# Amicus Brief — Piper v. Chris-Craft Industries, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Brief
- **Published:** January 1, 1977
- **Citation:** 430 U.S. 1

## Text

“ Suoreme Coart, U. & |

FILED

C

SEP 3 1976

Ju the Suyrreme Court of the Unite Seeee

OCTOBER TERM, 1976

S. 79-353, 75-354, and 75-355

HOWARD PIPER, ET AL., PETITIONERS
U-

CHRIS-CRAFT INDUSTRIES, INC., ET AL.

THE First Boston CORPORATION, PETITIONER
v.

CHRIS-CRAFT INDUSTRIES, INC., ET AL.

BANGOR PUNTA CORPORATION, ET AL., PETITIONERS

Uv.

CHRIS-CRAFT INDUSTRIES, INC., ET AL.

ON WRITS OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF FOR THE SECURITIES AND EXCHANGE
COMMISSION AS AMICUS CURIAE

Haagvey L. Pit,
General Counsel,
DAVID FERBER, RALPH C. FERRARA,
Solicitor, Special Counsel,

Securities and Exchan ge Commission,
Washington, D.C. 20549.

ANDREW M. KLEIN,
Special Counsel,

JACOB H. STILLMAN,
Assistant General Counsel,

EGON GUTTMAN,”
Attorney Fellow,

IRVING H. PICARD,
Assistant General Counsel,

LEWIS H. MENDELSON,
Special Counsel,

JAMES H. SCHRoprP,
Special Counsel,

KENNETH T. SPIRER,
Special Counsel,

RicnarD T. SHAR?,
SAMMY S. KNIGHT,
FRANK A. WILSON,
SUE AUERBACH,
JOHN P. SWEENEY,
VERNON I. ZVOLEFF,
Attorneys,

Securities and Exchange Commission,
Washington, D.C. 20549 **

* Professor Guttman is a member of the Middle Temple,
Barrister at Law.

“* Richard Weingarten, a May, 1976, graduate of the
Antioch School of Law, Linda W. Jarrett, a May, 1976,
graduate of the Georgetown University Law Center, and
Catherine Scanlon, a third year student at the American
University Washington College of Law, also assisted in the
preparation of this brief.

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TABLE OF CONTENTS

Page
i clea allah caer IV
QUESTIONS ADDRESSED ....................cccc--0---2.--22------- 2
INTEREST OF THE SECURITIES AND EX-
MOUS GORI cccciccctnccccscnccenencncnnsnnnsnenscsnnnnen 3
I i aeeeiinaeeiibnientl 3
SUMMARY OF DISCUSSION ..................22--2222222-2-2-------- 5
I i tae 20
I. IN ADOPTING THE WILLIAMS ACT IN
1968, CONGRESS INTENDED TO PROVIDE
A COMPREHENSIVE SCHEME OF FEDER-
AL REGULATION FOR ALL TENDER OF-
FERS, AND TO CREATE FEDERAL RIGHTS
FOR, AND OBLIGATIONS UPON, ALL PER-
SONS PARTICIPATING IN, OR DIRECTLY
AFFECTED BY, CASH AND EXCHANGE
I re 20
A. The Dynamics of Tender Offers: The Contest
TT TIIIIIIITT ninicciciedeesandamestoiathneeiaadiiaemeeniasetnbebwaieiinienes 22
1. The emergence of the tender offer ............. 22
REISER See ara 27
EELS ae eecons ee 27
I 31
Sa i 35
d. The dealer-manager .............................. 38

B. Prior to the Adoption of the Williams Act,
Tender Offers Were Virtually Unregulated,
in Contrast to the Comprehensive Federal
Regulation of Proxies and Proxy Contests.... 42

C. Regulation of Tender Offers Was Needed
Because Significant Abuses Had Developed.. 48

DISCUSSION—Continued

Il.

D. In Passing the Williams Act, Congress In-
tended to Fill the Regulatory Gap by Enact-
ing a Comprehensive Scheme of Regulation
Comparable to That Which Governed Proxy
TEI , Seitenende 8, 42, 49, 59, 73, 88, 138
S. Rep. No. 47, 73d Cong., Ist Sess. (1983) .... 75
S. Rep. No. 792, 73d Cong., 2d Sess. (1934) ....18, 164,
170-171

S. Rep. No. 1455, 73d Cong., 2d Sess. (1934).. 6, 48,
83, 109, 164, 167-168, 172, 192

S. Rep. No. 550, 90th Cong., Ist Sess. (1967).. 8, 42,
49, 59, 73, 88, 99, 1388, 155

Debates:
111 Cong. Rec. 28257-28259 (1965) ..0000000..... 55, 56
112 Cong. Rec. 19003-19007 (1966) ....... 10, et passim
113 Cong. Rec. 854-857 (1967) ......... 57, 60, 67, 68-70
113 Cong. Rec. 93840 (1967) 0.0.00. 85

Gait etic a

XIX
Legislative Material—Continued Page
113 Cong. Rec. 24664 (1967) ....................... 53, 84-85
116 Cong. Rec. 29252 (1970) .....2.22-....cccceceeeeee 24

Documents:

Securities and Exchange Commission, 37th

Annual Report (1971) ................---cccc--seeeeeees 25
Securities and Exchange Commission, 41st
Annual Report (1975) ............. 25

Report of the Securities and Exchange Com-
mission, Institutional Investor Study, H.R.
Doc. No. 92-64, 92d Cong., Ist Sess.
(1971)... sisues~anbibiieiidienainteenainnaemamsinaamindil 32, 185

Securities and Exchange Commission, Report
on Proposals for Amendments of the Se-
curities Act of 1933 and the Securities
Exchange Act of 1934, Comm. Print, 77th
Sn, BD TU GID Mundheim, et al., ed., Sizth Annual Institute on Securities
Regulation 83 (P.L.I., 1975).

*° Troubh, supra, 54 Harv. Bus. Rev. at 84.
™? Ibid.

39

and the fees to be paid the solicting dealers.” Un-
like underwriters of securities offerings, the dealer-
manager’s obligation does not encompass personal
buying and selling; rather it relates primarily to
structuring the deal, soliciting stockholders, and or-
ganizing other broker-dealers to solicit tenders.

Because the dealer-manager is part of the pre-
tender offer planning process, he has access to privi-
leged inside information and, therefore, may not par-
ticipate in the market prior to the announcement.”
After the announcement, he also acts as an agent for
the offeror and must, therefore, limit his purchases
to that contained in the tender offer.”

The dealer-manager’s fee may be a flat sum or a
“»er-share”’ commission or a flat sum and an “over-
ride” fee on each share tendered. If the dealer-
manager acts as a soliciting dealer,’ he will be paid
additionally for each share he personally solicits.”

78 Id., at 79-87.

7 Cf., Securities and Exchange Commission Vv. Healy, 74
C-4305 (S.D. N.Y., 1974), SEC Litigation Rel. No. 6589 (Nov.
18, 1974; Securities and Exchange Commission Vv. Sorg
Printing Co., CCH Fed. Sec. L. Rep. { 95,034 (S.D. N.Y.,
1975).

8° See 17 CFR 240.10b-13.

*! The soliciting dealer is a broker-dealer who is paid a fee
for each share of stock he induces investors to tender.

*2 “The fee to soliciting brokers generally approximates 2%
of the purchase price of the tendered stock or 125% to 175%
of a New York Stock Exchange commission on an equivalent
Big Board Transaction.” Troubh, supra, 54 Harv. Bus. Rev.
at 86.

40

In addition to its fee, the typical agreement between
the offeror and the dealer-manager contains a pro-
vision for reimbursement of the dealer-manager’s ex-
penses—including indemnification for any liability
connected with the offer.“* Unlike underwriters,
whose fees are usually based on the number of se-
curities to be issued and, in a firm commitment un-
derwriting, purchased by him, a dealer-manager is
often compensated quite handsomely even though he
neither assures the success of the offer nor assumes
the risks of a purchaser.“

The dealer-manager may, in the accomplishment
of his goal, assume some of the characteristics of a
mere underwriter, but those characteristics are only
coincidental; his role, as general and tactician in an
exchange tender offer, encompasses much more than
the mere distribution of the offeror’s shares and his
total reimbursement usually reflects this difference.”
Nor are these unimportant distinctions, particularly
for the scope of the dealer-manager’s ultimate liabil-
ity for his actions. As one commentator recently
noted:

“The major difference between the underwriters’
liability in a normal “firm” underwritten public
offering and an exchange offer is that the dealer-

*’ Mundheim, et al., ed., Sixth Annual Institute on Securities
Regulation 85 (P.L.I., 1975).

8 “TF jees of $500,000 to $1,000,000 are not unheard of in
large tender-offers.” Troubh, supra, 54 Harv. Bus. Rev. at 86.

®° Troubh, Purchased Affection: A Primer on Cash Tender
Offers, 54 Harv. Bus. Rev. 79, 84-89 (Jul.-Aug., 1976).

41

manager in the exchange offer is potentially li-
able as sort of a ‘super underwriter’ for the
entire package. In the typical Securities Act
registration situation, the underwriting agree-
ment is between the issuer and each of the un-
derwriters severally, and the managing under-
writer receives his management fee from the
other participating underwriters. Therefore,
within the statutory framework of Section 11
(e) of the Securities Act, the managing under-
writer does not receive from the issuer any
benefit that all other underwriters do not re-
ceive and he is not liable for more than the price
at which he, the managing underwriter, sold his
securities.

“In the exchange offer, however, the dealer-
manager receives a fee that the soliciting dealers
do not receive, and, consequently, the benefits
afforded by Section 11(e) would not be appli-
cable and the dealer-manager would be liable
for the full amount of the offering, subject to
his right under Section 11(f) to receive con-
tributions from other persons found liable under
Section 11.” ©

*6 Mundheim, et al., ed. Sizth Annual Institute on Securities
Regulation 88-89 (P.L.I., 1975).

42

B. Prior to the Adoption of the Williams Act, Tender
Offers Were Virtually Unregw'ated, in Contrast to
the Comprehensive Federal Regulation of Proxies
and Proxy Contests.

Before the Williams Act,*’ few controls existed over
tender offers. The states had not been governing ten-
der offers,“ and existing federal law had only periph-
eral application to them. In those instances where
the tender offer took the form of an exchange of
shares—in essence, a sale of the offeror’s stock—the
transaction was subject to the disclosure require-
ments of the Securities Act of 1933.” However, that

** The Williams Act added new Sections 13(d), 13(e), 14
(d) (e) and 14(f) to the Securities Exchange Act of 1934. Act
of July 29, 1968, P.L. No. 90-439, 82 Stat. 454 (codified at
15 U.S.C. 78m(d)-(e), 78n(d)-(f) (1970).

** Only one State, Virginia, had, by that time, even passed
a statute regulating tender offers—that statute was enacted
in March 1968, just four months prior to the Williams Act.
Va. Code Ann. § 13.1-528, eff. Mar. 5, 1968 (3 CCH Blue Sky
Law Rep. © 49,228).

**See Fleischer & Mundheim, Corporate Acquisition By
Tender Offer, 115 U. Pa. L. Rev. 317, 328-349 (1967) ; Note,
The Regulation of Corporate Tender Offers Under Federal
Securities Laws: A New Challenge For Rule 10b-5, 33 U.
Chi. L. Rev. 359, 373-376 (1966); Binder, The Securities
Law of Contested Tender Offers, 18 N.Y.L.F. 569, 572-610
(1973).

* See S. Rep. No. 550, 90th Cong., 1st Sess. 2-3 (1967);
H.R. Rep. No. 1711, 90th Cong., 2d Sess. 3 (1968). See also
Bromberg, The Securities Law of Tender Offers, 15 N.Y.L.F.
462 (1969); Hamilton, Some Relections on Cash Tender Of-
fer Legislation, 15 N.Y.L.F. 269, 273-274 (1969) ; Note, Cash
Tender Offers, 83 Harv. L. Rev. 377, 379 (1969) ; Note, The
Developing Meaning of “Tender Offer’ Under the Securities

~ Ad het R wader 5 nee: We en ee SS

113

ing Section 14(e), that the predictable consequences
would include the implication of private remedies
consonant with those provided in the proxy area.
The courts have seized upon the protective provisions
of the Williams Act, and the general right in Sec-
tion 27 of the Act to permit private actions by share-
holders, target corporations and tender offerors to
“make effective the Congressional purpose.” Borak,
supra, 377 U.S. at 432; Cort v. Ash, 422 U.S. 66.
Unlike the proxy regulations, where there exists
a statutory scheme which initially appeared to some
courts to require deference to the Commission’s re-
view of filed material, shareholders seeking to enforce
private rights under the Williams Act have not been
required to demonstrate Commission approval of, or
acquiesence in, a private action. Shareholders who
have tendered their securities in response to a tender
offer have standing to sue the offeror for either in-
junctive relief *’ or monetary damages.”* And, be-
cause Section 14(e) does not contain the restricting,
“in connection with the purchase or sale” language
of Section 10(b), nontendering shareholders have
been found to have standing to sue both indivi-

203 See, e.g., Broder Vv. Dane, 384 F.Supp. 1312 (S.D. N.Y.,
1974).

34 See, e.g., Lowenschuss V. Kane, 520 F.2d 255 (C.A. 2,
1975).

114

dually *’ and derivatively *” for both injunctive re-
lief “° and monetary damages “— irrespective of the
independent standing of the target to sue on its own
behalf."° Standing has neither been denied to target
shareholders suing the target itself’ nor when seek-

2° Smallwood vy. Pearl Brewing Co., 489 F.2d 579, 596
(C.A. 5), certiorari denied, 419 U.S. 873 (1974); Spielman
Vv. General Host Corp., 402 F. Supp. 190 (S.D. N.Y., 1975),
affirmed, Docket 75-7538, slip opinion (C.A. 2, July 12, 1976) ;
McCloskey Vv. Epko Shoes, Inc., 391 F. Supp. 1279 (E.D. Pa.,
1975); Petersen V. Federated Development Co., 387 F. Supp.
355 (S.D.N.Y., 1974).

86 See, e.g., Smallwood v. Pearl Brewing Co., supra, 489
F.2d at 596.

7 See, e.g., McCloskcy v. Epko Shoes, Inc., supra, 391 F.
Supp. at 1282; Petersen v. Federated Development Co., su-
pra, 387 F. Supp. 355.

9°8 See, e.g., Smallwood v. Pearl Brewing Co., supra, 489
F.2d 579; Spiclman v. General Host Corp., supra, 402 F.
Supp. 190; McCloskey v. Epko Shoes, Inc., supra, 391 F.
Supp. 1279; Petersen v. Federated Development Co., supra,
387 F. Supp. 355; Fabrikant v. Jacobellis, CCH Fed. Sec. L.
Rep. © 92,686, (E.D. N.Y., 1970) Dyer v. Eastern Trust and
Banking Co., 336 F.Supp. 890 (D. Me., 1971).

