Petition — Wood Walker & Co. v. Marbury Management, Inc.
Supreme Court brief1980
Ask Donna
What actually matters in this document.
Text
Ze 3 4 2 Suoreme es 5"
SEP2 1980
IN THE
Supreme Court of the United bette SIR. CLERK |
OCTOBER TERM, 1980
No.
WOOD WALKER & CO.,
Petitioner,
Vv.
MARBURY MANAGEMENT INC. and HARRY BADER,
Respondent.
On Writ or CERTIORARI TO THE Unitep STATES
Court oF APPEALS FOR THE Sseconp CrRcultT
eS
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
as
Cuartes A. Crocco, JR.
Lunney & Crocco
641 Lexington Avenue
New York, New York 10022
(212) 355-0800
Attorneys for Petitioner
Wood Walker & Co.
IN THE
Supreme Court of the United States
October Term, 1980
No.
s
vv
Woop Waker & Co.,
Petitioner,
4
V.
Marsury ManaGeMent Inc. and Harry Baber,
Respondent.
On Writ oF CERTIORARI TO THE Unitrep STATES
Court oF APPEALS FOR THE Sseconp Circuit
a
7
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Questions Presented
1. Is the common law concept of respondeat superior read
into the Securities Exchange Act of 1934 and specifically
into §10(b), (15 U.S.C. § 78j(b)) to hold an employer ab-
solutely liable without scienter for the acts of its employees?
2. If a collateral misstatement is made prior to the pur-
chase of a security at its fair market value and the security
thereafter declines in price solely due to market forces, are
damages for such decline recoverable by the purchaser?
Both questions were answered in the affirmative by the
Court of Appeals for the Second Circuit.
TABLE OF CONTENTS
Questions Presented .....--+--+eeereerrerreeeeees
Table of Authorities ........--.e eee eeeeeeeeeeees
Official and Unofficial Reports of Case Below .....
Jurisdiction ........cecccccccecccccecsssccrecces
Statutes Involved .........eee eee eree ee ereeenereee
Statement of the Case .....----ceeeeeceeereeeees
Reasons for Granting the Writ ......----.+eeeee:
I.
II.
Ill.
IV.
The Second Circuit Decision Is Patently In-
consistent With the Holding of the Supreme
Court as to Scienter in 10(b) Actions .......
There Is a Conflict Among the Circuits as to
Whether Respondeat Superior Can Be a Basis
for Liability Under Section 10(b) of the Se-
curities Exchange Act of 1934 and the In-
stant Second Circuit Decision Overturns Its
7 ee ee
The Court Below Applied a Measure of Dama-
ges That Flagrantly and Improperly Shifts
the Losses Away From the Customer ......
The Second Cireuit’s Opinion as to the Rele-
vance of Being a “Not Registered” Registered
Representative Flatly Contradicts the Holding
of the Ninth Circuit .........-.ceceeesscoes
Conclusion ......:ceesceunecaeeeweuceuane es eens
6
11
14
15
il
Appendix
Appendix A—Decision of the United States Court
of Appeals, Entered April 21, 1980 ............
Appendix B—Opinion of the United States Dis-
trict Court for the Southern District of New
York, Entered April 25, 1979 ............+005-
TABLE OF AUTHORITIES
Cases
Aaron v. Securities and Exchange Commission, Fed.
ees Bin Bee ABER CIB) ics ccs cciacgperncces
Abel v. Paterno, 245 App. Div. 285, 281 N.Y.S. 58
EG AIOE, ROOD Cio ss bn Swe eKede sen dene secwes
Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir.
TE cekcxdaals cde teenbshss rasa ewes sh canes
Affiliated Ute Citizens v. United States, 406 U.S. 128
CONE ailie's kd daen Bee daes Ub pene RONe ward a We Rane
Armstrong, Jones & Co. v. SEC, 421 F.2d 359 (6th
Cir. 1970), cert. denied, 398 U.S. 958 (1970) ......
Christoffel v. E. F. Hutton & Co., Inc., 58s F.2d 665
CR I MR ei awiihsicbeasedesbdbenssnehusve
Darrel v. Goodson, CCH Fed. See. L. Rep. { 97,349
i SD kkk ae dks boas tan ixksrabesanens
Edwards & Hanley v. Wells Fargo Securities Clear-
ance Corp., 458 F. Supp. 110 (S.D.N.Y. 1978) ....
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ..
Fey v. Walston & Co., Inc., 493 F.2d 1036 (7th Cir.
| ren Vic bie “eeeesien Nie wed Chu een «eee
Gordon v. Burr, 506 F.2d 1080 (2d Cir. 1974) .......
Hayden v. Walston & Co., 528 F.2d 901 (9th Cir.
SEAS ALY NEAT De NAGE TERE
PAGE
Al
A40
12
13
14
iii
Hotaling v. A. B. Leach & Co., 247 N.Y. 84 (1928) ..
LIT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980) ....-.
Johns Hopkins University v. Hutton, 422 F.2d 1124
(4th Cir. 1970), cert. denied, 416 U.S. 916 (1974)
Kamen & Co. v. Paul H. Aschkar & Co., 382 F.2d 684
(Oth Cir. 1967) ......eceeereceecrseecencenceees
Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir. 1973)
(em DANC) ..ccsccccereccccvecreesceereteaeeers
Mihara v. Dean Witter & Co., Inc., 619 F.2d 814 (9th
Cie, 10BD) ..cvccccvccccsccesccusececescsaccess
Myezel v. Fields, 386 F.2d 718 (8th Cir. 1967), cert.
denied, 390 U.S. 951 (1970) ......ee ere eeeeeeees
Richardson v. MacArthur, 451 F.2d 35 (10th Cir.
WOTED. funeccdasicanccdsersperdeyege a sens cee es
Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (3rd
Cae, TOTBY ca can cctcencer crn cans strectscecssves
SEC v. Lum’s, Inc., 365 F. Supp. 1046 (S.D.N.Y. 1973)
Superintendent of Insurance v. Banker’s Life and
Casualty Co., 404 U.S. 6 (L971) «ee eee eee eee ees
Woodward v. Metro Bank of Dallas, 522 F.2d 84 (5th
Civ, 1975) occ cccvcnccccvecsncccescevccscnesces
Statutes
Judicial Code
98 U.S.C. §1254(1) occ cece eee eee ee en eens
Commerce and Trade
UW UGC. § 78) wc ccc ccc crn ecccecscrveccesenes
15 UG... $ TBC cc ccccccccccccsccsccceccascoses
Secondary Materials
Prosser, Law of Torts (4th Ed.) ...-..-.seeeeeeees
PAGE
6
13
13
Official and Unofficial Reports of Case Below
The Second Cireuit Court of Appeals decision dated
April 21, 1980 is reported in CCH Fed. Sec. L. Rep. | 97 youd
[1980 transfer binder]. (Appendix, Exhibit A). The Dis-
trict Court opinion (Appendix, Exhibit B) is reported at
470 F. Supp. 509 (1979). The Second Cireuit denia!s of -
rehearing and of the petition for rehearing en banc dated
and entered June 4, 1980 are unreported.
|
_——— a
Jurisdiction
The judgment of the Court of Appeals is dated and was
filed April 21, 1980. The denial of the petition for rehear-
ing en banc was dated and filed June 4, 1980. J urisdiction
of the court is invoked under 28 U.S.C. § 1254(1).
Statutes Involved
15 U.S.C. § 78j—Manipulative and deceptive devices
It shall be unlawful for any person, directly or in-
directly, by the use of any means or instrumentality
of interstate commerce or of the mails, or of any fa-
cility of any national securities exchange—
(a) To effect a short sale, or to use or employ any
stop-loss order in connection with the purchase or sale,
of any security registered on a national securities ex-
change, in contravention of such rules and regulations
as the Commission may prescribe as necessary or ap-
propriate in the public interest or for the protection
of investors.
(b) To use or employ, in connection with the pur-
chase or sale of any security registered on a national
securities exchange or any security not so registered,
any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Com-
mission may prescribe as necessary or appropriate
in the public interest or for the protection of investors.
15 U.S.C. § 78t—Liabilities of controlling persons
(a) Every person who, directly or indirectly, con-
trols any person liable under any provision of this
chapter or of any rule or regulation thereunder shall
also be liable jointly and severally with and to the
same extent as such controlled person to any person
to whom such controlled person is liable, unless the
controlling person acted in good faith and did not
directly or indirectly induce the act or acts constituting
the violation or cause of action.
Statement of the Case
Marbury Management Inc. and Harry Bader (plaintiffs
below) were customers of the brokerage house Wood
Walker & Co. (petitioner herein), opeining accounts in the
summer of 1968. In September 1968 a personal friend of
plaintiffs, co-defendant Alfred Kohn, joined Wood Walker
as a registered representative-trainee. While the record
below is not altogether clear (the action was dismissed as
to Wood Walker at the close of plaintiffs’ case), plaintiffs
apparently dealt principally with Alfred Kohn in their
buying of stock at Wood Walker. Kohn who was not reg-
istered, was said to hold himself out as being a “portfolio
management specialist” or “security analyst”.*
Plaintiffs alleged that they took investment advice from
Kohn, implying that they listened with particular attentive-
ness because he claimed to be a “portfolio management
specialist”.
* A title that did not exist at Wood Walker nor one recognized by
any regulatory agency.
Plaintiffs’ principal argument was that they bought stocks
based on misleading and erroneous information from Kohn
concerning the stocks. This argument was rejected by the
trial court and the Court of Appeals. The secondary allega-
tion was that because Kohn printed up business cards
identifying him as a “Portfolio Management Specialist-
Security Analyst”, and so described himself, he clothed
his advice with an aura of expertise that helped sway
plaintiffs’ decisions to buy the stocks.
Though both lower courts totally absolved Kohn of mak-
ing any statements concerning the stocks that violated
§10(b), they held that his suggestions of expertise in
selecting stocks when he was not a registered representa-
tive equalled a violation of 410(b) and that two of the
plaintiffs could recover for the drop in price of the pur-
chased securities even though the drop was totally due to
free market factors.
The Court of Appeals went on to hold (reversing the
trial court) that Wood Walker violated ¢10(b) solely by
reason of the common law doctrine of respondeat superior,
in effect a doctrine of absolute liability.
Reasons for Granting the Writ
I.
The Second Circuit Decision Is Patently Inconsistent
With the Holding of the Supreme Court as to Scienter
in 10(b) Actions.
This court has clearly held that in order to violate Rule
10(b) of the Securities Exchange Act of 1934 one must
act with scienter. Ernst & Ernst v. Hochfelder, 425 US.
185 (1976).
Nonetheless, the court below held that an entity whose
only involvement was that it was the wrongdoer’s employer
has no defense and is absolutely liable for any wrongdoing.
Ernst & Ernst v. Hochfelder, supra, clearly states in foot-
note 28 that each provision of the Securities Exchange Act
of 1934 (except 16 (b)) requires some affirmative wrong-
doing.
Recently in Aaron v. Securities and Exchange Commis-
sion, Fed. Sec. L. Rep. 97,511 (1980), this Court said:
“Tt was the view of the Court that the terms ‘manipu-
lative’, ‘device’ and ‘contrivance’—whether given
their commonly accepted meaning or read as terms of
art—quite clearly evinced a congressional intent to
proscrive only ‘knowing or intentional misconduct’,
[Citing Ernst & Ernst]. This meaning, in fact, was
thought to be so unambiguous as to suggest that
‘further inquiry may be unnecessary’.” (p. 97, 681).
Marbury is a 10(b) case yet the Second Circuit has held
that the brokerage house is liable without intent. This
cracks the cornerstone of this Court’s interpretation of
10(b). It is wrong.
The 1934 Act is fundamentally a criminal act and in-
tentionality is indispensable.
This Court said in the Aaron case,
“In our view, the rationale of Hochfelder ineluctably
leads to the conclusion that scienter is an element of
a violation of §10(b) and Rule 10b-5, regardless of
the identity of the plaintiff or the nature of the relief
sought.” (p. 97, 681).
Judge Friendly, writing for a unanimous court in J/T v.
Cornfeld, 619 F.2d 909 (2d Cir. 1980), cited the lower court
opinion in this case approvingly, and in light of Ernst &
Ernst v. Hochfelder reaffirmed Lanza v. Drexel & Co., 479
F.2d 1277 (2d Cir. 1973) (en banc), for the proposition that
scienter is an indispensable part of a violation of Section
10(b). Although the Court was addressing itself to liability
under an aiding and abetting theory, the clear inference
was that scienter was necessary to find liability. Accord-
ingly, it is incongruous to find liability on the part of Wood
Walker where the court below found that Wood Walker
had no “... wrongful participation ... nor a legally equiva-
lent recklessness”. (App. A4).®
Even against someone who aids and abets the wrongdoer
there must be proof of “. . . their conscious and intentional
complicity . . .” (App. All).
One whose liability arises only out of being a controlling
person is allowed the defense that he “. . . acted in good
faith and did not directly or indirectly induce the act or acts
constituting the violation or cause of action.” (Securities
Exchange Act of 1934, Section 20(a)).
Section 20(a), which was aimed at dummy corporations
or nondisclosed parties, gives to even those who hide their
control both a “good faith” and “did not induce” defense.
Yet the majority in the lower court would ascribe to a dis-
closed principal operating openly and publicly no com-
parable defense. This is untenable.
* References are to Appendix.
There Is a Conflict Among the Circuits as to Whether
Respondeat Superior Can Be a Basis for Liability
Under Section 10(b) of the Securities Exchange Act
of 1934 and the Instant Second Circuit Decision Over-
turns Its Own Rule.
Certain circuits have held there is no respondeat superior
liability under Section 10(b), others have not decided the
issue or made equivocal holdings, while still other circuits
have held that there is respondeat superior liability under
Section 10(b).
In a 10(b) action reviewed by the Third Circuit, Rochez
Brothers, Inc. v. Rhoades, 527 F.2d 880 (3rd Cir. 1975), an
executive vice president of a corporation sold 50 percent
of the stock of the corporation to its president. The court
held that the corporation was not liable for its president’s
activities in purchasing the stock. Judge Stanley stated:
“We are of the opinion that, after reviewing the
legislative history of the 1934 Act and the pertinent
cases, the principles of agency, i.e., respondeat su-
perior, are inappropriate to impose secondary liabil-
ity in a securities violation case,” Jd. at 884.
The Ninth Cireuit also does not apply respondeat su-
perior to Section 10(b). In Christoffel v. E. F. Hutton &
Co., Inc., 588 F.2d 665 (9th Cir. 1978), a brokerage house
was held to be not liable for losses sustained by the estate
of an incompetent due to the brokerage firm’s former ac-
count executive who had dissipated and misappropriated
assets of the estate. Judge Hufstedler stated:
“The district court correctly granted summary judg-
ment against Christoffel [the plaintiff] on his com-
mon law theory because it is the established law of
this circuit that section 20(a) supplants vicarious
liability of an employer for the acts of an employee
applying the respondeat superior doctrine,” Id. at
667.
A brokerage house was held not to be liable for the
“churning” by its account executive of a customer’s securi-
ties in Mihara v. Dean Witter & Co., Inc., 619 F.2d 814 (9th
Cir. 1980). Judge Campbell held:
“The contention that the Court incorrectly instructed
the jury regarding the applicability of respondeat
superior to a 10b-5 claim is also unsupported by the
record. The Court gave the respondeat superior in-
struction in connection with the fiduciary duty claim,
and limited it to that claim,” Jd. at 825.
