCI’s
claim that the May 8 release was inaccurate, if “taken in its
own terms’. It found that, although the release violated
s9(c) of the 1933 Act, CCI had failed to show that this
violation caused it to lose the contest or to increase unneces-
sarily its cost of acquiring Piper stock. The court held
that the BPC registration statement for its exchange offer
was “unintentionally in error” in failing to disclose the
negotiations for the sale of the Bangor and Aroostook
Railroad, but that CCI had failed to prove the scienter and
causal effect necessary for a Rule 10b-5 or (14(e) cause of
action for damages bronght by a party in the position of
CCI. The court held that BPC’s May cash purchases had
violated Rule 10-6 and were not exempt, but that the vio-
lations did not canse injury to CCI. The court faulted
Piper for failing to disclose certain matters in its annual
statements and other reports, but decided that CCI was
not in a position to complain. With regard to the claims
against First Boston, the court concluded that First Boston
had not engaged in any conduct which operated as a fraud
upon CCT or the public shareholders of Piper and that it
should not he held liable for the actions of its client. The
court held that Piner had failed to prove its counterclaim
6a CCI also amended its complaint to allege violations of $16 of the
1934 Act, 15 U.S.C. §78p (1970).
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A-21
Court of Appeals Opinion on Liability
against CCI by not adequately showing violations of the
law or that such violations were related to injury sus-
tained by Piper. The court dismissed CCI’s complaint
against the corporate defendants and against each of the
individual defendants.’
For the reasons stated below, we reverse and remand with
directions to grant appropriate relief.
(A) Function or Private Action ror DaMaGEs IN
ENFORCEMENT OF FEDERAL SEcURITIES Laws
In order better to understand our rulings on the issues
raised on this appeal—including our disagreement with
the district court on certain issues—we believe it may be
helpful briefly to delineate the proper function of the pri-
vate action for damages in the overall pattern of enforce-
ment of the federal securities laws.
This matter is squarely raised by the following observa-
tion by the district court in ruling on CCI’s claims of vio-
lations of the antifraud provisions of the securities laws:
“In effect, Chris-Craft seeks the windfall of a punitive
award against Bangor Punta by assuming the role of
defender of the publie interest in the purity of the
registration process, This role has already been as-
sumed by the Commission and we could well expect it
to be assumed by exchanging Piper holders if there
were material harm to them.” 337 F.Supp. at 1139.
The SEC of course has been entrusted—by the statutes
and implementing decisions—with the primary responsibil-
ity of protecting the public interest under the federal secu-
—— ee
7 On appeal, CCI does not claim damages for BPC’s violation of $5(c)
of the 1933 Act, and it has dropped its claim that Piper directly de-
ceived CCI as a purchaser of Piper shares by false and misleading
statements in Piper's financial and other reports.
Piper has not appealed from the dismissal of its counterclaim.
A-22
Court of Appeals Opinion on Liability
rities laws. But the Supreme Court, as well as other federal
courts including our own, have recognized that vigorous
enforcement of the federal securities laws, particularly the
antifraud provisions, can be accomplished effectively only
when implemented by private damage actions. In J. I.
Case Co. v. Borak, 377 U.S. 426 (1964), the Supreme Court
emphasized that private actions provide “a necessary sup-
plement to Commission action” and that “the possibility of
civil damages or injunctive relief serves as a most effective
weapon in the enforcement” of the securities laws. 377 U.S.
at 432. See Fischman v. Raytheon Mfg. Co., 188 F.2d 783
(2 Cir. 1951); Speed v. Transamerica Corp., 235 F.2d 369
(3 Cir. 1956). ~
This policy of vigorous enforcement through private liti-
gation has been the instrument for forging many salutary
developments in the securities fraud area, including a
broadening of standing to sue and a relaxation of the ele-
ments of proof in a private action. A private right of action
for damages has been implied for purchasers or sellers de-
frauded in violation of Rule 10b-5. Kardon v. National
Gypsum Co., 69 F.Supp. 512, 513-14 (E.D.Pa. 1946). Share-
holders deceived by misleading proxy solicitations have
been held to have a cause of action under §14(a) of the
1934 Act, 15 U.S.C. §781(a) (1970). J. I. Case Co. v. Borak,
supra. The scienter requirement in a Rule 10b-5 private
damage action appears to have been reduced to a knowledge
of falsity or reckless disregard for the truth standard by
our decisions in Heit v. Weitzen, 402 F.2d 909, 914 (2 Cir.
1968), cert. denied, 395 U.S. 903 (1969), and Globus v. Law
Research Service, Inc., 418 F.2d 1276, 1290-91 (2 Cir. 1969),
cert. denied, 397 U.S. 913 (1970), “to insure the maintenance
of fair and honest markets in. . . [securities] transactions.”
Section 2 of the 1934 Act, 15 U.S.C. §78b (1970). The re-
liance standard also has been relaxed under certain circum-
stances; for example, if a material omission or misstate-
A-23
Court of Appeals Opinion on Liability
ment is proven, a presumption may be raised that the
plaintiff relied on the deception to his detriment. See
Affiliated Ute Citizens of Utah v. United States, 406 U.S.
128, 153-54 (1972) (Rule 10b-5 violation) ; Mills v. Electric
Auto-Lite Co., 396 U.S. 375, 585 (1970) (§14(a) violation).
These are merely examples of innovations that have been
prompted in substantial part by a uniform policy of en-
couraging vigorous enforcement of the securities laws
through private litigation.
To understand the indispensability of private actions in
the securities area, and the necessity for facilitating such
litigation, it may be illuminating to focus upon the rea-
sons Congress enacted the antifraud and antimanipulation
provisions of the statutes. Obviously Congress was con-
cerned about the plight of the average public investor who
is at a serious disadvantage in dealing with persons pos-
sessing superior knowledge, skill and resources. But the
public in the role of investor is only part of the picture.
The integrity and efficiency of the securities markets are
even more important since our entire economy is depen-
dent upon these markets. The securities market performs
the essential function of assessing the value that society
places upon the efforts of a particular enterprise so that
society can obtain the maximum amount of its preferred
goods and services that our resources can produce. This
function can be performed effectively only if the deli-
cately calibrated balance of factors affecting demand and
supply are allowed to have their impact upon the market
place through an unrestricted flow of information and
funds. See Crossland & James, The Gods of the Market-
place: An Examination of the Regulation of the Securt-
ties Business, 48 B.U.L. Rev. 515 (1968). The securities
laws seek to prevent restrictions which distort the mar-
ket’s estimate of value. Considering the weighty interests
at stake, Congress and the courts justifiably have outlawed
A-24
Court of Appeals Opinion on Liability
all unfair and deceptive practices related to the trading
of securities and have encouraged private damage actions
to implement the enforcement of the federal securities
laws.’
(B) Vtorations or AntTiFraup Provisions
or Section 14(e) or 1934 Act
We turn now to one of the key issues on these appeals:
CCI's claim that each of the defendants violated Section
14(e) of the Securities Exchange Act of 1934. We hold
that they did.
We shall discuss seriatum with respect to this claim each
of the subordinate issues as briefed and argued by the
parties, namely, (1) standing of CCI to sue for damages,
(2) defendants’ violations of Section 14(e), and (3) causa-
tion. Then, after discussing CCI’s further claim of viola-
tions of Rule 10b-6, we shall take up the form of relief to
be granted.
(1) Standing of CCI to Sue for Damages
CCI claims that defendants violated Rule 10b-5 or §14(e)
when, during the pendency of CCI’s attempt to take over
Piper, BPC and Piper issued improper and misleading
press releases, BPC filed an exchange offer registration
statement with material omissions, and the Piper family
sent out shareholder letters with material omissions and
8 Discernment must be exercised in determining whether a particular
violation of an antifraud provision brings into play the policy of vig-
orous enforcement with all its effects. The Supreme C.urt’s recent
decision in Supertntendent of Insurance vy. Bankers Life ¢ Cesvaity Co
494 U.S. 6, 11-123 (1971), indicates that a Rule 10b-5 cause of action
may be stated even though the fact that a security somehow was in-
volved in the underlying transaction is otherwise insignificant. In such
cases, although there may have been a securities law violation, the harm
caused by the violation may not be regarded as sufficiently momentous
to justify a dilution of the standards of proof normal ; :
orm
action for fraud. P ly required in ar.
A-25
Court of Appeals Opinion on Liability
misstatements. All the alleged violations relate either to
a cash tender offer or to an exchange offer the purpose
of which was to secure for the offeror a majority share-
holder position in the target corporation.
Defendants contend that CCI lacks standing to complain
of their alleged violations of Rule 10b-5 or 614{e).
The district court found it unnecessary to decide whether
CCI had standing under Rule 10b-5 because there was a
failure to show causation; and it found that it was “un-
necessary to decide whether §14(e) may be separately
invoked by one competitor for corporate control against
another” since “our 10b-5 conclusions are dispositive of
the issues as raised under Section 14(e)”. 337 F.Supp. at
1134 and 1140.
We hold that CCI does have standing under §14(e) to
sue defendants for damages. Our holding is based on the
statute itself ard such decisional law as there is that has
touched on the question.
Section 14(e) of the Exchange Act, 15 U.S.C. 4§78n(e)
(1970), provides:
“Tt shall be unlawful for any person to make any
untrue statement of a material fact or omit to state
any material fact necessary in order to make the
statements made, in the light of the circumstances un-
der which they aye made, not misleading, or to engage
in any fraudvlent, deceptive, or manipulative acts or
practices, in connection with any tender offer or re-
quest or invitation for tenders, or any solicitation of
security holders in opposition to or in favor of any
such offer, request, or invitation.”
The Senate Report which accompanied proposed ‘14(e)
indicates clearly—more specifically than does Rule 10b-5°—
9 Rule 10b-5 under the 1934 Act, 17 C.F.R. $240.10b-5 (1972), provides:
“Tt shall be unlawful for any person, directly or indirectly, by
A-26
Court of Appeals Opinion on Liability
that §14(e) was intended to make applicable to a tender
offer the long established antifrewd proscriptions of the
federal securities laws:
“Proposed subsection (e) would prohibit any mis-
statement or omission of a material fact, or any fraud-
ulent or manipulative acts or practices, in connection
with any tender offer, whether for cash, securities or
other consideration, or in connection with any solici-
tation of security holders in opposition to or in favor
of any tender offer. This provision would affirm the
fact that persons engaged in making or opposing
tender offers or otherwise seeking to influence the
decision of investors or the outcome of the tender
offer are under an obligation to make full disclosure
of material information to those with whom they deal.”
S. Rep. No. 510, 90th Cong., 2d Sess. (1968), quoted
in U.S. Code Cong. & Admin. News 2811, 2821 (1968).
See also H. K. Porter Co. v. Nicholson File Co., ——
F.Supp. ‘ (D.R.I. 1972), 4 CCH Fed. Sec. L.Rep.
793,703, at 93,079-81 (Nov. 30, 1972).
. Section 14(e) is especially appropriate where, as in the
instant case, the tender offer, in connection with which
fraud is charged, was made with a view to obtaining control
of a target company. The Williams Act of 1968, of which
§14(e) is a part, was enacted to control what has become
the use of any means or instrumentality of interstate commerce, or
of the mails or of any facility of any national securities exchange,
(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 circumstances under which they were
made, not misleading, or
(ce) 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 cf any security.”
A-27
Court of Appeals Opinion on Liability
an increasingly popular method of corporate acquisition—
obtaining a majority of a corporation’s stock rather than
its assets. See Mundheim, Tender Offers, 2 Rev. of Se-
curities Reg. 953 (1969). The Act added to §13 of the
1933 Act subsections (d) and (e), which require tender
offer disclosures similar to those required for issuance
of new securities. Section 14(e) provides for openness and
truthfulness in the solicitation of shares through tender
offers and in the opposition to such solicitation.
Although the fraudulent acts involved in the instant case
literally are proscribed by Rule 10b-5, we conclude that
414(e) is the antifraud provision which more appropriately
provides the basis for CCI’s standing to sue here. It there-
fore is unnecessary for us to decide whether CCI has
standing to sue under §10(b) and Rule 10b-5.
A corporation in the position of CCI undoubtedly has
standing to sue in a constitutional sense on the basis of
the illegal acts alleged in the instant action." Those who
10 The issue of standing to which we address ourselves is whether ccI
is an appropriate party to be seeking relief on account of defendants’
illegal conduct. As stated in Flast v. Cohen, 392 U.S. 83, 99 (1968),
quoting Baker v. Carr, 369 U.8. 186, 204 (1962), a threshold question
is presented by the provision in Article ITI, Section 2, of the United
States Constitution, limiting federal judicial power to cases and con-
troversies:
“The ‘gist of the question of standing’ is whether the party seeking
relief has ‘alleged such a personal stake in the outeome of the con-
troversy as to assure that concrete adverseness which sharpens
the presentation of issues upon which the court so largely de-
pends....’”