“® See Electronic Specialty Co. v. International Controls
Corp., supra, 409 F.2d at 946: “The rights of the nontender-
ing stockholders and the corporation thus seem sufficiently
independent to give standing to both under all the provisions
added to § 14.”

10 See, e.g., Neuman v. Electronics Speciality Co., CCH
Fed. Sec. L. Rep. © 92,591 (N.D. Ill., 1969). See also H. K.
Porter Co., Inc. V. Nicholson File Co., 482 F.2d 421, 423 (C.A.
1, 1973).

115

ing injunctive or monetary relief from targets and
allied offerors.*"’

The standing of a target company to sue the tender
offeror under Section 14(e) was also confirmed early
in the judiciary’s review of the Williams Act. See,
e.g., Electronic Specialty Co. v. International Con-
trols Corp., 409 F.2d 937 (C.A. 2, 1969). Those
cases reflect a recognition that the target company
could well be harmed by the misrepresentations and
omissions of a tender offeror. And, while individual
shareholders of the target weuld undoubtedly have
a right to sue under the Williams Act for damages to
their corporation, it was concluded that the superior
resources of the corporation were vitally needed if a
timely and effective attack were to be made on illegal
offers. Id. at 946.

311 Petersen V. Federated Development Co., supra, 387 F.
Supp. 355. See also, Smallwood v. Pearl Brewing Co., supra,
489 F.2d at 598 (footnote omitted) :

“(I}f there is danger that an investor may be misled by
management of the target company or the tender offeror
in a situation where these two are hostile, there is no
reason to assume that the danger will be lessened when
both are on the same side of the fence. Indeed, investors
would seem to require greater protection in this situation.
Cf. Electronic Specialty Co. v. International Controls
Corp., 2 Cir. 1969, 409 F.2d 937, 946.”

Congress also was aware of the need for protection where
the tender offer was made by a person friendly to manage-
ment. See Senate Hearings, p. 144. In those circumstances,
the offeror becomes “a member of the coterie which surrounds

management.” Jd.

116

Since 1969, therefore, a target company’s standing
to seek injunctive relief against a tender offeror for
violations of Sections 14(d) and (e) has been ac-
cepted universally, often with little or no discussion.”

The standing accorded to management is but a
reflection of the fact that any private action, whose
goal is to redress violatiens of the Act’s provisions,
even if motivated by personal or pecuniary interest,
will foster the Congressional purpose. In the end,
the shareholders will be the beneficiaries of private
actions involving violations that the Commission either
could not detect, or could not prosecute in a timely
fashion. The same reasoning supports standing for
defeated offerors.

2 Butler Aviation International, Inc. v. Comprehensive De-
signers, Inc., 425 F.2d 842 (C.A. 2, 1970); Gulf & Western
Indus. Vv. Great Atlantic & Pacific Tea Co., 476 F.2d 687 (C.A.
2, 1973); H. K. Porter Co. v. Nicholson File Co., 482 F.2d
421, 423 (C.A. 1, 1973); Sonesta International Hotel Corp.
Vv. Wellington Assoc., 483 F.2d 247 (C.A. 2, 1973); Ronson
Corp. V. Liquifin Aktiengesellschaft, 497 F.2d 394 (C.A. 3,
1974), affirming, 370 F. Supp. 597 (D. N.J., 1974) ; Copper-
weld Corp. V. Imetal, 403 F. Supp. 579 (W.D. Pa., 1975);
Texasgulf, Inc. v. Canada Development Corp., 366 F. Supp.
374 (S.D. Tex., 1973) ; MGM, Inc. v. Transamerica Corp., 303
F. Supp. 1344 (S.D. N.Y., 1969) ; Otis Elevator Co. v. United
Technologies Corp., 405 F. Supp. 960 (S.D. N.Y., 1975);
D-Z Investment Co. v. Holloway, CCH Fed. Sec. L. Rep.
94,771 (S.D. N.Y., 1974). Commonwealth Oil Refining Co.
v. Tesoro Petroleum Corp., 394 F. Supp. 267, 273 (S.D. N.Y.,
1975): Missouri Portland Cement Co. v. Cargill, Inc., 498
F.2d 851, 872 (C.A. 2), certiorari denied, 419 U.S. 883
(1974) ; Cattlemen’s Investment Co. v. Fears, 343 F. Supp.
1248, 1252 (W.D. Okla., 1972); Corenco Corp. v. Schiavone
& Sons, Inc., 498 F.2d 207 (C.A. 2, 1973); Jewelcor, Ine. v.
Pearlman, CCH Fed. Sec. L. Rep. § 95,096 (S.D. N.Y., 1975).

6 ee AO

117

But for offerors, there are other bases as well that
the courts have utilized to justify standing to sue for
tender offer violations—and those bases are equally
productive in light of the Congressional intent under-
lying Section 14(e). Insurgents, whether share-
holders or not (and, as is true here, they usually
are), have a definite pecuniary interest in the out-
come of the contest. If management is free to violate
the Williams Act, but the insurgent, even though that
violation redounds to its detriment, cannot maintain
a law suit to correct the violation or compensate it-
self for damages suffered, then the scheme of tender
offer regulation Congress so painstakingly sought to
create would be little better than a mirage, denying
the substantive benefit its remedial provisions were
intended to effect, including the benefits intended for
shareholders. Worse, if management can sue, as Borak
and its progeny have held it can, to correct or
penalize the insurgent for its violations, but the of-
feror cannot sue to correct management’s violations,
then the clearly articulated Congressional intent not
to “tip the balance” in a tender offer contest is
thwarted, not aided, by the recognition of private
remedies—a result this Court surely did not intend
in deciding Borak, and a result wholly at odds with
the Congressional scheme.

Thus, when the question whether a thwarted tender
offeror had standing under Section 14(e) to sue a
target and its ally was first raised in Crane Co. v.
Westinghouse Air Brake Co., 419 F.2d 787 (C.A. 2,
1969), the court commented that

118

“The amendment to the Act adding section 14
(e) * * * effective July 29, 1968, subsequent
te the events here in question, should serve to
resolve any doubts about standing in the tender
offer cases, even when an offeror is not, as is
Crane, in the position of a forced seller.” *"*

The court below followed Crane’s instruction,’ as
have all other courts directly confronted with the is-
sue.” Thus, in Mesa Petroleum Co. v. Aztec Oil &

8 419 F.2d at 798-799. The action in Crane was predicated
upon Rule 10b-5, since the events in question had occurred
prior to the effective date of the Williams Act.

4 See A. 29-30.

*° See, e.g., H. K. Porter Co. v. Nicholson File Co., supra,
482 F.2d 421; Smallwood v. Pearl Brewing Co., supra, 489
F.2d 579; Sargent v. Genesco, Inc., 492 F.2d 750 (C.A. 5,
1974) ; Dyer v. Eastern Trust and Banking Co., supra, 336
F. Supp. 890.

There is no support for the isolated dictum in Klaus Vv.
Hi-Shear Corp., 528 F.2d 225, 232 (C.A. 9, 1975), that “the
Williams Act was designed to protect cash tender offerees not
offerors.” In any event, it appears that, in Klaus, the court
itself presumed standing and disposed of the action on the
appropriateness of the remedy sought. /d., at 232. And the
Ninth Circuit’s reliance in Klaus on this Court’s decision in
Rondeau Vv. Mosinee Paper Co., 422 U.S. 49 (1975), was
seriously misplaced. A careful reading of the Court’s decision
in Rondeau fails to elicit the slightest support for the above-
quoted dictum. Not only did this Court delimit the issue
before it to a determination of the availability of a remedy for
an acknowledged violation of Section 13(d) (1) by a failure
to file form Schedule 13D, but the Court in Rondeau did not
consider the issue of standing. It did, however, indicate the
“dilemma” which led to the passage of the Williams Act, but
did not consider the solution which the Williams Act provides.
The Court in Klaus neither referred to determinations made

119

Gas Co., 406 F.Supp. 910 (N.D. Tex., 1976), an
offeror sued the target under Section 14(e) for an
injunction prohibiting interference with its planned
communications to target shareholders and employ-
ing false and misleading statements in waging its de-
fense. The target counterclaimed for injunctive re-
lief, and questioned the tender offeror’s standing to
bring suit under Section 14(e), “since it is not a
stockholder of [the target].” 406 F.Supp. at 912 n. 2.

The district court examined the provisions of Sec-
tion 14(e), and observed that Section “14(e) on its
face is a kinsman of the proxy rules. Congress had
that kinship in mind when it created the Williams
Act.” Id., at 913. It was against this “background”
as well as the admonitions from this Court in Borak,
supra, 377 U.S. at 433, that the court rejected the
challenge to the offeror’s standing. Relying upon an
opinion of the Fifth Cireuit, which had commented
that “the right to bring suit has not been limited to
tendering offerees but has been extended to numerous
other parties who claimed to be victims of 14(e)
violations,” *’ the court noted that the Fifth Circuit

by the court below in this case, nor to any of the opinions
of the other circuits supporting that decision.

6 Sargent v. Genesco, Inc., 492 F.2d 750 (C.A. 5, 1974).
There the court of appeals reversed the district court’s deter-
mination that plaintiff shareholders were entitled to recovery
under Section 14(e) because they had “not alleged any in-
adequacy of disclosure” made to the offerees-holders of an-
other class of securities, 492 F.2d at 769. But, the court rec-
ognized that:

“Although section 14(e) does not expressly provide for a
private right of action, courts have uniformly implied

120

had, in turn, “cited with approval” the decision of
the Second Circuit in this case, as well as that of the
First Circuit in H. K. Porter Co. v. Nicholson File
Co., supra, 482 F.2d 421.

In H. K. Porter Co., supra, a tender offeror claimed
that the target had violated Section 14(e) in com-
municating its defense to its shareholders. The target
challenged the standing of the offeror to maintain an
action against it, urging that “Porter’s is not the
interest which § 14(e) was designed to protect and
that therefore we should not imply for it a right of
action for damages.” 482 F.2d at 423.

In concluding that H. K. Porter Co., the tender of-
feror, had standing to assert a claim for damages
for the violations of the securities laws by the target,

one. See Smallwood v. Pearl Brewing Co., supra, 48S
F.2d at 596 n. 20. In determining who has standing to
sue under 14(e), the quest has been for what will best
further the objective of the statute. Consequently, the
right to bring suit has not been limited to tendering
offerees only but has been extended to numerous other
parties who claimed to be victims of 14(e) violations”
(citations omitted).

In fact, the court in Sargent explicitly cautioned, citing Dyer
v. Eastern Trust and Banking Co., 336 F. Supp. 890 (D. Me.,
1971), “where the court accorded standing to shareholders of
the te :der offeror,” that:

“we do not hold that the plaintiffs in the instant case
would have no standing to sue under 14(e) if there had

been misleading statements in the offer to debenture
holders.”

492 F.2d at 770 n. 28 (emphasis supplied). See also, Wash-
burn Vv. Madison Square Garden Corp., 340 F. Supp. 504, 509
(S.D. N.Y., 1972).

121

the First Circuit cogently and compellingly stated its
rationale:

“From the statutory scheme and the legislative
history, it seems clear that the overriding pur-
pose of § 14(e) is the protection of the investors.
Yet affording for the offeror and the target’s
management a cause of action for damages would
in many instances further that purpose. With
an obvious economic stake in the outcome of
the tender offer battle, they have the incentive
to detect violations and vigorously pursue reme-
dies. * * * We see no reason why actions by the
protagonists in the battle, as well as by the
stockholders themselves, would not be effective
enforcement weapons.

“We find further support for this construction
when we look to the context in which § 14(e)
was enacted. Rule 10b-5 already covered ex-
changes of stock generally, including tender of-
fers, but rights of action under it were commonly
limited to purchasers and sellers. * * * Since
§ 14(e) substantially tracks the language of 10b-
5 except for its omission of the purchase and sale
requirement, it seems reasonable to conclude that
its ‘major contribution [was] a broader standing
to sue—accorded both to the offeror and to the
opposition.’

“Finally, implying for the offeror and the tar-
get’s management reciprocal rights of action for
damages seems only fair given that each has a
heavy economic stake, and that each is subject

122

to what has been aptly described as ‘symmetri-
cal’ statutory obligations. * * * Each is vic-
timized when the other commits illegal acts to
defeat or accomplish takeover bids.”

Id. at 424 (emphasis supplied).

Thus, the necessity of a supplement to Commission
action in the tender offer area, as well as prior ju-
dicial determinations under the proxy and tender
offer provisions of the Act to make effective the in-
tent of the Congress, each demonstrate that the im-
plication of private remedies under Section 14(e) is
consistent with the underlying purposes of the legis-
lative scheme. The courts thus have held that, in
order to have standing to sue, the plaintiff must be
either a participant in the tender offer contest or have
a proprietary interest in such a participant.” The

“17 See, e.g., Alaska Interstate Co. v. McMillan, 402 F. Supp.
532 (D. Del., 1975) (standing recognized for competing tender
offerors to sue each other) ; Emhart Corp. v. USM Corp., 403
F. Supp. 660 (D. Mass., 1975) vacated on other grounds, 527
F.2d 177 (1975) (tender offeror had standing under Section
14(e) to sue target company) Cauble v. White, 360 F. Supp.
1021 (E.D. La., 1973), Wule v. Gulf & Western Indus., Inc.,
CCH Fed. Sec. L. Rep. { 95,361 (E.D. Pa., 1975) (employee
who had not exercised stock option held not to have standing).

In Dyer V. Eastern Trust & Banking Co., supra, 336 F.
Supp. 890, standing was granted to a shareholder of the tender
offeror on the court’s reading of the intent of Congress in en-
acting § 14(e) that “a determination that she has standing
is both logical and compatible with the purpose of the statute.”
To determine who has standing, the “quest must be for what
will best accomplish the purposes of the legislature.” Jd. at
914, quoting Electronic Specialty Co. v. International Con-
trols Corp., supra, 409 F.2d at 946. The Dyer court concluded:

123

implication of private actions to offerors furthers the
Congressional goal of providing even-handed protec-
tion to the various participants in tender offers, and
also has a didactic effect in curbing the abuses Con-
gress sought to remedy in enacting the Williams Act.

D. The Williams Act is an Intrusion of Federal Law
into the Internal Affairs of Corporations and a Fed-
eral Remedy is Appropriate to Effect the Congres-
sional Purpose to Provide Protections to Those In-
volved in a Tender Offer.

A final factor of importance relied upon by this
Court in determining whether to imply a private
remedy is whether the action is one traditionally
relegated to state law, in an area of basic concern
to the states, so that it would be inappropriate to in-
fer a cause of action solely under federal law. Cort v.
Ash, supra, 422 U.S. at 78. Here, as in Borak,
there is a need to imply a private federal remedy,
since the Williams Act is a clear intrusion into the
internal affairs of corporations and an application
of state law might serve to frustrate the Congres-
sional purpose in enacting this federal legislation.

