Petition — Chestnutt Management Corp. v. Miller

Supreme Court brief1979

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IN THE

Supreme Court of the United States

Octoser Term, 1978

CuEestNuTT ManaGEMENT CorporaTION,

Petitioner,

Vv.

Eveanor C. Mrmr,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

—--—-—— -

Crenpon H. Lee

Counsel for Petitioner

Chestnutt Managament Corporation

One Dag Hammarskjold Plaza

New York, New York 10017

Tel. (212) 754-1430

ae he ee?

TABLE OF CONTENTS

PAGE

ESE SE ET oe OE OE 1

a GEE eS Se 2

EOS OO TT 3

Constitutional and Statutory Provisions Involved ........ 4

Statement of the Case

EE TEE ES ES Se ne EL 4

Further Statement and Chronology ........................ 7

The Jury Was Required to Try Written and Pub-

I acl ccnsictesnnseiebhenenetctnbesisnmivensschdesabesonsinbve 11

Reasons for Granting the Writ

_ AP er SRIAEh intabsaiicaclarpslididlacsesitc ableuhcaesintocmshanesnne 15

Ur ciiaee Labalealdaphieciicaliiadiedidinsssuhhiindabinddenieaiensiditisaenonncesdamashons 17

RE era 18

APPENDIX

1. Ex. 4—Profiting from Stock Market Psychology .... Al

2. Petitioner’s Proposed Charges ....................-:..-ss-+0--+- A8

I RT All

4. District Court Denial of Motion n.o.v., ete. ..00......... Als

5. Court of Appeals Judgment ...0.............cecceccecseeeeeeeee A19

> HR co accasstieoce A21

7. Panel Decision Dictated from Beneh ......00.0.00000........ A23

an ccecssansendenmntioncecnnosicdas A26

TaBLe or AvTHORITIES

Cases: PAGE

Angelakis v. Churchill Management Corp., Fed. Sec.

L. Rep. (CCH) 995,285 (1975-1976 Transfer Binder,

soca hac ln. ee Oa ade TS 17

Blue Chip Stamps v. Manor Drug Stores, Inc., 423 U.S.

sp tlpcciendee, ee ne aoe nea ERE 17

Bolger v. Laventhol, K rekstein, Horwath & Horwath,

381 F.Supp. 260 (S.D.N.Y. PY aia oh Rt 17

Burnstyn, Inc.—see Joseph Burnstyn, Inc., infra ........ 15

FCC v. Pacifica Foundation, —~— U.S. —-, 98 S.Ct.

“itp cet coasee neki ee TE aia 15

First Houston Investment Corp. v. Wilson (No. 77-

1717) petition I cho a eo 4

First National Bank, etc. v. Bellotti, —— U.S, ——

stot gs Raped actaced, dye cd oe 3, 16

Gammage v. Roberts, Scott & Co., Fed. See. L. Rep.

(CCH) 994,760 (1974-1975 Transfer Binder) §.D.

pains ore en te Tae eR Te EER 17

Greenspan vy. del Toro, Fed. See. L. Rep. (CCH)

95,488 (S.D. Fla.) 1975-76 Transfer Binder, appeal

Joseph Burnstyn, Inc. y. Wilson, 343 U.S, 495 (1952) .... 15

Kovacs v. Cooper, 336 U.S. 77 | BROMO ts ae SR 16

Lewis v. Transamerica Corp., No. 75-1285 (9 Cir. on

vac cana dione en nt AEN NT a as SR 17

lil

PAGE

New York Times, Inc. v. Sullivan, 376 U.S. 254 (1964) 16

SEC v. Capital Gains Research Bureau, Inc., 375 U.S.

180 (1963) sesseseseeeecnneeennnnnsenensnneseeevneneeetsnneeeetsanneeecenesy 11

Sullivan v. Chase Investment Services of Boston, 434

I IE WE MR MPET EE, sniiisixcisswlacecmicmsninehasesicancs 17

Thompson v. Louisville, 362 U.S. 199 (1960) ...0.0000002.... 3

Tot v. United States, 319 U.S. 463 (1943) oo... 3

Wilson v. First Houston Inv. Corp. (5 Cir., 1978), 566

Sa IO snecbusieiiclc tetas bichsacie MEAN Cilai ninasionistcihncicanbonnis 4

Winters v. New York, 333 U.S. 507 (1948)... 3,5

Other:

Constitution of the United States

BP MI ra dacchaberibreisnticd Nendibccnlpicnccedocs passim

I I pian alent aatadeceeninicceanaminlict passim

Statutes:

Investment Advisers Act of 1940

I MR GI elreieiecacthcteteleescidiiltniintinditeinaemntaxenaasaniinsi 2, 4, 7, 14

(Appendix A26-A30)

Regulations thereunder

SE ELLA GRE OOO TO 4,14

(26 F.R. 10549)

(Appendix A26-A30)

IN THE

Supreme Court of the United States

Octroser TERM, 1978

No.

CuEstNuTT MANAGEMENT CorpPorATION,

Petitioner,

ELeanor C. Miter,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

CHESTNUTT MaNnaGEMENT Corporation* (a Connecticut

Corporation) seeks a Writ of Certiorari to review the

judgment of the United States Court of Appeals for the

Second Circuit entered April 3, 1978.

Opinions Below

The judgment is not reported (A19).** The state-

ment by Judge Timbers rendered from the bench is not

* Petitioner, its parent Chestnutt Corporation and George A.

Chestnutt, Jr., its president, are generally called “Chestnutt”

herein.

** “A———” refers to appendix hereto. “——a” refers to ap-

pendix below.

reported and is printed A23. The panel affirmed the judg-

ment en a jury verdict rendered in one hour and ten

minutes following a three day trial upon which judgment

was entered October 21, 1975 awarding Respondent Eleanor

Miller*** exactly $53,000 against investment adviser Chest-

nutt. Senior Judge Murphy had denied motions to dismiss

at the end of plaintiff’s case and the entire case and re-

fused defendants’ charges (printed A8 hereto). His charge

is printed All. On September 20, 1977 Judge Murphy

denied Chestnutt’s Motion for Judgment Notwithstanding

the Verdict, or alternatively, for new trial.

Jurisdiction

This Court’s jurisdiction is invoked pursuant to 28 U.S.C.

§1254 (1). The entry of the Court of Appeals judgment

was April 3, 1978, and a timely Petition for Rehearing

with Suggestion for Rehearing En Bane was denied

June 22, 1978.

Questions Presented

1. Whether financial writing published to the world is

free speech, or whether the First Amendment permits

money damage under a criminal statute*

—Where, the only attempt to allege or prove the “cir-

cumstances constituting fraud... with particularity” re-

quired by Rule 9(b), FR. Civ. Pr., consisted of :

a. the 17th Edition of a 20-year old book, filed annually

with the SEQ,

*** Her husband Dudley acted for her throughout and they are

generally called “Miller” herein.

* Investment Advisers Act of 1940, Sec. 217; 15 U.S.C. 80b-17.

b. a magazine article by an independent third party in

a professional journal,

ec. about 75 weekly, two-page opinion letters by Chest-

nutt accompanied by four pages of unchallenged facts filed

weekly with the SEC,

d. a “D minus” grade conferred by Forbes Magazine

upon a different investment advisory client of Chestnutt,

with all of which views and opinions an “expert” stock-

broker formerly employed by Forbes Magazine, over ob-

jection, disagreed;

—and—

—Where, there was neither allegation nor proof of mis-

statement or omission of any historical fact, either material

or immaterial ;

—and—

—Where, no security or transaction was alleged, or even

identified, to involve fraud under federal or state law;

—and—

the gravamen of the complaint was failure to order “short

sales” by Miller’s independent third party broker contrary

to Chestnutt’s published views that stock prices were more

likely to advance than decline, which advances occurred

promptly after Miller ordered an account liquidated.

Necessarily embraced in the foregoing is the denial of

Fifth Amendment due process for vagueness (Winters vy.