While a personal stake in the outcome meets the Article III require-
ment, a court must take into account other considerations before decid-
ing that a plaintiff has standing to sue.
In the absence of a specific provision in a federal statute authorizing
suit, the Constitution requires that we analyze the statute to ascertain
whether a federal cause of action can be derived from it in favor of
the plaintiff. See Bivens v. Siz Unknown Named Agents, 403 U.S. 388
(1971). Depending on the statute, Congress may have intended, for
any number of reasons, that only certain persons should be entitled to
sue thereunder, and the plaintiff may not be one of them. See Birnbaum
A-28
Court of Appeals Opinion on Liability
make tender offers have an economic interest in restrict-
ing their opponents to fair conduct, for fear that they
themselves might ineur injury because of practices which
they are legally barred from meeting in kind. CCI’s al-
legations indicate that it has “a personal stake in the
outcome of the controversy”, Baker v. Carr, 369 U.S. 186
204 (1962), because it has suffered a pecuniary loss di-
rectly attributable to the defendants’ acts. See generally
Flast v. Cohen, 392 U.S. 83, 94-101 (1968). Thus under
the requirements of the cases or controversies deess of
the United States Constitution, CCI is an appropriate
party to complain of such illegal acts.
We must alsé decide, however, whether CCI has a pri-
vate federal right of action under $14(e) against each of
the defendants and, more specifically, whether it has Pp
claim for compensatory damages." Cf. Dyer v. Eastern
v. KN oupers Steel Corp., 193 F.2d 461 (2 Cir.), cert. denied, 343 U.S
wer 1952 , On the other hand, Congress may have authorized the
menses to bring suit but limited the type of relief to which he is
— In short, the Constitution or statutory scheme enacted by
ongress should be closely examined to determine whether the particular
action brought by the plaintiff is explicitly or implicitly authorized.
ing bere whether a right of action or claim for relief exists
— - ™ eral law is conceptually different from the Flast question.
“alle attempting to make clear which concept we are discussing, we
nevertheless shall refer to both as questions of “standing” since th t
is the term used in our prior decisions referring to $14(e). See, e :
a Aviation International, Inc. vy. Comprehensive Ria ee
a lar 842, 843 n. 1 (2 Cir. 1970): Crane Co. v. Westinghouse Ait
rong. = F.2d 787, 798-99 (2 Cir. 1969), cert. denied, 400 U.S.
+d . 70); Iroquois Industries, Inc. v. Syracuse China Corp., 417
2d 963, 969-70 (2 Cir. 1969), cert. denied, 399 U.S. 909 (1970);
Electric Specialty Co. v. Internation
- Vv. al Controls
944-46, 948 (2 Cir. 1969). “he SP Tae Oe
11 A party with a sufficient economic or legal interest at stake con-
ceivably might be permitted to bring an action to vindicate the bit
interest. That is, although his own interest was not intended > be
protected by the statute, he right be allowed to sue, because of his
/wn economic interest in the result, on behalf of those whose interests
were to be protected. Cf. FCC v. Sanders Bros. Radio Station, 309
if
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Court of Appeals Opinion on Liability
Trust and Banking Co., 336 F.Supp. 890, 913-14 (D.Maine
1971). The statute is silent as to a private remedy. In
deciding this issue, however, we are not writing from a
clean slate. Our Court has spoken on the issue on at least
four previous occasions. In Electronic Specialty Co. v.
International Controls Corp., 409 F.2d 937, 940-41, 944-46
(2 Cir. 1969), our holding on the merits made it unnec-
esssary for us to reach a decision on the standing question,
but we did indicate that a target corporation and nonten-
dering shareholders could bring an action for a prelim-
inary injunction under §14(e) against an offeror charged
with wrongdoing. In Butler Aviation International, Inc.
v. Comprehensive Designers Inc., 425 F.2d 842, 843 n. 1
(2 Cir. 1970), a target corporation sought a preliminary
injunction and we expressly held that standing existed
under §14(e), at least as to the misstatements in the an-
ual report. See also Susquehanna Corp. v. Pan American
Sulphur Co., 423 F.2d 1075 (5 Cir. 1970). In Crane Co.
v, Westinghouse Air Brake Co., 419 F.2d 787 (2 Cir. 1969),
cert. denied, 400 U.S. 822 (1970), after holding that a
tender offeror had a Rule 10b-5 claim for relief against
a target corporation under the “forced seller” principle,
we went on to say that:
“The amendment to the Act adding section 14(e) (15
U.S.C. §78n(e)), . . . should serve to resolve any
doubts about standing in the tender offer cases, even
where an offeror is not, as is Crane, in the position
of a forced seller.” 419 F.2d at 798-99.
See also H.K. Porter Co. v, Nicholson File Co., supra,
4 CCH Fed.Sec.L.Rep. at 93,079-81. In upholding the dis-
U.S. 470, 476-77 (1940); Mutual Shares v. Genesco, 384 F.2d 540,
543-46 (2 Cir. 1967). But in such a suit by a “private attorney
general”, compensatory damages normally would be improper relief,
although punitive damages might be permitted.
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Court of Appeals Opinion on Liability
missal of a Rule 10b-5 claim in another action brought
by an offeror against a target corporation, we suggested
that standing might be provided by $14(e) although the
1968 amendment is an indication that “there was no stand-
ing to sue under Rule 10b-5 by either the tender offeror
or by the target corporation”. Iroquois Industries, Inc.
v. Syracuse China Corp., 417 F.2d 963, 969-70 (2 Cir.
1969), cert. denied, 399 U.S. 909 (1970).
While we have not heretofore squarely held that a private
right of action for damages can be implied from $14(e)
in favor of a party in CCI’s position, we have indicated
that such an implied right of action would be reasonable.
Section 14(e) prohibits, as stated above, material omis-
sions and misstatements in communications favoring or
opposing tender offers. Under well recognized common law
principles, interference with a “prospective advantage”
such as the opportunity to purchase property, gives rise
to a cause of action in the person injured where the means
of interference adopted alone is unlawful, even though the
purpose in itself may be justifiable. Prosser & Smith
Cases and Materials on Torts 1131-52 (1967). CCI there.
fore probably could state a claim for relief in most state
courts against each of the defendants for tortious inter-
ference. Through unlawful and deceptive practices, they
allegedly have denied CCI a fair opportunity to succeed
in its tender offers. We will not infer from the silence of
the statute that Congress intended to deny a federal rem-
edy and to extinguish a liability which, under established
principles of tort law, normally attends the doing of a
proscribed act. See Kardon v. National Gypsum Co., 69
F.Supp. 512, 513-14 (E.D. Pa. 1946). :
We previously have noted, referring to §14(e), that
“[{t}he legislative history of the 1968 amendment demon-
strates that the focus of legislative interest was on the
public shareholder; Congress wanted to ensure that he had
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Court of Appeals Opinion on Liability
the benefit of a full statement from the offeror, with a
chance for ‘incumbent management’ to ‘explain its position
publicly’, if so disposed, H.R. Rep. No. 1711, supra, at 2,
U.S. Code Cong. & Adm. News at p. 2998.” Electronic
Specialty Co. v. International Controls Corp., supra, 409
F.2d at 945; Susquehanna Corp. v. Pan American Sulphur
Co., supra, 423 F.2d at 1085. The general objective surely
is to encourage extensive and accurate disclosure of infor-
mation relevant to a tender offer. The Supreme Court
made it clear in J. I. Case Co. v. Borak, supra, 377 U.S. at
432-33, that, in dealing with controversies involving the
securities laws, we should not be reluctant to imply a
private right of action when to do so will further the gen-
eral objective of the statute involved. We can conceive
of no more effective means of furthering the general
objective of §14(e) than to grant a victim of violations
of the statute standing to sue for damages. CCI is such
a victim, as recognized by common law tort principles. A
party in its position is especially likely to vindicate the
wrong inflicted upon it. Particularly in light of the en-
forcement rationale of Borak, we believe it is both neces-
sary and appropriate that CCI should be granted standing
to sue for damages.
In enacting §14(e), while Congress did not explicitly
state that shareholders of a target company are not the
only persons entitled to the protection of the securities
laws from fraudulent misrepresentations, it is a fair in-
ference that a broader standing was intended. Since Rule
10b-5 covers all types of exchange offers, the major con-
tribution provided by §14(e) would appear to be a broader
standing to sue—accorded both to the offeror and to the
opposition—based on fraudulent securities transactions.
See Bath Industries, Inc. v. Blot, 427 F.2d 97, 102 (7 Cir.
1970) ; Dyer v. Eastern Trust and Banking Co., 336 F.Supp.
890, 914 (D. Maine 1971). In Electronic Specialty Co. v.
A-32
Court of Appeals Opinion on Liability
International Controls Corp., supra, 409 F.2d at 940-41
we commented on the impact of §14(e): |
“In effect this applies Rule 10b-5 both to the offeror
and to the opposition—very likely, except perhaps for
any bearing it may have on the issue of standing
only a codification of existing case law.”
While Judge Friendly’s opinion in Electronic Specialty is
not dispositive, its holding that the target company may
sue goes some distance toward saying that contestants may
also sue. Cf. Iroguois Industries, Inc. v. Syracuse China
Corp., supra, 417 F.2d at 969-70.
Our holding on the standing of CCI to sue for damages
may be summarized as follows. The statutory language of
‘14(e) is silent on standing; it neither confers nor eX-
cludes standing with respect to one in the position of CCI
As a distinguished commentator said years ago, in such :
situation there is no need to try to discover “supposed
legislative intent”; [w]hether his offenses shall have any
other legal consequence has not been passed on one way
or the other as a question of legislative intent, but is left
to be determined by the rules of law.” Thaver. Public
Wrong and Private Action, 27 Harv. L. Rev. 317. 320
(1914). Under common law tort principles, we hold that
a claim for relief under federal law is stated where. as
here, a defeated contestant for control has been put ie ,
minority shareholder position because of the wrongdoing
of its opponent and the margin of victorv is onlv 1%.
CCI has shown that it had a reasonable chance of siti.
ing control of Piper, but lost the opportunity because its
opponent gained control through means illegal under fed-
eral law. This is a case of first impression with respect
to the right of a tender offeror to claim damages for statu-
tory violations by his adversary. And our holding is
A-33
Court of Appeals Opinion on Liability
premised on the belief that the harm done the defeated
contestant is not that it had to pay more for the stock but
that it got less stock than it needed for control.
We hold that CCI has a right of action for damages
ayainst all defendants for violations of §14(e).”
(2) Defendants’ Violations of Section 14(e)
The district court held that the various communications
to shareholders by members of the Piper family and the
May 8 press release by Piper and BPC did not violate
si4(e), but that the BPC registration statement and pro-
spectus were materially misleading. 337 F.Supp. at 1134-
38, 1138-40. CCI challenges the court’s holdings with re-
spect to the Piper communications to shareholders and the
May 8 press release. Defendants contend that the BPC
registration statement and prospectus did not violate
§14(e). We hold that each of the defendants violated
§14(e).
(a) Controlling Principles In Determining
Section 14(e) Violations
Before turning to defendants’ alleged violatious of Sec-
tion 14(e), a statement of what we believe to be the con-
trolling principles in determining such liability may aid
in understanding our rulings which follow.
Section 14(e) is relatively new. It has not been the
subject of extensive judicial construction, and never in the
context of the factual situation here presented. And yet
the underlying proscription of §14(e) is virtually identical
The fraudulent acts alleged to have been committed by Piper and
its allies, BPC and First Boston, in effect were in the nature of
eountersolicitations to CCI’s tender offers. CCI’s right of action against
each therefore is the same: to recover damages or to obtain other
relief based on defendants’ illegal conduct under $14(e) to achieve an
objective injurious to CCI.
A-34
Court of Appeals Opinion on Liability
to that of Rule 10b-5; the critical difference is that the
latter is applicable only “in connection with the purchase or
sale of any securitv”, while the former is applicable ‘in
connection With any tender offer... or anv solicitation
of security holders in opposition to... any such oger....”
In determining whether ‘l14(e) violations were commmitied
in the instant case, we shall follow the principles developed
under Rule 10b-5 regarding the elements of such violations.
