Petitioners Brief — Bangor Punta Corp. v. Chris-Craft Industries, Inc.
Supreme Court brief1975
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| Supreme Court, U. &
| FILED w&»
S157
” | AEL RODAK, JR., CLERK
Supreme Court of the Muited Hes —
OCTOBER TERM, 1975
No. 75-355
BANGOR PUNTA CORPORATION, NICOLAS M. SALGO,
AND DAvID W. WALLACE,
. Petitioners,
CHRIS-CRAFT INDUSTRIES, INC.,
Respondent.
On Writ of Certiorari to the United States Court of Appeals
for the Second Circuit
BRIEF FOR PETITIONERS
JAMES V. RYAN LLOYD N. CUTLER
Rocer L. WALDMAN MANUEL F. COHEN
C. KENNETH SHANK, JR. Louis R. COHEN
ALLAN J. GRAF STEPHEN F. BLACK
WILLIAM T. LAKE
MICHAEL S. HELFER
WILLIAM J. KOLASKY, JR.
WEBSTER & SHEFFIELD
One Rockefeller Plaza
New York, New York 10020
CHARLES ALAN WRIGHT WILMER, CUTLER & PICKERING
2500 Red River Street 1666 K Street, N.W.
Austin, Texas 78705 Washington, D.C. 20006
Counsel for Petitioners
Of Counsel
DuDLEY C. PHILLIPS
JOHN J. MARTIN
One Greenwich Plaza
Greenwich, Connecticut 06830
a CS CELE aE
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|
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INDEX
pe FF Be Be
DCE ctecetecteesnnrwiciinitietiinininimevaianiiaiabiiainaia
JURISDICTION .............. cidemienausinnanniameninianiamiinaans
eT
STATUTES AND REGULATIONS INVOLVED ..........
STATEMENT OF THE CASE ........................-----ec---00-+0
1. The Contest for Control of Piper -..................
Bs IR BE IIIII <rectentstinecicncaetcenietnnintentiednnsiscetieninabenaiins
RSE NONE NN
b. The Decisions on Liability —......................
c. The Decisions on Damages ..........................-.
SUMMARY OF ARGUMENT ..........................................
1. The Implied Causes of Action ................-.-.........
a. Section 10(b) and Rule 10b-6 ...........000..
i> Sy -TTIIED niniiipnehhiessuieiascihcastanebtiesineamibeendiaiiuabareanenis
SEER ER Ost ERT AREA EES ARM ALANS SRT
TIRING COIII oececeeccseccececenececcecsserecceeee
PP
ARGUMENT
I. There Is No Implied Private Federal Cause of
Action for Damages, Under Either Rule 10b-6 or
Section 14(e), in Favor of One Takeover Aspir-
ae Be hntcctectetneeemeciea navies
A. CCI Has No Cause of Action for Damages
Under Section 10(b) and Rule 10b-6 Because
It Neither Purchased nor Sold the Securities
Be IIIS cccccchanitaclrsteathsnmndibaniiimmigiianeiiead ce eiede sce
~-_ - & WO NH
31
32
Il.
Il.
ii
INDEX—Continued
B. CCI Has No Cause of Action for Damages
Under Section 14(e) Because It Is Not a
Member of the Class Congress Sought To
Protect and Did Not Suffer the Injury Con-
gress Sought To Prevent ....................---.-.------
The Actions of BPC and Its Directors Did Not
Involve “Intent to Deceive, Manipulate, or De-
fraud” and Therefore Cannot Give Rise to Dam-
age Liability under Rule 10b-6 or Section 14(e) ..
A. The Actions of BPC and Its Directors Did
Not Involve “Intent to Deceive, Manipulate,
a a scieisianionmnenencins
1. The Rule 10b-6 Violation -........................
2. The Section 14(e) Violation —.....................
B. If There Is Any Cause of Action for Damages
Under Rule 10b-6 or Section 14(e), It Does
Not Lie in the Absence of Proof of “Intent
to Deceive, Manipulate, or Defraud” _............
eens aoe
ef ae
The Court of Appeals Wrongly Interpreted This
Court’s Decisions in the Mills and Ute Cases To
Create a Conclusive Presumption That BPC’s
Exchange Offer Would Not “Have Attracted
Any Takers” Without the BAR Omission and
Wrongly Assumed, in the Face of Contrary
Findings by the District Court, That BPC’s Acts
Caused CCI To Lose the Control Contest -...........
A. There Was No Basis for a Conclusive Pre-
sumption That BPC’s Exchange Offer Would
Not “Have Attracted Any Takers” Without
the BAR Omission .
Page
36
49
62
68
70
iii
INDEX—Continued
Page
B. There Was No Proof That BPC’s Alleged
Missteps Caused the Injury for Which CCI
Was Compensated 200000000 76
IV. The Court of Appeals Awarded CCI an Amount
That Far Exceeds CCI’s “Actual Damages on
Account of the Act Complained of”... 82
V. The Court of Appeals’ Failure To Remand for a
Calculation of Damages and for a Reconsid-
eration of the Award of Prejudgment Interest
Denied Petitioners Due Process of Law
IIT stenistiisesesssensettcnsiisniicsicniinansonntedenedeunsenmeseenesanses 97
ae A-l
iv
TABLE OF AUTHORITIES
CASES: Page
Affiliated Ute Citizens v. United States, 406 U.S.
| 26, 69, 71, 73, 89
Association of Data Processing Service Organiza-
tions, Inc. V. Camp, 397 U.S. 150 (1970) -......-.---. 31
Baker v. Carr, 369 U.S. 186 (1962) -.........-...--.-------- 31
Birnbaum Vv. Newport Steel Corp., 193 F.2d 461
(2d Cir.), cert. denied, 343 U.S. 956 (1952) ......... 32, 34,
45, 46
Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975),
petition for cert. filed, 44 U.S.L.W. 3518 (U.S.
Mar. 16, 10796) ....-.-.-.---22-c0~---2--cc--ecsereceseceescensessoneees 75
Blau v. Lehman, 368 U.S. 403 (1962) -.............-.---- 95
Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
6 EE 18-20, 31-34, 37, 45
Board of Commissioners V. United States, 308 US.
BAB CAGID) nnnannnnecceccccreceneceencnsnscctovesnevcccesencesennssosscnes 95
Borg V. International Silver Co., 11 F.2d 147 (2d
Cher, BIER) annencnsenncccccccseccnccennnccesncnsncssnsesncneevonenccsnsoes 86
Butler Aviation International, Inc. ¥. Comprehen-
sive Designers, Inc., 425 F.2d 842 (2d Cir.
DOTY ceeecerecescccsecseccccneenecenesnescsnnenomnscenenereomesnnnssomsnnes 46
Byrd v. Blue Ridge Rural Electric Cooperative,
Inc., 356 U.S. 525 (1958) .........----------------+--0+-00-20++ 93
Carras V. Burns, 516 F.2d 251 (4th Cir. 1975) -....... 75
Chasins v. Smith, Barney & Co., 438 F.2d 1167
(BE Cle. 1990) .......222-22a---0.0---0-cecceronvennesesneenssennssenes 89, 90
Chelsea Assoc. V. Rapanos, 527 F.2d 1266 (6th
|) an 75
Cort v. Ash, 422 U.S. 66 (1975) .............---- 18, 20-22, 31, 34,
39, 40, 48
Crane Co. Vv. American Standard, Inc., 490 F.2d
SEB (BA Cle. 197B) ....-2---2----2-----00enece--cceeeneesnneennnoee 80
Crane Co. V. Westinghouse Air Brake Co., 419 F.2d
787 (2d Cir. 1969), cert. denied, 400 U.S. 822
CIGD) nnnnencncnccnnccenceenensacnescasessccsccnssassenessenscenneonessoens 73, 80
Dale Benz, Inc. v. American Casualty Co., 303 F.2d
BO (Oth Clr. POGB)....~--...-2---0--<cncsecccscccecseceessncessesece 94
Dasho v. Susquehanna Corp., 461 F.2d 11 (7th
Cir.), cert. denied, 408 U.S. 925 (1972) ............- 78, 80
v
TABLE OF AUTHORITIES—Continued
Page
Domine v. Grimsdall, [1937] 2 All E.R. 119
| ETE cE Le EE a SE 82
Dopp V. Franklin National Bank, 461 F.2d 873 (2d
IS I chnceihiei e 70, 94
Electronic Specialty Co. v. International Controls
Corp., 409 F.2d 937 (2d Cir. 1969)... 44, 46
Erie R.R. v. Tompkins, 304 U.S. 64 SEE 38
Ernst & Ernst Vv. Hochfelder, 96 S. Ct. 1375
SUIT aaestintasenetasiets inate etetandentoeeel 23-25, 33, 49-51, 61-67
Esplin Vv. Hirschi, 402 F.2d 94 (10th Cir. 1968),
cert. denied, 394 U.S. 928 (1969)... 90
Estate Counseling Service v. Merrill Lynch, Pierce,
Fenner & Smith, 303 F.2d 527 (10th Cir. 1962) .. 89
Feit v. Leasco Data Processing Equipment Corp.,
332 F. Supp. 544 (E.D.N.Y. 1971)... 87
Flast v. Cohen, 392 U.S. 83 (1968)... 31
Fountain Vv. Filson, 336 U.S. 681 I 93
Fuentes v. Shevin, 407 U.S. 67 (CA oe 95
General Time Corp. v. Talley Industries, Inc., 403
F.2d 159 (2d Cir. 1968), cert. denied, 393 U.S.
Se REEESNCE eR HOS SAD etree 47
Georgia-Pacific Corp. v. U.S. Plywood-Champion
Papers, Inc., 446 F.2d 295 (2d Cir.), cert. denied,
|) ERAS Tt ie at ee 94
Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d
EE a Lal 67, 89
Gordon Vv. Burr, 506 F.2d 1080 (2d Cir. OR 90
Gould v. American-Hawaiian Steamship Co., [Cur-
rent] CCH Fed. Sec. L. Rep. § 95,512 (3d Cir.
NESE NE eR a kN AV 67, 82
Green V. Wolf Corp., 406 F.2d 291 (2d Cir. 1968),
cert. denied, 395 U.S. 977 (1969)... 82
H. K. Porter Co. v. Nicholson File Co., 482 F.2d
ok ee 44, 46
Harris Vv. American Investment Co., 523 F.2d 220
(8th Cir. 1975), cert. denied, 96 S. Ct. 784
(1976) ...... ; 89
vi
TABLE OF AUTHORITIES—Continued
Page
Hawaii v. Standard Oil Co., 405 U.S. 251 (1972)... 22, 31,
46, 47
Herbst v. International Tel. & Tel. Corp., 495 F.2d
1808 (2d Cir. 1974) ...........----.-------------ceeeeeneesnnsenneees 76
Iroquois Industries, Inc. Vv. Syracuse China Corp.,
417 F.2d 963 (2d Cir. 1969), cert. denied, 399
RR yy “_ 49
J. 1. Case Co. Vv. Borak, 377 U.S. 426 (1964) uaiaaiitel 37, 39, 68
Kahan V. Rosenstiel, 424 F.2d 161 (3d Cir.), cert.
denied sub nom. Glen Alden Corp. V. Kahan, 398
U.S. 950 (1970)... ; 47
Kardon Vv. National Gypsum Co., 69 F. Supp. 512
(E.D. Pa. 1946) -.........--.-----c.-c-eceeencecrererececnnersescooes 37, 38
Klaus Vv. Hi-Shear Corp., 528 F.2d 225 (9th Cir.
rr 43
Kohn V. American Metal Climaz, Inc., 458 F.2d
255 (3d Cir.), cert. denied, 409 U.S. 874 (1972) .. 71, 74
List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir.),
cert. denied sub nom. List v. Lerner, 382 U.S. 811
| ET SSS 70
Lowenschuss V. Kane, 520 F.2d 255 (2d Cir. 1975) -. 78
Marconi Wireless Telegraph Co. v. Simon, 246 U.S.
| 93
Mason V. Belieu, No. 74-1731 (D.C. Cir., April 15,
__ 40
McComb Vv. Utica Knitting Co., 164 F.2d 670 (2d
I 94
Miller v. United States, 294 U.S. 435 (1935) .......... 33, 62
Mills v. Electric Auto-Lite Co., 396 U.S. 375
a 26, 27, 69-75
Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540
be SS a 47
Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967),
cert. denied, 390 U.S. 951 (1968) -.........---......---... 90
National Railroad Passenger Corp. Vv. National As-
sociation of Railroad Passengers, 414 U.S. 453
(1974) Aaa nd Se ADR 31
vii
TABLE OF AUTHORITIES—Continued
Page
Neuman vV. Electronic Specialty Co., [1969-1970
Transfer Binder] CCH Fed. Sec. L. Rep. § 92,591
FS RE Oe ce ee 47
Norte & Co. v. Huffines, 416 F.2d 1189 (2d Cir.
1969), cert. denied sub nom. Muscat v. Norte &
Se Ws i 96
Northway, Inc. V. TSC Industries, Inc., 512 F.2d
324 (7th Cir.), cert. granted, 423 U.S. 820
I eeiceiitniiaiieniiaiaen a 75
Occidental Life Ins. Co. v. Pat Ryan & Assoc., Inc.,
496 F.2d 1255 (4th Cir.), cert. denied, 419 U.S.
RRR eerie Hee ESS aries A 95
Ohio Bell Telephone Co. v. Commission, 301 U.S.
RR TER ketene 95
Perlman V. Feldmann, 154 F. Supp. 436 (D. Conn.
RRR RET ir sete Ra Dike DANE Ot A Oe 84
Pierre J. LeLandais & Co. v. MDS-Atron, Inc., No.
75-7108 (2d Cir., May 5, 1976) 85
Polansky v. Trans World Airlines, Inc., 523 F.2d
SE 40
Republic Technology Fund, Inc. v. Lionel Corp.,
483 F.2d 540 (2d Cir. 1973), cert. denied, 415
TINS IER viens Aart hari 60
Rochez Bros., Inc. v. Rhoades, 491 F.2d 402 (3d
ea id So a 75
Rondeau Vv. Mosinee Paper Corp., 422 U.S. 49
TUE aisieitintaditebiedentiinioa! 16, 18, 20-22, 27-28, 31-32, 40,
43, 48, 68, 81
Sanders v. John Nuveen & Co., 524 F.2d 1064 (7th
Cir. 1975), vacated on other grounds, 96 S. Ct.
Re eae aA ea 95
Sargent v. Genesco, Inc., 492 F.2d 750 (5th Cir.
MeO ercle tn RAINE RT OnE ne AG 43, 90
Saunders v. Shaw, 244 U.S. 317 I lei 93, 95
SEC v. Capital Gains Research Bureau, Inc., 375
St SEE a ee a 47
SEC v. National Securities, Ine., 393 U.S. 453
AS ree TASS WD 35
viii
TABLE OF AUTHORITIES—Continued
SEC v. Scott Taylor & Co., 183 F. Supp. 904 (S.D.
N.Y. 1959) sininienmneiiiilaeiaeadaett ibaa iadiasaaaeiiasibdaaiae 33, 52
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d
Cir. 1968), cert. denied sub nom. Coates v. SEC,
————————————— 48
Securities Investor Protection Corp. Vv. Barbour,
Ee 31
Simon v. Eastern Ky. Welfare Rights Organiza-
tion, 44 U.S.L.W. 4724 (U.S. June 1, 1976) ......... 31
Simon Vv. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 482 F.2d 880 (5th Cir. 1973) -................-.. 70
Simpson V. United States, 322 F.2d 688 (5th Cir.
oo 94
Smallwood v. Pearl Brewing Co., 489 F.2d 579
(5th Cir.), cert. denied, 419 U.S. 873 (1974) ..44, 45, 64
Sola Electric Co. v. Jefferson Electric Co., 317 U.S.
FF ee eee 38
Swift v. Tyson, 41 U.S. (16 Pet.) 1 (1842)-......... 37
Texas & Pacific Ry. v. Rigsby, 241 U.S. 33 (1916) .. 21, 38,
39
Thomas V. Duralite Co., 524 F.2d 577 (3d Cir.
STII . vcnsencvtitennsinsinlinintipenanstlinteincicaieeinmnammiaumaitmaiiny 89, 95
United States v. Byrum, 408 U.S. 125 (1972) _........ 83
Vine Vv. Beneficial Finance Co., 374 F.2d 627 (2d
Cir.), cert. denied, 389 U.S. 970 (1967) .............. 74
Wachtel v. National Alfalfa Journal Co., 176 N.W.
Be CE SEI cxesininsnsrenmmenmcectintunsemninesatmaiennnen 82
Weitzen Vv. Kearns, 271 F. Supp. 616 (S.D.N.Y.
TTT ssisaesssenensoncetshtniecemneresiinnainnneuaninantinioa, 19, 33, 52
Wessel V. Buhler, 487 F.2d 279 (9th Cir. 1971)... 96
White v. Abrams, 495 F.2d 724 (9th Cir. 1974) -... 60
Wolf v. Frank, 477 F.2d 467 (5th Cir.), cert.
denied, 414 U.S. 975 (1978) ............--------..-.------+-+- 95
Wyandotte Transportation Co. v. United States,
RS 8 ee ee 20, 39
Zeller Vv. Bogue Elec. Mfg. Corp., 476 F.2d 795
(2d Cir.), cert. denied, 414 U.S. 908 (1973) -..... 81, 89
ix
TABLE OF AUTHORITIES—Continued
STATUTES: Page
Securities Act of 1933
Section 2(11), 15 U.S.C. § 77b(11) -................ 86
Section 4(1), 15 U.S.C. § 77d(1) -.................... 86
Section 6, 16 U.S.C. 8 776 .............-cccccecesesseeceoes 10, 86
Section 11, 15 U.S.C. § 77k................. 37, 66, 75, 86, 87
Section 12(2), 15 U.S.C. § 771(2) .............. 37, 66, 67
Section 15, 15.U.S.C. § 770...........02...20....-..-e- 66
Securities Exchange Act of 1934
Section 9, 15 U.S.C. § 78i _...2....... 66, 74
Section 10(b), 15 U.S.C. § 78j(b) 2.2.2... passim
Section 13(d), 15 U.S.C. § 78m(d).................. 36
Section 14(a), 15 U.S.C. § 78n(a) -....00.... 67
Section 14(d), 15 U.S.C. § 78n(d) 0.0. 36
Section 14(e), 15 U.S.C. § 78n(e) 000. passim
Section 18, 15 U.S.C. § 78r W000... 66
Section 20, 15 U.S.C. § 78t..........................--.-.- 66
Section 28(a), 15 U.S.C. § 78bb(a) _..... 18, 28, 30, 82
Be I SUITE nchedicdapiisinacsinainscnctessendenbaiueresnniabecniantode 94
REGULATIONS:
Rule 10b-5 under the Securities Exchange Act of
kA RS eee passim
Rule 10b-6 under the Securities Exchange Act of
1984, 17 C.F.R. § 240.10b-6 .................... passim
Rule 135 under the Securities Act of 1933, 17
Us I i uemnieiineees 10
BOOKS:
E. Aranow & H. Einhorn, Tender Offers for Cor-
I TI TI a ictincescciniscnssvesnenmssennessonestens 86
C. McCormick, Law of Damages, § 31 (1935)...... 82
W. Prosser, Law of Torts (4th ed. 1971) ................ 68, 82
Restatement of Torts, § 286 (1934) 38
Restatement (Second) of Torts §§9, 430, 500
SI siseitiniinibedi itil sneidineliciiabiadd a aaa I 61, 68
Restatement (Second) of Torts § 874A and com-
ment h (Tent. Draft No. 22, April 1976) ............ 38, 49
x
TABLE OF AUTHORITIES—Continued
ARTICLES:
Andrews, The Stockholder’s Right to Equal Oppor-
tunity in the Sale of Shares, 78 Harv. L. Rev.