New York, 333 U.S. 507 (1948) and First National Bank,

etc. v. Bellotti, —— U.S. —— (1978)) and the substitution

of presumption for proof and causation (Tot v. United

States, 319 U.S. 463 (1943) and Thompson v. Louisville,

362 U.S. 199 (1960)).

2. May a private right of action for damages be implied

under the Investment Advisers Act of 1940,* under which

statute (and Regulations) this is believed to be the first

final* judgment awarding damages,

Constitutional and Statutory

Provisions Involved

This case invokes freedom of speech and press under

the First Amendment and the Due Process Clause under

the Fifth Amendment to the Constitution of the United

States. Also involved are Sections 206, 214 and 217 of

the Investment Advisers Act of 1940 (15 U.S.C. 80b-6,

14 and 17) and Reg. §275.206(4)-1 thereunder, printed in

the Appendix (A26-30),

Statement of the Case

Introduction

This case indicted a book published in 1952 (17th Kd.,

evidence to the jury in 1975 as Ex. 5) and punished the

author. Not only its quarter-century old cartoons, but also

a ten-column copyrighted magazine article written in

Medical Economics (Ex. 4) by its Senior Editor, consti-

tuted federal securities “fraud”, as did some 75 weekly

letters of opinion published worldwide (Ex. 3).

* Justices Stewart and Powell would have granted certiorari

on the pleadings in Fleschner v. Abrahamson (No, 77-1279, cert.

den. May 15, 1978). For the reasons stated in that petition, and

by Judge Gurfein dissenting therein below (568 F.2d at 879),

and by Judge Hill, dissenting in Wilson v. First Houston Inv.

Corp., 5 Cir. 1978, 566 F.2d 1235, 1243 (pet. pending, First

Houston Investment Corp. v. Wilson (No. 77-1717)) the petition

eae

A a Ae ANS ee tet ta nitive

a een I i Sh

This unconstitutional consequence was upon the causal

nexus that Forbes Magazine opined a “D minus” grade to a

different Chestnutt advisory client American Investors

Fund, Inc. which in a couple of decades of operations has

appreciated in value about 314 times the Dow-Jones Indus-

trial average, or plus 339% vs. plus 101%.

The courts below drummed published financial opinion

out of the First Amendment mansion in the following

manner. '

Petitioner Chestnutt believed and wrote that the savage

stock market débacle in spring 1970 was overdone, and he

published weekly—worldwide—the word “bullish” * and

his opinion that prices were more likely to advance than

decline. Respondent Miller saw a headline in Paris, ordered

an account maintained with a third party broker (Spencer

Trask & Co.) liquidated, and sued for federal statutory

and Connecticut fraud for Chestnutt’s failure to order

“short sales” in Miller’s account.

No historical fact published by Chestnutt was challenged.

There was no claim of omission of any historical fact or

failure to keep Miller currently and exactly informed of

the account. No security or transaction was alleged or even

identified as involving “fraud”, federal or state.

Miller’s counsel summed up to the jury as to Chestnutt’s

opinion:

“The only information that he had as to the future of

the market is right here in Exhibit 3. The only prog-

nostications made that were available to Mr. Miller

were right here. . .” (456a, emphasis added).

* The decisions below permit a jury to make criminal and sub-

ject to inealeulable liability the television picture of a “Thundering

Herd” and the statement “Merrill Lynch is Bullish on America”.

See Winters v. New York, 333 U.S. 507 (1948).

Over no Jess than nine objections (22a, 23a, 27a, 38a, 39a,

00a, dla, 52a, d4a-56a), one Quick,* who became a stock

broker after the events complained of, opined the market

trend was “bearish” for the five months from November

26, 1969 through April 1970. (188a-1 98a),

The judge, among other things, compelled the jury on

the basis of expert testimony to find an orthodox dogma of

financial opinion as to future stock prices, charging:

“...a Wall Street broker who has by reason of educa-

tion and experience become expert in his profession or

trade or business may be permitted to state his opinion

as to a matter in which he is versed and which is mate-

rial to the case. He also may state the reasons for his

opinion.

You should consider the opinion of the two[*] ex-

perts that we had. You can reject the expert’s opinion

entirely if you conclude that the reasons given in sup-

port of the opinion are unsound.” (A15, Emphasis

added).

Shortly after Miller’s panic liquidation, stock prices

moved sharply higher, reaching all time highs by

1973. side ced

A six-person jury after a three day trial and in an hour

and ten minutes on Friday afternoon awarded exactly

eg Judge Timbers dictated affirmance from the bench

The 65-paragraph complaint (denied generally) alleges

weekly publication of “Stock Market Survey” Reports and

management of American Investors Fund

psi und, Ine. (2).

* Employed by Forbes Magazine in 1969 and 1970.

* The judge apparently treated Geo

4 : rge Chestnutt, wh

been affiliated with a broker or dealer, as the second —

128 alleged:

“28. On various and divers oceasions from February

16, 1969 to April 24, 1970, defendants, or one of them,

made to plaintiff through their various publications

several statements which were false and misleading

about the state of the securities market in the United

States and which, on information and belief, were

known to defendants to be false and misleading, or, in

the alternative, should have been known to defendants

to be false and misleading.” (Emphasis added).

The virtues of “short sales” were extolled in f’s 8, 50(d),

63, and 64 reads:

“64. Market conditions, on many occasions during

the period February 16, 1969, to April 24, 1970 dictated

the employment of the ‘short sale’. Defendants, reck-

lessly and with apparent disregard for the financial

interests of plaintiff, failed to ‘sell short’ for plaintiff's

account.” (Emphasis added).

The four purported causes of action went to the jury as

a claim under Section 206 of the Investment Advisers Act

and a claim for Connecticut common law fraud.

Further Statement and Chronology

About 1952 George A. Chestnutt, Jr. published:

“Stock Market ANALYSIS

Facts and Principals”

which (as wel! as subsequent editions) was filed with the

Securities and Exchange Commission, its 17th Edition,

Chestnutt Corporation, is Ex. 5 (577a, ff.).

Philip Harsham, Senior Editor, Medical Economics,

wrote a ten-column article entitled “Profiting from Stock

Market Psychology” in that professional magazine (copy-

right 1968 by Medical Economics, Inc., a subsidiary of

Chapman-Reinhold, Inec., Oradell, N.J.) relating to Chest-

nutt, a copy of which went to the jury as Exhibit 4. It is

A1-7 hereto, photographs excluded. Mr. Harsham’s first

sentence reads:

“Wall Streeters call George A. Chestnutt, Jr. a mav-

erick, and they may be right.”

Mr. Harsham reported Chestnutt as saying (A2):

“That’s because the majority let their emotions dic-

tate their investment moves.” “It’s the worst thing

they can do”, says Chestnutt, “the stock market will

do whatever it has to do to prove the majority wrong.”

The “Redbook” has outlined Chestnutt’s selection of ob-

jective data, and includes for 23 years through 1968 the

actual percentage market performance (plus and minus)

of 63 industry groups compared to the percentage plus or

minus of the 800 stock geometric average originated by

Chestnutt in 1947* and the Dow Jones averages.

The “Redbook” under 24 headings outlined Chestnutt’s

philosophy on the basis of which each week since 1951 he

has written, signed and published throughout the world a

two page opinion letter on the stock market with 4 pages

of statistics. Weekly issues (March 1969-April 1970, with

certain gaps) went to the jury as Exhibit 3 (465a-570a).

* This original undistorted percentage concept, applied initi

, applied initial]

in 1947 to 400 stocks was increased successively to 1,000 stocks “4

1970. The concept has been emulated by the “Value Line Geometric

Average” now widely reported in various publications.

Like the “Redbook”, each weekly publication of “Amer-

ican Investors Service” has been filed with the Securities

and Exchange Commission, as have two decades of registra-

tion statements including the prospectuses of American

Investors Fund, Inc. describing Chestnutt’s analytical

methods and each showing ten vears investment results,

In May 1968 Dudley E, Miller,* unannounced and un-

solicited dropped into Chestnutt’s office in Greenwich be-

cause a fellow oilman abroad, Mr. Squires, had suggested

it. (316a).

At the time of trial Miller for 314 years had been Eastern

Hemisphere Vice President and General Counsel for Oc-

cidental Petroleum.

Chestnutt’s officer Murray showed him the record, as

Miller admitted, of all managed accounts over a period of

“several years” which Miller further admitted “ ... varied

from account to account, but certainly for 2 to 3 years at a

minimum”. (330a). Miller was given a copy of the “Red-

book” (Exhibit 5) which he described as “very complete

and expresses a lot of the feelings 1 have in the stock

market”. (277a).