In short, we hold that a violation of -l4(e) is shown when
there has been a material misstatement or omission con-
cerned with a tender offer and when such misstatement or
omission Was sufficiently culpable to justify granting relief
to the injured party. The key concepts in this formulation
are materiality and culpability.™
13 It is well to bear j i
eit to bear in mind Judge Friendly'’s observations regarding
14(: in Electronic Spe 0 orp
’ oP cialty Co. Vv Internation y ,
~~ 4 : al Contr 4
supra, 409 F.2d at ¥4s: "
“The likeness of tender off
> +}
O ne
ers to proxy contests is not limited
> issue of standing. They are alike in the fundamental
feature that they generally are contests. This means that the
participants on both sides act, not ‘in the peace of a quiet
a r, ey aanes Ltd. ¥. Brown & Williamson Tobacco
168, § L.Ed 24 102 (1960), but under the sheaee of a a
place. They act quickly “ ti : j i on . —
iulcKiy, sometimes impulsively, often in angry
n P nee te what they consider, whether rightly or wrongly to
be ; w blows by the other side. Probably there will no more be ‘a
portent ten ler offer than a perfect trial. Congress intended to
earune basie h meaty and fair dealing, not to impose an unrealistic
Suen ment of laboratory conditions that might make the new
a vit . pane hear for incumbent management to protect its
ae interes . against the desires and welfare of the stockholders,
ies ae , oo heating kind of judgment to be applied
g nduct—of both sic es—and also on the issue of materi-
ad igs bes po pgs yg test announced in Symington
oi ma es : : ange = whether ‘any of the stockholders
ranthecy, ge t) ad 1a? : — probably not have tendered their
, if 1e alleged violations had not occurred. See also
General Time Corp. v. Talley Industries, Inc., supra, 403 ¥ 9
at 161-162.” a
A-35
Court of Appeals Opinion on Liability
The concept of materiality focuses on the weightiness of
the misstated or cmitted faci in a reasonable investor’s
decision to buy or sell. We articulated the materiality
standard in List v. Fashion Park, Inc., 340 F.2d 457, 462
(2 Cir.), cert. denied, 382 U.S. 811 (1965), to be “whether
‘a reasonable man would attach importance [to the fact
misrepresented] in determining his choice of action in the
transaction in question.’”'* The materiality test is con-
cerned only with whether a prototype reasonable investor
would have relied. See Heit v. Weitzen, 402 F.2d 909, 912-14
(2 Cir. 1968), cert. denied, 395 U.S. 903 (1969). Account
must be taken of all the surrounding circumstances to de-
termine whether the fact under consideration is of such
significance that a reasonable investor would weigh it in
his decision whether or not to invest. See SEC v. Texas
Gulf Sulphur Co., 401 F.2d 833, 849 (2 Cir. 1968) (en banc),
cert. denied sub nom. Kline v. SEC, 394 U.S. 976 (1969).
As for the concept of culpability, intent to defrand is
not an indispensable element in a private action under Rule
10b-5: knowledge of falsity or reckless disregard for the
truth may be sufficient. See Shemtob v. Shearson, Hammill
& Co., 448 F.2d 442, 445 (2 Cir. 1971); Globus v. Law Re-
search Service, Inc., 418 F.2d 1276, 1290-91 (2 Cir. 1969),
cert. denied, 397 U.S. 913 (1970); Heit v. Weittzen, supra,
402 F.2d at 913-14; SEC v. Texas Gulf Sulphur Co., supra,
401 F.2d at 854-55. We have indicated, however, that mere
negligent conduct is not sufficient “to permit plaintiffs to
recover damages in a private action under 417(a) or
‘10(b).” SEC v. Manor Nursing Centers, Inc., 458 F.2d
1082, 1096 n. 15 (2 Cir. 1972).
14 And in SEC v. Teras Gulf Sulphur Co., supra, 401 F.2d at 849:
“fM laterial facts include not only information disclosing the earnings
and distributions of a company but also those facts ... which may
affect the desire of investors to buy, sell, or held the company’s
securities.”
A-36
Court of Appeals Opinion on Inability
The function of what has been called the “scienter” re-
quirement is to confine the imposition of liability to those
whose conduct has been sufficiently culpable to justify the
penalty sought to be exacted. The initial inquiry in each
ease is what duty of disclosure the law should impose upon
the person being sued. See Royal Air Properties, Inc. v.
Smith, 312 F.2d 210, 212 (9 Cir. 1962); Ellis v. Carter,
291 F.2d 270, 274 (9 Cir. 1961). In making this deter-
mination we should bear in mind that a major congres-
sional policy behind the securities laws in general, and
the antifraud provisions in particular, is the protection
of investors who rely on the completeness and accuracy of
information made available to them. See 1 Bromberg,
Securities Law: Rule 10b-5, §7.1. at 14 (1971). Those with
greater access to information, or having a special relation-
ship to investors making use of the information, often may
have an affirmative duty of disclosure. When making a
representation, they are required to ascertain what is mate-
rial as of the time of the transaction and to disclose fully
“those material facts about which the [investor] is pre-
sumably uninformed and which would, in reasonable antic-
ipation, affect his judgment”. Aohler v. Kohler Co., 319
F.2d 654, 642 (7 Cir. 1963). A failure to perform these
duties with “due diligence” in issuing registration mate-
rials provides a basis for snit under §11 of the 1933 Act,
15 U.S.C. ‘77k (1970). A knowing or reckless failure to
discharge these obligations constitutes sufficiently culpable
conduct to justify a judgment under Rule 10b-5 or §14(e)
foi damages or other appropriate relief against the wrong-
doer. SEC v. Teras Gulf Sulphur Co., supra, 401 F.2d
at 854-55.
In sum, and put as simply as possible, the standard for
determining liability under ‘14fe) on the part of a person
making a misleading tender offer, or a responsible officer
of a corporation making such such an offer, is whether
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Court of Appeals Opinion on Liability
plaintiff has established that defendant either (1) knew
the material facts that were misstated or omitted, or (2)
failed or refused to ascertain such facts when they were
available to him or could have been discovered by him
with reasonable effort. .
Our disagreement with the district court on whether de-
fendants have violated §14(e) does not go to its findings
of fact, as to which the “unless clearly erroneous” test
applies, but to its application of the legal standards just
discussed. See Mamiye Bros. v. Barber S.S. Lines, Inc.,
360 F.2d 774, 776-78 (2 Cir.), cert. denied, 385 U.S. 835
(1966).
We turn now to a consideration of the 414(e) violations
charged against each of the defendants.
(b) Piper Family
CCI’s charges against the Piper family stem from a
series of communications to Piper shareholders in the form
of shareholder letters and a press release.
The shareholder letters dated Januury 27 and 28, sent
while the CCI tender offer was pending, stated that the
Piper Board of Directors had “carefully studied this offer
and is convinced that it is inadequate and not in the best
interests of Piper’s shareholders”. It further stated that,
if CCI were suddenly willing to offer shareholders $65, it
must believe that Piper stock is worth more than it is
offering.** CCI contends that a reasonable shareholder
15 The Ictter also stated that Piper was taiking to major industrial
corporations about combination and that if one could be put through,
“fA] higher value could be realized for all shareholders.” This was
not misleading because Piper officials were trying to find an alternative,
such as a merger, that would be better for themselves and Piper
shareholders. The letter also urged shareholders io consider “important
points” such as the facts that “Piper’s sales increased more than 20%
in fiseal 1968 over the prior year, and its earnings per share were
approximately 29% higher.” CCI maintains that they should also
have disclosed that sales and earnings for the first quarter of the next
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Court of Appeals Opinion on Liability
would have assumed that “inadequate” referred to price.
At that time Piper stock was selling on the market for
considerably less than $65 per share. First Boston in fact
had given Piper its opinion that the price offered was
“fair and equitable”. The Piper corporation itself, acting
through the Piper family, at that time was contemplating
a large sale of Piper stock to Grumman at the same price.
The district court concluded that “inadequate” referred
to factors other than price, such as the quality of Chris-
Craft management. We disagree. A reasonable share-
holder reading the letter most likely would assume that
the reference was to price. Since price usually is what a
person contemplating a sale of shares is most concerned
with, a prudent shareholder naturally would assume that
the Piper family was addressing itself to that considera-
tion in opposing the offer. If the Piper family intended to
refer to other factors, it surely would have been more
specific. The Piper family’s culpability regarding these
shareholder letters is clear. Corporate officers and direc-
tors in their relations with shareholders owe a high fidu-
ciary duty of honesty and fair dealing. See Swanson v.
American Consumer Industries, Inc., 415 F.2d 1326 (7 Cir.
1969). By reason of the special relationship between them,
shareholders are likely to rely heavily upon the repre-
sentations of corporate insidérs when the shareholders
find themselves in the midst of a battle for control. Cor-
porate insiders therefore have a special responsibility to
be meticulous and precise in their representations to share-
holders. The Piper family obviously disregarded this
obligation when they sent out these shareholder letters
knowing that they were materially misleading.
fiseal year were down considerably compared to the first quarter of
the previous year. We cannot say that, once Piper mentioned sales
and earnings figures, it was required to reveal all relevant figures.
Nor can we say that the decline was so severe that it made the
previous year sales and earnings figures deceptive.
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Court of Appeals Opinion on Liability
CCI also attacks the press release of January 29 by
Piper officials that Grumman had “agreed to purchase”
300,000 shares of Piper at $65 per share. CCI argues that
the tentative nature of the January 25 agreement was not
adequately disclosed in the release. The agreement per-
mitted Grumman to return the entire 300,000 shares for
a refund of its purchase price plus interest within six
months. This “put” provision was not disclosed in the
press release, although it was described in Piper’s ap-
plication for listing with the NYSE. The release did reveal
that the agreement was subject to the approval of the
Piper and Grumman boards as well as cther conditions.
The published list of conditions gave the appearance of
being exclusive, thus solidifying the impression that the
sale was all but formally completed.
We find no fault in the Piper family’s effort to avert
through a Grumman merger what they had concluded was
an unfavorable takeover by CCI. Such a maneuver is a
common response to a takeover attempt. See Schmultz &
Kelly, Cash Take-Over Bids—Defense Tactics, 23 Bus.
Law 115, 132-34 (1967). We also agree with the district
court’s conclusions that the agreement was not a “sham”
and that the “put” was a rational and logical part of the
agreement. But Piper’s failure to describe the put in its
press release, or in its subsequent letter to shareholders,
constituted a material omission in violation of 614(e).
By failing to disclose this provision, the release portrayed
the Grumman agreement as a completed, favorable deal
between Piper and Grumman which also was likely to pro-
vide a basis for further and more profitable relations be-
tween the two companies.’* The “agreement” actually was
16 This depiction of the agreement was further suggested by a state-
ment in the release that the “purchase provides an opportunity for
Grumman and Piper to study the feasibility and advantages of a
possible combination of the two companies.”
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Court of Appeals Opinion on Liabiuity
a preliminary and conditional overture directed toward a
possible merger. The Piper family recklessly disregarded
its obligation to shareholders in failing to disclose with
substantial accuracy a transaction which was likely to
affect the attitude of Piper shareholders toward the CCI
tender offer.
CCI also challenges the shareholder letters with respect
to the BPC and CCI exchange offers on the ground that
they failed to disclose the Piper family’s financial interest
in the success of the BPC general exchange offer. Letters
dated June 4 and July 25 urged Piper shareholders to ac-
cept the BPC exchange offer. A June 20 letter disparaged
the CCI exchange offer. All the letters were sent over the
signature of W. T. Piper, Jr. None of the letters explained
that, under the terms of the May 8 agreement between BPC
and the Piper family, the Piper family might profit hand-
somely from BPC’s acquiring a controlling interest in
Piper.** The agreement provided, as stated above, that, if
the value of the securities package traded to the Piper
family for their Piper holdings was below $80 per Piper
share on the effective date of the general exchange offer,
BPC would make up the difference, if BPC were successful
in obtaining over 50% of the outstanding Piper shares.
The Piper family therefore potentially had an interest in
the success of the BPC exchange offer. By wuly 25, they
must have realized that this interest amounted to a con-
siderable sum of money.** If the letters merely had sup-
17 The preliminary and final prospectus for the BPC genere] exchange
offer disclosed that there had beer an exchange offer made to the
Piper family and related that under the May 8 agreement the family
might gain from the success of the general exchange offer. We do not
believe under the circumstances that disclosure in a detailed and
extremely complex prospectus, which did not aceompany the letters,
fulfilled the Piper family’s duty to revea] this material fact. Cf. Mills
v. Electric Auto-Lite Co., 403 F.2d 429, 433 (7 Cir 1968). vacated
and remanded, 396 U.S. 275 (1970).
is One estimate placed the amount at a total of $13 million.
A-41
Court of Appeals Upinion on Liability
plemented the prospectus in providing publicity for the
terms of the offer, there might be less basis for coneern
that the Piper family’s self-interest was not disclosed. But
the letters are replete with the personal opinions and recom-
mendations of W. T. Piper, Jr. on the quality of the BPC
securities and the management of BPC. The July 25 letter,
sent after the Piper family must have known what they
stood to gain in the event of a suecessful BPC takeover,
stated that “we strongly recommend” the offer and “‘we
have been impressed with the management and operations
of Bangor Punta”. Under these circumstances, the Piper
shareholders were entitled to receive information sufficient
to make an informed judgment on the weight to be given
the personal recommendations of the Piper family. Cf.
