Appendix — Chemetron Corp. v. Business Funds, Inc.

* 8 U.S.

5

82-999

DEC 15 1982

No. 82- ALEXANDER L STEVAS, |

CLERK

In The

Supreme Court of the United States

October Term, 1982

Chemetron Corporation,

Petitioner,

V

Business Funds, Inc., John F. Austin, Jr.,

and David C. Bintliff,

Respondents.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Louis Loss

1545 Massachusetts Avenue

Cambridge, Massachusetts 02138

(617) 495-4626

Counsel of Record for Petitioner

Of Counsel;

JAMES G. PARK JOE H. REYNOLDS

VINCENT C. DELUZIO LLOYD R. CUNNINGHAM, JR.

CARL E. ROTHENBERGER, JR. Reynolds, Allen & Cook

STANLEY YORSZ Incorporated

Buchanan, Ingersoll, 1100 Milam Building

Rodewald, Kyle 16th Floor

& Buerger, P.C. Houston, Texas 77002

57th Floor—600 Grant St.

Pittsburgh, Pennsylvania 15219

December 1982

APPENDIX A

CHEMETRON CORPORATION,

Plaintiff-Appellee

Cross-Appellant,

V.

BUSINESS FUNDS, INC., et al.,

Defendants-Appellants Cross-Appellees.

No. 80-1658.

United States Court of Appeals,

Fifth Circuit.

Aug. 16, 1982.

Appeals from the United States District Court for

the Southern District of Texas.

Before GEE, REAVLEY, and WILLIAMS, Circuit

Judges.

GEE, Circuit Judge:

I. INTRODUCTION

We review the latest act in the long-running drama

of the Western Equities, Inc. (Westec“) stock scandal.

The characters include defendants-appellants, cross-

appellees Business Funds, Inc., (“BFT’”), a small business

investment company, John Austin (“Austin”), chairman

of BFI, and David Bintliff (“Bintliff”’), a businessman and

investor. The final character is plaintiff-appellee, cross-

appellant Chemetron Corporation (“Chemetron”). The

defendants appeal from a judgment of $18,413,160 in

actual and exemplary damages for violations of the fed-

eral and Texas securities laws entered against them

A2

based on jury answers to special interrogatories.’ De-

spite an able job in a very complex case by the district

court, we discern several errors requiring reversal and

remand.

II. FACTS AND DISPOSITION BELOW

This court is quite familiar with the Westec stock

scandal.“ We sketch only those facts necessary for the

disposition of this case.

BFI, a Maryland corporation, was a small business

investment company formed prior to 1961 with Houston,

Texas, as its principal place of business.* BFI loaned

venture capital to companies in exchange for stock war-

rants, often providing management expertise and placing

representatives on the boards of directors of these com-

panies as well. In order to encourage their growth and

enhance its investment, BFI also helped arrange mergers

and acquisitions for these companies.

In late 1961, BFI hired James Williams (“Williams”)

as a vice president to supervise some of its investments.

The chairman of BFI at that time was defendant Austin.

While he was not a full-time chairman, spending substan-

tial time each week with his principal business, a

mortgage-banking firm, he did meet with Williams and

discuss his activities several times a week.

1. Austin died after the filing of this appeal, and his estate is prosecuting

it.

2. See, e. g., Williams u Commissioner, 584 F.2d 90 (5th Cir. 1978); United

States u Hall, 457 F.2d 1324 (5th Cir. 1972); United States u Williams, 447 F.2d

1285 (5th Cir. 1971) (en banc), cert. denied, 405 U.S. 954, 92 S.Ct. 1168, 31

L.Ed.2d 231 (1972).

3. Since initiation of this suit, BFI has become part of the Penn Central

A3

Through a series of mergers and acquisitions or-

chestrated by Williams, Geo-Space, a company in which

BFI had invested and for which Williams had responsi-

bility, grew and in 1963 began considering a merger with

Westec, a company listed on the American Stock Ex-

change. A merger with a listed company would substan-

tially enhance the value of BFI’s investment in Geo-

Space. Williams, assisted by Ernest Hall (“Hall”) of Geo-

Space, undertook to consummate the merger. They ac-

quired a foothold in Westec with a private nonmarket

purchase of Westec stock in August 1963 and elected

Williams to the Westec board shortly thereafter. Negotia-

tions on a merger concluded successfully in September

1964. BFI exchanged its warrants for Geo-Space stock

for stock in Westec, leaving BFI in control of Westec.

Williams became chairman of the new company, Hall

became president and Austin was made a director.

From September 1964 until August 1966, Williams

and Hall engaged in massive and complex stock opera-

tions designed to increase the value of Westec stock.

These operations took many forms. For example, Hall

repaid a debt to a business associate on the condition that

the money be used to purchase Westec stock on the open

market during 1964; Williams aided in the financing of

this deal, although it is not clear whether BFI was the

source of the funds. In another instance, defendant

Austin guaranteed a loan in December 1964 from a third

party to Hall that Hall used to purchase Westec stock.

BFI portfolio companies and Westec subsidiaries also

bought Westec shares. In addition, stock was purchased

in the name of various relatives and associates of Hall

and Williams. In most of these transactions, BFI money

appears to have played a role.

A4

In April 1965, Williams resigned from BFI, although

his connections with it appear to have continued for a

short time thereaiter. His departure may have been on

unfriendly terms, but this is not altogether clear. About

this time, Austin also left the Westec board and BFI

distributed its Westec shares to its shareholders. Despite

these actions BFI may, however, have continued to in-

fluence and control Westec until December 1965.

September 1965 marked the appearance of defendant

Bintliff with the acquisition by Westec of Camerina Pe-

troleum Company, partially owned by Bintliff. Bintliff

exchanged his Camerina shares for Westec shares. This

transaction appears to have been unrelated to the stock

price manipulation operation.

Chemetron, a Delaware corporation with its princi-

pal place of business in Chicago, began its involvement in

1965, when Williams and Hall sought to acquire a

Chemetron subsidiary, Pan Geo Atlas Corporation

(“PGAC”), for Westec. Lengthy negotiations led to an

October 1965 tentative deal subject to approval by both

parties’ boards. On January 14, 1966, Chemetron re-

ceived Westec stock for its PGAC stock and notes. The

transaction was nonmarket, and a Chemetron official

testified at trial that the market price of Westec shares

played no role in Chemetron’s evaluation of the deal.

Chemetron claims it was never told of the stock manipu-

lation scheme and would not have made the deal had it

known.

The manipulative activities of Hall and Williams

continued after the Chemetron transaction. They or-

dered Westec stock in the names of third parties, seeking

A5

loans to finance the purchases. One such loan was se-

cured by defendant Bintliff, for which he received Westec

stock as a fee. Bintliff also bought Westec stock from a

third party in a sale arranged by Williams.

In August 1966, as part of the scheme, Williams and

Hall placed a large stock order they could not finance.

Bintliff declined to finance it. Chemetron was approached

to finance it but declined and informed the Securities and

Exchange Commission and the American Stock Ex-

change, which suspended trading in Westec stock. At

that time Chemetron was the largest shareholder of

Westec. Shortly after the suspension of trading, Westec

went into Chapter X reorganization, emerging as a reor-

ganized company in 1969. Chemetron exchanged its

Westec shares with the bankruptcy trustee in 1969, re-

ceiving shares and notes in the reorganized company.

The failure of Westec spawned an avalanche of litiga-

tion. This suit began in 1967 when Chemetron sued 57

defendants seeking recovery of its losses under many

provisions of the federal and Texas securities laws.

Chemetron basically alleged a plan, scheme, or conspir-

acy to manipulate the price of Westec stock through

actual or apparent trading, thereby inducing transactions

by others, leading to its injury when Westec collapsed.

After lengthy discovery and settlement with or voluntary

dismissal of 53 of the defendants, the case against four

defendants, BFI, Austin, Bintliff, and Brazos Valley

Cotton Oil Company (“Brazos Valley“), came to trial in

the Southern District of Texas before a jury in 1979. The

legal claims had been narrowed to violations of three

statutes: (1) section 9 of the Securities Exchange Act of

1934, 15 U.S.C. § 78i (1976); (2) section 10(b) of the 1934

A6

Act, 15 U.S.C. § 78j(b) (1976), and SEC Rule 10b-5,

17 C.F.R. § 240.10b-5 (1981), thereunder; and (3)

Tex.Rev.Civ.Stat.Ann. art. 4004 (Vernon 1966), the Texas

antifraud statute.*

In response to 31 specie interrogatories, the jury

completely exonerated Brazos Valley and found no sec-

tion 9 violation. However, the trial judge entered judg-

ment for Chemetron under section 10(b), Rule. 10b-5, and

article 4004 based on the jury’s remaining responses. The

three defendants were held jointly and severally liable

for actual damages of $4,726,128 under federal and state

law, prejudgment interest of $4,817,276, and exemplary

damages under art. 4004 of $9,452,256, less settlement of

$582,500, for a total liability of $18,413,160. All defend-

ants moved for judgment, n. o. v. or a new trial, which

were denied. All now appeal to this court. Chemetron

lodges a cautionary cross-appeal.