HI iscsi ccelihaeanademasemnnbdenaliiaadiaianbanianadainn
Cobine, Elements of Liability and Actual Damages
in Rule 10b-5 Actions, 1972 U. Ill. L. Forum
RR eee ee eee ee eae
Note, Developments in the Law—Damages, 61
I ee
Note, The Measure of Damages in Rule 10b-5 Cases
Involving Actively Traded Securities, 26 Stan.
ac! I, a aleiliniaatnisiinnets
Note, The Reliance Requirement in Private Actions
Under SEC Rule 10b-5, 88 Harv. L. Rev. 584
(1975) OST Ae SAO ee TCE ET TO
Weiskopf, Remedies Under Rule 10b-5, 45 St.
oS SlUDD ee
LEGISLATIVE MATERIALS:
Hearings on S. 510 Before the Subcomm. on Securi-
ties of the Senate Comm. on Banking and Cur-
rency, 90th Cong., Ist Sess. (1967) -...................
Hearings on H.R. 14475, S. 510 Before the Sub-
comm. on Commerce and Finance of the House
Comm. on Interstate and Foreign Commerce,
90th Cong., 2d Sess. (1968) -.............................--
Page
84
74
82
90
75
91
42
S. Rep. No. 550, 90th Cong., Ist Sess. (1967).....36, 37, 41,
45, 65, 72
S. Rep. No. 1125, 91st Cong., 2d Sess. (1970) -........
H.R. Rep. No. 1383, 73d Cong., 2d Sess. (1934) -...
65
82
H.R. Rep. No. 1711, 90th Cong., 2d Sess. (1968) _... 36, 41,
42
113 Cong. Rec. 854-56 (1967) -.......--.-----.. 36, 41, 45
REGULATORY MATERIALS:
SEC Release No. 34-5194 (July 5, 1955)... 32
SEC Release No. 34-8595 (May 5, 1969)................ 54
IN THE
Supreme Court of the United States
OcTOBER TERM, 1975
No. 75-355
BANGOR PUNTA CORPORATION, NICOLAS M. SALGO,
AND DAvID W. WALLACE,
i Petitioners,
CHRIS-CRAFT INDUSTRIES, INC.,
Respondent.
On Writ of Certiorari to the United States Court of Appeals
for the Second Circuit
BRIEF FOR PETITIONERS
OPINIONS BELOW
The opinion of the District Court for the Southern
District of New York on the issue of liability is reported
at 337 F. Supp. 1128 and is reprinted in the Appendix
at A-125-162.* The opinion of the court of appeals on
* The Appendix volume in this Court is divided into sections A
through F, and i fh oe 7. eg “E”, and “PF” page refer-
ences are to the sections of that volume. The printed Appendix in
the court of appeals is cited as “App.”, except for the exhibit
volumes which are cited “EV”.
2
the issue of liability (A-1-124) is reported at 480 F.2d
341 (“Chris-Craft II”). The opinion of the district court
on relief (B-43-80) is reported at 384 F. Supp. 507. The
opinion of the court of appeals on relief (B-1-42) is re-
ported at 516 F.2d 172 (“Chris-Craft III”).
Prior opinions of the district court (C-32-48) and the
court of appeals (C-1-31) relating to an application for
a preliminary injunction are reported at 303 F. Supp.
191 and 426 F.2d 569, respectively (“Chris-Craft I’).
The opinions of the district court in the connected cases
of SEC v. Bangor Punta Corporation (D-1-21) and Ban-
gor Punta Corporation v. Chris-Craft Industries, Inc.
(D-22-34) are reported at 331 F. Supp. 1154 and 337
F. Supp. 1147, respectively.
JURISDICTION
The judgment of the court of appeals was entered on
April 11, 1975 (E-1-2), and a timely petition for re-
hearing was denied on June 9, 1975. (E-3, E-6) The
Petition for a Writ of Certiorari was filed on September
5, 1975, and was granted on April 5, 1976. 96 S. Ct.
1505. This Court has jurisdiction under 28 U.S.C.
§ 1254(1).
QUESTIONS PRESENTED
1. Is there an implied private federal cause of action
for damages in favor of one takeover aspirant against
another—
(a) under Section 10(b) of the Securities Exchange
Act of 1934 (“1934 Act”) and Rule 10b-6 thereunder,
where the plaintiff neither bought nor sold the securities
involved in the alleged violation, or
3
(b) under Section 14(e) of the 1934 Act, on account
of an omission from a prospectus for an exchange offer,
where the plaintiff is not suing as a target company
shareholder, the class Section 14(e) was designed to
protect?
2. If there are such implied causes of action, may the
plaintiff recover damages where the defendants’ actions
involved no intent to deceive, manipulate, or defraud and
no recklessness?
3. If there are such implied causes of action, is one
takeover aspirant entitled to conclusive presumptions that
(a) the other aspirant’s exchange offer would not “have
attracted any takers” but for an omission from its pros-
pectus and (b) the other aspirant’s violations decided the
contest, despite findings by the district court that neither
reliance nor causation had been proved?
4. If there are such implied causes of action, is a take-
over aspirant that is neither induced to buy nor forced to
sell shares of the target company entitled to a rescission
measure of damages that compensates it for its own mis-
judgment of the worth of the target and for an unrelated
market decline?
5. May a court of appeals that formulates a differ- -
ent measure of damages than that employed by the dis-
trict court decide not to remand for a hearing, and in-
stead fix the damages itself by using excerpts from the
record created for the purpose of determining damages
under the other measure of recovery, thereby increasing
damages from $1.7 million to $25.8 million and increas-
ing prejudgment interest from $600,000 to nearly $10
million?
4
STATUTES AND REGULATIONS INVOLVED
Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) ;
Section 14(e) of the 1934 Act, 15 U.S.C. § 78n(e) ; Sec-
tion 28(a) of the 1934 Act, 15 U.S.C § 78bb(a) ; Act of
June 25, 1948, c. 646, 62 Stat. 968, 28 U.S.C. § 2106;
Rule 10b-5 under the 1934 Act, 17 C.F.R. § 240.10b-5;
and Rule 10b-6 under the 1934 Act, 17 C.F.R. § 240.10b-6,
are set forth in an Addendum to this Brief.
STATEMENT OF THE CASE
This case arises out of a “sophisticated and hard
fought” (A-127) contest for control of Piper Aircraft
Corporation (“Piper”). The “winner,” Bangor Punta
Corporation (“BPC”), was found to have committed two
technical and unintentional violations of the 1934 «ct
during the contest. These missteps were presumed (but
not shown) to have denied the “loser,” Chris-Craft In-
dustries, Inc. (“CCI”), a fair chance to compete for
control. BPC was held liable—jointly and severally with
two of its directors, three members of the Piper family
and Piper’s financial adviser—to pay CCI, which still
owns 43% of Piper, nearly $36 million (including pre-
judgment interest). The judgment equals approximately
the entire net shareholders’ equity of Piper and far ex-
ceeds what CCI would now have if it had won.
1. The Contest for Control of Piper
CCI began acquiring Piper shares in December 1968.
By January 23, 1969, CCI had acquired approximately
203,000 Piper shares (12.4%) through transactions on
the New York Stock Exchange and through a private
purchase from an institutional investor. Table at p. 9,
Item 1. On that date CCI publicly announced a cash
tender offer for 300,000 Piper shares at $65 per share.
5
Piper’s management decided to oppose CCI’s tender
offer. On January 27 and 28, 1969, Piper sent letters to
its shareholders advising them not to tender. On Janu-
ary 29, 1969, Piper announced an agreement to sell 300,-
000 unissued Piper shares to Grumman Aircraft Engi-
neering Corporation. (The agreement was terminated on
March 17, 1969.) These letters and the announcement
were later held to violate Section 14(e) and are the basis
for the liability of the individual Piper family defend-
ants. (B-5, 9)
Despite Piper’s opposition, CCI’s January tender offer
was successful (A-12), bringing CCI 304,000 shares.
Table, Item 2. CCI made additional cash purchases of
Piper shares during its tender offer, and by February 3,
1969 it owned a total of 547,106 Piper shares (33%),
bought at a cost of about $35 million. (A-128) With
“{ijts cash resources . . . virtually exhausted” (A-114),
CCI announced late in February, after the close of its
cash tender offer, its intention to make an exchange offer
to Piper shareholders. (A-12)
Between January and mid-April 1969, BPC was twice
approached by Piper’s investment adviser, the First Bos-
ton Corporation (“First Boston”), about the possibility
that BPC might acquire control of Piper. But it was not
until after CCI’s tender offer had been successfully com-
pleted (and the Pipers’ alleged violations had been com-
mitted) that BPC first met with any Piper official.
Serious negotiations between BPC and the Piper family
did not begin until late in April, by which time CCI
owned 33.8% of Piper. Table, Item 3.
On May 8, 1969, BPC agreed to purchase the entire
interest of the Piper family, about 31% of the outstand-
ing shares, for a package of BPC securities valued by
First Boston at $70-$72 per Piper share. Table, Item 4.
6
BPC also promised to use its best efforts to acquire a
majority of Piper’s shares by offering all Piper share-
holders a package of BPC securities with a value of at
least $80 per Piper share, and, if successful in that ef-
fort, to give the Piper family (in BPC securities or in
cash) the difference between the value of the securities
they had received and $80. (A-14-15)
A few days after purchasing shares from the Piper
family, BPC was offered a total of 98,600 Piper shares at
approximately $80 per share by two institutional inves-
tors. BPC accepted the offers, bought the shares in off-
exhange transactions, and promptly disclosed them to the
public on May 16, 1969. During the following week BPC
ourchased an additional 21,600 Piper shares from another
institutional investor in another off-exchange transaction,
which was also promptly disclosed to the public. (A-16;
App. 374A; EV 1092) After making these cash pur-
chases (totaling 7% of the Piper stock, see Table, Item 5),
BPC had a 4% lead over CCI with almost 30% of the
Piper shares still in public hands. These purchases were
made with the advice of counsel that they were lawful
(App. 1644A-45A) and were found to have had no
market effect. (A-152) Nevertheless, the purchases were
later held to have been in technical violation of Rule
10b-6, in the first reported administrative or judicial ap-
plication of that rule to the purchase of target company
shares.
CCI’s exchange offer began in mid-May. The 1969-70
stock market decline intervened, however, and the prices
of CCI’s securities, which it was offering in exchange,
declined rapidly, making the exchange offer increasingly
unattractive. CCI renewed the offer several times but
never supplemented the original package of securities to
make it competitive with BPC’s prospective offer. The
7
result was that CCI’s offer never attracted even the mini-
mum number of shares (80,000) that CCI had set as a
condition of accepting any of the Piper shares tendered.
The offer was withdrawn on July 24. (A-17) Table,
Item 6.
On July 18, 1969, BPC’s exchange offer became effec-
tive. It remained open until July 29, attracting 110,802
Piper shares, all of which BPC accepted. CCI in the
meantime had registered another exchange offer, which
opened on July 24 and closed on August 4, attracting
112,089 Piper shares. The district court found that dur-
ing the period in which the offers overlapped, BPC’s
package had a market value ranging between $79.93 and
$73.37 ; by contrast, CCI’s package ranged between $75.50
and $63.25. (A-140 n. 10) At the close of the competing
exchange offers, BPC retained a 4% lead with 15% of
the stock still in the hands of public stockholders. Table,
Items 7, 8. The prospectus that was used in BPC’s ex-
change offer was later held to have been unintentionally
in error, on a matter that did not affect the value of
BPC’s offer. (A-140)
At this point, neither aspirant had control of Piper.
The district court specifically found that, as late as
August 19, 1969, control was available to either BPC
or CCI, and accordingly denied CCI’s request for pre-
liminary injunctive relief against future purchases by
BPC, saying:
Neither party has gained control of Piper, and
both are stil! in a position to do so. (C-47)
The court of appeals en banc affirmed this conclusion in
Chris-Craft I and went on to say that in mid-August
1969, CCI was not “at any real disadvantage” in the
contest :
8
[W]e conclude that the district court did not
err in refusing to enjoin the continued solici-
tation of stock by Bangor Punta. At that time
Chris-Craft was free to compete equally with
Bangor Punta for the remaining Piper shares,
and it did so. We do not understand Chris-
Craft to allege that prior misdeeds of Bangor
Punta so determined the course of the competi-
tion for shares after the date of the decision
below that Chris-Craft was placed at any real
disadvantage. (C-9)
In short, after the exchange offers, control was avail-
able in the market to the higher bidder. CCI spent about
$2 million to purchase 29,200 Piper shares, giving it
42%; it then voluntarily “withdrew from the battle.”
(B-7) BPC, with its superior financial resources, pur-
chased an additional 100,614 Piper shares for over $7
million, reaching a total of 51% on September 5, 1969.
Table, Items 9, 10. BPC then stopped making purchases
because it had a majority. Apparent control of Piper had,
appropriately, gone to the higher bidder.
SUMMARY OF THE CONTEST FOR CONTROL
Total Piper Shares Outstanding 1,644,790
Cumulative Percentage of
Acquisition of Piper Shares Piper Shares Owned
Type of No. of % of
Buyer Acquisition Dates Shares Total CCI BPC Public
1. CCI cash purchases 12/30/68-
1/22/69 203,700 12.4% 12.4% 0% 87.6%
2. CCI cash tender 1/23 /69-
offer 2/ 3/69 304,606 18.5% 30.9% 0% 69.1%
3. CCI cash purchases 1/23/69-
4/ 7/69 47,900 2.9% 33.8% 0% 66.2%
[MAY 8: BPC ENTERED CONTEST]
4. BPC sale by Piper 5/ 8/69 501,090 30.5% 33.8% 30.5% 35.7%
family
5. BPC cash purchases 5/14/69-
5/23/69 120,200 7.3% 33.8% 37.8% 28.4%
[MAY 22: THIS LITIGATION BEGAN ]
6. CCI exchange offer 5/15/69-
7/24/69 WITHDRAWN
7. BPC exchange offer 7/18/69-
7/29/69 110,802 6.7% 33.8% 44.5% 21.7%
8. CCI exchange offer 7/24/69-
8/ 4/69 112,089 6.8% 40.6% 44.5% 14.9%
9. CCI cash purchases 8/12/69-
8/18/69 29,200 1.8% 42.4% 44.5% 13.1%
[AUGUST 19: PRELIMINARY INJUNCTION
DENIED; CCI “WITHDREW FROM THE BATTLE” ]
10. BPC cash purchases 8/ 8/69-
9/ 5/69 100,614 6.1% 42.4% 50.6% 7.0%
10
2. The Litigation
a. The Initial Decisions
This action was commenced on May 22, 1969. In its
first amended complaint, CCI alleged that BPC’s private
purchases of 120,200 Piper shares in May 1969 violated
Rule 10b-6, which prohibits a person participating in the
distribution of a security from acquiring that security or
any right to acquire that security. CUI’s theory was that
BPC, having announced its intention to offer BPC secur-
ities in exchange for Piper shares, was engaged in the
distribution of BPC securities; that Piper stock repre-
sented a right to acquire BPC securities in the exchange
offer itself; and that BPC was therefore prohibited by
Rule 10b-6 from purchasing Piper stock. The district
court held that Rule 10b-6 did not apply to BPC’s pur-
chases, since purchases of Piper stock could not have the
prohibited effect of artificially stimulating the market
value of the BPC securities in distribution. (C-45) CCI’s
request for a preliminary injunction preventing BPC
from purchasing additional Piper shares was denied.*
In Chris-Craft I the denial of the preliminary injunc-
tion was affirmed. However, a majority of the court of
appeals disagreed with the district court’s interpretation
of Rule 10b-6, and held that purchases of a target com-
* CCI also alleged in its first amended complaint that the press
release issued by Piper and BPC on May 8, 1969, which included
the statement that BPC intended to offer “Bangor Punta securi-
ties to be valued in the judgment of The First Boston Corpora-
tion at not less than $80 per Piper share,” violated Section 5(c)
of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. § 77e(c),
by going beyond Rule 135, 17 C.F.R. § 230.135, which specifies the
information that may be published before the filing of a registration
statement. Since the statement was entirely accurate, the court
of appeals, like the district court, found that CCI had not been
damaged by the release. (A-42-43) This issue is no longer involved
in this case.
11
pany’s stock by a company that plans to make an ex-
change offer for that stock constitute purchases of rights
to acquire the maker’s own stock within the meaning of
the rule. Chief Judge Lumbard dissented vigorou.ly, ar-
guing that “the majority would stretch the wording of
[Rule] 10b-6 beyond anything that courts, commentators,
and—in published actions—the [Securities and Exchange
Commission] had considered included until this case.”
(C-28) The case was remanded to the district court for
further proceedings to determine whether an exemption
was available.
b. The Decisions on Liability
After remand, CCI filed a second amended complaint,
adding to its Rule 10b-6 charge the allegation that the
prospectus for BPC’s July 1969 exchange offer had failed
to disclose an alleged agreement to sell BPC’s shares of
the Bangor and Aroostook Railroad (“BAR”) at a price
lower than BPC’s book value for that investment. CCI
claimed that because of this alleged omission, the pro-
spectus violated Section 14(e) of the 1934 Act. Shortly
thereafter, the Securities and Exchange Commission
(“SEC”) brought an action against BPC based on the
same alleged omission. The SEC sought an injunction re-
quiring BPC to offer rescission to the former Piper share-
holders who had exchanged their shares, plus a general
injunction against future securities law violations.