The Tenth Circuit in Richardson v. MacArthur, 451 F.2d
35 (10th Cir. 1971), imposed Section 20(a) liability on an
employing corporation i. a Rule 10b-5 case, stating that
“Liability under § 20 (a) is not restricted by principles of
agency or conspiracy,” Jd. at 41. However, the court did
not analyze the facts with respect to respondeat superior.
In a footnote on respondeat superior, the Fifth Circuit
noted that the Second Circuit had not applied the concept
at that time, and the Fifth Circuit left the question un-
answered, Woodward v. Metro Bank of Dallas, 522 F.2d 84
(5th Cir. 1975).
“Apparently, the Second Circuit takes the view that
section 20 (a) of the Act, 15 U.S.C. §78t (1970),
which deals with ‘controlling persons,’ is the exclusive
way to hold someone secondarily liable. See Gordon
v. Burr, 8.D.N.Y. 1973, 366 F, Supp. 156, aff’d 2 Cir.
1974, 506 F.2d 1080. While this may be an unneces-
sarily restrictive approach to the securities acts, it
is a question that we need not resolve here,” Id. at
94, fn. 22.
The Sixth Circuit has not applied respondeat superior in
a civil context but only (as had the Second Circuit) applied
it in limited areas of SEC enforcement proceedings, Arm-
strong, Jones & Co. v. SEC, 421 F.2d 359 (6th Cir. 1970),
cert. denied, 398 U.S. 958 (1970).
Three circuits have applied respondeat superior: the
Fourth Circuit in Johns Hopkins University v. Hutton, 422
F.2d 1124 (4th Cir. 1970), cert. denied, 416 U.S. 916 (1974),
the Seventh Circuit in Fey v. Walston & Co., Inc., 493 F.2d
1036 (7th Cir. 1973), and the Eighth Cireuit in Myzel v.
Fields, 386 F.2d 718 (8th Cir. 1967), cert. denied, 390 U.S.
951 (1970). This conflict among the circuits requires the
attention of the Supreme Court.
Finally, until the decision in the instant case it was per-
fectly clear that the Second Circuit had held that, except in
a very limited area of SEC enforcement proceedings, there
was no liability under Section 10(b) of the Securities Ex-
change Act of 1934 purely on the basis of respondeat
superior.
As a matter of fact the lower court majority had to devote
multiple paragraphs to ‘‘ey »lain’’ how other circuits have
‘‘mistakenly” believed that the Second Circuit did not im-
pose respondeat superior liability.
The simple truth is that the Second Circuit in an un-
broken string of cases had declined to impose civil liability
based on respondeat superior and this divided panel over-
ruled existing law and promulgated new law.
The Second Circuit in Lanza v. Drexel € Co., 479 F.2d
1277 (1973) (en banc) per Judge Moore held that before
secondary liability would attach, some culpability on the
part of the controlling person be found. The Court ap-
provingly cited Kamen €& Co. v. Paul H. Aschkar & Co., 382
F.2d 684 (9th Cir. 1967), a case almost identical to the
present one; in Kamen the Court found that broker-dealer’s
liability was based on § 20(a), and that scienter must be
proved.
Shortly after Lanza, SEC v. Lum’s Inc., 365 F. Supp. 1046
(S.D.N.Y. 1973), citing Kamen and Lanza, held decisively
and clearly that a broker-dealer could not be held liable
even in enforcement proceedings under respondeat supe-
rior:
‘*To hold Lehman liable on a theory of respondeat
superior would also do violence to the legislative
intent underlying the Act.” 365 F. Supp. at 1063.
The same court went on to say:
‘*Insistence upon a standard or respondeat superior
would result in the imposition of absolute liability
upon broker-dealers in this context.’’ 365 F. Supp.
at 1064.
That court concluded that a standard of absolute liability
vn the part of broker-dealers in the securities industry for
the acts of its salesmen would be
“. . , to read a non-existent insurer’s liability into
the statute for broker-dealers.” 365 F. Supp. at 1064.
Also in Gordon v. Burr, 366 F. Supp. 156 (S.D.N.Y. 1973),
Judge Bauman disavowed the concept of respondeat super-
ior liability stating:
‘‘This is not, however, the view of the majority of
circuits, as Judge Tyler has recently pointed out in
S.E.C. v. Lums, Inc., 365 F. Supp. 1046, CCH Fed.
Sec. Law Rep. {| 94, 134 (S.D.N.Y. 1973). He reads
both the majority and the dissenting opinions in
Lanza v. Drexel & Co., supra, to suggest that § 20(a),
10
and not respondeat superior is the appropriate
standard for determining secondary liability under
the Securities Exchange Act. Judge Judd’s opinion
in Moerman v. Zipco., Inc. supra, which was affirmed
by the Court of Appeals, also supports the exclu-
sivity of §20(a). See also, Moscarelli v. Stamm,
288 F. Supp. 453 (E.D.N.Y. 1968) (emphasis sup-
plied). 506 F. Supp. at 168.
The Second Circuit affirmed, Gordon v. Burr, 506 F.2d
1080 (1974), holding:
‘‘Tf P.A.W. is also liable to Gordon, it must be de-
rivatively—as a “controlling person” of Lord, within
the meaning of § 20(a) of the 1934 Act.’’ 506 F.2d
at 1085.
The majority opinion below incorrectly states that the
Second Circuit has previously found that respondeat
superior applies. The majority misread those cases. An
example is their statement that:
‘‘In Edwards & Hanly v. Wells Fargo Securities
Clearance Corp., 458 F. Supp. 1110 (S.D.N.Y. 1978),
the court held that a defendant was liable for its
president’s Rule 10b-5 frauds both on the respondeat
superior and on the Section 20(a) theories .. .”
(App. A18).
However, the trial judge* in Edwards ¢ Hamnly stated
that because he found liability under § 20(a) he did not
have to decide whether respondeat superior alone would
provide a sufficient basis for damages:
‘‘On the facts of the case, this court need not resolve
‘the rather thorny controlling person-respondeat
superior issue’.” 458 F’. Supp. at 1125.
* Lee P. Gagliardi, also the trial judge in the instant case.
ee ee we eg ee ~ ern reer tag ae ee
11
The Court Below Applied a Measure of Damages
That Flagrantly and Improperly Shifts the Losses
Away From the Customer.
Judge Meskill, in his dissent herein, clearly and lucidly
set forth the argument rebutting the majority’s ca. sation
theory of damages. We respectfully refer the Court to his
opinion.
Judge Meskill points out that the majority has opened up
a potentially limitless expansion of § 10(b) liability (App.
A29). Any factor anywhere in the universe that starts a
chain of events can now be deemed to cause the ultimate
event. As Judge Meskill so appropriately quotes Judge
Weinfeld: “This is causation run riot. (App. A35).
Essentially, the majority held that
(a) if a valid recommendation is made, and
(b) there is reliance, and
(c) the advisor did not have the credentials claimed,
then all loss thereafter is the responsibility of the advisor.
Both the trial court and the Court of Appeals held that
because plaintiffs did not learn that Kohn was neither a
“portfolio management specialist” nor “security analyst”
until January 1970* and continued to hold their stocks
despite price declines, the loss falls on the defendants.
* A curious holding is that Kohn left Wood Walker in early 1969
and plaintiffs were paying no attention to Kohn after March of 1969.
From Marbury’s Trial Testimony :
(footnote continued on following page)
12
The majority implies that plaintiffs continued to hold
their stock based on the advice of Kohn and misstatements
by Kohn as to his status, which reinforced their belief that
his information was accurate. In fact, Judge Gagliardi did
not make such a finding. See dissent of Judge Meskill
(App. A39).
Even if he had made such a finding, the mere retention
of a security due to a materially false representation would
not state a claim under Rule 10b-5. Darrell v. Goodson,
CCH Fed. Sec. L. Rep. 997,349 (S.D.N.Y. 1980), citing
Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977).
The causality adopted by the Second Circuit is effectively
a “but for” test, as there is no suggestion that the stock
declined in value because of anything Kohn did. Rather, it
declined after what Kohn did. The loss, nonetheless, is
attributed to him and to his employer, Wood Walker.
The anomalous revival of “but for” causation in the
context of the 10(b) actions absolutely flies in the face of
(footnote continued from preceding page)
Q. When was the last time you spoke with Mr. Kohn at
the number which you said was Wood Walker’s? A. I don't
remember that at all.
. No idea? A. No, no idea.
. Let me try it another way. According to your charge,
the last purchase you made was March 26, 1969. Clearly at
that point you were still listening to Mr. Kohn as you were
making no independent investigation and buying stocks solel
on his comments to you. What made you stop on March 26,
1969? A. Because we weren’t getting too successful results
with the stocks that he recommended,
Q. You made a concious decision not to use Mr. Kohn any
longer or for anyone to talk to? A. When you do business
with someone that you don’t have too much success—
Q. You made a conscious decision at that point of no
further dealings with Mr. Kohn? A. You are asking me
whether I remember after 8 years?
Q. I am asking you to recall as best you can. A. I would
say yes.
(Trial Transcript pp. 44/45)
13
this Court’s rulings in Affiliated Ute Citizens v. United
States, 406 U.S. 128 (1972) and Superintendent of Insur-
ance v. Bankers’ Life and Casualty Co., 404 U.S. 6 (1971).
It is as if someone asked directions of a person imper-
sonating a policeman, was given proper directions and
along his journey was struck by a car. The majority would
hold that an action would lie against the “false policeman”,
The majority lose sight of their own affirmance of the
trial court’s finding that Kohn’s alleged recommendations
were not wrongful. Not one of the ancient cases cited by
the majority allowed recovery based on a misdescribed
adviser.
If one wants a battle of ancient New York cases, Judge
Meskill’s dissent cites equally ancient but correct law that
“but for” causality is not the New York rule. See Hotaling
v. A. B. Leach & Co., 247 N.Y. 84 (1928), Abel v. Paterno,
245 App. Div. 285, 281 N.Y.S. 58 (First Dept. 1935).
Prosser, Law of Torts, quoted in Judge Meskill’s dissent
at App. A28 sums up the entire point.
. . if false statements are made in connection with
the sale of corporate stock, losses due to a subsequent
decline of the market, or insolvency of the corpora-
tion, brought about by business conditions or other
factors in no way related to the representations, will
not afford any basis for recovery. It is only where
the fact misstated was of a nature calculated to
bring about such a result that damages for it can be
recovered.
Prosser, Law of Torts 1110 at 732 (4th ed.) (footnotes
omitted).
Plaintiffs bought stock at fair market value and got ex-
actly whet they paid for. The fact that later the stock
declined in price had nothing to do with Kohn’s represen-
tations as to his expertise.
14
IV.
The Second Circuit’s Opinion as to the Relevance of
Being a “Not Registered” Registered Representative
Flatly Contradicts the Holding of the Ninth Circuit.
The majority on appeal summarily disregarded a case
directly on point: Hayden, et al. v. Walston & Co., Inc., et
al,, 528 F.2d 901 (9th Cir. 1975). The facts and the issue
are as identical as two cases can be.
In Hayden the only misleading information, as in our case
was a lack of registration.* The decision should be the
same,
If there were other misleading statements by Kohn,
there might be a distinction, but it was specifically found
by both lower courts that he did not make other misleading
statements.
The majority suggest that in Hayden, the salesman may
not have held himself out to be a duly registered repre-
sentative. How the court divined that from the sparse
opinion is unclear, but since the Hayden court found that
he was a salesman and was not registered, the reasonable
inference is that he did in fact so hold himself out.
Can it be that the majority seriously means to say that
the two cases are distinguishable on whether the unregis-
tered employee was careful not to say, “I am a duly regis-
tered representative.”’?
* “Appellants were solicited by and purchased stock through a
salesman employed by the defendant Walston & Co., who at the time
was unlicensed to sell securities... On the basis of this fact alone,
appellants seek to state a federal claim to recover their losses on the
stock . . mn Held: Appellants’ Rule 10b-5 claim is unavailing. 528
F.2d at 901.
15
We draw to this Court’s attention the absolutely appro-
priate language found in the Hayden case.
“The customer may receive thoroughly competent
service from an unregistered salesman, and be un-
harmed by violation of the rule.” 501 F.2d at 902.
Conclusion
Because of the importance of these issues to the securi-
ties industry, the fact that the Second Circuit decision is
inconsistent with the holdings of this Court, and the fact
that there is a conflict between the circuits, we request that
this Court grant certiorari.
Dated: August 29, 1980
Respectfully submitted,
Cares A, Crocco, JR.
Lunngy & Crocco
641 Lexington Avenue
New York, New York 10022
Attorneys for Petitioner
Wood Walker & Co.
APPENDIX
APPENDIX A
Decision of the United States Court of Appeals
for the Second Circuit
UNITED STATES COURT OF APPEALS
Second Circuit
Nos. 79-7363, 79-7380
April 21, 1980
Marbury Management, Inc., et al.,
Plaintiffs-Appellants,
v.
Kohn, et al.,
Defendant-Appellant.
4
v
George Berkowitz, for plaintiffs-appellants.
Fischer & Klein, Jay H. Fischer, for defendant-appellant
Kohn.
Lunney & Crocco, Charles A. Crocco, Jr., for appellee
Wood, Walker & Co.
Before:
MeskiLu and Kearse,
Circuit Judges.
Doo.ina,*
District Judge.
Appeal by defendant Kohn from a judgment of the United
States District Court for the Southern District of New
* Of the Eastern District of New York, sitting by designation.
[Al]
A2
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
York, Lee P. Gagliardi, Judge, 470 F. Supp. 509, awarding
damages under Section 10(b) of the Securities Exchange
Act to purchasers of securities who relied on Kohn’s alleged
misstatement of his status in the securities business in
making purchases through him. Cross appeal by plaintiffs
from the judgment dismissing the action against defendant-
appellee Wood, Walker & Co., Kohn’s employer.
Affirmed in part and reversed and remanded in part.
Doouine, District Judge: Marbury Management, Inc.,
(‘‘Marbury’’), and Harry Bader sued Alfred Kohn and
Wood, Walker & Co., the brokerage house that employed
Kohn, for losses incurred on securities purchased through
Wood, Walker allegedly on the faith of Kohn’s representa-
tions that he was a ‘‘lawfully licensed registered repre-
sentative,” authorized to transact buy and sell orders on
behalf of Wood, Walker.' After a non-jury trial before the
Honorable Lee P. Gagliardi, District Judge, the court found
that Kohn was employed by Wood, Walker as a trainee
and that his repeated statements that he was a stockbroker
and his use of a business card stating that he was a ‘‘port-
folio management specialist” were undeniably false; the
court found further that Kohn made the statements with
intent to deceive, manipulate or defraud in making them,
and that his misstatements were material. The court found
that Kohn’s misrepresentations about his employment
status caused Marbury and Bader to purchase securities
from Kohn between summer 1967 and April 1969. The
district court also found that the predictive statements
1 Harvey Jaffe was also a plaintiff but at the close of plaintiffs’ case
the action was discontinued as to him with prejudice and without
costs, and the judgment stated that he was not entitled to relief. Jaffe
has not appealed. The New York Stock Exchange, originally joined
as a defendant, was dismissed from ‘he ection before trial.
A3
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
Kohn made about various securities were not fraudulently
made, and that there was no evidence that they were made
without a firm basis.