SEC v. Capital Gains Research Bureau, Inc., 575 U.S. 180,
197-201 (1963).
We hold that the commmnications to Piper shareholders
in the form of shareholder letters and a press release con-
stituted violations of 414(e) by the Piper family defendants.
(c) BPC And Its Officers
CCI’s claims that BPC violated ‘14(e) arise from public
communications and filed materials regarding the BPC
general exchange offer. On May 8, Piper and BPC pub-
lished a press release which stated that BPC had agreed
“to file a registration statement with the SEC covering
a proposed exchange offer for any and all of the re-
maining outstanding shares of Piper Aircraft for a
package of Bangor Punta securities to be valued in
the judgment of the First Boston Corporation at not
less than $80 per Piper share.”
CCT contends that this statement was inateriallv misleading
because a reasonable investor would have interpreted the
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Court of Appeals Opinion on Liability
$80 value figure to be a guarantee of market value when
the actual market value proved to be considerably less than
$80. As stated above, we held in our earlier en bane deci-
sion that this statement of value violated 45(c) of the 1933
Act but we made no determination whether the statement
also was misleading. 426 F.2d at 573-76. We did observe
that a prospectus “would have eliminated the possibility,
perhaps the probability, that some persons would have
construed the $80 figure as referring to market value when
that value was neither accurate nor intended”. 7d. at 575.
The district court concluded that “the language of the
May 8 release could not be confused by reasonable men .. .
with offers intending or implying guarantees of market
value.” 337 F.Supp. at 1137 n. ¥."* We agree. If the release
were to be construed as a promise of future value, it would
not be as a promise of markct value. A reasonably knowl-
edgeable investor is aware that the “value” of a security
ean refer either to the market or sales price of the security
or to its worth as measured by the assets and earnings of
the issuing company. The absence of the term “market
value” in the release, as well as the fact that the valuation
was to be “in the judgment of the First Boston Corpora-
tion”, would suggest to a prudent investor that “‘value”
here was to be based on an appraisal of assets and earnings.
The statement of value was not a fraud violation for
another reason. It was not a material representation. A
rational investor considering whether to take advantage of
the BPC exchange offer after it became effective would
not have been influenced by the earlier promise of value
when the actual package had been disclosed to him for
scrutiny and value determination. We therefore agree
19 The district court aiso held that even if a prudent investor might
have interpreted “value” to mean market or resale svalue, the BPC
package turned out to be worth $73 to $79, the difference between
the promise and performance being “de minimis”.
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Court of Appeals Opinion on Liability
with the district court that the May 8 release has not been
shown to have been damaging to CCI.
BPC contends that the district court erred in holding
that the BPC registration statement was misleading. The
district court, in SEC v. Bangor Punta Corporation, 331
F.Supp. at 1160-61, held that BPC’s failure to disclose the
circumstances which made the carrying figure for the Ban-
gor and Aroostook Railroad (BAR) obsolete caused the
registration statement to be misleading. BPC carried on its
books its holdings in the BAR (98.7%) at $18.4 million.
Although this amount was established through question-
able accounting techniques, such techniques are not specif- .
ically attacked here." CCI does charge that BPC failed
to disclose that it had negotiated for a sale of the BAR
at a price substantially below $18.4 million. Some addi-
tional facts are necessary to an understanding of this
claim.**
At the April 1, 1969 BPC board meeting, BPC had con-
sidered disposing of the BAR and had appointed a com-
mittee headed by Curtis Hutchins to study various methods
of disposition. On May 12 and 15, Hutchins met with
Frederic Dumaine, Chairman of the Board of Amoskeag,
Ine., to discuss the possible sale of the BAR to Amoskeag.
On May 12, Dumaine offered $5 million for the BAR. He
indicated no preference for buying assets or stock. On
May 15, Hutchins provided Dumaine with information on
the BAR, such as the railroad’s cesh flow figures and bal-
ance sheet. Dumaine decided that he wanted to buy the
stock. Hutchins met with his committee the same day.
They agreed that a sale to Dumaine at $5 million would be
192 Among other things, the increase in book value resulting from a
revaluation of the BAR was credited directly to earned surplus, thus
by-passing the income accounts. This is dubious accounting procedure.
20 A full discussion of the BAR incident is set forth by the district
court in SEC v. Bangor Punta Corporation, 331 F.Supp. at 1156-60.
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Court of Appeals Opinion on Liahility
BPC's best course of action. At a BPC board meeting on
May 21, Hutchins reported Dumaine’s offer and his com-
mittee’s recommendation.”? He did not ask for approval of
the sale but only for authority to continue negotiations.
Nicolas M. Salgo, BPC’s Chairman, suggested selling 51%
of the BAR then and 49% later for a total consideration of
$7 million. This proposal was rejected Sy Dumaine when it
was later submitted to him. The BPC board resolved to
study further the tax and accounting ramifications of the
sale. On May 27, Hutchins and Dumaine formulated a let-
ter of understanding concerning the sale. This was not
signed by Hutchins. It stated that “you [Dumaine] and
I have agreed ... on the sale” at $5 million, but qualified
this by noting that any understanding was subject to BPC
board approval. Hutchins repeatedly explained to Dumaine
that his authority was limited to exploring possibilities of
divestiture and that he did not have the power to make a
decision alone. On June 3, Hutchins met with the BPC
management. They decided to table the matter while their
tax and accounting departments studied the effect of sell-
ing assets rather than stock. On June 16, Hutchins in.
formed Dumaine that the board refused to approve the
letter of understanding. He further explained that the
BPC management considered it essential that the legal and
accounting effects of the transaction be studied, and that
these investigations probably could not be completed for
another two months because other matters (the exchange
offer) had priority. Hutchins expressed to Dumaine his
personal opinion that a deal would be made. On September
9, the board authorized Hutchins to make the sale to Amos-
keag of BAR assets rather than stock, if possible, but
basically with freedom to enter into the deal on whatever
terms he decided were best. The agreement was entered
2) Hutchins presented three options to the board: sale, merger, cr
status quo. He and the board rejected the last two options.
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Court of Appeals Opinion on Liability
into on October 2, 1969. This resulted in BPC sustaining
a $13.8 million book loss, thus contributing to an $8,566,964
loss of net income for 1969 and to a reduction in retained
earnings from $37.9 million at the end of fiscal 1968 to
$20.5 million at the end of 1969.
The district court found that “the Bangor Punta direc-
tors could not [at the time of the exchange offer] have be-
lieved that the $18.4 million figure . . . any longer repre-
sented a responsible appraisal of market value of the BAR
holding”. 331 F.Supp. at 1161. It concluded that “[c]on-
sistency of fair disclosure required exposure of circum-
stances which so clearly rendered obsolete an appraisal
made four years earlier”. Id.
We hold, under the principles enunciated above for de-
termining §14(e) liability, that BPC was required to dis-
close to Piper shareholders the circumstances surrounding
the negotiations for a sale of the BAR, to apprise them
with a reasonable degree of accuracy of the seriousness
of such negotiations, and to inform them of the basic effect
this might have on the operations of BPC. In SEC v.
Texas Gulf Sulphur Co., supra, 401 F.2d at 849, we stated
the standard of materiality to be applied where an event
has not yet occurred but certain facts are known in ad-
vance:
“(Whether facts are material . . . when the facts relate
to a particular event... will depend at any given time
upon a balancing of both the indicated probability
that the event will occur and the anticipated magnitude
of the event in light of the totality of the company
activity.”
Hutchins and the other special committee members—
Robertson, Stone, Siel—were highly knowledgeable about
the BAR’s affairs. Several had been past presidents of
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Court of Appeals Opinion on Liability
the BAR and all had managed it in some capacity. These
men had decided in May 1969 that a sale to Amoskeag was
the only viable alternative. Certainly the BPC board was
likely to be strongly influenced by their decision. The
board in fact had taken a position favorable to the sale
from the beginning and was primarily concerned with
getting as much out of the sale as possible. The board
knew that a merger of the BAR with another New England
railroad was improbable. If they kept it, there would have
‘o be substantial capital outlays of $5 million over the
nexi five years to break even. Under these circumstances,
by July the board must have realized that a sale of the
BAR at a price substantially below its carrying value
would be effected in the near future. A possible loss of
$13 million, moreover, would have a sufficiently drastic
impact on the financial position of BPC to justify dis-
closure even if the probability of a sale were less. The
district court found that a sale of the BAR at $5 million
would eliminate 36% of BPC’s retained earnings and 12%
of the shareholders’ book eguity.
In addition to the sales negotiations, there were other
circumstances indicating that the book value of the BAR
was obsolete and unrealistic. Since 1967, the management
of BPC had been trying to dispose of the BAR, originally
through a merger with another railroad. They apparently
realized that the BAR did not have a promising future.
The $5 million offer from Amoskeag was the only realistic
offer that BPC had received. This alone demonstrated that
the BAR was not worth anything close to $18.4 million.
BPC’s auditors reported on May 20 that a sale to Amos-
keag at that price would be reported as an extraordinary
loss of $13.5 million.
On the basis of these facts, the district court concluded
that the registration statement was “unintentionally in er-
ror” and that the omissions were “mere negligence”. It
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Court of Appeals Opinion on Liability
further concluded that the requisite scienter for a private
damage action had not been shown. We disagree.
The district court’s findings of fact, supported by sub-
stantial evidence, do not warrant the conclusions that
BPC’s officers had decided to sell the BAR before the
exchange offer became effective and had postponed con-
summation in order to avoid disclosure. Nor does the evi-
dence show that BPC failed to disclose the sales negotia-
tions in bad faith. As we have indicated above, however,
intent to defraud is not an indispensable element in a
private action for damages under the antifraud provisions
of the federal securities laws. Heit v. Weitzen, supra,
402 F.2d at 913-14. The securities laws impose upon an
offeror of an exchange offer a duty to act reasonably in
discovering facts material to the offer as of the time of
the transaction and in disclosing fully those materia! facts
of which the offeree is presumably unaware and which
ostensibly would influence his judgment. Cf. Kohler v.
Kohler Co., supra, 319 F.2d at 642. Corporate officers have
a reasonable area of discretion in determining how far to
explore the facts and in deciding what facts need to be
disclosed. So long as they operate within this area, the
securities laws do not impose liability. In order to en-
courage candor in the securities market, and well informed
decisions by investors, this discretion must be exercised
with caution.”
We believe that the officers of BPC greatly transgressed
their allowable area of discretion in not disclosing the BAR
negotiations and other circumstances reflecting the value
of the BAR. The officials in charge of the exchange offer
22 We do not hold that a corporation prima facie has acted unreasonably
if the omission or misstatement is material. Corporate officials must
be allowed considerable room for diseretion; otherwise their normal
functions as corporate officials will be inhibited. The totality of the
facts and circumstances must be examined to determine whether the
officials were reckless ur grossly negligent.
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Court of Appeals Opinion on Liability
were well aware of the discussions with Amoskeag and the
activities of the special BAR committee. They also were
aware of all the other circumstances that indicated that
the book value of the BAR was deceptive and unrealistic,
Their judgment not to reveal basic information about the
then current status of the BAR holdings clearly was un-
reasonabie. They showed reckless disregard for the im-
port of their activities concerning the BAR. They knew
that the book value of the BAR set forth in the registra-
tion statement was no longer realistic. Considering the
totality of the facts and circumstances, they failed to dis-
charge their clear duty of proper disclosure.
We hold that such conduct on the part of BPC and its
officers violated §14(e).
(d) First Boston And Its Officers
CCI’s claim that First Boston violated §14(e) is based
on its conduct in connection with the BPC exchange offer.
First Boston was the underwriter and dealer-manager for
the exchange offer. As such, it had ready access to the
books and records of BPC. It availed itself of this privi-
lege sufficiently to examine the minutes of the BPC board
meetings, including those of April 1 and May 21. Repre-
sentatives of First Boston did not see the letter of under-
standing between Hutchins and Dumaine. They did ques-
tion BPC’s management regarding the BAR and were
informed that there were no plans at the time to d’spose
of the railroad. That appears to have been the ful] extent
of First Boston’s investigation.
The federal securities laws impose upon private parties
the primary responsibility for verifying the accuracy and
completeness of information provided to potential in-
vestors. See HR Rep. No. 85, 73rd Cong., 1st Sess. 2-3
(1933). For this reason, Sec'ion 11 of the Securities Act
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Court of Appeals Opinion on Liability
of 1933, 15 U.S.C. §77k (1970), authorizes the purchaser
of a security to sue the underwriter and others involved
in the issuance of securities, if the registration statement
contains a misstatement or misleading omission of mate-
rial fact. A “due diligence” defense to such a suit is avail-
able toll but the issuer. Seetion 11(b), 15 U.S.C. 77k(b)
(1970), provides that a defendant can escape liability if he
ean prove that:
“he had, after reasonable investigation, reasonable
ground to believe and did believe, at the time such
part of the registration statement became effective,
that the statements therein were true and that there
was no omission to state a material fact required to be
stated therein or necessary to make the statements
therein not misleading.”
