Petitioners Reply Brief — First Boston Corp. v. Chris-Craft Industries

FOR ARGUMENT

No. 75-354

IN THE

Supreme Court of the United

October Term, 1975

THE FIRST BOSTON CORPORATION,

Petitioner,

v

CHRIS-CRAFT INDUSTRIES, INC.,

Respondent.

On WRIT OF CERTIORARI TO THE UNITED STATES

CourRT OF APPEALS FOR THE SECOND CIRCUIT

CONSOLIDATED WITH Nos, 75-353 AND 75-355

FIRST BOSTON’S REPLY BRIEF

Davip W. PECK

48 Wall Street,

New York, New York 10005.

Counsel for Petitioner

Louis Loss The First Boston Corporation

Of Counsel

ARTHUR H. DEAN

JOHN F. ARNING

JOHN L. WARDEN

CHARLES W. SULLIVAN

PHILIP K. HowarD

SULLIVAN & CROMWELL

Of Counsel

September 16, 1976

INDEX

PAGE

THE ISSUES FOR DECISION ...........-000ee005: l

EE Cree neebeecsdesocteovcersveceece 5

PT Jiu degheeSeedesdcccccccoesccoces 10

ee scene k es catdedscecseeeens 16

ee eae dees deueareacecesecs 17

ee a cet us ede bedsecesseeneess 18

diced eneeenndsecdedne ses cee 19

AUTHORITIES CITED

CASES:

Affiliated Ute Citizens v. United States, 406 US.

ite eee deteeseeneeeneoes bens 16, 17

Barnes V. Osofsky, 373 F.2d 269 (2d Cir. 1967) .. Y

Berenyi Vv. Immigration Director, 385 U.S. 630

inp heeeeanenebnuees éébdeunadaded 3

Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

EE Dh sc echiesShdieeudeudndeneceee 9,10

Cort v. Ash, 422 U.S. 66 (1975) ..........04.. 6

Electronic Specialty Co. v. International Con-

trols Corp., 409 F.2d 937 (2d Cir. 1969) .... 8,9

Ernst & Ernst v. Hochfelder, 96 S. Ct. 1375

i scheebewsGed Geeks veducessies 10, 12, 13, 14

Fischman v. Raytheon Mfg. Co., 188 F.2d 783

ee i adie eawradabees 10, 12

GAF Corp. Vv. Milstein, 453 F.2d 709 (2d Cir.

1971), cert. denied, 406 U.S. 910 (1972) .... 8

Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281

oe ca ive ceheeddeedeséiaets 11

J. 1. Case Co. Vv. Borak, 377 U.S. 426 (1964) .... 6,8,9

’ >

ii

Cases (Cont’d): PAGE

Mills v. Electric Auto-Lite Co., 396 U.S. 375

SE heketesedcdsntwavenestaeuenen 4, 8, 16, 17

H. K. Porter Co. v. Nicholson File Co., 482 F.2d

Se Se SD i'6 ce udndudueenueeanenns 7,8

Rondeau v. Mosinee Paper Corp., 422 U.S. 49

SE 2tkcndcccinwts taededabanaenteneae 4,7

Ronson Corp. Vv. Liquifin A.G., [1973-1974 Trans-

fer Binder} CCH Fep. Sec. L. Rep. { 94,369

(D.N.J.), aff'd, 497 F.2d 394 (3d Cir. 1974) .. 8

Sargent v. Genesco, Inc., 492 F.2d 750 (Sth Cir.

SE savednekdusedungeedansceeeeaus 7

Smallwood v. Pearl Brewing Co., 489 F.2d 579

(Sth Cir.), cert. denied, 419 U.S. 873 (1974) .. y

TSC Industries v. Northway, Inc., 9% S.Ct. 2126

SEED <xbone cadnnedeweediaditeseetieee 8

United States v. Reliable Transfer Co., 421 U.S.

Se SEE 4.00 004beeuetsecetansebaetiod 3

STATUTES AND RULES:

Securities Act of 1933:

Section 11, 15 U.S.C. § 77k ............ passim

Section 12, 15 U.S.C. § 77] ............. 9

Securities Exchange Act of 1934:

Section 10(b), 15 U.S.C. 78j(b) ....8, 10, 11, 12

Section 14(a), 15 U.S.C. § 78n(a) ...... 6, 11

Section 14(e), 15 U.S.C. § 78n(e) ...... passim

Section 28(a), 15 U.S.C. § 78bb(a) .... 7

Rules under the Securities Exchange Act of 1934:

Rule 10b-5, 17 C.F.R. § 240.10b-5 ...... 11,12

Rule 14a-9, 17 C.F.R. § 240.14a-9 ...... 1]

ili

| PAGE

LEGISLATIVE MATERIALS:

S. Rep. No. 91-1125, 91st Cong., 2d Sess. (1970) . ll

H.R. Rep. No. 91-1655, 9lst Cong., 2d Sess.