The CCI and SEC actions were tried together. The
evidence established that at the time of the exchange
offer BPC had not agreed to sell its investment in the
BAR to anyone. BPC had received an offer for the BAR,
which it had considered; but BPC had “decided to
table the entire matter” (D-8) pending completion of an
investigation of the legal, accounting and tax implica-
12
tions of various forms of disposing of the BAR, particu-
larly the financial consequences of a sale of stock as
compared to a sale of assets. The evidence further estab-
lished that counsel for BPC and First Boston had re-
viewed the status of the BAR with BPC and First Boston
executives. (A-48; App. 1657A-59A) Since there had
been no decision to sell and since the financial effect of
any disposition of the BAR would depend on the form of
the transaction (which was still being studied), no one
suggested that disclosure of possible disposition was re-
quired. BPC’s independent accountants were also fully
aware of the negotiations concerning the BAR when they
permitted the use of their opinion in the exchange offer
prospectus. (App. 1759A-61A; EV 87, 89) BPC finally
agreed to a sale of its BAR stock for cash on October 2,
1969, more than two months after the close of BPC’s
exchange offer. (D-6-13)
In the SEC case, the district court ruled that the evi-
dence “unequivocally negate[{d]” (D-11) the existence of
any agreement to sell the BAR and that BPC had not
“eonsciously concealed, deferred or refrained from going
forward with [the] offer {for the BAR] in order to cir-
cumvent disclosure” in the exchange offer prospectus.
(D-12) There was at the relevant time no “reasonable
probability” of a sale. (D-13) However, the court ad-
vanced a theory neither the SEC nor CCI had relied on:
that the offer of $5 million for BPC’s interest in the BAR
made the carrying value of $18.4 million on BPC’s bal-
ance sheet “obsolete.” (D-14) Applying a “standard of
materiality” that turned on whether “a reasonable stock-
holder of Piper might have hesitated to” accept BPC’s
exchange offer if he had known of the possible disposition
of the BAR (D-15), the district court held that although
BPC did not “intentionally or purposefully mislead” any-
13
one (D-14), the prospectus was unintentionally mislead-
ing because of the failure to mention the offer. In order
to “correc[t] [the prospectus] for those to whom it re-
lated” (A-143), the district court ordered BPC to offer
rescission to all Piper shareholders who had accepted its
exchange offer.* The court denied the SEC’s request for
an injunction against future violations because it found
no “bad faith” on the part of BPC. (D-16-17)
In CCI’s case the district court, after trial, dismissed
the complaint without reaching the question whether CCI
had standing to sue BPC under Section 14(e). With re-
spect to CCI’s claim based on the BAR omission, it re-
peated the conclusion it had reached in the SEC ease:
the prospectus was “unintentionally in error” (A-143)
because of a “mere negligent omission.” (A-148) There-
fore, CCI had failed to prove any “form of scienter.”
(A-144) The district court also held that CCI had failed
to show any “causal relation between the deficiency and
the harm complained of.” (Jd.)
CCI’s case (but not the SEC’s) also involved the al-
leged Rule 10b-6 violation. As to that, the evidence
showed that BPC’s in-house and outside counsel had ad-
vised it that the rule did not apply to purchases of Piper
stock by BPC under the circumstances. (App. 1644A-46A)
BPC’s counsel knew that in a May 5, 1969 release the
SEC had circulated for public comment a proposed new
Rule 10b-13 to deal explicitly with purchases of a target
company’s stock by a tender offeror. Although the new
rule would not become effective until November 1969, the
SEC’s May release had asserted that the new rule was
“in effect a codification of existing interpretations under
Rule 10b-6.” But not one such published interpretation,
*The rescission offer was made. It was not accepted by any
former Piper shareholder.
14
administrative or judicial, was ever found. (C-28-31,
44-46)
The district court, bound by Chris-Craft I, found that
BPC’s cash purchases in May were “technical” (A-149)
violations of Rule 10b-6, though “well within the spirit”
(A-151) of one of the many exemptions from the rule.
It also found that the purchases—all in large blocs, all
off-the-exchange, and all promptly announeed—had not
“acted to produce or heighten a stimulating effect on the
market” (A-152), and had not misled CCI or any Piper
shareholder. (A-151) The district court also found that
there was “no basis for concluding that, absent Bangor
Punta’s acquisition of these blocks, Chris-Craft would
have achieved its goal of control.” (A-150)
On appeal (Chris-Craft II), the court of appeals re-
versed and remanded.* It held that CCI, as one aspirant
for control of Piper, had implied causes of action for
damages against BPC, another aspirant, under both Rule
10b-6 and Section 14(e). The court of appeals acknowl-
edged that BPC’s violations were technical and not made
in bad faith. (A-37, 47, 97-100, 117-123) It also ac-
knowledged that there was no evidence that CCI could
ever have gained control of Piper, even if the defendants
had not violated the law. (A-56, 66) Nevertheless, the
court of appeals held that the violations would be legally
presumed to have injured CCI by denying it a “fair op-
portunity to compete for control.” (A-60)
The court of appeals then directed the district
court to enjoin BPC from voting either bloe of Piper
shares for five years, so that BPC would (as it does
today) have the power to vote only 37% of the shares
* The district court’s decision in the SEC action—ordering BPC
to offer rescission but denying the broad injunction the SEC sought
—was affirmed. (A-94-95)
aoe
ole ee tee, Mae we =
15
against CCI’s 42%. In addition to this injunction and
the rescission offer that was ordered in the SEC case,
the court of appeals directed that the district court de-
termine the money damages CCI suffered by being de-
prived of a “fair opportunity to compete for control” of
Piper by BPC and the other defendants.
c. The Decisions on Damages
On remand, the district court heard and evaluated ex-
tensive expert testimony on the value of CCI’s lost oppor-
tunity. After analyzing the factors that give value to
control, the district court found that the value of control
would be no more than 10% over the fair market value
of Piper stock on September 5, 1969, the day BPC ac-
quired 51% of Piper. The fair market value on that date,
the district court found, was $48 per share; the value of
control was therefore $4.80. Since CCI lost at most an
opportunity to gain control, its damages were “generously
valued” at $2.40 per Piper share, for a total of $1,673,-
988. (B-70) In addition, the district court awarded pre-
judgment interest, which totaled $599,011. (B-76-79)
On appeal (Chris-Craft III), the court of appeals
deemed this judgment for more than $2 million “quite
insubstantial” (B-17), and took the following steps to
enlarge it:
First, the court of appeals disregarded the fact that
CCI’s injury was a supposed interference with its op-
portunity to gain control of Piper and held that the
measure of damages was the difference between the his-
torical cost of CCI’s Piper shares and the price at which
CCI could theoretically have sold the stock by a public
offering in a severely depressed market five months after
BPC acquired control. It did so even though (a) CCI was
y
16
not induced to buy a single Piper share by BPC and re-
tained every share of Piper it had bought during the
contest; (b) the historical cost of CCI’s Piper shares
greatly exceeded their value (as found by the district
court) at the time the court of appeals deemed relevant;
(c) CCI had not proved that BPC would have lost or
that CCI cou!d have won control under any circumstances;
and (d) CCI would have suffered precisely the same de-
cline in the market value of its Piper shares had it ob-
tained the control it allegedly was unfairly denied.
Second, the court of appeals decided that it would
itself determine damages without a remand, and did so
on the basis of selected portions of the testimony and
report of a CCI expert who was not credited by the trial
judge. The court made plain errors in calculating both
the cost and the selling price and directed that judgment
be entered against all defendants, jointly and severally,
for $25,793,365. (B-21-32) It then merely “affirmed”
the district court’s decision to award prejudgment inter-
est; but because of the redetermination of damages, this
“affirmance” increased the actual interest award from
$599,011 to approximately $10 million.
The result is a crushing $36 million judgment that
provides a massive “windfall” (A-145) for the loser in
the takeover contest, unfairly penalizes BPC and its di-
rectors for technical good faith violations, and renders
the Williams Act a lethal weapon to deter competition
for corporate control—a result Congress took “extreme
care” to avoid. Rondeau v. Mosinee Paper Corp., 422
U.S. 49, 58-59 (1975).
ee eee eee ong inns bene
17
SUMMARY OF ARGUMENT
The judgment against BPC and its directors was based
on two alleged violations. The first was a “technical”
(A-149) violation of SEC Rule 10b-6 that the district
court found not to have “such substance as to merit
serious consideration . . . as a basis for money dam-
ages.” (A-150) The second was an omission from BPC’s
exchange offer prospectus that the district court found
to involve no “intent to mislead” (A-143) or “bad faith”
(D-14) and to have no “causal relation” to the injury
CCI claimed to have suffered. (A-144)
CCI neither bought nor sold the BPC securities in-
volved in the alleged violation of Rule 10b-6. As for the
alleged Section 14(e) violation, CCI was not the target of
BPC’s exchange offer, was not misled by the prospectus,
and is not suing as a member of the shareholder class
that Section 14(e) was intended to protect or for harm
that Section 14(e) was intended to redress. CCI’s only
claim is that the two violations during BPC’s quest for
Piper stock injured CCl because CCI was seeking Piper
stock at the same time. CCI did not, however, prove that
BPC’s violations caused it to lose its quest for control.
CCI “withdrew from the struggle’ while control was
still available to either aspirant in the marketplace.
(A-18, A-114-16, C-47) CCI suffered a loss on the Piper
shares, just as BPC did, because both bought just before
a sharp decline in the stock market and particularly in
the share prices of general aviation companies including
Piper.
The court of appeals bailed CCI out. Invoking a policy
of “vigorous enforcement through private litigation”
(A-22), it created damage actions in favor of a plaintiff
the statute was not designed to protect; defined “scienter”
18
to include mere knowledge of an omitted fact, even in
good faith; conclusively presumed that BPC’s exchange
offer would not “have attracted any takers” (A-60)
without the omission; and further presumed, in the face
of contrary findings of fact, that the two violations were
what cost CCI its opportunity for control of Piper. Then,
ignoring the statutory limitation to “actual damages on
account of the act complained of,” 15 U.S.C. § 78bb(a)
(1970), the court of appeals awarded CCI an amount
. "teen times as great as the value of the “opportunity”
the court of appeals presumed it had lost.
1. The Implied Causes of Action
The court of appeals interpreted the federal securities
laws so as to create two new implied federal causes of
action for damages in favor of CCI. One was implied
under Section 10(b) and Rule 10b-6 even though CCl
was neither a purchaser nor a seller of the securities
involved. Compare Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723 (1975). The other was implied un-
der Section 14(e) even though CCI was not a member
of the class for whose “especial benefit” Section 14(e)
was enacted, compare Cort v. Ash, 422 U.S. 66 (1975),
and did not suffer the type of harm Section 14(e) was
designed to redress. Compare Rondeau v. Mosinee Paper
Corp., 422 U.S. 49, 60 (1975).
a. Section 10(b) and Rule 106-6
The court of appeals ruled that BPC had violated Sec-
tion 10(b) and Rule 10b-6 in connection with a distribu-
tion of BPC securities. It then created an implied fed-
eral cause of action in favor of CCI for damages: even
though CCI neither bought nor sold the BPC securities
in connection with which the violation occurred. This
Se
19
ruling is inconsistent with the subsequent holding of this
Court in Blue Chip Stamps that the plaintiff must pur-
chase or sell the securities involved in order to have an
implied cause of action for damages under Section
10(b). Blue Chip Stamps involved Rule 10b-5 rather
than Rule 10b-6, but this Court’s decision was based on
the words “in connection with the purchase or sale” in
Section 10(b) itself, words that necessarily limit the
scope of both rules.
Subject to many exemptions, Rule 10b-6 prohibits a
corporation that is engaged in a distribution of its secur-
ities from simultaneously buying the same securities
or “rights” to buy such securities. Its objective is to
protect purchasers of the securities in distribution from
paying a price that has been artificially inflated by the
issuer’s own trading. Weitzen v. Kearns, 271 F. Supp.
616, 623 (S.D.N.Y. 1967). BPC was held to have vio-
lated the rule when, after announcing its intention to
offer to exchange BPC securities for Piper stock, it pur-
chased Piper stock for cash. Because of BPC’s own ex-
change offer, the Piper stock itself was deemed to con-
stitute “rights” to acquire the BPC securities.*
This case illustrates why Blue Chip Stamps was cor-
rect. CCI never bought or sold the BPC securities whose
“distribution” Rule 10b-6 was designed to regulate. There
is no proof that BPC’s purchases affected the price
* This new and strained reading of Rule 10b-6 was hotly dis-
puted. The main point was that BPC’s purchases here were con-
sistent with its announced intention to acquire as much Piper stock
as possible, not (as in the normal case) directly contrary to an an-
nounced intention to sell. See the dissenting opinion of Chief Judge
Lumbard at C-28-31. The only plausible market effect of buying
Piper shares would be to raise the price of Piper stock. BPC
obviously did not want to do that since it would make BPC’s ex-
change offer seem less attractive. (C-45) In any event BPC’s pur-
chases were found not to have had any market effect. (A-151)
ee
20
at which any security was purchased or sold by CCI.
CCI’s only claim is that it also wanted Piper stock. Blue
Chip Stamps plainly and properly forbids making the
purchaser of a security in a technically unlawful transac-
tion liable to a plaintiff whose only claim is that it was
seeking securities of the same class.
b. Section 14(e)
The court of appeals created for CCI, a takeover
aspirant, an implied right to seek damages under Section
14(e), which was ene*ted to protect target company
shareholders. This ruli, wrong in principle, has the
practical effect of penalizing the very people Congress
wanted to protect—the Piper shareholders who accepted
BPC’s exchange offer and now hold BPC securities.
Federal courts have sometimes created new implied
damage remedies under federal statutes, but only “[bJe-
cause the interest of the plaintiffs in those cases fell
within the class that the statute was intended to pro-
tect, and because the harm that had occurred was of
the type that the statute was intended to forestall... .”
Wyandotte Transportation Co. v. United States, 389 U.S.
191, 202 (1967). The statute must “create a federal
right in favor of the plaintiff,” Cort v. Ash, 422 U.S.
66, 78 (1975), who must allege “harm... redressable
under its provisions.” Rondeau v. Mosinee Paper Corp.,
422 U.S. 49, 60 (1975). These well established principles
follow both from the general Jaw of torts and from the
inherent limitations on the federal courts.
Section 14(e) is a part of the Williams Act. That Act
was designed to assure the shareholders of a target com-
~~ |
21
pany accurate information with which to respond to an
offer for their shares. Takeover aspirants, among others,
were given the duty of obeying the disclosure require-
ments; there is no evidence that they were intended to
be among the statute’s beneficiaries. The words of the
section itself contemplate only statements aimed at secur-
ity holders. The committee reports on the Williams Act
emphasized that it was a disclosure statute designed to
provide material information to the target company
shareholders; they say nothing about protecting offerors.
Senator Williams, introducing the legislation, said that
the law was “for the benefit of shareholders” and bal-
anced that benefit against the burdens imposed on take-
over aspirants. See p. 40, infra. The testimony at con-
gressional hearings was that offerors “do not need any
additional protection.” See p. 42, infra. This Court in
Rondeau recognized that “(t]he purpose of the Williams
Act is to insure that public shareholders who are con-
fronted by a cash tender offer for their stock will not be
required to respond without adequate information ... .”
422 U.S. at 58. Other courts have consistently taken this
view. The fact that Section 14(e) protects target share-
holders from misleading solicitations “in opposition to”
a tender offer, if relevant at all here, reinforces this con-
clusion. Congress wanted shareholders to receive accurate
information from both pro- and anti-takeover forces.
There is no evidence whatever that Congress meant to
protect (much less to provide a cause of action for dam-
ages to) the offeror, which can fend for itself.
CCI falls well outside the class “for whose especial
benefit the statute was enacted.” Texas & Pacific Ry. Vv.
Rigsby, 241 U.S. 33, 39 (1916), quoted and reempha-
sized in Cort, 422 U.S. at 78. CCI is not a Piper share-
22
holder misled into tendering,* nor is it a Piper share-
holder misled into not tendering, nor is it complaining
of any injury done to Piper that might derivatively af-
fect that company’s shareholders. CCI sought damages
solely on the ground that it, like BPC, was seeking Piper
shares. An injury to this interest simply is not “redress-
able under its [the Williams Act’s] provisions.” Ron-
deau, 422 U.S. at 60. The fact that it might be redress-
able on a proper showing in state courts under state tort
law does not alter this conclusion, as Judge Timbers
thought (A-30) ; it reinforces it. Cort, 422 U.S. at 84-85.
So-called “standing” cases that involve only injunctive
relief are not relevant here. Injunctions requiring the
defendant to carry out a policy established by Congress
can be afforded broadly even to those whose interests
Congress did not specifically intend to protect, because
“the fact is that one injunction is as effective as 100
and, concomitantly, that 100 injunctions are no more
effective than one.” Hawaii v. Standard Oil Co., 405
U.S. 251, 261 (1972). Damages by contrast can have a
multiplicative effect, often on innocent shareholders or
even (as here) on the very shareholders (those who ex-
changed Piper shares for BPC securities) intended to be
the beneficiaries. Accordingly, if a particular injury is
to be compensable in damages, the federal courts “should
insist upon a clear expression of a congressional purpose
to make it so.” Id. at 264. The only “clear expression”
*The Piper shareholders who were the intended beneficiaries
of Section 14(e) have received the full measure of its protection.
Because the BPC prospectus was found “unintentionally in error,”
the district court in the SEC action ordered BPC to offer rescission
to the tendering shareholders, and BPC did so. None accepted. The
present case concerns whether, in addition, BPC owes massive
damages to CCI, the competing offeror.
from the language, history and purpose of the Williams
Act is that target company shareholders, not tender of-
ferors, were the intended beneficiaries.
2. Scienter
In Ernst & Ernst v. Hochfelder, 96 S. Ct. 1375 (1976),
this Court held that a cause of action for damages will
not lie under Section 10(b) and Rule 10b-5 in the ab
sence of scienter, defined as “intent to deceive, manipu-
late, or defraud.” Jd. at 1381. The Court left undecided
whether reckless behavior could ever be deemed “a form
of intentional conduct.” Jd. at 1381 n.12. BPC’s conduct
in the present case does not meet the Hochfelder test.
The district court characterized the Rule 10b-6 viola-
tion as merely “technical”? (A-149) and within the “in-
tent” of one of the exemptions from the rule. (A-151)
With respect to the BAR omission the district court found
as follows:
I find that Bangor Punta did not intention-
ally or purposefully mislead Piper Aircraft
stockholders or the public or investors by the
omission to make disclosure of the sale under
consideration nor did Bangor Punta or its di-
rectors intend to gain an advantage over Chris-
Craft by the nondisclosure in the contest being
waged for control of Piper. There was no pur-
poseful connection between the nondisclosure
and the contest for control. In other words,
the nondisclosure was not prompted by aun im-
proper purpose. However, absence of bad faith
does not excuse the failure to state facts nec-
essary to make the facts stated not misleading.