“The purpose of Congress in enacting Section 14(e) was
to protect the investing public from harm caused by mis-
leading tender offers. Shareholders of the offeror are
plainly within the class for whom such protection was
designed. Plaintiff is such a shareholder, and effectuation
of the Congressional purpose requires that she be granted
standing to maintain the present suit” (emphasis sup-
plied).

124

In Borak, this Court pointed to the evils inherent
in relegating private parties to state law remedies—
evils equally present in the tender offer area:

“TI]f the law of the State happened to attach
no responsibility to the use of misleading proxy
statements, the whole purpose of the section
might be frustrated. Furthermore, the hurdles
that the victims might face (such as separate
suits, as contemplated by Dann v. Studebaker-
Packard Corp., [288 F.2d 201], security for ex-
pense statutes, bringing in all the parties neces-
sary for complete relief, etc.) might well prove
insuperable to effective relief.”

Borak, swpra, 377 U.S. at 434-435. Committing a
tender offeror to state-provided remedies also “might
well prove insuperable to effective relief.” Thus, only
where state statutes exist and do not interject hur-
dles to effective relief should the courts hesitate in
implying a private cause of action. Cort v. Ash,
supra, 422 U.S. at 66 (1974).** In the area of tender
offers for publicly-held corporations whose securities
are traded in national markets—-an area not “basic-
ally the concern of” the states (Cort v. Ash, supra,
422 U.S. at 78)—relegating tender offerors to what-
ever remedies are created by state law would neither
‘ be an adequate nor effective means of effectuating
the Congressional intent in enacting the Williams
Act.

218 We have already indicated the inadequacy of nonstatu-
tory state law. See pp. 44-47, supra.

125

Currently, 21 states have statutes regulating tender
offers in some respects and, with a single exception,*”
each has been enacted within the past two and a half
years.*” None existed substantially prior to the Wil-
liams Act, and most reflect state efforts to counter-
act the regulatory even-handedness the Williams Act
sought to achieve.

Motivated by a desire to protect the management
of companies with significant assets or employees in,
or contacts with, their states,*"—-but with operations
and shareholders in several states—many of these
legislative enactments frustrate Congress’s clear ex-
pression of national policy to allow the forces in con-
tention to have full play and not to “tip the balance”’
of regulation in favor of management or insurg-
ents.’ Indeed, state tender offer laws are generally
designated to provide a “closed shop” for entrenched
management and to neutralize the Congressional

19 Virginia’s statute was passed almost comtemporaneously
with the Williams Act. Va. Code Ann. § 13.1-528; eff. March
5, 1968 (3 CCH Blue Sky L. Rep. { 49,228).

320 New York approved tender offer legislation on July 27,
1976, effective Nov. 1, 1976, N.Y. Bus. Corp. Law § 1600
(2 CCH Blue Sky L. Rep. § 35,351). Bills have been proposed
in Louisiana, and Illinois has proposed administrative rules
to govern tender offers. Five other states—lowa, Florida,
Missouri, Mississippi and New Jersey—have considered, but
not passed, tender offer legislation.

321 See, e.g., Senate Hearings, p. 59, and Vorys, Ohio Tender
Offer Bill, 43 Ohio Bar J. 65 (1970).

322 See discussion at pp. 69-74, supra.

126

policy of even-handedness.** Thus, protective state
legislation, with its “crazy quilt” pattern of conflict-
ing and inconsistent provisions relating to jurisdic-
tion,’ procedure,” and remedies,*” seeks to nullify

223 Id.

“4 A critical infirmity of the emerging pattern of state
regulation of tender offers is the conflicting, and often over-
lapping, jurisdictional provisions of the various statutes.
While jurisdiction for most state provisions is predicated upon
the presence in the state of the offeree or the target company,
see e.g. Tenn. Code Ann. § 48-2102(9), eff. March 17, 1976 (3
CCH Blue Sky L. Rep. § 45,192), jurisdictional bases vary
widely. Some states rely on the fact that the company is incor-
porated in the state, Del. Code Ann. Title 8, § 203(c) (2), eff.
May 1, 1976 (1 CCH Blue Sky L. Rep. § 11,131); Nev. Rev.
Stat. § 78.3765 (1973), or is incorporated and doing business
in the state, Hawaii Rev. Stat. § 417E-1(5), eff. 1974 (1A
CCH Blue Sky L. Rep. { 14,731) ; Va. Code Ann. § 13.1-529(e),
eff. March 5, 1968 (3 CCH Blue Sky L. Rep. © 49,229). Others
are less stringent in asserting sufficient jurisdictional con-
tacts requiring only that the target company be incorporated
in the state or have its principal place of business and sub-
stantial assets in the state, Alaska Stat. § 45.57.110(4), eff.
June 8, 1976 (1 CCH Blue Sky L. Rep. © 6029); Kan. Stat.
Ann. § 17-1276(a), eff. June 1974 (1A CCH Blue Sky L. Rep.
* 19,351); Ohio Rev. Code Ann. § 1707.041(A)(1) (Page
Supp. 1974); Pa. Stat. Ann., eff. March 3, 1976 (2 Blue Sky
L. Rep. 41,183); Ky. Rev. Stat. Ann., eff. July 1, 1976 (1A
CCH Blue Sky L. Rep. £ 20,131). At least one state simply
requires that there be either incorporation in the state, or
that the principal place of business or a substantial portion
of its assets be located there, see Md. Ann. Code Art. 9, § 11-
901 (i), eff. July 1, 1976 (1A CCH Blue Sky L. Rep. © 23,421).

**° Given the present status of state laws regulating tender
offers, especially the intended imbalances of most favoring
the target company and its management, procedural protec-

127

tions for the tender offeror are virtually non-existent. Since
delays in completing a tender offer usually favor management
of the target company, the cooling-off period specified in
many state statutes can effectively delay the commencement
of an offer for sufficient time to render it effectively inopera-
tive, see, e.g., Hawaii Rev. Stat. 417E-3(f), eff. 1974 (1A
CCH Blue Sky L. Rep. § 14,733); Ind. Code § 23-2-3-2(e),
(f), eff. May 1975 (1A CCH Blue Sky L. Rep. { 17,152);
Ohio Rev. Code Ann. § 1707.041(B) (1) (b).4 (2 Blue Sky L.
Rep. © 38,104-1), when coupled with disparate disclosure re-
quirements, see, ¢.g. Alaska Stat. § 45.57.030, eff. June 8, 1976
(1 CCH Blue Sky L. Rep. {| 6029B); Colo. Rev. Stat. Ann.
§ 11-51.5-105, eff. July 1, 1975 (1 CCH Blue Sky L. Rep.
©9155); Hawaii Rev. Stat. § 417E-7, eff. 1974 (1A CCH
Blue Sky L. Rep. § 14,737); Ind. Code § 23-2-3-3, eff. May
1975 (1A CCH Blue Sky L. Rep. { 17,153); Idaho Code
§ 30-1504(1), eff. July 1, 1975 (1A CCH Blue Sky L. Rep.
© 15,174) ; Md. Ann. Code Art. 9 § 11-903, eff. July 1, 1976
(1A CCH Blue Sky L. Rep. {| 23,423) ; Mass. Gen. Laws Ann.
Ch. 110C § 5, eff. May 22, 1976 (1A CCH Blue Sky L. Rep.
© 24,265) ; Minn. Stat. § 80B.04, eff. 1973 (1A CCH Blue Sky
L. Rep. { 26,214) ; Pa. Stat. Ann., eff. March 3, 1976 (2 CCH
Blue Sky L. Rep. § 41,186); S.D. Comp. Laws Ann. § 47-
32-31, eff. 1975 (2 CCH Blue Sky L. Rep. { 44,301); Tenn.
Code Ann. § 48-2105, eff. March 17, 1976 (3 CCH Blue Sky
L. Rep. { 45,195) ; Utah Code Ann., eff. Feb. 5, 1976 (3 CCH
Blue Sky L. Rep. ) 47,335); Va. Code Ann. § 13.1-532, eff.
March 5, 1968 (3 CCH Blue Sky L. Rep. { 49,232); Wis.
Stat. § 552.07, eff. 1972 (8 CCH Blue Sky L. Rep. {| 52,267),
and the provision in some states that a state agency must
hold a hearing if requested by the target company or ten
percent of its shareholders, see, e.g., Mass. Gen. Laws Ann.
Ch. 110c92 eff. May 22, 1976 (1A CCH Blue Sky L. Rep.
© 24,262) ; Ind. Code § 23-2-3-2(e), eff. May, 1975 (1A CCH
Blue Sky L. Rep. § 17,152); Minn. Stat. § 80B.03(4), eff.
1973 (1A CCH Blue Sky L. Rep. { 26,213) ; Conn. Gen, Stat.
Rev., eff. June 2, 1976 (1 CCH Blue Sky L. Rep. {| 10,155;
S.D. Comp. Laws Ann. § 47-32-23, eff. 1975 (2 CCH Blue Sky
L. Rep. { 44,293). Moreover, ten states confer discretionary
authority on a state agency to delay an offer summarily if

128

the “intrusion of federal law into the internal af-
fairs of corporations” in an area in which Congress

they believe full disclosure is lacking, and Hawaii even
allows summary delay if the offer, in the opinion of the state
agency, is not fair and equitable to offerees, Hawaii Rev.
Stat. § 417E-4, eff. 1974 (1A CCH Blue Sky L. Rep. {| 14,734.

*26 Although some state statutes do proscribe conduct either
fraudulent or in violation of their tender offer statutes. see,
e.g., Md. Ann. Code Art. 9 § 11-904, eff. July 1, 1976 (1A
CCH Blue Sky L. Rep. {| 23,424); Mich. Comp. Laws § 17,
eff. July 1, 1976 (1A CCH Blue Sky L. Rep. {| 25,357) ; Ind.
Code § 23-2-3-9(b), eff. May, 1975 (1A CCH Blue Sky L.
Rep. £ 17,159), they are not consistent in the remedies or
penalties provided. Indeed, thirteen of the twenty-one states
specify civil remedies and/or penalties for violation by tender
offerors, but, consistent with the protectionist tinge to the
legislation, make no specific provision for remedies in the
event of violations by the target company. See, e.g., Colo.
Rev. Stat. Ann. § 11.51.5-106, eff. July 1, 1975 (1 CCH Blue
Sky L. Rep. © 9156); Hawaii Rev. Stat. § 417E-9, eff. 1974
(1A CCH Blue Sky L. Rep. {| 14,739) ; Kan. Stat. Ann. § 17-
1276, eff. 1974 (1A CCH Blue Sky L. Rep. § 19,351); Ky.
Rev. Stat. Ann., eff. July 1, 1976 (1A CCH Blue Sky L. Rep.
* 20,136) ; Mass. Gen. Laws Ann. Ch. 110 C §9, eff. May
22, 1976 (1A CCH Blue Sky L. Rep. ‘ 24,269); Minn. Stat.
§ 80B.11, eff. 1973 (1A CCH Blue Sky L. Rep. * 26,221);
Ohic Rev. Code Ann. § 1707.041(E) (Page Supp. 1974);
Pa. Stat. Ann., eff. March 3, 1976 (2 CCH Blue Sky L. Rep.
© 41,193); Tenn. Code Ann. § 48-2112, eff. March 17, 1976
(3 CCH Blue Sky L. Rep. * 45,202); Utah Code Ann. eff.
Feb. 5, 1976 (3 CCH Blue Sky L. Rep. § 47,343); Va. Code
Ann. § 13.1-539, eff. March 5, 1968 (3 CCH Blue Sky L. Rep.
* 49,239); Nev. Rev. Stat. § 78.3774 (1973); Wis. Stat.
§ 552.21, eff. 1972 (3 CCH Blue Sky L. Rep. © 52,281). Thus,
conflicts inconsistencies and procedural and substantive hur-
d'es can effectively tie up an insurgent tender offeror long
enough to make the success of its offer highly unlikely, and
deny the offeror any effective relief should it attempt to pur-
sue whatever remedies may exist under state law.

129

has clearly intended to so intrude.” Due to the
irreconcilably conflicting policies underlying the state
and federal legislation, the Congressional purpose and
policy embodied in the Williams Act would be hope-
lessly frustrated if the parties to tender offer con-
tests were relegated to search for remedies in the
state courts.”

III. ANY LIMITATIONS THE COURTS IMPOSE ON
THE MAINTENANCE OF, OR ON THE RELIEF
GRANTED UNDER, AN IMPLIED PRIVATE RIGHT
OF ACTION, SHOULD EFFECTUATE IMPORT-
ANT PUBLIC POLICY CONSIDERATIONS, AS
GLEANED BOTH FROM THE CONGRESSIONAL
INTENT UNDERLYING THE STATUTORY BASIS
FOR THE IMPLIED PRIVATE ACTION AND FROM
THE JUDICIALLY-ENUNCIATED PURPOSES THE
IMPLIED REMEDY IS TO SERVE.

Although private actions have been judicially im-
plied under the federal securities laws for thirty

827 See discussion, supr1, at pp. 52-69, 83-86.

%* The question of the constitutionality of state tender offer
statutes—as constituting an excessive burden upon interstate
commerce—may well be decided in the future, adding uncer-
tainty to the inconsistency and inadequacy of state statutory
remedies. See Thrall Car Mfg. Co. v. Rhodes, et al., C-2-76-
605 (S.D. Ohio); see also, Moylan, State Regulation of Tender
Offers, 58 Marq. L. Rev. 687 (1975); Note, Commerce Clause
Limitations Upon State Regulation of Tender Offers, 47 S.
Cal. L. Rev. 1133 (1974). Moreover, state tender offer legisla-
tion might be pre-empted by the federal statutory scheme.
See, e.g., Senate Committee on Banking, Housing and Urban
Affairs, Hearings on Corporate Takeovers, 94th Cong., 2d
Sess. 90, 94 (1976) ; Florida Lime & Avocado Growers, Inc. V.
Paul, 373 U.S. 132 (1963); New York Department of Social
Services V. Dublino, 413 U.S. 405 (1973); Merrill Lynch,
Pierce, Fenner & Smith v. Ware, 414 U.S. 117 (1973). We
do not address these questions here, however, since they are
not directly at issue in this case.

136

years,” extensive use of implied private actions by
plaintiffs seeking civil remedies is of fairly recent
vintage.*” The increased reliance on implied actions
under the federal securities laws has necessitated this
Court’s consideration of the broad parameters of
such actions, a consideration which has led this Court
to conclude that, just as the federal courts may imply
federal remedies under the federal securities laws,
so too may they imply limitations on those remedies.”