Nine months later, and after receiving in the mail a copy

of Harsham’s ten column article in Medical Economics

* He acted for his wife, Plaintiff-Respondent throughout. The

Millers live in London. He began his career as staff counsel in

New York for U.S. Life for 3 years doing international, tax, cor-

porate, labor and insurance law; went with ARAMCO in New

York, then to Holland and then to Arabia doing general practice

and contract problems. From 1963 to 1969 he was general counsel

for another consortium, Oasis Oil Company, in Libya. After a

period with “Oxy-Libya” and having an additional office in Paris,

Mr. Miller had for 314 years before trial been Occidental Petro-

leum’s Eastern Hemisphere Vice-President and General Counsel

in London (257a-266a). Mrs. Miller, formerly a nurse, had done

post graduate work at Johns Hopkins University in neurosurgery

(101a).

(Exhibit 4) and after conferring with the fellow oilman

abroad, in February 1969 Miller engaged Chestnutt to

place, buy and sell orders with her long-standing broker,

Spencer Trask & Company, for which Chestnutt received a

quarterly fee of $325.00, plus one quarter of 1%, which

amounted to $653.26 on the initial portfolio value of

$131,305.62 as of February 28, 1969. (680a).

Miller received physically in Tripoli a confirmation slip

within 5 to 8 days for every portfolio transaction, as well

as monthly reports showing exact portfolio and cash posi-

tions. (28la-282a, 321a). He also received each week within

5 to 8 days Chestnutt’s current opinion and the factual

information upon which the opinion was based in the six

page publication American Investor’s Service. (Exhibit 3)*.

The account prospered for a few months. The one-page

engagement of Chestnutt could be terminated at will (Ex-

hibit 1, 463a) and was accompanied by a one page limited

power of attorney furnished to her broker Spencer Trask

* Each published letter (filed with the Securities and Exchange

Commission) included:

1. The actual closing prices of 800 stocks.

2. The actual Dow Jones average and weekly change, plus

charts of other averages.

3. The actual American Investors 800 stock geometric average

and weekly change.

4. The ranking of each of such 800 stocks in accordance with

their “relative” market strength, ranking from 0 to 99.

5. The ranking of 65 industry groups, and the individual

ranking of the 800 stocks within its group.

6. The number of the 65 groups which had advanced in fact

and the number of groups which had declined in fact.

A proprietary “Trend Oscillograph” showing plus or minus

in figures where the market as a whole appeared to be

trending in the Adviser’s opinion.

8. A narrative opinion letter expressing the Adviser’s inter-

pretation of what the “market trend evidence” appeared

to be.

& Company authorizing only acceptance of buy and sell

orders, (Exhibit 2, 464a)*.

The Jury Was Required

To Try Written and Published

Opinion.

Miller’s counsel closing to the jury (427a, ff.) itemized his

bill of attainder separately against the 20-year old Redbook

(Ex. 5), the weekly opinion letter (Ex. 3) and the Medical

Economics article (Ex. 4), described as a “testimonial”,

and the “D minus” rating by Forbes Magazine of Amer-

ican Investors Fund, Inc., a different client. The Judge’s

charge (A11) lumped them together.

* Chestnutt never had control or possession of assets. Chestnutt

has no affiliation or interest in brokerage or underwriting and has

always squarely conformed to the high standards set for invest-

ment advisers in SEC v. Capital Gains Research Bureau, Inc., 375

U.S. 180 (1963), that there be no conflicting activity to impair

investment judgment, stating at 190:

“. . not engaged in any activity such as security selling or

brokerage, which might directly or indirectly bias an invest-

ment judgment .. .”. (Emphasis added)

And the Court stated earlier

“The report stressed that affiliates by investment advisers

with investment bankers, or corporations might be ‘an im-

pediment to a disinterested, objective, or critical attitude to-

ward an investment by clients .. .’” (at 187-188),

and further:

“The report incorporated the Code of Ethics and Standards

of Practice of one of the leading investment counsel associa-

tions, which contained the following canon:

“(An investment adviser] should continuously occupy an im-

partial and disinterested position, as free as humanly possible

from the subtle influence of prejudice, conscious or wuncon-

scious; he should scrupulously avoid any affiliation, or any

act, which subjects his position to challenge in this respect.”

(at 188, emphasis the Court’s)

Not a single security transaction was identified by either

as claimed to be fraudulent. Not a single existing fact was

challenged.

(A) As to the Redbook

Mentioned repeatedly, a few quotations suffice:

“Look at the red book or what I have been calling

the red book. I want you to look first, if you will, at

all the graphs, all the charts. There are a lot of them,

2, 3, 4, 5, they go on, 6, then you go in the back and

count a lot more.” (430a)

“Mr. Miller testified exactly to the contrary, that he

was never told of a limitation of this book. You’ve got

some cartoons in here too. Page 24, a poor fellow is

on the train going the wrong way and wants to get off.

Page 14, I have another cartoon, somebody at the

betting window down at Yonkers or someplace like

that. (431a)

* * oe

“I’m going to go with them.” and he was particularly

impressed by this technique, tactic, sometimes it’s

called of selling short. He is a believer in the short

sale and he made an inquiry about the short sale. (432a)

«* * * The book talks about the value of the short

sale.” (432a)

“There’s also another statement in here that’s pretty

interesting and Mr. Chestnutt, I believe, testified to

it. Page 7, it says ‘This geometric average was de-

signed to satisfy the need for a scientifically accurate

index of average general market performance.’ He

said and he testified that it is a scientifically accurate

tool. If you find it is not a scientifically accurate tool,

I think you would find too that that was a violation of

the Securities Law.” (433a)

(B) As to Senior Editor’s Harsham’s 10-column article

published in Medical Economics :

“Mr. Miller in May went to see Chestnutt. A while

later, he was mailed this document, Profiting From

Stock Market Psychology. We claim that this document

is a testimonial, a testimonial to the ability of Mr.

George Chestnutt, the boss, as Mr. Lee characterized

him today, the boss of Chestnutt Management and

Chestnutt Corporation. And we maintain that this is

a violation of a Federal Securities Law.” (430a)

American Investors Fund, Inc.:

“The organization that he invested with had a D or

D minus rating from Forbes.” (438a)

“This, on top of the D rating in the market. . .” (439a)

(D) As to the Weekly Stock Market Survey (Ex. 3):

There was no challenge to any fact in four pages, or

claim that Chestnutt did not act in accordance with his

opinion expressed in two pages.

“The monthly brokerage statements ... was just a

history for a period of 30 or 31 days, whatever. The

only information that he had as to the future of the

market is right here in Exhibit 3. The only prognosti-

cations made that were available to Mr. Miller were

right here .. .” (456a) (Emphasis added)

“.. this thing they call the Stock Market Survey, I

think is perhaps the most important.” (434a)

“Now, the Stock Market Survey used this word

‘bullish’ as I read to you before. Was the American

securities market in the period February 1969 to April

of 1970 bullish?

Remember Mr. Quick’s example about the tide. Mr.

Quick testified that in his opinion it was bullish. He

testified that it was bullish up to about November 26,

1969, and thbreafter, through the period in question

and indeed through most of May, the market was

bearish. The tide was going out. In no week during

that period did he testify the tide was coming in.”

(435a)

The trial judge rejected the crucial portions of Chest-

nutt’s proposed charge (A8). He made the charge

printed All, permitting the jury to treat a magazine

article as a “testimonial” in violation of the Act, a book

as criminal, and an opinion as to the future as a material

fact, imposing absolute liability. He charged:

“Tt is not necessary to prove that the maker of

the statement had a guilty intent. It is sufficient if

the statement was made without reasonable grounds

or made recklessly.

If you find that the statements that were made if,

in fact, they were made, were statements of opinions

relative to the conditions of the securities market, it

doesn’t make any difference because if the opinion

was given by a professional person whose services

had been engaged, the opinion was false because of

a lack of due care and a defendant would be liable.”

(A13-14)

Throughout the 1975 trial, a half-year before Ernst &

Ernst v. Hochfelder, 425 U.S. 185 (1976), “advertising”

and “testimonial” under Reg. 275.206(4)-1 were utterly

confused with the statutory words “device, scheme or

artifice to defraud a client” (§206(1)) and the statutory

words “fraudulent, deceptive or manipulative” (§206(4).