SURE scscucoccbaunwasaeuuseenceasesese 11

S. Rep. No. 550, 90th Cong., Ist Sess. (1967) .. .6, 8, 11

H.R. Rep. No. 1711, 90th Cong., 2d Sess. (1968) . 11

Hearing on S. 336 and S. 3431 Before the Sub-

comm. on Securities of the Senate Comm. on

Banking and Currency, 91st Cong., 2d Sess.

SED dudcccancsnesancabacasesuienwee 11

Hearing on H.R. 14475, S§.510 Before the Sub-

comm. on Commerce and Finance of the

House Interstate and Foreign Commerce

Comm., 90th Cong., 2d Sess. (1968) ........ 6

Hearings on S.510 Before the Subcomm. on Se-

curities of the Senate Comm. on Banking and

Currency, 90th Cong., Ist Sess. (1967) ...... 6, 8, 11

113 Cong. Rec. 854 (Jan. 18, 1967) .......... 6

116 Cong. Rec. 29251 (Aug. 18, 1970) ........ 11

MISCELLANEOUS:

L. Loss, SECURITIES REGULATION (Supp. 1969) . 10, 11

Cohen, A Note on Takeover Bids and Corporate

Purchases of Stock, 22 Bus. Lawyer 149

FR Kanccususepeneudeuecetetsancens 6

Note, Section 11 and Underwriter Liability: A

Case of Statutory Misconstruction, 7 RutT-

GERS-CAMDEN L.J. 741 (1976) .............. 14

Note, Chris-Craft: The Uncertain Evolution of

Section 14(e), 76 CoLum. L. REv. 634 (1976) ... 17

IN THE

Supreme Court of the United States

October Term, 1975

No. 75-354

THE First BOSTON CORPORATION,

Petitioner,

v.

CHRIS-CRAFT INDUSTRIES, INC.,

Respondent.

On WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

CONSOLIDATED WITH Nos. 75-353 AND 75-355

FIRST BOSTON’S REPLY BRIEF

The Issues for Decision

Chris-Craft contends that the various petitioners,

including First Boston, engaged in a sort of backroom

conspiracy to deny it through “fraud” an otherwise

inevitable victory in the contest for control of Piper. This

was indeed Chris-Craft’s contention at trial, but it was

rejected by both courts below, and First Boston was held

liable solely by reason of the nonpurposeful BAR omission

from the Bangor Punta registration statement. Thus,

Chris-Craft’s presentation here is not based on the find-

ings of fact that frame the legal issues for decision by

this Court.

Both courts below rejected totally, as a factual matter,

Chris-Craft’s charges that First Boston was the sinister

guiding force behind all the many wrongs claimed to have

been done Chris-Craft. The District Court stated (A158-

59):

“On the basis of the record, the Court cannot find

that [First Boston] committed, or engaged in any

course of conduct which operated as fraud or deceit

upon Chris-Craft or the public shareholders of

Piper.”

* * *

“First Boston, in its capacity as an investment

banker, rendered a variety of professional services

to Piper Aircraft Corporation, Bangor Punta and

members of the Piper family. In each case, sub-

stantive decision making power rested with and

was exercised by these clients and not First Boston.”

* * *

“The record compels the conclusion that [First

Boston] acted solely in the furtherance of what [it]

believed in good faith to be the legitimate interests

of [its] clients.”

The Court of Appeals, although holding First Boston

liable as an underwriter for the BAR omission. affirmed

these findings (A55 n.25):

“We agree with the district court that there is

no merit to [Chris-Craft’s] other claims against

First Boston, essentially that it was the chief strate-

gist for Piper and [Bangor Punta] in the control

battle. The district court found, based on substan-

tial evidence, that in its capacity as investment

banker First Boston merely provided professionai

services to these companies. The business decisions

that led to violations of the secyrities laws were

initiated by these companies, not by First Boston

in its role as investment banker. We are aware of

no authority for holding First Boston liable in that

capacity.”

It is thus Chris-Craft, not First Boston, which seeks a

“de novo trial” in this Court (see Chris-Craft Brief 5).

Absent exceptionai circumstances—and none exists or is

even argued—the “concurrent findings” of the two courts

below are not to be relitigated here. E.g., United States Vv.

Reliable Transfer Co., 421 U.S. 397, 401 n.2 (1975);

Berenyi V. Immigration Director, 385 U.S. 630, 635 (1967).