In short, the strong public policy considerations
supporting the implication of private actions under
the federal securities laws should be balanced only
against competing policy considerations of equal
strength, where they may exist. If private remedies
are utilized or expanded in a manner inconsistent
with the legislative scheme, that could encourage vexa-
tious, ill-founded or otherwise inappropriate lawsuits
—lawsuits which a reading of the express language
of the federal securities laws or their legislative his-
tory would show to be at odds with the Congressional
purpose. It is these lawsuits which should not be al-
lowed to increase the burden of the courts or result
in detriment to the interests of corporate shareholders

22% Kardon V. National Gypsum Co., 69 F. Supp. 512 (E.D.
Pa., 1946). See also, Superintendent of Insurance Vv. Bankers
Life & Casualty Co., 404 U.S. 6 (1971).

399 Blue Chip Stamps Vv. Manor Drug Stores, 421 U.S. 723
(1975); Securities and Exchange Commission Vv. National
Securities, Inc., 393 U.S. 453 (1969).

°31 Blue Chip Stamps Vv. Manor Drug Stores, supra, 421 U.S.
at 723.

131

who, along with the consumers of corporate products

and services, must ultimately bear the cost of such
actions.*”

In seeking to delimit the scope of implied private
actions, however, caution must be exercised to avoid
precluding meaningful remedies; for, it is axiomatic
that the absence of a meaningful remedy in an im-
plied private cause of action will preclude the utiliza-
tion of such an action for its intended purposes and
make the availability of an implied private remedy
meaningless. This Court recognized as much in Mills
v. Electric Auto-Lite Co., 396 U.S. 375, 396 (1970),
when it awarded interim attorneys’ fees to the plain-
tiffs, whether or not the corporation on whose behalf
they sued could ever realize any monetary advan-
tage from the suit, because such plaintiffs who fun-
damentally

“vindicat[e] the statutory policy[,] * * * have
rendered a substantial service to the corporation

*82 Blue Chip Stamps v. Manor Drug Stores, supra, 421
U.S. at 739, citing Securities and Exchange Commission V.
Texas Gulf Sulphur Co., 401 F.2d 833, 867 (C.A. 2, 1968)
(Friendly, J., concurring), certiorari denied, sub nom., Coates
v. Securities and Exchange Commission, 394 U.S. 976 (1969).

Blue Chip Stamps, supra, however, does not require courts
to be unduly preoccupied with the possibility of vexatious
suits. As this Court held a decade ago, private suits have
“nlayed a rather important role in protecting shareholders of
corporations from the designing schemes and wiles of insiders
who are willing to betray their company’s interests in order
to enrich themselves.” Surowitz v. Hilton Hotels Corp., 383
U.S. 363, 371 (1966). This Court there suggested that, in
most cases, there might be a need to demonstrate that the
plaintiffs “sought to do the corporation * * * injury in [the]
litigation,” before it would affix the appellation “vexatious”
to such suits.

‘~

132

and its shareholders * * * ‘involv[ing] corporate
therapeutics’[,] and furnish a benefit to all
shareholders by providing an important means
of enforcement of the * * * statute.”

Accord, Surowitz v. Hilton Hotels Corp., 383 U.S.
363, 371 (1966).

While the limits of implied private actions are an
appropriate concern of the courts, at least until Con-
gress should act, the existence of implied remedies
has repeatedly been affirmed, even in cases in which
it has been deemed appropriate to impose limitations
on such suits.** Accordingly, the imposition of any
limitations on implied private actions should flow
from important countervailing considerations, and be
imposed only to the extent consistent with Congres-
sional intent. This translates into a series of opera-
tive policy objectives which the Commission believes
effectuates the basic purpose served by implying judi-
cial remedies under the federal securities laws, while
at the same time delimiting the scope of such rem-
edies to avoid unfortunate and unintended conse-
quences.

Thus, in applying delimiting doctrines, this Court
has instructed that the starting point is always Con-
gressional intent. Any limitation on an implied ac-

838 As this Court noted in Rondeau v. Mosinee Paper Co.,
422 U.S. 49, 62 (1975): “Of course, we have not hesitated to
recognize the power of federal courts to fashion private reme-
dies for securities laws violations when to do so is consistent
with the legislative scheme and necessary for the protection
of investors as a supplement to enforcement by the Securities
and Exchange Commission.”

133

tion under the federal securities laws should be “con-
sistent with the legislative scheme” ** and not impede
or frustrate the purposes which the statutory provi-
sion and implied remedy seek to effectuate.’ And,
this is particularly so when private enforcement is
a “necessary supplement” to Commission action.”
But, just as the Court has declined to impose limita-
tions on implied private acticns where such limitations
would be inconsistent with Congressional purposes, it
has limited such private actions where the failure

33%¢ Rondeau, supra, 422 U.S. at 62; Cort, supra, 422 U.S. at
78; National Railroad Passenger Corp., supra, 414 U.S. at
458-461; Barbour, supra, 421 U.S. at 423-424.

335 In Mills v. Electric Auto-Lite Co., supra, 396 U.S. at 382,
for example, the plaintiffs alleged that a proxy statement
soliciting shareholder support for a merger was materially
misleading because it did not ¢ivulge the fact that manage-
ment, which supported the merger, was financially interested
in assuring the approval of the merger. The defendants as-
serted that, irrespective of any material omissions in the
proxy statement, the merger was fair. But, the alleged “fair-
ness of the merger” was rejected by this Court as an adequate
defense, since such a defense would have “subvert[ed] the
congressional purpose of ensuring full and fair disclosure to
shareholders.” As this Court there explained,

“The risk that [the plaintiffs] would be unable to rebut
the corporation’s evidence of the fairness of the proposal,
and thus to establish their cause of action, would be bound
to discourage such shareholders from the private enforce-
ment of the proxy rules that ‘provides a necessary supple-
ment to Commission action.’ ”

836 Borak, supra, 377 U.S. at 432; Mills, supra, 396 U.S. at
382; Rondeau, supra, 422 U.S. at 62.

134

to do so would unreasonably and needlessly expand
expressed Congressional motives.*”’

Similarly, the express language of the provision pur-
suant to which a private action has been implied is
a second guide in determining whether, when, and
how, to limit implied actions under the federal securi-
ties laws.*** On the other hand, this Court has refused
to imply limitations where the proposed limitation
was not consistent with the express language of the
statute.”

°° In Cort v. Ash, supra, 422 U.S. at 84, for example, this
Court declined to imply a private damage action for corporate
shareholders alleging violations of 18 U.S.C. § 610, which
prohibits corporate contributions or expenditures in certain
elections, upon determining that, unlike the present case, “the
remedy sought would not aid the primary congressional goal.”

In Blue Chip Stamps Vv. Manor Drug Stores, supra, 421
U.S. at 733, for example, this Court concluded that the re-
quirement in Section 10(b) of the Securities Exchange Act—
that.a violation, to be actionable, occur “in connection with
the purchase or sale of any security”—by its very terms pre-
cluded an implied private action for damages by a person who
did not actually purchase or sell any securities. Similarly, in
Ernst & Ernst v. Hochfelder, supra, 96 S.Ct. at 1385. this
Court implied a scienter limitation on private damage actions
under Section 10(b) of the Exchange Act only after determin-
ing that the express use of the terms “manipulative,” “de-
vice,” and “contrivance” in Section 10(b) was intended to
proscribe knowing or intentional (and possibly reckless), as
opposed to merely negligent, misconduct.

°° In Mills v. Electric Auto-Lite Co., supra, a major reason
for rejecting the “fairness of the merger” as a defense (see
n. 335, supra), was that “[s]uch a frustration of the congres-
sional policy is not required by anything in the wording of
the statute * * *.” 396 U.S. at 383. See also, J. J. Case Co. v.
Borak, supra, where this Court declined to limit the relief

135

And, finally, a third guideline for determining
whether to limit implied private actions may be de-
rived from the express remedy provisions of the Act.
In that context, it is instructive that, in Blue Chip
Stamps v. Manor Drug Stores, supra, 421 U.S. at
736, this Court concluded that “[i]t would indeed be
anomalous to impute to Congress an intention to ex-
pand the * * * bounds it delineated for comparable
express causes of action” for judicially-implied causes
of action under other sections of the Act. In so hold-
ing, this Court was giving effect to the philosophical
underpinnings Congress sought to reflect in the ex-
press remedy provisions of the Act. As such, where
express remedies are indeed “comparable” to reme-
dies judicially implied by the courts, the “bounds
* * * delineated” by the Congress in creating express
remedies serve as a useful yardstick against which to
measure limitations on implied actions.” Neverthe-

available in an implied action under the proxy rules to pros-
pective relief, because the express language < : Section 14(a)
included the protection of investors, which “certainly implies
the availability of judicial relief where necessary to achieve
that result.” 377 U.S. at 432.

0° In Biue Chip Stamps, supra, therefore, this Court limited
standing in implied damage actions under Section 10(b) and
Rule 10b-5 to actual purchasers or sellers of securities, rely-
ing, in part, on the fact that Congress, in amending Section
11 of the Securities Act in 1934, provided that the courts
could require an undertaking for expenses in any action under
Section 11. Citing the legislative history of this amendment,
the Court pointed out that one of the purposes of the amend-
ment was to prevent nuisance or strike suits, and stated that:

“Where Congress in those sections of the 1933 Act which

136

less, even though express remedies may furnish a
useful reference point in delimiting implied private
actions, the existence of limitations in the express
remedy sections does not necessarily require the im-
position of the same, or even a similar, limitation on
an action implied under another section of the fed-
eral securities laws.**’

expressly conferred a private cause of action for damages,
adopted a provision uniformly regarded as designed to
deter ‘strike’ or nuisance actions, * * *, that fact alone
justifies our consideration of such potential in deter-
mining the limits of the class of plaintiffs who may sue
in an action wholly implied from the language of the 1934
Act.”

Id., at 741.

341 See, e.g., Deckert v. Independence Shares Corp., 311 U.S.
282 (1940), where this Court refused to deny plaintiffs, suing
under Section 12(2) of the Securities Act, standing to seek
an injunction, even though the statutory remedy expressly
referred to in Section 12(2) did not include injunctive relief.
As this Court there noted (id., at 288):

“TS]ection 12(2) states the legal consequences of conduct
proscribed by the Act; it does not purport to state the
form of action or procedure the claimant is to employ.

“Moreover, in Section 22(a), * * * specified courts are
given jurisdiction ‘of all suits in equity and actions at law
brought to enforce any liability or duty created by this
subchapter.’ The power to enforce implies the power
to make effective the right of recovery afforded by the
Act. And the power to make the right of recovery effec-
tive implies the power to utilize any of the procedures
or actions normally available to the litigant according to
the exigencies of the particular case. If petitioners’ bill
states a cause of action when tested by the customary
rules governing suits of such character, the Securities
Act authorizes maintenance of the suit * * *” (emphasis
in original).

a

137

The foregoing principles, derived largely from the
teachings of this Court and sound canons of statu-
tory construction, militate against blackletter law
responses to the limitations suggested by the parties
for implied private actions under the Williams Act.
But, they do serve to order a discussion of the single
significant limitation issue raised—the appropriate
manner of measuring damages in an implied action
under Section 14(e) of the Act.*”

** Three threshold limitations suggested by the parties
seem susceptible of fairly abbreviated disposition.

(1) Relying on this Court’s decision in Blue Chip Stamps Vv.
Manor Drug Stores, supra, it has been suggested that
the purchaser-seller limitation on standing to sue under
Section 10(b) of the Act, and Rule 10b-5 thereunder,
should also be engrafted onto private actions under Sec-
tion 14(e).

The purchaser-seller limitation on Rule 10b-5 actions
was imposed by this Court in Blue Chip largely as a
result of the precise language of Section 10(b)—that
violations occur in connection with “the purchase or sale
of any security”—-language pointedly not present in Sec-
tion 14(e). Indeed, the same court that first implied the
purchaser-seller limitation for 10b-5 private actions has
held that the same limitation does not apply in private
actions under the Williams Act, Electronic Speciality
Co. Vv. International Controls Corp., 409 F.2d 937, 945
n.6 (C.A. 2, 1969); A-34, and its view in that regard
has been followed by every court to consider the question.
See, e.g., Smallwood v. Pearl Brewing Co., 489 F.2d 579,
596 (C.A. 5, 1974), H. K. Porter Co., Inc. v. Nicholson
File Co., 482 F.2d 421, 424 (C.A. 1, 1973); Dyer v.
Eastern Trust & Banking Co., 336 F. Supp. 890, 914 (D.
Me., 1971). See also, Bromberg, Securities Law of Ten-
der Offers, 15 N.Y.L.F. 459, 548-549 (1969). Hamilton,
Some Reflections on Cash Tender Offer Legislation, 15

(2)

138

N.Y.L.F. 296, 289 (1969); Note, The Developing Mean-
ing of “Tender Ojfer” Under the Securities Exchange
Act of 1934, 86 Harv. L. Rev. 1250, 1260 (1973); Note,
The Williams Amendments: An Evaluation of the Early
Returns, 23 Vand. L. Rev. 700, 709-710 (1970). This is
consistent with the legislative history underlying the en-
actment of Section 14(e). It was noted during the hear-
ings that the broad language of the Section was intended
to correct the “unsettied state of the law” with respect
to the need for a purchase or sale. See House Hearings,
p. 59.

Moreover, requiring private plaintiffs to demonstrate
that they purchased or sold a security, before they could
complain of violations in connection with a tender offer,
would deny them many essential protections of the Wil-
liams Act—for example, if an offeror received more
shares than it requested, but refused to apply the pro-
rata acceptance protections of Section 14(d) (6) of the
Act to a tendering shareholder; in such a circumstance,
the very act complained of would be that the plaintiff
could not “sell” or tender securities when it had a statu-
tory right to do so. Like the proxy rules, upon which it
was patterned, the Williams Act was meant to govern
the conduct of contests for corporate control, not simply
fraud in the purchase or sale of securities.

It is also suggested that this Court should limit the ap-
plication of the protections of Section 14(e) of the Wil-
liams Act only to cash tender offers, not exchange offers.
But, Section 14(e) of the Act, by its express terms ap-
plies to “any tender offer * * * ,” and it makes no dis-
tinction between cash tender offers and tenders through
an exchange of securities. Moreover, the Committee re-
ports on the Williams Act explicitly state that Section
14(e) applies to “any tender offer, whether for cash,

’ securities or other consideration.” H.R. Rep. 1711, 90th

Cong., 2d Sess. 11 (1968); S. Rep. 550, 90th Cong., Ist
Sess. 10-11 (1967). Indeed, before its enactment, the
terms of Section i4(e) were moved to a separate sub-
paragraph precisely to ensure that it would apply to

: Sel wr Cte DD heels AoE: + Ko

(3)

139

exchange offers as well as cash offers. See p. 63 n. 156,
supra.