AT

III. ISSUES ON APPEAL

A. Federal Securities Law Claims.

Chemetron alleged that appellants illegally manipu-

lated the national securities exchange market for Westec

stock and failed to disclose or made misleading state-

ments about that scheme in violation of two federal se-

curities laws, section 9(a)*® of the Securities Exchange

5. Section 9(a) provides:

(a) It shall be unlawful for any person, directly or indirectly, by the use of

facility of any national securities exchange, or for any member of a national

securities exchange—

(1) For the purpose of creating a false or misleading appearance of active

trading in any security registered on a national securities exchange, or a

false or mis) appearance with respect to the market for any such

security, (A) to any transaction in such security which involves no

in the beneficial ownership thereof, or (B) to enter an order or

orders for the purchase of such security with the knowledge that an order

or orders of substantially the same size, at substantially the same time,

and at substantially the same price, for the sale of any such security, has

been or will be entered by or for the same or different parties, or (C) to

enter any order or orders for the sale of any security with the knowledge

that an order or orders of substantially the same size, at substantially the

same time, and at substantially the same price, for the purchase of such

security, has been or will be entered by or for the same or different parties.

(2) To effect, alone or with one or more other persons, a series of transac-

tions in any security registered on a national securities exchange creating

actual or t active trading in such security or raising or depressing

the price of such security, for the purpose of inducing the purchase or sale

of such security by others.

(3) If a dealer or broker, or other selling or offering for sale or

or offering to purchase any

security registered on a national securities exchange, for the purpose of

inducing the purchase or sale of such security, any statement which was at

the time and in the light of the circumstances under which it was made,

false or misleading with respect to any material fact, and which he knew

or had reasonable ground to believe was so false or misleading.

Act of 1934, 15 U.S.C. § 78i(a) (1976), and SEC Rule

10b-5, 17 C. F. R. § 240.10b-5 (1981), enacted pursuant

to section 10(b)* of the 1934 Act, 15 U.S.C. § 78j(b)

5. Continued

(5) For a consideration, received directly or indirectly from a dealer or

broker, or other selling or offering for sale or purchasing or offer-

ing to purchase the security, to induce the purchase or sale of any security

—— — l — exchange by the circulation or dissemi-

or is likely to rise or fall because of the market operations of any one or

.

of security.

(6) To effect either alone or with one or more other persons any series of

pegging,

zing the of such security in contravention of such rules and regula-

tions as Commission may prescribe as necessary or appropriate in the

public interest or for the protection of investors.

6. Rule 10b-5 states:

It shall be unlawful for any person, directly or indirectly, by the use of any

means or instrumentality of interstate commerce, or of the mails or of any

facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a

material fact necessary in order to make the statements made, in the light of

the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or

would operate as a fraud or deceit upon any person, in connection with the

purchase or sale of any security.

7. Section 10(b) declares;

It shall be unlawful for any person, directly or indirectly, by the use of any

means or instrumentality of interstate commerce or of the mails, or of any

facility of any national securities exchange—

(b) To use or employ, in connection with the purchase or sale of any

security registered on a national securities exchange or any security not

so registered, any mani ve or deceptive device or contrivance in

contravention of such and regulations as the Commission may pre-

scribe as necessary cr appropriate in the public interest or for the protec-

tion of investors.

A9

(1976). Section 90e)“ of the 1934 Act, 15 U.S.C. § 78i(e)

(1976), creates an express private remedy for violations

of section 9(a), and an implied private cause of action has

long been recognized under section 10(b) and Rule 10b-5,

see Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196, 96

S. Ct. 1375, 1382, 47 L.Ed.2d 668 (1976).

While Chemetron specifically alleged violations of

subsections 9(a)(1), (2), (4), and (6), the trial judge sub-

mitted to the jury only the subsection 9(a)(2) allegation,

directed at the manipulative stock scheme itself. How-

ever, all three subsections of Rule 10b-5 were submitted,

permitting the jury to hold appellants liable under Rule

10b-5 for either the stock scheme (Rule 10b-5(a) and/or

(c)), its misrepresentation/nondisclosure (Rule 10b-

5(b) ), or both.

In response to Special Interrogatory No. 6, the jury

found that Chemetron had not proven that the stock

scheme “affected” the price it paid for the Westec stock,

a necessary element of a section 9 claim, see section 9(e),

15 U.S.C. § 78i(e). This finding foreclosed any relief un-

der section 9. Nevertheless, the trial court entered judg-

8. Section 9(e) reads:

(e) Any ae Oey ee Se oe oe I

-I INI section, shall be liable to any

Al0

ment for Chemetron on its federal law claim based on

Rule 10b-5. The judgment of the trial court does not

specify which of Rule 10b-5’s subsections or combination

of subsections it relies on. However, since the jury found

that there was a manipulative stock scheme and that the

scheme was not disclosed to Chemetron, the trial court’s

judgment could have been based on Rule 10b-5(a) or (c)

(banning fraudulent schemes in general), on Rule 10b-

5(b) (prohibiting misrepresentation/nondisclosure), or

on both. Thus the very jury findings that barred section

9 relief permitted without any inconsistency, relief under

Rule 10b-5.

Appellants assail this result, claiming that this over-

lap in private remedies impermissibly nullifies the ex-

press remedy and limitations of section 9. This question

of whether an implied private remedy is available under

Rule 10b-5 for activities covered by section 9’s express

In United States u Charnay 537 F.2d 341 (9th Cir.), cert. denied, 429 U.S.

1000, 97 S.Ct. 528, 50 L.Ed.2d 610 (1976), the court, not directly

confronted with this claim, dismissed it without analysis in a . See id.

& n.14. In 1975, the Seventh Circuit in Schaefer u First National Bank

F.2d 1287, 1291-93 (7th Cir. 1975), cert. denied, 425 U.S.

pts

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10b-5 liability, the existence of a stock scheme and its

misrepresentation/nondisclosure, to determine whether

they impermissibly nullify the express section 9 reme-

dies. If both nullify section 9, the trial court’s judgment

based on Rule 10b-5 has no legal support and must be

reversed.

For purposes of analysis, we will address two specific

questions: (1) is subsection 9(a)(4), which prohibits mis-

representation/ nondisclosure, nullified by the similar

prohibition in Rule 10b-5(b), and (2) do the general bans

on fraudulent schemes and courses of business in Ruie

10b-5(a) and (e) nullify the bans on specific stock manip-

ulation schemes found in subsections 9(a)(1), (2), or

(6)?*°

1. Supreme Court GUIDANCE AND CIRCUIT PRECEDENT.

Our analysis of these questions begins with the

premise that “it is an elemental canon of statutory con-

struction that where a statute expressly provides a par-

ticular remedy or remedies, a court must be chary of

reading others into it.” Transamerica Mortgage

Advisors, Inc. u Lewis, 444 U.S. 11, 19, 100 S.Ct. 242, 247,

62 L.Ed.2d 146 (1979).

Looking first to the Supreme Court for direction, we

find that, although it has not yet addressed the question

of maintaining an implied cause of action in the face of

an express cause of action, see Ernst & Ernst, 425 U.S. at

211 n.31, 96 S.Ct. at 1389 n.31; Blue Chip Stamps u

Manor Drug Stores, 421 U.S. 723, 752 n.15, 95 S.Ct. 1917,

se Seamene Cee weve no spoils Sues << eee Se

or trading, commonly known as the question of their nullifica-

tion by Rule 10b-5 is not before us. our entire analysis applies to

them with equal force and would yield the same conclusions.

Al2

1933 n.15, 44 L.Ed.2d 539 (1975); infra note 11, its deci-

sions provide some guidance. In Touche Ross & Co. u

Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82

(1979), the Court declined to imply a cause of action

under section 17(a) of the 1934 Act, 15 U.S.C. § 78q(a)

(1976), for customers of securities brokerage firms

against accountants who audit section 17(a) reports. The

Court found support in the statutory scheme created by

Congress:

But we need not decide whether Congress expressly

intended § 18(a) to provide the exclusive remedy for

misstatements contained in § 17(a) reports. For

where the principal express civil remedy for

misstatements in reports created by Congress con-

temporaneously with the passage of § 17(a) is by its

terms limited to purchasers and sellers of securities,

we are extremely reluctant to imply a cause of ac-

tion in § 17(a) that is significantly broader than the

remedy that Congress chose to provide.

Id. at 574, 99 S.Ct. at 2488 (citations and footnotes

omitted, emphasis added). It also noted evidence in leg-

islative history that section 18(a) was intended to be the

exclusive remedy, id. at 573 & n.15, 99 S.Ct. at 2487 &

n.15 and warned that even the “remedial purposes” of

the securities laws “will not justify reading a provision

more broadly than its language and the statutory scheme

reasonably permit,” id. at 578, 99 S.Ct. at 2490.

Under Ernst & Ernst, proof of scienter is required in

a private suit under Rule 10b-5. In reaching this conclu-

sion, the Court found it significant that sections of the

1933 Act allowing recovery for mere negligence are sub-

ject to restrictions not applicable to section 10(b), 425

US. at 209, 96 S.Ct. at 1388, and observed:

Al3

We think these procedural limitations indicate that

the judicially created private damages remedy under

§ 10(b)—which has no comparable restrictions

cannot be extended, consistently with the intent of

Congress, to actions premised on negligent wrongdo-

ing. Such extension would allow causes of action

covered by §§ 11, 12(2), and 15 to be brought instead

under § 10(b) and thereby nullify the effectiveness of

the carefully drawn procedural restrictions on these

express actions. We would be unwilling to bring

about this result absent substantial support in the

legislative history, and there is none.