As the SEC recognizes in its brief amicus curiae,

(SEC Brief 155-59 & n.365), the Court of Appeals held

against First Boston only by concluding that it had not

properly performed its special duty under § 11 of the 1933

Act as a statutory underwriter (A48-55). On this predi-

cate, First Boston was rendered liable to Chris-Craft

under § 14(e) of the 1934 Act. These legal conclusions

and the means by which they were reached—not Chris-

Craft’s rejected claims of fraud and conspiracy—give rise

to the important issues that the Coui. granted certiorari

to review.

In discussing these issues, the SEC concludes that the

judgment against First Boston as a § 11 underwriter must

be vacated to the extent it awards damages in excess of

§ 11’s prescribed maximum (SEC Brief 155-59 & n.365,

194). But that result is the very minimum required by con-

struction of the securities laws as a coherent whole. A

correct interpretation of § 14(e), in light of its legislative

history and purpose and in light of the express limitations

of § 11, requires complete reversal of the judgment of lia-

bility against First Boston: Chris-Craft has no right of

action at all against First Boston as a § 11 underwriter

(“standing”), and First Boston’s conduct did not violate

§$ 14(e) (“scienter”).'

Further, Chris-Craft’s simplistic pretense that causa-

tion was “a matter of mathematics” (Chris-Craft Brief 29,

79), among other deficiencies, ignores the basic question of

whether the Court of Appeals was correct in presuming

that, but for the BAR omission, not a single Piper share-

holder would have accepted Bangor Punta’s exchange

offer (A60). The SEC avoids the issue in a different way:

it endorses presumed causation {or “liability” but not

“damages,” relying on Mills and Rondeau, and claims to

take no position as to whether causation of “damages” has

been established as a matter of fact (SEC Brief 145-48,

161-62).

The real causation question in this case is one of injury

to Chris-Craft—not “liability” in the abstract. The Mills

presumption simply has no application in determining

whether Chris-Craft was in fact injured, and the District

Court found that causation in fact was not proved (A144-

47).

‘In the face of Chris-Craft’s screed, it bears repetition thet there

was no finding or conclusion below that “fraud” in any sense was

involved as to the BAR omission. Even the SEC, which continues

generally to support Chris-Craft’s a on rey now implicitly

acknowledges as much (see SEC Brief 155-59 & n. 365)

5

The judgment against First Boston is without factual or

legal foundation, and is contrary to basic principles of civil

law. It serves no manifest or conceivable congressional

purpose, and can only injure the public interest in the

proper functioning of capital markets. The wrong done

First Boston is egregious.

I. Standing

Both Chris-Craft and the SEC go to great lengths

to establish a proposition not at issue here: that judicial

implication under § 14(e) of some private right of action

—e.g., a damage action by a deceived public shareholder—

is called for by legislative intent (Chris-Craft Brief 40-46;

SEC Brief 74-78, 83-85). The issues for decision here are

whether an action for damages by a contestant for control

is created by § 14(e) under any circumstances and, if so,

whether such an action lies against a 1933 Act under-

writer on account of an alleged deficiency in a prospectus.

A. When Chris-Craft and the SEC finally approach the

first of these issues, both rely on repetitive assertion, wholly

unsupported by a single statement in the legislative his-

tory, that there was “unmistakable congressional intent

to afford standing to all participants” in contested tender

offers (Chris-Craft Brief 37). They base this sweeping

assertion primarily on the concern that was expressed by

Congress that the burden of regulation imposed by the

2 Every legislative reference cited by Chris-Craft and the SEC,

when examined, either supports the contrary proposition or is irrele-

vant. For the convenience of the Court, First Boston has reproduced

ro ne history of the Williams Act and lodged copies with the

erk.

Williams Act “for the benefit of investors” should fall

equally upon all parties to a control contest. E.g., SENATE

REPORT 3.

But equal allocation of the burdens and duties imposed

by the Act was Congress’ only concern as to contestants

for control.* Congress showed no concern for protecting

contestants, or for creating any rights in their favor—the

rights which are corollary to the duties imposed upon con-

testants are the rights of the target company’s shareholders.

E.g., SENATE Report 1, 2, 3, 4; Senate Hearings 178. It is

those shareholders, public investors, “for whose especial

benefit” the Williams Act was passed. See Cort v. Ash, 422

U.S. 66, 78 (1975).°

* Senator Williams stated:

“Every effort has been made to avoid tipping the balance of

— burden in favor of management or in favor of the

offeror.”

113 Cong. Rec. 854 (Jan. 18, 1967) (emphasis added). Likewise,

in an article cited several times by Chris-Craft, SEC Chairman Cohen

stated:

“The opponents in an sogenes takeover bid would be placed

on an equal footing. Each would be subject to equivalent dis-

closure and anti-fraud regulations.”