It is possible that persons misled in an exchange tender
offer may also fall within the class of persons expressly
protected by Sections 11 or 12(2) of the Securities Act,
but that fact, if true, would not warrant judicial rewrit-
ing of the terms of Section 14(e). Persons who actually
tender their shares and have a cause of action under Sec-
tion 11 of the Securities Act presumably should not also
need the protections of Section 14(e); and, in such cir-
cumstances, actions brought under Section 14(e) presum-
ably would, in most cases, be subject, by analogy, to the
same conditions provided in Section 11. See pp. 149-160,
infra. Cf. Ernst & Ernst v. Hochfelder, 96 S.Ct. 1375.

Finally, some of the parties suggest that a prevailing
plaintiff in a suit involving violations of the Williams
Act should be limited to prospective, injunctive, relief
only, and that damage relief should not be available.

But that issue was definitively resolved in J. J. Case Co.
Vv. Borak, 377 U.S. 426, 432-435 (1964), where this Court
rejected an identical claim, in part because “the possi-
bility of civil damages” was “a most effective weapon in
the enforcement of the proxy requirements,” and in part
because it is “the duty of the courts to be alert to pro-
vide such remedies as are necessary to make effective
the Congressional purpose.” Accord, Deckert v. Inde-
pendence Shares Corp., 311 U.S. 282, 288 (1940); Bell
V. Hood, 327 U.S. 678, 684 (1946), Bath Indus. Ine. V.
Blot, 427 F.2d 97, 113 (C.A. 7, 1970); H. K. Porter Co.,
Inc. v. Nichoison File Co., 482 F.2d 421, 423 (C.A. 1,
1973) ; cf. Rondeau v. Mosinee Paper Co., 422 U.S. 49,
59 (1975).

Indeed, limiting private parties to prospective injunctive
relief may, effectively, limit them to largely illusory rem-
edies. A takeover may occur with great speed so that a
court would generally be asked to grant an injunction
before al] the facts are known. Because a tender offer
may be based on financial] commitments of a limited dura-
tion, a court might well hesitate to enjoin the offer until

140

The Commission, as a government agency, prop-
erly has no interest in the specific amount of damages
awarded for a proven violation of the Act; its concern
is with the principles applied in arriving at a compu-
tation of damages. To effectuate the purposes of the
Act, the manner in which damages are calculated

complex and difficult questions of fact and law have been
resolved. In addition, “once the tender offer has been
consummated it becomes difficult, and sometimes virtually
impossible, for a court to ‘unscramble the eggs.’ ”’ Sonesta
International Hotels Corp. v. Wellington Associates, 483
F.2d 247, 250 (C.A. 2, 1973). Since there is nothing in
the statutory policy of the Act which “requires the court
to unscramble a corporate transaction merely because a
violation occurred,” Mills v. Electric Auto-Lite Co., su-
pra, 396 U.S. at 386, a court, in devising the type of
restrospective relief which is most appropriate, should
“consider the same factors that would govern the relief
granted for any similar illegality or fraud.” Jd. at 386.
“([MJonetary relief’ should always be “a possibility,”
Mills, supra, 396 U.S. at 388. The lower courts have been
uniform in awarding damages, where appropriate, in
private actions under Section 14(e). See, e.g., Lowen-
schuss V. Kane, 520 F.2d 255, 268-269 (C.A. 2, 1975);
H. K. Porter Co., Inc. v. Nicholson File Co., 482 F.2d
421, 424-425 (C.A. 1, 1973).

Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251 (1972),
does not compel a different result. In Hawaii, this Court
simply held that Section 4 of the Clayton Act, 15 U.S.C.
§ 15, required a litigant to demonstrate actual injury to
its “business or property” before damages could be
awarded. The State of Hawaii was permitted to main-
tain such an action to the extent it could demonstrate
such losses in its proprietary capacity, but was not per-
mitted to maintain such a suit, as parens patriae for its
citizenry, because of an alleged, and rather amorphous
injury to its “general economy,” 405 U.S. at 264.

141

should both implement the statutory scheme, and
not cause undue disruption in the methods by which
persons regulated under the Act carry on their nor-
mal business activities.

If damages are denied in the face of truly violative
conduct, or, are otherwise inadequate where real
injury has been suffered, so as to diminish the likeli-
hood that bona fide private lawsuits will be brought
or, conversely, if damages are computed in a Dra-
conian fashion, the principles employed in awarding
and measuring damages will not effectuate the Con-
gressional purposes underlying the Act.

On the other hand, awards of damages under the
federal securities laws were intended to be com-
pensatory. Section 28(a) of the Securities Exchange
Act authorizes the courts to award damages in private
actions under the Act to compensate for the “actual
damages [sustained] on account of the act complained
of,” ** including consequential damages, while puni-
tive and speculative damages have traditionally been
viewed as contrary to the intent of Section 28.*° In

343 Affiliated Ute Citizens v. United States, 406 U.S. 128,
154-155 (1972) ; Simon v. New Haven Bd. & Carton Co., Inc.,
516 F.2d 303 (C.A. 2, 1975); Wolf v. Frank, 477 F.2d 467
(C.A. 5), certiorari denied, 414 U.S. 1065 (1973); Richard-
son V. MacArthur, 451 F.2d 35 (C.A. 10, 1971).

344 A ffilated Ute Citizens v. United States, 406 U.S. 128, 155
(1972) ; Janigan v. Taylor, 344 F.2d 781, 786 (C.A. 1), cer-
tiorari denied, 382 U.S. 879 (1965).

345 deHaas v. Empire Petroleum Co., 435 F.2d 1223 (C.A.
10, 1970) ; Myzel v. Fields, 386 F.2d 718 (C.A. 8, 1967), cer-
tiorari denied, 390 U.S. 951 (1968); Green v. Wolf Corp.,

142

measuring damages sustained by a prevailing plain-
tiff under the Act, the courts most frequently look
to the plaintiff’s “out-of-pocket” expenses.*” Simi-
larly, under the Securities Act, punitive damages
have been disallowed,’ and the damages based on
limitations provided by Section 11 and 12 of that Act
have been, in acordance with their terms, computed to

406 F.2d 291 (C.A. 2, 1968), certiorari denied, 395 U.S. 977
(1969) ; Simon v. New Haven Bd & Carton Co., Inc., 516 F.2d
303 (C.A. 2, 1975); Meisel v. North Jersey Trust Co. of
Ridgewood, 216 F. Supp. 469 (S.D. N.Y., 1963) ; Schaefer v.
First National Bank of Lincolnwood, 326 F. Supp. 1186 (N.D.
Il]., 1970), appeal dismissed, 465 F.2d 234 (C.A. 7, 1972);
In Re Caesars Palace Securities Litigation, 360 F. Supp. 366
(S.D. N.Y., 1973). See Wolf v. Frank, 477 F.2d 467 (C.A. 5,
1973), certiorari denied, 414 U.S. 975 (1973).

On the other hand, as this Court has held, where a defend-
ant-buyer has received more than the plaintiff-seller’s actual
loss, “damages are the amount of the defendant’s profit.”
Affiliated Ute Citizens v. United States, 406 U.S. 128, 155
(1972). Accord, Janigan V. Taylor, 344 F.2d 781, 786 (C.A.
1), certiorari denied, 382 U.S. 879 (1965).

*#° See e.g. Abrahamson v. Fleschner, 392 F. Supp. 740
(S.D. N.Y., 1975), appeal pending, Docket No. 75-7203 (C.A.
2); Schaefer Vv. First National Bank of Lincolnwood, supra
326 F. Supp. 1186; Tucker v. Arthur Andersen & Co., 67
F.R.D. 468 (S.D. N.Y., 1975).

*** See, e.g., Hill York Corp. v. American International
Franchises, Inc., 448 F.2d 680, 697 (C.A. 5, 1971) ; Globus v.
Law Research Service, Inc., 418 F.2d 1276, 1284-1287 (C.A.
2, 1969), certiorari denied, 397 U.S. 913 (1970); Green v.
Wolf Corp., supra, 406 F.2d at 303; Hirsch & Lewis, Punitive
Damages Under the Federal Securities Acts, 47 Notre Dame
L. Rev. 72 (1971). But see, Nagel v. Prescott & Co., 36 F.R.D.
445, 449 (N.D. Chio, 1964) suggesting that exemplary dam-
ages are not excluded under Section 12(2), “upon a proper
showing of maliciously improper conduct ;” Berley v. Dreyfus
& Co., 43 F.R.D. 397, 399 (S.D. N.Y., 1967) (semble).

143

compensate successful plaintiffs for the actual dam-
ages they have sustained.”

A careful balancing of the several factors which
play a role in the resolution of these competing policy
considerations is required to harmonize the prior
teachings of this Court with the need to fashion ap-
propriate relief to remedy violations of the Williams
Act.

In considering the measure of damages in implied
private actions, this Court has repeatedly made clear
the fact that questions of relief and liability should be
treated separately under the Securities Exchange Act,
and that a separate standard of. causation should be
applied to each. Thus, in Mills v. Electric Auto-Lite
Co., 396 U.S. at 384-385, it was held that causation,
for the purpose of liability, may be established as a
matter of law once the materiality of a misleading
statement or omission had been established. Mr. Jus-
tice Harlan, writing for a unanimous Court on this
point, stated:

“Where the misstatement or omission in a proxy
statement has been shown to be material, * * *
that determination itself indubitably embodies a
conclusion that the defect was of such a char-
acter that it might have been considered im-

portant by a reasonable shareholder who was in
the process of deciding how to vote. This re-

4815 U.S.C. 78k and 781; See, e.g., Kramer v. Scientific
Control Corp., 365 F. Supp. 780 (E.D. Pa., 1973) ; Goldman
v. Bank of Commonwealth, 332 F. Supp. 699 (E.D. Mich.,
1971), affirmed, 467 F.2d 439 (C.A. 6, 1972); Hirsch &

Lewis, supra.

144

quirement that the defect have a significant
propensity to affect the voting process is found
in the express terms of Rule 14a-9, and it ade-
quately serves the purpose of ensuring that a
cause of action cannot be established by proof
of a defect so trivial, or so unrelated to the
transaction for which approval is sought, that
correction of the defect or imposition of liability
would not further the interests protected by § 14

(a).

There is no need to supplement this requirement
with a requirement of proof of whether the de-
fect actually had a decisive effect on the voting.
Where there has been a finding of materiality,
a shareholder has made a sufficient showing of
causal relationship between the violation and the
injury for which he seeks redress if, as here, he
proves that the proxy solicitation itself * * * was
an essential link in the accomplishment of the
transaction.” **

Similarly, in Affiliated Ute Citizens v. United
States, 406 U.S. 128, 154 (1972), this Court unani-
mously held that the “withholding of a material fact
establish[es] the requisite element of causation in
fact’”’ to make out a cause of action under Rule 10b-
5; and, in TSC Indus., Inc. v. Northway, Inc., 96 S. Ct.
2126, 2130 (1976), it was held that “[s]o long as the
misstatement or omission was material, the causal

**° (Emphasis supplied.) In J. I. Case Co. v. Borak, 377
U.S. 426, 431 (1964), this Court held that a private right of
action “exists as to both derivative and direct” claims, even
before a “causal relationship” had been established between
the violation alleged and the injury claimed.

145

relation between violation and injury is sufficiently
established’.” **°

However, Mills was careful to separate the two very
different contexts in which “causation” arises: (i)
causation for purposes of determining the existence
of a cause of action—that is, liability, and (ii) dam-
ages causation. As to the latter, the Court made
clear:

“Our conclusion that petitioners have established
their case by showing that proxies necessary to
approval of the merger were obtained by means
of a materially misleading solicitation implies
nothing about the form of relief to which they
may be entitled.”

396 U.S. at 386.

36° And see, Rondeau v. Mosinee Paper Corp., 422 U.S. 49
(1975). Just as causation may be established by the material-
ity of the misstatements or omissions in proxy or tender offer
materials, so too may reliance. In Ute, supra, this court held
that “positive proof of reliance [on material misrepresenta-
tions] is not a prerequisite to recovery. All that is necessary
is that the facts withheld be material * * *.” 406 U.S. at 153-
154. See also Mills, supra, 396 U.S. at 382 n. 5; TSC, supra,
96 S. Ct. at 2132 n. 9, to the effect that “positive proof of
reliance is not necessary when materiality is established.”

The practical necessity of deducing reliance from material-
ity rather than requiring actual proof of reliance was ex-
plained by Mr. Justice Harlan in Mills:

“Proof of actual reliance by thousands of individuals
would, as the [lower] court acknowledged, not be feas-
ible, * * * and reliance on the nondisclosure of a fact
is a particularly difficult matter to define or prove * * *
(citations omitted, emphasis in original).

396 U.S. at 382 n. 5.

146

After considering “[p]Jossible forms of relief,” 396
U.S. at 386, the Court concluded that “damages should
be recoverable only to the extent that they can be
shown,” 396 U.S. at 389, and remanded the case for
further proceedings on the damages question. Indeed,
“Mills could not be plainer in holding that the ques-
tions of liability and relief are separate in private
actions under the securities laws, and that the latter
is to be determined according to traditional princi-
ples,” Rondeau v. Mosinee Paper Corp., 422 U.S. 49,
64 (1975).

Application of the Mills-Ute-TSC objective stand-
ard of liability causation to Section 14(e) follows
logically from the intent of the Congress to establish
under the tender offer provisions a scheme of regula-
tion parallel to that existing under the proxy provi-
sions.*" As Mr. Justice Harlan noted in Mills, the ob-
jective test “avoid[s] the impracticalities,” of proving
injury and, “by resolving doubts in favor of those
the statute is designed to protect, will effectuate the
congressional policy of ensuring that the shareholders
are able to make an informed choice when they are
consulted on corporate transactions.” 396 U.S. at 385.
This rationale is equally applicable to actions brought
for viclations of Section 14(e), since that Section
was designed to protect each of the parties partici-
pating in, or affected by, tender offer contests.** Cau-
sation, therefore, should be presumed, as was done by

31 See, pp. 52-54, supra.

852 See discussion at pp. 69-74, supra.

147

the Court of Appeals below ** for the purposes of
establishing liability under Section 14(e) where ma-
terial misstatements or omissions have been shown.
But, as was held in Mills, supra, 396 U.S. at 389,
and noted in Rondeau, supra, 422 U.S. at 64, “dam-
ages should he recoverable only to the extent that they
can be shown.” The presumption of causation from
materiality, consequently, does not automatically en-
title a private plaintiff to monetary damages—a cau-
sal connection between the material misstatement or
omission on the one hand, and the consequences com-
plained of on the other, must be demonstrated. Thus,
while the court below, having properly found material
misstatements and omissions,** properly presumed
causation to establish liability** (A. 55-63), the

8 See A. 55-63.

4 See TSC Indus., Inc. v. Northway, Inc., 96 S. Ct. 2126,
2130-2131 (1976).

*°* The Court of Appeals below held:

“(T]he fact that CCI was not directly deceived is what
makes application of the Mills-Ute test appropriate and
essential. It would be unduly burdensome to require an
offeror to prove actual reliance when, as here, there are
numerous shareholders who undoubtedly possess a wide
range of expertise and knowledge. It would be imprac-
tical to require CCI to prove that each individual Piper
shareholder who failed to trade for CCI’s stock, or who
traded for BPC’s stock, relied upon defendants’ misrep-
resentations in doing so. These impracticalities are
avoided by establishing a presumption of reliance where
it is logical to presume that reliance in fact existed. Kohn
v. American Metal Climaz, Inc., supra, 458 F.2d at 288-

148

plaintiff here should be allowed to recover only those
damages shown to have been caused by the violative
conduct. For, as Judge Friendly stated in Crane Co. v.
American Standard, Inc., 490 F. 2d 332, 334 (C.A.
2, 1973):

“Quite conceivably a judge * * * might find the
chain of causation so dubious and the task of
determining damages so elusive as to lead him
to decide that, except for some items that may
be readily provable, he could not properly award
anything save perhaps attorneys’ fees.”