Id. at 210-11, 96 S.Ct. at 1388-89 (footnotes and citations

omitted, emphasis added).

Finally, in Blue Chip the Supreme Court considered

whether stock offering offerees can maintain a Rule 10b-5

cause of action despite the fact that they were neither

purchasers nor sellers of the offered shares as required

by the express terms of Rule 10b-5 and section 10(b). In

holding that such offerees have no Rule 10b-5 cause of

action, it reviewed the various express remedies under

the 1933 and 1934 Acts, including section 9, and declared

that it would indeed be anomalous to impute to Con-

gress an intention to expand the plaintiff class for a

judicially implied cause of action beyond the bounds it

delineated for comparable express causes of action.” 421

USS. at 736, 95 S.Ct. at 1925 (footnote omitted).

From these decisions, we conclude that our examina-

tion of these questions must focus on whether permitting

a Rule 10b-5 action here will impermissibly broaden the

section 9 remedy by nullifying its restrictions in defiance

of the congressional mandate. In addressing that issue,

this court in Huddleston v. Herman & MacLean, 640

Al4

F.2d 534 (5th Cir. 1981), modified on denial of rehearing

and of rehearing en banc, 5th Cir. 650 F.2d 815, cert.

granted, —_ U.S. —, 102 S.Ct. 1766, 72 L.Ed.2d 173 (US.

1982) (Nos. 81-680, 81-1076), 1 agreed with the approach

used in the Second and District of Columbia Circuits. See

Wachovia Bank & Trust Co. v. National Student Mar-

keting Co., 650 F.2d 342 (D.C.Cir. 1980), cert. denied sub

nom. Peat, Marwick, Mitchell & Co. v. Wachovia Bank &

Trust Co., White & Case v. Wachovia Bank & Trust Co.,

and Joy v. Wachovia Bank & Trust Co., 452 U.S. 954, 101

S. Ct. 3098, 69 L.Ed. 2d 965 (1981); Ross u A. H. Robins

Oo., 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946,

100 S.Ct. 2175, 64 L.Ed. 2d 802 (1980). The Huddleston

analysis must be applied in this case, since we are bound

by it until it is reversed by the Supreme Court or over-

ruled by this circuit en banc. 8 & H Riggers & Erectors,

Inc. u OSHRC, 659 F.2d 1273, 1278-79 (5th Cir. 1981).12

11. The grant of certiorari was limited to two questions. In No. 81-680, the

question is:

Does implied remedy exist under either § 10(b) of 1934 Securities Ex-

change Act or § 17(a) of 1933 Securities Act for purchasers of securities

who have express remedy under § 11 of 1933 Act by virture of fact that

securities purchased were issued pursuant to registration statement filed

as required by § 5 of 1933 act?

50 U.S.L.W. at 3796. The question in No. 81-1076, which is irrelevant in this

case due to our disposition, is: “Is clear and convincing standard appropriate

burden of proof in private Rule 10b-5 actions?” Id. at 3797.

1 Prior cases in this circuit do not permit us to forego the Huddleston

ysis.

In Alabama Farm Bur. Mut. Cas. Co. v. American Fidelity Life Ins. Co.,

606 F.2d 602 (5th Cir. 1979), cert. denied, 449 U.S. 820, 101 S.Ct. 77, 66 L.Ed.2d

„ e eee

t directors and officers for their stock repurchase program.

nder Rule 10b-5, plaintiffs alleged that the repurchase program was an

undisclosed “manipulative device“ to boost the ce of corporate stock and

thereby protect incumbent management’s control of the corporation. Id. at

605. The court reversed the district court’s grant of summary judgment for the

defendants on this issue, id. at 617, holding that the program and

Al5

In Huddleston, plaintiffs sought damages for alleged

materially misleading statements in a prospectus. 640

F.2d at 539. There existed a conflict between sections 11

and 12(2) of the 1933 Act, 15 U.S.C. §§ 77k and 771(2)

(1976), each of which creates an express remedy for such

misrepresentations, and Rule 10b-5'* The court com-

pared the competing causes of action to determine

whether Rule 10b-5 requires proof of facts “not neces-

sary to recovery” under the express causes of action,

12. Continued

nondisclosure of material facts concerning it could violate Rule 10b-5, id. at

611-13. The court in Alabama Farm Bureau was not presented with a § 9 cause

of action since the stock was apparently not registered on a national securities

exchange as § 9 requires, and therefore did not consider the conflict we face

here. Judge Rubin, the author of Huddleston, did not consider his opinion in

Alabama Farm Bureau dispositive of the conflict presented in Huddleston,

nor do we believe it resolves the conflict presented here.

We also note that some Fifth Circuit cases have been cited as holding that

“remedies of the two [1933 and 1934] Acts are cumulative and that plaintiffs

have a choice in the event of overlap.” Wachovia, 650 F.2d at 357 n.33, citing

Wolf u Frank, 477 F.2d 467, 475 (Sth Cir.), cert. denied, 414 U.S. 975, 94 8. Ct.

— 4 L. Ed. 2d 218 (1973), and Rekant u Desser, 425 F. 2d 872, 882 (5th Cir.

1970).

However, in Wolf the district court held and this court affirmed that (1)

plaintiffs had no individual claim under Rule 10b-5 but that derivative relief

under Rule 10b-5 was available and that (2) plaintiffs had an individual claim

under § 5 of the 1933 Act, 15 U.S.C. § Te (1976), but no derivativ» claim. See

477 F.2d at 471-73, 475-76, 478-49. Thus, Wolf held those remedies cumulative

only insofar as it permitted plaintiffs to maintain different causes of action,

eT

tively.

In Rekant, although this court cited the Second Circuit dicta in Fischman

u Raytheon Mfg. Co., 188 F.2d 783, 787 (2d Cir. 1951), which underlies Ross,

Wachovia, and Huddleston, the court held it “unnecessary to determine”

whether an implied cause of action exists under Rule 15d-1, promulgated

pursuant to § 15(d) of the 1934 Act, 15 U.S.C. § 780(d) (1976). Since the court

failed to cross that threshold, it did not reach the question analogous to the

one presented here of whether two implied remedies that overlap may be

pursued simultaneously. See 425 F.2d at 882.

Neither Wolf nor Rekant requires us to recognize a § 9 remedy here and

forego the Huddleston analysis.

13. The opinion does not mention a § 9 claim, and there probably was no

basis for one since the misleading statements were not alleged to be part of a

stock manipulation scheme, and the stock at issue was apparently not regis-

tered on a national securities exchange as § 9 requires.

Al

reasoning that if Rule 10b-5 reguires additional facts

creating a higher burden of proof, the Rule 10b-5 implied

action is available. See 640 F.2d at 542. The court per-

mitted the implied action because Rule 10b-5 requires

deceit committed with scienter, elements not found in

sections 11 and 12(2). See id.“

With these Supreme Court and Fifth Circuit cases to

guide us, we turn now to the specific questions before us.

14. In Ross, the claims involved stock price manipulation and artificial

price inflation through dissemination of false and misleading information in

annual reports, press releases, a prospectus, and 10-K forms, some of which

A See 607 F.2d at 547. There was apparently no § 9

claim, despite the fact that some of the statements may have violated § 9, and

court permitted a Rule 10b-5 action despite a conflict with the express remedy

in § 18 of the 1934 Act, 15 U.S.C. § 78r (1976), for false statements in SEC-filed

documents because Rule 10b-5 required the “far more difficult task” of proving

fraud and scienter that justified dispensing with § 18’s reliance requirement.

See 607 F.2d at 555-56.

Wachovia dealt with allegations of artificial stock price inflation through

numerous oral and written misrepresentations, including press releases, SEC-

filed reports, and unfiled reports. See 650 F.2d at 345. Absent, however, was a

§ 9 claim, and there probably was no basis for one, since it appears that the

stock at issue was traded over the counter and not on a national securities

exchange. See SEC u National Student Marketing Corp., 457 F.Supp. 682, 687

(D.D.C.1978). The court held that Rule 10b-5’s fraud requirement, which im-

poses a “higher burden of proof,” was a “trade-off” for the restrictions of §§ 11

and 12(2) of the 1933 Act and § 18 of the 1934 Act, 15 U.S.C. §§ 77k, 771(2), and

78r (1976). See 650 F.2d at 355-58.

Huddleston, Wachovia, and Ross posited another reason, not present here,

AlT7

2. THE MISREPRESENTATION AND NONDISCLOSURE

REMEDIES.

Our examination of this issue begins with a compari-

son of the texts of the statute and rule. Subsection

9(a)(4) contains a provision forbidding misrepresenta-

tion that is quite similar to that found in Rule 10b-5:

(a) It shall be unlawful for any person, directly

or indirectly, by the use of the mails or any means or

instrumentality of interstate commerce, or of any

facility of any national securites exchange, or for any

member of a national securities exchange—

(4) If a dealer or broker, or other person selling

or offering for sale or purchasing or offering to pur-

chase the security, to make, regarding any security

registered on a national securities exchange, for the

purpose of inducing the purchase or sale of such

security, any statement which was at the time and

in the light of the circumstances under which it was

made, false or misleading with respect to any mate-

rial fact, and which he knew or had reasonable

ground to believe was so false or misleading.