Judge Gagliardi reasoned: a trainee at a brokerage firm
can accept buy or sell orders by phone only under the
supervision of a broker and cannot recommend the pur-
chase of a security outside the brokerage office; moreover,
the qualifications and expertise of a security salesman are
particularly significant criteria in evaluating any informa-
tion as inherently speculative as future earnings predic-
tions; and a reasonable investor would consider the total
mix of information that he received significantly altered
if he learned that the investment advice was being furnished
to him by a trainee in the field rather than by a specialist
Judge Gagliardi concluded that the important circumstance
was that the terms ‘‘broker’’ and ‘‘specialist’’ themselves
connote a level of competence to the reasonable investor.
Thus, he held Kohn liable to plaintiffs under § 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Infer-
entially Judge Gagliardi found that Kohn’s misstatements
of his status not only induced the purchase of the securities
involved but their retention as investments as well, until
it became evident that Kohn was not, as his business card
asserted, a ‘‘security analyst’’ and ‘‘portfolio manage-
ment specialist’’ associated with Wood, Walker, but simply
a trainee. Since both plaintiffs learned the true facts about
Kohn’s status on or about January 28, 1970, Judge Gag-
liardi computed the damage award to each plaintiff by
taking the difference between the price each plaintiff paid
for the securities and either the selling price of the securi-
ties, if sold before January 28, 1970, or the value within a
reasonable time after that date, if the securities were still
held on that date.
me ene Ce = —— - — —
A4
Appendia A—Decision of the
United States Court of Appeals for the Second Circuit
Judge Gagliardi dismissed the plaintiffs’ claims against
Wood, Walker on the ground of plaintiffs’ failure to prove
that Wood, Walker participated in the fraudulent manipu-
lation or intended to deceive plaintiffs; treating plaintiffs
as basing their claims against Wood, Walker solely on the
theory that the firm aided and abetted Kohn’s fraud, the
court found that the evidence supported neither a finding
of conscious wrongful participation by the firm nor a legally
equivalent reckiessness but at best a finding of negligence
in supervision.
Judge Gagliardi’s findings of fact are not clearly erron-
eous. The cross-appeals of defendant-appellant Kohn from
the judgment against him and of plaintiffs-appellants from
the judgment exonerating Wood, Walker from liability
raise questions of law that are hardly novel but are not
free from difficulty in application. It is concluded that the
judgment against appellant Kohn must be affirmed and
that in favor of Wood, Walker reversed.
1. The substantial question that the appeal of defendant-
appellant Kohn raises is whether Kohn’s misrepresentation
was the legal cause of the loss for which Marbury and
Bader have been allowed recovery. The securities bought
did not lose value because Kohn was not a registered repre-
sentative with Wood, Walker, and this case, accordingly,
is not one in which a material misrepresentation of an ele-
ment of value intrinsic to the worth of the security is shown
to be false, and in which it is shown that disclosure of the
falsity of the representation results in a collapse of the
value of the security on the market. In such cases one in-
duced to buy the security on the faith of the misrepresenta-
tion of the value element is obviously damaged, and the
chain of causation is clear.
A5
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
Here the claim and finding are that Kohn’s statements
by their nature induced both the purchase and the retention
of the securities, the expertise implicit in Kohn’s supposed
status overcoming plaintiffs’ misgivings, prompted by the
market behavior of the securities.? Plaintiffs’ recovery of
their whole loss measured by the decline in value of the
securities to the date when they learned the truth certainly
does not fit the familiar rubric, for example, of Section
11(e) of the Securities Act of 1933, 15 U.S.C. § 77k(e)—
limiting recovery on account of a false or misleading regis-
tration statement to the deprecipation in value of the secur-
ity resulting from the untruthfulness of the statement made
about it. Cf. Restatement (Second) of Torts § 548A (Com-
ment b, Illustration 1) (1977) (security bought on faith of
untrue representation that issuer had received full con-
sideration for it; later full consideration received by issuer,
but a court invalidated the security on other grounds; buyer
not allowed to recover his loss because it was not considered
a proximate consequence of the untrue representation),
But plaintiffs in such a case as this, whether or not their
claims fall under the more familiar rubric, are, neverthe-
less, entitled to recover the damages that they suffered as
a proximate result of the allegedly misleading statements,
Globus v. Law Research Service, Inc., 418 F.2d 1276, 1291
(2d Cir. 1969), cert. denied, 397 U.S. 913 (1970).
2 Marbury’s representative, asked why they had held one of the
securities so long, answered that Kohn told them to do it, that it was
going to go up; that Kohn had advised them to hold the other securi-
ties as well; and that Marbury continued to rely on Kohn’s advice
and to hold onto the securities until they learned that he was not a
licensed and registered representative. (See 67a, 70a, 73a, 80a-81a,
and &4a-85a.) Bader’s testimony, while less detailed and pointed,
leads to the same ultimate finding. (See 93a-94a, 97a-99a, 106a, 113a,
and 114a-116a).
AG
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
As Judge Weinfeld observed in Miller v. Schwetckart,
413 F. Supp. 1062, 1067 (S.D.N.Y. 1970) :
Proximate cause, of course, is a concept borrowed
from the law of torts, and generally requires that
one’s wrongful conduct play a “substantial” or “es-
sential” part in bringing about the damage sustained
by another.
The generalization is that only the loss that might reason-
ably be expected to result from action or inaction in reliance
on a fraudulent misrepresentation is legally, that is, proxi-
mately, caused by the misrepresentation. Restatement
(Second) of Torts 4 548A (1977). See Levine v. Seilon,
439 F.2d 328, 333-34 (2d Cir. 1971). Oleck v. Fischer, Fp.
Src. L. Rev. (CCH) {[ 96,898, at 95,702-03 (S.D.N.Y. 1979),
in effect requires that the damage complained of be one of
the foreseeable consequences of the misrepresentation. The
case for Marbury and Bader is that, since the misrepresen-
tation was such as to induce both their purchases and their
holding of the securities, their holding and its duration
determined the extent of their losses. As in Schlick v. Penn-
Dixie Cement Corp., 507 F.2d 374, 380-81 (2d Cir. 1974),
cert. denied, 421 U.S. 976 (1975), the claim is that the mis-
representation was the agency both of transaction causa-
tion and of loss causation.
Liability for representations having the effects of Kohn’s
representation was familiar in the law even before the
Securities Act of 1933 and the Securities Exchange Act of
1934 were enacted. For example, in Rothmiller v. Stein,
143 N.Y. 581 (1894), the defendant officers of a small corpo-
ration told plaintiff that the company was prospering and
would pay at least a 10% dividend, and they recommended
that plaintiff reject an offer of $80 a share for his stock
AT
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
and accept an offer at $50 a share plus a deferred payment
of $50 a share if there were an interim dividend of 10% on
the stock. Plaintiff acted on the advice, relying on the de-
fendants’ fraudulent statements about the company’s af-
fairs. In holding defendants liable, the court said that de-
fendants
. .. cannot in such case shelter themselves under
the statement that they did not make the representa-
tions, i.¢., commit the fraud with the motive or for
the purpose of inducing the plaintiff to sell his stock.
They intended to deceive the plaintiff and they were
induced thereto by other causes, yet the natural,
proximate and direct result of such deception they
knew or had reasonable ground for believing would
be this sale, although its accomplishment was not
the particular purpose of their fraud. In such case
their liability would seem to be plain.
Id. at 588. Soin David v. Belmont, 291 Mass. 450, 197 N.E.
83 (1935), plaintiff had retained stock of a certain company
and bought additional shares of the same stock in reliance
on certain representations made by defendant which were
false. The court said:
Presumably [plaintiff] continued to hold the stock
after the purchase in reliance on the representations.
The fraud was therefore continuing in its effect until
such time as the plaintiff discovered the falsity of the
representations. A loss which he suffered would
manifestly be the difference in the then value of the
stock and the price which he paid for it.
Id. at 454, 197 N.E. at 85. Similarly in Cartwright v. Hughes,
226 Ala. 464, 147 So. 399 (1933), the plaintiff bought stock
A8
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
of the defendants’ bank on their representation that it was
“a good investment,” that the bank was solvent, and that its
assets were “good clean assets.” The bank ceased to func-
tion and its stock became worthless. The issue in the ap-
pellate court was the appropriate measure of damages.
Agreeing that the ordinary rule measures damages by the
difference between value at the time of the fraud and what
the value would have been had the representations been
true (the so-called “warranty” measure of damages), the
court said:
The question of time is not often involved, but in
such a transaction as this in 4 Sutherland on Dam-
ages, § 1172, at p. 4409, it is said that “the value of
the stock sold is not uniformly fixed as of the time
of the sale, especially if the purchase was made as an
investment. The fraud in such a case has been con-
sidered operative until the purchaser learned of it;
that is regarded as the time when his cause of action
arose.”
Id. at 467, 147 So. at 401.
The proposition that fraudulent representations may in-
duce the retention of securities as an investment and entail
liability for the damages flowing from retention was given a
more general form in Continental Insurance Co. v. Merca-
dante, 222 A.D. 181, 225 N.Y.S. 488 (1st Dept. 1927). The
court there said:
Where the damage is caused by inducing plaintiff’s
inaction, it is necessarily more difficult to allege or
prove causation than in those cases where active
conduct is induced. Indeed, in all fraud cases, the
element of proximate cause is more impalpable than
in negligence cases because we are dealing with the
A9
Appendia A—Decision of the
United States Court of Appeals for the Second Circuit
plaintiff’s state of mind. The defendants cannot,
therefore, require the same exact proof of causation.
Id. at 186, 225 N.Y.S. at 494. See to the same effect Hotaling
v. A. B. Leach & Co., 247 N.Y. 84, 93 (1928) (“As long as
the fraud continued to operate and to induce the continued
holding of the bond, all loss flowing naturally from that
fraud may be regarded as its proximate result.”); Stern
Bros. v. New York Edison Co., 251 A.D. 379, 381, 296 N.Y.S.
857, 859 (1st Dept. 1937) (“Fraud which induces non-action
where action would otherwise have been taken is as culpable
as fraud which induces action which would otherwise have
been withheld.”); Hadden v. Consolidated Edison Co., 45
N.Y.2d 466, 470, 410 N.Y.S.2d 274, 276 (1978). See 1 F.
Harper and F. James, The Law of Torts 600-603 (1956).
Although the theory of plaintiffs’ case relates their dam-
ages to the inaction of retaining the securities on the faith
of their belief in Kohn’s assertion of his status, the claim
is nevertheless one within Section 10(b) and Rule 10b-5
because the representation relied upon was made in connec-
tion with the purchase of securities, and both Marbury and
Bader sue as purchasers of securities. Cf. Blue Chip Stamps
v. Manor Drug Stores, 421 U.S. 723, 731, 755 (1975) (private
damage action under Rule 10b-5 is confined to actual pur-
chasers or sellers of securities). The case is not one in
which nothing has been shown except an inducement to
hold as in Parsons v. Hornblower & Weeks-Hemphill, Noyes,
447 F’. Supp. 482, 487 (M.D.N.C. 1977), aff’d, 571 F.2d 203
(4th Cir. 1978), if that case is a correct reading of Blue
Chip. Nor is this case similar to Hayden v. Walston & Co.,
528 F.2d 901 (9th Cir. 1975): there the plaintiffs had pur-
chased securities through a salesman who was not a duly
licensed registered representative, but did not show that
A10
Appendia A—Decision of the
United States Court of Appeals for the Second Circuit
the salesman’s nondisclosure of his status rendered his
other statements misleading within the meaning of Rule
10b-5, and there was evidently no claim or proof that he
held himself out to be a duly registered representative. The
second ground of suit rejected in the Hayden case, that a
private right of action could be predicated on the violation
of the National Association of Securities Dealers rules, has
not been relied upon in this case, and was not a ground of
decision in the district court.
It follows from what has been said that the judgment
against defendant-appellant Kohn must be affirmed.’
3 The majority and dissenting opinions do not differ in recognition
of the basic principles of proximate causation in agreement that those
principles apply to the torts of fraud and deceit, and that the critical
issue is their application to those of Kohn’s statement that Judge
Gagliardi found to be untruthful and affective of the action of Mar-
bury and Bader. Kohn, it is agreed, is liable only for the damages that
his misrepresentations proximately caused. The dissenting opinion
rejects what the majority opinion considered Judge Gagliardi’s im-
plicit finding that Kohn’s representations, unrelated to the intrinsic
charateristics of the stocks bought, induced both the purchase and
the retention of the stocks on which the damages were computed.
That is implicit in Judge Gagliardi’s analysis of the representations
and their culpable untruth, the period over which he found the
untruth affective of plaintiff’s conduct (that is, until Kohn’s true
status was disclosed), the measure of damages he employed, and his
explicit reliance on Clark v. John Lamule Investors, Inc. and Harris
v. American Investment Co. The majori-y opinion neither refuses to
give effect to the traditional and acknowl :dged standard of causation,
nor does it repudiate it, or refuse to abide by it. Differentiating trans-
action causation from loss causation car be a helpful analytical pro-
cedure only so long as it does not become a new rule effectively
limiting recovery for fraudulently induced securities transactions to
instances of fraudulent representations about the value charac-
teristics of the securities dealt in. So concise+a theory of liability for
fraud would be too accommodative of many common types of fraud,
such as the misrepresentation of a collateral fact that induces a
transaction.
All
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
2. Marbury and Bader have appealed from the judgment
in favor of Wood, Walker. Judge Gagliardi considered the
case against Wood, Walker as one in which plaintiffs sought
recovery against Wood, Walker only “as an aider and
abettor of Kohn’s securities law violations.” Judge Gagli-
ardi found that the evidence did not show that Wood,
Walker intended to deceive plaintiffs, or knew of Kohn’s
violations, or provided substantial assistance to Kohn in
violating the securities law, but at most showed only negli-
gence on Wood, Walker’s part. Applying the standard of
Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 44-48 (2d
Cir.), cert. denied, 439 U.S. 1039 (1978), the district court
held that plaintiffs had failed to establish essential elements
of their claim against Wood, Walker as an aider and abettor
of Kohn’s securities law violations. The court did not con-
sider Wood, Walker’s possible liability under the respondeat
superior theory, or as a “controlling person” under Section
20(a) of the Securities Act of 1934, 15 U.S.C. § 78t(a). It is
concluded, on this branch of the case, that the court’s dis-
position of the “aider and abettor” issues was correct, but
that it was error, on the record before the court, not to
consider and determine whether Wood, Walker was liable
as a controlling person or as Kohn’s employer.
(a) Marbury and Bader have in this court again argued
that Wood, Walker is liable because the evidence shows that
it did aid and abet Kohn’s commission of the fraud. If Kohn
and Wood, Walker are regarded as distinct actors liable
for each other’s acts only to the extent of their conscious
and intentional complicity in them, and the “aiding and
abetting” theory requires that approach, Judge Gagliardi’s
conelvsion is unassailable on the evidence. The circum-
stances on which plaintiffs rely to show that Wood, Walker
eee eee ee eee
wee ertes <er qn
Al2
Appendia A—Decision of the
United States Court of Appeals for the Second Circuit
should be held liable as an “aider and abettor” may suggest
inadequate supervision and lax control but they do not show
that the firm was guilty of “knowing or intentional mis-
conduct” or of equivalently reckless misconduct. See gen-
erally Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 200-
201 (1976); Edwards & Hanly v. Wells Fargo Securities
Clearance Corp., 602 F.2d 475, 483-85 (2d Cir. 1979), cert.
denied, 48 U.S.L.W. 3465 (1980); Rolf v. Blyth, Eastman
Dillon & Co., supra, 570 F.2d at 44-48.