Beyond the question of causation, federal courts, in
exercising their power to “make effective the right
of recovery afforded by the Act,” ** cannot ignore the
fact that the Williams Act, as part of the Securities
Exchange Act, subjects injured plaintiffs to the limi-
tations on recovery the Act generally provides in
Section 28(a)—‘“actual damages on account of the
Act complained of.” *”

291. As we have stated above, § 14(e) was designed to
protect offerors from unfair and unlawful opposition.
By ‘resolving doubts in favor or those the statute is
designed to protect,’ Mills v. Eiectric Auto-Lite Co.,
supra, 396 U.S. at 385, we are implementing congres-
sional intent not only to protect investors, but to make
sure that contests for contro] between offerors and in-
cumbent management, or other offerors, shall proceed
fairly.” (A. 59-60).

*°° Deckert Vv. Independence Shares Corp., 311 U.S. 282, 288

(1940). Accord, J. I. Case Co. v. Borak, 377 U.S. 426, 433-
434 (1964).

**7 15 U.S.C. 78bb. That damages may be awarded for Wil-
liams Act violations has not been doubted by the lower courts.
See, e.g., Lowenschuss V. Kane, 520 F.2d 255, 268-269 (C.A. 2,

149

Sections 14(e) and 28(a), moreover, are but two
provisions of the Securities Exchange Act which,
along with the Securities Act, “constitute interrelated
components of the federal regulatory scheme govern-
ing transactions in securities.” Ernst & Ernst v.
Hochfelder, supra, 96 S. Ct. at 1387; Blue Chip
Stamps, supra, 421 U.S. at 727-730. Accordingly, as
this Court has noted, “the interdependence of the
various sections of the federal securities laws is cer-
tainly a relevant factor in any interpretation of the
language Congress has chosen * * *.” Securities and
Exchange Commission v. National Securities, Inc.,
393 U.S. 453, 466 (1969); Hochfelder, supra, 96 S.
Ct. at 1388-1389. In accordance with this teaching
and because the instant case involves misleading
statements in a registration statement and prospectus
filed in connection with an exchange tender offer,”
the express civil liability sections of the Securities
Act should be considered in determining the appro-
priate relief to be granted here.*”

1975); H. K. Porter Co., Inc. v. Nicholson File Co., 482 F.2d
421, 424-425 (C.A. 1, 1973).

8 See A. 16-18.

*8° As a threshold proposition, it seems self-evident that the
courts may, on an ad hoc basis, limit the relief available in a
private action under the Williams Act where the Commission
has obtained relief in its own enforcement action which re-
stores all injured persons to their status quo ante, or other-
wise makes them whole. While the Commission may not in-
stitute its own lawsuit to vindicate purely individual griev-
ances, see, e.g., Federal Trade Commission Vv. Klesner, 280
U.S. 19 (1929), when the Commission does bring suit, it may

150

seek remedies that are ancillary to its traditional injunctive
relief, including the disgorgement of profits unlawfully ob-
tained by wrongdoers and the creation of a pool of funds to
compensate the victims of a fraud. See, e.g., Securities and
Exchange Commission V. Manor Nursing Centers, Inc. 458
F.2d 1082 (C.A. 2, 1972); Securities and Exchange Commis-
sion V. Texas Gulf Sulphur Co., 446 F.2d 1301 (C.A. 2, 1971);
Securities and Exchange Commission Vv. Bowler, 427 F.2d
190, 197-198 (C.A. 4, 1970); Securities and Exchange Com-
mission V. Bartlett, 422 F.2d 475, 477-478 (C.A. 8, 1970);
Los Angeles Trust Deed & Mortgage Exchange v. Securities
and Exchange Commission, 285 F.2d 162, 181-182 (C.A. 9,
1960) ; Securities and Exchange Commission Vv. Aldred In-
vestment Trust, 151 F.2d 254 (C.A. 1, 1945). Such relief is
sought by the Commission to effectuate the purposes of the
federal securities laws, and is a proper exercise of the equity
powers of a federal] court. Securities and Exchange Commis-
sion V. Texas Gulf Sulphur Co., supra, 446 F.2d at 1308.

And, where the Commission obtains injunctive and other
equitable relief, such a result conceivably could, as well, re-
dress in whole or in part injuries suffered by private liti-
gants. Since private actions are implied under the fed-
eral securities law, at least in part, to “supplement” Com-
mission enforcement action, the effects of the award of such
remedies in Commission actions should be considered before
a damage award is made in a private action.

In the instant case, for example, the Commission obtained
a judgment requiring Bangor Punta to make a rescission offer
to all of the Piper shareholders who had tendered their shares
during the period in which the misleading Bangor Punta pros-
pectus was in circulation (D-16). Thus, the District Court
attempted to remedy the misleading registration statement and
prospectus by restoring the Piper shareholders to the status
quo ante violation. Had no other violations occurred, and, if
Chris-Craft were unable to sustain a showing that it had suf-
fered damages, no further award of relief would be necessary.
The Commission, however, in seeking disgorgement of illegal
profits, cannot always effect an award of monies in an amount
equal to the actual damages suffered by the parties to a
transaction, and, therefore, it is likely that there will be many
situations where private damage actions will be necessary

151

Sections 11, 12 and 15 create express civil liabili-
ties under the Securities Act.*” Each of these sections
“allow[s] recovery for negligent conduct,” Ernst &
Ernst v. Hochfelder, 96 S. Ct. at 1388. Section 11,
for example, claimed by First Boston here as a limi-
tation on its liability, “unambiguously creates a pri-
vate action for damages when a registration statement
includes untrue statements of material facts or fails
to state material facts necessary to make the ‘tate-
ments therein not misleading,” Hochfelder, supra,
96 S. Ct. at 1388. Similarly, Section 12 “creates po-
tential civil liability for a seller of securities in favor
of the purchaser for misleading statements or omis-
sions in connection with the transaction,” id., at 1338
n. 27. Unlike Section 28(a) of the Securities Ex-
change Act, however, Sections 11 and 12(2) specify
precise damage measurements to be applied.

Since both Section 11 and Section 12 of the Se-
curities Act explicitly provide for recovery where

to complement Commission actions, see, e.g., Ruder, Texas
Gulf Sulphur—The Second Round, 63 N.W. L. Rev. 423, 429

(1968).

36° Section 11 of the Securities Act establishes express civil
remedies for false or misleading registration statements.
Section 12 of the Act establishes express civil remedies for
false or misleading prospectuses or oral communications. Sec-
tion 15, relating to “control” persons, is not relevant for the
purposes of this discussion, although the reasoning herein
should be equally applicable in a Section 15 action, 96 S. Ct.
at 1388 n. 27.

152

conduct is merely inadvertent or negligent," and —

since violations of these sections may also amount to
violations of the Securities Exchange Act,*” the ques-
tion arises whether recovery for wrongs that are vio-
lations of both acts are necessarily limited by the ex-
press civil remedy provisions of the Securities Act.
Limitations on recovery in these express civil remedy
provisions provide an apt analogy for measuring dam-
ages resulting from negligent or inadvertent viola-
tions of the Securities Exchange Act. Where there
is added the ingredient of fraud, however, the limita-
tions on recoveries under the Securities Act should
not be applied by analogy to suits for violations un-
der the Securities Exchange Act, even if the suit could
also have been maintained under the Securities Act.

Judge Jerome Frank first decided this issue
twenty-five years ago, in Fischman v. Raytheon Man-
ufacturing Co., 188 F. 2d 783, 786-787 (C.A. 2,
1951). Writing for a unanimous panel of the Court

%1 Brnst & Ernst v. Hochfelder, supra, 96 S. Ct. at 1388;
Fischman Vv. Raytheon Mfg. Co., 188 F.2d 783 (C.A. 2, 1951) ;
Unicorn Field, Inc. v. Cannon Group, Inc., 60 F.R.D. 217
(S.D. N.Y., 1973); Phillips v. Alabama Credit Corp., 403
F.2d 693 (C.A. 5, 1968); Johns Hopkins University v. Hut-
ton, 297 F. Supp. 1165 (D. Md., 1968), affirmed in part, re-
versed in part, 422 F.2d 1124 (C.A. 4, 1970) ; Wilko v. Swann,
127 F. Supp. 55 (S.D. N.Y., 1955).

862 See, e.g., Fischman Vv. Raytheon Mfg. Co., 188 F.2d 783
(C.A. 2, 1951); Matheson v. Armbrust, 284 F.2d 670 (C.A.
9, 1960); Ellis v. Carter, 291 F.2d 270 (C.A. 9, 1961); Orn
v. Eastman Dillon, Union Securities & Co., 364 F. Supp. 352
(C.D. Cal., 1973).

/ +
~
,

153

of Appeals for the Second Circuit, Judge Frank held
that suits under Section 10(b) of the Securities Ex-
change Act could be brought “free of the restrictions”
applicable to a suit under Section 11 of the Securities
Act:

“We think that when, to conduct actionable un-
der § 11 of the 1933 Act, there is added the in-
gredient of fraud, then that conduct becomes ac-
tionable under § 10(b) of the 1934 Act and [Rule
10b-5] at the suit of any defrauded person,
whether or not he could maintain a suit under
§ 11 of the 1933 Act.

“Were this not true, Section 11 of the 1933 Act,
designed to protect investors even where there is
no fraud, would afford a shelter or sanctuary for
those who defraud investors” (footnote omitted).
Cf. McClure v. Borne Chemical Co., 292 F. 2d 824
(C.A. 3, 1961); Donlon Indus. Inc. v. Forte, 402
F, 2d 935 (C.A. 2, 1968) (Friendly, J.); Ellis v.
Carter, 291 F. 2d 270 (1961); Matheson v. Arm-
brust, 284 F. 2d 670 (1960). Knowing wrongdoers,
in sum, should not be able to find “shelter or sanc-
tuary” in the express limitations on liability set forth
in the Securities Act to protect against inadvertent
misleading statements.” Thus, if First Boston,

363 Cf. Herzfeld v. Laventhal, Kreckstein, Horwath & Hor-
wath, CCH Fed. Sec. L. Rep. § 95,660 (C.A. 2, July 15, 1976);
Bailey v. Meister Brau, Inc., CCH Fed. Sec. L. Rep. { 95,543
(C.A. 7, May 6, 1976); Gould v. American-Hawaiian Steam-
ship Company, CCH Fed. Sec. L. Rep. {| 95,512 (C.A. 3, April
8, 1976); and United States v. Charnay, CCH Fed. Sec. L.
Rep. § 95,560 (C.A. 9, May 7, 1976), petition for rehearing
en banc denied (C.A. 9, July 8, 1976).

[Footnote continued on page 154]

154

Bangor Punta or the Pipers made knowing misstate-
ments in connection with sales of securities, the limi-
tations on recovery under the Securities Act should
not, by analogy, be applied to limit the relief that
Chris-Craft can obtain from them under Section
14(e).°”

868 [Continued]

If liability for violations of the Securities Exchange Act
were limited to the same amounts recoverable under the Se-
curities Act when both Acts are violated, it would be possible
for the perpetrators of a fraud to calculate, in accordance
with the precise damage provisions of Sections 11 and 12
of the latter Act, the maximum amount of their liability and
thus the maximum risk to which their knowing fraud, if un-
covered, would expose them. But such a result is contrary to
the entire purpose of the Securities Act. Moreover, it is ap-
parent that “actua] damages” to the victim of such a know-
ing fraud might far exceed the amount recoverable under
the Securities Act, a burden that the wrongdoer, nct his vic-
tim, appropriately should bear.

%6* As the above analysis suggests, “‘scienter,’”’ 7.e., “a men-
tal state embracing intent to deceive, manipulate or defraud,”
Ernst & Ernst Vv. Hochfelder, 96 Sup. Ct. 1375, 1381 n. 12, is
not a necessary element to establish entitlement to damages
in a cause of action pursuant to Section 14(e). Damages may
be limited by analogy to Sections 11 and 12 of the Securities
Act if the conduct of the parties here was inadvertent or
merely negligent. By the same token, damages may be
awarded in accordance with Section 28(a) of the Securities
Exchange Act against the knowing violator.

The statutory language of Section 14(e)—“the starting
point in every case involving the construction of a statute,”
Blue Chip Stamp vy. Manor Drug Stores, 421 U.S. at 756
(Powell, J., concurring)—is in itself ample indication that
Congress intended to proscribe strictly inadvertent, mis-
leading statements and omissions: The Section is drafted
in the disiunctive, it directly prohibits failures to disclose
and it specifically proscribes the making of “untrue” state-
ments. This Court intimated as much in Ernst & Ernst v.

155

Conversely, however, where conduct is merely neg-
ligent or inadvertent, the Securities Act limitations
on liability appropriately, by analogy, may be ap-
plied. Thus, if this Court were to find that Bangor
Punta or the Pipers made false and misleading state-
ments in connection with the sale of Bangor Punta or
Piper securities, but that such statements were made
inadvertently, by analogy the limitations on recovery

Hochfelder, supra, when it examined the language of Rule
10b-5, which is followed almost word for word in the lan-
guage of Section 14(e), and concluded:

“Viewed in isolation the language of subsection (2),
and arguably that of subsection (3), could be read as |
proscribing, respectively, any type of material misstate-
ment or omission, and any course of conduct, that has
the effect of defrauding investors, whether the wrong-
doing was intentional or not.”