Cohen, A Note on Takeover Bids and Corporate Purchases of Stock,

22 Bus. Lawyer 149, 153 (1966); see House Hearing 17.

* SEC Chairman Cohen stated, at Senate Hearings 178:

“(T]he principal point is that we are not concerned with assist-

ing or hurting either side. We are concerned with the investor

who today is just a pawn in a form of industrial warfare. . . . The

investor is lost somewhere in the shuffle. This is our concern

and our only concern.”

* Chris-Craft (Brief 55) seeks to pass off this Court’s controlling

decision in Cort by announcing that it approved J. J. Case Co. v.

Borak, 377 U.S. 426 (1964); this is quite true but also quite mean-

ingless, since Borak granted standing to the very corporate share-

holders “for whose especial benefit” § 14(a) of the 1934 Act was

enacted, just as Cort requires.

In its zeal to urge the contrary, the SEC presents the

astounding argument that Congress intended the Williams

Act wholly to displace state law governing the rights and

liabilities of competitors among themselves and to create

a new federal law occupying that field.° This argument

proves too much, for had Congress intended such a dras-

tic step it surely would have made its will unmistakably

clear, and the legislative history contains not a single state-

ment to that effect. Cf. § 28(a) of the 1934 Act.

Each case cited by Chris-Craft (Brief 46, 50-53) and

the SEC (Brief 112-16, 122) in support of standing sup-

ports the contrary proposition—that the Williams Act was

enacted to protect shareholders, not to bestow any rights

on contestants.’ None of the decisions under § 14(e), with

* The SEC, in contrast to the court below (A30), correctly states

that Chris-Craft as a disappointed competitor would have no cause of

action at common law on account of the acts it complains of here

(SEC Brief 44-47; see also First Boston Brief 25-26 n.9).

7 See, e. g., Rondeau Vv. Mosinee Paper Corp., 422 US. at 58, 60:

“The Congress expressly disclaimed an intention to provide a

weapon for management... .”

* * *

“[T}he rré ob of the Williams Act is to solve the

= of shareholders desiring to respond to a cash tender

GP ces

Sargent v. Genesco, Inc., 492 F.2d 750, 769 (Sth Cir. 1974):

“The evil to be remedied [by the Williams Act] was inadequate

disclosure to tendering security holders. Congress made it clear

that the investor protection sought by 14(e) was disclosure to

those who had to make the hold or sell decision.”

H. K. Porter Co. v. Nicholson File Co., 482 F.2d 421, 423-24 (Ist

Cir. 1973):

“Little in the legislative history [of the Williams Act] suggests

that Congress was motivated by concern for the plight of frus-

trated tender offerors or, for that matter, the incumbent man-

agement of the target.”

* * *

“From the statutory scheme and the legislative history, it

seems clear that the overriding purpose of § 14(e) is the pro-

tection of the investor.”

the single and very limited exception of H. K. Porter Co. v.

Nicholson File Co., (see note 7, supra, and our main brief

at 24, 29), has granted a contestant for control the right to

sue for damages. Nor have any of the decisions under the

allegedly analogous proxy rules (Chris-Craft Brief 40-41;

SEC Brief 107-112) allowed such actions."

To be sure, contestants for control have been permit-

ted to sue under § 14(e) for corrective injunctive relief

during the course of a contest, because such relief benefits

the shareholders themselves and supplements the SEC’s

enforcement of statutory obligations for the shareholders’

benefit.” In contrast, a damage action by a corporate

contestant in no way benefits the public investors intended

to be protected by the securities laws. This crucial dis-

tinction is said by Chris-Craft (Brief 58-59) and the SEC

(Brief 139 n.342 §3) to have been rejected in Borak,

* The proxy analogy is far overdrawn. Though both can affect

corporate control, proxies and tender offers have “obvious dif-

ferences,” see Senate Hearings 35; Electronic Specialty Co. v. Inter-

national Controls Corp., 409 F.2d 937, 945-46 (2d Cir. 1969), and

the “closest analogy” to the Williams Act in prior law was the regula-

tion of exchange offers, where only shareholder-purchasers could sue.

Senate Hearings 138; see SENATE REPORT 2-3; Senate Hearings 201.

The concern of the Williams Act, as with § 10(b), is primarily with

a decision to buy or sell at a given price. See Senate Hearings 34-35;

see also id. at 118, 126, 131, 140-41, 143. The concern of the proxy

rules, on the other hand, is corporate suffrage—the right of the share-

holder to cast an informed vote. See TSC Industries v. Northway,

Inc., 96 §. Ct. 2126 (1976); Mills v. Electric Auto-Lite Co., 396 U.S.

375 (1970). See also page 11 & n.15, infra.