(b) A threshold question on this aspect of plaintiffs’
appeal relates to plaintiffs’ right to argue that the court
should have considered the respondeat superior and control-
ling person contentions. The district judge took the view,
470 F. Supp. at 515 n.11, that plaintiffs had not alleged that
Wood, Walker was liable either as a controlling person or
as a principal under the respondeat superior doctrine, and
that, in consequence, the court did not need to consider
Wood, Walker’s liabilities on either of those theories. In
the opinion, id., at 515, the court said that plaintiffs’ posi-
tion, as expressed at the trial and in their post-trial memo-
randum of law, indicated that they sought recovery against
Wood, Walker as an aider and abettor of Kohn’s violations.
While plaintiffs have not denominated their argument in
this court and in the district court a respondeat superior
argument, and the complaint did not contain the traditional
allegation that Kohn made the representations relied upon
in the course of his employment with Wood, Walker, the
evidence upon which plaintiffs rely in this court, as in the
district court, and the allegations of fact made in the com-
plaint are alike completely descriptive of the transactions
and of the roles of the actors in them, and they are the
evidence and allegations relevant to a determination of the
Al3
Appendia A—Decision of the
United States Court of Appeals for the Second Circuit
respondeat superior issue, and, inevitably, of the Section
20(a) issue. Plaintiffs’ counsel argued the respondeat su-
perior issue orally at the trial, and the bare failure to
reiterate it in the closing brief in the district court cannot
be considered an abandonment of the point.
The way in which the case was tried, and the shift in
the emphasis of argument on the motion to dismiss arising
from the introduction of Ernst & Ernst into the discussion
may explain Judge Gagliardi’s taking the position that he
had to consider only the aider and abettor analysis, but the
record evidence tending to support the plaintiffs’ claim on
the other two grounds was before the court, and, on the
whole of that evidence, the three theories of liability—
aider and abettor, controlling person, and respondeat su-
perior—equally presented themselves for resolution. There
was evidence of Kohn’s hiring, his compensation, his au-
thority to accept orders over the telephone at the firm’s
Bronx office, the execution by Wood, Walker of the orders
Kohn obtained from plaintiffs, the fact that Wood, Walker
received the brokerage commission on all the transactions,
the extent to which and the circumstances in which Kohn
was authorized to recommend securities to the firm’s cus-
tomers, the uncertain provenance of Kohn’s Wood, Walker
business card, and the relation of the Bronx office of Wood,
Walker to its main office. While plaintiffs’ motion to con-
form the pleadings to the proofs—if the very factual com-
plaint required amendment—was made in general form and
was almost at once apparently confined to a narrow point
on damages, the evidence, although not complete in every
particular, disclosed each operative factual element of the
transactions involved, and it thus invoked the application of
whatever principles of law determined the outcome of the
Al4
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
issues raised by the evidence.* Cf. Fed. Rules Civ. Proc.
15(b) (issues tried by implied consent treated as if raised in
the pleadings, which may be amended to conform to the
evidence at any time, although failure to amend does not
affect the result of the trial of the issues); Wasik v. Borg,
423 F.2d 44, 46 (2d Cir. 1970) (third party defendant held
directly liable to plaintiff although plaintiff did not plead
against third party defendant where issues of fact tried
between those parties).
It was then error not to pass on the respondeat superior
and Section 20(a) issues which lurked in the record, unless
resort to respondeat superior is precluded by Section 20(a)
and the district court’s rejection of the claim that Wood,
Walker aided and abetted Kohn’s violations implies a find-
ing that Wood, Walker has a “good faith” defense under
Section 20(a). That section provides in relevant part:
Every person who, directly or indirectly, controls
any person liable under any provision of this chapter
or of any rule or regulation thereunder shall also be
liable jointly and severally with and to the same
extent as such controlled person to any person to
whom such controlled person is liable, unless the
controlling person acted in good faith and did not
4 Generally a complaint that gives full notice of the circumstances
giving rise to the plaintiff’s claim for relief need not also correctly
plead the legal theory or theories and statutory basis supporting the
claim. Rohler v. TRW, Inc., 576 F.2d 1260, 1264 (7th Cir. 1978) :
Hostrop v. Board of Junior College District No. 515, 523 F.2d 569,
581 (8th Cir. 1975), cert. denied, 425 U.S. 963 (1976) ; Bramlet v.
Wiison, 495 F.2d 714, 716 (8th Cir. 1974) ; Siegelman v. Cunard
White Star Ltd., 221 F.2d 189, 196 (2d Cir. i958) ; cf. New York
State Waterways Assn. vy. Diamond, 469 F.2d 419, 421 (2d Cir.
1972) (court’s duty to read pleading liberally to determine whether
facts alleged justify taking jurisdiction on grounds other than those
most artistically pleaded).
Al5
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
directly or indirectly induce the act or acts constitut-
ing the violation or cause of action.
This court has avoided explicit “resolution of the rather
thorny controlling person-respondeat superior issue.” Rolf
v. Blyth, Eastman Dillion & Co., supra, 570 F.2d at 48 n.19.
SEC v. Management Dynamics, Inc., 515 F.2d 801, 812-13
(2d Cir. 1975), reasoned in the light of the legislative his-
tory, that the “controlling person” provision of Section
20(a) was not intended to supplant the application of agency
principles in securities cases, and that it was enacted to
expand rather than to restrict the scope of liability under
the securities laws,’ the court, however, intimated no view
as to cases involving minor employees, claims for damages,
or respondeat superior which might be broader than the
apparent authority involved in Management Dynamics,
which dealt with actions of a principal executive officer
using corporate facilities to create a misleading appearance
of activity in the stock in question. A little later in SEC v.
Geon Industries, Inc., 531 F.2d 39, 54-56 (2d Cir. 1976), the
court, reiterating the view expressed in Management Dy-
namics, again rejected the theory that a brokerage firm
5 Management Dynamics discussed Section 15 of the Securities Act
of 1933, 15 U.S.C. $770, as well as Section 20(a). Section 15
originally made controlling persons liable under Securities Act Section
11 (imposing liability for untrue or misleading statements in a regis-
tration statement on issuer, underwriter and others involved with
the registration statement) and Section 12 (imposing liability on
sellers of unregistered securities or securities sold by means of untrue
of misleading statements) jointly and severally with the controlled
person to anyone to whom the controlled person was liable. The Act
which enacted the ’34 Act amended Section 15 of the ’33 Act by add-
ing at the end “unless the controlling person had no knowledge of
or reasonable ground to believe in the existence of the facts by reason
of which the liability of the controlled person is alleged to exist.”
A16
Appendia A—Decision of the
United States Court of Appeals for the Second Circuit
ealled to account for an employee’s activities could be liable
only as a controlling person under § 20(a). The court,
however, declined to enjoin the firm on the theory that as
employer it was responsible for the acts of its employee, a
registered representative, finding that the firm had exer-
cised reasonable supervision over him, that he had made
no special use of his connection with the firm, and that the
firm derived only ordinary commissions from his activities.
Judge Friendly stated for the court that, “we intimate no
view as to cases with different facts, and that situations
which fall between [Management Dynamics] and this one
will have to await future resolution.” 531 F.2d at 55-56.
Nevertheless, as a footnote in Woodward v. Metro Bank of
Dallas, 522 F.2d 84, 94 n.22 (5th Cir. 1975), illustrates, it
has been thought that the Second Circuit has taken the
view that Section 20(a) is the exclusive way to impose
secondary liability.
The cases in this court are not, however, to that effect.
Moerman v. Zipco, Inc., 422 F.2d 871 (1970), affirming on
the district court opinion, 302 F. Supp. 439 (E.D.N.Y. 1969),
approved the imposition of liability on a corporation and
its controlling directors under Section 20(a); but nothing
in the district court opinion considered normal agency
principles, or treated Section 20(a) as supplanting the
doctrine of respondeat superior. The en banc decision in
Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir. 1973),
declined to impose Rule 10b-5 liability, through Section
20(a), on an outside director of BarChris Corporation for
fraud perpetrated by other officials of the corporation in
inducing the plaintiffs to exchange stock in their thriving
company for shares of BarChris stock that soon became
worthless. The Lanza case did not present any occasion for
Al7
Appendiaz A—Decision of the
United States Court of Appeals for the Second Circuit
considering respondeat superior; only if the court had held
that the director was in guilty complicity with the officials
of the corporation who had perpetrated the fraud would the
court have had to decide whether the investment banking
firm of which the defendant director was an employee was
liable on a respondeat superior or Section 20(a) theory for
its employee’s delinquency. 479 F.2d at 1319-20 (opinion of
Judge Hays, dissenting in part). The district court in
Gordon v. Burr, 366 F. Supp. 156, 167-168 (S.D.N.Y. 1973),
adopted the view that Section 20(a) and not respondeat
superior is the appropriate standard for determining sec-
ondary liability of a brokerage firm under the ’34 Act, but
this court, reversing the district court’s imposition of Sec-
tion 20(a) liability on a brokerage house by reason of the
fraud of one of its stock salesmen did not comment on the
rationale of the decision in the court below; it said only
that if the brokerage house was liable it must be “deriva-
tively—as a ‘controlling person’ of [the salesman] within
the meaning of § 20(a) of the 1934 Act.” Gordon v. Burr,
506 F.2d 1080, 1085 (2d Cir. 1974). The court cited SEC v.
Inm’s Inc., 365 F. Supp. 1046, 1064-65 (S.D.N.Y. 1973),
which rejected the respondeat superior approach, with evi-
dent approval, but the part of the Lwm’s opinion cited deals
principally with the standard of culpability required for
Section 20(a) liability, and that was the point on which
this court cited it. Moreover this court has in Management
Dynamics, supra, 515 F.2d at 813, stated that Gordon v.
Burr does not dictate a result contrary to the application
of agency principles to hold brokerage firms liable for acts
of their employees; Geon Industries, supra, 531 F.2d at 54,
states that this court has, in Management Dynamics, held
the Lum’s view—that a brokerage house could be liable for
A18
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
its employee’s securities frauds only as a controlling per-
son under Section 20(a)—to be erroneous. In Edwards ¢
Hanly v. Wells Fargo Securities Clearance Corp., 458 F.
Supp. 1110 (S.D.N.Y. 1978), the court held that a defendant
was liable for its president’s Rule 10b-5 frauds both on the
respondeat superi.* and on the Section 20(a) theories, but
the judgment was reversed because the evidence was insuf-
ficient to support a finding that the individual wrongdoer
had aided and abetted the fraud in question and because the
damage to the plaintiff was occasioned by its own failure to
exercise due diligence in the supervision of the account in
question and of its own conipliance with applicable regula-
tions. 602 F.2d at 485-89.
Cases in other circuits are not in agreement about the
relation of respondeat superior to Section 20(a) liability.
The Eighth Circuit, in Myzel v. Fields, 386 F.2d 718, 737-739
(8th Cir. 1967), imposed Section 20(a) liability in a Rule
10b-5 case in which, on the evidence, the liability of the
allegedly controlling persons was governed “neither by
principles of agency nor conspiracy,” but the court assumed
that common law principles of agency would apply to im-
pose liability on a principal for an agent’s deceit committed
in the business he was appointed to carry out.
The Sixth Circuit, in Armstrong, Jones & Co. v. SEC,
421 F.2d 359, 362 (6th Cir.), cert. denied, 398 U.S. 958
(1970), held, adopting the position of the Securities Ex-
change Commission, that sanctions may be imposed on a
broker-dealer for the wilful violations of its agents under
the doctrine of respondeat superior; the court did not refer
to Section 20(a). In Holloway v. Howerdd, 536 F.2d 690,
694-95 (6th Cir. 1976), the Sixth Circuit, following what it
took to be the lead of the Second, Fourth, Fifth, and Seventh
A19
Appendix A—I ‘cision of the
United States Court of Appeals for the Second Circuit
Circuits, went farther in holding that the controlling person
provisions, Section 15 of the 33 Act and Section 20(a) of
the 34 Act, were not intended to preempt the operation of
the doctrine of respondeat superior in cases involving un-
lawful activities of a brokerage firm’s employees, It im-
posed damage liability on the firm in favor of those cus-
tomers of the firm who were ignorant of the limitations on
the authority of the wrongdoing employee. The court relied
on what had been said in Management Dynamics, supra, 515
F.2d at 812, to the effect that the controlling person provi-
sions were intended to expand, rather than restrict, the
scope of liability under the securities laws.
The Fourth Cireuit, in Johns Hopkins University v. Hut-
ton, 422 F.2d 1124 (4th Cir. 1970), cert. denied, 416 U.S. 916
(1974), a case brought under $12(2) of the ’33 Act, 15
U.S.C. § 771(2), held a brokerage house liable “under fa-
miliar [agency] principles, for the tortious representations
of its agent”; although the partners of the defendant broker-
age house were personally blameless, they had clothed their
departmental manager with actual and apparent authority
to provide the purchaser of the security with information
about its yield, the manager acted within the scope of his
employment in offering the security to the purchaser, and
the firm received compensation based on the manager’s sales
effort. The court heid that Section 15 of the ’33 Act, 15
U.S.C. § 770, which imposes a controlling person liability
parallel to that imposed by Section 20(a) of the ’34 Act,
was not intended to insulate a brokerage house from the
misdeeds of its employees.
The Fifth Cireuit in Lewis vy. Walston & Co., 487 F.2d
617 (5th Cir. 1973), applied agency principles in imposing
liability on a brokerage firm in a suit under Section 12(1)
A20
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
of the ’33 Act for an employee’s sale of unregistered stock to
plaintiffs, notwithstanding that the brokerage house never
received a commission or other benefit from the transac-
tions, did not deal in unregistered securities in the course
of its own business, and did not perform any of its usual
brokerage functions in the completion of the sales transac-
tions. Later, in a case in which liability under Rule 10b-5
could have been imposed only under Section 20(a) if the
evidence had warranted it, the Fifth Circuit, under the
mistaken impression that Gordon v. Burr, supra, had com-
mitted this circuit to the view that Section 20(a) was “the
exclusive way to hold someone secondarily liable” in Rule
10b-5 cases, stated that such an approach might be unneces-
sarily restrictive to the securities acts but that it did not
need to resolve that question in the case before it. Wood-
ward v. Metro Bank of Dallas, 522 F.2d 84, 94 n.22 (5th
Cir. 1975). The Seventh Circuit in a “churning” case, Fey
v. Walston & Co., 493 F.2d 1036, 1052-53 (7th Cir. 1974),
held a brokerage house liable for the conduct of one of its
officers, on the ground that “the general law rendered the
broker liable for any churning conduct by its representative,
and foundation for this result need not be sought within the
confines of Section 20(a).” Jd. at 1052. The Tenth Circuit
in Richardson v. MacArthur, 451 F.2d 35, 41-42 (10th Cir.
1971), imposed Section 20(a) liability or, an employing
corporation in a Rule 10b-5 case, saying that, “Liability
under § 20(a) is not restricted by principles of agency or
conspiracy.” Jd. at 41. The court did not make a respondeat
superior analysis of the facts.
The earliest of the cases usually cited for the proposition
that Section 20(a) of the 34 Act supplanted the doctrine
of respondeat superior in securities cases, Kamen & Co. v.