As applied, the Regulation not merely exceeded the legis-

lative grant, but violated free speech and was vague con-

trary to due process.

Reasons for Granting the Writ

Left standing, the decisions below permit jailing a finan-

cial writer for a 20 year old book.*

Left standing, the decisions below would endanger an

author selling his book, unless accompanied by the “D

minus” grade of a hostile reviewer.

Left standing, the case creates absolute liability—not

only for writing—but even for being written about (Ex. 4,

A1-7). While the first sentence of the ten-column mag-

azine article by the Senior Editor of Medical Economics

does indeed refer to Chestnutt as a “maverick”, this “an-

imal metaphor” even when added to “bullish” and “bearish”

does not resemble a “pig in the parlor”. FCC v. Pacifica

Foundation, —— U.S. ——, 98 S.Ct. 3026, 3041, 3049 (1978).

Moreover, one should add, neither the Redbook in its many

editions (Ex. 5) nor the weekly opinion letter (Ex. 3), both

filed through the years with the SEC, has over the decades

occasioned “any of the available sanctions [the SEC] has

been granted by Congress”. id., 98 S.Ct. at 3030.

As a consenting adult and California and New York

international lawyer, Miller spent May 1968 through Feb-

ruary 1969 reading the Redbook (Ex. 5) and the magazine

* Our fatuous hope when privileged to be of counsel a quarter-

century ago in Joseph Burnstyn, Inc. v. Wilson, 343 U.S. 495

(1952)—the year Chestnutt first published his Redbook—was that

the unparalleled concurring opinion of Mr. Justice Frankfurter

had forever banished silliness, as well as terror and punitive dam-

age, where some regulation may be permissible.

article (Ex. 4), all the while a bull-market raged ever

higher. During this nine-month gestation, had he been

besieged with sound trucks blaring their contents, all

Justices would have agreed that the contents could not be

censored, or punished. Kovacs v. Cooper, 336 U.S. 77

(1948).

While Chestnutt is a writer and publisher and not a

national bank, it must be recognized, First National Bank,

etc. v. Bellotti, 46 L.W. 4317, 4878, Note 31:

“... The First Amendment rejects the ‘highly paternal-

istic’? approach of statutes like §8 which restrict what

the people may hear. Virginia State Bd. of Pharmacy

v. Virginia Citizen Consumers Council, Inc., 425 US.,

at 770; see Linmark Associates, Inc. v. Township of

Willingboro, 431 U.S., at 97; Whitney v. California,

274 U.S. 357, 377 (1927) (Brandeis, J., concurring) ;

Abrams v. United States, 250 U.S. 616, 630 (1919)

(Holmes, J., dissenting).”

The Bellotti case completes the interweaving of public

policy free speech and commercial free speech, irrespective

of the speaker.

But the decisions below go far beyond the evil perceived

in New York Times, Inc. v, Sullivan, 376 U.S. 254 (1964),

and deprive Chestnutt even of the defense of truth of every

fact stated. The decisions below impose absolute and

punitive liability for opinion.

The decisions below would hang actuaries for epidemics

and drown messengers in wells. They exclude financial

writing from free speech.

We plagiarize and adopt the reasons set forth in the

petition in Fleschner v. Abrahamson (No. 77-1279, cert.

den. May 15, 1978) which two Justices would have granted,

referred to supra, p. 4.

We add that everything decided and said in Blue Chip

Stamps v. Manor Drug Store, Inc., 423 U.S. 884 (1975)

applies even more to alleged fraudulent failure to “sell

short”.

We mention again that Hochfelder, supra, was decided

after the trial judge made his charge.

For convenience we reprint in the margin notes 7 and 8

(page 8) from the Fleschner petition.*

* “TDLewis v. Transamerica Corp., No. 75-1285 (9th Cir., doc-

keted 1975) (argued May 12, 1977).

8 The district courts have divided on the issue: Sullivan v.

Chase Investment Services of Boston, 434 F.Supp. 171 (N.D.

Cal. 1977) cause of action impiied after dismissal of 10b-5

claim) ; Angelakis v. Churchill Management Corp., [1975-1976

Transfer Binder] Fep. Sec. L. Rep. (CCH) {95,285 (N.D.

Cal. 1975) (cause of action implied) ; Lewis v. Transamerica

Corp., No. C 73-2180 (N.D.Cal. 1974) (“no Federal jurisdic-

tion” and no right of action; oral decision by District Court,

see transcript of argument held Sept. 27, 1974 at 10), appeal

argued, No. 75-1285 (9th Cir., May 12, 1977) ; Bolger v. Laven-

thol, Krekstein, Horwath & Horwath, 381 F.Supp. 260 (S.D.

N.Y. 1974) (cause of action implied) ; Greenspan v. del Toro,

[1975- 1976 Transfer Binder] Fep. Sec. L. Rep. (CCH)

7 95,488 (S.D.Fla.) (noright of action), appeal dismissed for

want of prosecution, No. 74-2943 (5th Cir. 1974) ; Gammage v.

Roberts, Scott & Co., [1974-1975 Transfer Binder] Fen. Sec.

L. Rep. (CCH) § 94,760 (S.D.Cal. 1974) (no right of action).”

CONCLUSION

For the foregoing reasons, and those incorporated herein,

a writ of certiorari should issue to the United States Court

of Appeals for the Second Circuit.

Respectfully submitted,

Cienpon H. Lee

Counsel for Petitioner

Chestnutt Managament Corporation .

One Dag Hammarskjold Plaza

New York, New York 10017

Tel. (212) 754-1430

APPENDIX

mee

Exhibit 4

Profiting from Stock Market Psychology

By Puitip HakSHAM

Senior editor, Medical Economics

(Photos Omitted )

Reprinted by permission from March 18, 1968, MEDICAL ECONOMICS.

a subsidiary of Chapman-Reinhold, Inc., Oradell, N.J.

Wall Streeters call George A. Chestnutt Jr, a maverick,

and they may be right. But no single label could do justice

to the 53-year-old mutual fund proprietor and money man-

ager. Actually, Chestnutt is a dedicated technical stock

analyst who believes that an understanding of the market’s

technical aspects can benefit any investor. He’s convinced

he has hit upon a stock analysis system that, properly

interpreted, can lead almost surely to extraordinary profits.

And he may be right.

When Chestnutt came out of Montana in 1946, at any

rate, he had only $5,000. Now, some 21 years later, he runs

a $225,000,000 mutual fund (American Investors Fund)

and heads an investment counseling service whose 250 or

so clients must have a minimum of $100,000 each. He also

publishes a weekly advisory report (American Investors

Service) for which investors “who want to kill their own

snakes,” as he puts it, pay $240 a year.

“You might say that I’m employed full time,” he quipped

with a deceptively timid grin, as he ushered me into his

blue-paneled Greenwich, Conn., office. Aware that Chest-

nutt’s methods had served him and his mutual fund well,

T had come calling primarily to see if some of those methods

might be put to practical use by doctor-investors. My con-

clusion: Some of them can be—and profitably.

“We operate on the basis of technical market analysis,

yes,” Chestnutt says. “But technical information has to

Exhibit 4—Profiting from Stock Market Psychology

be interpreted in the light of investor psychology. Anybody

can keep charts. I’m more a stock market psychoanalyst.”

Behind Chestnutt’s probings of the market’s psyche is

the theory that the best source of information for an in-

vestor is the action of the market itself. “I usually couldn’t

care less what a company does,” he says. “What I want to

know is how its stock has been performing; that’s the best

clue to how it’s likely to perform in the future.”

What about such fundamentals as a company’s earnings,

profit margin, debt position, and growth rate? “All those

things are reflected in the market action of the stock,”

Chestnutt says. Besides, studies he’s made over the years

indicate that economic factors have only a 15 percent cor-

relation with stock market averages, So he concludes that

the market’s action is rooted only 15 percent in economics

and 85 per cent in psychology. Chestnutt concedes that he

and his staff do correlate their technical information with

current economic factors. But, he says, “You have to re-

cognize above all that stock prices move up or down because

real live people are bidding them up or down.” An astute

technical analyst can determine by watching the charted

trends of prices and trading volume the points at which

those people are most likely to be selling or buying.

