# Appendix — Piper v. Chris-Craft Industries, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0990%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1977 - **Citation:** 430 U.S. 1 ## Text 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. 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 A-29 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. A-30 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 A-31 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 A-37 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 A-38 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. A-39 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.” A-40 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 A-42 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”. A-43 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. A-44 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. A-45 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 A-46 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 A-47 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. A-48 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 AA9 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- A-50 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 A-51 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 A-53 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 A-54 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. A-55 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. A-56 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). A-57 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- A-58 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 A-59 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. A-60 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. A-61 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. A-62 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 A-63 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. A-64 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, A-65 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). A-66 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 A-68 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. A-69 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. A-70 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 A-71 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 A-72 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 A-73 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. A-74 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 A-75 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. A-76 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. A-77 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 that BPC had violated the securities laws, including the antifraud pro- visions of the 1933 and 1934 Acts. The court ordered that BPC offer rescission to all former Piper shareholders who had accepted BPC’s exchange offer, subject to a condition which we shall discuss below. The court denied the SEC’s A-78 Court of Appeals Opinion on Liability request that BPC be permanently enjoined from further violations of the securities laws. On the SEC's appeal, to the extent the judgment is appealed from, we affirm in part, and reverse and remand in part. On BPC’s cross-appeal, we affirm. (A) Insuncrive ReEvier The district court concluded that, although BPC had violated the securities laws in disseminating a materially misleading registration statement and prospectus for a securities exchange offer, nevertheless “the Commission has failed to carry its burden to establish, with persuasive evidence, that Bangor-Punta, its officers, directors and employees have a propensity or natural inclination to violate the securities law.” (emphasis added.) Accordingly, the court denied a permanent injunction against further violations. 331 F.Supp. at 1163. I disagree.** Based upon the SEC"’s stautory responsibility under the 19323 and 1934 Acts®® to seek a permanent injunction “(wlhenever it shall appear to the Commission that any person is engaged or about to engage in any acts or prac- tices which constitute er will constitute a violation” of the provisions of such Acts or any rule or regulation promul- gated thereunder, I believe that the district court erred in denying a permanent inJunction and I emphatically dissent from the opinion of Judge Gurfein affirming the denial of -_—-- 34 On this iesue—the district court’s denial of injunctive relief in the SEC's enforcement aection—I would reverse the district court and remand with directions that it issue an injunction against further violations of the securities laws by Bangor Punta, its officers, directors and employees. But my opinion on this issue, I regret to say, has ererged as the minority view. The majority view is set forth in Judge Gurfein’s separate opinion at pages 4991, 4966 infra. 35 Section 20°) of the 1923 Act, 15 U.S.C. §77t(b) (1970); Seetion fife, of the 1934 Act, 15 U.S.C. $78ule) (1970). A-79 Court of Appeals Opinion on Liability such injunction. The grounds of my dissent are as follows.** (1) Erroneous Standard First, the district court applied an erroneous standard in determining whether a permanent injunction should issue. ‘he court held, as stated above, that the SEC had failed to show that “Bangor Punta, its officers, directors and employees have a propensity or natural inclination to violate the securities law.” (emphasis added), It uniformly has been held that the correct standard is “whether there 36 As to one finding of the district court with respect to which the SEC challenges the denial of an injunction, although the issue is a very close one, I am inclined to agree with my colleagues that the district court's finding of fact should not be set aside as clearly erroneous, Fed. R. Civ. P. 52(a); Heyman v. A. R. Winarick, Inc., 325 F.2d 584, 589 (2 Cir. 1963). The SEC contends that the court erred in refusing to find that RPC had decided by the carly summer of 1969 to sell its BAR holdings to Amoskeag for $5 million and chose deliberately to postpone effectuat- ing the sale in order to avoid recording and disclosing a loss of $13 million. Upon reviewing the entire evidence with respect to this aspect of the matter, howeve:, I agree that we are not “left with the definite and firm conviction that a mistake has been committed.” United States v. United States Gypsum Co., 333 U.S, 364, 395 (1948). The SEC relies heavily upon the testimony of Dumaine to estabiish that a deal had been made prior to the close of the Piper exchange offer. The district court, which observed the demeanor of the witness, concluded that his testi- mony was not worthy of belief. On such a determination, I agree that we should not substitute our views for those of the trial judge who heard and saw the witness. Nor do I believe that we should find unreasonable the court's inferences drawn from undisputed evidence that BPC’s delay in consummating the deal resulted from a prudent business decision to ascertain, through a complete investigation of legal and accounting ramifications before closing the deal, the precise impact of the sale. Since the issue on this point is very close, T could well be wrong and the SEC may be correct in urging that the district court's finding was clearly erroneous, Nevertheless, for the reasons stated above, prefer to resolve any doubt on this point in favor of the correctness of the distriet court's finding —especially in view of the more persuasive reasons set forth below which in my opinion demand reversal of the district court’s denial of an injunction, A-80 Court of Appeals Opinion on Liability is a reasonable likelihood that the wrong will be repeated”, SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1100 (2 Cir. 1972).