96 S. Ct. at 1390.

In addition, the legislative history unmistakably indicates
that Congress was concerned with “inaccurate or incomplete”
information and presentations, see, e.g., 112 Cong. Rec. 19003
(1966), Senate Hearings, pp. 17, 19, 20, 28, 31, 35, 38,
98-99, 125, 159, 178, 196, 210; Senate Report, 10-11; House
Hearings, pp. 17, 59; and was aware that the Section as
drafted would not require proof of fraud, Senate Hear-
ings, p. 196. See also, id., pp. 125, 159 and 178. Moreover,
since an intent to deceive, manipulate, or defraud is not, and
has not been, required to establish violations of Rule 14a-9,
adopted pursuant to Section 14(a) of the Exchange Act, see,
e.g., Richland vy. Crandall, 262 F. Supp. 538 (S.D. N.Y.,
1967); Gerstle v. Gamble-Skogmo, Inc., 478 F. 2d 1281 (C.A.
2, 1973) (Friendly, J.); Gould v. American Hawaiian Steam-
ship Company, 523 F. 2d 761 (C.A. 3, 1976), and, since the
relevant portion of Section 14(e) is substantially identical to
Rule 14a-9, see Senate Hearings, pp. 140-141, such an intent
should not be required to establish a violation of Section 14
(e). But cf. Gerstle v. Gamble-Skogmo, Inc., supra, 478 F. 2d
at 1299 n. 17.

156

in Section 12(2) of the Securities Act might be ap-
plied. Similarly, if this Court were to find that First
Boston acted as an underwriter and nothing more,
and that its conduct with regard to the misleading
registration statement was merely inadvertent or
negligent, it would be proper to apply, by analogy,
limitations on relief similar to those in Section 11 in
assessing damages against it.°*”

%65 The court of appeals found that First Boston “had an
obligation with respect to the [Bangor Punta] exchange of-
fer to reach a careful, independent judgment” (A. 51) and
that First Boston was “duty bound to make a reasonable
further investigation” (A. 51), if a suggestion arose that the
exchange offer materials were deceptive (A. 51). Further, it
explicitly held that “First Boston did not adequately perform
its duty,” (A. 51) and that its conduct “went far beyond
mere negligence” (A. 54) and “amounted to an almost com-
plete abdication of its responsibilities”. (A. 55).

The district court, by contrast, failed to perceive the inde-
pendent duty of First Boston. It found that First Boston
“acted solely in furtherance of what [it] believed in good
faith to be the legitimate interests of [its] clients” (A. 159).
Thus, while the court of appeals analyzed First Boston’s lia-
bility in terms of negligence and the breach of its duty as
an underwriter, the district court conducted its analysis from
the premise that First Boston was not to be “responsible or
liable for the action of its clients” (A. 159) in the absence
of “fraud or deceit” (A. 158).

It is the Commission’s view that the premise from which
the court of appeals began its inquiry was the correct one.
The appellate court properly observed that:

“An underwriter by participating in an offering construc-
tively represents that statements made in the registra-
tion materials are complete and accurate. The investing
public properly relies upon the underwriter to check the

ecuracy of the statements and the soundness of the
offer; when the underwriter does not speak out, the in-

157

Reliance on Section 11 limitations on recovery,
however, is fundamentally misplaced if an invest-
ment banker serves in the dual capacity of under-
writer and dealer-manager. The role of the dealer-

vestor reasonably assumes that there are no undisclosed
material deficiencies” (A. 50).

Consequently, an underwriter has a duty to act diligently in
performing its function and to inquire when it is “aware of
facts that strongly [suggest], even though they [do] not con-
clusively show, that * * * registration materials [are] decep-
tive” (A. 51). Because First Boston did not conduct such
an inquiry here, although it had reason to believe that Bangor
Punta’s registration statement might be deceptive, First Bos-
ton breached its duty as an underwriter and consequently
may properly be found, on the present record, at least liable
in accordance with the minimal liability provisions of Section
il. Thus, the judgment of the court of appeals as against
First Boston should be affirmed insofar as it compensates
Chris-Craft in accordance, by analogy, with Section 11 of the
Securities Act.

The remaining issue is whether First Boston’s liability
should extend beyond the limitations provided by Section ii
to compensate Chris-Craft for its actual damages as provided
by Section 28(a) of the Securities Exchange Act. Since our
reading of the lower court opinions in this case indicates tnat
the district court made no findings of fact and drew no con-
clusions of law regarding the extent of First Boston’s culpa-
bility in terms of breach of its independent duty as an under-
writer, we cannot say, as did the court of appeals, whether,
as a matter of law, First Boston’s conduct was more than
negligent. :

Such a determination should be made, in the first instance,
by a district court inquiring into that question. Accordingly,
the Commission believes it appropriate for this Court to va-
cate that portion of the order of the court of appeals that
imposes liability upon First Boston exceeding that provided,
by analogy, under Section 11, and remand the cause for hear-
ing on the question of whethe: First Boston was more than

negligent.

158

manager, discussed supra at pages 38-41, may be sig-
nificantly different from the role of a mere under-
writer of a registered securities offering. The dealer-
manager of an exchange tender offer often serves as
the “acknowledged general” and principal adviser to
the offeror and undertakes responsibility for the
soundness of the transaction and the accuracy of the
disclosures not only in the offering but in the full
panoply of materials used in the attack or defense.
In these instances, it is compensated not as an inde-
pendent underwriter but rather as the offeror’s ally,
actively participating in the tender offer contest. In
addition, it usually receives benefits from the offeror
in the form of additional fees which the other under-
writers and soliciting dealers do not receive.“ Where
these differences between a traditional underwriter
and a dealer-manager exist, it would be inappropriate
to apply, by analogy, the liability limitations of Sec-
tion 11 to an investment banker serving in a dual
capacity as underwriter and dealer-manager.””

*°° It should be noted that Section 11(e) provides that an
underwriter’s liability is limited only when the underwriter
receives, in proportion to the amount of securities under-
written, no greater benefit than other underwriters. There-
fore, an underwriter who does receive additional fees from
the issuer could be held liable under Section 11(e) for dam-
ages exceeding the public offering price of the securities he
has directly underwritten. See also, supra, pp. 39-41.

* The legislative history establishes that Congress specifi-
cally chose not to extend the benefits of Section 11 limita-
tions on liability to persons who violate Section 14(e). Sen-
ate Hearings, pp. 112, 164; see also, p. 63 n. 156, supra.

There could be situations, however, where the misleading
prospectus of tender offeror A induces a stockholder to ten-

159

Here, both the district court and the court of ap-
peals “agree[d]” that, “based on substantial evi-
dence,” First Boston, “in its capacity as investment
banker * * * merely provided professional services to
[Bangor Punta and Piper],” A. 55 n.25,. The busi-
ness decisions that led to violations of the securities
laws were initiated by these companies, “not by First
Boston in its role of investment banker,” id. Assum-
ing that First Boston did not act knowingly, these
findings of its limited role, if not clearly erroneous,
would permit this Court to conclude that First Bos-
ton’s conduct was more analogous to that of a tradi-
tional underwriter and not to that of the usual
dealer-manager, and for the application, by analogy,
of limitations on damages in Section 11 of the Secur-
ities Act.

Moreover, the limitation placed on an underwriter’s
liability under Section 11 of the Securities Act simply
recognizes that the loss suffered by a defrauded pur-
chaser will presumably not exceed the price he paid
for the securities. In contrast, the losses incurred by
an unsuccessful contestant for corporate control as a
result of the misleading practices of a competing
tender offeror’s dealer-manager may well exceed the
total price at which the competitor’s securities were
offered. In such instances, there is nothing in the
Securities Exchange Act that bars the award of fully
compensatory damages to the injured tender offeror

der his securities in exchange for A’s securities instead of
tendering them for an offer of B, where the damages of the
tendering stockholder might exceed the liability limitations
of Section 11.

160

for violations of Section 14(e). Certainly from an
equitable standpoint, the cost of any actual damage
should be borne by the wrongdoer rather than his
victim.

Where, however, multiple defendants are found lia-
ble for violations of the Securities Exchange Act, a
court, in order to reach a more equitable result, may
choose to apportion damage liability among the vari-
ous violators by reference to the extent that each
might have profited by the violations, or by reference
to the degree of culpability of each defendant,** or
some combination of these considerations. For exam-
ple, the court might require defendants who have
actively and directly violated the statute, or have
done so knowingly, to pay a greater portion of the
judgment than those defendants who have been pas-
sive violators.*”

8 Cf. Section 11(f) of the Securities Act of 1933, 15
U.S.C. 77k(f£), which provides for joint and several liability
and for contribution on behalf of persons who have become
“liable to make any payment” under Section 11 “unless the
person who has become liable was, and the other was not,
guilty of fraudulent misrepresentation.”

*° This is consistent with Section 11(f) of the Securities
Act. In the instant action, First Boston and the insiders are
free to assert the doctrines of contribution and possibly in-
demnification from other defendants in a separate proeeed-
ing, see e.g., de Haas y. Empire Petroleum Co., 286 F. Supp.
809, 815-816 (D. Colo., 1968) affirmed in part and vacated
in part, 435 F. 2d 1228 (C.A. 10, 1970); Globus v. Law Re-
search Serv., Inc., 418 F. 2d 1276, 1287-1289 (C.A. 2, 1969),
affirming 287 F. Supp. 188 (S.D.N.Y., 1968), certiorari de-
nied, 397 U.S. 913 (1970). Whether damages should be ap-
portioned has not been litigated and is not before the Court
at this time.

161

Assuming that this Court should conclude that it
is appropriate here to award actual damages for vio-
lations of the Williams Act, and that such actual
damages have been shown, the Commission limits its
concern only to the principle that the damages
awarded should be sufficient to compensate an injured
party to the full extent of its injury. This is so be-
cause the Commission must rely upon private parties
to “supplement” its own enforcement actions, and
that function only will be assured if the damages
that are awarded are sufficient to compensate any
injured party to the full extent of its loss.*”

Of course, in circumstances such as these, the op-
erative question is what constitutes the full extent
of an injured tender offeror’s injury. The district
court believed the injury to be compensated was Chris-
Craft’s lost “opportunity to gain control” of Piper
(B. 52). The court of appeals, on the other hand,
sought to compensate Chris-Craft for the decline in
the value of its Piper holdings suffered when Bangor
Punta unfairly gained control of Piper (B. 17-32).
Indeed, as the court of appeals correctly found, when
Bangor Punta gained control of Piper, the value of
Chris-Craft’s Piper shares was significantly reduced
(B. 18-20, B. 28-32). In such a situation, the award
of “actual damages” to “hris-Craft, assuming that

37° Whether or not the genera! limitations in Sections 11
and 12 of the Securities Act are applied, by analogy, to this
action, it seems appropriate that, as in Section 11 (® of the
Securities Act, if the defendants ean demonstrate that all or
part of the plaintiff’s damages were the result of factors
other than the defendant’s wrongdoing, the award of damages
should be diminished accordingly.

162

the necessary element—the causation of those dam-
ages by the defendants’ unlawful conduct—is shown,
should include any reduction in value in order to be
compensatory. As the court of appeals explained:

“Moreover, the [district] court erroneously as-
sumed that our phrase “appraisal value” referred
to a statutory appraisal proceeding. Such con-
notation, had we intended it, would have justified
the conclusion that there had been no reduction
in the value of CCI’s Piper holdings upon BPC’s
gaining control. Our opinion in Chris-Craft Il,
however, expressly forecloses any such intention.
We pointed out at least three times that CCI
had sustained injury as the result of BPC Ss un-
fairly gaining control and that the injury sus-
tained was a decline in the value of CCI’s Piper
holdings. First, in assessing the impact of de-
fendants’ Section 14(e) violations upon OCI, we
stated: : ‘

‘The specific injwry sustained was a reduc-
“~ in the value of CCI’s Piper holdings
upon BPC’s unfairly obtaining control... .
480 F.2d at 375.

“Second, in evaluating the damaging effect of
BPC’s violations of Rule 10b-6, we held:

‘BPC’s attainment of a majority position
has caused CCI to suffer a decline in the
value of its Piper holdings.’ 480 F.2d at

379.
“Third, in our mandate with respect to the proper
measure of damages, we said:

‘The measure of damages should be the re-

duction in the appraisal value of CCI’s Piper
holdings attributable to BPC’s taking a ma-

er

163

jority position and reducing CCI to a mi-
nority position... .’ 480 F.2d at 380.

“Accordingly, the [district] court’s assumption
that there had been no such reduction in the
value of CCI’s Piper holdings was the first step
in reaching an erroneous formulation of dam-

ages” (B. 18-19).

The district court’s theory of damages did not
compensate Chris-Craft for its “actual damage.”
The principle applied by the court of appeals in at-
tempting to compensate Chris-Craft for decline in
value of its Piper holdings, to the extent shown and
to the extent caused by the wrongful acts of the de-
fendants, in the Commission’s view, is correct.*”

IV. SECURITIES EXCHANGE ACT RULE 10b-6 WAS
ADOPTED TO PRECLUDE ACTUAL OR POTEN-
TIAL MANIPULATIVE CONDUCT IN CONNEC-
TION WITH THE PUBLIC DISTRIBUTION OF
SECURITIES, INCLUDING EXCHANGE TENDER
OFFERS, AND THERE IS A PRIVATE ACTION ON
BEHALF OF ANY PERSON ADVERSELY AFFECT-
ED BY VIOLATION OF THE RULE.

“Federal regulation of transactions in securities
emerged as part of the aftermath of the market crash
in 1929.” ** That regulation was adopted in response
to the Senate’s intensive study of Stock Exchange

*! The precise method of computing damages in accord-
ance with the general principle that the court of appeals

purported to apply is a matter as to which the Commission
expresses no position.

*? Ernst & Ernst v. Hochfelder, supra, 96 S. Ct. at 1381.

164

Practices,’ a principal focus of which was the manip-
ulative devices that had led to the crash.** Indeed,
the Report itself noted that “[t]he exposure of the
extent and effect of manipulative practices upon or-
ganized exchanges was one of the most salutory and
important accomplishments of the investigation.” *”
And, the results of that investigation “laid the foun-
dation for remedial legislation in a field heretofore

unregulated.” **

78 Senate Committee on Banking and Currency, Report on
Stock Exchange Practices, S. Rep. No. 1455, 73d Cong., 2d
Sess. (1934).

The Senate’s study commenced on April 11, 1932, and fin-
ished more than two years later, on May 4, 1934, after com-
piling 12,000 printed pages of testimony and 1,000 pages of
exhibits. Jd., at pp. 2-3.

74 Td., at pp. 30-54.

78 Td., at p. 30.

3276S. Rep. No. 792, 73 Cong., 2d Sess. 3 (1934).