That’s because the majority let their emotions dictate

their investment moves. “It’s the worst thing they can

do,” says Chestnutt. “The stock market will do whatever

it has to do to prove the majority wrong.” Meanwhile,

the investor, who lets himself be guided only by accurate

technical analysis, totally unencumbered by emotions, ean

wait for the opportunity to pick up bargains. “All he has

to do is hold out his basket,” as Chestnutt puts it, “and

eatch the falling shares.”

Can the average doctor-investor play that game? Chest-

nutt thinks so, “if he’s willing to take the time to study

Exhibit 4—Profiting from Stock Market Psychology

charts and relate them to invester emotions.” But even

if he can’t play it, he can benefit by learning how the pro-

fessionals play it. The fundamentals behind the psychology

of the market are these: At any given time, some investors

may have gains in a stock and some may have losses. Those

with gains want to safeguard them, and, if possible, build

them higher. The motives of those with losses are a bit

more complex. Some will opt to cut their losses short by

selling out early when the stock’s price begins to slide;

some will sell the moment a minor rally: returns the stock’s

price to the level they paid; and some will hold on doggedly,

awaiting a turnaround. “Everybody has his own flash

point,” explains Chestnutt. The better acquainted an in-

vestor is with the stages at which those flash points might

occur, the more profitable his buy and sell decisions will be.

Take a stock like du Pont, as an example. A couple of

years ago, it was selling at around 260. It was a “happy-

people” stock, to use Chestnutt’s terminology, because many

of its shareholders were long-term investors with immense

profits in it. But those who bought in at 260 or so now

have little reason to be happy; from that level, du Pont

began a decline that eventually exceeded 100 points.

Analysts charting du Pont’s decline could see at various

points just what shareholders’ emotions were prompting

them to do. Eventually, the chart pattern indicated that

most of those who intended to get out had gotten out. Du

Pont stock drifted listlessly between 145 and 155. It seemed

to have hit bottom.

Was that the time to buy? Those who thought so found

themselves with gains of 20 to 30 points within very few

months. The stock rose for technical reasons even while

the company reported disappointing earnings.

Even those stocks in a strong uptrend may rise and fall

from time to time. In the Chestnutt lexicon, those price

Exhtbit 4—Profiting from Stock Market Psychology

movements are intermediate-term fluctuations within a

major trend. So a stock may be hitting intermediate-term

bottoms and tops while the long-term bottom or top is

nowhere in sight. The trick, ther} is to buy on the inter-

mediate-term bottom, stay with the stock until it approaches

its intermediate-term top, then sell before it heads for an-

other intermediate-term low. If the long-term price trend

is up, Chestnutt observes, the chances are always good

that the next intermediate-term low will be a bit higher

than the previous low and that the next intermediate-term

high will be a bit higher than the previous high. But re-

gardless of long-term trends, the investor who waits for

the dips to occur to do his buying stands to boost his profits.

That Chestnutt approach to buying low and selling high

raises some questions: How do you know that the stock

isn’t going lower—much lower—than the point you’ve

chosen as the intermediate-term bottom? Or how do you

know that it isn’t going to soar right on through the point

that you’ve determined as the probable intermediate-term

top? How do you, in fact, know that you hav2 a stock that’s

going to do anything at all?

George Chestnutt’s answer is, “You have your charts.

You figure it out!” It should be noted that Chestnutt has

the mathematical mind of an engineer, which indeed he

was until his stock market values began taking more time

than his job with a Montana utility company. He reads

stock market charts as easily as others read the printed

word—maybe because he started charting stocks at the

age of 13.

A key factor in Chestnutt’s method of analysis is the

trend of upside and downside volume—the number of

shares traded at prices higher than the previous day’s

prices and the number traded at lower prices. Those

Exhibit 4—Profiting from Stock Market Psychology

trends, whether applying to the market as a whole or to

individual stocks, give a good indication of how bullish or

bearish the investing public is at any given time.

It’s market “psychoanalysis” of this type that Chestnutt

believes an individual investor could be doing for himself.

“Everything he needs to work with is published daily in

The Wall Street Journal and other newspapers,” he says.

In these days of computerization, the job is made easier.

Most brokers can give you total upside and downside

volume of stocks listed on the New York Stock Exchange

simply by pressing buttons on their market monitors.

Here’s how Chestnutt explains the principle of volume

analysis to subscribers to his weekly advisory service:

“If you had unlimited capital, you could test the market

for any stock by alternately throwing in large buying and

selling orders, Suppose you wanted to test the market

for U.S. Steel; that is, determine which was heavier, sup-

ply or demand. Suppose steel is selling at 40, and the

market is quiet.

“You start giving your broker buy orders until you have

forced the price up to 41. At that point, you stop to note

that it took 15,000 shares to put the price up a point.

During that time, other people bought 10,000 shares so that

the total volume in U.S. Steel was 25,000 shares.

“You wait a while because you’ve created a little excite-

ment by your buying, which is the sort of thing that at-

tracts the attention of others to the stock. Let’s suppose

that U.S. Steel falls back and stabilizes at 401%. You might

conclude that your buying 15,000 shares had caused a

\%-point increase in the price, )

“Now, you make another test by giving your broker sell

orders until you have forced the price down one full point

to 39%. Again you stop and note that it took only 10,000

Exhibit 4—Profiting from Stock Market Psychology

shares to put the price down a point. During that time

other people sold 5,000 shares so that the total volume to

drive U.S. Steel down a point from 401% to 391% was only

15,000 shares, against 25,000 to put it up from 40 to 41.

Again you sit back and watch it, and you observe that the

price has now apparently stabilized at 395%. What con-

clusion could you draw?”

The conclusion would be obvious, says Chestnutt: The

stock is more likely to go down than up. The reasoning

goes like this: More shares were required to drive the

price up than were needed to drive it down, You and others

are left with an excess of 10,000 shares while the net price

has dropped %% point. So supply apparently exceeds de-

mand by 10,000 shares, and the stock is weak.

Fortunately, you don’t need to test the market with un-

limited capital. “Actual buyers and sellers are doing it

for you every day,” says Chestnutt. The daily volume

figures indicate where majority investment sentiment lies.

By recording daily price changes and volume figures over

a period of time, it’s possible to judge whether a trend is

likely to change in the near future.

Volume analysis is just one of the important elements

in Chestnutt’s sophisticated analytical method—which, he

hastens to point out, is certainly not infallible. “But we've

run up a pretty good batting average with it,” he says.

He can point to published figures for American Investors

Fund that show gains in per-share net asset value aver-

aging 19 per cent a year since the fund was started. And

he can point to a number of managed individual portfolios

that show gains of better than 30 per cent a year. “Of

course, we can buy on margin or sell short for our man-

aged accounts,” he explains.

AZT

Exhibit 4—Profiting from Stock Market Psychology

Those tactics are forbidden to mutual funds; and, as far

as Chestnutt is concerned, they should be forbidden to a

busy doctor—or any other investor—who can’t devote very

nearly full time to the market. “If you’re going to play

the speculator’s game,” he says, “you should have profes-

sional help. Get an investment counselor if your account

is large enough to make his fees worthwhile. And if it isn’t

that large you’d be wise not to play that game at all.”

As a man who manages millions for others, Chestnutt

has some thoughts on how those who use investment coun-

selors can do so to best advantage. “I prefer to be given

full discretion,” he says. “I might make a wrong move for

an account. But, obviously, ’m not going to make a move

that I think will be wrong—the better my clients’ accounts

look, the better I look. Still, some clients prefer tu tie your

hands.” Some specify that no margin trades or short sales

will be made for their accounts. Some rule out purchases

of liquor or tobacco company stocks, “That’s all right

with me,” Chestnutt says, “so long as they recognize that

imposing such restrictions on me might eut down their

gains. Most investors do. But, you know,” he grins, hook-

ing his thumbs Western-style under his belt, “some people

complain even if they’re hanged with a new rope.”

Petitioner’s Proposed Charges

“1. There is no basis for liability on the ground that

plaintiff’s account was worth less at the time it was sold

out on orders of the plaintiff’s husband than it was earlier.

“2. You are not to consider whether defendants did a

good job, or not so good, or a poor job.

“3. You are to remove from your minds all questions

except whether defendants acted fraudulently or deceit-

fully.