(D-14)
The court of appeals expressly accepted the district
court’s findings. (A-47) But, using the term “scienter”
24
in a manner quite inconsistent with Hochfelder, the court
of appeals ruled that mere knowledge of an omitted fact
is enough. Judge Timbers said in the main opinion:
In sum, and put as simply as possible, the
standard for determining liability under § 14 (e)
on the part of a person making a mislead-
ing tender offer, or a responsible officer of a
corporation making such ... an offer, is
whether plaintiff has established that defend-
ant either (1) knew the material facts that
were misstated or omitted, or (2) failed or re-
fused to ascertain such facts when they were
available to him or could have been discovered
by him with reasonable effort. (A-36-37)
Judge Mansfield said almost the same thing. He thought
only “some degree of awareness” was necessary. (A-
105, emphasis in original) Without discussion, the court
of appeals apparently applied the same test to the Rule
10b-6 violation. If scienter is satisfied by mere aware-
ness, without more, then the scienter requirement in ef-
fect would be abolished.
BPC’s conduct obviously satisfied the “awareness”
test. BPC knew it was buying Piper stock for cash in
May 1969, although it “did not then know of any rule or
interpretation precluding the transactions,” (C-22, Lum-
bard, C. J., dissenting) and, far from intending to de-
ceive anyone, it fully disclosed them publicly and in a
Schedule 13D filed with the SEC at the time they were
made. BPC discussed disclosure of the BAR offer with
its counsel and its financial advisors and concluded that
disclosure would be premature. If BPC’s judgments are
now deemed wrong, it nevertheless plainly did not have
the “intent to defraud, manipulate, or deceive” required
by Hochfelder. Recklessness was neither charged nor
25
found and is precluded by the findings that were made.
In any event, recklessness is insufficient to support the
imposition of liability unless it amounts to intentional
fraud.
The same standard of scienter should apply in private
actions under Rule 10b-6 or Section 14(e) as in those
under Section 10(b). and Rule 10b-5. With regard to
Rule 10b-6, the statute underlying that rule is the same
as the one underlying Rule 10b-5, so Hochfelder plainly
controls. Section 14(e) is worded slightly differently,
and incorporates language from Rule 10b-5(2) not found
in Section 10(b) itself. While this Court noted in Hoch-
felder that these words taken by themselves do not ex-
plicitly resolve the scienter question, any doubt left by
the language of Section 14(e) is resolved by its history.
Both Section 10(b) and Rule 10b-5 are antifraud pro-
visions. Section 14(e) was based on these provisions.
The court of appeals in this case thought it was apply-
ing “the principles developed under Rule 10b-5” (A-34)
to determine what form of scienter, if any, should be
required under Section 14(e). Every other court that
has considered the issue has started from the same prem-
ise. There is no reason to assume that when Congress
borrowed the language of Rule 10b-5 and went on to
describe Section i4(e) in the committee reports as a
“fraudulent transactions” section, Congress was operat-
ing under the mistaken impression that Rule 10b-5(2)
actions did not require “intent to deceive, manipulate,
or defraud.” Indeed, Hochfelder precludes such an as-
sumption. In adopting a lesser standard of scienter, the
court of appeals failed to anticipate Hochfelder and
disregarded the logic of the interrelated and interde-
pendent express remedies provisions of the securities
acts.
26
3. Reliance and Causation
The district court found that CCI had not established
“a nexus between the violations it charges and the dam-
ages it claims to have suffered.” (A-147) As to the
Section 14(e) claim, it found “no proof that a single
exchanging Piper shareholder would have refrained from
the exchange and taken an offer for his shares from
Chris-Craft instead of that from Bangor Punta.” (A-
145) As to the Rule 10b-6 claim, it found no basis for
concluding that even absent BPC’s cash purchases CCI
would have gained control. (A-150)
The court of appeals agreed (A-55-56) but ruled that
under Mills v. Electric Auto-Lite Co., 396 U.S. 375
(1970), and Affiliated Ute Citizens v. United States, 406
U.S. 128 (1972), and “to encourage the vigorous enforce-
ment of the securities laws through shareholder suits”
(A-57) it was required to make two critical presump-
tions on CCI’s behalf: first, even assuming “BPC’s offer
was superior to that of CCI, taking into account the
BAR loss” (A-60), that “BPC’s exchange offer would
not “have attracted any takers” (A-60) without the BAR
omission; and, second, that BPC’s missteps caused CCI
to lose control of Piper (the injury for which it was
compensated) even though it was not proved that CCI
“would have obtained a controlling position in Piper”
(A-56) under any circumstances.
These rulings are both an erroneous reading of this
Court’s holdings and bad law. In Mills, suit was brought
by shareholders challenging a proxy solicitation by man-
agement from which a material fact was omitted. The
Court ruled that there was a violation because the omis-
sion itself denied the shareholders “fair corporate suf-
frage.” 396 U.S. at 381. They were entitled to a proper
27
proxy regardless of any showing of what they would
have done. The Court specifically found “no justifica-
tion” for any presumption as to how the shareholders
would have voted absent the omission. Jd. at 382 n. 5.
In the present case, the district court ordered BPC
to offer rescission to every shareholder who exchanged.
That order, which BPC followed, is the most that Mills
can demand and the only remedy to which CCI would be
entitled even if it had established standing and scienter.
The court of appeals, however, invoked Mills for a fur-
ther step that Mills never envisioned: it gave CCI, a
third party, a rule of law conclusively establishing that
BPC’s offer would not in fact “have attracted any tak-
ers” if the negotiations had been disclosed. (A-60)
The court of appeals then took an even broader leap.
It simply ignored the district court’s (C-47) and its own
(C-9) conclusion that CCI was “still in a position” to
gain control of Piper and was not “at any real disad-
vantage” after all the events at issue and conclusively
presumed that BPC’s missteps had caused CCI’s defeat.
As Judge Mansfield noted, however, “it was BPC’s cash
purchases in the open market of 100,614 shares, as com-
pared with CCI’s capacity to buy only 29,200 shares,
that won control for BPC.” (A-116)* The result reached
by the court of appeals is as if, in the Mills case, the
Court had created an irrebuttable presumption that the
merger would have been rejected and had awarded dam-
ages to a competing suitor seeking a different merger
with the target.
In Rondeau, this Court noted that “Mills could not be
plainer in holding that the questions of liability and re-
* These purchases, Item 10 on the Table, were wholly lawful.
28
lief are separate in private actions under the securities
laws, and that the latter is to be determined according
to traditional principles,” 422 U.S. at 64. CCI obviously
should not have been awarded damages based on the
difference between winning end losing the contest “in
the absence of evidence establishing a reasonable prob-
ability that its defeat and damage were connected with
the claimed violations.” (A-145)
4. Damages
Section 28(a) of the 1934 Act prohibits any plaintiff
from recovering more than its “actual damages on ac-
count of the act complained of.” Since the court of ap-
peals in Chris-Craft II had defined the injury as BPC’s
alleged interference with CCI’s opportunity to compete
for control of Piper, the district court first found the
value of control. This value was found after an extensive
hearing to be $4.80 per share. The district court dis-
counted this figure to $2.40 because what was taken was
not control itself but a highly uncertain “opportunity”
to gain control. (B-57-70)
In Chris-Craft III, the court of appeals ignored its
previous definition of the injury and adopted an in- .
demnification measure of damages that increased dam-
ages more than fifteen-fold to $37 per share. The new
formula was
. . . the difference between the price CCI paid
for its Piper stock . . . and the price it could
have obtained for it through a public offering
after BPC unlawfully acquired control... .
(B-31)
The court of appeals tried to force this new formula to
serve as a measure of the actual decline in the value of
CCI’s holdings caused by BPC’s obtaining a majority.
The results are, at best, tens of millions of dollars wide
of the mark.
The court of appeals first found the per-share value
of a bloc of Piper stock that carried with it the chance
of gaining control to be $64, based on CCI’s supposed
cost, despite the district court’s finding that even a con-
trol bloc was worth only $52.80 per share at the relevant
date. The court of appeals then found the per-share value
of a minority bloc to be $27 per share, based on an esti-
mated selling price five months after BPC obtained a
majority. The SEC pointed out that this—
appears to compensate Chris-Craft for a loss
caused by a post-injury decline in the market
value of Piper stock of approximately $15 per
share—a loss that Chris-Craft would have sus-
tained even if [BPC] had, not violated the se-
curities laws and, indeed, even if Chris-Craft
itself had succeeded in the contest for control
.... Brief for the United States as Amicus
Curiae on Petitions for Certiorari at 23 n.14.
In this manner the court of appeals reached the remark-
able conclusion that the value of control was $37 per
share ($64 minus $27) for a stock that the court thought
was itself worth only $27 per share.
The court of appeals then assessed damages b»sed on
the full $37 per share, making no allowance at all for
the fact that what CCI lost was, at the very most, an
opportunity to compete for control against a vigorous
opponent. Even the SEC has acknowledged that this
risks “substantial overcompensation of the defeated con-
testant,” which lost only its “expectancy.” Jd. at 22.
30
What the court of appeals really did, as the cases it cited
show, was to use a rescission measure of damages even
though CCI was neither induced to buy nor forced to sell.
The effect was to make BPC insure CCI against CCI’s
own misjudgment of Piper’s worth and against a steep
market decline. This was plain error. In a contest for
control where the “act complained of” is denial of the
opportunity to gain control, the “actual damages” under
Section 28(a) must be measured by the value of control,
“discounted by the likelihood that the defeated contestant
would have lost the control contest” anyway. Id.
5. Due Process
Even if the court of appeals’ second damage formula
were right, it was error for the court to calculate dam-
ages itself, on the basis of selected excerpts from a rec-
ord made on the old theory, without giving the parties
an opportunity to present evidence or argument on the
new theory. Had BPC been given the chance, it could,
for example, have offered proof challenging the critical
but unanalyzed assumptions that CCI would have had
to register its non-control bloc with the SEC and that
this would have taken five months of steady market de-
cline. Such matters became critical after Chris-Craft III
because every one-dollar difference in the presumed cost
or hypothetical sale price of a Piper share changes the
total judgment against BPC and its directors by $1
million. This denial of BPC’s fundamental rights was
compounded by the court of appeals’ “affirmance” of the
award of prejudgment interest. Since the court of ap-
peals had itself increased the underlying damages fifteen-
fold, this “affirmance” enlarged the interest component
alone from $600,000 to nearly $10 million. :
$1
ARGUMENT
I. There Is No Implied Private Federal Cause of Action
for Damages, Under Either Rule 10b-6 or Section 14(e),
in Favor of One Takeover Aspirant Against Another.
The court of appeals created two new implied federal
causes of action for damages, one under Rule 10b-6 and
one under Section 14(e), in favor of one takeover as-
pirant against another. In so doing, the court disregarded
controlling statutory language, accorded standing* to a
class of plaintiffs Congress never intended to benefit, and
overrode important and carefully drafted limitations on
the express civil damage remedies in the same body of
federal laws.
This Court has, in cases that are controlling here,
repeatedly ruled against this kind of automatic provision
of implied federal remedies. See Cort v. Ash, 422 U.S. 66
(1975); Rondeau v. Mosinee Paper Corp., 422 U.S. 49
(1975); Blue Chip Stamps v. Manor Drug Stores, 421
U.S. 723 (1975); Securities Investor Protection Corp.
v. Barbour, 421 U.S. 412 (1975); National Railroad
Passenger Corp. Vv. National Association of Railroad
Passengers, 414 U.S. 453 (1974) ; cf. Hawaii v. Standard
Oil Co., 405 U.S. 251 (1972). The Court has, instead,
demanded a careful examination of the language, his-
* This case does not present an issue of “standing” in the consti-
tutional sense. Compare Simon v. Eastern Ky. Welfare Rights
Organization, 44 U.S.L.W. 4724 (U.S. June 1, 1976); Association
of Data Processing Service Organizations, Inc. v. Camp, 397 U.S.
150 (1970); Flast v. Cohen, 392 U.S. 83 (1968); Baker v. Carr,
369 U.S. 186 (1962). The question is not whether CCI has a
sufficient interest in the injury it alleges but whether Congress
intended to create a private federal damage remedy, under Section
10(b) or Section 14(e) of the 1934 Act, for the kind of injury CCI
alleges it suffered.
32
tory, and purpose of a statute before concluding that
particular harm is “redressable under its provisions” in
an implied private action in a federal court. Rondeau,
422 US. at 60. That examination leads to a reversal
here.
A. CCI Has No Cause of Action for Damages Under
Section 10(6) and Rule 10b-6 Because It Neither
Purchased Nor Sold the Securities in Question.
Rule 10b-6 was promulgated pursuant to Section 10 (b)
of the 1934 Act. SEC Release No. 34-5194 (July 5,
1955). In Blue Chip Stamps, this Court upheld the Sec-
ond Circuit’s Birnbaum* rule that a private cause of
action for damages under Section 10(b) lies only in
favor of a plaintiff who has purchased or sold the secur-
ities in question. CCI neither purchased nor sold the
BPC securities in connection with which the alleged vio-
lation of Rule 10b-6 occurred. Consequently, CCI cannot
sue BPC for damages under Rule 10b-6.
The court of appeals did not have the guidance of
Blue Chip Stamps. It purported to distinguish Birnbaum,
which involved Rule 10b-5, on the ground that “Rule
10b-6 does not contain the clause ‘in connection with the
purchase or sale of any security’, which limits a cause
of action under Rule 10b-5.” (A-65 n. 29) The distinc-
tion is groundless. The “in connection with” lan-
guage, which is the basis for the decisions in both Blue
Chip Stamps and Birnbaum, comes from Section 10 (b)
itself, and it does not matter that the SEC chose to re-
peat the limiting clause in one rule under Section 10(b)
but not in the other. Section 10(b) limits the reach of all
* Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert.
denied, 343 U.S. 956 (1952).
33
rules issued under it. As this Court declared in Ernst &
Ernst v. Hochfelder, 96 S. Ct. 1875, 1391 (1976):
The rulemaking power granted to an adminis-
trative agency charged with the administration
of a federal statute is not the power to make
law. Rather, it is “ ‘the power to adopt regu-
lations to carry into effect the will of Congress
as expressed by the statute.’” [Citations omit-
ted.| Thus, despite the broad view of the Rule
[10b-5] advanced by ‘he [Securities and Ex-
change] Commission in this case, its scope can-
not exceed the power granted the Commission
by Congress under § 10(b).
See also Miller v. United States, 294 U.S. 435 (1935).
Were the law otherwise, as the court of appeals here
thought, the SEC itself could overrule Blue Chip Stamps
and the will of Congress by amending Rule 10b-5 to
omit the statutory “in connection with” limitation that
the rule now contains.
This case is a good illustration of why the decision
in Blue Chip Stamps was right. Rule 10b-6 prohibits a
corporation engaged in a distribution of its securities
from simultaneously acquiring either those securities or
“rights” to acquire them. The purpose of the rule is “to
protect a purchaser of a security in a distribution from
abnormal market pressures on the distribution price
created by the issuer’s or underwriter’s own trading.”
Weitzen v. Kearns, 271 F. Supp. 616, 623 (S.D.N.Y.
1967) ; see also SEC v. Scott Taylor & Co., 183 F. Supp.
904, 907 (S.D.N.Y. 1959). The securities in “distribu-
tion” here were BPC securities. BPC’s acquisition of
Piper stock was wrongful, if at all, only because it might
in theory affect the price of the BPC securities in distri-
34
bution.* Anyone who purchased these BPC securities is a
member of the “especial” class, Cort v. Ash, 422 U.S. at
78, that was intended to be protected by Rule 10b-6 and
can meet the Blue Chip Stamps test. CCI was not a
purchaser of BPC securities. It did not suffer any injury
Rule 10b-6 was intended to prevent.
CCI’s injury, if any, has nothing to do with the rea-
son for Rule 10b-6. Its only claim is that it also
wanted Piper stock.** CCI would, of course, have suffered
exactly the same “injury” if BPC’s purchases had been
made ten to fifteen days earlier or two months later
(either of which would have beer possible) when the
technical proscriptions of Rule 10b-6 would not have been
applicable on any theory. Birnbawm and Blue Chip
Stamps plainly forbid making the purchaser of a security
in a technically unlawful transaction liable to a plaintiff
whose only claim is that it was seeking the same security.
Obviously recognizing that the court of appeals ruling
cannot survive Blue Chip Stamps, CCI argued in its op-
position to certiorari that Rule 10b-6 might be read to
define a “manipulative act” under Section 14(e) of the
1934 Act, which does not contain the vords “in connec-
tion with the purchase or sale... .” This argument is
as unpersuasive as it is untimely: BPC’s “technical”
* In fact, the district court wand that these private, off-exchange
acquisitions did not “produce «* heighten a stimulating effect on
the market.” (A-152)
** There was no proof that BPC’s purchases affected the price
at which any security was purchased or sold by CCI. (A-33) Judge
Mansfield (A-111) and Judge Gurfein (A-96) both based CCI’s
standing solely on the ground that BPC’s purchases added to BPC’s
holdings of Piper stock, rejecting Judge Timbers’ speculation
(A-65-66) that CCI might show some sort of injury to itself
based on a legally presumed (but undemonstrated) market effect of
BPC’s purchases.
(A-149) violation of Rule 10b-6 did not contravene Sec-
tion 14(e) either in theory or in fact.
Rule 10b-6 was issued for the carefully limited pur-
pose, stated in the rule itself, of implementing terms “as
used in Section 10(b) of the Act.” The violations defined
by Rule 10b-6 are, in light of its source in Section 10(b),
necessarily subject to the statutory purchaser-seller limi-
tation, and CCI’s express purpose in asking this Court
to reissue the rule under a different section is to change
its meaning to remove this inherent limitation.* There
is no reason for this Court to engage in such mysterious
alchemy. The larger question, whether a rule like 10b-6,
which is aimed at market manipulations by sellers, would
be appropriate under Section 14(e), which is aimed at
fraud by purchasers, is hardly an issue that should re-
ceive its initial consideration on certiorari. No lower
court ever considered the possibility that BPC’s cash
purchases of Piper stock violated Section 14(e).
CCI’s proposed carelessness with the language and
statutory context of Rule 10b-6 is all the more inap-
propriate since there was no substance behind the tech-
nical violation. (A-149) BPC promptly disclosed its pur-
chases of Piper stock. The district court specifically
found that CCI was not misled (A-150), that there was
“not a scintilla of evidence that any Piper holder was
misled” (A-151), and that there was no evidence of any
effect on the market for any security. (A-151-52) In the
court of appeals, Judges Mansfield (A-111) and Gurfein
(A-96) both expressly recognized the absence of any
proof of a manipulative effect and predicated standing
*Cf. SEC v. National Securities, Inc., 393 U.S. 453, 465-66
(1969) (rejecting the contention that an SEC rule defining “sale”
for purposes of Section 11 of the 1933 Act could be invoked to
define the same term as used in Section 10(b)).