Section 11 of course provides a cause of action only for a
purchaser of securities issued pursuant to a registration
statement. We believe that 614(c) imposes liability upon
an underwriter in favor of a competing offeror, specifically
where the misrepresentation occurs in the context of a con-
test for control. An underwriter is liable under §14(e) as
an aider and abettor of the issuer if he was aware of a
material falsity in the registration statement or was reck-
less in deterraining whether material falsity existed. See
SEC v. North American Research & Development Corp., 424
F.2d 63, 81 (2 Cir. 1970); Ruder, Multiple Defendants in
Securities Law Fraud Cases: Aiding and Abetting, Con-
spiracy, In Pari Delicto, Indemnification, Contribution, 120
U. of Pa. L. Rev. 597, 620.46 (1972).
Section 14(@) provides that “[i]t shall be unlawful for
any person to make any untrue statement of a material
fact” or to mislead by omitting “to state any material
fact”. (Emphasis added). An underwriter or dealer-man-
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Court of Appeals Opinion on Liability
ager for a securities issue does not actually prepare the
registration materials. Thus, in a literal sense, it does not
“make” statements to potential investors. But we do not
read §14(e) so narrowly. An underwriter by participating
in an offering constructively represents that statements
made in the registration materials are complete and accu-
rate. The investing public properly relies upon the under-
writer to check the accuracy of the statements and the
soundness of the offer; when the underwriter does not
speak out, the investor reasonably assumes that there are
no undisclosed material deficiencies. The representations
in the registration statement are those of the underwriter
as much as they are those of the issuer.
Self-regulation is the mainspring of the federal securi-
ties laws. No greater reliance in our self-regulatory sys-
tem is placed on any single participant in the issuance of
securities than upon the underwriter. He is most heavily
relied upon to verify published materials because of his
expertise in appraising the securities issue and the issuer,
and because of his incentive to do so. He is familiar with
the process of investigating the business condition of a
company and possesses extensive resources for doing so.
Since he often has a financial stake in the issue, he has a
special motive thoroughly to investigate the issuer’s
strengths and weaknesses. Prospective investors look to
the underwriter—a fact well known to all concerned and
especially to the underwriter—to pass on the soundness
of the security and the correctness of the registration
statement and prospectus. See generally Note, Escott v.
Barchris: “Reasonable Investigation” and Prospectus Lia-
bility Under Section 11 of the Securities Act of 1933, 82
Harv. L. Rev. 908 (1969). The Senaie Report that accom-
panied proposed §14(e) indicates that this degree of in-
volvement by the underwriter in the making or opposing of
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Court of Appeals Opinion on Liability
a tender offer may subject him to liability if the registra-
tion materials are misleading:
“This provision would affirm the fact that persons
engaged in making or opposing tender offers or other-
wise seeking to influence the decision of investors or
the outcome of the tender offer are under an obliga-
tion to make full disclosure of material information
to those with whom they deal”. (Emphasis added).
S. Rep. No. 510, 90th Cong., 2d Sess. (1968), quoted in
U.S. Code Cong. & Admin. News 2811, 2821 (1968).
We turn now to a determination of whether First Boston
violated §14(e). Since we already have concluded that the
BPC registration statement and prospectus were materially
deficient, the remaining issue to be determined is First
Boston’s culpability. First Boston is a skilled, experienced
and well respected dealer-manager and underwriter. It had
an obligation with respect to the BPC exchange offer to
reach a careful, independent judgment based on facts
known to it as to the accuracy of the registration statement.
Moreover, if it was aware of facts that strongly suggested,
even though they did not conclusively show, that the regis-
tration materials were deceptive, it was duty-bound to
make a reasonable further investigation.
We hold that First Boston did not adequately perform
its duty in these respects. The minutes of the April 1 and
May 21 board meetings,** which were examined by the
23 In view of the critical bearing these minutes have upon the issue
of First Boston’s liability, we set forth the relevant portions.
The minutes of the BPC board meeting of April 1, 1969 included the
following reference to the BAR (Appendix 763):
“ORGANIZATION AND LONG RANGE PLANNING.
Mr. Salgo* stated that he wished to discuss with the Board
the general philosophy of the types of business in which Bangor
© Chairman of the Board.
A-52
Court of Appeals Opinion on Liability
underwriting department of First Boston, disclosed the
early discussions and negotiations concerning the disposi-
tion of the BAR. At the April 1 meeting, the board con-
sidered disposing of the BAR and appointed a committee
to study the alternatives. At the May 21 meeting, a pos-
Punta should be involved, and also share with the Board some
of the thoughts of management in this connection. He stated
that there had been under consideration for some time the question
of whether minority interests in some of the more attractive
operations, such as the Leisure Time and Public Security Groups,
should be spun off, but that he, Mr. Robertson and Mr. Wallace
are in unanimous agreement that this should not be done. Instead,
there have been discussions about the possibility of spinning off,
either in whole or in part, those companies where growth is not
developing as rapidly as it is throughout the remainder of the
Corporation. In particular, he stated that such discussions had
centered upon the Process Engineering Group, the Railroad and
the Textile Group. In this connection, he pointed out that the
Textile Group is a substantial contributor of cash even though
it is not in a growth area. Mr. Salgo stated that the earnings
of the Process Engineering Group are small and we need to
seriously consider whether this group could be sold to another
company. With respect to the Railroad, he stated that there is a
question as to whether it should eventually go into a larger rail-
road system.
Mr. Salgo further stated that it would be very helpful if a
committee from the Board of Directors could study the possible
divestiture of the Bangor and Aroostook Railroad resulting in
public ownership of it, either in whole or in part. He asked Mr.
Curtis M. Hutchins to serve as Chairman and Messrs. George H.
Seal and Robert G. Stone to serve as members of this Committee,
with Mr. W. Jerome Strout as an ex-officio member and advisor
to the Committee.”
The minutes of the BPC board meeting of May 21, 1969 referred to
the BAR as follows (Appendix 775-76) :
“BANGOR AND AROOSTOOK RAILROAD.
Mr. Curtis M. Hutchins, as Chairman of a special committee
appointed by Mr. Salgo at the Board of Directors meeting held
April 1, 1969 (Reference: BPC-4-1-69-28), reported that he and
Messrs. Robert G. Stone and George H. Seal (members of the
special committee) have just completed a study of the situation
with respect to the Bangor and Aroostook Railroad and wish to
submit to the Board their unanimous report through Mr. Hutchins.
Mr. Hutchins stated that there appears to be three possibilities
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Court of Appeals Opinion on Liability
sible sale to Amoskeag was discussed extensively. The
board showed considerable interest in the sale at the time
and gave the impression of strongly favoring it. These
ininutes, if not sufficient in themselves to lead a reasonable
person to believe that the registration statement was mis-
leading, certainly would have impelled a reasonable person
which could be adopted with respect to the future of the Railroad.
Bangor Punta might keep the Railroad as is, merge the Railroad
with another railroad if that were possible, or sell the Railroad
at the best possible price.
Mr. Hutchins stated that keeping the Railroad is not very ap-
pealing. He pointed out that because of the increased use of
trucks and the restricted nature of the territory involved, it is
doubtful that the traffic on the Railroad will increase. It appears
that if the Railroad is to break even over the next five years, it
will be necessary to spend substantial amounts of money for new
freight cars and other equipment. He also stated that in discussing
the situation with Mr. W. Jerome Strout, President of the Rail-
road, it appears that the amount of money to be expended might
be as much as $5,000,000, Under these circumstances, Mr. Hutchins
pointed out that it becomes more and more difficult to justify
retention of the Railroad.
Mr. Hutchins next discussed the second possibility, that is,
consolidating with another railroad. In this connection, he felt
that a combination with the Boston & Maine Railroad, if otherwise
possible, might result in Bangor Punta’s receiving a third to @
40% interest in a new company. The consideration, however,
would he in the form of securities rather than cash. Mr. Hutchins
did not feel that this would be a palatable solution.
Mr. Hutchins next considered the question of selling the Rail-
road and to whom it might be sold. He pointed out that neither
the Penn Central nor the Norfolk and Western Railroads have any
known interest in the Bangor and Aroostook Railroad and a merger
with either of these railroads is very unlikely. He stated that the
only person whom he knew who might be interested in the Railroad
is Mr. F. C. Dumaine, Jr., Chairman of Amoskeag Company.
Mr. Hutchins stated that he has had preliminary discussions with
Mr. Dumaine who had indicated that he might be willing to pay
$5,000,000. in cash, a combination of cash and Bangor Punta
securities, or Bangor Punta securities for the stock of the Bangor
and Aroostook Railroad owned by the Corporation. At this point,
Mr. Salgo asked whether it might be wise to offer to Mr. Dumaine
51% of the stock of the Bangor and Aroostook Railroad at book
value, with an option to purchase the remaining 49% at a higher
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Court of Appeals Opinion on Liability
to explore further. The only additional investigation by
First Boston was to question company officials about the
possible sale of the BAR. First Boston did not seek verifi-
cation of the officials’ answer that a sale was not anticipated
at that time. Cf. Escott v. Barchris, 283 F.Supp. 643, 697
(S.D.N.Y. 1968, MeLean, D.J.).** It did not make a more
careful search of BPC’s records, nor did it talk to officials
price, with a total consideration, therefore, of approximately
$7,000,000,
(At this point, Mr. Flick was called away from the meeting
and Mr. Wallace acted as Secretary for the remainder of the
meeting. )
Mr. Hutchins stated that, in bis opinion, Mr. Dumaine would
not agree to a price of $7,000,000., but that he probably would
be able to obtain tLe approval of the Board of Directors of
Amoskeag Company at a price of $5,000,000.
Mr. Hutchins stated that he is not asking for an approval by
the Corporation’s Board of Directors at this time, but only the
authority to continue discussions with Mr. Dumaine. He stated
that he wishes to first ascertain whether Amoskeag Company is
willing to submit a definitive proposal.
Mr. Salgo next suggested that he would like to have Mr. Dumaine
transfer to the Corporation 22,500 shares of Bangor Punta $1.25
Convertible Preference Stock as consideration for an option on
51% of the Railroad, the option to be for sixty days with the
provision that the stock would be forfeited if the option is not
exercised. In discussing Mr. Salgo’s proposal, Mr. Strout pointed
out that Mr. Dumaine also wishes to enter into an arrangement
with the Maine Central Railroad; he does not believe the Maine
Central Railroad will agree if such an agreement existed between
Amoskeag Company and Bangor Punta Corporation.
After considerable discussion, it was the consensus of the Board
that Mr. Hutchins should attempt to negotiate on the 49/51% basis
suggested by Mr. Salgo, but that he has the authority to negotiate on
the basis of a sale of 100% of the Bangor and Aroostook Railroad
subject to further investigation of accounting and tax ramifications
of such a transaction and approval by the Board of Directors or the
Executive Committee of the Board of Directors.”
24 The standard of reasonableness under $11 of the 1933 Act is that
of “a prudent man in the management of his own property”. 15 U.S.C.
¢77k(e) (1970). It is unnecessary for us to decide whether a reason-
ableness standard should be imposed under $14(e) since First Boston’s
conduct, in our view, went far beyond mere negligence.
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Court of Appeals Opinion on Liability
at Amoskeag after it discovered from the minutes that
Amoskeag was the likely buyer. Under these circumstances,
First Boston’s certification of the BPC registration state.
ment carrying the BAR at $18.4 million amounted to an
almost complete abdication of its responsibility to potential
investors, to CCI, and to others who relied upon it to detect
misrepresentations. We hold that First Boston possessed
enough information reasonably to deduce that the BPC
registration statement was materially inaccurate.
We hold that the conduct on the part of First Boston and
its officers violated §14(e).”
(3) Causation
One of the fundamental issues upon which we disagree
with the district court is that of causation.
The district court correctly pointed out that COL neither
bought nor sold Piper stock on the basis of the communica-
tions from the Piper management, the May 8 press release
or the BPC registration statement. The court concluded
that CCI was seeking damages as a “defeated contender
for control” without showing that “a single exchanging
Piper shareholder would have refrained from the exchange
and taken an offer for his shares from Chris-Craft instead
of that from Bangor Punta”. 337 F.Supp. at 1139. (em-
phasis that of district court). We hold that the district
court applied inappropriate causation principles and erred
in assessing the nature of CCI’s complaint.