A21
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
Paul H. Aschkar & Co., 382 F.2d 689, 697 (9th Cir. 1967),
does not elaborate the point, and Hecht v. Harris, Upham
& Co., 403 F.2d 1202, 1210 (9th Cir. 1970), which imposed
liability in a churning case, did so under Section 20(a) on
the basis that the brokerage house had failed to maintain
adequate internal controls, and that its failure of diligence
constituted failure to act in good faith; the court did not
refer to the doctrine of respondeat superior. Later, in
Zweig v. Hearst Corp., 521 F.2d 1129, 1132-33 (9th Cir.),
cert. denied, 423 U.S. 1025 (1975), the court interpreted
its earlier decision in Kamen as holding that Section 20(a)
is to be applied to determine an employing :orporation’s
liability and as rejecting the contention that “the more
stringent doctrine of respondeat superior remained effec-
tive to establish vicarious liability.” The court did not
explain the basis for its conclusion. Most recently, in
Christoffel v. E.F. Hutton & Co., 588 F.2d 665, 667 (9th
Cir. 1978), the court, in a single sentence, and, again, with-
out discussion, stated that it was “the established law of
[the 9th] Circuit that section 20(a) supplants vicarious
liability of an employer for the acts of an employee apply-
ing the respondeat superior doctrine.”
The Third Cireuit, in Rochez Brothers, Inc. v. Rhoades,
527 F.2d 880, 884-886 (3rd Cir. 1975), concluded in what is,
it may be, elaborate dictum, that, in the light of the legisla-
tive history and of earlier cases, “the principles of agency,
i.e., respondeat superior, are inappropriate to impose secon-
dary liability in a securities violation case”. Id. at 884. The
court put its conclusion essentially on the ground that the
defense furnished by the closing language of Section
20(a)—
. unless the controlling person acted in good
faith and did not directly or indirectly induce the
A22
Appendia A—Decision of the
United States Court of Appeals for the Second Circuit
act or acts constituting the violation or cause of
action—
established a standard of conscious culpability that was
inconsistent with the imposition of an essentially secondary
liability on respondeat superior grounds.® Rochez Brothers
was followed in Thomas v. Duralite Co., 524 F.2d 577, 586
(3rd Cir. 1975). In both cases liability was not in fact im-
posed under Section 20(a) because, in Rochez Brothers, the
active wrongdoer, and not the corporation of which he was
an officer, was the controlling person, and because, in Dura-
lite, the active wrongdoers were not acting for the corpora-
tion in the transaction in the corporation’s shares.’
(c) While the precise standard of supervision required
of broker-dealers to make good the good faith defense of
Section 20(a) is uncertain, where, as in the present case,
the erring salesman completes the transactions through the
employing brokerage house and the brokerage house re-
6 Before turning to the question of the appropriate standards of
secondary liability the court seems to have decided, in agreement with
the district court’s factual finding, that a traditional agency analysis
would not have resulted in a judgment against the wrong-doing in-
dividual’s corporate employer; the wrongdoing employee was presi-
dent, a director, and a 50% stockholder of the employing corpora-
tion, and he bought 50% of the corporation’s stock from the corpora-
tion’s executive vice-president without disclosing that there were in
the Bly a two possible buyers for all the company’s stock. 527 F.2d
at -O4,.
7 Rochez Brothers noted that the relationship before it was not of
the type that prevails in the broker-dealer cases where a stringent
duty to supervise employees exists. 527 F.2d at 886. Duralite indi-
cated that whatever the merit of imposing respondeat superior liability
in a broker-agent relationship, the circumstances in the Duralite case
were different and required a different result. For references to the
effect of the presence »f a fiduciary relationship, sce Edwards &
Hanly v. Wells Fargo Securities Clearance Corp., supra, 602 F.2d
at 485 ; Rolf v. Blyth, Eastman Dillon & Co., supra, 570 F.2d at 47.
A23
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
ceives a commission on the transactions, the burden of
proving good faith if shifted to the brokerage house, Stern
v. American Bankshares Corp., 429 F. Supp. 818, 823 (E.D.
Wis. 1977), and requires it to show at least that it has not
been negligent in supervision, SEC v. Geon Industries, Inc.,
supra, 581 F.2d at 54; Gordon v. Burr, supra, 506 F.2d at
1085-86; SEC v. Lum’s Inc., supra, 365 F. Supp. at 1064-65,
and that it has maintained and enforced a reasonable and
proper system of supervision and internal control over
sales personnel. Zweig v. Hearst, supra, 521 F.2d at 1134-
35. That Wood, Walker has successfully met the charge
that it aided and abetted Kohn does not establish that it
has borne the burden of proving “good faith” under the last
clause of Section 20(a). The intimation of Judge Gag-
liardi’s findings of fact is to the contrary; he was very far
from finding that Wood, Walker had shown due care in its
supervision and control of Kohn’s activities.
Different considerations control the application of re-
spondeat superior principles, Here the concern is simply
with scope or course of employment and whether the acts
of the employee Kohn can fairly be considered to be within
the scope of his employment. See Restatement (Second)
of Agency §§ 228, 229, 257, 258, 261, 262, 265. The evidence
of record in the present case presents substantial issues of
credibility and interpretation, but it indicates, if taken at
face value, that Kohn at all times acted as an employee
of Wood, Walker, and accounted to Wood, Walker for the
transactions. The evidence contains no indication that he
profited by any of the transactions other than by reason of
his compensation from Wood, Walker as one of its em-
ployees. Whatever the specific limitations on his authority
as between his and his employer, the evidence, again, indi-
A24
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
cates, although with some uncertainty, that it was his func-
tion as a trainee to be an intermediary in the making of
transactions in securities, but that there were certain limita-
tions on the manner in which he was to carry on his activi-
ties. Kohn’s deviant conduct, while it may have induced
the purchase of securities that would not otherwise have
been purchased, did not appear, on the record made at the
trial, to mark any deviation from Kohn’s services to his
employer. Arguably, what he did was done in Wood, Walk-
er’s service, though it was done badly and contrary to the
practices of the industry and the standing instructions of
the firm. The record on the respondeat superior issue more
than sufticed to require the trier of the fact to dispose of
the issue on the merits.
Where respondeat superior principles are applied, the
special good faith defense afforded by the last clause of
Section 20(a) is unavailable. Quite apart from the fact that
that conclusion was clearly adumbrated in SEC v. Manage-
ment Dynamics, supra, 515 F.2d at 812-13, and has become
settled law in other circuits, there is no warrant for believ-
ing that Section 20(a) was intended to narrow the remedies
of the customers of brokerage houses or to create a novel
defense in cases otherwise governed by traditional agency
principles. On the contrary, Section 28(a), 15 U.S.C. § 78bb,
specifically enacts that the rights and remedies provided
by the ’34 Act shall be in addition to any and all rights and
remedies that may exist at law or in equity, and Section 16
of the ’33 Act, 15 U.S.C. §77p, similarly provides that the
rights and remedies of the ’383 Act are additional to pre-
existing remedies.
The judgment against defendant Kohn is affirmed and
the judgment in favor of Wood, Walker & Co. is reversed,
A25
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
and a new trial of the claims of Marbury Management and
Harry Bader against Wood, Walker & Co. is granted.
[Dissenting Opinion]
Meski1, J., dissenting: In straining to reach a sympa-
thetic result, the majority overlooks a fundamental principle
of causation which has long prevailed under the common
law of fraud and which had been applied to comparable
claims brought under the federal securities acts. This is,
quite simply, that the injury averred must proceed directly
from the wrong alleged and must not be attributable to
some supervening cause. This elementary rule precludes
recovery in the case at bar since Kohn’s misrepresentations
as to his qualifications as a broker in no way caused the
decline in the market value of the stocks he promoted.
I share my colleagues’ condemnation of Kohn’s miscon-
duct and express no view as to whether recourse may lie
in an appropriate court under a theory more feasible than
the one advanced by plaintiffs. In approving Kohn’s pres-
ent sanction, however, the majority is more righteous than
right, for its decision abandons the traditional understand-
ing of causation in the context of the sale of securities
induced through misrepresentation, disregards governing
precedent and extends the reach of Section 10(b) beyond
that of its common law antecedent to provide for recovery
in cases in which federal policies are offened by such expan-
sion. Accordingly, I respectfully dissent.
The essential facts are undisputed and bear but brief
recapitulation. While a trainee at the brokerage firm of
Wood, Walker & Co., Kohn deceitfully held himself out
to be a registered representative and ‘‘portfolio manage-
ment specialist.’’ Trading upon those non-existent creden-
A26
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
tials, he persuaded Marbury Management and its principal
shareholder, Bader, to purchase several highly speculative
stocks. Contrary to a New York Stock Exchange rule re-
quiring that purchase orders placed by novices be reviewed
and approved by licensed brokers, Wood, Walker processed
these orders without the necessary clearance. Despite
Kohn’s sincere belief in the bright prospects of each of
these investments, their market value plummeted. The pre-
cise timing of their decline and the reasons therefor are not
apparent from the record; it suffices for present purposes
to note that Kohn’s exaggeration of his expertise played
no role in the economic collapse of the various stocks he
had touted.
Under these circumstances, no recovery may be had
against either Kohn or Wood, Walker under Section 10(b)
since it is patent that the essential element of causation was
not and could not be established as a matter of law. While
it is true that Kohn’s misrepresentations may have been a
precondition of the ensuing injury in that the investments
might not have been made had he revealed his lack of
qualifications, those misstatements nevertheless do not con-
stitute the legal cause of the subsequent pecuniary loss and
consequently will not suffice to establish an actionable
fraud,”
1 Plaintiffs also averred that Kohn falsely represented to them that
he based his investment advice on “inside information.” As to these
claims, the trial court found, and it is not disputed here, that the
statements were merely nonactionable projections.
2 Since the injury in the instant case derived from the unanticipated
decline in the market value of the stocks Kohn had promoted, the
situation is distinguishable from that presented in Competitive Asso-
ciates, Inc. v. Laventhol, Krekstein, Horwath & Horwath, 516 F.2d
811 (2d Cir. 1975). There, plaintiff mutual fund alleged that it had
been defrauded by an investment advisory firm which after obtaining
A27
Appendix A—Decision of the
United States Court of Appeals for the Second Circut
From time immemorial proof of proximate cause—the
legal link between the misconduct alleged and the injury
averred—has been a precondition of recovery under
theories of fraud and deceit. It is axiomatic that fraudu-
lent misrepresentations are not actionable where the sub-
sequent injury is due to an intervening or supervening
cause. As applied to the sale of stock precipitated by mis-
statements, these principles of causation are satisfied only
where the misrepresentation touches upon the reasons for
the investment’s decline in value. Thus, where one is in-
duced to purchase securities in reliance upon a claim which,
however deceitful, is immaterial to the operative reason
for the pecuniary loss, recovery under a theory of fraud
is precluded by the inability to prove the requisite causa-
tion. See, e.g., Hotaling v. A. B. Leach & Co., 247 N.Y. 84,
the fund’s business deliberately proceeded to loot the assets placed
under its supervision through unlawful investment. The mutual fund
thereafter sued the independent auditors who had certified the ad-
visor’s extremely favorable, but false, financial statement, alleging
that the misimpression gained from that document led the fund to
retain the larcenous advisor.
In contrast to the instant case, Competitive Associates, in which
we reversed a summary judgment in favor of the defendants, involved
an alleged scheme which provided a direct connection between the
wrong and the injury, uninterrupted by any intervening independent
cause. Thus, in that case a fraudulent scheme to pilfer the mutual fund
was already afoot at the time of the violation, and the plaintiff’s losses
were inevitable upon the advisor’s procurement of the account. The
case at bar involves no such scheme, and plaintiffs’ losses were cer-
tainly not intended by Kohn at the time he gained their account.
3 Under the securities statutes, liability is limited, by principles
of causation even where the plaintiff is aided by a presumption in his
favor. For example, under Section 11 of the Securities Act of 1933,
15 U.S.C. § 77k, which proscribes false or misleading representations
in registration statements, a plaintiff may recover the difference be-
tween the purchase price of a security and its market value at the
time of the filing of his suit, without having to establish a causal
connection between the false statement and the decline of the stock.
A28
Appendix A—Decision of the
United States Court of Appeals for the Second Circut
87 (1928) (‘‘The plaintiff should be entitled to recover from
the defendants the loss which is the proximate result of
the fraud that induced the investment; the defendants
should not be held liable for any part of plaintiff’s loss
caused by subsequent events not connected with such
fraud.’’) ; Abel v. Paterno, 245 App. Div. 285, 281 N.Y.S. 58
(1st Dept. 1935); People v. 8S. W. Straus & Co., 156 Mise.
642, 282 N.Y.S. 972 (Sup. Ct. Kings Cty. 1935). Prosser
categorically states:
... if false statements are made in connection with
the sale of corporate stock, losses due to a subsequent
decline of the market, or insolvency of the corpora-
tion, brought about by business conditions or other
factors in no way related to the representations, will
not afford any basis for recovery. It is only where
the fact misstated was of a nature calculated to bring
about such a result that damages for it can be re-
covered.
Prosser, Law of Torts, [110 at 732 (4th ed.) (footnotes
omitted).
However, the courts have permitted a reduction in damages to the
extent that defendants can prove that the loss of value is due to rea-
sons unrelated to the matters misrepresented in the registration state-
ment. See Feit v. Leasco Data Processing Equipment Corp., 332
F.Supp. 544, 584-88 (E.D.N.Y. 1971), and see footnote 7, infra.
41 respectfully suggest that the authorities cited by the majority in
support of its broad notion of causality in fraud cases involving the
sale of stock, many of them decided before the current federal securi-
ties laws were enacted and many involving the sale of tangibles, do
not conflict with the more restrictive standard suggested here. For
example, in Hotaling v. A.B. Leach & Co., 247 N.Y. 84 (1928),
Judge Lehman permitted recovery, but specifically noted, “The loss
sustained is directly traceable to the original misrepresentation of the
a of the investment the plaintiff was induced to make.” Jd.
at 93.
A29
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
The rationale for this exacting standard of causation is
quite simply that one should be held liable only for the
foreseeable consequences of one’s action. Where the pur-
case of stock is induced through a misrepresentation, one
is chargeable only for the consequences flowing from that
statement; one does not thereby become an insurer of the
investment, responsible for an indefinite period of time for
any and all manner of unforeseen difficulties which may
eventually beset the stock. This Court has previously re-
marked upon the necessity of thus restricting “the poten-
tially limitless thrust of Rule 10b-5 to those situations in
which there exists a causation in fact between the act and
injury.” Titan Group, Inc. v. Faggen, 513 F.2d 234, 239
(2d Cir.), cert. denied, 423 U.S. 840 (1975). See also
Globus v. Law Research Service, Inc., 418 F.2d 1276, 1292
(2d Cir. 1969), cert. denied, 397 U.S. 913 (1970) (“causa-
tion must be proved else defendants could be held liable to
all the world”); List v. Fashion Park, Inc., 340 F.2d 457,
463 (2d Cir.), cert. denied, 382 U.S. 811 (1965) (Rule 10b-5
does not “establish a scheme of investors’ insurance”). The
Restatement (2d) of Torts takes a similar view. Dis-
cussing the situation in which the financial condition of a
company has been misrepresented to the purchaser of stock
the authors conclude:
there is no liability when the value of the stock goes
down after the sale, not in any way because of the
misrepresented financial condition, but as a result
of some subsequent ev nt that has no connection
with or relation to its financial condition. There is,
for example, no liability when the shares go down
because of the sudden death of the corporation’s
leading officers. Although the misrepresentation has
A30
Appendia A—Decision of the
United States Court of Appeals for the Second Circuit
in fact caused the loss, since it has induced the pur-
chase without which the loss would not have occurred,
it is not a legal cause of the loss for which the maker
is responsible.