15 U.S.C. § 78i(a)(4) (emphasis added).

It shall be unlawful for any person, directly or indi-

rectly, by the use of any means of instrumentality of

interstate commerce, or of the mails or of any facility of

any national securities exchange,

(b) To make any untrue statement of a material fact

or to omit to state a material fact necessary in order to

make the statements made, in the light of the circum-

stances under which they were made, not misleading... .

Als

17 C. F. R. § 240. 10b-5 (0b) (emphasis added). The prohibi-

tion in subsection 90a) (4) is certainly intended to apply to

misrepresentations made in the course of manipulative

schemes banned by section 9. See H.R.Rep. No. 1383, 73d

Cong., 2d Sess. 10-11 (1934), reprinted in 5 J. S.

Ellenberger & E. P. Mahar, Legislative History of the

Securities Act of 1933 and Securities Exchange Act of

1934, Item 18 (1973) (hereinafter cited as Ellenberger &

Mahar); S.Rep.No.792, 73d Cong., 2d Sess. 12-13 (1934)

reprinted in 5 Ellenberger & Mahar, Item 17. Whether

Rule 10b-5(b) can also be applied to misrepresentations

in the course of a manipulative scheme banned by section

9 turns on the results of the Huddleston analysis.

As the Huddleston court stated:

The elements necessary to prove a Section 10(b)

claim have been so often applied by the lower federal

courts that they can be stated in black letter fashion.

To make out a claim under Section 10(b), which is

based on the common law action of deceit, the plain-

tiff must establish (1) a misstatement or an omission

(2) of material fact (3) made with scienter*® (4) on

15. The definition of scienter in this circuit follows that of the Supreme

Court in Ernst & Ernst: “A mental state embracing, intent to deceive, manip-

ulate, or defraud,” 425 U.S. at 193 n.12, 96 S.Ct. at 1381 n.12. Broad u Rockwell

Internat I Corp., 642 F.2d 929, 961 (5th Cir.) (en banc), cert. denied, .S.

— 102 S.Ct. 506, 70 L.Ed.2d 380 (1981). However, this circuit, like others,

U enn

wi is

limited to those highly unreasonable omissions or misrepresentations that

involve not merely simple or even inexcusable negligence, but an extreme

departure from the standards of ordinary care, and that present a danger

of misleading buyers or sellers which is either known to the defendant or

is so obvious that the defendant must have been aware of it.

Id. at 961-62. The Supreme Court has reserved the question of whether

scienter under Rule 10b-5 includes recklessness. See Aaron u SEC, 446 U.S.

680, 686 n.5, 100 S.Ct. 1945, 1950 n.5, 64 L.Ed.2d 611 (1980); Ernst & Ernst, 425

US. at 193 n.12, 96 S.Ct. at 1381 n.12.

Alꝰ

which the plaintiff relied (5) that proximately caused

his injury.

640 F.2d at 543 (footnote omitted). Subsection 9a) (4), as

privately enforced through subsection 9(e), requires a (1)

misstatement or omission’® (2) of material fact“ (3)

made with scienter’® (4) for the purpose of inducing a

sale or purchase of a security’® (5) on which the plaintiff

misleading” statements and not omissions, Congress intended it to cover

omissions as well. See H.R.Conf. Rep.No. 1838, 73d Cong., 2d Sess. 32 (1934),

reprinted in 5 Ellenberger & Mahar, Item 20 (“The Senate amendment...

that a statement shall be construed to include any omission

to state a material fact. The latter provision is omitted from the substitute as

surplusage, in view of the fact that a statement obviously may be

because of a material omission.”); cf. In re Penn Central Securities Li

357 F.Supp. 869, 876-77 (E.D.Pa.1973), aff'd, 494 F.2d 528 (3d Cir. 1974) (identi-

cal phrase in § 18(a) of the 1934 Act, 15 U.S.C. § 78r(a) (1976), construed to

include omissions).

17. Subsection 9(a)(4) addresses statements or omissions that are “false or

misleading with respect to any material fact.”

18. Subsection 9(a)(4) covers statements or omissions made if the speaker

“knew or had reasonable ground to believe” that they were false or mislead-

ing. (emphasis added). Subsection 9(e) applies to “{ajny person who willfully

participates in any act or transaction in violation of subsection (a).

(emphasis added).

The interplay of § 9(a)(4) and (e) yields at most two standards for action-

able behavior. The first, a statement or omission known to be false or mislead-

ing and willfully made, clearly constitutes scienter. The second, a statement or

omission believed to be false or misleading at the time and under the circum-

stances made, yet willfully made, also constitutes scienter. See Prosser, Torts

§ 105 at 685-86, § 107 at 700-01 (4th ed. 1971).

19. Subsection 9(a)(4) applies te statements or omissions made “for the

rpose of inducing the purchase or sale” of a security. (Emphasis added).

Subsection 9(e) applies to “[aJny person who willfully participates in any act

or transaction in violation of subsection (a).. (emphasis added).

A20

reliedzo (6) that affected plaintiffs purchase or selling

price.

We thus perceive that the implied cause of action

under Rule 10b-5(b) and the express remedy of subsec-

tion 9(a)(4) differ in at least three respects, scienter,

intent to induce a purchase or sale, and causation. While

Rule 10b-5 permits recklessness to fulfill its scienter re-

quirement, see supra note 15, section 9(a)(4) and (e) and

its legislative history do not permit us to loosen its

scienter requirement by permitting recklessness to suf-

fice. See S.Rep.No.792, 73d Cong., 2d Sess 17 (1934), re-

printed in 5 Ellenberger & Mahar, Item 17; H.R.Rep.

No.1383, 73d Cong., 2d Sess. 20 (1934), reprinted in 5

Ellenberger & Mahar, Item 18. Therefore, section 9’s

scienter requirement is stricter than Rule 10b-5’s.

Furthermore, the “intent to induce” requirement of

subsection 9(a)(4) is distinct from the scienter require-

ment of Rule 10b-5(b). While one may intend to do a

fraudulent act thereby fulfilling Rule 10b-5(b)’s scienter

requirement, the intent that that act induce a purchase

or sale is a distinct and more specific requirement. Thus

20. As Judge Rubin stated in Huddleston, reliance and causation are

related but distinct concepts. See 640 F.2d at 549. Under § 9, causation is

established by the “affecting price“ requirement. See infra n.21.

We hold that § 9(a)(4) also requires reliance on the omissions or

misstatements. The legislative history of § 9 makes clear that Congress de-

sired that reliance be established. “(T]he burden is on the plaintiff to show ...

the fact that the statement was false or misleading, and that he relied thereon

to his detriment.” S.Rep.No. 792, 73d Cong., 2d Sess. 13 (1934), reprinted in 5

& Mahar, Item 17. This is in accord with the observation that the

securities law remedies for misrepresentation are rooted in

tort cause of action for deceit, see, ¢.g., Huddleston, 640 F.2d at 547 n.21 (Rule

10b-5 derived from deceit action), a basic element of which was reliance by the

plaintiff. Prosser, Torts § 105 at 685-86, § 108 at 714-18 (4th ed. 1971); Restate-

ment (Second) of Torts § 537 (1977); cf. Rosenberg v. Hano, 121 F.2d 818, 821

(3d Cir. en a eae ee

21. Section 9(e) extends liability “to any person who shall purchase or sell

89 wa en by an} ator transaction (in vile

tion of subsection (a) ].“ (emphasis added

A21

the “intent to induce” requirement creates a higher bur-

den of proof for the plaintiff under section 9(a)(4) than

that borne under Rule 10b-5(b).

Finally, subsection 9(a)(4)’s causation standard is

also tougher for a plaintiff—the plaintiff's purchase or

sale price must be “affected,” while “the causation re-

quirement is satisfied in a Rule 10b-5 case only if the

misrepresentation touches upon the reasons for the in-

vestment’s decline in value.” Huddleston, 640 F.2d at 549

(emphasis added). This case presents the classic example

of the difference in liability under these causation stan-

dards. The jury found that the nondisclosure of the ma-

nipulative scheme did not “affect” the price that

Chemetron negotiated in its nonmarket purchase of

Westec stock—thus no subsection 9(a)(4) remedy. How-

ever, the nondisclosure obviously touched upon the rea-

son for the decline in value of Chemetron’s Westec stock

because the nondisclosure hid the manipulative scheme.

Rule 10b-5(b) therefore requires no additional proof

of facts creating a higher burden of proof when compared

to subsection 9(a)(4). In fact, Rule 10b-5(b) creates a

lower burden of proof than does subsection 9(a)(4)?? and

contains no elements that compensate for this change.

Lacking a trade-off for this easing of the burden of proof

and concomitant enlargement of the plaintiff class,?* we

22. Accord 1 A. & L. Lowenfels, Securities Fraud & Commodi-

ties Fraud § 2.5(4) (1968) ( requirements appear much easier under

10b-5 than under express civil-liability provisions for market manipulation.”)

(emphasis added, footnote citing § 9 omitted).