36
on the technical violation. Since there was no manipula-
tion in fact, it is hardly suprising that not even CCI has
alleged, until now, that the purchases violated Section
14(e).
B. CCI Has No Cause of Action for Damages Under
Section 14(e) Because It Ie Not a Member of the
Class Congress Sought To Protect and Did Not
Suffer the Injury Congress Sought To Prevent.
The Williams Act of 1968, which added Section 14(e)
to the 1934 Act, is a disclosure statute. As Senator Wil-
liams declared in introducing the bill:
This legislation will close a significant gap in
investor protection under the Federal securities
laws by requiring the disclosure of pertinent in-
formation to stockholders when persons seek to
obtain control of a corporation by a cash tender
offer or through open market or privately ne-
gotiated purchases of securities. 113 Cong. Rec.
854 (1967). See also S. Rep. No. 550, 90th
Cong., Ist Sess. 2-3 (1967); H.R. Rep. No.
* 1711, 90th Cong., 2d Sess. 3-4 (1968).
To give “stockholders” adequate information to make an
investment decision, the Act imposed new filing require-
ments (Sections 13(d) and i4(d)) plus a traditional pro-
hibition against fraud (Section 14(e)). While it is not
clear that Congress intended to create any new damage
remedy at all, it is very clear that any such remedy
should be limited to the stockholders Congress sought to
protect, not extended at their expense to other persons
who are seeking their shares.
To begin with, neither the Act nor the committee re-
ports or statements of the sponsors contain any reference
37
to any new private federal damage remedy.* If there is
any such remedy at all, there is no reason to think it
extends to suits against persons who have made regis-
tered exchange offers, such as that made by BPC. The
gap that Congress perceived in the regulatory pattern
was that cash tender offerors had no affirmative disclo-
sure obligations to the shareholders whose stock they were
seeking. E.g., S. Rep. No. 550, 90th Cong., Ist Sess. 1-3
(1967). As to registered exchange offers, adequate dam-
age remedies were already available in appropriate cases
under Sections 11 and 12(2) of the 1933 Act.**
If a federal court is nevertheless going to imply a new
cause of action for damages under Section 14(e) against
the maker of a registered exchange offer, it must at least
find implicit congressional intent to provide redress for
the kind of harm the plaintiff is alleging. Such a finding
is required by both the general law of torts and the in-
herent limitations imposed by the federal system, and this
Court has repeatedly insisted on it for both reasons.
The doctrine that the federal courts can imply damage
actions from federal statutes originated during the reign
of Swift v. Tyson, 41 U.S. (16 Pet.) 1 (1842). It was
based on the common law tort principle that the violation
of a statute makes the actor liable to another person if
*Nor is there any reference to J.J. Case Co. v. Borak, 377 U.S.
426 (1964), Kardon v. National Gypsum Co., 69 F. Supp. 512
(E.D. Pa. 1946), or any other case recognizing an implied damage
action under the federal securities laws.
** CCI cannot qualify as a plaintiff or prove a cause of action
under Section 11 or Section 12(2), although it has been awarded
damages in excess of the amounts available under those sections.
If Congress enacted Section 14(e) in order to circumvent the
express limitations of those sections, it gave no indication of its
intentions. Cf. Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
723, 736 (1975).
ar er ee
ee
38
the intent of the statute was to protect that person from
the particular harm caused. See Restatement of Torts
§ 286 (1934).* Accordingly, in Texas & Pacific Ry. v.
Rigsby, 241 U.S. 33, 39 (1916), the Court ruled that a
railroad switchman could recover from his employer for
injuries resulting from a violation of federal railroad
safety legislation because the employee was “one of the
class for whose especial benefit the statute was enacted.”
This doctrine was first applied to the federal securities
laws in the two-page opinion in Kardon v. National Gyp-
sum Co., 69 F. Supp. 512 (E.D. Pa. 1946). The district
court in Kardon, relying on Rigsby, the Restatement of
Torts, and “fundamental” law, id. at 514, ruled that
shareholders who were induced to sell their stock by
“fraudulent misrepresentations” could recover under Sec-
tion 10(b) and Rule 10b-5 because they were members
of the class for whose special benefit the section was
enacted and had suffered the type of injury it was in-
tended to prevent.
Since Erie R.R. v. Tompkins, 304 U.S. 64 (1988),
which was not referred to in Kardon, this Court has con-
sistently recognized that limiting implied federal damage
remedies to the persons Congress sought to protect and
the type of injury Congress sought to prevent is required
not only by general tort law but also by fundamental
restrictions on the power of the federal courts. In Sola
Electric Co. v. Jefferson Electric Co., 317 U.S. 173, 176
(1942), the Court ruled that a damage remedy, though
implied rather than explicit, must be “derived from the
*The most recent formulation is that “in furtherance of the
purpose of particular legislation” a court may “supply a civil action
for damages affording relief to a person for whose benefit conduct
of another was either proscribed or required by the legislation.”
Restatement (Second) of Torts § 874A (Tent. Draft No. 22, April
1976) (emphasis added).
statute and the federal policy which it has adopted.”
Quoting this language, the Court in J. I. Case Co. V.
Borak, 377 U.S. 426 (1964), allowed stockholders a di-
rect and derivative damage remedy for “(t]he injury
which a stockholder suffers from corporate action pur-
suant to a deceptive proxy solicitation,” id. at 482, the
very injury the proxy requirements were designed to
prevent. In Wyandotte Transportation Co. v. United
States, 389 U.S. 191 (1967), a unanimous court stated
the doctrine of Rigsby and Borak as follows:
Because the interest of the plaintiffs in those
cases fell within the class that the statute was
intended to protect, and because the harm that
had occurred was of the type thai the statute
was intended to forestall, we held that civil ac-
tions were proper. Jd. at 202 (emphasis add-
ed).
Both parts of this formula have recently been reempha-
sized by the Court. Little more than a year ago, in Cort
v. Ash, 422 U.S. 66, 78 (1975), Mr. Justice Brennan,
speaking for a unanimous Court, re-endorsed the strict
Rigsby test of whether implication of a private damage
remedy in favor of a particular plaintiff is appropriate:
First, is the plaintiff “one of the class for whose
especial benefit the statute was enacted,” Texas
& Pacific R. Co. v. Rigsby, 241 U.S. 38, 39
(1916) (emphasis supplied)—that is, does the
statute create a federal right in favor of the
plaintiff?
In Cort, the plaintiff was denied standing as not suffi-
ciently “especial” even though he was within the class of
secondary beneficiaries explicitly named in the history of
the legislation. Id. at 80-81. In Rondeau v. Mosinee
40
Paper Corp., 422 U.S. 49 (1975), decided the same day
as Cort, the Court noted that mere membership in the
special class is not enough to obtain a remedy: the plain-
tiff bringing an implied action under a federal statute
must also allege a type of harm “redressable under its
provisions.” Jd. at 60.
In short, the right to recover damages in a federal
court is not merely a matter of providing redress for an
injury perceived (or, in this case, presumed) by the
court. The statute itself must “create a federal right in
favor of the plaintiff.” Cort, 422 U.S. at 78. If the stat-
ute is not explicit, this right may only be implied from a
clear congressional intention to provide an “especial bene-
fit” to a particular class of persons by protecting them
against particular harm.*
That plain and sound doctrine precludes recovery by
CCI here. The legislative history of the Williams Act
makes it clear that the shareholders of the target cor-
poration, not tender offerors or others who might in-
directly be affected by the shareholders’ misimpressions,
were alone the intended beneficiaries of the statute. Sena-
tor Williams spoke directly to the point in introducing the
bill:
The purpose of this bill is to require full and
fair disclosure for the benefit of stockholders
while at the same time providing the offeror
and management equal opportunity to fairly
* See Mason v. Belieu, No. 74-1731 (D.C. Cir., April 15, 1976)
(although plaintiff's injury was “directly and foreseeably caused” by
violation of Federal Aviation Act, she had no cause of action on
ground that “someone else was denied transportation”) ; Polansky
Vv. Trans World Airlines, Inc., 523 F.2d 332 (3d Cir. 1975) ( plain-
tiff was within the protected class, but did not allege a redressable
harm, and was held not to have an implied cause of action).
41
present their case. 113 Cong. Rec. 854-55
(1967) (emphasis added).
The committee reports on the Williams Act are equally
plain about the kind of harm the statute was intended to
redress—harm to shareholders who need adequate infor-
mation to make the decision whether to tender or hold:
The public shareholder must, . . . with se-
verely limited information, decide what course
of action he should take. He has many aiterna-
tives.
Without knowledge of who the bidder is and
what he plans to do, the shareholder cannot
reach an informed decision. He is forced to
take a chance. For no matter what he does, he
does it without adequate information to enable
him to decide rationally what is the best pos-
sible course of action. This is precisely the
kind of dilemma which our Federal securities
laws are designed to prevent. S. Rep. No. 550,
90th Cong., Ist Sess. 2 (1967). See also H.R.
Rep. No. 1711, 90th Cong., 2d Sess. 2-3 (1968).
The explanations of Section 14(e) in particular empha-
sized that Congress regarded tender offerors simply as
persons upon whom obligations were imposed for the
benefit of the shareholders:
This provision would affirm the fact that per-
sons engaged in making or opposing tender of-
fers or otherwise seeking to influence the deci-
sion of investors or the outcome of the tender
offer are under an obligation to make full dis-
closure of material information to those with
whom they deal. S. Rep. No. 550, 90th Cong.,
ai
42
Ist Sess. 11 (1967); H.R. Rep. No. 1711, 90th
Cong., 2d Sess. 11 (1968).
During the House hearings, the Chairman of the SEC
testified:
I would like to emphasize and reemphasize
that the purpose of the bill . . . is a very simple
one, solely to provide information to investors
so that they can arrive at an informed invest-
ment decision. It is not designed to assist the
offeror, nor designed to assist the management
in resisting any plans put forward by the of-
feror. It is essentially based on the concept
that the investor should have the information
so that he can arrive at a decision. Hearings
on H.R.14475, $.510 Before the Subcomm. on
Commerce and Finance of the House Comm. on
Irterstate and Foreign Commerce, 90th Cong.,
2d Sess. 17 (1968).
He told the Senate Committee:
The investor is lost somewhere in the shuffle.
This is our concern and our only concern.
Hearings on S.510 Before the Subcomm. on Se-
curities of the Senate Comm. on Banking and
Currency, 90th Cong., 1st Sess. 178 (1967).
An important financial witness testified specifically that
tender offerors required no protection:
The two major protagonists—the bidder and the
defending management—do not need any addi-
tional protection, in our opinion. They have the
resources and the arsenal of moves and coun-
termoves which can adequately protect their
43
interests. Rather, the investor—who is the sub-
ject of these entreaties of both major protagon-
ists—is the one who needs a more effective |
champion, and this is an important point.
Hearings on S. 510 Before Subcomm. on Se-
curities of the Senate Comm. on Banking and
Currency, 90th Cong., 1st Sess. 57 (1967)
(testimony of Professor Hayes).
In view of this history, it is hardly surprising that the
courts have uniformly recognized protection of the tar-
get company’s shareholders as the purpose of the Wil-
liams Act. In Rondeau v. Mosinee Paper Corp., this
Court declared:
The purpose of the Williams Act is to insure
that public shareholders who are confronted by
a cash tender offer for their stock will not be
required to respond without adequate informa-
tion regarding the qualifications and intentions
of the offering party. 422 U.S. at 58 (em-
phasis added) .*
In Klaus v. Hi-Shear Corp., 528 F.2d 225 (9th Cir.
1976), the Ninth Circuit denied a remedy to a delib-
erately defrauded tender offeror with the words “the
Williams Act was designed to protect cash tender offer-
ees, not offerors.” Id. at 232 (emphasis added). In
Sargent v. Genesco, Inc., 492 F.2d 750, 769 (5th Cir.
1974), the court declared:
*In rejecting the target company’s claimed right to obtain an
injunction to protect the interests of those of its shareholders who
either sold at predisclosure prices or would not have invested had
they known of the imminent takeover bid, the Court further de-
clared: “{T]he principal object of the Williams Act is to solve the
dilemma of shareholders desiring to respond to a cash tender offer,
and it is not at all clear that the type of ‘harm’ identified by respond-
ent is redressable under its provisions.” 422 U.S. at 60 (emphasis
added).
a
44
The focus of the legislative history of section
14(e) is on adequate disclosure to those inves-
tors whose tenders are being solicited so that an
informed meaningfui consideration of the al-
ternatives can be made.
The evil to be remedied was inadequate dis-
closure 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.
Even Judge Timbers in Chris-Craft II acknowledged
that “‘[t]he legislative history of the 1968 amendment
demonstrates that the focus of legislative interest was
on the public shareholder; Congress wanted to ensure
that he had the benefit of a full statement from the of-
feror, with a chance for “incumbent management” to
“explain its position publicly,” if so disposed... .’”
(A-30-31, quoting Electronic Specialty Co. v. Interna-
tional Controls Corp., 409 F.2d 937, 945 (2d Cir. 1969) )
Accord, Smallwood v. Pearl Prewing Co., 489 F.2d 579,
598 (5th Cir.), cert. denied, 419 U.S. 873 (1974); H. K.
Porter Co. v. Nicholson File Co., 482 F.2d 421, 423-24
(1st Cir. 1973).
CCI falls well outside the class for whose “especial”
benefit Section 14(e) was enacted and has not alleged
harm that Section 14(e) was intended to redress. Con-
gress’ stated concern was for persons in the position of
the Piper shareholders who had to decide, based on BPC’s
prospectus, whether to tender their shares to BPC; the
harm Congress intended to prevent, in a situation like
the present one, was injury to those who did so. CCI is
obviously not a member of that class. To be sure, by
45
regulating solicitations “in opposition to” as well as in
favor of tender offers, Congress extended protection also
to target shareholders who fail to tender because of a mis-
leading opposition solicitation.* This is the class excluded
by Birnbaum and Blue Chip Stamps from suing under
Section 10(b). But CCI is not a shareholder misled into
not tendering and so is not a member of this class either.
In any event, BPC made no solicitation “in opposi-
tion to” any tender offer. Finally, even if the congres-
sional intent to protect target shareholders were read so
broadly as to permit nontendering shareholders, without
proving that they made any investment decision at all,
to recover from a tender offeror who has injured their
company and hence their investments (see Smallwood v.
Pearl Brewing Co., supra), CCI has no cause of action.
No such injury to Piper is involved in this case.
CCI was awarded a massive judgment not because it
was misled into tendering shares, nor because it was
misled into not tendering shares, nor because there was
any injury to Piper that affected the value of CCI’s
Piper investment. CCI sought and was given damages
solely as a competitor for the same shares BPC obtained
in its exchange offer. CCI is not in the special class, and
it does not allege the particular harm with which Con-
gress was concerned in the Williams Act.
*Section 14(e)’s prohibition of material omissions in “any
solicitation of security holders in opposition to” a tender offer was
intended to protect the target corporation’s shareholders. See S.
Rep. No. 550, 90th Cong., Ist Sess. 11 (1967). The concern of
Congress was not to protect tender offerors but, “[i]n the rather
common situation where existing management or third parties
contest a tender offer,” to protect the “shareholders [who] may be
exposed te a bewildering variety of conflicting appeals and argu-
ments designed to persuade them either to accept or to reject
the tender offer.” 113 Cong. Rec. 855-56 (1967) (remarks of
Senator Williams).
46
The court of appeals’ extension of standing beyond the
statute’s “target area” is especially unwarranted in light
of its effect on the persons Congress was trying to pro-
tect. They, the Piper shareholders who exchanged their
shares for BPC securities, were offered rescission; all
declined. But if CCI’s suit, based on what amounts to an
allegation of tortious interference with its competing
quest for their shares, is allowed to succeed, the tendering
Piper shareholders (who now hold BPC securities) would
be among the primary victims of CCI’s recovery. Cf.
H. K. Porter Co. v. Nicholson File Co., 482 F.2d 421,
424-25 (1st Cir. 1973).*
The so-called “standing” cases that involve only injunc-
tive relief are not pertinent here, except insofar as
they demonstrate that a plaiztiff may have standing to
seek an injunction even though he himself has not suf-
fered harm redressable in damages. That point was made
in Hawaii v. Standard Oil Co., 405 U.S. 251 (1972),
* The court of appeals misinterpreted (at A-32) Judge Friendly’s
general observation, in Electronic Specialty Co. v. International
Controls Corp., 409 F.2d 9837 (2d Cir. 1969), that:
In effect [Section 14(e)] applies Rule 10b-5 both to the
offeror and to the opposition—very likely, except perhaps
for any bearing it may have on the issue of standing, only
a codification of existing law. Id. at 940-41 (emphasis
added).
Under the Birnbaum rule a target shareholder who refrained from
tendering his shares because of a misleading opposition statement
could not sue under Section 10(b) because he was neither a pur-
chaser nor a seller. The speculation that Section 14(e) might remove
that obstacle offers no support for an extension of standing beyond
the shareholders who were the intended beneficiaries. The
holding of Electronic Specialty was simply that the target company
had standing to seek injunctive relief. See also Butler Aviation
International, Inc. v. Comprehensive Designers, Inc., 425 F.2d. 842
(2d Cir. 1970) (Friendly, J.). The case has no bearing on whether
a person other than a shareholder has a right to obtain damages
for injury to itself.
47
involving Sections 4 and 16 of the Clayton Act, which
authorize private damage and injunction suits, respec-
tively, for violation of the antitrust laws. This Court
held in Hawaii that while a State may, along with many
other plaintiffs, sue for injunctive relief against viola-
tions of the antitrust laws, it may not sue for damages
to its general economy because that kind of injury is
not compensable under Section 4 of the Clayton Act. Jd.
at 264. In reaching that conclusion, the court naturally
recognized that every violation “is a blow to the free-
enterprise system,” id. at 262, that every damage award
might be defended as serving some deterrent purpose,
and that the harm alleged by Hawaii could be assumed
to be real. Nevertheless, it said, if that “type of injury
is to be compensable under the antitrust laws, we should
insist upon a clear expression of a congressional purpose
to make it so... .” Id. at 264. Standing to seek an
injunction may be broadly afforded, said the Court, be-
cause “the fact is that one injunction is as effective as
100, and, concomitantly, that 100 injunctions are no more
effective than one.” Jd. at 261. Separate but cumulative
claims for damages are different, for they multiply the
defendant’s liability and may be duplicative. Jd. at 261-
62. Thus damages suits present, in a way that injunc-
tion actions do not, the question of how far Congress
intended liability to extend.*
*The distinction between an injunction to enforce the policy
of the law and damages to remedy a harm not contemplated by
Congress is equally clear in the securities laws. See, e.g., SEC V.