25 We agree with the district court that there is no inerit to crs
other claims against First Boston, essentially that it was the chief
strategist for Piper and BPC in the contro) battle. The district court
found, based on substantial evidence, that in its capacity as investment
banker First Boston merely provided professional services to tuese
companies. The business decisions that led to violations of the securi-
ties laws were initiated by these companies, not by First Boston in its
role as investment banker. We are aware of no authority for holding
First Boston liable in that capacity.
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Court of Appeals Opinion on Liability
We agree with the district court’s findings that CCI
failed to show with reasonable certainty that it would have
obtained a controlling position in Piper had it not been for
the violations of the securities laws by BPC and First
Boston. On the other hand, it is equally clear that BPC
itself obtained control through its violations of the secu-
rities laws,
Since failure to disclose the BAR negotiations was a
material omission, the next question is whether such omis-
sion was relied upon. It is important to note that, since
the harmful effect of the negligence in this case did not
depend upon the exercise of volition by CCI, but instead
upon the exercise of volition by other persons, CCI need
not show that it relied upon the deception. CCI must show
that there was a misrepresentation upon which the target
corporation stockholders relied and that this was in fact
the cause of CCI’s injury. See Vine v. Beneficial Finance
Cu., 374 F.2d 627, 635 (2 Cir.), cert. denied, 389 U.S. 970
(1967).
We have held that reliance is established in a Rule 10b-5
action if the “‘misrepresentation is a substantial factor in
determining the course of conduct which results in [the
recipient’s) loss’”. List v. Fashion Park, Inc., 340 F.2d
457, 462 (2 Cir.), cert. denied, 382 U.S. 811 (1965). In
many instances, courts have applied a subjective test to
the reliance requirements, considering such factors as the
plaintiff’s general business expertise, Clement A. Evans &
Co. v. McAlpine, 434 F.2d 100, 104 (5 Cir. 1970), his famil-
iarity with the affairs of the corporation, Kohler v. Kohler
Co., 319 F.2d 634, 641-42 (7 Cir, 1963), and his access to
the information misrepresented, Hafner v. Forest Labora-
tories, Inc., 345 F.2d 167, 168 (2 Cir. 1965). See generally
Note, Reliance Under Rule 10b-5: Is the “Reasonable In-
vestor” Reasonable?, 72 Colum. L. Rev. 562 (1972).
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Court of Appeals Opinion on Liability
Where the transaction is accomplished through imper-
sonal dealings, such as on a stock exchange, or for some
other reason the factors that influenced the parties are
not readily apparent, the decisions have discussed liability
in terms of the “materiality” of the misrepresentation. See
Heit v. Weitzen, 402 F.2d 909, 913 (2 Cir. 1968), cert. de-
nied, 395 U.S. 903 (1969) ; List v. Fashion Park, Inc., supra,
340 F.2d at 462-64; Kahan v. Rosenstiel, 424 F.2d 161,
173-74 (3 Cir. 1970). This constructive reliance principle
is particularly appropriate in class actions where proof
of actual reliance by numerous class members would be
impracticable. Kahan v. Rosenstiel, supra.
The Supreme Court adopted this principle in Mille v.
Electric Auto-Lite Co., 396 U.S. 375 (1970). Mills was a
class action brought by shareholders under §14(a) of the
1934 Act, 15 U.S.C. §78n(a) (1970), complaining that proxy
solicitation material recommending a merger failed to dis-
close a conflict of interest. The proxy contest was won by
the alleged wrongdoers and they needed the votes of
minority shareholders to achieve the victory. The Court,
in an opinion by Mr. Justice Harlan, stated the causation
principle to be applied:
“Where there has been a finding of materiality, a share-
holder has made a sufficient showing of causal relation-
ship between the violation and the injury for which
he seeks redress if, as here, he proves that the proxy
solicitation itself, rather than the particular defect in
the solicitation materials, was an essential link in the
accomplishment of the transaction.” 396 U.S. at 385.
The Court established a presumption of reasonable reliance
in order to avoid an overly difficult burden of proof. This
was to encourage the vigorous enforcement of the securities
laws through shareholder suits, and to effectuate the con-
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Court of Appeals Opinion on Lnability
gressional purpose of enabling shareholders to make in-
formed decisions “by resolving doubts in favor of those the
statute is designed to protect”. Id.
The Supreme Court recently held that the Mills principle
is applicable to a Rule 10b-5 damage action. Affiliated Ute
Citizens v. United States, 406 U.S. 128 (1972). In Ute,
members of a large class of security holders had been
influenced to sell because of a failure to disclose. The
Court held:
“Under the circumstances of this case, involving pri-
marily a failure to disclose, positive proof of reliance
is not a prerequisite to recovery. All that is necessary
is that .he facts withheld be material in the sense that
a reasonable investor might have considered them im-
portant in the making of this decision .... This
obligation to disclose and this withholding of a mate-
rial fact establish the requisite element of causation
in fact.” 406 U.S. at 153-54.
Accord, Kohn v. American Metal Climaz, Inc., 458 F.2d 255,
288-91 (3 Cir. 1972).
The district court below acknowledged that in “a proper
ease” the Mills test is sound, but concluded that this was
not an appropriate case. It also held that §14(e) does not
in any way alter the result. 337 F.Supp. 1139-40. We
disagree.
The Mills-UVte test may be appropriately invoked, as
here, in the context of a suit under 414(e) by an offeror
against the target corporation and its allies. In such an
action, the claim, as here, usually will be that the offeror’s
opponents have defeated him or impaired his efforts by
misleading the target shareholders. H.K. Porter Co. v.
Nicholson File Co., supra, 4 CCH Fed.Sec.L.Rep. at 93,080-
81. Concentration upon such shareholders often is the
primary means of defeating the tender offer. Since the
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Court of Appeals Opinion on Liability
offeror usually is a sophisticated businessman, his op-
ponents rarely will be able to deceive him directly. As we
said in Crane Co. v. Westinghouse Air Brake Co., 419 F.2d
787, 796 (2 Cir. 1969), cert. denied, 400 U.S. $22 (1970):
“When [the offeror] entered the securities market with
its tender offer, it was entitled to the Act’s protection
not only against being deceived itself but also against
deception of the investing public designed to prevent
the public from entering into securities transactions.” *
In the instant case, the offeror was not directly deceived
but it was directly injured by defendants’ deception of the
Piper shareholders.
The fact that CCI was not directly deceived is what
makes application of the Mills-Ute test appropriate and es-
sential. It would be unduly burdensome to require an of-
feror to prove actual reliance when, as here, there are
numerous shareholders who undoubtedly possess a wide
range of expertise and knowledge. It would be impractical
to require CCI to prove that each individual Piper share-
holder who failed to trade for CCI’s stock, or who traded
for BPC’s stock, relied upon defendants’ misrepresenta-
tions in doing so. These impracticalities are avoided by
establishing a presumption of reliance where it is logical
to presume that reliance in fact existed. Kuhn v. American
Metal Climaz, Inc., supra, 458 F.2d at 288-91. As we have
stated above, (14(e) was designed to protect offerors from
26 In Crane, the offeror, Crane, made a tender offer for stock in Air
Prake, but was thwarted when an ally of Air Brake, Standard, made
heavy market purehases in Air Brake so as to manipulate its price.
We held that Crane was entitled to specified relief under Rule 10b-5
even though it had not established that its tender offer would have
been more generally aceepted if these violations had not been com-
mitted. The district court in the instant case distinguished Crane a3 a
decision where the “character of the violation and the clear causa]
nexus were erucial to the . . . result”. 337 F.Supp. at 1140. We do
not read Crane in such a restricted fashion.
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Court of Appeals Opinion on Liability
unfair and unlawful opposition. By “resolving doubts in
favor of those the statute is designed to protect”, Mills v.
Electric Auto-Lite Co., supra, ?96 U.S. at 385, we are im-
plementing congressional intent not only to protect in-
vestors, but to make sure that contests for control between
offerors and incumbent management, or other offerors,
shall proceed fairly.
In applying the Mills-Ute test to the instant action, we
presume that the Piper shareholders would not have ac-
cepted the BPC exchange offer but for the misrepresenta-
tions to which we have referred above. Even if we assume
arguendo that BPC’s offer was superior to that of CCI,
taking into account the BAR loss, we still must conclude
that BPC’s success was unlawfully attained. Piper share-
holders had a third option, i.e. to hold their shares, which
presumably they would have chosen if all the material facts
had been disclosed. Under the Mills-Ute test, we must pre-
sume that BPC’s offer was not so appealing, considering
the BAR loss, as to have attracted any takers. See Vine v.
Beneficial Finance Co., supra, 374 F.2d at 635. Since BPC
eventually acquired only about 51% of the outstanding
Piper shares, it is clear that the 7% acquired through its
exchange offer was critical to its success. Reliance and
causation have been shown.
What the securities law violations caused was a denial to
CCI of a fair opportunity to compete for control of Piper.
The specific injury sustained was a reduction in the value
of CCl’s Piper holdings upon BPC’s unfairly obtaining
control. CCI spent large sums of money in actively seeking
control. Its purchases were made in the reasonable belief
that its opponents would battle hard but within the law.
CCI is entitled to compensatory damages for the decline in
the value of the minority shareholder’s interest with which
it became encumbered as a result of competing against
those who violated the securities laws.
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Court of Appeals Opinion on Liability
Even if CCI had discovered, prior to purchasing some
of the shares that it now holds, that BPC was competing
unfairly, it was not required to mitigate damages by drop-
ping out of the contest. A victim of a securities fraud does
not have to elect between pursuing his goal in spite of the
unlawful tactics of his opponents and recovery of damages
for injuries sustained. Indeed, if CCI’s persistence in the
fight despite the violations had brought it victory, it would
not have sustained damages from being put in a minority
shareholder’s position.
The Piper femily’s violations also caused injury to CCI.
Piper contends that since CCI was not able and willing to
accept any more shares than it did accept as a result of
the cash tender offer, the January letters to shareholders
and the Grumman press release were harmless. The evi-
dence does not support this contention.
Since CCI had decided by the time of the cash tender of-
fer that its objective was to win control of Piper, it clearly
was willing to accept as many shares as it could obtain.
While it was ready to commit itself to purchase only 300,000
shares, that limitation does not indicate that it would not
accept a substantial number of additional shares if ten-
dered.*” Indeed, it expressly reserved the right to purchase
more than the 300,000 shares.’ And although Piper of-
fered some evidence indicat‘ng that CCI might have trouble
27 Mr. Gordon testified, when asked why CCI had committed itself to
purchase no more than 300,000 shares, that one reason was that “[wie
did not want .. . Piper to emphasize the fact that the financing for
the shares beyond 300,000 had not yet heen arranged—to emphasize
that successfully, because we knew we could arrange it, but we didn’t
have it at that time.”
27a Officers of CCI announced to the press that the tender offer was
successful. The Piper family would have us construe this announcement
as a concession that CCI did not expect or desire more from its cash
tender offer. As is well known, such statements in this context often
are made for the sake of appearance. We decline to ascribe to them
the interpretation suggested by the Piper family.
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Court of Appeals Opinion on Liability
financing additional purchases, it appears that such finane-
ing was available. Mr. Gordon testified that, before the
cash tender offer had expired, he had arranged with Burn-
ham & Co. to borrow ap to $22,000,000 if needed to purchase
shares in excess of 300,000. Moreover, the fact that CCI
bought only a few shares of Piper on the market after the
termination of its cash tender offer is of little probative
value. There are many possible explanations for this con-
sistent with CCI’s position that it would have purchased
additional shares pursuant to the cash tender offer. For
example, CCI might have been avoiding the expense of
searching out small blocks of shares and the high transac-
tional costs involved in purchasing them. We are satisfied
that CCT had a desire to purchase, and was capable of pur-
chasing, a substantial number of additional shares pursu-
ant to its tender offer.
The January letters to shareholders and the Grumman
press release misled the Piper shareholders into believing
that CCI’s tender offer was undesirable. CCI’s tender offer
could be fruitful only if Piper shareholders believed that
the price was currently a fair one and would remain so
for at Jeast a reasonable period in the future. The fairness
of the offer is demonstrated by the fact that, despite the
misrepresentations of the Piper family, over 300,000 shares
were tendered. Considering the soundness of the offer and
the materiality of the Piper family’s deceptions, it is a
reasonable presumption that CCI was unlawfully denied
the opportunity to purchase additional shares. See Crane
Co. v. Westinghouse Air Brake Co., supra, 419 F.2d at 797.
Moreover, these misleading statements most likely had a
continuing adverse effect ao, CCTs attempts to aequire
Piper shares. When Piper shareholders were deciding
whether or not to accept CCI’s exchange offer, many un-
doubtedly remembered and were influenced by the Piper
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Court of Appeals Opinion on Liability
family’s misleading January statements portraying CCI
as a company that made inadequate and unfair offers.
We hold that, considering the narrow margin of victory
here, the Piper family’s misstatements and omissions in
the January shareholder letters and the Grumman press
release denied to CCI a fair opportunity to win the contest
for control.