23. This concern over “inexorable er

under Rule 100-5, Blue Chip, 421 U.&. at 748, 95 8. t 1931, has consistently

04 Sick at 1391 nt, Santa #0 Indusrin Inc. v Green, 400 US. 462,

; Santa Fe Industries, Inc. v Green, 430 U.S. 462,

o. g., Herpich u Wallace, 430 F.2d 792, 804-05 (Sth Cir. 1970).

A22

hold that permitting a judgment for Chemetron under a

Rule 10b-5(b) implied action for misrepresentation or

nondisclosure of the stock scheme impermissibly nulli-

fies Congress’ deliberate and careful limitations on the

express statutory remedy of subsection 90a) (4).

3. THE STOCK MANIPULATION REMEDIES.

Because there are some differences between

subsections 9(a)(1), (2), and (6), we must compare each

separately to Rule 10b-5(a) and (c) to fulfill the

Huddleston analysis.

a. The Elements of Rule 10b-5(a) and (c).

To violate Rule 10b-5(a) and (c), a person must (1)

employ a device, scheme, or artifice to defraud or engage

in a course of business that operates as a fraud (2) with

scienter** (3) on which the plaintiff relied?* (4) that

proximately caused his/her injury.

posed by Congress.

nn. 29, 30, 96 S.Ct. at 1389 & nn.29, 30. Consideration of these procedural

limits reinforces our conclusion.

Finally, we also note the presence of an additional consideration] that

weigh({s) heavily against permitting a cause of action under Rule 10b—5,”

Santa Fe Industries, 430 U.S. at 477, 97 S.Ct. at 1302, the existence of a state

law remedy, discussed infra, see Blue Chip, 421 U.S. at 738 n.9, 95 S.Ct. at 1927

n.9. The Texas remedies offer several advantages over the federal remedies.

oe Alternative to Federal Securities Fraud Remedies, $3 Sw. LJ.

( )

25. See Ernst & Ernst, 425 U.S. at 199, 212-14 & n.20, 96 S.Ct. at 1383,

1390-1391 & n.20; supra n.15.

26. See Huddleston, 640 F.2d at 547-48. Under Huddleston, conduct invok-

b. The Elements of Subsection 9(a)(1).

To make out a violation of subsection 9(a)(1) in a

private action under subsection 9(e), a plaintiff must

prove the existence of (1) a wash sale or matched orders

in a security?” (2) done with scienter** (3) for the pur-

pose of creating a false or misleading appearance of ac-

tive trading in that security?® (4) on which the plaintiff

relied®*° (5) that affected plaintiff's purchase or selling

price.“

c. The Elements of Subsection (a) (2).

In order to show a violation of subsection 9(a)(2) in

a private suit under subsection 9(e), a plaintiff must

plead and prove that (1) a series of transactions in a

security creating actual or apparent trading in that se-

curity or raising or depressing the price of that secu-

a 2 Wash sales are banned by §9(a)(1)(A), matched orders by §9(a)(1)(B)

28. The very language of §9(a)(1) requires scienter (e.g., “effect any

transaction,” “enter any order... with the knowledge“). In addition, subsec-

tion 9(e) applies to any person who “willfully participates” in an act or trans-

action violating §9(a). See S.Rep.No. 792, 73d Cong., 2d Sess. 17 (1934), =

Sess. 20 (1934), reprinted in 5 Ellenberger & Mahar, Item 18; United States u

Minuse, 114 F.2d 36, 39 (2d Cir. 1940).

29. §9(a).

30. The legislative history of §9 erects a reliance requirement:

[T]he bill provides that any person who unlawfully manipulates the price

of a security, or who induces transactions in a security by means of fraud

or misleading statements. shall be liable in damages to those who have

bought or sold the security at prices affected by such violation or state-

ment. In such case the burden is on the plaintiff to show the violation or

the fact that the statement was false or misleading, and that he relied

thereon to his detriment.

S. Rep. No. 792, 73d Cong., 2d Sess. 12-13 (1934), reprinted in 5 Ellenberger &

Mahar, Item 17.

31. §9(e).

24

rity, 2 (2) carried out with scienter“ (3) for the purpose

of inducing the security’s sale or purchase by others,““

(4) was relied on by the plaintiff,** (5) and affected plain-

tiff’s purchase or selling price.**

d. The Elements of Subsection 9(a) (6).

To prove a violation of subsection 9(a)(6) in a private

suit under subsection 9(e), a plaintiff is required to show

(1) a series of transactions in a security“ (2) made for

the purpose of pegging, fixing, or stabilizing the price of

that security in violation of SEC rules“ (3) done with

32. §9(a)(2). It should be noted that §9(a)(2)’s reach may be limited by SEC

rules permitting manipulative activites for legitimate stabilizing purposes.

See, ¢.g., SEC Rule 10b-7, 17 C.F.R. §240.10b-7 (1981). Prior to Rule 10b-7’s

adoption in 1955, courts had held that legitimate stabilizing activity during a

stock distribution otherwise violative of §9(a)(2) is not actionable. See, e. g.,

Pergament u Frazer, 93 F.Supp. 13 (E.D.Mich.1950), aff'd, 203 F.2d 315 (6th

Cir. 1953), cert. denied, 346 U.S. 832, 74 S.Ct. 33, 98 L.Ed. 355 (1953); Stella v.

Kaiser, 82 F.Supp. 301 (S.D.N.Y.1948).

33. See, e. g., Crane Co. u Westinghouse Air Brake Co., 419 F.2d 787, 794

(2d Cir. 1969), cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L.Ed.2d 50 (1970), on

remand on other grounds, 326 F.Supp. 766 (S.D.N.Y.1971), rev’d on other

grounds, 490 F.2d 332 (2d Cir. 1973); supra n.28.

34. §9(a)(2).

35. See supra n.30.

36. 59e).

37. $9(a)(6).

38. Id. The SEC does not currently have any rules published exclusively

under §9, although several §10(b) rules are promulgated either pursuant to

both §§9 and 10(b) or pursuant to §10 but covering §9 activities. See, e. g., Rules

10b-6, -7, -8, -13, 17 C. F. R. §240.10b-6, -7, -8, -13 (1981). Thus, reference must be

had to those rules and any conditions they impose if a plaintiff is pursuing a

§9(a)(6) claim. However, none of those rules may be used to circumvent Con-

2 statutorily-imposed requirements as found in §9(a)(6) and (e). See infra

A25

scienter“ (4) on which the plaintiff relied*® (5) that af-

fected plaintiff's purchase or selling price.“

e. A Comparison of Rule 10b-5(a) and (c) and

Subsections 9(a)(1), and (2), and (6).

We note several elements that make a violation of

subsections 9(a)(1), (2), and (6) more difficult to prove

than a violation of Rule 10b-5(a) and (c).

39. The SEC has maintained that it can enact prophylactic rules, such as

Rule 10b-6, which brand particular practices illegal per se

4

i

F

F

;

in 5 Hlenberger & Mahar, Item 18. To have it otherwise could, as

Chief Judge Cardozo said long ago, render defendants liable “in an indetermi-

nate amount for an indeterminate time to an indeterminate class.” Ultramares

Corp. u Touche, 255 N.Y. 170, 179-80, 174 N.E. 441, 444 (1931), quoted in Ernst

& Ernst, 425 U.S. at 215 n.33, 96 S.Ct. at 1391 n.33.

40. See supra n.30.

41. §9(e).

A26

First, causation, as discussed previously, is much

easier to prove under Rule 10b-5 than under section 9.“

Second, under Rule 10b-5, recklessness can fulfill the

scienter requirement. However, recklessness may not be

used to fulfill section 9’s scienter requirement, as we

noted in our discussion of subsection 9(a)(4).** Third,

while Rule 10b-5(a) and (c) create a presumption of reli-

ance by the plaintiff that can be rebutted by the defend-

ant, section 9 aids the plaintiff with no such presump-

tion.“ Fourth, and only as to subsection 9(a)(2), there is

an intent to induce requirement not found in Rule 10b-

5(a) and (c).

Rule 10b-5(a) and (c) therefore require no additional

proof of facts creating a higher burden of proof when

compared to subsections 9(a)(1), (2), and (6). In fact,

Rule 10b-5(a) and (c) create a lower burden of proof.“

Lacking a trade-off for this easing of the burden of proof

and accompanying enlargement of the plaintiff class,“

we hold that permitting a verdict for Chemetron under a

Rule 10b-5(a) and (c) implied action impermissibly nulli-

fies Congress’ deliberate and careful limitations on the

express statutory remedy of subsections 9(a)(1), (2), and

(6).*7.

42. In the wake of Shores u Sklar, 647 F.2d 462, 471-72 (Sth Cir. 1981) (

banc), petition for cert. docketed, ——U.S.—, 102 S.Ct. 1424, 71 L. Ea. ad

(1981), of causation under Rule 10b-5(a) and (c) may be easier than it

under 10b-5(b). If Shores so holds, and we express no opinion on

issue since we need not, our conclusion as to the relative burdens of

under Rule 10b-5(a) and (e), and §9(a)(1), (2), and (6) is reinforced.