Capital Gains Research Bureau, Inc., 375 U.S. 180, 193 (1963) ;
Kahan v. Rosenstiel, 424 F.2d 161, 173 (3d Cir.), cert. denied sub
nom. Glen Alden Corp. v. Kahan, 398 U.S. 950 (1970); Mutual
Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2d Cir. 1967);
Neuman Vv. Electronic Specialty Co., [1969-1970 Transfer Binder]
CCH Fed. Sec. L. Rep. {| 92,591 at 98,703-04 (N.D. Ill. 1969) ; ef.
General Time Corp. v. Talley Industries, Inc., 403 F.2d 159, 164
(2d Cir. 1968), cert. denied, 393 U.S. 1026 (1969).
48
Only two other arguments were suggested in the opin-
ions below to support the implication of a cause of action
on behalf of CCI, and both have already been rejected by
this Court. Judge Mansfield said that CCI had “stand-
ing solely on the ground that vigorous enforcement of
the anti-fraud provisions . . . calls for . . . implication
of a private right of action in favor of a defeated con-
testant. . . .” (A-102-03) But standing “solely” on this
ground was rejected in Blue Chip Stamps, 421 U.S. at
748-49. The unlimited invocation of the “vigorous en-
forcement” rationale would result, as here, in crushing
judgments “ ‘payable in the last analysis by innocent in-
vestors.’” Id. at 739, quoting SEC v. Texas Gulf Sulphur
Co., 401 F.2d 833, 867 (2d Cir. 1968) (Friendly, J., con-
curring). The target shareholders, the protected class,
can provide a supplement to SEC enforcement actions
and to the express causes of action Congress did create,
if a supplement is deemed “necessary.” Rondeau, 422
U.S. at 62.
Judge Timbers also argued that CCI “probably could
state a claim for relief in most state courts against each
of the defendants for tortious interference,” and that he
would “not infer from the silence of the statute that
Congress intended to deny a federal remedy and to ex-
tinguish a liability which, under established principles
of tort law, normally attends the doing of a proscribed
act.” (A-30) In Cort, this Court reached exactly the
opposite conclusion: the existence of a traditional state-
court remedy based on state law argues against, not for,
implying a federal remedy from a federal statute designed
to protect a different class of persons. 422 U.S. at 84-
85; cf. Blue Chip Stamps, 421 U.S. at 738-39 n.9.* ..
* As noted by the American Law Institute, “There is a problem
of broadening the jurisdiction of the federal courts if the court-
49
At bottom, the argument for CCI’s right of action ,’or
damages is that if a nondisclosure to Piper sharenolders
did CCI an injury, even a conclusively presumed rathe-
than a proved one, it must have a federal remedy. This
is the more or less explicit rationale of the court of ap-
peals. (A-30, 95) But as the Second Circuit recognized
in Iroquois Industries, Inc. v. Syracuse China Corp., 417
F.2d 963 (1969), cert. denied, 399 U.S. 909 (1970), in
denying a damage remedy under Section 10(b) to a
deliberately defrauded tender offeror, the fact that a
plaintiff may have been hurt by the defendant’s conduct
“does not mean that a federal remedy must be furnished
by judges. . . . If there is to be a federal remedy, it is
the Congress which must create it.” Jd. at 969. The
Second Circuit’s later conclusion that Congress created
such a remedy for CCI when it enacted Section 14(e)
finds no support in the language, history, or purpose of
the Williams Act.
II. The Actions of BPC and Its Directors Did Not Involve
“Intent to Deceive, Manipulate, or Defraud” and There-
fore Cannot Give Rise to Damage Liability Under Rule
10b-6 or Section 14(e).
In Ernst & Ernst v. Hochfelder, 96 S. Ct. 1375
(1976), this Court held that no private cause of action
for damages will lie under Section 10(b) and Rule 10b-5
absent proof of “scienter”—defined as “a mental state
embracing intent to deceive, manipulate, or defraud.” *
granted remedy of a civil action for damages is treated as arising
out of a federal statute. For this reason the federal courts may give
particular attention to the question as to whether the state remedies
are adequate.” Restatement (Second) of Torts § 874(A), comment
h at 79-80 (Tent. Draft No. 22, April 1976).
*The Court found it unnecessary to decide whether “reckless-
ness” that is “a form of intentional conduct” could ever be sufiicient
to permit imposition of civil liability under Section 10(b). 96 S. Ct.
“a ae
Id. at 1381 n. 12. Starting with the words of the stat-
ute itself, the Court noted that the terms “ ‘manipulative
or deceptive’ used in conjunction with ‘device or contriv-
ance’ strongly suggest that § 10(b) was intended to pro-
scribe knowing or intentional misconduct.” Jd. at 1383.
The Court reviewed the legislative history of the 1934
Act and concluded that “[t]here is no indication that
Congress intended anyone to be made liable for .. .
[manipulative and deceptive] practices unless he acted
other than in good faith.” Jd. at 1887. The Court’s care-
ful analysis of the express civil liability provisions of the
federal securities laws, id. at 1887-89, confirmed that Sec-
tion 10(b) creates liability only for intentional miscon-
duct, and its examination of the history of Rule 10b-5
confirmed that the SEC had only “fraud” in mind when
it adopted the language of the rule. Jd. at 1390 n. 32.
BPC’s actions did not involve “intent to deceive, ma-
nipulate, or defraud.” To the contrary, the court of
appeals approved the findings of the district court that
BPC’s two technical violations were committed in good
faith without fraudulent intent. (A-37, 47, 97-98, 117-
23, 142-44, 150; D-14; cf. C-28-31) Under these circum-
at 1381 n. 12. The Court did not attempt to define “recklessness”
but plainly regarded it as conduct demonstrating a high level of
culpability, since the plaintiff’s charge in Hochfelder that the de-
fendants acted with “inexcusable negligence” was insufficient to
meet the test. Jd. at 1380 n. 5. We submit that the rationale of
Hochfelder precludes basing liability on recklessness, except in the
limited evidentiary sense that sufficiently outrageous conduct can
support a finding of “intent to deceive, manipulate, or defraud”
despite a defendant’s protests of good faith. But that issue need
not be resolved here. The complaint did not charge BPC with
recklessness in the Rule 10b-6 or Section 14(e) violations (F-1) ;
CCI has always proceeded on a theory of intentional miscon-
duct, cf. Hochfelder, 96 S. Ct. at 1891; and there was no finding
(and no basis for a finding) of recklessness.
51
stances, the principles of Hochfelder preclude imposing
liability on BPC. For while neither Rule 10b-6 nor Sec-
tion 14(e) was involved in Hochfelder, there is no justi-
fication for applying a different standard of culpability in
actions based on those provisions than in actions based
on Rule 10b-5.
A. The Actions of BPC and Its Directors Did Not
Involve “intent to Deceive, Manipulate, or Defraud.”
1. The Rule 10b-6 Violation.
Between May 14 and May 23, 1969, after announcing
its intention to make an exchange offer for Piper shares
but two months before beginning the exchange offer,
BPC bought 120,200 Piper shares for cash in off-exchange
transactions from three large investors. BPC’s “intent”
in making these purchases was simply to increase its
holdings of Piper shares as part of its announced effort
to gain control of Piper.
Far from intending to deceive anyone, BPC publicly
disclosed these cash purchases immediately in its Schedule
13D filed with the SEC, again on May 29 in the prelim-
inary prospectus for its exchange offer, and again in the
final prospectus. Reports of the purchases appeared in the
press. (App. 374A; EV 31, 1092) The district court found
that CCI “was not misled” by these purchases (A-150)
and that there was “not a scintilla of evidence that any
Piper holder was misled.” (A-151) Far from having
“a mental state embracing intent to . . . defraud,” 96
S. Ct. at 13881 n. 12, BPC was an “innocent party” that
“did not then know of any rule or interpretation preclud-
ing the transactions” (C-22, 30, Lumbard C. J., dissent-
ing) and was advised by its lawyers that the purchase
52
were lawful.” BPC had acted in a way that was “well
within the spirit” of one of Rule 10b-6’s several exemp-
tions. (A-151) And far from intending to manipulate
the price of any security, BPC’s purchases “were not
designed to produce a stimulating effect” (A-66), and
did not “produce or heighten a stimulating effect on the
market.” (A-152)
In fact, BPC could not logically have intended the evil
against which Rule 10b-6 is aimed. The rule prohibits a
corporation that is engaged in distributing its securities
from simultaneously purchasing the same securities or
“rights” to the securities; its plain purpose is to prevent
artificial stimulation of the market price of the secur-
ities being distributed. Weitzen v. Kearns, 271 F. Supp.
616, 623 (S.D.N.Y. 1967) ; SEC v. Scott Taylor & Co., 183
F. Supp. 904, 907 (S.D.N.Y. 1959). CCI contended
here that the Piper stock bought by BPC technically
constituted “rights” to acquire BPC securities. The dis-
trict court rejected this contention, pointing out that
BPC’s purchases would, if they had any market effect,
“obviously serve only to make Bangor Punta’s exchange
offer appear less desirable to Piper shareholders” by rais-
ing the price of Piper stock. (C-45)
The court of appeals in Chris-Craft I reversed on the
ground that the transactions in question fell within the
* It was the opinion of both BPC’s in-house counsel and its out-
side counsel that Rule 10b-6 did not apply to purchases of Piper
stock by BPC. Counsel advised that, taking “a conservative posi-
tion,” it would be “proper to buy shares of [Piper] but only if
they were unsolicited and not over an exchange.” (App. 1645A)
CCI had itself earlier purchased Piper shares on the open mar-
ket following the announcement of its exchange offer, relying on
an opinion of highly qualified counsel that Rule 10b-6 did not
prohibit cash purchases of target company stock by an exchange
offeror. (A-13; App. 401A)
53
literal terms of the rule and that cash purchases of a
target company’s stock might theoretically stimulate in-
terest in the exchange offer.* (C-17-18) But the court
of appeals had before it no evidence (and did not pur-
port to make any finding) of any actual manipulative
intention or effect of the purchases, and the district
court on remand found no such intention or effect. (A-
151-152) In short, as the district court found, there
was no “substance in the 10b-6 contention behind the
technical violation ... .” (A-149)
In Chris-Craft II, each of the judges recognized that
there was no proof that BPC’s challenged cash purchases
had a manipulative intent or effect. (A-63-67; A-96; A-
111) Judge Timbers wanted to predicate liability on
the extraordinary argument that since the court had
previously held that the purchases were within Rule
10b-6, “then presumptively a stimulating effect was pro-
duced which misled the public.” (A-66) Judge Mans-
field, however, responded crisply that “[t]here was no
such proof.” (A-111) He and Judge Gurfein (A-96)
explicitly predicated damages on the bare fact of the
technical violation. They held, in short, that scienter in
the Hochfelder sense was unnecessary in a private ac-
tion under Rule 10b-6. This Court’s subsequent decision
shows that they were wrong. .
* Even so, no one has ever explained why, as long as the pur-
chases were correctly disclosed (as they were here), this is a
“manipulation.” Purchases by a corporation of the very securities it
purports to be distributing (or the rights, like warrants, to buy
those securities), will have an avtificial upward impact on the
market price of the securities being sold. This is the manipulation
at which Rule 10b-6 is aimed. But purchases of a target company’s
stock (which are “rights” only because of the exchange offer
itself) are entirely consistent with the offeror’s announced and
legitimate intentions.
Ee
54
What happened here is that a new and disputed
interpretation of Rule 10b-6 was applied to BPC’s pur-
chases without the slightest proof that they had either
a manipulative purpose or a manipulative effect. The
court of appeals thus impermissibly substituted retro-
active application * of a rule of manipulation for a find-
ing that BPC’s technical violation of Rule 10b-6 involved
an “intent to deceive, manipulate, or defraud.” **
2. The Section 14(e) Violation.
The district court found that BPC’s exchange offer
prospectus was “unintentionally in error” (A-148) in
failing to disclose that the carrying (or book) value of
BPC’s interest in the Bangor and Aroostook Railroad
(“BAR”) was higher than the current market value
* On May 5, i969, the SEC issued Release No. 34-8595 asking for
public comment on proposed Rule 10b-i3 prohibiting tender offerors
from purchasing target company stock otherwise than pursuant
to the tender offer. This rule did not become effective until Novem-
ber 10, 1969 and is not involved in this case. Although the SEC
proclaimed in the release that this was merely “a codification of
existing interpretations under Rule 10b-6,” this assertion was re-
jected by all courts in this case. Indeed, the court of appeals itself
noted that “neither the SEC nor the parties to this action have
cited any such precedents, nor have we found any.” (C-16; see also
the district court’s opinion at C-45).
** Nor is there any evidence or finding that BPC acted recklessly
in making the cash purchases held to violate Rule 10b-6. CCI likes
to pretend that the SEC warned both aspirants against making
cash purchases and that CCI obeyed while BPC did not. In fact, for
reasons never satisfactorily explained, the SEC staff personally
advised CCI’s chairman not to make the particular purchases at issue
while “no such warning was ever communicated to Bangor Punta.”
(C-30 n. 4; ef. A-13, 15-16) Once again, no court has ever disputed
Chief Judge Lumbard’s characterization of BPC as an “innocent
party” (C-30, n. 4) which “did not then know of any rule or interpre-
tation preciuding the transactions ... .” (C-22) The SEC never
eharged BPC with a violation of Rule 10b-6 and never required
it to disclose the supposed violation in any registration statement
or other filing.
55
of that investment. The district court found tha. BPC
had no “intent to mislead” (A-143) in making this mis-
take. Unfortunately for BPC, the SEC and CCI had
originally accused it of a much more serious violation:
deliberately deferring concluding an agreement to sell
the BAR for less than its carrying value in order to
avoid disclosing the loss in the exchange offer prospectus.
(D-11-12) The district court found that accusation “un-
equivocally negate[d]” (D-11) by the credible evidence.
Nonetheless, the accusation has continued to underlie
the scienter arguments made by CCI. For that reason,
it is necessary to make clear exactly what the violation
actually found by the district court was.
On January 1, 1969, BPC owned a 98.7% stock inter-
est in the BAR, which it hac been considering disposing
of for some time. The BAR investment was carried on
BPC’s books at $18.4 million on the basis of a 1965 ap-
praisal.* Although the use of that figure as of that date
was not challenged, the fact that it resulted from an
appraisal rather than from a transaction is critical to
what followed.
On April 1, 1969, BPC’s Board appointed a committee
to study a management plan to divest the BAR in whole
or in part to BPC’s shareholders, as well as other possi-
bilities. (D-5; App. 1650A-51A) Several weeks later a
member of the committee received an offer from Amos-
keag Corporation to purchase the BAR stock for $5 mil-
lion. (D-5) The committee reported to the Board on
-May 21, 1969. The proposal to sell the BAR stock “was
*The circumstances leading to the use of this figure (rather
than BPC’s shareholder’s equity in the BAR of $29.8 million) were
fully described in the financial statements contained in the exchange
offer prospectus (EV 93, 99) and are set forth in the district
court’s opinion at D-3-4.
56
a surprise to the Board and met with the objection that
the Board had insufficient information to make an intelli-
gent decision since a great deal of accounting, tax and
legal work had to be done to put the offer in proper
focus.” (D-7) The Board authorized further negotiations,
seeking a higher price, subject to an investigation of tax
and accounting consequences.* (A-44;- D-5-8)
No understanding was reached with Amoskeag, how-
ever, and on June 3, 1969, BPC “table[d] the entire mat-
ter until the tax impact upon Bangor Punta of a sale of
assets, as compared with some other disposition of the
interest, could be studied and ascertained.” (D-8, foot-
note omitted) The Board did not take the matter up again
until September 9, 1969, when it authorized a sale of the
BAR assets to Amoskeag, if possible, but if not, of the
BAR stock. (A-44) Amoskeag only wanted the stock, and
a sale of BPC’s BAR stock to Amoskeag for $5 million in
cash and contingent consideration was agreed to October
2, 1969, more than two months after BPC’s exchange
offer closed. The sale was announced the next day and
the market price of BPC’s stock reacted favorably. (D-9-
13; App. 591).
On May 29, 1969, shortly after the May 21 Board
meeting, BPC had filed a registration statement covering
its exchange offer for Piper shares. Tue registration
statement became effective on July 18, and the exchange
offer continued until July 29. The prospectus carried the
BAR investment at $18.4 million and did not mention the
offer from Amoskeag. BPC, its directors, its in-house
*The district court, which heard the witnesses testify, found
that BPC’s representative “explicitly informed [Amoskeag] that
time was needed for accountants and tax personnel of Bangor
Punta to review the tax effects of any deal and the evidence un-
questionably confirms [BPC’s representative’s] limited explora-
tory role.” (D-8, n.5) (emphasis in original)
57
counsel and its outside counsel were fully aware that an
offer for the BAR had been received. First Boston and its
counsel had read the minutes of the relevant Board meet-
ings and had discussed the BAR matter with BPC counsel
and executives. (A-48; App. 1657A-59A) Since there had
been no decision to sell—indeed, the matter had been
tabled—and since the financial effect of any disposition
of the BAR would depend on the form of the transaction
(which was still being studied),* no one suggested that
disclosure of possible disposition was required. BPC’s in-
dependent accountants were also fully aware of the nego-
tiations concerning the BAR when they permitted the use
of their opinion in the exchange offer prospectus. (D-6-
13; App. 1759A-61A; EV 87, 89)
These facts wholly undermined the accusation that BPC
decided “at some undefined time during June, July or
August” (D-11) to sell the BAR to Amoskeag but had
deferred the formalities to avoid writing down the in-
vestment during the exchange offer. The district court
held that “the evidence which the Court accepts as worthy
of belief unequivocally negates any such purpose or
plan,” (D-11) and that “[t]he Court has found that as
of these dates [ending with August 27, 1969, the final
date on which SEC rules required delivery of the pros-
pectus] Bangor Punta had not reached a decision to
sell.” (D-13)
* For example, a sale of the assets might have resulted in the
recognition of a large tax loss, which would have produced the
benefit .of additional cash flow for BPC. At one time it was thought
that the cash flow might be as high as $17.5 million but after the
extensive investigation required (which ended in September 1969)
the cash flow advantage was estimated at about $9 million. (D-8-
12; App. 2163A-66A) Sale of the stock might, it was recognized,
result in capital gains tax; and this is what eventually did happen.