*" See United Siates v. W. T. Grant Co., 345 U.S. 629, 633 (1953); SEC v. Culpepper, 270 F.2d 241, 249 (2 Cir. 1959). There is a meaningful difference be- tween the standards of “propensity or natural inclination to violate” and “reasonable likelihood that the wrong will be repeated”. The district court’s failure to perceive this difference and my colleagues’ sanctioning the application of an erroneous standard cuts to the core of the error com- mitted. This leads to the second ground of my dissent. (2) Requirement of Intent Second, in sanctioning a standard of “propensity or natural inclination to violate the securities laws”, my col- leagues have engrafted upon the standard required for an injunction in an SEC enforcement action a requirement not 37 In SEC v. Manor Nursing Centers, Inc., supra, we expressly rejected appellants’ contention that “the SEC must show more than a reasonable likelihood of future violations. ... [A]ppellants must be shown to have a propensity or natural inclination to violate the securities laws.” 458 F.2d at 1101. In Manor Nursing, referring to the district court’s opinion below in the instant case, we assumed that “it was not purporting to apply a new standard for the issuance of an injunction” in view of the court’s reliance upon our decision in SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301 (2 Cir.), cert. denied, 404 U.S. 1005 (1971). 458 F.2a at 1101. Since the author of the present opinion also was the author of Manor Nursing, I can state unequivocally that the Manor Nursing court was totally unfamiliar with the record in the instant case, other than the district court’s opinion reported at 331 F.Supp. 1154; and of course, as with Judge Pollack when he denied the permanent in- junction in the instant case, we did not know at the time of our decision in Manor Nursing that the conduct of Bangor Punta here ultimately would be held, as we now hold, to constitute serious viola- tions of the wntifraud provisions of the federal securities laws-— including such conduct as recklessly failing to disclose in its registration statement and prospectus the true value of the BAR: hardly a minor omission, but a $13 million one. A-81 Court of Appeals Opinion on Liability required by Congress, by the Supreme Court or by our Court (prior to today’s decision), namely, a purposeful violation of the securitics laws and a showing of intent. In Judge Gurfein’s words (p. 4994 infra), “In the last anal- ysis we are dealing with intent... .” (emphasis added). I disagree. To impose upon the SEC the burden of showing evil motive or intent to violate the securities laws as a condition to obtaining an injunction against further violations would be tantamount to converting a civil injunction enforcement proceeding into a criminal prosecution. As the Supreme Court said in reversing our Court in SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963) :** “This, of course, is but another way of putting the re- jected argument that the elements of technical common-law fraud—particularly intent—must be es- tablished before an injunction requiring disclosure may be ordered. It is the practice itself, however, with its potential for abuse, which ‘operates as a fraud or deceit’ within the meaning of the Act when relevant information is suppressed. ... Failure to disclose ma- terial facts must be deemed fraud or deceit within its intended meaning, for, as the experience of the 1920's and 1930’s amply reveals, the darkness and ignorance of commercial secrecy are the conditions upon which 38 Capital Gains involved the showing the SEC was required to make in order to obtain an injunction compelling disclosure under the Invest- ment Advisers Act of 1940. The Court held that “Congress, in em- powering the courts to enjoin any practice which operates ‘as a fraud or deecit’. . . did not intend to require proof of intent to injure... . Congress intended [the Act] to be construed like other securities legislation ‘enacted for the purpose of avoiding frauds,’ not technically and restrictively, but flexibly to effectuate its remedial purposes.” 375 U.S. at 195. This applies a fortiori to the remedial injunctive provisious of the 1933 and 1934 Acts pursuant to which the SEC brought the instant injunction action. See note 35 supra. A-82 Court of Appeals Opinion on Liability predatory practices best thrive. To impose upon the Securities and Exchange Commission the burden of showing deliberate dishonesty as a condition prece- dent to protecting investors through the prophylaxis of disclosure would effectively nullify the protective purposes of the statute.” 375 U.S. at 200. The absence of any such requirement of intent for an injunction under Section 20(b) of the 1933 Act or Section 21(e) of the 1934 Act is borne out by the provision in each section, immediately following the authorization for the SEC to seek an injunction, empowering “[t]he Commis- sion [to] transmit such evidence as may be available con- cerning such acts or practices to the Attorney General who may, in his discretion, institute the necessary criminal proceedings. . . .” 15 U.S.C. 4477t(b) and 78u(e) (1970). In short, Congress itself has made separate provision for the SEC to institute civil injunction proceedings on the one hand, and to submit criminal reference reports to the Attorney General on the other hand; a showing of intent clearly is required for the latter, and equally clearly not required for the former. (3) Injunction to Protect Public Interest Third, the district court totally failed to recognize that an injunction in an SEC enforcement proceeding is sought to protect public rather than private interests. Doubts as to whether an injunction sought in such a proceeding is necessary to safeguard the public interest should be re- solved in favor of granting the injunction. See United States v. First National City Bank, 379 U.S. 378, 383 (1965) ; Mitchell v. Pidcock, 299 F.2d 281, 287 (5 Cir. 1962) As Judge Smith recently observed, there is a vital Satie: tion between the function of a district court in deter- mining whether to issue an injunction in an action between A-83 Court of Appeals Opinion on Liability two private litigants and its function in an action by a government agency seeking an injunction to enforce an Act of Congress: “But the function of a court [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0990%3A02. Public record. Not legal advice.