43. See supra nn. 15, 18.

44. Shores may also further reduce the plaintiff's burden of proof of

reliance under Rule 10b-5(a) and (e) insofar as it permits reliance on the

“integrity of the marketplace.” See 647 F.2d at 471. If Shores is so interpreted,

and we forbear from interpreting it thusly, our conclusion as to the relative

burden of proof is reinforced.

45. Accord, 1 A. Bromberg & L. Lowenfels, supra n.22.

46. See supra n.23.

47. See supra n.24.

Fes

i

A27

4. LEGISLATIVE HISTORY OF THE 1933 AND 1934 AcTs AND

THE PROPER SCOPE OF RULE 10B-5.

Any doubts about the results reached under the

Huddleston analysis are laid to rest by an analysis not

undertaken in Huddleston, Wachovia, or Ross—the in-

tent of Congress as revealed in the legislative history

and structure of the 1933 and 1934 Acts. Reviewing that

history and structure, we conclude that in the coherent

and comprehensive scheme for controlling securities

fraud that Congress established,“ section 9 is the only

remedy for the fraud in this case.

Section 9 is considered t jhe very heart of the Act.”

SEC, Report on Proposals for Amendments of the Securi-

ties Act of 1933 and the Securities Zxchange Act of 1934,

H.R. Comm. Print, 77th Cong., Ist Sess. 50 (1941). With

its procedural and substantive limitations, it takes aim at

several specific types of stock manipulation schemes,“

virtually all known and acknowledged to be harmful in

1934. In addition section 9 gives the SEC rulemaking

power to reach types of stock manipulation not known in

1934 or not proven harmful per se at that time. See

§9(a)(6), (b), and (c), 15 U.S.C. §78i(a)(6), (b), and (c).

However, Congress, in its legislative wisdom, laid down

the limits on private liability under section 9. Neither

private parties, the SEC, nor the courts may go around

those limits, no matter how broad the rulemaking power

appears, since the Supreme Court has made it clear that

48. Judging by the comments of its own members, the Securites Exchange

Act of 1934 is probably one of the better statutes in terms of coherence and

thoroughness ever to emerge from Congress. See, . g., 78 Cong. Rec. 8164

(1934) (remarks of Sen. Fletcher).

49. “Wash sales” are banned by §9(a)(1)(A), “matched orders” by

r and (C), market operations by §9(a)(2), “prophecies” by §9(a)(3)

and (5), false and a statements by §9(a)(4), pegging, or stabili-

zing securities prices by §9(a)(6), and “calls,” “straddles,” “options,”

and “privileges” by §9(a)(6), (b), ©), (d).

A28

the “administration of a federal statute is not the power

to make law.” Ernst & Ernst, 425 U.S. at 213, 96 S.Ct. at

1391; see Aaron, 446 U.S. at 691, 100 S.Ct. at 1952; Piper

v. Chris-Craft Industries, Inc., 430 U.S. 1, 41 n.27, 97

S. Ct. 926, 949 n.27, 51 L.Ed.2d 124 (1977). Equally obvi-

ous is that a rule promulgated under section 10(b) cannot

be used to evade section 9. See Piper, 430 U.S. at 45-47, 97

S.Ct. at 951-952.

That Congress was very concerned about the scope of

section 9 is evidenced by its meticulous drafting, legisla-

tive history, and the massive investigation that led to it.

See, e.g., S. Rep. No. 1455, 73d Cong., 2d Sess. 54-55 (1934),

reprinted in 5 Ellenberger & Mahar, Item 21 (known as

the Fletcher Report); H.R.Rep.No.1383, 73d Cong., 2d

Sess. 10-11 (1934), reprinted in 5 Ellenberger & Mahar,

Item 18. To nullify section 9 by implication would violate

the “cardinal principle of construction that repeals by

implication are not favored.” Silver u New York Stock

Exchange, 373 U.S. 341, 357, 83 S.Ct. 1246, 1257, 10

L.Ed.2d 389 (1963). This principle and Congress’ great

care from investigation through final passage militates

against nullification of section 9 by implication without

an express desire by Congress to do so. See Ernst &

Ernst, 425 U.S. at 210-11, 96 S.Ct. at 1389; Ruder, Civil

Liability Under Rule 10b-5: Judicial Revision of Legisla-

tive Intent? 57 Nw.L. Rev. 627, 649 (1963).

Not only is such clear intent of nullification absent

from section 10(b)’s legislative history, but that history

demonstrates the opposite—that section 10(b) was never

intended to supplant or traduce the remedies and limita-

tions of section 9 or the other express remedies of the

1933 and 1934 Acts. From its inception through various

amendments and into its final form, section 10(b) was

always intended as a “catchall” provision to reach activi-

A29

ties not covered or anticipated in other provisions of the

Acts.

In House committee hearings, Thomas Corcoran, an

official of the Roosevelt administration who assisted in

the drafting of the Act, described the provisions of sec-

tion 9(c), the forerunner of section 10(b), in these terms:

Subsection (c) says, Thou shalt not devise any other

cunning devices”...Of course subsection (c) is a

catch-all clause to prevent manipulative devices. I do

not think there is any objection to that kind of a

clause. The Commission should have the authority to

deal with new manipulative devices.

Stock Exchange Regulation, Hearings Before the House

Comm. on Interstate and Foreign Commerce, 73d Cong.,

2d Sess. 115 (1934), reprinted in 8 Ellenberger & Mahar,

Item 23 (emphasis added). J. M. Landis, FTC Commis-

sioner and one of the Act’s draftsmen, substantiated this

interpretation of section 10(b): “[I]t gives the general

power to the Commission to prescribe rules and regula-

tions governing any other manipulative devices.” Id. at

21, reprinted in 8 Ellenberger & Mahar, Item 23 (empha-

sis added).

The report of the Senate committee which studied the

proposed bill summarized section 10(b) as follows: “Sub-

section (b) authorizes the Commission by rules and reg-

ulations to prohibit or regulate the use of any other

manipulative or deceptive practices which it finds detri-

50. As comments made by “persons responsible for the preparation or the

drafting of [the] bill,” Ernst & Ernst, 425 U.S. at 203 n.24, 96 S.Ct. at 1386 n.24,

during cross-examination by and comment from a congressional committee,

soe Piper, 430 US. at 81 & 2.30, 97 S.Ct. at 944 & n.20, the views of Messrs.

Landis are of considerable weight. See 2A C. D. Sands. Suther-

land Statutory Construction §48.06, at 203 (4th ed. 1973).

A30

mental to the interests of the investor.” S.Rep.No.792,

73d Cong., 2d Sess. 18 (1934), reprinted in 5 Ellenberger

& Mahar, Item 17 (emphasis added). Finally, Senator

Fletcher, the Senate sponsor of the Act, declared in the

floor debates that section 10(b) gave the SEC “power to

forbid any other devices.” 78 Cong.Rec. 2271 (1934) (em-

phasis added).

In line with the catchall purpose of section 10(b), the

conference committee broadened the SEC’s rulemaking

power to include protection of the public interest, as well

as protection of investors. H.R.Conf. Rep.No.1838. 73d

Cong., 2d Sess. 32-33 (1934), reprinted in 5 Ellenberger &

Mahar, Item 20. The Supreme Court and this circuit have

consistently interpreted section 10(b) as a catchall. See,

e.g., Aaron, 446 U.S. at 690, 100 S.Ct. at 1952; Ernst &

Ernst, 425 U.S. at 203, 96 S.Ct. at 1385; Herpich u

Wallace, 430 F.2d 792, 801 (5th Cir. 1970).

From this power to enact catchall rules under section

10(b) came Rule 10b-5. Judge Ainsworth, in his thorough

and scholarly opinion in Herpich, captured the precise

origins and original purpose of the Rule:

The SEC adopted Rule 10b-5 in 1942 to close a

“loophole in the protections against fraud admin-

istered by the Commission by prohibiting

individuals or companies from buying securities if

they engage in fraud in their purchase.” SEC

dea. Exch. Act Rel.No.3230 (May 21, 1942). The pur-

pose M the rule, it seems clear, was to afford sellers

of secu. ties the same protections already afforded

purchaser. by the federal scheme of securities regu-

lation. Prev. wusly, fraud on sellers, as distinct from

fraud on pur. hasers, see Securities Act of 1933,

A31

§17(a), 15 U.S.C. §77q(a), was not covered by the

securities acts unless committed by an over-the-

counter broker or dealer. 8 SEC Ann.Rep. 10 (1943);

see Securities Exchange Act of 1934, §15(c), 15

U.S.C. §780(c). Viewing the rule as an “additional

protection to investors,” 8 SEC Ann.Rep. 10 (1943),

the Commission fashioned it to “make applicable to

the purchase of securities, the same broad anti-fraud

provisions which the Congress has imposed in Sec-

tion 17(a) of the Securities Act of 1933, in connec-

tion with the sale of securities.” Ward La France

Truck Corp., 13 S. E. C. 373, n.8 (1943). To accomplish

this end the Commission... copied the language of

section 17 (a) of the Securities Act.. and applied it

“in connection with the purchase or sale of any se-

curity,” this being the reach of section 10(b). See also

Birnbaum v. Newport Steel Corp., 2 Cir., 1952, 193

F.2d 461, 463; 3 and 6 Loss, Securities Regulation

1424-1427 (2d ed. 1961), 3617 (Supp. 2d ed. 1969).