“4. To find for the plaintiff you must consider whether

defendants set out, on purpose, to mislead plaintiff. You

cannot consider whether defendants are as good, or better,

or worse in their skill in investments than you might be,

or someone else might be.

“You may believe that defendants are more optimistic

and have greater confidence in their abilities than you have,

or is warranted by the facts, but that is not ground for

finding any liability.

“9. To find any liability you must be convinced by a

preponderance of clear and convincing evidence that the

defendants made false representations of a material fact.

“By false, you must understand something untrue, and

that the defendants knew it was untrue when it was made.

“In addition you must find this falsity related to some-

thing material, which means important, and this was what

led or induced and caused the plaintiff to enter into the

advisory agreement.

“What type of statement, true or false, would lead this

plaintiff whose husband acted for her, to make the agree-

ment? You must understand that the husband acted for

his wife throughout, and his knowledge and experience

Petitioner's Proposed Charges

and skill must be considered as to what would lead him

to act.

“Since, when the agreement was made, the account was to

be managed in the future, in order to find for the plaintiff,

you must find that when the agreement was made, defen-

dants did not intend to carry it out—that is, the manage-

ment of the account—according to their best ability.

“7. Thus far, to decide in favor of plaintiff you will have

had to consider, and on the basis of the preponderance of

clear and convincing evidence, decided that defendants

deliberately and on purpose; first, hid something from the

plaintiff or told an untruth about something important or

material, and second, that plaintiff and her lawyer-husband

who had the experience of the world which is in the record

was fooled by it, and relied upon it.

“In short, to reach this point in your deliberations, you

must have decided after being persuaded on the basis of

clear and convincing evidence that:

(a) defendants concealed or misrepresented the true

facts, and did not intend to do as well as they could

with plaintiff's account and lied when they under-

took to manage the account, and also that

(b) Mr. Miller, the plaintiff’s husband and agent—as

a lawyer and executive of many years experience

with international oil companies—relied on the

misrepresentation and was in fact fooled or mis-

led by the false statement or statements.

“8. These are preliminary steps up to this point.

“You recall that it is undisputed that stock prices in gen-

eral went down from the time the management account

was opened.

A10

Petitioner's Proposed Charges

“You will also remember that plaintiff’s husband by cable

ordered the stocks sold.

“You must take these undisputed facts into account.

“Since these facts did occur, namely, falling stock prices

and the direct instructions of plaintiff’s husband to sell,

then, in order for you to find any injury or damage, you

must be satisfied that a specific stock in the account on the

day the account was ordered to be sold was previously

bought in bad faith, without regard to whether plaintiffs

thought it was a good purchase for the account.

“Thus, even though you may have decided that the mak-

ing of the agreement was induced by misleading state-

ments or concealment, to find any liability or injury you

must further find that a specific stock or specific stocks

held at the time the account was liquidated was bought

for some other reason than the best interests of the account.

“As to any stock held in the account at the time plaintiff's

husband ordered the account sold out and bought in bad

faith by the defendants, you may then fix the measure of

damage for each of such stocks at not more than the differ-

ence between the purchase price of such stock and the

price at which it was sold.”

All

District Judge’s Charges

The Court: Ladies and gentlemen, I am sure you will

agree that this has been a little bit out of the ordinary

garden variety case that juries usually hear. I thought

the case was interesting. At least we had a vicarious trip

to some exotic lands and a limited view of Wall Street by

some experts. And with due respect, I thought Mr. Miller’s

voice was not unlike the late Sidney Greenstreet’s.

But whether a case is interesting or not, I am sure you

know that the most important part of the ease is the part

that you people are going to play in a little while because

you are going to decide whether or not the Chestnutt Man-

agement Corporation owes any money to Mrs. Miller and,

if so, how much. And I suggest to you that you decide those

issues according to the oath that you took some weeks ago

when you told us through the Clerk that you would well

and truly try the issues joined and a true verdict give: and

I suggest further that you cannot do it according to your

oath if for one minute you let emotions like bias or prej-

udice or sympathy enter into your thinking or your de-

liberations. I know that if you do it according to your

oath, you will do it the way you resolve an important mat-

ter at home or in business, and if you do that, then justice

will be done and that is all that anybody asks.

Now, this is a civil lawsuit and in a civil lawsuit the

burden is on the plaintiff to prove every essential element

of her claim by a preponderance of the evidence. This test,

the preponderance of the evidence test applies to plaintiff’s

first claim under a Federal Statute which I will explain.

The test with regard to her second claim which is based

upon fraud is that fraud must be strictly proven and the

evidence must be clear, precise and unequivocal.

Al2

District Judge’s Charges

Now, if the plaintiff fails in the burden that is imposed

upon her, then your verdict must be for the defendant. If

you find on weighing all the evidence that the scales are

even balanced, then your verdict must also be for the

defendant because, obviously, the plaintiff has not per-

suaded you. But if vou find on weighing all the evidence

that the scales tip ever so slightly in favor of the plaintiff,

then, of course, she has persuaded you and she is entitled

to your verdict.

Now, the plaintiff, Mrs. Miller, sues two corporations,

one called the Chestnutt Management Corporation and the

other, Chestnutt Corporation. You are to concern yourself

only with the Chestnutt Management Corporation since

that is the company with which she made her investment

agreement.

Now, Mrs. Miller, as I indicated, has two claims which

she advances. Hither one or both, if proved, will entitle her

to the damages that she has proved.

The first claim is based upon a Federal Statute which is

called the Investment Advisers Act of 1940. That law pro-

vides in part it is unlawful for any investment adviser by

the use of the mails or any means of interstate commerce

to employ a device or scheme or artifice directly or in-

directly to defraud a client. These words include the pub-

lication or circulation of any advertisement which directly

or indirectly refers to a testimonial of any kind concerning

the investment adviser or concerning any advice analysis

or report or other service rendered by the investment ad-

viser.

It is Mrs. Miller’s claim that the defendant, Chestnutt

Management Corporation did employ such testimonials

and also the Company employed graphs and charts and

other formulas which implied that these graphs and charts

A138

District Judge’s Charges

and formulas could be used to determine what securities

to buy or sell and when to buy or sell without disclosing

prominently the limitations on such graphs or charts or

formulas, If you find that the defendant did these things,

you may find that such are in violation of the Investment

Advisers Act or if you find that any advertisements or

brochures or surveys of the defendant, Chestnutt Manage-

ment Corporation, which were conveyed by the mails con-

tained any untrue or false statement of a material fact, you

may find that this also is a violation of the Act.

All this is so because an investment adviser like the

Chestnutt Management Corporation occupies a position of

trust and as such is a fiduciary upon whom an affirmative

duty of the utmost good faith has been imposed and affirma-

tive objection to employ reasonable care to avoid mislead-

ing a client.

Now, the second claim that the plaintiff advances is that

the defendant, Chestnutt Management Corporation, made

false and misleading statements about the condition of the

securities market. In order to prevail on this count, the

plaintiff must prove by clear and precise and unequivocal

evidence, (1) that there was one or more false representa-

tions; (2) that the representation was of an existing fact;

(3) that it was fraudulently, recklessly or negligently made;

and (4) that the plaintiff relied on it and that she was

damaged thereby.

It is not necessary to prove that the maker of the state-

ment had a guilty intent. It is sufficient if the statement

was made without reasonable grounds or made recklessly.

If you find that the statements thut were made if, in

fact, they were made, were statements of opinions relative

to the conditions of the securities market, it doesn’t make

any difference because if the opinion was given by a pro-

Al4

District Judge’s Charges

fessional person whose services had been engarzed, the

opinion was false because of a lack of due care and a de-

fendunt would be liable.

On the other hand, I must tell you that merely because

plaintiff's account was worth less at the time it was sold

out on the order of the plaintiff’s husband than it was

earlier, it is not a basis for liability of the Chestnutt Man-

, agement Corporation. The question is not whether Chest-

~ nutt Management Corporation did a good job or not so good

or a poor job. If you find liability, you must be convinced

with reference to the alleged statutory violation that is

the first claim—you must be convinced with regard to the

alleged statutory violation, the first claim, by a fair pre-

ponderance of the evidence that the defendant employed a

scheme or artifice or device to defraud a client.