The June and July letters to Piper shareholders are a
different matter. Although they omitted any reference to
the arrangement between the Piper family and BPC
whereby the family might gain a considerable amount of
money if BPC were to be successful in gaining control of
Piper, CCI protected itself against injury from such omis-
sion by sending letters to all Piper shareholders on June 16
exposing this non-disclosure by the Piper family. The
nature of the Piper family’s persona! stake in the exchange
offer was fully described. We therefore conclude that this
omission was rendered harmless.
We hold that the record establishes that the injuries sus-
tained by CCI were caused by the violations of the secu-
rities laws by BPC and its named officers, First Boston
and its named officers and members of the Piper family.
(C) Viovations or Rute 10b-6 Unper 1934 Act
We turn now to CCI’s claim that BPC’s cash purchases
between May 14 and 23 of three large blocks of Piper stock
violuted Rule 10b-6 under the 1934 Act, 17 C.F.R. §240.10b-6
(1972), and that such purchases caused injury to CCI. We
hold that they did.
Rule 10b-6 prohibits bids for or purchases of a security
by or on behalf of the issuer of a security if the security
is “the subject of ... [a] distribution”. Included within
the prohibition are bids for or purchases of “any right to
purchase any such security”. Clearly here, Piper stock,
within the meaning of Rule 10b-6, was a “right to purchase”
BP C s.7ck.
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Court of Appeals Opinion on Liability
On May 14, BPC purchased 78,600 Piper shares from
Fund of Funds Proprietary Fund, Ltd. (FOF). On May 15,
it purchased an additional 20,000 Piper shares from Amer-
ican Securities Corporation, And between May 16 and 23,
it purchased an additional 21,600 Piper shares from Bay
Securities Corporation. Thus, during this 10 day period
and while its exchange offer for Piper shares was pending,
BPC made three block purchases of Piper stock totalling
120,200 shares.
In our earlier en bane decision, we held that these pur-
chases fell within the prohibition of the first sentence of
Rule 10b-6. Chris-Craft Industries, Inc. v. Bangor Punta
Corp., 426 F.2d 569, 576-77 (2 Cir. 1970). Our reasoning
was that such large purchases by BPC had a tendency
to boost the market value of Piper stock to an artificial
level. Since the purchases were made shortly after BPC
announced on May 8 that it would make an exchange offer,
reasonable investors were likely to have attributed the
increase in the price of Piper stock to the soundness of
BPC’s exchange offer. As a result, the operation of the
market would tend to raise the market price of the BPC
package to align it with the inflated Piper price. Rule
10b-€ was designed to prevent such manipulation of a
security which is “the subject of ... [a] distribution”. See
SEC v. Scott Taylor € Co., 183 F.Supp. 904, 907 (S.D.N.Y.
1959). We therefore concluded that Rule 10b-6 had been
violated but we remanded for a determination of whether
the exemption contained in Rule 19b.6(a)(3)(2) was ap-
plicable and what remedy, if any, was appropriate. 426
F.2d at 577.
On remand, BPC claimed the applicability of the exemp-
tion only with respect to its purchase from FOF on May 14.
The district court held that “[a] literal reading of the
exemption requires a finding that the [FOF] purchase,
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Court of Appeals Opinion on Liability
like the others, was not exempted”. 337 F.Supp. at 1141.
BPC does not contest this holding. The court concluded,
however, that these were “technical violation[s]” and that
there was not enough substance to them to support a find-
ing that CCI was damaged. Jd. at 1141-43. We disagree.
Since the violations constituted a manipulation of the
price of BPC, the question arises whether CCI is a proper
party to sue on this claim since it did not accept the BPC
exchange offer.** CCI’s contention is not that it was misled
by BPC’s purchases of Piper stock. It does contend that
Piper shareholders were misled into accepting the BPC
exchange offer because the Rule 10h-6 violations had a
tendency to inflate the market value, and that CCI, as
BPC’s rival for the Piper stock, was thereby injured. Cf.
Vine v. Beneficial Finance Co., 374 F.2d 627, 635 (2 Cir.),
cer’. denied, 389 U.S. 970 (1967). The SEC’s policy state-
ment of May 5 announced that purchases of stock of a
target company during the pendency of an exchange offer
are forbidden by Rule 10b-6 in order to promote fairness
in contests for control. We find nothing in the language
or history of Rule 10b-6 to suggest that only purchasers of
the manipulated stock are entitled to bring an action.” We
hold that CCI has a right of action to complain that BPC’s
Rule 10b-6 violation caused it injury.
The remaining question is whether BPC’s cash purchases
misled the Piper shareholders by artificially boosting the
market value of the BPC securities and, if so, whether this
deception was in fact the cause of the injury for which CCI
seeks redress. The district court held that, although the
28 The district court held that CCI had standing to sue on the Rule
10b-6 violation. 337 F.Supp. at 1133.
29 Rule 10b-6 does not contain the clause, “in connection with the
purchase or sale of any security”, which limits a cause of action
under Rule 10b-5. Birnbaum v. Newport Steel Corp., 193 F.2d 461
(2 Cir.), cert. denied, 343 U.S, 956 (1952).
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Court of Appeals Opinion on Liability
purchases were literally proscribed by Rule 10b-6 Piper
shareholders were not necessarily misled because ‘one y
other reasons, the purchases were not designed to aaaihlans
a stimulating effect, were not radiated into the general
market, and were not made through an exchange or saenien
broker-dealer, 337 F.Supp. at 1142-43. We hold that ae
the purchases were in violation of Rule 10b-G6 and wots not
exempt, CCI is entitled to recover damages from BPC
based on such violations. :
Fither the purchases were prohibited by the Rule or they
were not. If they were, as we have held. then prestmmptively
a stimulating effect was produced which misled the public
Rule 10b-6 was drafted by the SEC on the basis of its CO |
siderable expertise and familiarity with market mastawre
It determined that a purchase that meets all the erltorta
set forth in the Rule will have a false prodding effect on the
price of the distributed security and therefore should be
outlawed. On the basis of the facts pecsonted here i
refuse to second guess the wisdom and rationale of the
Rule. Cf. 17. Kook & Co. vy. Scheinman, Hochstin & Trott
Inc., 414 F.2d 93, 98 (2 Cir. 1969). Piper shareholders Ce
sumptively were deceived by a material alteration ir
value of the exchange package. They no doubt were "4
fluenced by this deception to take advantase of what a8 =A
to be a highly favorable BPC exchane: offer 1 oa
BPC’s unlawful eonduet denied CCT a fair chance t
compete for control of Piper. We exnnot sav that COT
would have obtained a majority of Piper sah had BPC
not violated the law, but it is a fact that BPC ot |
trol through its unlawful acts. T
30 CCT need not prove
aimed con-
ts May purchases of large
Peer 0 actual reliance by Piper sharcholders. Rule
ares a presumption that illegal purchases w
isihial santas ae dae ace HW] substantially
A reasonable investor j
’ ° , hi ; . ; ; ; ; - 2 ~ :
on on this inflation in deciding to accept the exchange ieee
Mills ©. Electric Auto-Lite Co., supra, 296 TS. at 385; Affl 7 oe
Citizens Vv. United States, supra, 406 U.S. at 153-54 on ee
—— te -eere re eer
-_ -o oe
A NS we
A-67
Court of Appeals Opinion on Liability
blocks of Piper stock operated in the market to make BPC’s
exchange offer deceptively attractive. Success on that offer
was necessary to achieve control. More important, the
unlawful purchases themselves constituted about 7% of
the outstanding shares of Piper. BPC eventually acquired
only 51%. Even arithmetically, it is apparent that the
block purchases in violation of Rule 10b-6 were essential
to achieve control. BPC’s attainment of a majority posi-
tion has caused CCI to suffer a decline in the value of its
Piper holdings.
We hold that CCI is entitled to recover damages from
BPC based on its violations of Rule 10b-6.
(D) Revier To Be Grantep For VioLaTions OF SEcTION
14(e) ano Rue 10b-6
Having held that all defendants violated Section 14(e)
and that BPC violated Rule 10b-6, we turn now to the form
of relief to which CCI is entitled.
Normally, the form of appropriate relief should be left
for determination by the district court upon remand, as
was done after consummation of mergers achieved as a
result of securities laws violations in Mills v. Electric Auto-
Lite Co.. 396 U.S. 375, 386-89 (1970); J. I. Case Co. v.
Borak, 377 U.S. 426, 433-35 (1964); Crane Co. v. Westing-
house Air Brake Co., 419 F.2d 787, 803-04 (2 Cir. 1969),
cert. denied, 400 U.S. 822 (1970).
In the instant case, however, we believe that it is in-
cumbent upon us to provide specific guidance to the district
court as to the form of relief to be granted upon remand.
There are several reasons for this. First, as indicated
above, the district court did not reach the issue of relief
to be granted, since it held that most of the alleged secu-
rities laws violations had not been proven, that those
proven had not caused injury to CCI and that CCT had
failed to prove its claim for damages. Second, under the
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Court of Appeals Opinion on Liability
posture of the case in the district court, CCI limited its
claim for relief to damages, but on appeal has pressed its
claim for equitable relief as well as damages. Third, this
litigation has been under way for more than three years,
with one appeal already having been decided en banc by
our Court. And, finally, certain of the questions presented
are of first impression, chiefly the application of the anti-
fraud provisions of the federal securities laws to a contest
for acquisition of a controlling stock interest in a target
corporation,
In short, the district court deserves guidance from this
Court on the form of relief to be granted. We therefore
order, upon remand and after appropriate opportunity has
been afforded to the parties to be heard on the issue of
relief, that the district court should grant at least the fol-
lowing relief:
(1) Damages
Piper has come under the dominance of BPC, with many
of its management positions being assumed by BPC ofi-
cers, It has been operated that way for two or three years.
Divestiture of the ill-gotten shares would not be appro-
priate under the circumstances of this case because it would
be difficult to administer and would unnecessarily reopen
the control battle. CCI understandably no longer desires
to take control of a company that has been substantially
changed. It seeks damages,
We have held that the unlawful conduct of the Piper
family,”’ of BPC and its named officers, and of First Boston
31 The Piper Aireraft Corporation itself was not a perpetrator of the
violations of the securities laws. The evidence shows that members of
the Piper family acted not on behalf of the corporation in committing
their illegal acts, but in their own individual interests. The district
court correctly characterized Piper as “the prize in the battle, not a
contender”. 337 F.Supp. at 1146. We agree that no liability is to be
imposed on the Piper Aircraft Corporation.
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Court of Appeals Opinion on Liability
and its named officers has caused financial loss to CCI for
which it should be compensated. The measure of damages
should be the reduction in the appraisal value of CCI’s
Piper holdings attributable to BPC’s taking a majority
position and reducing CCI to a minority position, and thus
being able to compel a merger at any time. Since the con-
duct of each of the defendants, through their violations of
the securities laws, contributed to the success of BPC’s
takeover attempt, a judgment should be entered assessing
damages against all defendants jointly and severally. See
Section 18(b) of the Securities Exchange Act of 1934,
15 U.S.C. §78r(b) (1970).
(2) Equitable Relief
We further hold that BPC should be denied the fruits of
obtaining Piper shares illegally. We therefore direct that
the district court include in its judgment an injunctive
provision barring BPC from voting for a period of at least
5 years the Piper shares it obtained through the unlawful
May cash purchases and those it obtained through its ex-
change offer.”
While we believe that the foregoing relief should be
sufficient, our direction that the two provisions indicated
above should be included in the judgment to be entered on
remand is not intended to foreclose the district court from
fashioning such additional appropriate relief as it may
find necessary to implement our decision herein, after af-
fording the parties an opportunity to be heard on the issue
of relief.
The judgment of the district court on the appeal in No.
72-1064 is reversed and the case is remanded.
32 This injunctive provision of course would not apply to those Piper
shares which are retransferred to former Piper shareholders who take
advantage of the rescission order referred to below.
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Court of Appeals Opinion on Liability
ITI.