430 F.2d at 801-02 (emphasis added); accord, Ernst &

Ernst, 425 U.S. at 212 n.32, 96 S.Ct. at 1390 n.32.

In 1946, four years after the adoption of Rule 10b-5,

came the landmark decision by Judge Kirkpatrick that

there existed an implied private right of action under the

Rule. Kardon v. National Gypsum Co., 69 F.Supp. 512

(E.D.Pa.1946). The Supreme Court subsequently acqui-

esced in this judicial implication. Touche Ross, 442 U.S.

at 577 n.19, 99 S.Ct. at 2490 n.19.

Judge Kirkpatrick confronted a novel issue again in

1948, one apposite to our case. In Rosenberg v. Globe

Aircraft Corp., 80 F.Supp. 123 (E.D.Pa.1948), plaintiffs

asserted a Rule 10b-5 claim that duplicated the coverage

of sections 11 and 12 of the 1933 Act, 15 U.S.C. §§77k,

A32

77l. His resolution of this conflict between the express

and implied remedies is worth quoting:

It cannot be supposed that Congress intended to

abolish [the] regulations and limitations [of §§77k

and 711] when it enacted Sec. 10 of the Act of 1934.

By any reasonable rule of statutory interpretation, it

would require either an express repeal or an implica-

tion of repeal so strong as to be inescapable. The two

Acts are unquestionably in pari materia and must be

construed together to make a consistent whole.

Looking at them as one statute it is simply not possi-

ble that Congress, having prescribed in elaborate

detail procedural requirements which must be ful-

filled in order to enforce civil liability attaching to a

carefully defined type of violation, would have casu-

ally nullified them all in a later section. Nor can an

intention to do so be deduced from the general provi-

sions of Sec. 29 of the Act of 1934, 15 U.S.C.A. §78bb,

which is, “The rights and remedies provided by this

chapter shall be in addition to any and all other

rights and remedies that may exist at law or in eq-

uity...” As a matter of fact “this chapter” does not

provide any remedies for the violation of Sec. 10(b).

Those remedies arise by the general law of torts,

which attaches civil liability to the violation of a

criminal statute. The point in Kardon v. National

Gypsum Co., D.C., 69 F.Supp. 512, was not that the

Act itself provided a civil remedy, but that there was

nothing in it to indicate that Congress intended to

withhold from injured parties the right to recover

damages which normally attends violations of a

criminal statute. Undoubtedly “The rights and reme-

dies provided by this chapter” referred to in Sec. 29

A33

were intended to be the rights and remedies which

the Act of 1934 did, in Sec. 9, 16 and 18, 15 U.S.C.A.

§§78i, 78p and 78r, expressly provide for violations

of those sections. No other interpretation can avoid

making a completely incongruous piece of legislation

out of the two statutes in question.

80 F.Supp. at 124-25; accord, Ernst & Ernst, 425 U.S. at

210-11, 96 S.Ct. at 1389. Judge Kirkpatrick thereupon

held that the suit under Rule 10b-5 would be subject to

the restrictions of the express remedies that applied. 80

F.Supp at 124-25. Thus the plaintiffs could not evade the

restrictions of the express remedies by pleading Rule

10b-5.51

The reasoning of Judge Kirkpatrick in Rosenberg

has been applied by two recent Supreme Court opinions,

Blue Chip and Piper In Blue Chip, the Court held that to

acquire standing under Rule 10b-5, private plaintiffs

must be either purchasers or sellers of securities, so-

called Birnbaum rule.“ This holding relied in part on

the principle that it would indeed be anomalous to

impute to Congress an intention to expand the plaintiff

51. To like effect is another early case, Montague v. Electronic Corp. of

America, 76 F.Supp. S03, S05 CRDI.E.1966), where the court conciuded that

statutory provision affording a remedy for particular specific cases and

where there is also a general which is comprehensive enough to

include what is embraced in the former, the special provision will prevail

over the general provision, and the latter will be held to apply only to such

cases as are not within the former.

Id. (citations omitted); see In re Bache & Co., [1972-73 Transfer Binder]

Fed.Sec.L.Rptr. (CCH) {| 93,571 ($9 exclusive remedy for activities it covers, no

Rule 10b-5 coverage) (N.Y. Sup.Ct.1972).

52. The rule is named after the case in which it originated, Birnbaum u

Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct.

1051, 96 L.Ed. 1356 (1952).

A34

class for a judicially implied cause of action beyond the

bounds it delineated for comparable express causes of

action.” 421 U.S. at 736, 95 S.Ct. at 1925.

In Piper, the Supreme Court was confronted with a

claim that the Birnbaum rule applies to plaintiffs pursu-

ing private remedies under Rule 10b-6.5° The Court,

however, decided the standing issue on a narrower

ground, holding that a frustrated tender offeror has no

Rule 10b-6 cause of action against the successful offeror

based solely on a failure to gain control. 430 U.S. at 45, 97

S. Ct. at 951. Alternatively, the SEC as amicus curiae

argued that a private plaintiff relying on Rule 10b-6 can

avail itself of section 9(e)’s standing requirement (the

purchase or sale of “any security”) since Rule 10b-6 is

grounded in part in section 9. If that is true, the Supreme

Court reasoned, the plaintiff must also meet the other

section 9(e) standing requirements.“ Since the plaintiff

failed to meet section 9(e)’s “affected price” criterion,

there was no section 9 standing. A party may not selec-

tively pick and choose among the requirements, depend-

ing on whether they aid his case. See 430 U.S. at 45-46, 97

S.Ct. at 951.

From Piper, we conclude that a private plaintiff pur-

suing an implied remedy is bound by the congressional

limits on the express remedy from which it is derived.

From Blue Chip, we derive a similar principle: implied

remedies are limited by the provisions of comparable

express remedies.

Despite the legislative history of sections 9 and 10(b)

that underlies the Rosenberg-Blue Chip-Piper principles

53. SEC Rule 10b-6, 17 C.F.R. §240.10b-6 (1981).

54. The SEC urged this position on the Court. See Brief of the SEC as

Amicus Curiae, supra note 39, at 191-94.

A35

limiting implied remedies, courts have permitted private

plaintiffs to use rules promulgated under section 10(b) to

reach section 9 activity without imposing section 9’s re-

strictions. See, e. g., cases cited supra note 9.

This is such a case. Section 9 encompassed this

scheme. Yet relief was granted under Rule 10b-5, defying

the intent of Congress as reveaied in the legislative

history of the Acts. From that history, “we are compelled

to conclude that Congress provided precisely the

remed[y] it considered appropriate.” Middlesex County

Sewerage Authority v. National Sea Clammers Associa-

tion, 453 U.S. 1, 15 (1981). Thus the correct response to

attempts such as this to evade section 9 is that pioneered

by Rosenberg and endorsed in Blue Chip and Piper: if the

action is styled as one under Rule 10b-5, yet addresses

section 9 activities, section 9’s limitations should apply.“

55. Accord, Ruder, Civil Liability Under Rule 10b-5: Judicial Revision of

Legislative Intent /, 57 Nw.L.Rev. 627, 660, 685 (1962).

3230 (1942), reprinted in A. Bromberg & L. Lowenfels, supra n. 21, at app. B

(Rule promulgated t to authority conferred upon [ by the Securi-

ties Exchange Act of 1934, particularly Sections 10(b) and 23(a) thereof”) with

fer Binder) — 1 (CCH) 176,350 (Rules 10b-6, -7, and -8 promul-

gated “pursuant to the provisions of the Securities Exchange Act of 1934,

particularly Sections 3(b), 9(a)(6), 10(b) and 23(a) thereof”).

However, since the SEC may administer the securities laws only in con-

formance with intent, see Aaron, 446 U.S. at 691, 100 S.Ct. at

1952; Piper, 430 U.S. at 41 n.27, 97 S. Ct. at 949 n.27; Ernst & Ernst, 425 U.S. at

213-14, 96 S.Ct at 1391, it may not “make law” by promulgat.ng rules that

A36

Rule 10b-5 has been extended well beyond its gap-filling

purpose as originally envisioned by Congress in section

10(b) and proposed by the SEC. In their eagerness to

improve upon the statutory scheme, a practice con-

demned by the Supreme Court, the courts have created

law that does not follow congressional intent, which is

the “ultimate question” in these cases. See Touche Ross,

442 U.S. at 578, 99 S.Ct. at 2490; Ruder, supra note 55, at

628. In this case, Rule 10b-5 has been extended until it

cuts out the heart of the 1934 Act, section 9, thereby

crossing the line between administration of a congres-

sional statute and making new law unauthorized by Con-

gress.

5. CONCLUSION

Because we have found that permitting a Rule 10b-5

remedy here would impermissibly nullify the section 9

remedy and is “unnecessary to ensure the fulfillment of

Congress’ purposes” in enacting the 1934 Act, Santa Fe

Industries, 430 U.S. at 477, 97 S.Ct. at 1302, we reverse

the trial court’s judgment insofar as it was based on Rule

10b-5 and remand for dismissal of the federal claims.“

56. Because we deny Chemetron’s cross-appeal of the trial judge's (1)

denial of a directed verdict and judgment notwithstanding the verdict

ing Special Interrogatory No. 6 (the answer to which foreclosed §9 relief

because the jury found that the scheme had not “affected” the price it paid for

its Westec stock) and (2) denial of a federal securities law claim arising out of

its 1969 sale of its Westec stock to the bankruptcy trustee, see infra section IV,

we pretermit discussion of numerous other issues raised on appeal insofar as

they are directed at the federal securities law claims.