58
The district court did fault BPC, however, on a dif-
ferent theory: leaving the $18.4 million appraisal figure
on its balance sheet without additional explanations. The
court concluded that the $18.4 million figure was “obso-
lete” (D-14) in that it did not represent “the market
value of the BAR holding.” (D-13) BPC has, of course,
never contended that in 1969 its directors believed the
market value of the BAR to be $18.4 million. Their “un-
intentional” error was in applying to this special situa-
tion the normal rule that a balance sheet carrying value
is only adjusted when there is a transaction or other
definitive event establishing a new figure.*
The district court specifically found that BPC had no
“propensity or natural inclination to violate the securi-
ties law” (D-17), that there was “no evidence of...
bad faith” (D-16), no “intent to mislead” (A-134), and
no “form of scienter.” (A-144) Calling the BAR item
a “mere negligent omission” (A-148), the district court
_ went on to state its conclusions in full as follows:
I find that Bangor Punta did not intention-
ally or purposefully mislead Piper Aircraft
stockholders or the public or investors by the
omission to make disclosure of the sale under
consideration nor did Bangor Punta or its di-
* Judge Mansfield, concurring, pointed out that
... under generally accepted accounting principles “stated
book value” may properly be used in a financial statement
and is not viewed in the financia! world as the equivalent
of market value. A person able to read a balance sheet
would probably have recognized that such “historical”
cost did not necessarily represent current liquidating
value. Furthermore, to write down the figure immediately
to £5 million might have been treated by the SEC as specu-
lative and possibly misleading, in view of the other forms
of disposition of BAR that were still under consideration.
(A-122-123)
—
etd
59
rectors intend to gain an advantage over Chris-
Craft by the nondisclosure in the contest being
waged for control of Piper. There was no pur-
poseful connection between the nondisclosure
and the contest for control. In other words, the
nondisclosure was not prompted by an improper
purpose. However, absence of bad faith does
not excuse the failure to state facts necessary
to make the facts stated not misleading. (D-14)
The court of appeals accepted these findings. Judge
Timbers in the main opinion said: “Our disagreement
with the district court on whether defendants have vio-
lated §14(e) does not go to its findings of fact, as to
which the ‘unless clearly erroneous’ test applies, but to
its application of the legal standards [of scienter] just
discussed.” (A-37) And later in his opinion he declared:
The district court’s findings of fact, supported
by substantial evidence, do not warrant the
conclusions that BPC’s officers had decided to
sell the BAR before the exchange offer became
effective and had postponed consummation in
order to avoid disclosure. Nor does the evi-
dence show that BPC failed to disclose the sales
negotiations in bad faith. As we have indicated
above, however, intent to defraud is not an in-
dispensable element in a private action for dam-
ages under the antifraud provisions of the fed-
erai securities laws. (A-47, emphasis added)
Judge Gurfein concurred. (A-97-98) Judge Mansfield
concurred at some length, emphasizing that the findings
of fact as to BPC’s actions were “fully supported by
more than ample credible evidence” (A-117), including
findings as to “absence of bad faith or of an intent or
purpose to violate the securities laws.” (A-122)
60
The court of appeals reversed the district court and
awarded damages to CCI, because, as Judge Timbers
stated, it applied a different “legal standard” (A-37) of
scienter:
In sum, and put as simply as possible, the
standard for determining liability under § 14 (e)
on the part of a person making a mislead-
ing tender offer, or a responsible officer of a cor-
poration making such an offer, is whether plain-
tiff has established that defendant either (1)
knew the material facts that were misstated
or omitted, or (2) failed or refused to ascertain
such facts when they were available to him or
could have been discovered by him with rea-
sonable effort. (A-36-37)
Judge Mansfield concurred, using almost exactly the same
words. (A-106)
This standard requires only that the defendant have
actual or imputed knowledge of the existence of any un-
disclosed fact later deemed by a court to have been ma-
terial. As Judge Friendly pointed out in Gerstle V.
Gamble-Skogmo, Inc., 478 F.2d 1281, 1301 n.20 (2d Cir.
1973), it is a doctrine of “virtually absolute liability”
where the defendant is a corporation because the corpo-
ration is “charged with the knowledge of all its agents.” *
*In White v. Abrams, 495 F.2d 724, 732 (9th Cir. 1974), the court
noted the inherent inconsistency in pronouncements on the scienter
requirement in Chris-Craft II: “We have difficulty with the court’s
announced position that mere negligence is not sufficient for lia-
bility while in the same case it summarizes with language that
sets forth a negligence standard ... .” The Second Circuit later
described the Chris-Craft II scienter test as permitting theimposi-
tion of liability upon a showing of “something short of specific
intent to deceive,” Republic Technology Fund, Inc. v. Lionel Corp.,
483 F.2d 540, 551 (2d Cir. 1973), cert. denied, 415 U.S. 918 (1974).
61
BPC was of course aware of the offer for the BAR.
But that is not enough to satisfy the standard articu-
lated in Hochfelder. There was, as the courts below re-
peatedly acknowledged, no intent to deceive, manipulate,
or defraud.*
* Nor was there any finding (or the basis for any finding) of
recklessness. Recklessness generally means acting with disregard
of a known, actual risk of doing substantial injury to another person.
See Restatement (Second) of Torts, § 500 (1965). Here, BPC had
no reason to believe that nondisclosure of the BAR negotiations
might injure Piper shareholders. BPC represented that it was offer-
ing securities “valued in the judgment of The First Boston Cor-
poration at not less than $80 per Piper share,” and the securities it
offered were valued at that price by First Boston (A-140), which
was fully aware of the preliminary negotiations for the sale of the
BAR and whose opinion was unaffected thereby. No court has sug-
gested that First Boston’s opinion as to value was wrong: to the con-
trary, the district court found that “actual values reached by the
Bangor Punta package were so close to $80 as to render any vari-
ance de minimis.” (A-140) When the BAR sale did take place more
than two months after the registration statement became
effective, the price of BPC securities went up, not down. (App.
591A)
Judge Timbers once called the BAR omission a “flagrant” viola-
tion (A-84) and at another point used the term “reckless,” (A-48)
but his adjectives were rejected by Judge Mansfield. (A-122) And
Judge Gurfein—writing for the court on the injunction issue—
stated that even though “reckless conduct” is a proper basis for an
SEC injunction, the district court’s findings supported the denial
of an injunction. (A-98-99) Finally, in his dissent from the denial
of the general injunction the SEC had sought, Judge Timbers
acknowledged again the district court’s findings “that BPC did not
intentionally or purposefully mislead and did not act in bad faith”
(A-84, emphasis in original), while arguing that denial of the in-
junction “was clearly erroneous” (id.) under the proper legal
standard.
62
B. If There Is Any Cause of Action for Damages Under
Rule 106-6 or Section 14(e), It Does Not Lie in the
Absence of Proof of “Intent to Deceive, Manipulate,
or Defraud.”
There is no justification for permitting imposition of
damage liability under Rule 10b-6 or Section 14(e) on
a lower standard of culpability than that governing ac-
tions under Rule 10b-5.
1. Rule 10b-6.
This Court’s holding in Hochfelder that Section 10(b)
permits imposition of damage liability only upon proof
of intent to deceive, manipulate, or defraud governs ac-
tions brought under Rule 10b-6 as well as those brought
under Rule 10b-5. The decisive point, with respect to
both rules, is that the SEC simply “cannot exceed the
power granted [it] by Congress under §10(b).” Hoch-
felder, 96 S. Ct. at 1391; see Miller v. United States,
294 U.S. 435, 439-40 (1935).
Requiring proof of deceptive or fraudulent intent as
‘a prerequisite to recovery of damages under an anti-
manipulation provision like Rule 10b-6 is also the right
result, for, as this Court declared in construing Section
10(b) in Hochfelder:
Use of the word “manipulative” is especially
significant. It is and was virtually a term of
art when used in connection with securities
markets. It connotes intentional or willful con-
duct designed to deceive or defraud investors
by controlling or artificially affecting the price
of securities. 96 S. Ct. at 1884 (emphasis added ;
footnote omitted).
And, as the Court also noted in Hochfelder, since the
provisions of the 1934 Act that deal more specifically
with artificial market-affecting practices require scienter,
the sensible conclusion is “that Congress intended no
lesser standard under §10(b).” Jd. at 1386.
Accordingly, there can be no recovery by a private
plaintiff in an action based on Rule 10b-6 without proof
of scienter.
2. Section 14(e).
The operative language of Section 14(e) is simply a
restatement of paragraphs (2) and (3) of Rule 10b-5.
Some of that language, when “[v]iewed in isolation. . .
could be read as proscribing . . . any type of material
misstatement or omission . . . whether the wrongdoing
was intentional or not,” Hochfelder, 96 S. Ct. at 1390.
But no fair reading of Section 14(e) in its statutory
context can support an inference of congressional intent
to establish a standard of damage liability different from
that applicable under Rule 10b-5.
This was the conclusion of the court of appeals, which
created the Section 14(e) damage action. On the ques-
tion of scienter, Judge Timbers declared that the court
would “follow the principles developed under Rule 10b-5
regarding the elements of such [Section 14(e)] viola-
tions.” (A-34) Similarly, Judge Mansfield recognized
that “[n]o reason has been advanced for a different
standard [of scienter] in the enforcement of § 14(e),
the language of which is substantially the same as that
found in §10(b) and Rule 10b-5.” (A-103) This basic
ruling was correct; the court of appeals’ error, as shown
above, was using the wrong scienter test under Rule
10b-5.
Each of the other courts that has considered the ques-
tion has also assumed or held that the same standards
—including the scienter requirement—applicable under
64
Rule 10b-5 govern Section 14(e). For example, Judge
Wisdom, writing for a unanimous court in Smallwood Vv.
Pearl Brewing Co., 489 F.2d 579, 605 (5th Cir.), cert.
denied, 419 U.S. 873 (1974), declared: “Congress adopt-
ed in Section 14(e) the substantive language of the sec-
ond paragraph of Rule 10b-5 and in so doing accepted
the precedential baggage those words have carried over
the years . . . . Once standing is established, therefore,
the analysis under Section 14(e) and Rule 10b-5 is iden-
tical.” On the specific problem of scienter he again em-
phasized “that the elements to be proved to establish a
violation of Section 14(e) are identical to those under
the Rule.” Jd. at 606. And Judge Friendly, commenting
on the Section 14(e) scienter question in Gerstle Vv.
Gamble-Skogmo, Inc., 478 F.2d 1281, 1299 n. 17 (2d
Cir. 1973), suggested that since “Congress in 1968
adopted the language of Rule 10b-5” in Section 14(e),
the same scienter standards should apply. Two years ago,
CCI told this Court the same thing: “Section 14(e) em-
bodies the same principles, and indeed the same language
as Rule 10b-5, which is the subject of a huge body of
“ease law.” Respondent’s Brief in Opposition to Certiorari,
Piper v. Chris-Craft Industries, Inc., 414 U.S. 910
(1973).
The conclusion that Congress intended that the same
scienter requirement govern private damage actions
under Section 14(e) and Rule 10b-5 is plainly the right
one. The language and legislative history of Section
10(b) indicate, as noted in Hochfelder, that Congress was
contemplating only “intentional or willful conduct de-
signed to deceive or defraud investors.” 96 S. Ct. at
1384. The administrative history of Rule 10b-5 makes it
“clear that when the Commission adopted the rule it was
intended to apply only to activities that involved scien-
ter.” Id. at 1390. There is no reason to assume that
65
Congress in 1968 ignored that history and borrowed the
language of Rule 10b-5 for use in Section 14(e) intend-
ing it to mean something different from what Congress
meant when it enacted Section 10(b) and from what the
SEC meant when it promulgated the rule. Indeed, Hoch-
felder itself precludes any such assumption.
The legislative history supports the scienter require-
ment. Both committee reports on the Williams Act de-
scribed Section 14(e) as the section dealing with “fraudu-
lent transactions.” S. Rep. No. 550, 90th Cong., 1st Sess.
10-11 (1967); H.R. Rep. No. 1711, 90th Cong., 2d Sess.
11 (1968); cf. Hochfelder, 96 S. Ct. at 1385-386. And
when Congress amended Section 14(e) in 1970, it au-
thorized the SEC to issue rules to implement Section
14(e) and described these rules as relating to “fraudu-
lent, deceptive, and manipulative” acts and practices.
See S. Rep. No. 1125, 91st Cong., 2d Sess. 2, 4 (1970).*
There is also no logical reason why Congress should
be deemed to have imposed a lower scienter standard
under Section 14(e) than under Rule 10b-5. If any priv-
ate damage remedy is available in this case, it is because
Section 14(e) is read to extend such a remedy beyond
the purchasers and sellers who alone have a remedy un-
der Rule 10b-5. To suggest that the more remote addi-
tional plaintiffs brought in by such a reading of Section
14(e) should have a lower burden would overturn the
logic of the interrelated and interdependent remedies pro-
visions of the securities laws.
As this Court observed in Hochfelder, in every section
of the securities laws that provides expressly for a dam-
* At the same time Congress described Section 14(e) as providing
“investor protection against fraudulent activities in connection
with these acquisitions [of control] and tender offers.” S. Rep.
No. 1125, 91st Cong., 2d Sess. 2 (1970) (emphasis added).
66
age remedy, Congress prescribed the required standard
of culpability. 96 S. Ct. at 1388. Except for the short-
term trading prohibition applicable to a very limited
group, each such section “contains a state-of-mind con-
dition requiring something more than negligence.” / d.
at 1388 n.28. When Congress did expressly permit lia-
bility to be imposed for less than willful misconduct, it
carefully limited the defendant’s potential exposure by
defining the substance of the cause of action, the required
relationship between the parties, the measure of dam-
ages, and the applicable procedural protections. See 1933
Act, §§11, 12(2), 15, 15 U.S.C. §§ 77k, 771(2), T7o
(1970) ; ef. Hochfelder, 96 S. Ct. at 1388-89. By contrast,
where it did not limit the defendant’s exposure to liability
in all these ways, Congress required proof of willfulness.
See 1934 Act, §§9, 18, 20, 15 U.S.C. §§ 78i, 78r, 78t
(1970) ; ef. Hochfelder, 96 S. Ct. at 1388-89 n. 28.
In Hochfelder this Court emphasized the need to as-
sure that any implied causes of action for damages are
consistent with the pattern of express civil damage
remedies. Since the implied actions do not contain the
procedural restrictions the express ones do, retaining
scienter as an element of implied private causes of ac-
tion is appropriate:
We think these procedural limitations indicate
that the judicially created private damage rem-
edy under § 10b—which has no comparable re-
strictions—cannot be extended, consistently with
the intent of Congress, to actions premised on
negligent wrongdoing. Such extension would
allow causes of action covered by § 11, § 12(2),
and $15 to be brought instead under § 10(b)
and thereby nullify the effectiveness of the care-
fully drawn procedural restrictions on these ex-
67
press actions. 96 S. Ct. 1389 (footnotes omit-
ted) .*
The present case illustrates the point perfectly. BPC’s
exchange offer was registered under the 1933 Act. For
any material omission from the registration statement,
BPC and its directors are liable to all purchasers under
Section 11 and BPC is liable to direct purchasers under
Section 12(2). CCI cannot recover under those sections
bec..use it was not a purchaser, did not rely on or buy
or sell at a price affected by any misrepresentation, and
sought damages vastly in excess of the statutory limits
imposed by those sections, for an injury traceable to
other causes. CCI seeks to avoid all these difficulties by
suing under Section 14(e) ; but it invokes the same “mere
awareness” standard of culpability that suffices under
* As noted in Hochfelder, 96 S. Ct. at 1388 n.28, the standard
of culpability required to maintain a damage action under the
proxy statement provision of the 1934 Act, Section 14(a), 15
U.S.C. §78n(a) (1970), has not been established, but some lower
courts have allowed damage actions against management “by the
shareholder recipients of a materially misleading proxy statement”
without scientcr, because of the “important difference between the
operative language and purpose of” the proxy provision as com-
pared with Section 10(b). See Gould v. American-Hawaiian Stean-
ship Co., [Current] CCH Fed. Sec. L. Rep. § 95,512 at 99,597 (3d
Cir. 1976); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d
Cir. 1973).
The “operative language” of Section 14(a) prohibits solicita-
tions of proxies “in contravention of such rules and regulations
as the Commission may prescribe ... .” It differs sharply from
the “evil-sounding language,” Gerstle, 478 F.2d at 1299, of Section
10(b) and Section 14(e). The word “fraud” is not used in the
proxy provision or rules; in contrast, Congress explained Section
14(e) as a “fraudulent transactions” section. Section 14(2) is at
the heart of management’s obligation to make a periodic account-
ing to shareholders for its discharge of its quasi-fiduciary duty,
which is why Judge Friendly concluded even before Hochfelder
that permitting shareholders to sue for mere negligence under
Section 14(a) is consistent with the fact that “scienter must be
proved in a private action under Section 14(e),” Gerstle, 478 F.2d
at 1299 n.17.
68
Section 12(2). Permitting it to do so would nullify care-
fully drawn substantive, as well as procedural, limitations.
Ill. The Court of Appeals Wrongly Interpreted This
Court’s Decisions in the Mills and Ute Cases To Create
a Conclusive Presumption That BPC’s Exchange Offer
Would Not “Have Attracted Any Takers” Without
the BAR Omission and Wrongly Assumed, in the Face
of Contrary Findings by the District Court, That
BPC’s Acts Caused CCI To Lose the Control Contest.
Traditional principles of tort law require a plaintiff
who seeks damages to show not only that the defendant
violated a duty but also that the violation caused com-
pensable injury. See Restatement (Second) of Torts §§ 9,
430 (1965); W. Prosser, Law of Torts §41 (4th ed.
1971). This Court has consistently recognized that proof
of causation of injury is essential before relief will be
awarded under the securities laws. E.g., J. I. Case Co. V.
Borak, 377 U.S. 426, 431 (1964) ; Rondeau Vv. Mosinee
Paper Corp., 422 U.S. 49, 62-65 (1975).
In the present case, this “causal nexus” between vio-
lation and injury has two elements. First, CCI could not
have been injured by the BAR omission in the BPC ex-
change offer unless a significant number of tendering
Piper shareholder. relied on it in the sense that they
would not have accepted BPC’s exchange offer had they
known of the possible sale of the BAR. Second, even if
there was reliance in this sense, neither the BAR omis-
sion nor the Rule 10b-6 violation caused injury to CCI
unless the outcome of the contest would have been dif-
ferent had the violations not occurred. Both these links
needed to be proved.