Prior to the adoption of the Securities Exchange Act of
1934, “(t]he legal approach to the problem of market manip-
ulation was primarily through the concept of fraud.” Com-
ment, Regulation of Stock Market Manipulation, 56 Yale
L.J. 509, 516 (1947) ; accord, Berle, Liability for Stock Mar-
ket Manipulation, 31 Col. L. Rev. 264 (1931). As one com-
mentator noted, “the reach of [the] strict fraud doctrine
was * * * far too short * * *. In the United States prior to
1924 no case established the illegality of any form of manipu-
lation by actual purchases and sales * * *.” Comment, Regu-
lation of Stock Market Manipulation, supra, 56 Yale L.J. at
516-517. But see, United States v. Brown, 5 F. Supp. 81
(S.D. N.Y., 1933), affirmed, 79 F.2d 321 (C.A. 2), certiorari
denied, sub nom. McCarthy v. United States, 296 U.S. 650
(1935); Berle, Liability for Stock Market Manipulation,
supra, 31 Col. L:Rev. 264; Berle, Stock Market Manipulation,
38 Col. L.Rev. 393 (1938).

165

In considering legislative approaches to manipula-
tive conduct, Congress was concerned with the im-
portance of securities exchanges to the overall eco-
nomic well-being of the Nation, and its concern was
reflected in Section 2 of the Act.’ Thus, Congres-
sional concern with manipulative devices was not lim-
ited to the damaging effects manipulative conduct
could have on individual investors, although those ef-
fects were of sufficient concern to warrant the provi-
sion of express remedies for investors actually dam-
aged by manipulative conduct.** Rather, Congress
was concerned with the honesty and fairness of the
marketplace for securities,” and feared that dis-
orderly and unfair markets either could induce ex-
cessive speculation,” which, in turn, could wreak eco-
nomic havoc, or could paralyze would-be investors
and precipitate the allocation of their savings to in-
vestment devices other than securities.

“* See Section 2(3) of the Securities Exchange Act, 15
U.S.C. 78b(3).

. ** Section 9(e) of the Securities Exchange Act, 15 U.S.C.
Bile).

7° See, e.g., H.R. Rep. No. 85, 73 Cong., 1st Sess. 1-5
(1933).

*“° See H.R. Rep. No. 1383, 73d Cong., 2d Sess. 11 (1934) :

“the accentuation of temporary fluctuations and the de-
liberate introduction of a mob psychology into the specu-
lative markets by the fanfare of organized manipulation
menace the true functioning of the exchanges upon
which the economic well-being of the wholy country
depends.”

166

“Behind the anti-manipulative provisions as a
whole was the conviction that manipulation bred
excessive speculation and unstable security prices
which, irrespective of fraud, injured the public
by unsettling the credit cycle and interfering
with the proper performance of the market func-
tion in valuing securities.”

This broader purpose led the Congress to adopt far-
reaching proscriptions and regulatory controls for
manipulative devices of all types. And, the specific
provisions adopted to prohibit manipulative devices
are “[t]he very heart of the Act.” *”

In structuring its legislative response to manipu-
lative conduct, Congress was well aware that there
were widely-varying devices used to stimulate or dis-
courage the buying and selling of securities and that
the easy negotiability of securities made the securi-
ties markets highly susceptible to that type of con-
duct.*”

*! Comment, Regulation of Stock Market Manipulation,
supra, 56 Yale L.J. at p. 521 (footnote omitted).

*2 Securities and Exchange Commission, Report on Pro-
posals for Amendments of the Securities Act of 1933 and the
Securities Exchange Act of 1934, H.R. Comm. Print, 77th
Cong., lst Sess. 50 (1941).

**3 See, e.g., Mathias, Manipulative Practices and the Se-
curities Exchange Act, 3 U. of Pitt. L.Rev. 7, 104 (1934) ;
Moore & Wiseman, Market Manipulation and the Exchange
Act, 2 U. of Chi. L.Rev. 46 (1934); Comment, Market Ma-
nipulation and the Securities Exchange Act, 46 Yale L.J.
624 (1937) ; Comment, Regulation of Stock Market Manipu-
lation, 56 Yale L.J. supra, at p. 509, 512.

167

While it was apparent that a leading manipula-
tive device was fraudulent publicity, whether directed
to the market generally or directed to a specific se-
curity,’ the record compiled by the Senate in its
investigation of Stock Market Practices revealed that
a more effective means of manipulation was the use
of the market itself to reflect actual or apparent
trading activity. Congress found that the notorious
“pool” operators of the 1920’s and 1930’s *° were not
above arranging securities transactions for the pur-
pose of creating the appearance of independent mar-
ket activity, the effect of which was to alter the inde-
pendent price-valuation mechanism of the exchange
markets.” Persons engaged in such manipulation

14 See, e.g., Twentieth Century Fund, Inc., The Securities
Markets 478 (1935).

*s° “A pool * * * is an agreement between several people,
usually more than three, to actively trade in a single
security. * * * [T]he purpose of a pool generally is to
raise the price of a security by concerted activity on
the part of the pool members, and thereby to enable
them to unload their holdings at a profit upon members
of the public attracted by the activity or by informa-
tion disseminated about the stock. Pool operations for
such a purpose are incompatible with the maintenance
of a free and uncontrolled market’ (footnote omitted).

S. Rep. 1455, 73d Cong., 2d Sess. 31 (1934).

*° As the Senate Report noted,
“The true function of the exchanges is to maintain an
open market for securities, where supply and demand
may freely meet at prices uninfluenced by manipulation
and control.”

S. Rep. No. 1455, 73d Cong., 2d Sess. 30 (1934); see also,

Berle, Liability for Stock Markct Manipulation, supra, 31
Col. L.Rev. at pp. 266-267.

168

would arrange to have both buy and sell orders en-
tered for the same security at the same price, pro-
ducing a recorded transaction in the market indis-
tinguishable from the external appearance of a nor-
mal transaction executed by independent and random
buyers and sellers. In recognizing that those pool-
fomented activities—“wash” sales and “matched or-
ders” *"—created “a false and deceptive appearance
of genuine demand for the security * * *,” Congress

rejected the “[a]ttempts * * * to differentiate be-
tween ‘beneficent’ pools and ‘nefarious’ pools.” In-
stead, it concluded that,

“From the viewpoint of the purchaser outside the
pool circle, there is no substantial or ethical
difference in these two types of pools. Although
the purpose may be different, the means em-
ployed are identical. In all cases fictitious ac-
tivity is intentionally created, and the purchaser
is deceived by an appearance of genuine demand
for the security. Motive furnishes no justifica-

tion for the employment of manipulative de-
vies.” ™

**7 In Ernst & Ernst v. Hochfelder, supra, 96 S. Ct. at 1386
n. 25 (1976), this Court appropriately defined wash sales and
matched orders as follows:

“ ‘Wash’ sales are transactions involving no change
in beneficial ownership. ‘Matched’ orders are orders for
the purchase sale of a security that are entered with the
knowledge that orders of substantially the same size,
at substantially the same time and price, have been or
will be entered by the same or different persons for the
sale/purchase of such security”.

oe 8. Rep. No. 1455, supra, at p. 32 (emphasis supplied).
The evil sought to be proscribed was the creation of an
appearance of false demand, irrespective of the ends the pool
operators were seeking to achieve. See p. 171, infra.

169

But, unlike wash sales, and matched orders, for
which no justification could be found, Congress re-
peatedly was made aware that stabilizing activities
in the face of a distribution of securities,’ could
have legitimate purposes, and that the United States
government itself had engaged in stabilizing conduct
in its own sales of certain securities and commodi-

ties.°”

86° Stabilization has been described as follows:

“When [a] * * * distribution begins, whether the dis-
tribution price has been raised by manipulation or not,
it will be in the interest of the distributors to maintain
that price on the market throughout the course of the
distribution. The market price may be subject to de-
pression from a number of causes. Speculators or in-
vestors who have changed their minds may dump on the
market the stocks which they bought on the direct dis-
tribution. Market conditions as a whole may become un-
favorable. Buyers who would normally absorb sales in
the open market may transfer their interest to the shares
being distributed * * *. To counteract these effects the
distributors support the market price by entering bids
and by purchasing * * * to absorb selling pressures en-
countered.

The converse of purchasing to raise the market price is
selling to depress it. A well-timed number of sell orders,
if sufficient in volume to overcome buying pressure, may
succeed in driving the market price of a security down
to a point at which it can be bought back at a profit.”

Comment, Regulation of Stock Market Manipulation, 56 Yale
L.J. 509, 514 (1947) (footnote omitted). See also, Securities
and Exchange Commission, Statement on Regulation of “Peg-
ging, Fixing and Stabilizing” of Securities Prices, Securities
Exchange Act Rel. No. 2446 (Mar. 18, 1940).

300 “When the original draft of the bill was before the House
and Senate committees at public hearings * * * [i]t was

170

In drafting the Securities Exchange Act, therefore,
Congress attempted to deal separately and specifi-
cally with the varying forms of manipulation to which
it had been exposed. Since Congress recognized that
any beneficently-motivated large purchases or sales of
a security could also raise or depress the market
price of the traded security,*” it took care to insure
that its efforts to proscribe manipulative conduct not
be drafted in such a fashion as to prohibit legitimate
trading activities not properly the subject of restric-
tive legislation. Accordingly, where classes of trad-
ing, appropriately described as manipulative, ap-
peared “to serve no legitimate function,” ** they were
“specifically prohibited.” ** In other areas, the Con-
gress recognized that “so delicate a mechanism as the
modern stock exchange cannot be regulated efficiently
under a rigid statutory program.” ** As a result,

pointed out that the Government in recent times, par-
ticularly, has resorted to stabilizing or pegging processes
to stabilize the market in the issuance and distribution
of Government securities, and the point was made that
that proved that there is ..ome benefit to the public in cer-
tain kinds of pegging processes or stabilizing processes.
It was in deference to. that argument, based upon the
example of governmental activities, that this clause [Sec-
tion 9(a) (6) ] was written.”

Senate Committee on Banking and Currency, Hearings on
Stock Exchange Practices, 73d Cong., 1st Sess., 7736 (1934)
(remarks of Mr. Pecora).

* S. Rep. 792, 73d Cong., 2d Sess. 7 (1984).
002 Id.

393 Td.
4 Td., at p. 5.

171

broad rulemaking authority was vested in the Securi-
ties and Exchange Commission—authority referred
to by the Congress as a “discretionary and elastic”
power—in order

“to avoid, on the one hand, unworkable ‘strait-
jacket’ regulation and, on the other, loopholes
which may be penetrated by slight variations in
the method of doing business.” *”

Section 9 of the Act is the embodiment of the major
Congressional effort to assure the maintenance of
free and open securities markets, in which prices
would be determined by natural forces of supply and
demand, not by manipulative devices inflating or de-
pressing prices artificially.

Some of the specific provisions dealing with ma-
nipulation in Section 9 trace their origin to the law
of fraud. Thus, Section 9(a) (1) prohibits wash sales
and matched orders if effected “for the purpose of
creating a false or misleading appearance of active
trading in any security * * * or a false or misleading
appearance with respect to the market for any such
security.” *” Similarly, Section 9(a)(4) of the Act
forbids “false or misleading statements” with regard
to material facts in inducing the purchase or sale of

5 Td.

3° See Comment, Regulation of Stock Market Manipulation,
supra, 56 Yale L.J. at 519:

“This phraseology [in Section 9(a) (1)] treats the wash
sale and matched order as a form of misrepresentation ; it
is an expanded concept of fraud, however, since there
need be no showing of damage to anyone.”

172

a registered security, also embodying a fraud con-
cept.*”

And, Sections 9(a)(3) and 9(a)(5) proscribe the
use of tips of impending manipulative price changes
to induce purchases or sales of securities. “The policy
of insulating the public from incentives to excessive
speculation is the primary aim here rather than the
protection of purchasers and sellers from fraud.”

These specific provisions in Section 9 are comple-
mented by the more general, but broader ranging,
proscriptions contained in Section 9(a)(2) of the
Act, the purpose of which is to make unlawful not
only pool operations, but “every other device used
to persuade the public that activity in a security is
the reflection of genuine demand instead of a mirage.”
S. Rep. No. 1455, 73d Cong., 2d Sess., 54 (1934).°”
In an attempt to deal with the concern of many wit-

7 “Tt is not an element of the offense under this section
[9(a) (4)] that the misleading statement be made directly
to a prospective seller or purchaser.” 3 Loss, Securities Regu-
lation 1543 (2d ed., 1961).

°° Comment, Regulation of Stock Market Manipulation,
supra, 56 Yale L.J. at p. 520 (footnote omitted).

*°° In coptrast to Section 9(a)(1) of the Act—which pro-
scribes wash sales and matched orders only if intended to mis-
lead—Section 9(a) (2) proscribes manipulation by actual pur-
chases and sales if ‘intended to induce others to buy or sell
the security. Section 9(a) (2), the Commission held early in
its administration of the Act, thus permits the condemna-
tion of activities which fall far short of “actual fraud.” Jn
the Matter of White & Weld, 3 S.E.C. 466, 513 (1938); see
also, Herlands, Criminal Law Aspects of the Securities Ex-
change Act of 1934, 21 Va. L. Rev. 139 (1934).

173

nesses that “pegging, fixing, or stabilizing” the price
of registered securities might not always prove objec-
tionable, however, Congress also adopted Section 9(a)
(6) of the Act, as an exception, of sorts, to the blanket
prohibitions contained in Section 9(a)(2). Section
9(a)(6) prohibits stabilizing transactions only if
they are effected in contravention of Commission reg-
ulations. “[I]t leaves it entirely within the discre-
tion of the * * * Commission to say what kind of
pegging or stabilizing operations may be permitted
as deemed to be in the public interest.” “”°

But, Congress also realized that the detailed scheme
of Section 9 of the Act would not, by its very terms,
reach those securities traded only in the over-the-
counter securities markets and that it was impossible
to catalogue every device which might prove manipu-
lative.” Accordingly, it enacted Section 10(b) of the
Act, making it unlawful to employ, in connection
with the purchase or sale of any security, “any ma-

40° Senate Committee on Banking and Currency, Hearings on
Stock Exchange Practices, 73d Cong., 1st Sess., 7736-7737
(remarks of Mr. Pecora).

#91 See, e.g., 3 Loss, Securities Regulation, supra, at 1546:

“It is not altogether correct to speak of § 9 as coextensive
with manipulation of the exchange markets. On the one
hand, it applies to over-the-counter manipulation of reg-
istered securities * * *. On the other hand, § 9 does not
apply to exempted securities even when they are traded
on an exchange; there the attack on manipulation is
made on the same basis as it is with respect to securities
which are traded solely in the over-the-counter market”
(footnotes omitted, emphasis in original).

174

nipulative or deceptive device or contrivance” in con-
travention of rules and regulations proscribed by the
Commission “‘as necessary or appropriate in the pub-
lic interest or for the protection of investors.” Simi-
larly, Section 15(c)(1) of the Act was adopted to
prohibit brokers and dealers in securities

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0990%3A07. Public record. Not legal advice.