Restatement (2d) of Torts 4 548A at 107 (1977).
Although the term causation is not itself used in Section
10(b) or Rule 10b-5, it has never been doubted that it is
an essential element of a claim brought thereunder. This
belief is based on the statute’s common law ancestry upon
Section 28a of the Securities Exchange Act, 15 U.S.C.
§ 78bb, which limits recoveries to “actual damages on ac-
count of the act complained of,” and upon case law, most
notably Affiliated Ute Citizens v. United States, 406 U.S.
128, 153-54 (1972), which recognized “the requisite element
5 The proposed ALI Federal Securities Code takes the same ap-
proach to the question of causation :
when the market declines after the published rectification of a
false earnings statement that was used in the sale of an electronics
stock, the misrepresentation is not the “legal cause” of the
buyer’s loss, or at any rate not the sole legal cause, to the extent
that a subsequent event that had no connection with or relation
to the misrepresentation occurred—for example, the sudden death
of the corporation’s president or a softening of the market in all
electronics stocks. See Feit v. Leasco Data Processing rere,
Corp., 332 F.Supp. 544, 586-88 (E.D.N.Y. 1971), 47 Ind. L.J.
367 (1972)....
[]That is to say, the basic distinction between reliance and
legal cause bears emphasizing, because the two concepts are so
frequently blurred: A buyer can have relied on a seller’s mis-
statement of a material fact in deciding to buy; but, if the gen-
eral market drops precipitately the next day on news of a political
assassination or an invasion in some part of the world, the buyer’s
loss is caused not by the misstatement (except in the “but for”
or post hoc propter hoc sense) but by the disastrous political
news.
Tentative Draft #2, § 215A at 5 (1973). (Commentary on § 220 of
the Proposed Official Draft (1978) ).
A31
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
of causation in fact,” and Superintendent of Insurance v.
Bankers Life & Casualty Co., 404 U.S. 6, 12-13 (1971),
wherein reference is made to the requirement that the
defrauded party must suffer an injury as a result of the
deceptive practice. See also Titan Group, Inc. v. Faggen,
supra, 513 F.2d at 239 (“causation remains a necessary
element in a private action for damages under Rule
10b-5.”) ; Shapiro v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 495 F.2d 228, 238 (2d Cir. 1974) (“We have consis-
tently held that causation is a necessary element of a pri-
vate action for damages under Rule 10b-5.”); compare
Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d
Cir. 1970) (“the test is properly one of tort ‘causation in
fact’”) with Globus v. Law Research Service, Inc., supra,
418 F.2d at 1291-92 (“there was sufficient evidence to sup-
port a finding of causal relationship between the misrepre-
sentation and the losses appellees incurred when they
sold.”).
Mere factual causation however is not enough. Causa-
tion in cases under the securities acts is governed by the
principle, set forth above, that the loss complained of
must proceed directly and proximately from the violation
claimed and not be attributable to some supervening cause.
Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 51 (1977)
(Blackmun, J., concurring). While this rule is easily stated,
its application to cases brought under the federal statutes
has frequently been problematic since in such cases both
the violation and the resulting loss must each be linked
with the requirement of a securities transaction, whether
it be a purchase or sale as would be the case in an action
under Section 10(b), or the exercise of the shareholder’s
franchise, as would be the case in an action under Section
14,
A32
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
That is, the violation must have precipitated the securi-
ties decision (be it a purchase or sale or a shareholder’s
vote), a requirement denominated as “transaction causa-
tion,” and the victim’s injury must also be proven to have
derived from that same securities decision, a requirement
somewhat ambiguously termed “loss causation,” Schlick v.
Penn-Dixie Cement Corp., 507 F.2d 374, 380-81 (2d Cir.
1974), cert. denied, 421 U.S. 976 (1975).° Attempts to prove
the existence of each link in this somewhat elongated chain
of causation have engendered considerable controversy.
With respect to “transaction causation,” it was frequently
contended, particularly in nondisclosure cases, that plain-
tiff’s coarse of action was in fact unaffected by the
material omissions, and this first link had not, there-
fore, been established. Such contentions have been re-
jected in several cases, see Mills v. Electric Auto-Lite Co.,
6 “Toss causation,” as the term is used in Schlick v. Penn-Dixie
Cement Corp., 507 F.2d 374, 380-82 (2d Cir. 1974), cert. denied,
421 U.S. 976 (1975), may mean nothing more than the proposition
advanced here, that the injury must be proximately used by the precise
violation alleged. Thus, the Court noted that in order to recover in
cases charging fraudulent misrepresentation or omissions,
[T]here would have to be a showing of both loss causation—
that the misrepresentations or omissions caused the economic
harm—and transaction causation—that the violation in question
caused the appellant to engage in the transaction in question.
507 F.2d at 380 (emphasis in original ; footnote omitted). However,
most commentators have construed this term to connote the neces-
sary causal nexus between the securities transaction and the injury,
rather than the requisite connection between the violation and the
injury. See, e.g., Jennings & Marsh, Securities Regulation at 1068-69
(4th ed. 1977). Judge Frankel, concurring in the result in Schick,
expressed reluctance about the phrase coined, see 507 F.2d at 384,
and other courts have been noticeably reluctant expressly to adopt
this language. See, e.g., Moody v. Bache & Co., Inc. 570 F.2d 523,
527 n.7 (5th Cir. 1978) ; St. Lowis Union Trust Co. v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 562 F.2d 1040, 1048 n.11 (8th Cir.
1977), cert. denied, 435 U.S. 925 (1978). :
A33
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
396 U.S. 375, 385 (1970), and Affiliated Ute Citizens v.
United States, supra, 406 U.S. at 153-54; see also Shapiro
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 495
F.2d at 238-40, which hold that in nondisclosure suits, trans-
action causation will be presumed when the matters with-
held are material. See Piper v. Chris-Craft Industries, Inc.,
supra, 430 U.S. at 50-51 (1977) (Blackmun, J., concurring).
Similarly spirited defenses have also been raised with re-
spect to the second link, as defendants have claimed that
the injury was not occasioned by a securities transaction,
or that the connection between those events was too attenu-
ated to satitsfy the loss causation requirement. See Su-
perintendent of Insurance v. Bankers Life & Casualty Co.,
404 U.S. 6 (1971); Vine v. Beneficial Finance Co., 374 F.2d
627 (2d Cir.), cert. denied, 389 U.S. 970 (1967); Hoover v.
Allen, 241 F.Supp. 213, 230 (S.D.N.Y. 1965). See also
Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480
F.2d 341, 401 (2d Cir. 1973) (Mansfield, J., concurring and
dissenting).
In my view, these cases do not undercut the requirement
that a single direct causal chain run uninterrupted from the
alleged violation through a securities transaction to a
demons‘ rable injury. In resolving the technical problems of
establishing transaction or loss causation, the courts have
refused to create insuperable barriers to the demonstration
of their existence, and in appropriate situations have al-
lowed the element of causation to be demonstrated through
resort to related notions such as reliance or materiality.
Nevertheless, in facilitating the proof of causation, the
courts have never renonuced the element itself, and have
never departed from the rudimentary principle that causa-
tion will not be found to exist where there is lacking a single,
logical procession from the violation to the injury.
A34
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
On the contrary, the courts have consistently denied re-
covery of damages in situations, such as the present case,
where the effect of the misrepresentation is merely to place
a victim in a vulnerable position which subsequently leads
to his injury due to a supervening event. For example, in
Oleck v. Fischer, CCH [1979 Transfer Binder] Fp. Sec. L.
Rep. { 96,898 (S.D.N.¥. 1979), appeal argued, No. 79-7513
(2d Cir. Feb. 7, 1980), plaintiffs after reading defendant’s
prospectus sold them their business in exchange for promis-
sory notes payable over time. The prospectus projected a
favorable image of defendant’s financial condition, due in
part to a misrepresentation of the collectibility of a sub-
stantial debt owed defendant by a third party. That obliga-
tion was in fact defauted upon, defendant underwent a
financial collapse, and plaintiff never received payment on
its notes. The district court denied relief against the de-
fendant or its independent accountant, however, since it
held that the misrepresentation was not the operative cause
for defendant’s demise and plaintiff’s consequent losses,
which were in fact due to defendant’s catastrophic losses in
certain coal mining ventures which could not have been
offset even if the debt had been fully discharged. Conse-
quently, recovery was denied, inter alia, on the grounds that
causation had not been established.
Again, in Miller v. Schweickart, 413 F.Supp. 1062 (S.D.
N.Y. 1976), a brokerage firm for serveral years engaged in
an allegedly illicit arrangement with the Skelly Oil Com-
pany involving the sale and repurchase of bonds. Two years
after this relationship had ceased, the brokerage firm went
bankrupt, and its limited partners, who had allegedly in-
vested due to the favorable financial picture made possible
by the bond dealings, brought an action under the securities
acts against the firm’s general partners and Skelly. Finding
A35
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
that the brokerage firm’s financial collapse was due to de-
velopments other than the consequences of the sale-repur-
chase agreement, Judge Weinfeld granted Skelly’s motion
for summary judgment stating:
To accept plaintiffs’ theory would extend liability
for fraud beyond the immediate and foreseeable con-
sequences of one’s wrongdoing and in effect make
Skelly the permanent accomplice of the Schweickart
general partners in all their subsequent parking
transactions with others; it would subject Skelly to
strict liability for any future depredations by those
general partners long after Skelly had ceased to have
any dealings with Schweickart, even for deeds done
with others years later, of which Skelly had no
knowledge. This is causation run riot.
413 F.Supp. at 1068.’
7The standard of causation espoused here is also implicit in the
manner of calculating damages in cases successfully prosecuted under
Section 10(b). Generally, plaintiffs will be awarded the difference
between their press price and sale price, with an adjustment for
that portion of their loss which is attributable to factors other than
those concealed or misrepresented such as a general market decline.
Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 48-50 (2d
Cir.), cert. denied, 439 U.S. 1039 (1978). But see Clark v. John
Lamula Investors, Inc., 583 F.2d 594, 603-04 (2d Cir. 1978). See
also Bonime v. Doyle, 416 F.Supp. 1372 (S.D.N.Y. 1976), aff'd. 556
F.2d 554 (2d Cir. 1977), where the district court approved the settle-
ment of a class action securities fraud suit over objection ‘hat the
recovery was too meager, noting that while the stock purchases may
have been fraudulently induced, the damages might in large measure
have been attributable to other causes unrelated to the gliewed mis-
statements. In rejecting a more lucrative method of con.puting dam-
ages. Judge Lasker stated:
It therefore has the potential of creating a windfall recovery
to a plaintiff in the nature of indemnification against the risks of
the vicissitudes of the market, and at the same time saddling
defendants with payments far out of proportion to the damages
caused by their fraud.
A36
Appendix A—Decision of the
United States Court of Appeals for the Second Circutt
This fundamental principle of causation is equally well
illustrated in the context of cases arising under Section 14.
In Mills v. Electric Auto-Lite Co., supra, the Supreme Court
held that where proxies are obtained through the use of
misleading solicitations, a damage action under Section 14
will lie to recover for harms later visited upon the corpora-
tions only if that resulting injury flowed from the corporate
action for which shareholder approval had been sought:
Where there has been a finding of materiality, a
shareholder has made a sufficient showing of causal
relationship between the violation and the injury for
which he seeks redress if, as here, he proves that the
proxy solicitation itself... was an essential link in
the accomplishment of the transaction.
Id. 396 U.S. at 385.
416 F.Supp. at 1384. See also Federman v. Empire Fire and Marine
Ins. Co., CCH [1975-76 Transfer Binder], J 95,418 (S.D.N.Y. 1976),
rev'd in part on other grounds, 597 F.2d 798 (2d Cir. 1979).
8In Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970), share-
holders of Auto-Lite alleged that the corporation’s directors had vio-
lated Section 14 by soliciting proxies for approval of a merger with
Mergenthaler Linotype Co. without disclosing in the proxy materials
that they were nominees of Mergenthaler. The Court held inter alia
that there was no need to demonstrate a connection between the
precise misstatement and the ultimate harm, that is, there was no need
to establish that the allegedly unfair merger terms were arrived at
because of the split allegiance of the directors. Plaintiffs were re-
quired to demonstrate only that the shareholders’ acquiescence in the
plan had been unlawfully obtained :
a shareholder has made a sufficient showing of causal relation-
ship between the violation and the injury for which he seeks
redress if, as here, he proves that the proxy solicitation itself,
rather than the particular defect in the solicitation materials, was
an essential link in the accomplishment of the transaction.
396 U.S. at 385. This rule does not mandate a relaxation in the
standard of causation suggested here since the violation in Mills lay
not in the directors’ advising approval of the merger, but in the pro-
curement of shareholder acceptance of the plan through a failure to
reveal that their ostensibly loyal directors who were recommending
the proposal, were in fact corporate double agents.
A37
Appendix A—Decision of the
United States Court of Appeals for the Second Circutt
Where the misleading proxy solicitation is merely a first
step which ultimately results in losses from an unrelated or
supervening cause, relief cannot be obtained under Section
14. Weisberg v. Coastal States Gas Corp., 609 F.2d 650, 654
(2d Cir. 1979), petition for cert. filed, 48 U.S.L.W. 3619
(U.S. Feb. 5, 1980) ; Maldonado v. Flynn, 597 F.2d 789, 795-
96 (2d Cir. 1979) ; see also Galef v. Alevander, slip op. 5893,
5924-25 (2d Cir. Jan. 22, 1980). For example, if corporate
officers are elected through solicitations which failed to
disclose a material lack of qualifications, and those im-
properly elected officers subsequently proceed to harm the
corporation and its shareholders through acts of deceit,
waste or mismanagement which were not themselves au-
thorized by the proxies, a suit to permit recovery of re-
sultant damages will not be permitted. See, e.g., Limmer v.
General Telephone and Electronics Corp., CCH [1977-78
Transfer Binder] Frep. Sec. L. Rep. § 96,111 (S.D.N.Y.
1977); Levy v. Johnson, CCH [1976-77 Transfer Binder]
Fep. Sec. L. Rep. J 95,899 (S.D.N.Y. 1977)?
Essentially the same situation is presented by the case at
bar. But for Kohn’s misrepresentation of his expertise,
plaintiffs might not have purchased the ill-fated stocks
which he touted. Like the improper election of incompetent
or larcenous officers, his misconduct was a precondition of
the eventual loss. But since the actual damage in both cases
stemmed from supervening events unrelated to the mis-
9 See also, Rediker v. Geon Industries, Inc., 464 F.Supp. 73, 82
(S.D.N.Y. 1978) ; Kerrigan v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 450 cag 639, 643 (S.D.N.Y. 1978) ; Maldonado v.
Flynn, 448 ee 1032,
part, 597 F.2d 7
446 ig: 628,
F.Supp. 659,
p. 1040 (S.D.N.Y. 1978), aff'd in pertinent
& Cir. 1979) ; Murgan v. Prudential Funds, Inc.,
, 633 (S.D.N.Y. 1978) ; Goldberger v. Baker, 442
666 (S.D.N.Y. 1977).
A38
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
statements that induced the transactions, the chain of causa-
tion has been broken and recovery may not be had.
It might only be added that there seems to be no policy
justification for the refusal to give effect to the traditional
standard of causation. The mission of Section 10(u) is to
give persons dealing in securities equal access to informa-
tion so that informed investment decisions may be made.