With reference to the second claim, namely, that the

defendant made false representations of a material fact,

that is something untrue, and the defendant knew it was

untrue when made and that it was material. On the second

claim, fraud, as I said, must be proved by clear and con-

vineing evidence and precise.

Remember too that the defendant corporation is not an

insurer of plaintiff’s account. It is an investment adviser

only.

Now, one of the issues in the case which is in every case

and that is the question of credibility. In short, who is

telling the truth? No one that I know of has come up with

a slide rule or a caliper to tell us how to measure it, but

everybody agrees that you do it by applying your own

God-given common sense and your experience at home and

in business. Did the witness have any reason for lying or

did he or she have a motive? Was he or she candid and

honest? Was he or she interested in the results of the trial?

Ald

District Judge’s Charges

And was his or her recollection as good as he or she said

it was? You determine all of these things based upon your

experience at home and in business and, of course, if you

find that a person testified falsely to a material fact, you

are at liberty to disregard that testimony or you can ac-

cept what you believe and disregard what you do not be-

lieve or you can, if you wish, disregard that witness’ entire

testimony.

Now, the question of the credibility of witnesses, of

course, is solely within your province. And the rules of

evidence do not ordinarily permit a witness to express his

opinion. An expert witness, however, is an exception to

this rule. A witness such as a doctor or an engineer or a

Wall Street broker who has by reason of education and

experience become expert in his profession or trade or

business may be permitted to state his opinion as to a

matter in which he is versed and which is material to the

case. He also may state the reasons for his opinion.

You should consider the opinion of the two experts that

we had. You can reject the expert’s opinion entirely if

you conclude that the reasons given in support of the

opinion are unsound. And, of course, if you find as I said

with regard to another witness, any other witness, that

the witness testified falsely to a material fact, you are at

liberty to disregard his testimony completely or accept

so much as you believe.

Now, if you are persuaded that the plaintiff has sus-

tained her burden of proof on either claim or on both

claims by the standards of proof that I have explained, then

you approach the question of damages. Damages are a

sum of money that will fairly and justly compensate the

plaintiff for the loss she has actually incurred.

A16

District Judge’s Charges

The mere fact that I have explained what damages are

does not mean that I believe that she is entitled to damages.

If she has not persuaded you, she is no more entitled to

the Chestnutt Management’s money than she would be to

your money or mine. However, if she has proved that she

is entitled to the damages, she is entitled to those damages

that she has proved.

And now I am sure you know that your verdict in favor

of the plaintiff or of the defendant must in either case be

unanimous. If you say that you find in favor of the defen-

dant, that is all you need to say. If you tell us that you

find in favor of the plaintiff, then you tell us what the

amount of money is by way of damages that will fairly and

justly compensate her.

I am sure you know that when you retire to the jury

room, you will elect one of your own members as a fore-

man or forelady and he or she will conduct your delibera-

tions and represent you when you return to Court with a

verdict.

And I must now talk to the lawyers for a minute or two

in your absence. So, please, excuse us.

(The following transpired in the courtroom)

The Court: Ladies and gentlemen, I was told that in

repeating the burden of proof that is on the plaintiff in

connection with the second or the fraud claim, I added a

word that I should not have added.

Fraud must be strictly proven and the evidence must

be clear, precise and unequivocal. I think I added the

word “convincing”. So I’m sorry.

You may retire now. Thanks.

Al7

District Judge’s Charges

(The jury left the courtroom at 2:10 p.m.)

(Court reconvened at 3:20 p.m.)

The Court: Will the foreman identify himself, please?

The Foreman: Roland Nimo.

The Court: Has the jury agreed upon a verdict?

The Foreman: Yes, sir. We have.

The Court: What is the verdict.

The Foreman: We find in favor of the plaintiff.

A18

District Court Denial of Motion n.0.v., ete.

In tHE Unirep Srates District Court

For tHe District or Connecticut

Civil Action No. B-477

Eveanor C. Mrier,

Plaintiff,

vs.

CHESTNUTT MANAGEMENT CoRPORATION and

CuestNuTt Corporation,

Defendants.

Defendant Chestnutt Management Corporation’s motion

for a new trial pursuant to Rule 99(a), Fed. R. Civ. P.,

and its motion for judgment notwithstanding the verdict

pursuant to Rule 50(b), Fed. R. Civ. P., are both denied.

/s/ Tuomas F. Murpny

Thomas F. Murphy

Senior United States District Judge

Dated: Waterbury, Ct., September 19, 1977.

A19

Court of Appeals Judgment

UNITED STATES COURT OF APPEALS

For tHe Seconp Circuit

77-7530

At a stated Term of the United States Court of

Appeals for the Second Circuit, held at the

United States Courthouse in the City of

New York, on the third day of April one

thousand nine hundred and seventy-eight.

Present:

Hon. Srerry R. Waterman,

Hon. Wiruuiam H. Timpers,

Hon. Extsworta A. Van GRaaFeILann,

Circuit Judges.

Plaintiff-A ppellee,

Vv.

CHESTNUTT MANAGEMENT CorPoRATION and

CHESTNUTT CORPORATION,

Defendants,

CHESTNUTT MANAGEMENT CorPORATION,

Defendani-A ppellant.

Appeal from the United States District Court for the

District of Connecticut.

This cause came on to be heard on the transcript of record

from the United States District Court for the District of

Connecticut, and was argued by counsel.

A20

Court of Appeals Judgment

ON Consiperation Wuereor, it is now hereby ordered,

adjudged, and decreed that the judgment of said District

Court be and it hereby is affirmed in accordance with the

Court’s oral opinion in open court with costs to be taxed

against the appellant.

A. Dantet Fusaro,

Clerk

By /s/ Artuur HELLER

Deputy Clerk

A2!]

Denial of Rehearing

UNITED STATES COURT OF APPEALS

For THE Seconp Crircurr

Docket No. 77-7530

At a Stated Term of the United States Court

of Appeals, in and for the Second Circuit,

held at the United States Court House, in

the City of New York, on the twenty-second

day of June, one thousand nine hundred and

seventy-eight.

Present:

Hon. Strerry R. WaterMan,

How. Wiuuiam H. Trmpers,

Hon. Exitswortn A. Van GRAArFeILAND,

Circuit Judges.

Plaintiff-A ppellee,

—against—

CHESTNUTT MANAGEMENT CoRPORATION and

CHEstTNUTT CoRPORATION,

Defendants,

CuestNutTt MaNnaGEMENT CorporaTION,

Defendant-A ppellant.

A22

Denial of Rehearing

A petition for a rehearing having been filed herein by

counsel for the defendant-appellant,

Upon consideration thereof, it is

Ordered that said petition be and hereby is Denied.

/s/ A. Dante, Fusaro

A. Danie, Fvusaro

Clerk

A23

Panel Decision Dictated from Bench

[The following statement does not constitute a formal

opinion of the Court and is not to be reported. It shall

not be cited or otherwise used in unrelated cases.]

UNITED STATES COURT OF APPEALS

For tue Seconp Circuit

Docket No. 77-7530

Eveanor C, MILuer,

Plaintiff-Appellee,

CHESTNUTT MANAGEMENT CorpoRATION and

CuHEstNUTT CoRPoRATION,

Defendants,

CuestNuttT ManaGEMeNT CorporaTION,

Defendant-Appellant.

Before:

Srerry R. Waterman, Wiuiam H. Timpers and

EiiswortH A, VAN GRAAFEILAND,

Circuit Judges.

New York, April 3, 1978

Statement by the Court at disposition of appeal

in open court.

JupGE TIMBERS:

I assume counsel are aware of the practice in this Court

increasingly followed by us to rule from the bench in a

A24

Panel Decision Dictated from Bench

case where we consider it appropriate to do so. We are

going to do so here. Our disposition of the case from the

bench does not reflect in any way adversely upon argu-

ments or briefs of counsel; on the contrary, just the oppo-

site. Counsel have so aided us in their briefs and oral

arguments as to enable us to rule from the bench.

The short of it is, we affirm. Briefly the following are

the grounds of our affirmance. In this action, authorized

under the law of this Circuit by Abrahamson v. Fleschner,

568 F.2d 862 (2 Cir. 1977), the case was submitted to the

jury on two claims, First, that defendant Chestnutt had

violated Section 206 of the Investment Advisers Act of

1940 and Rule 206(4)-1 promulgated thereunder, Secondly,

that defendant Chestnutt had committed common law fraud.