® Chris-Craft relies heavily on GAF Corp. v. Milstein, 453 F.2d

709 (2d Cir. 1971), cert. denied, 406 U.S. 910 (1972), to support

its claim for damages. The case is to the contrary:

“We should not be wooden or rigid in granting the right to

the issuer seeking equitable or prophylactic relief—not monetary

damages—to take the necessary steps to effectuate the purposes

of section 13(d) [of the Williams Act].”

453 F.2d at 720 n.22 (emphasis added). See also Electronic Spe-

cialty Co. Vv. International Controls Corp., 409 F.2d at 947; Ronson

Corp. Vv. Liquifin A.G., [1973-1974 Transfer Binder] CCH Fep. Sec.

L. —. : 94,369 at 95,248 & n.7 (D.N.J.), aff'd, 497 F.2d 394 (3d

Cir. 1 ).

9

but Borak dealt only with the relief to be afforded at the

instance of, and for the direct benefit of, shareholders.’°

B. First Boston’s additional point that actions com-

plaining of a 1933 Act registration statement should be

limited to those expressly provided by Congress in §§ 11

and 12(2) of that act is answered neither by Chris-Craft

nor by the SEC.

The SEC does acknowledge (Brief 155-56 & n.365) that

§ 11’s limitation of damage liability should be given effect

in its propos 4 actions on registration statements under

§ 14(e), but ignores the other important limitation pre-

scribed by § 11—the restriction of any claim for damages

to purchasers of the registered securities.'’ Nothing in the

language or legislative history of § 14(e) indicates a con-

gressional intent to repeal this limitation by implication

in the case of registration statements that happen to per-

tain to exchange offers."*

© Courts have recognized that the “primary contribution of the

Williams Act to the antifraud arsenal” is to provide a shareholder

standing “whether or not he has tendered his shares.” Smallwood v.

Pearl Brewing Co., 489 F.2d 579, 596 (Sth Cir.), cert. denied, 419

U.S. 873 (1974); see Senate Hearings 35. Judge Friendly’s lan-

guage in Electronic Specialty Co. v. International Controls Corp.,

409 F.2d at 940-41, as to the “bearing” § 14(e) “may have on the

issue of standing” refers to the point made in Smallwood, not to

recovery of damages by contestants for control.

11 This restriction has been most strictly construed and yo

Barnes Vv. Osofsky, 373 F.2d 269 (2d Cir. 1967), and the ’s

failure to take account of it is surprising in view of this Court's rec-

ognition in Blue Chip Stamps that it “would indeed be anomalous to

impute to Congress an intention to expand the plaintiff class for a

judicially implied cause of action beyond the bounds it delineated for

comparable express causes of action.” 421 U.S. at 736.

12 As noted in our main brief at pages 32-33, the Williams Act

was intended to protect shareholders faced with cash tender offers.

Congress —— that exchange offers were already adequately

covered by § 11, and they were included within the literal scope of

§ 14(e) only in order to regulate communications opposing them.

10

Moreover, § 14(e) says nothing about underwriters,

and for purposes of liability on a registration statement an

underwriter is solely a creature of § 11, which imposes

specified obligations upon him for the benefit of a specified

class and no one else.

The SEC, like the Court of Appeals, regards § 14(e)

as having invisibly incorporated and extended the § 11

obligations of a § 11 underwriter to a new, undefined and

apparently unlimited class (SEC Brief 156-57 n.365; see

A55). As Judge Mansfield observed (A117), Congress

“would be startled to find” that it, or more accurately the

courts, had accomplished such a result.”®

C. Finally, Chris-Craft complains that First Boston’s

“one-sided view” toward standing would create “jungle

warfare.” Rather, were losing contestants permitted to sue

on the hypothetical deception of shareholders of another

company, the result would be a jungle of speculative

litigation. Congress certainly did not intend § 14(e) to

give rise to such controversies in the abstract and they

should not be permitted by judicial implication.

Il. Scienter

A. Chris-Craft and the SEC argue in passing that

scienter, i.c.. an “intent to deceive, manipulate, or de-

fraud,” see Ernst & Ernst v. Hochfelder, 96 S. Ct. at 1381,

'* Nor does Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d

Cir. 1951), which is relied upon by both Chris-Craft (Brief 103-04)

and the SEC (Brief 152-54), support the extension of § 11 duties

beyond § 11's bounds. Fischman did permit an action challenging

a prospectus to be maintained under § 10(b) of the 1934 Act, but

only upon a claim of fraud, not negligence in respect of a § 11

duty. Even that limited holding is without support in this Court's

decisions. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

at 752 n.15. See also 6 L. Loss, SecuRITIES REGULATION 3912

(Supp. 1969).

1]

is not required for damage liability under § 14(e) by

reason of its language and legislative history (Chris-Craft

Brief 69-72) (SEC Brief 154-55 n.364).