J.I. Case Co. v. Borak, 377 U.S. 426 (1964). It is debatable
whether today’s decision will further that goal since Kohn’s
dereliction was not in withholding or misstating data mate-
rial to the merits of the investments he recommended, but
only as to his expertise in promoting them.
On the other hand, repudiation of the traditional standard
of causation will effectively thwart the oft-repeated goal of
confining claims of corporate waste and mismanagement to
the state courts which have the principal, if not exclusive,
responsibility for such matters. Santa Fe Industries, Inc.
v. Green, 430 U.S. 462, 479 (1977); Cort v. Ash, 422 U.S.
66, 84 (1975) ; Superintendent of Insurance v. Bankers Life
& Casualty Co., supra, 404 U.S. at 12 (“Congress by § 10(b)
did not seek to regulate transactions which constitute no
more than internal corporate mismanagement.”) Under the
causation test promulgated today the federal courts will be
obliged to entertain suits brought by parties claiming to
have been fraudulently induced to purchase stock which
subsequently declined in value due to ineptitude, poor judg-
ment or neglect. These are precisely the types of cases
which this Court has refused to entertain, and yet, today’s
holding will open a back door to the federal courthouse for
these same cases which have historically been left to state
adjudication.
A39
Appendix A—Decision of the
United States Court of Appeals for the Second Circuit
The majority offers no compelling rationale for its re-
fusal to abide by the acknowledged standard of causation.
It is emphasized that the misrepresentation in issue not
only prompted the initial purchase but was later repeated
so as to cause the retention of the stocks. This observation
has no bearing on the principle governing this action. First,
the trial judge did not make such a factual finding, and I
do not believe that it can be “implied” from the opinion
below. Factual support for such an approach appears to
be lacking, since it may have been that Kohn’s stocks all
went into an immediate tailspin after their purchase by
plaintiffs, and that they simply remained in this sorry
state, or perhaps even revived somewhat, following Kohn’s
subsequent misrepresentations."° More significantly, this
claim even if supported by the record would not supply the
missing element of causation. The fact that the defrauded
parties retained their stock after a reprise of Kohn’s decep-
tion is no more the cause of the stock’s loss of value than
was Kohn’s initial misrepresentation.
Because I view the causation issue as dispositive I would
not consider whether it is permissible or advisable for this
Court to formulate on plaintiffs’ behalf theories of Wood,
Walker’s liability which were not averred in the pleadings,
actively litigated or resolved by the trial court, see Opinion
of the District Court at 17 n.11. Consequently, I intimate no
view on the merits of those issues.
The judgment as to Wood, Walker should be affirmed and
as to Kohn, reversed.
10 The only testimony on the subject concerns the stock prices on
the date of purchase, the date of Kohn’s unmasking and the date of
sale.
APPENDIX B
Decision of the United States District Court
for the Southern District of New York
UNITED STATES DISTRICT COURT
For tHE SouTHERN District or New York
No. 72 Civ, 5121
April 25, 1979.
,%
v
Marsury ManaGEMENT, Inc.,
Harry Baper AnD Harvey JAFFE,
Plaintiffs,
Vv.
Axrrep Koun anp Woop, Waker & Co.,
Defendants.
a
v
George Berkowitz, New York City, for plaintiffs.
Lunney, Downey & Crocco, New York City, for defendant
Wood, Walker & Co.; Charles A. Crocco, Jr., New York
City, of counsel.
Fisher & Klein, New York City, for defendant Kohn; Jay
D. Fisher, New York City, of counsel.
OPINION
GaauiarpI, District Judge,
Plaintiffs Marbury Management, Inc., Harry Bader and
Harvey Jaffe commenced this action against the brokerage
[A40]
_—_ Se ——
~
A41
Appendiz B—Decision of the United States
District Court for the Southern District of New York
firm of Wood, Walker & Co. (“Wood Walker”) and its
employee, Alfred Kohn, alleging violations of Section 10(b)
of the Secuirties Exchange Act of 1934 (“Exchange Act”),
15 U.S.C. § 78j(b), Section 17(a) of the Securities Act of
1933, 15 U.S.C. § 77q, and common law fraud.' Jurisdiction
is predicated upon 15 U.S.C. §§ 78aa, 77v and principles of
pendent jurisdiction. This action was tried to the court and,
at the conclusion of the evidence, the court granted Wood
Walker’s motion to dismiss the complaint on the ground
that plaintiffs failed to prove a prima facie case against it
(Tr. 188-90). The court reserved decision as to defendant
Kohn’s motion to dismiss the complaint against him.
Plaintiffs are former customers of defendant Wood
Walker, a stock brokerage firm.2 The complaint alleges
that, beginning during the summer of 1967, Alfred Kohn
falsely held himself out to be a licensed registered repre-
sentative employed by Wood Walker. Plaintiffs claim that
they placed buy and sell orders with Wood Walker through
Kohn? in reliance upon his training and expertise. (Com-
plaint, at J] 10, 37, 64). The complaint further alleges that
Kohn offered advice to the plaintiffs regar@.ng the invest-
ment potential of certain securities; that he represented
that his opinion was “based upon personal conversations
1 This court dismsised the complaint against a third defendant, the
New York Stock Exchange, Inc. in a memorandum decision dated
January 24, 1974.
2 Plaintiff Marbury Management is engaged in business as a
finance company.
3 A list of the securities that each of the plaintiffs purchased with
Wood Walker through its employee, Alfred Kohn, is set forth in
Schedules A, B, and C which are attached to the complaint. See n.14
—— of the securities purchased by Marbury + seaman and
ader.
A42
Appendix B—Decision of the United States
District Court for the Southern District of New York
and meetings with officers and other persons who had unique
information as to the transactions of the corporation and
their effect on the market price”; and that Kohn knew that
his representations were false when he made them but
offered them in order to induce the plaintiffs to purchase
certain stocks. (Jd. [J 18-20, 42-45, 70-73). Wood Walker,
it is alleged, permitted Kohn to hold himself out as a
registered representative when it either knew or should
have known that he was not so licensed. (Jd. at {ff 12-13,
39-40, 66-67). Based upon the aforesaid actions of the de-
fendants, the complaint alleges three causes of action on
behalf of each of the plaintiffs: violations of Section 10(b)
of the Exchange Act (and Rule 10(b)(5) thereunder), Sec-
tion 17(a) of the Securities Act of 1933, and fraud under
the law of New York. The following constitutes this court’s
findings of fact and conclusions of law in accordance with
Rule 52(a), Fed.R.Civ.P. Plaintiffs Marbury Management
and Bader have proved their claims under §10(b) and
therefore are entitled to recover damages from Kohn.
Plaintiff, Jaffe, however, has not proved all of the requisite
elements of a §10(b) cause of action and therefore is not
entitled to relief. Plaintiff’s motion for reconsideration of
the court’s dismissal of the complaint against Wood Walker
pursuant to Rule 60(b), Fed.R.Civ.P. is also denied.
Discussion
1. 10(b) Claims Against Defendant Kohn
[1] It is well established that an implied cause of action
under § 10(b) will lie only if the plaintiffs can prove that
the defendant willfully misstated or omitted a material fact
which caused the plaintiff injury in connection with his pur-
chase or sale of a security. Ernst & Ernst v. Hochfelder,
A43
Appendix B—Decision of the United States
District Court for the Southern District of New York
425 U.S. 185, 197, 96 S.Ct. 1875, 47 L.Ed.2d 668 (1976)
(knowing or intentional conduct required) ; TSC Industries
Inc. v. Northway, Inc., 426 U.S. 488, 449, 96 S.Ct. 2126, 48
L.Ed.2d 757 (1976) (misstatement or omission must be
material) ; Affiliated Ute Citizens v. United States, 406 U.S.
128, 153-54, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); Titan
Group Inc. v. Faggen, 513 F.2d 234, 237 (2d Cir. 1975)
(causation still a necessary element in some private 10(b)
actions) ; Blue Chip Stamp v. Manor Drug Stores, 421 U.S.
723, 730-31, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) (plaintiff
must be a purchaser or seller of securities).
[2-4] The complaint in this case alleges that Kohn made
two types of misstatements giving rise to a private cause
of action under § 10(b): (1) numerous prediction concern-
ing the future earning capacities and proposed acquisitions
of various companies, and (2) representations that he was
a “portfolio management specialist.” As to the first set of
alleged misstatements, plaintiffs claim that Kohn stated
that “he had a relative on the board of directors .. . of
[DWQG] corporation” and that the stock “should go up in
price” (Gold Tr. 30) (Jaffe Tr. 90); that investors in Com-
muter Airlines Co. were likely to earn a “big return” (Bader
Tr. 1) (Jaffe Tr. 100); that Capital Holding and Stanrock
Uranium were “good stocks” which should return a profit
(Bader Tr. 63-64) ; and that a favorable newspaper article
regarding the Responsive Environment Co. would soon be
published (Gold Tr. 33) (Bader Tr. 62). Although the
plaintiffs claim that Kohn knew that these representations
were false when he made them (Complaint {If 20, 47, 74),
nothing in the record supports this conclusion. On the con-
trary, Robert Gold, President of plaintiff Marbury Manage-
ment, testified that he did not believe that Kohn was making
A44
Appendix B—Decision of the United States
District Court for the Southern District of New York
fraudulent statements (Tr. 31, 41), and plaintiff Jaffe
conceded that certain information and investment advice
that Kohn gave to him may have been true (Tr. 116). Nor
does the mere fact that the defendant’s predictions did not
materialize indicate that the statements were untrue at
the time of issuance. See A. Jacobs, What is Misleading
Statement or Omission under Rule 10b-5, 42 Fordham
L.Rev. 243, 284 (1973) citing inter alia Dolgow v. Anderson,
53 F.R.D. 664, 670, 676-79 (E.D.N.Y. 1971) (intervening
cause); Milberg v. Western Pac. RR., 51 F.R.D. 280, 282
(S.D.N.Y. 1970) (cannot reasonably expect projections to
be infallible in all situations). A false prediction, how-
ever, may be actionable if the plaintiff establishes that the
statements, whether characterized as either fact or opinion,‘
were not prepared in a reasonable manner or with a firm
4 The fact-opinion dichotomy has become largely a distinction with-
out a difference. Recommendations to buy or sell securities, opinions
or estimates as to the present or the future status of an event, projec-
tions and predictions of future occurrences, and representations that
an incident will take place all have been considered to be “facts” with-
in the ambit of §10(b). See A. Jacobs, supra at 279 citing inter
alia Chris Craft Indus., Inc. v. Bangor Punta Corp., 426 F.2d 569,
579 (2d Cir. 1970) (Lumbard, J. concurring) (the Rule covers “in-
formation” that dose not fit easily into categories of either “fact” or
“opinion”) ; Myzel v. Fields, 386 F.2d 718, 734 n. 8 (9th Cir. 1967) ;
SEC v. American Plan Inv. Corp., [1972-1973 Transfer Binder]
CCH Fed.Sec.L.Rep. 93,769, at 93,361 (C.D.Cal.1972) (consent
order enjoining misleadin oot t Dolgow v. Anderson, 53
F.R.D. 664, 670-79 (E.D.N.Y. 1971) ; Sprayregen v. Livingston Oil
Co., 295 F.Supp. 1376, 1377-78 (S.D.N.Y. 1968) (false statements
on projected Bape ts ; Fischer v. Kletz, 249 F.Supp. 539, 541
(S.D.N.Y. 1966) (inflated earnings forecast disseminated both to
public and to regulatory cy); Nicewarner v. Bleavins, 244
F.Supp. 261, 264 (D.Colo. 1965) (statements about expected profits,
likelihood of success of venture, etc., not shown to be in bad faith
by the evidence) ; SEC v. Broadwall Sec., Inc., 240 F.Supp. 962, 968
’ (S.D.N.Y. 1965) (broker-dealer’s predictions and opinions as to
future market prices of stock).
A45
Appendix B—Decision of the United States
District Court for the Southern District of New York
basis. SEC v. Okin, 137 F.2d 862, 864 (2d Cir. 1943); REA
Express v. Interway Corp., 410 F.Supp. 192, 197 (S.D.N.Y.
1976) citing Marx v. Computer Sciences Corp., 507 F.2d
485, 490 (9th Cir. 1974); Schuller v. Slick Corp., [1974-
1975 Binder] Fed.Sec.Law Rep. (CCH) {| 95,065 at p. 97,739;
In re Alexander Reid & Co., Inc., [1962-63 Binder] Fed.
See.Law Rep. (CCH) {| 76,823 at p. 81,073; In re Mac Rob-
bins & Co., 40 S.E.C. 497, 502 (1961) remanded sub nom.
Kahn v. SEC, 297 F.2d 112 (2d Cir. 1961) and Berko v.
SEC, 316 F.2d 137 (2d Cir. 1963); Jacobs, supra, at 285;
A. Bromberg, 2 Securities Law §7.2(1) (1977); E. Weiss,
Registration & Regulation of Brokers and Dealers, at 185
(1965).5 Plaintiffs have not offered even a scintilla of
evidence to show that Kohn’s representations were ground-
less and absent proof, the requisite falsity is lacking to
establish a misstatement within the purview of § 10(b).
Kohn’s representations concerning his expertise in the
securities field present a different problem. Unlike his in-
vestment advice, Kohn’s repeated statements that he was
a stockbroker (Gold Tr. 13) (Bader Tr. 60 (Jaffe Tr. 87-89)
and his use of a business card stating that he was a ‘‘port-
folio management specialist’? (Exhibits 47, 48) were un-
deniably false. William Haneman, general partner of Wood
Walker, testified that Kohn was employed by Wood Walker
as a trainee, and as such, was permitted to accept buy or
5 Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969) and Hiller v. SEC,
429 F.2d 856 (2d Cir. 1970) are not conrtary to this position. Hanly
only held that a broker violates Rule 10b-5 when he makes a recom-
mendation to a customer without an “adequate and reasonable basis
for such recommendation.” Hanley v. SEC, supra, at 597. After
quoting its holding in Hanly, the Second Circuit noted specifically in
Hiller that “there was substantial evidence in the record that .. . [the]
salseman recommended Transition Stock on the basis of extravagant
reports...” Hiller v. SEC, supra, at 858.
A46
Appendix B—Decision of the Umted States
District Court for the Southern District of New York
sell orders only under the supervision of a Wood Walker
officer (Haneman Tr. 141).
[5, 6] Scienter and materiality, two principal elements
of the private cause of action under 10(b), are also present
with regard to Kohn’s statements concerning his qualifica-
tions. Given defendant’s deposition testimony that he was
neither a ‘‘securities analyst’’ nor ‘‘portfolio management
specialist’? but knew that his business card listed him as
such (Tr. 138-39), it is clear that Kohn acted with an ‘‘ ‘in-
tent to deceive, manipulate, or defraud’ ”. See Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Hd.2d
668 (1976). A willfully false statement is considered to
be material if:
[there is] a substantial likelihod that, under all the
circumstances, the omitted [or misrepresented] fact
would have assumed actual significance in the de-
liberations of the reasonable shareholder. Put an-
other way, there must be a substantial likelihood that
the disclosures of the omitted [or misrepresented]
fact would have been viewed by the reasonable in-
vestor as having significantly altered the ‘‘total mix’’
of information made available.