The jury returned a general verdict in amount of $53,000

in plaintiffs favor on October 3, 1975. Chestnutt moved

for judgment n.0o.v. or in the alternative for a new trial.

The district court denied the motions on September 20,

1977. Chestnutt appeals from the order denying those

motions, but not from the judgment itself.

With respect to the claim of insufficiency of the evi-

dence, as indicated or reflected by the statements from the

bench during the course of the argument, particularly by

my two colleagues, Judge Waterman and Judge Van

Graafeiland, we hold that plaintiff presented sufficient

evidence from which the jury could have found that Rule

206(4)-1(a)(3) was violated by Chestnutt’s representa-

tions about its systems of graphs and tables and “Trend

Oscillographs”, without adequate disclosure of their limi-

tations. Moreover, Chestnutt’s intentional failure to dis-

close its prior performance in bear markets we hold con-

stituted a sufficiently material non-disclosure to support a

jury finding of common law fraud.

A25

Panel Decision Dictated from Bench”

With respect to the charge—on this aspect of our rul-

ing we assume for present purposes that objections fo the

charge were properly preserved in the district court—the

only matter which we believe merits brief comment is

Judge Murphy’s use of the word “negligently”, in the con-

text of his charge, disjunctively with the words “fraudu-

lently” and “recklessly” as an element of common law

fraud. After careful examination of the charge, in the

context of the entire record, however, we are satisfied that

this does not require reversal, for the reason that, where

one makes a negligent representation in violation of a duty

of care, scienter, if indeed it is required, is imputed. In

support of that we find the following cases to be control-

ling: Isen v. Calvert Corp., 379 F.2d 126, 129-30 (D.C.

Cir. 1967), cert. denied, 389 U.S. 961 (1968); Stein v.

Treger, 182 F.2d 696, 699 (D.C. Cir. 1950); Anderson vy.

Tway, 143 F.2d 95, 99 (6 Cir. 1944); Shane v. Hoffman,

227 Pa. Super. Ct. 176, 181-82, 324 A.2d 532, 536 (1974).

Those are the reasons briefly stated, among others, upon

which we rely in affirming from the bench the judgment

of the district court.

Thank you very much.

JupGE Van GRAAFEILAND:

I would like to note my reservation to the last portion

of the opinion just given; that is the part which equates

negligent misrepresentation with scienter. I would prefer

to base my affirmance on the appellant’s failure to take

proper exception to the testimony and to the charge.

JupGE TIMBERS:

The record will note Judge Van Graafeiland’s statement.

A26

Statutory Appendix

Text or Statutes INvo.vep

Section 206 of the Investment Advisers Act of 1940, 54

Stat. 852, as amended, 74 Stat. 887, 15 U.S.C. § 80b-6,

provides:

Proursitep TRANSACTIONS By

RecisteRED INVESTMENT ADVISERS

Sec. 206. It shall be unlawful for any investment

adviser, by use of the mails or any means or instru-

mentality of interstate commerce, directly or indi-

rectly—

(1) to employ any device, scheme, or artifice to

defraud any client or prospective client ;

(2) to engage in any transaction, practice, or

course of business which operates as a fraud or

deceit upon any client or prospective client;

(3) acting as principal for his own account,

knowingly to sell any security to or purchase any

security from a client, or acting as broker for a

person other than such client, knowingly to effect

any sale or purchase of any security for the account

of such client, without disclosing to such client in

writing before the completion of such transaction

the capacity in which he is acting and obtaining

the consent of the client to such transaction. The

prohibitions of this paragraph (3) shall not apply

to any transaction with a customer of a broker or

dealer if such broker or dealer is not acting as an

investment adviser in relation to such transaction ;

(4) to engage in any act, practice, or course of

business which is fraudulent, deceptive, or manipu-

A27

Statutory Appendix

lative. The Commission shall, for the purposes of

this paragraph (4) by rules and regulations define,

and prescribe means reasonably designed to pre-

vent, such acts, practices, and courses of business

as are fraudulent, deceptive, or manipulative.

Section 214 of the Investment Advisers Act of 1940,

54 Stat. 856, 15 U.S.C. § 80b-14, provides:

JURISDICTION OF OFFENSES AND Suits

Sec. 214. The district courts of the United States

and the United States courts of any Territory or other

place subject to the jurisdiction of the United States

shall have jurisdiction of violations of this title or

the rules, regulations, or orders thereunder, and, con-

currently with State and Territorial courts, of all suits

in equity to enjoin any violation of this title or the

rules, regulations, or orders thereunder. Any criminal

proceeding may be brought in the district wherein

any act or transaction constituting the violation oc-

curred. Any suit or action to enjoin any violation of

this title or rules, regulations, or orders thereunder,

may be brought in any such district or in the district

wherein the defendant is an inhabitant or transacts

business, and process in such cases may be served in

any district of which the defendant is an inhabitant

or transacts business or wherever the defendant may

be found. Judgments and decrees so rendered shall

be subject to review as provided in sections 128 and

240 of the Judicial Code, as amended, and section 7,

as amended, of the Act entitled “An Act to establish

a court of appeals for the District of Columbia”,

approved February 9, 1893. No costs shall be as-

A28

Statutory Appendia

sessed for or against the Commission in any pro-

ceeding under this title brought by or against the

Commission in any court.

PENALTIES

Sec. 217. Any person who willfully violates any pro-

visions of this title, or any rule, regulation, or order

promulgated by the Commission under authority there-

of, shall, upon conviction, be fined not more than

$10,000, imprisoned for not more than five years,

or both.

Ree. § 275.206(4)-1. (a) It shall constitute a fraudulent,

deceptive, or manipulative act, practice or course of busi-

ness within the meaning of Section 206(4) of the Act, for

any investment adviser, directly or indirectly, to publish,

circulate or distribute any advertis:»ent:

(1) which refers, directly or indirectly, to any testi-

monial of any kind concerning the investment adviser or

concerning any advice, analysis, report or other service

rendered by such investment adviser; or

(2) which refers, directly or indirectly, to past specific

recommendations of such investment adviser which were

or would have been profitable to any person; provided,

however, that this shall not prohibit an advertisement

which sets out or offers to furnish a list of all recommen-

dations made by such investment adviser within the im-

mediately preceding period of not less than one year if

such advertisement, and such list if it is furnished sep-

arately: (A) state the name of each such security recom-

mended, the date and nature of each such recommendation

(e.g., whether to buy, sell or hold), the market price at

A29

Statutory Appendix

that time, the price at which the recommendation was to

be acted upon, and the market price of each such security

as of the most recent practicable date, and (B) contain

the following cautionary \egend on the first page thereof

in print or type as large as the largest print or type used

in the body or text thereof: “it should not be assumed

that recommendations made in the future will be profitable

or will equal the performance of the securities in this list”;

(3) which represents, directly or indirectly, that any

graph, chart, formula or other device being offered can

in and of itself be used to determine which securities to

buy or sell, or when to buy or sell them; or which repre-

sents, directly or indirectly, that any graph, chart, formula

or other device being offered will assist any person in

making his own decisions as to which securities to buy or

sell, or when to buy or sell them, without prominently dis-

closing in such advertisement the limitations thereof and

the difficulties with respect to its use; or

(4) which contains any statement to the effect that any

report, analysis, or other service will be furnished free

or without charge, unless such report, analysis or other

service actually is or will be furnished entirely free and

without any condition or obligation, directly or indirectly ;

(5) which contains any untrue statement of a material

fact, or which is otherwise false or misleading.

(b) For the purposes of this rule the term “advertise-

ment” shall include any notice, circular, letter or other

written communication addressed to more than one per-

son, or any notice or other announcement in any publica-

A30

Statutory Appendia

tion or by radio or television, which offers (1) any analy-

sis, report, or publication concerning securities, or which

is to be used in making any determination as to when to

buy or sell any security, or which security to buy or sell,

(2) any graph, chart, formula or other device to be

used in making any determination as to when to buy or

sell any security, or which security to buy or sell, or (3)

any other investment advisory service with regard to se-

curities.

[Adopted in Release No. TA-121, January 1, 1962,

26 F. R. 10549.]

pans

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.