The language of § 14(e) is virtually identical to that of

Rule 10b-5, and the lower courts have unanimously found

the 10b-5 scienter requirement equally applicable to

§ 14(e), as pointed out in our main brief at pages 34-35.

The references in the legislative history cited by Chris-

Craft (Brief 70-71) and the SEC (Brief 154 n.354) do

not suggest that intent to defraud is unnecessary for lia-

bility under § 14(e); rather, they are general discussions

of the Williams Act as a whole, with its various affirmative

notice, disclosure, and filing requirements (e.g., §§ 13(d),

13(e), 14(d) of the 1934 Act) (see note 8, supra). All

specific references to § 14(e) in the legislative history

analogize it to Rule 1Uo-5 and characterize it as the “anti-

fraud” or “fraudulent transactions” provision of the Wil-

liams Act."* Indeed, in the course of its argument, the SEC

acknowledges that § 10(b) and anti-fraud precedents are

the source of § 14(e)."®

1 E.g., SENATE REPORT 10; House REporT 11; Senate Hearings

131, 140-41, 143. In the legislative history of the 1970 Amend-

ments to the Williams Act, Congress and the SEC repeatedly de-

scribed § 14(e) as proscribing “fraudulent activities.” E.g., S. Rep.

No. 91-1125, 91st Cong., 2d Sess. 2 (1970); H. Rep. No. 91-1655,

9ist Cong., 2d Sess. 2, 7 (1970); Hearing on S. 336 and S. 3431

Before the Subcomm. on Securities of the Senate Comm. on Banking

and Currency, 91st Cong., 2d Sess. 8, 35, 116 (1970); 116 Cong.

Rec. 29251 (Aug. 18, 1970). Accord, 6 L. Loss, SecuRITIES REGU-

LATION 3660-61 (Supp. 1969).

1SSEC Brief 17, 64-65 & n.159, 154-55 n.364. At 154-55

n.364, the SEC states that “the relevant portion of Section 14(e) is

substantially identical to Rule 14a-9,” implying that § 14(e) was

modeled on Rule 14a-9 under § 14(a) of the 1934 Act. In fac‘.

§ 14(e) is “substantially identical” to Rule 10b-5 and does not fol-

low either § 14(a) or Rule 14a-9, which, as Judge Friendly pointed

out in Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1299 & n.17

(2d Cir. 1973), lack the “evil-sounding language” of §§ 10(b) and

14(e).

12

Further, the fact that the language of Rule 10b-5(2),

pertaining to material misstatements and omissions, was

incorporated into § 14(e) itself, rather than a subsidiary

regulation, is of no significance (see First Boston Brief

35 n.16). Congress patterned § 14(e) on Rule 10b-5 with

full knowledge that the courts had construed § 10(b) and

Rule 10b-5 as “anti-fraud” provisions, and enacted § 14(e)

as a “fraudulent transactions” provision. The question

whether the language of Rule 10b-5(2) “viewed in isola-

tion . . . could be read” to proscribe unintentional but

wrongful conduct is, therefore, as irrelevant to this case

as it was to Ernst & Ernst (see 96 S. Ct. at 1390).

B. In order to afford a grudging measure of recogni-

tion to Congress’ express limitations of an underwriter’s

liability in § 11, the SEC proposes a bizarre dual culpa-

bility test of its own devising. The SEC would limit an

underwriter’s liability under § 14(e) to the maximum

amount permitted by § 11 if only negligence were found,

but provide unlimited liability if something more were

proven (SEC Brief 152, 156-57 & n.365, 159). There are

two basic errors inherent in this approach: (1) it proceeds

on the wrong assumption that intent to defraud is not

required for damage liability in any amount under

§ 14(e), and (2) it mistakenly attempts to incorporate the

§ 11 underwriter’s duty into § 14(e), making § 11 meaning-

less as to registered exchange offers. Fischman v. Ray-

theon Mfg. Co., relied upon by the SEC, did not adopt

§ 11 standards under § 10(b) and in fact required proof

of fraud in such cases (see note 13, supra).

The significance of the SEC’s discussion lies in its

acknowledgment that the Court of Appeals was mistaken

in holding First Boston to have been anything more than

13

negligent, even in terms of “its independent duty as an

underwriter” (SEC Brief 156-57 & n.365). The SEC sug-

gests a remand to the District Court to reconsider that

question, but, aside from the basic error of viewing § 14(e)

liability in terms of a §11 duty, such a remand is

unnecessary.

The District Court has already considered First

Boston’s conduct and has found, on the evidence, that

First Boston acted “in good faith” and did not engage in

“any course of conduct which operated as fraud or deceit

upon Chris-Craft or the public shareholders of Piper.”