BANGOR PUNTA CORPORATION v. CHRIS-CRAFT
INDUSTRIES, INC. ;
(NO. 72-1120)
In this second of three related appeals, BPC appeals
from the district court’s dismissal after trial, 337 F.Supp
1147 (S.D.N.Y. 1971), of BPC’s complaint which comatih
damages f rom CCI for alleged violations of the securities
laws during the contest for control of Piper, BPC’s prin-
es we being that, because of CCI’s wrongful acts,
°C paid more than it otherwis
quire conte a rwise would have paid to ac-
The complaint alleged violations of various provisions of
the securities laws, including violations of Sections 9(a) (2)
and 10(b) of the 1934 Act, 15 U.S.C, §$78i(a) and 78j(b)
(1970); of Rules 10b-5 and 10b-6 promulgated under the
We — ‘sae > :240.10b-5 and 240.10b-6 (1972); and
Section 17(a) of the Inves
3 UAC ee poms tment Company Act of 1940,
At the trial before Judge Pollack; BPC adduced no proof
specifically as plaintiff in the instant case, but instead
relied on the record in Chris-Craft Industries, Inc. v. Piper
Aircraft Corporation, et al. (No. 72-1064). After trial the
district court dismissed the complaint essentially my the
grounds that the winner in a contest for control is not en-
titled to seek damages against the loser for alleged viola-
tions of the securities laws, that whatever BPC paid for
control was attributable not to any alleged securities law
violations hy CCI but to BPC’s own determination to ob-
tain control, and that BPC had not supported with credible
evidence its contentions that CCI had violated the secu-
rities laws or that s rj j bond
neaae or that such violations had caused injury to
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Court of Appeals Opinion on Liability
Since we affirm the district court’s dismissal of the com-
plaint on the ground that BPC failed to adduce sufficient
evidence to prove that the securities laws were violated,
we do not reach the question whether BPC’s allegations
state a claim for relief under Rule 10b-5.
(A) Cuatm or ManrpuLation oF PRICES OF CCI Srocx
The gravamen of BPC’s claim is that CCI violated the
securities laws in an attempt to gain control of Piper, and
that these violations caused BPC to pay more for Piper
stock than it otherwise would have been required to pay.
BPC’s prime contention is that CCI acted in concert with
others unlawfully to inflate the market price of CCI stock
at the time of CCI’s exchange offer so that the offer would
be deceptively attractive. This alleged inflation of CCI’s
price is said to have had the secondary effect of driving
up the price of Piper stock.
To prove such price manipulation, BPC relies upon
inferences from a series of events. The relevant occur-
rences began in 1968 when Roger Spencer, a vice-president
of Mitchell, Hutchins & Co., Inc. (a brokerage firm with
close ties to several mutual funds), took an interest in ccl
as a possible investment for Mitchell, Hutchins’ clients.
Spencer conducted an investigation of CCI that included
several conversations with Herbert Siegel, President of
CCI. Spencer subsequently recommended to several of his
clients that CCI would be a sound investment. Several of
these funds—Technology Fund, Inc. (Tech Fund), In-
vestors Diversified Services, Inc. (IDS), Newton Fund,
Inc. and Commonwealth Edison Pension Fund, Inc.—
eventually were involved in the purchase of CCI stock.
IDS is a manager of a complex of mutual funds. Two of
its managed funds, Investors Mutual, Inc. and Investors
Stock, Inc., purchased 28,300 shares of ICC common in the
period January 14-23, 1969. Another purchase of 53,900
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Court of Appeals Opinion on Liability
shares was made on January 24 and 25. By January 3i,
the two funds had acquired 94,600 common and 24,700 of
$1.40 preferred; another IDS fund had purchased 9000
common,
Tech Fund, a registered investment company, not only
purchased many shares of CCI stock, but also, as discussed
above in our opinion in No. 72-1064, sold 1U1,100 shares of
Piper to CCI on January 22 at $65 per share. On the same
day that the Piper sale was completed, Tech Fund ap-
parently decided to acquire 50,000 shares of CCI common
and 10,000 shares of CCI preferred. These purchases were
made between January 23 and February 25.
About this time, several other organizations also began
making purchases of CCI stock in large amounts. American
Investors Fund, Inc. (AIF) bought 22,500 common and
$78,000 of 6% convertible debentures on four trading days
beginning February 7. Keystone Custodian Services, Inc.
(Keystone), fund managers, recommended that its Polaris
and S-4 Funds buy CCI stock. The two funds purchased
130,000 shares of CCI common between January 20 and
April 26. Between January 14 and February 25, these four
organizations acquired 17% of CCI’s outstanding common
stock. These large purchases significantly contributed to
a rise in the price of CCI common from 40 on January 13
to 551, on February 11, an increase of 45% over the aver-
age price during the preceding six weeks,
BPC maintains that these heavy market purchases by
the funds were instigated by CCI through agreements and
oy providing inside information abouts its bids for Piper.
Mitchell, Hutchins allegedly was the intermediarv in this
scheme. BPC’s evidence of “agreements” clearly is insuf-
ficient. It contends that Tech Fund agreed to purchase
CCT stock in return for CCI’s buving Tech Fund’s Piper
holdings at a “premium price”. This is pure surmise. There
is no evidence of an actual agreement to that effect or that
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Court of Appeals Opinion on Liability
the parties even discussed such an agreement. The price
paid for the Piper stock, $65, was not a “premium” price
since the next day CCI announced a large cash tender offer
at the same price. IDS allegedly made purchases because
it was a principal holder of CCI senior notes and there-
fore had an interest in the success of CCI’s takeover at-
tempt. This interest is not sufficient proof that IDS wil-
fully manipulated the price of CCI stock.
BPC also has failed to show that CCI gave illegal insider
tips to spur market purchases of its stock. CCI did make
known that it was planning to make acquisitions in the
leisure-time field but this was a well publicized intention.”
Indeed, most of the funds’ purchases were made after CCI
announced its tender offer. Any well informed investor by
then would have known CCI’s plans. It is evident that the
funds purchased CCI heavily because their customary
sources of information, such as Mitchell, Hutchins, revealed
that CCI’s acquisition of a company such as Piper probably
would increase the value of CCI stock. It was a reason-
able investment decision on their part, induced not by a
desire to inflate artificially the value of CCI stock but by
the prospect of gain. As we indicate below, these invest-
ments proved to be ill-advised and of little benefit to CCI
or the funds. We cannot conclude on the basis of such
evidence that the district court’s findings were clearly
erroneous.
BPC further contends that a manipulative intent is
shown by the timing of the funds in disposing of their
CCI holdings. CCI stock decreased in value substantially
in the spring and summer of 1969, along with the general
market decline. One of the three IDS funds sold its entire
33 As we stated above in our opinion in No. 72-1064, CCI had sought
financing in late 1968 by selling $26 million in debentures for the
express purpose of making acquisitions in the leisure-time field. CCI
also had made substantial investments in Warner Bros. and Harley-
Davidson before purchasing Piper shares.
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Court of Appeals Opinion on Liability
9000 shares in March because of CCI’s difficulties with the
Piper takeover. The other two IDS funds retained their
CCI investments and sustained book losses of more than
$4,600,000. Tech Fund, after selling 1600 of its shares
on March 28, decided on April 1 to sell out its entire posi-
tion. It accomplished this total disposal by selling gradu-
ally through July 7. It sustained a $691,000 loss on an
investment of $3 million. AIF sold out completely between
April 30 and May 20. The Keystone funds retained their
holdings until August 1 and disposed of their entire posi-
tion within the month, incurring a $3,625,048 loss on a
$6,447,579 investment. These funds sustained a total loss
of about $9,000,000 on their investments in CCI.
BPC argues that the funds did not immediately dispose
of their CCI stock in a declining market because they
intended to keep CCI’s stock prices at an unlawfully in-
flated level. There is no discernible pattern in the sales
that supports such a conclusion. It may be that one of
the considerations which influenced the decisions of these
investors was concern for the success of CCI’s exchange
offer. But, even if so, the record does not establish that it
was the sole or even dominant consideration. It is ap-
parent that each investor took the course of action that it
believed would minimize its losses. Some were erroneously
optimistic and anticipated that CCI would be successful in
its quest for control of Piper. But most sold out early. A
major portion of the shares was sold before and during the
CCI exchange offer, thus impairing rather than promoting
its suecess. We conclude that the district court was not
clearly erroneous in refusing to find either a scheme to
boost the price of CCI stock or a purpose on the part of
CCI and the funds to manipulate the market in CCI shares.
Moreover, the facts as found by the district court, which
are based on substantial evidence, do not establish that
an unlawful market manipulation occurred. BPC’s reliance
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Court of Appeals Opinion on Liability
upon Crane Co. v. Westinghouse Air Brake Co., 419 F.2d
787 (2 Cir. 1969), cert. denied, 400 U.S. 822 (1970), is
misplaced. There, Crane sought to take over Air Brake
by a cash tender offer. Air Brake enlisted the aid of
Standard to oppose the takeover. One of the means selected
by Standard to achieve this objective was manipulation
of Air Brake stock. On the last effective date of the
tender offer, Standard, through a series of transactions,
purchased on the market an extremely large number of
shares at a price above the then market price, while at the
same time secretly arranging for others to purchase at a
much lower price many of the shares it had acquired. It
was manifest from the secret deals and the intentional loss
taken by Standard that it. deliberately maneuvered the
market price of Air Brake stock in order to defeat Crane’s
tender offer.
In the instant case, unlike Crane, the requisite purpose
and wilfullness for a market manipulation claim cannot
be inferred from the established facts. BPC places unwar-
ranted reliance on circumstantial evidence. The funds
bought CCI shares because they believed that it was a wise
investment. The securities laws do not proscribe all buying
or selling which tends to raise or lower the price of a
security. The securities laws are designed to create “in-
vestors markets where prices may be established by the
free and honest balancing of investment demand with in-
vestment supply.” H.R. Rep. No. 1583, 73 Cong., 2d Sess.
11 (1934). So long as the investor’s motive in buying or
selling a security is not to create an artificial demand for,
or supply of, the security, illegal market manipulation 1s
not established. See Section 9(a)(2) of the 1934 Act, 15
U.S.C. ‘78i(a) (1970).
We hold that BPC failed to prove that the funds acted
from improper motive, that CCI encouraged them to do
so or that unlawful market manipulation in fact occurred.
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Court of Appeals Opinion on Liability
(B) Cxaim or Itteca, WarEHOoUsING
BPC claims that, at the direction of CCI, Tech Fund
instructed its affiliates to purchase and illegally “ware-
house” Piper stock which these affiliates later tendered to
CCI.
BPC bases this claim on the following facts. After CCI
announced its exchange offer, it continued to purchase
Piper shares on the market. On April 7, the SEC warned
CCI that these purchases violated Rule 10b-6. CCI heeded
this warning and ceased making purchases. On April 17
and 18, Tech Fund ordered two of its affiliates to start
buying Piper stock. They acquired 14,700 shares by April
25. Of this total, 9,900 shares were tendered on June 5 to
CCI pursuant to its exchange offer.
BPC argues that Tech Fund purchased these securities
at the encouragement of Spencer of Mitchell, Hutchins,
who supposedly acted under instructions from CCI. Tech
Fund evidently did purchase the stocks because it hoped
to take advantage of a favorable CCI exchange offer.
Tech Fund also apparently relied at least in part upon
the representations of Spencer. The record, however, does
not support BPC’s assertion that CCI arranged this pur-
chase by Tech Fund or that it made promises of value to
Tech Fund with regard to its exchange offer.
We hold that the district court was not clearly erroneous
in rejecting BPC’s claim of illegal warehousing.
We have considered BPC’s other claims on this appeal,
such as CCI’s alleged violation of Section 17(a)(2) of
the Investment Company Act of 1940, 15 U.S.C. *80a-17(a)
(2)(1970), and have concluded that they are without merit.
The judgment of the district court on the appeal in No.
72-1120 is affirmed.
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Court of Appeals Opinion on Liability
IV.
SEC v. BANGOR PUNTA CORPORATION
(NOS. 72-1053 and 72-1140)
These are cross-appeals from a judgment entered Novem-
ber 17, 1971 after trial on the merits. 331 F.Supp. 1154
(S.D.N.Y. 1971). The SEC appeals from those provisions
of the judgment which denied a permanent injunction
against further violations of the securities laws and which
imposed a condition upon BPC’s rescission offer to former
Piper shareholders. BPC cross-appeals from those pro-
visions of the judgment which found BPC to have violated
the securities laws and which ordered BPC to offer rescis-
sion to former Piper shareholders.
The SEC brought this action pursuant to Sections 20(b)
and 22(a) of the 1933 Act, 15 U.S.C. 4$77t(b) and 77v(a)
(1970), and Sections 21(e) and 27 of the 1934 Act, 15
U.S.C. $478u(e) and 78aa (1970). The complaint alleged
that BPC’s registration statement and prospectus for its
Piper exchange offer violated the registration statement
and prospectus requirement provisions of Sections 7 and
10(a) of the 1933 Act, 15 U.S.C. 4477g and 77j(a) (1970);
and the antifraud provisions of both acts, Section 17(a)
of the 1933 Act. 15 U.S.C. §77q(a) (1970), Section 10(b)
of the 1934 Act, 15 U.S.C. §78j(b) (1970), and Rule 10b-5
promulgated under the 1934 Act, 17 C.F.R. 4$240.10b-5
(1972).
After trial of this action at the same time as the other
two actions (the subject of the appeals in Nos. 72-1064
and 72-1120), the district court concluded
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