TSC Industries v. Northway, Inc., 426 U.S. 438, 449, 96
S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). Analyzed against
this standard, the court finds that Kohn’s misstatements
were material. The court reaches this conclusion for two
6 Although this standard arose in the context of defining materiality
for the purposes of Section 14(a) of the Exchange Act, “it is gen-
erally agreed that the same standard applies under § 10(b). Joyce v.
Joyce Beverages, Inc., 571 F.2d 703, 17 n. 6 (2d Cir. 1978) citing
Goldberg v. Meridor, 567 F.2d 209, 218-19 (2d Cir. 1977) ; see also
SEC v. Bausch & Lomb Inc., 565 F.2d 8, 14-15 (2d Cir. 1977).
A47
Appendix B—Decision of the United States
District Court for the Southern District of New York
reasons. First, the expertise that Kohn held himself out as
having affected the type of services that he could lawfully
perform for investors. For example, testimony at trial
indicated that while trainees at a brokerage firm can accept
buy or sell orders by phone under the supervision of a
broker, they cannot recommend the purchase of a security
outside of the office. (Haneman Tr. 148-49). Second, the
qualifications and expertise of a securities salesman are
particularly significant criteria in evaluating any informa-
tion as inherently speculative as future earnings predic-
tions. Thus, a reasonable investor would certainly consider
the total mix of information ‘‘significantly altered’ if he
learned that certain investment advice was being furnished
to him by ‘‘a trainee’’ in the securities field rather than a
‘‘snecialist’’. It is therefore irrelevant that the plaintiffs
may not have known the precise training required for an
individual to be licensed as a broker (Tr. 52, 84, 108) ; what
is important is that the terms ‘‘broker” and ‘‘specialist”
themselves connote a level of competence to the reasonable
investor. Defendant’s reliance on Hayden v. Walston & Co.,
Inc., 528 F.2d 901 (9th Cir. 1975) is inappropriate. Although
the Ninth Circuit held that a salesman’s failure to reveal
to his investors that he was not licensed to sell securities
was not an omission of a material fact under Rule 10b-5,
that decision predated the Supreme Court’s ruling in North-
way and relies heavily on the fact that the complaint con-
tained no allegations that the salesman’s omission rendered
his other statements misleading. The complaint in this case,
in contrast, alleges that the misstatements mere materially
misleading (Complaint If 21, 48, 75). These allegations are
amply supported by the trial testimony to warrant a dif-
ferent result from that reached by the Ninth Circuit in
Hayden.
r+
A48
Appendix B—Decision of the United States
District Court for the Southern District of New York
(7, 8] The final element of a 10(b) cause of action based
on affirmative misrepresentations is proof of reliance.’ In
such a case, “reliance” would seem to embody,
two separate questions both of which are designed
to determine whether the utterance by defendant
caused the plaintiff to enter into the transaction and
therefore his losses which allegedly flowed from the
transaction. The two questions are did the plaintiff
believe what the defendant said and was his belief
the cause (or a cause) of plaintiff’s action in entering
into the transaction.
R. Jennings & H. Marsh, Securities Regulation 1063 (1977).
Unlike the concept of materiality, which is couched in terms
of “the reasonable investor”, the concept of reliance re-
quires a subjective inquiry to determine causation in fact.
3 A. Bromberg, supra § 8.6 at p. 209-11. See also Schlick v.
Penn-Dixzie Cement Corp., 507 F.2d 374, 380-81 (2d Cir.
1974) ; Shapiro v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 495 F.2d 228, 238-39 (2d Cir. 1974).
[9-11] Based upon plaintiffs’ testimony at trial, this court
finds that Kohn’s misrepresentations regarding his employ-
ment status caused plaintiffs Marbury Management and
Bade to purchase securities from Kohn between the summer
of 1967 and April 1969. Both of these plaintiffs testified
repeatedly and without qualification that they would not
have purchased the stocks had they known that Kohn was
7 The Supreme Court's decision in Affiliated Ute Citizens v. United
States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972) did not
eliminate proof of reliance as an element in a private cause of action
under Rule 10b-5. Rather, the Court beld that proof of reliance would
not be a prerequisite to recovery in situations involving a failure to
disclose a material fact. Jd. at 153-54, 92 S.Ct. 1456.
7%
A49
Appendix B—Decision of the United States
District Court for the Southern District of New York
not a broker (Gold Tr. 24, 47-48, 51-53)® (Bader Tr. 66, 82).
Plaintiff Jaffe, however, has not established to the court’s
satisfaction that he p rehased the securities in question
based upon Kohn’s misstatement of his employment status.
On the contrary, Jaffe’s testimony indicates that he pur-
chased in reliance upon his friendship with Kohn and
Kohn’s misrepresentations that Kohn had inside informa-
tion regarding the companies whose stock was being recom-
mended. (Jaffe Tr. 89, 90, 113-16). Thus, this court finds
that only plaintiffs Marbury Management and Harry Bader
have proven a cause of action under Section 10(b) of the
Securities Exchange Act.’
2. Reconsideration of Dismissal of Wood Walker
Finding that there was “no evidence whatsoever . . . of
any participation on behalf of defendant Wood Walker to
manipulate with fraud or to in any way indicate that they
intended to deecive their customers,” the ccurt dismissed
at trial the complaint against Wood Walker (Tr. 188-90).
® Robert Gold, President of Marbury Management, testified on
behalf of the plaintiff corporation.
9 The court dismisses those portions of the complaint that seek to
recover for violations of § 17(a) of the Securities Act of 1933, 15
U.S.C. § 77q(a). The Court of Appeals for this circuit stated several
years ago that the question whether § i7(a), a criminal provision,
may be the source of an implied private right of action was an open
uestion. Globus v. Law Research Service, Inc., 418 F.2d 1276,
283 (2d Cir. 1969). Since that time, however, this district has re-
peatedly held that no such cause of action exists, see, e. g., Scarfarotti
v. Bache & Co., 438 pe ae 199, 207 (S.D.N.Y. 19775 : Architec-
tural League of New York v. Bartos, 404 F.Supp. 304 (S.D.N.Y.
1975), and this court adopts the reasoning set forth in those cases.
Since reliance is also an essential element of a common law fraud
claim, see W. Prosser, Torts § 108 (4th ed. 1971), plaintiff Jaffe
also fails to state a cause of action against defendant Kohn under this
t
A50
Appendix B—Decision of the United States
District Court for the Southern District of New York
Plaintiffs have requested that the court reconsider the dis-
missal pursuant to Rule 60(b).'° For the reasons stated
below, plaintiffs’ motion is denied.
The complaint alleges that Wood Walker (1) “knew or
should have known that defendant Kohn was not a legally
licensed allowed him to hold himself out as one authorized
to transact buy and sell orders representative, but never-
theless . . .” (Complaint {[f] 12-13, 39-40, 66-67), and (2)
knew that Kohn’s statements concerning the investment
potential of various securities were false when they were
made (Jd. 17, 46, 71). Although the complaint does not
articulate with any more precision the theory upon which
the plaintiffs seek to impose liability upon Wood Walker,
plaintiffs’ position as expressed at trial and in their post-
trial memorandum of law indicates that they seek recovery
against Wood Walker as an aider and abettor of Kohn’s
secuirties law violations."
[12-14] In Ernst & Ernst v. Hochfelder, 425 U.S. 185,
96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), the Supreme Court
explicitly refused to decide whether § 10(b) and Rule 10b-5
may give rise to aiding and abetting liability. 7d., 425 U.S.
at 192 n.7, 96 S.Ct. 1375. Since Hochfzlder, however, the
Second Circuit has held that these provisions permit the
imposition of aiding and abetting liability. Rolf v. Blyth,
10 Although a final judgment dismissing the complaint against
Wood Walker was never signed due to settlement negotiations with
the remaining defendant, Rule 60(b) provides for relief from either
a “final judgment, order or proceeding.” Rule 60(b), Fed.R.Civ.P.
11 Plaintiffs have not alleged that Wood Walker is liable to them
either as a principal under the theory of respondeat superior or as a
controlling person under Section 20(a) of the Exc Act. Absent
such allegations, the court need not consider Wood Walker’s liability
based upon either of these theories.
A51
Appendix B—Decision of the Umited States
District Court for the Southern District of New York
Eastman Dillon & Co., 570 F.2d 38, 44 (2d Cir. 1978) ; Hirsch
v. DuPont, 553 F.2d 750, 759 (2d Cir. 1977). In order to
impose aiding and abetting liability, the plaintiff must
prove (1) that the primary party, here Kohn, committed
a securities law violation; (2) that the aider and abettor
knew of the violation; (3) and that the aider and abettor
substantially assisted in effecting the violation. Rolf v.
Blyth, Eastman Dillon & Co., supra, 570 F.2d at 47-48;
SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974), cert.
denied, 420 U.S. 908, 95 S.Ct. 826, 42 L.Ed.2d 837 (1975) ;
cf. Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 886 (3d
Cir. 1975); Landy v. Federal Deposit Ins. Co., 486 F.2d
139, 162-63 (3d Cir. 1973) cert. denied, 416 U.S. 960, 94 S.Ct.
1979, 40 L.Ed.2d 312 (1974) (proof of “wrongful act” by
primary wrongdoer suffices for first element). Judged
against this standard, Wood Walker cannot be held liable
under an aiding and abetting theory. Although Kohn’s
underlying violation satisfies the first element of the test,
neither of the other requirements have been satisfied. All
of the actions and inactions of Wood Walker, even when
viewed most favorably to the plaintiffs, support a finding
of only negligence. (Tr. 153-54). Thus, plaintiffs have failed
to establish the element of recklessness enunciated in Rolf.'?
The court also found that Wood Walker neither supplied
nor paid for Kohn’s business cards (Tr. 182-83). Wood
Walker thus did not in any way provide substantial assist-
12 “Reckless conduct is, at the least, conduct which is ‘highly un-
reasonable’ and which represents ‘an extreme departure from the
standards of ordinary care. . . to the extent that the danger was
either known to the defendant or so obvious that the defendant must
have been aware of it.’” Rolf v. Blyth, Eastman Dillon & Co., supra,
570 F.2d at 47 citing Sanders v. John Nuveen & Co., 554 F.2d 790,
793 (7th Cir. 1977).
A52
Appendix B—Decision of the United States
District Court for the Southern District of New York
ance to Kohn in violating the securities law. The court’s
conclusions with respect to plaintiffs’ attempts to satisfy
the second and third elements of aiding and abetting lia-
bility are supported by Woodward v. Metro Bank of Dallas,
522 F.2d 84 (5th Cir. 1975). In Woodward, the Fifth Circuit
stated that the degree of knowledge required to impose
aiding and abetting liability should depend on the unique-
ness of the assisting activity in the particular enterprise.
Id. at 97. Thus, in a case combining inaction and affirmative
assistance, the Fifth Circuit “was loathed” to find 10b-5
liability without clear proof of intent to violate the securi-
ties law if the evidence shows no more than the perform-
ance of routine transactions. Accordingly, plaintiff’s mo-
tion pursuant to Rule 60(b), Fed.R.Civ.P. is denied.
Damages
[15, 16] Section 28(a) of the Exchange Act, 15 U.S.C.
§ 78bb(a) limits recovery in securities law actions to “actual
damages”. The appropriate measure of damages in this
Circuit for the type of violations proven in this case is the
amount of each defrauded buyer’s net economic loss. This
figure is calculated by determining each plaintiff’s gross
economic loss—the difference between the purchase and
resale prices of the securities—and subtracting “an appro-
priate offset dictated by the particular facts of the case.”
See Clark v. John Lamula Investors, Inc., 583 F.2d 594, 604
(2d Cir. 1978). Although Robert Gold, president of Mar-
bury Management, testified at two post-trial hearings that
plaintiffs Marbury Management and Harry Bader learned
on approximately January 28, 1970 that Kohn was not a
portfolio management specialist, Marbury Management did
not sell its D.W.G., Responsive Environment, and Universal
rs
A53
Appendix B—Decision of the United States
District Court for the Southern District of New York
Container securities until over a year after that date, and
Bader continues to hold all of the securities that Kohn pur-
chased for his aceount. Accordingly, applying the general
principles of the Clark decision to the facts of this case,
the court determines that the plaintiffs’ gross economic
losses must be reduced by the amount that the plaintiffs
lost due to their failure to sell their securities within a rea-
sonable period after discovering defendant’s fraud.’ Based
upon the stipulation entered into by the parties regarding
the market value of the securities on January 28, 1970 and
the schedules of purchases attached to the complaint, Mar-
bury Management’s net economic loss is $28,727.27 and
13 The Second Circuit seems to te ahs plaintiff’s failure to mitigate
damages as a posible ground for reducing the amount of the damage
award in an appropriate case. See Clark v. John Lamula Investors,
Inc., supra, at n. 9. Such an approach has received support from
courts and commentators alike because it attempts to calculate the
amount of damages based upon losses that are truly attributable to
the fraud. See Harris v. American Investment Co., 523 F.2d 220
(S8ht Cir. 1975), cert. denied, 423 U.S. 1054, 96 S.Ct. 784, 48 L.Ed.2d
643 (1976) ; Foster v. Financial Technology, Inc., 517 F.2d 1068 (9th
Cir. 1975); Esplin v. Hirschi, 402 F.2d 34 (10th Cir. 1968), cert.
denied, 394 U.S. 928, 89 S.Ct. 1194, 22 L.Ed.2d 459 (1969) ; Com-
petitive Ass'n, Inc. v. International Health Services, [1974-1975
Binder] Fed.Sec.Law Rep. (CCH) {| 94,966; Fox v. Glickman Corp.,
253 F.Supp. 1005 (S.D.N.Y. 1975); Reder, Measuring Buyer’s
Damages in 10b-5 Cases, 31 Bus. Lawyer 1839 (1976). Thus, if
the plaintiff continues to hold the stock after the discovery of the
fraud, he can be deemed to have made a “second investment decision”,
see Harris v. American Investment Co., supra, 523 F.2d at 228, based
on the “total mix” of information now available.
77>
A54
Appendix B—Decision of the United States
District Court for the Southern District of New York
Bader’s net economic loss is $20,502.25. Let the Clerk
enter judgment for plaintiff Marbury Management in the
amount of $28,727.27 and judgment for plaintiff Bader in
the amount of $20,502.25, both plus interest from January
28, 1970.
14 These figures were determined as follows:
MARBURY MANAGEMENT
Market
Stipulated Market Value
Value Per of All Shares
# of Date Purchase Share as Owned as of
Name of stock shares Purchased Price of 1/28/70 1/28/70 Loss
D.W.G. Corp. 1000 8/27/68 14,967.50 bid $4 7/8 4,875.00 $10,092.50
Responsive
Environment 100 12/ 6/68 3,385.75 bid $8 800.00 2,585.75
Universal Container 500 3/26/69. 12,406.25 bid $9 4,500.00 7,906.25
Unexcelled 500 1/20/69 22,205.00 [sold on 3/26/69 for $13,312.23] 8,892.77
$29,477.27
- 750.00*
Total loss $28,727.27
* Stipulated amount that defendant Kohn previously paid to defendant Marbury Management
regarding its loss on D.W.G. stock.
Harry Baber
Responsive
Environment
Capital Holding 1
Commuter Airlines 500
Stanrock Uranium 200
ss
12/13/68
12/27/68
9/27/68
1/ 6/69
16,928.75
687.50
6,312.50
973.50
bid $8
$4,000.00
{no market value]
{no market value]
bid $2
400.00
Total Loss
$12,928.75
687.50
6,312.50
573.50
$20,502.25
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.