Indeed, the District Court said that “were the record to

support” Chris-Craft’s claims against the other defendants,

“the Court would be hard put to find any basis” for impos-

ing liability on First Boston. (A158; emphasis added).

As to the tendering Piper shareholders, First Boston was

an underwriter; hence, the District Court has already

found First Boston free from culpability in terms of “its

independent duty as an underwriter,” as well as other-

wise.*®

C. Though the SEC in effect concedes that First

Boston is not liable under the scienter standard estab-

lished by Ernst & Ernst, Chris-Craft persists in its Alice-

in-Wonderland portrayal of the BAR omission as an

intentional “fraud” of “devastating impact” (Chris-Craft

Brief 20, 22).

Chris-Craft would have evil intent presumed from a

later finding of materiality. Its thesis is that if one prepar-

16 Chris-Craft’s insinuation (Brief 75) that First Boston decided

“to remain silent” about the BAR on grounds of a claimed “pro-

fessional privilege” and by reason of a policy of “loyalty to clients”

is — and without basis in the record or in any submission of coun-

sel.

14

ing a complicated and lengthy prospectus knows some-

thing and does not include it, he ipso facto had an intent

to deceive or defraud, or was guilty of “reckless disre-

gard for the truth” (Chris-Craft Brief 64-69). This ignores

the fact that reasonable men may and do differ, and does

not accept the necessity for the exercise of judgment by

those carrying out difficult professional tasks in a complex

commercial society.

The District Court’s findings of “good faith,” based

on a careful assessment of all the evidence by a highly ex-

perienced trial judge,*’ absolutely preclude a determina-

tion of culpability under Ernst & Ernst.**

Moreover, were it at all relevant to the issues before the

Court, we would show at length that First Boston’s con-

duct was free even of negligence. Merely by way of fur-

ther summary of the BAR matter, which is discussed in

our main brief at pages 9-11 and 38-40, we note that the

BAR was never “overvalued” as Chris-Craft claims, nor

was there a “loss” on the BAR undisclosed to the public.

Carrying values on balance sheets do not normally rep-

resent realizable market values for any fixed asset, and

Bangor Punta’s use of estimated 1965 market value as the

book value of the BAR was a conservative accounting

treatment as that amount was 40% below the historic cost

basis (D4). There was no representation in the prospectus,

—

17 Judges Mansfield and Gurfein observed that, in Judge Mans-

field’s words, the District Court’s findings as to the BAR were based

on “extensive proof . . . including the testimony of key witnesses

who were personally observed and whose credibility was appraised

by Judge Pollack, whose experience in the field of securities litiga-

— at least matches if not exceeds that of this panel” (A118, see

A98).

*® See generally Note, Section 11 and Underwriter Liability: A

Case of Statutory Misconstruction, 7 RUTGERS-CAMDEN L.J. 741,

752-53 (1976).

15

explicit or implicit, that estimated /965 market value was

1969 market value, and the BAR’s steadily declining post-

1965 earnings record was fully set forth in the prospectus.

Likewise, there was no “loss,” even an accounting loss,

on the BAR until it was later sold. At the time of the

exchange offer, a sale was not “a reasonable probability”

(D13) and the board had ordered a lengthy study of the

question; alternate approaches that might have effectively

realized an additional $9 million were then under con-

sideration and continued to be strongly espoused by some

members of the board for months thereafter, until three

days before the actual sale (D6-12). Even upon the sale,

the only “loss” was a book loss, not a cash loss. Thus,

while the shareholders’ book equity declined by 12%, the

sale was recognized in the financial community as im-

proving Bangor Punta’s prospects, and its shares increased

in market price.*®

Finally, Chris-Craft’s suggestion (Brief 20-21. 77) that

First Boston was somehow derelict or deceptive vis-a-vis

the Piper shareholders in its “appraisal” of the Bangor

Punta offer is factually distorted and disingenuous. First

Boston of course knew of the possibility that the BAR

could be sold at a book loss; First Boston also knew

of the BAR’s current insignificance and potential detri-

ment to Bangor Punta’s earnings (as disclosed in the

prospectus, EV 47). Further, First Boston knew that a

sale, if it occurred, would improve Bangor Punta’s earn-

ings prospects, the principal factor in valving a going

concern. First Boston’s judgment took all this into account

1® Tn sum, the effect of a possible sale of the BAR was not of

such significance as to provide even persons prepared to act in bad

faith a motive for concealment, assuming there was something to

conceal. Likewise, in contemplation and actuality the sale was posi-

tive, or at least immaterial, to the value of Bangor Punta’s securi-

ties.

16

and was vindicated promptly by the market itself (A140),

again when the market rose following the BAR sale, and

finally by the total lack of any complaint from any tender-

ing shareholder.”