The district court found, after trial, that CCI had
failed to establish “a reasonable probability that its de-
69
feat and damage were connected with the claimed vio-
lations.” (A-145) With respect to the possibility of re-
liance on the BAR omission, the district court said:
There is no proof that a single exchanging
Piper shareholder would have refrained from
the exchange and taken an offer for his shares
from Chris-Craft instead of that from Bangor
Punta. (A-145)
With respect to the alleged Rule 10b-6 violation, the dis-
trict court found “not a scintilla of evidence that any
Piper holder was misled” (A-151) and no proof that it
decided the contest:
Even granting that the block purchases re-
sulted arithmetically in Bangor Punta’s achieve-
ment of control, there is no basis for concluding
that, absent Bangor Punta’s acquisition of these
blocks, Chris-Craft would have achieved its goal
of control. Thus the record will not support a
contention that Bangor Punta should. by reason
of violation of Rule 10b-6, compensate Chris-
Craft for the latter’s failure to gain control
of Piper. (A-150)
The court of appeals did not even suggest that these
findings were erroneous. Indeed, it was prepared to “as-
sume arguendo that BPC’s offer was superior to that of
CCI, taking into account the BAR loss... .” (A-60)
However, it then misread this Court’s decision in Mills v.
Electric Auto-Lite Co., 396 U.S. 375 (1970), and A ffili-
ated Ute Citizens v. United States, 406 U.S. 128 (1972),
to require that damages be awarded anyway.
The court made two fundamental errors. First, in con-
nection with the BAR omission, the court thought that
Mills and Ute required it to presume conclusively, on
behalf of a third party, that every tendering Piper share-
70
holder would have rejected the BPC exchange offer had
this “unintentional” error not been made. Second, the
court of appeals disregarded the fact that even if there
were a presumption of reliance by Piper shareholders,
CCI still failed to show that this presumed reliance or
the technical Rule 10b-6 violation caused it to lose the
control contest, the injury for which it was compensated.
A. There Was No Basis for a Conclusive Presumption
That BPC’s Exchange Offer Would Not “Have
Attracted Any Takers” Without the BAR Omission.
All other issues aside, CCI was not in fact injured by
the BAR omission unless the Piper shareholders who
accepted BPC’s exchange offer relied on the omission in
the sense that they “would have been influenced to act
differently than [they] did act if [BPC] had disclosed
to [them] the undisclosed fact.” List v. Fashion Park,
Inc., 340 F.2d 457, 463 (2d Cir.), cert. denied sub nom.
List v. Lerner, 382 U.S. 811 (1965); see also Dopp v.
Franklin Nat’i Bank, 461 F.2d 873, 880 (2d Cir. 1972) ;
cf. Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
482 F.2d 880, 884 (5th Cir. 1973). The district court
found CCI had failed to prove reliance by the Piper
shareholders. The court of appeals obligingly granted
CCI a presumption that BPC’s exchange offer would
not “have attracted any takers” (A-60) had the pos-
sible sale of the BAR been mentioned. This was based
on a misreading of Millis.
Mills was a suit by shareholders claiming that a proxy
statement used by management to solicit their votes for
a merger was misleading because it failed to disclose a
relationship between management and the proposed mer-
ger partner. The court of appeals had ruled that even
though this was a material omission it did not affect the
aes wt + y
71
fairness of the merger, and the defendants should have
judgment if the terms were fair in fact. This Court re-
versed and remanded on the ground that this procedure
would “allow shareholders to be bypassed” in favor of
“a judicial appraisal of the merger’s merits.” 396 U.S.
at 381.
The Court did not create or endorse any presumption,
conclusive or otherwise, about how the shareholders would
have behaved had they been fully informed. On the con-
trary, it held that there was “no justification for...
[the] presumption . . . implicit in the opinion of the
Court of Appeals,” that the shareholders would have
voted for the merger if its terms were fair. 396 U.S. at
382 n. 5. But since ‘» central purpose of Section 14(a)
was “(flair corporate suffrage,” id. at 381, the Court held
that the “[u]se of a solicitation that is materially mis-
leading is itself a violation of law... .” Id. at 383.
The shareholders were entitled to a proper proxy state-
ment before their votes could be validly used, and specu-
lation about how they would have voted was irrelevant.
In short, reliance was not presumed; it was simply un-
necessary to the conclusion that the shareholders had
been wronged by the use of their proxies obtained by a
deficient solicitation. See Kohn v. American Metal Cli-
max, Inc., 458 F.2d 255, 289 (8d Cir.) (Adams, J., con-
curring and dissenting), cert. denied, 409 U.S. 874
(1972).
The present case is altogether different. CCI is not a
shareholder vindicating its absolute legal right to a proper
proxy statement regardless of any showing of what it
would in fact have done. The injury for which CCI was
compensated does not even exist unless it is established,
at a minimum, that BPC would not in fact have obtained,
and that CCI would in fact have obtained, Piper shares
72
tendered to BPC in its exchange offer. CCI’s case de-
pended, logically, on proof that the BAR omission ac-
tually affected what a large number of the tendering
Piper shareholders did. Mills is not a substitute for that
proof.
If Mills has any application outside proxy cases, the
district court here did full justice to Mills when it or-
dered BPC to offer rescission to the tendering Piper
shareholders. They were the persons who were alleged-
ly injured (although none of them ever brought suit)
by a prospectus deficiency without which they “might
have hesitated” (D-15) to tender their shares. The dis-
trict court therefore ordered that the prospectus “be
corrected for those to whom it related” (A-143), in ac-
cordance with Section 14(e)’s stated purpose of requir-
ing offerors to make full disclosure “to those with whom
they deal.” S. Rep. No. 550, 90th Cong., Ist Sess. 11
(1967).
The court of appeals’ presumption that the Piper
shareholders would have rejected BPC’s offer (which is
the only basis on which the court could find injury to
CCI, a third party) was not justified either by findings
of fact or by Mills. The Court that decided Mills would
have been astounded by the proposition that a competing
suitor, seeking a different merger with the target com-
pany, could automatically recover damages by proving
the omission and then invoking a conclusive “presump-
tion” that the merger would have failed. Yet that is
exactly analogous to what the court of appeals did here
when it said on behalf of CCI:
Under the Mills-Ute test we must presume
that BPC’s offer was not so appealing, consid-
ering the BAR loss, as to have attracted any
takers .... (A-60)
73
The court of appeals mistakenly sought confirmation
of its reading of Mills in this Court’s decision in Affili-
ated Ute Citizens v. United States, 406 U.S. 128 (1972).
That too, is a case in which reliance was not presumed
but was logically unnecessary. Certain Indians brought
suit against bankers who acted as custodians of shares
of stock owned by the Indians. The bankers, who were
“acting for the individual stockholders” and thus had fi-
duciary responsibilities to them, deliberately “devised a
plan” that “operated as a fraud” on the Indians by “in-
duc[ing]” them to dispose of their stock at less than its
fair value. Jd. at 152-53. This scheme cheated the Indians
without regard to whether they relied on any particular
misinformation.*
The key to the court of appeals’ misapplication of
Mills and Ute is the different status of CCI from the
plaintiffs in those cases and the different nature of the
injury for which CCI is seeking damages. This case is
not concerned with vindicating the right to a prospectus:
the Piper shareholders who exchanged their shares and
now hold BPC securities are not the plaintiffs in this
ease but, in effect, defendants hoist by a presumption of
their own reliance. CCI, a stranger to the transaction,
seeks to recover damages on the ground that it was af-
fected when they were misled into acting differently than
they otherwise would have.** But a competing offeror like
* The Court did say that the bankers had violated Rule 10b-5(2)
by understating at least one material fact—the prevailing market
price of the shares. It is hardly necessary to “presume” whether a
seller would have sold if he had known that a higher price was
available in the market. In any event, carefully limiting its ruling
to “the circumstances of this case,” the Court made it clear that
the decision turned not on the specific misstatement but the overall
scheme, and that was why reliance was unnecessary. 406 U.S. at 153.
** The court of appeals relied on its own earlier decision in Crane
Co. Vv. Westinghouse Air Brake Co., 419 F.2d 787 (2d Cir. 1969),
74
CCI has shown no injury at all unless and until it estab-
lishes that a significant number of shareholders would
have acted differently. Evidence of this is by no means
impossible to obtain,* and should be required under this
Court’s direction in Mills that “damages should be recov-
erable only to the extent that they can be shown.” 396
U.S. at 389.**
cert. denied, 400 U.S. 822 (1970), to support its conclusion that CCI
could recover without proving that in fact a significant number of
shareholders would have acted differently. Neither Crane nor the
case it relied on, Vine v. Beneficial Finance Co., 374 F.2d 627 (2d
Cir.), cert. denied, 389 U.S. 970 (1967), creates a presumption of
reliance by shareholders. Those cases merely permit a plaintiff who
was not himself deceived to recover if a “deception which misled”
others is “shown” and if “this was in fact the cause of plaintiff's
claimed injury.” Vine, 374 F.2d at 635, quoted in Crane, 419 F.2d at
797. Vine involved the sufficiency of the complaint. so the allegation
of reliance by others was taken as true. Crane, as the district court
here pointed out (A-146), involved a fact situation in which the
target company shareholders were unquestionably misled into not
tendering. The defendant there violated Section 9(a) (2) of the 1934
Act and Rule 10b-5 by deliberately engaging in offsetting trans-
actions that artificially inflated the price of the target company’s
stock above the tender offer price on the crucial last day of Crane’s
tender offer. The court of appeals in Chris-Craft II simply ignored
this crucial factual distinction.
* For example, to the extent that there are large institutional
holdings, there is readily available direct evidence of whether sig-
nificant blocs would have been tendered. See also, e.g., Kohn Vv.
American Metal Climaz, Inc., supra, 458 F.2d at 288 (Adams, J.,
concurring and dissenting) ; Cobine, Elements of Liability and Ac-
tual Damages in Rule 10b-5 Actions, 1972 U. Ill. L. Forum 651,
688-89.
** A showing of materiality alone does not provide the needed
factual link because, as the concept was applied here, there is no
good reason to think any Piper shareholders were influenced by the
BAR omission at all. No exchanging shareholder either sued BPC
or accepted the offer of rescission. The district court said that
“[t]he standard of materiality to be applied here is whether a
reasonable stockholder of Piper might have hesitated to make an
exchange for Bangor Punta securities” had the BAR negotiations
been fully disclosed. (D-15, emphasis added) The court of appeals
affirmed. (A-45-46) While a finding that some shareholders “might
75
Even if Mills and Ute could be extended to give a
third party a presumption about how someone else would
have acted under other circumstances, nothing in those
decisions justifies making the presumption conclusive, as
the court of appeals did here. Even the policy of “vig-
orous enforcement” of the securities laws does not sup-
port damages for injury the defendant did not cause.*
If problems of proof are thought to support a presump-
tion as a starting place in appropriate cases, there is no
excuse whatever for excluding contrary evidence. See
Note, The Reliance Requirement in Private Actions
Under SEC Rule 10b-5, 88 Harv. L. Rev. 584, 597-600
(1975). Other courts of appeals faced with the issue
have permitted the defendant to prove the absence of
reliance. See Rochez Bros., Inc. v. Rhoades, 491 F.2d 402,
410 (3d Cir. 1974) ; Chelsea Assoc. v. Rapanos, 527 F.2d
1266 (6th Cir. 1975); Carras v. Burns, 516 F.2d 251,
257 (4th Cir. 1975). But here, BPC was given no oppor-
tunity to rebut the court of appeals’ presumption by
showing that there were Piper stockholders who would
have accepted the exchange offer had they known of the
BAR offer. Compare Blackie v. Barrack, 524 F.2d 891, 906
(9th Cir. 1975), petition for cert. filed, 44 U.S.L.W. 3518
(U.S. Mar. 16, 1976). The court of appeals simply re-
versed the district court’s finding that CCI failed to prove
have hesitated” to have exchanged with BPC may be enough to
require that the fact be disclosed to the offerees and even that
they be given the opportunity to rescind, see Northway, Inc. Vv.
TSC Industries, Inc., 512 F.2d 324 (7th Cir.), cert. granted,
423 U.S. 820 (1975), argued, March 3, 1976, it is hardly an ade-
quate basis to support a presumption that BPC “obtained control
through its violations of the securities laws.” (A-56)
* Under Section 11 of the 1983 Act, 15 U.S.C. § 77k (1970), for
example, a defendant can avoid liability by proving that the plain-
tiff could not have relied on the misstatement or omission because
the plaintiff knew of it.
76
reliance by the Piper shareholders; it did not remand to
give BPC a chance to show the absence of reliance. See
Herbst v. International Tel. & Tel. Corp., 495 F.2d 1308,
1316 n. 14 (2d Cir. 1974).
B. There Was No Proof That BPC’s Alleged Missteps
Caused the Injury for Which CCI Was Compensated.
The injury for which CCI was compensated was de
nial of control of Piper. The injury the court of appeals
purported to find was denial of an opportunity to com-
pete for control. To show that BPC’s alleged missteps
actually denied it control, or even the opportunity for
control, CCI should have been required to establish that
it had a reasonable prospect of gaining control absent
the violations. In fact, even granting the court of ap-
peals’ presumption that without the BAR omission not a
single Piper shareholder would have tendered to BPC in
its exchange offer, such a presumption does not establish
that the BAR omission (or the Rule 10b-6 violation) af-
fected the outcome.
There was no proof that CCI would have won under
any circumstances. The district court found, and the
court of appeals agreed, “that CCI failed to show with
reasonable certainty that it would have obtained a con-
trolling position in Piper had it not been for the viola-
tions” alleged. (A-56) The court of appeals ignored the
question of actual effect and relied solely on the truism
that if 14% out of BPC’s 51% were left out of account
BPC would have less than 51%; it disregarded the fact
that the shares would have remained availa.le, that BPC
had the resources and the will to buy them, and that
CCI did not. As to the BAR omission, the court of ap-
peals’ entire analysis of causation was as follows:
<p whe "st wench ota pails ULIRaetation San cae! RE A RR ati et am une a
Acie a wah ae te gow A Dawes ok!
77
Since BPC eventually acquired only about 51%
of the outstanding Piper shares, it is clear that
the 7% acquired through its exchange offer was
critical to its success. Reliance and causation
have been shown. (A-60)*
The court of appeals took a similarly mathematical ap-
proach to the impact of the supposed Rule 10b-6 viola-
tion. (A-67, A-96, A-111)
This simplistic reasoning disregarded the fact that the
control contest was not a race but an auction, won, as
it should have been, by the higher bidder. CCI had vir-
tually exhausted its cash and borrowing capacity by
spending about $35 million by February 4. (A-113-15,
128) BPC, whose large initial acquisition from the
Pipers three months later was made for securities, always
had more cash, more borrowing power (see A-113-15)
and, since disclosure of the BAR transaction had no nega-
tive effect on their value (App. 591), more valuable
securities to offer. Each of CCI’s tender offers (unlike
BPC’s) was for a limited number of shares; the first one,
which was for far fewer shares than needed for control,
brought CCI “more shares than it agreed to buy.” (A-
113) Once BPC entered the contest, it consistently outbid
CCI. (A-140 n. 10) Finally, CCI “withdrew from the
struggle” (A-18) before BPC had a majority.
In light of these facts, and others, the district court
quite properly found no “causal relation between the de-
ficiency [in the prospectus] and the harm complained
of” (A-144), and “no basis for concluding that, absent
*The reason BPC got “only about 51%” is, of course, that it
voluntarily stopped buying when it reached that figure in Sep-
tember. When BPC stopped buying, about 7% of Piper stock was
in public hands. If BPC had gone on to buy these shares the ex-
change offer would not have been “critical to its success.”
78
Bangor Punta’s acquisition of these [Rule 10b-6] blocks,
Chris-Craft would have achieved its goal of control.”
(A-150) CCI lost because it had “ ‘shot its bolt’ in the
financial sense by early February 1969” and “was in no
position to purchase for cash any appreciable amount of
Piper shares” thereafter. (A-114) (Mansfield, J., con-
curring)
CCI should have had the burden of proving that BPC’s
acts materially affected the outcome of the contest, see
Dasho v. Susquehanna Corp., 461 F.2d 11, 28-29 (7th
Cir.), cert. denied, 408 U.S. 925 (1972) ; cf. Lowenschuss
v. Kane, 520 F.2d 255, 269 (2d Cir. 1975), but in fact
there were judicial findings at precisely the critical mo-
ment that the contest was still open. In August 1969,
after both of BPC’s alleged missteps, CCI sought a pre-
liminary injunction restraining BPC from, inter alia,
accepting the shares tendered in response to its exchange
offer or buying additional Piper shares. The district court
denied the injunction, expressly finding that the contest
for control was then still open and both sides had a chance
- of victory. The court said:
With approximately 259,026 shares of Piper
still in the hands of the public, it would appear
that at this time neither Chris-Craft nor Ban-
gor Punta has succeeded in gaining control of
Piper. (C-38)
Neither party has gained control of Piper, and
both are still in a position to do so. (C-47)
The court of appeals en banc affirmed the denial of a
preliminary injunction, agreeing with the district court
that the contest was still open:
[Wle conclude that the district court did not
err in refusing to enjoin the continued solicita-
op . het de tie
79
tion of stock by Bangor Punta. At that time
Chris-Craft was free to compete equally with
Bangor Punta for the remaining Piper shares,
and it did so. We do not understand Chris-
Craft to allege that prior misdeeds of Bangor
Punta so determined the course of the competi-
tion for shares after the date of the decision be-
low that Chris-Craft was placed at any real dis-
advantage. (C-9)
The court of appeals reaffirmed this conclusion in its
later opinion on liability. It observed that, after the
competing exchange offers had expired,
The contest for control was not yet over, .. .
because after the expiration of both offers CCI
and BPC owned only 41% and 45%, respec-
tively, of the outstanding Piper shares. (A-18)
Although not “at any real disadvantage” in August, CCI
lost the contest in the succeeding weeks, when BPC law-
fully purchased additional shares in the open market,
while CCI lacked the cash or the will to do so:
CCI made additional purchases of 29,200 shares
between August 12 and 18, and then virtually
withdrew from the struggle. BPC, on the other
hand, continued to purchase for cash... .
By September 5, it had acquired another 100,-
614 shares, enough to achieve a majority stock-
holder position in Piper (839,306 shares or
51%). (A-18)
As Judge Mansfield summed it up:
[I]t was BPC’s cash purchases in the open mar-
ket of 100,614 shares, as compared with CCI’s
capacity to buy only 29,200 shares, that won
control for BPC. (A-116) (emphasis added)
80
On these facts, there was clearly no showing that the
alleged violations denied CCI control of Piper, the injury
for which CCI was compensated, or even the chance to
compete for control. The court of appeals, however, again
invoking Mills, simply ignored the need for a causal con-
nection between the violation and the injury for which
the plaintiff is compensated.*
Nothing in Mills or any other decision of this Court
justifies, much less compels, this jump.** Mills is perfectly
clear about the need to show causation of actual injury
before the plaintiff can obtain further relief: “[{D]am-
ages should be recoverable only to the extent that they
can be shown.” 396 U.S. at 389.*** Any doubt about the
* And once again, the court made the presumption conclusive.
The district court thought CCI had a burden of proving causation
and had failed to me
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