First Boston acted in good faith and breached no duty

to anyone.

III. Causation

The SEC contends that the Court of Appeals properly

applied its ‘“Mills-Ute test” of presumed causation to estab-

lish “liability,” but agrees that causation of “damages”

cannot be so presumed and refuses to address whether

damages in this case were proved (SEC Biwi 145-48, 161-

62 &n.370). Itis unclear whether the SEC regards injury-

in-fact as encompassed within “liability” or “damages,”

but it is injury-in-fact to Chris-Craft, not “liability” in

vacuo, that gives rise to the basic causation issue in this

case.**

Mills »>nnounced a rule of law equating violation by

corporate fiduciaries of the disclosure requirements of the

proxy rules with legal injury to shareholders and, hence,

with liability in a private action by such shareholders.

If Mills has any direct application outside the shareholder-

proxy context, which is questionable, it provides abso-

lutely no basis for erecting a legal presumption of injury

*0 First Boston was, in reality, not an “appraiser” at all and

rendered no opinion on value to the public shareholders of Piper;

First Boston did render to the Piper family, as required by their

contract with Bangor Punta, its opinion that the package Bangor

Punta proposed to offer to Piper’s public shareholders had a market

value of $80 per Piper share.

*! There is, of course, a question of damage causation raised by

the compensation of Chris-Craft for market loss.

17

to one party by reason of an allegedly material omission

in a statement made to someone else.**

Chris-Craft both relies on the Court of Appeals’

erroneous presumption and asks this Court to find causa-

tion by factual inferences (Chris-Craft Brief 82). The

District Court, which considered and made findings on

causation as a factual matter, found that the evidence did

not justify any such inference (A145-46). Those findings

are clearly correct and were unquestioned by the Court of

Appeals, which felt compelled by its “Mil/s-Ute test” to

presume injury (A59-60).

Since injury, i.e., compensable loss proximately caused

by the defendant, is an essential element in establishing

liability in a civil action for money damages and was not

proved by Chris-Craft, reversal is required on this ground

alone.

IV. Relief

We note only the following as to relief, which is fully

discussed at pages 46-55 of our main brief:

The SEC now agrees that the rescission offer decreed

at its instance may have fully remedied any injury done

to anyone by the BAR omission (SEC Brief 149-50

n.359). Certainly that is so as to Chris-Craft, which bases

its claim on a derivative presumption of injury. There-

fore, no damages should be awarded.

22 See generally Note, Chris-Craft: The Uncertain Evolution of

Section 14(e), 76 Cotum. L. Rev. 634, 655-57 (1976). Even Ute

did not rely on Mills to postulate injury, but to find reliance in a

situation ohens a factual inference of reliance by the plaintiffs was

virtually inescapable and their injury was indisputable.

18

The Solicitor General in his statement appended to the

SEC’s brief calls to the Court’s attention the earlier ex-

pressed view of the United States that the Court of

Appeals took “an incorrect approach in measuring dam-

ages” (SEC Brief 198). The SEC agrees on the limitation

of First Boston’s liability, as noted above, and tacitly con-

cedes the broader proposition (SEC Brief 161 n.370).

V. Summary

Error pervaded every aspect of the decision below.

The law was improperly construed and applied on ques-

tions of culpability, causation and damages. The Court

of Appeals’ analysis and understanding of the character

of First Boston’s conduct as to the Bangor Punta regis-

tration statement were particularly askew, both factually

and legally.

The basic inapplicability to this type of litigation of

rules developed by the courts to protect defrauded or

misled investors is itself grounds for denying the judicial

implication of a cause of action for damages here. When

litigation is focused on theoretical deceit, unconnected to

any loss by the allegedly deceived, a predictable result

is confusion and arbitrary decision. Such litigation

puts honest businessmen in peril of their property and

reputations, encourages certain businessmen to view the

judicial process as a new area of diversification, and

materially interferes with the functioning of capital mar-

kets. Congress never intended to foster litigation of this

nature, and it is devoid of social utility.

19

A full examination of all aspects of this case confirms

that § 14(e) should not be construed to afford a cause of

action for damages to contestants for control, and certainly

not a cause of action against an underwriter of a rival

exchange offer.

Conclusion

For the reasons stated herein and in our main brief,

the judgment should be reversed and the complaint dis-

missed.

Respectfully submitted,

Davin W. PECK

48 Wall Street,

New York, New York 10005.

Counsel for Petitioner

The First Boston Corporation

Louis Loss

Of Counsel

ARTHUR H. DEAN

JOHN F. ARNING

JOHN L. WARDEN

CHARLES W. SULLIVAN

PuitiP K. HOwArRD

SULLIVAN & CROMWELL

Of Counsel

September 16, 1976