A37

B. Texas Securities Law Claims.

Chemetron alleged violations of article 4004,

Tex.Rev.Civ.Stat. (Vernon 1966).57 On appeal, several

claims of error are made against the trial court’s judg-

ment based on art. 4004.

1. ERRORS IN THE SUBMISSION OF SPECIAL INTERROGATO-

RIES AND INSTRUCTIONS.

a. Special Interrogatories.

Appellants assert that the trial court erroneously

failed to submit or submitted faulty special interrogato-

ries on three elements of an article 4004 claim: (1) duty

to disclose, (2) intent to induce action, and (3) material

inducement. Further, appellants claim that it was error

57 Former Tex.Rev.Civ.Stat.Ann. art. 4004 (Vernon 1966) (reenacted as

Tex. Zus. & Comm. Code §27.01 (Vernon 1968), see supra n.4, declared:

Actionable fraud in this State with regard to transactions in real

estate or in stock in corporations or joint stock companies shall consist of

ment to another party to enter into a contract and but for which promise

said party would not have entered into said contract. Whenever a promise

thus made has not been complied with by the party making it within a

A38

not to submit a separate interrogatory requesting exem-

plary damages as to each appellant. Chemetron initially

rejoins that appellants’ failure to request or object to the

special interrogatories submitted below waives a jury

trial on those issues under Fed.R.Civ.P. 49(a),5* citing

Fredonia Broadcasting Corp. v. RCA Corp., 481 F.2d 781,

796 (5th Cir. 1973); John R. Lewis, Inc. v. Newman, 446

F.2d 800, 804-05 (5th Cir. 1971); and First National Bank,

Henrietta v. SBA, 429 F.2d 280, 285 (5th Cir. 1970).

We see no merit in this claim. In this circuit, a party

preserves a claim of error either by proposing and being

denied a special interrogatory or by objecting to a pro-

posed special interrogatory before the jury has retired.

See Huddleston, 640 F.2d at 550. John R. Lewis,

Fredonia, and Henrietta are not to the contrary. Either

method serves the ultimate purpose of directing the trial

court’s attention to the issue. The preferred method is to

assist the trial court by proposing special interrogato-

ries, but failure to do so is not fatal so long as a timely,

comprehensible objection is made before submission to

the jury. See id. A final requirement is that each party

58. Rule 49(a) provides:

Special Verdicts. The court may require a jury to return only a special

verdict in the form of a special written finding upon each issue of fact. In

it shall be deemed to have made a finding in accord with the judgment on

A39

desiring to preserve the claim of error must object. See

L’Urbaine et la Seine u Rodriguez, 268 F.2d 1, 4 (5th Cir.

1959). Our examination of the record indicates that all

appellants preserved their claims of error with timely

objections.*®®

We turn now to the asserted errors.

Rule 49(a) allows special verdicts at the discretion of

the trial court. The trial court also has discretion over

the nature and scope of the issues submitted, a discretion

reviewable only for abuse. Loffland Brothers Co. u

Roberts, 386 F.2d 540, 546 (5th Cir. 1967), cert. denied,

389 U.S. 1040, 88 S.Ct. 778, 19 L.Ed.2d 830 (1968). The

criteria used in appellate evaluation of the adequacy of

special interrogatories are:

(i) whether, when read as a whole and in con-

junction with the general charge the interrogatories

_ adequately presented the contested issues to the

jury; (ii) whether the submission of the issues to the

jury was fair“; and (iii) whether the “ultimate

questions of fact” were clearly submitted to the jury.

Dreiling v. General Electric Co., 511 F.2d 768, 774 (5th

Cir. 1975) (citations omitted). We apply these criteria in

light of several holdings that clarify their meaning.

“(T]he judge must submit all material issues raised by

the pleadings and the evidence,” Simien u 8. S. Kresge

59. After the reading of the instructions to the jury and its retirement, the

trial judge entertained objections on the record to the instructions. Counsel

for Chemetron proposed that all counsel file objections at a later time. The

trial court agreed, as did counsel for BFI on behalf of all defendants.

All defendants subsequently filed timely objections to the instructions and

interrogatories that covered all of their points on appeal. These objections

repeated those made at an off-the-record charge conference in chambers before

submission to the jury.

A40

Co., 566 F.2d 551, 555 (5th Cir. 1978), although none

must be submitted twice through redundant special in-

terrogatories, Angelina Casualty Co. v. Bluitt, 235 F.2d

764, 770 (Sth Cir. 1956). The limits on the submission

requirement were recently outlined:

There is no dobut that a judge must clearly and

properly instruct the jury with regard to the reso-

lution of key issues in a given case. However, there is

no basis for [appellant’s] apparent assumption that

because an issue is important to the outcome of a

case, the jury must be instructed to supply a specific

answer informing the court how they resolved that

one issue. No party is entitled to a special verdict on

each of the multi-faceted, multitudinous issues es-

sential to the resolution of a given case.

Miley v. Oppenheimer & Co., 637 F.2d 318, 334 (5th Cir.

1981).

Guided by these holdings, we turn to the law of fraud

in Texas. Each of the following elements must be estab-

lished in order to permit recovery: (1) the charged party

made a false material representation that consisted of

either a positive untrue statement of material fact, con-

cealment of a material fact, or nondisclosure of a mate-

rial fact that the charged party had a duty to disclose; (2)

the charged party knew that the material representation

was false or made it recklessly without any knowledge of

its truth; (3) the charged party made the false material

representation with the intent that it should be acted

upon by the charging party; (4) the charging party acted

60. Thus the Huddleston court, for instance, found that reliance and

causation were contested material issues in a Rule 10b-5 case and required

their submission. 640 F.2d at 549-50.

A4l1

in reliance thereon; and (5) the charging party thereby

suffered an injury. See Custom Leasing, Inc. v. Texas

Bank & Trust Co., 516 8.W.2d 138, 142-43 (Tex.1974);

Roland u McCullough, 561 S.W.2d 207, 210

(Tex.Civ.App. San Antonio 1977, writ ref'd n. r. e.);

Moore & Moore Drilling Co. v. White, 345 S.W.2d 550, 555

(Tex.Civ.App.—Dallas 1961, writ ref’d n. r. e.).

Appellants first assert that this was only a case of

nondisclosure, and hence it was error not to submit a

special interrogatory on the duty to disclose.“

Chemetron responds that this was a case involving only

concealment or positive untrue statements, and there-

fore the duty to disclose does not apply. Our examination

of the record indicates that while concealment or posi-

tive untrue statements may have been issues in this case,

nondisclosure was the only type of misrepresentation

under Texas law submitted to the jury.“ Since

61. The premise underlying this assertion is that the existence of a duty to

disclose is always a jury issue. This is not valid in all cases. The

existence of such a duty depends on w there is a fiduciary or confiden

tial relationship the which is usually a question of fact for the

Fraud—Conceal

(1936) (arguing that duty to disclose should always be a question

judge). However, certain relationships have been held to be fiduciary or confi-

er Py , trustee-cestui que trust, and so forth. See Trevino u Sample,

565 g. W. 2d 93, 96 (Tex. Civ. App.—E] Paso 1978, writ ref’d n.r.e.). The existence

of other kinds of fiduciary or confidential relationships is apparently still a

of tet, but Tones low may be in Sux ond may be moving in the

pare 240 A

SW ifort oly ope spay cote

n opinion arguably creating

between family members as a matter of law). Despite

— ———————r— 1 — Shaders

or confidential relationship and its concomitant duty to disclose here as a

matter of law. Therefore, we accept appellants’ premise.

62. Special Interrogatory No. 20, upon which liability under Texas law is

premised, asked: Do you find from a preponderance of the evidence that at

„ |» sewn ng wempraabag peer rhea

Se one said plan,

scheme or conspiracy?” (emphasis added).

A42

nondisclosure was the only basis for liability under Texas

law, the existence of a duty to disclose was a material

issue. However, a duty to disclose arises only in particu-

lar circumstances. This court has held that “Texas law is

clear that if there is no confidential or fiduciary relation

between the parties (creating a duty to disclose], mere

silence does not amount to fraud or misrepresentation.”

Southwest E & T Suppliers, Inc. u American Enka Corp.,

463 F.2d 1165, 1166 (5th Cir. 1972).

Chemetron cites several Texas cases in which

nonfiduciary relationships have been held to create a

duty to disclose, see, e.g. Campbell u Booth, 526 S.W.2d

167, 172 (Tex.Civ.App.—Dallas 1975, writ ref'd n. r. e.);

Chandler u Butler, 284 S. W. 2d 388, 394 (Tex.Civ.App.—

Texarkana 1955, no writ), or where “active” concealment

was actionable without there being a duty to disclose,

see, e. g., Campbell, 526 S.W.2d at 172; Crofford u

Bowden, 311 S.W.2d 954, 956-57 (Tex.Civ.App.—Fort

Worth 1958, writ ref’d). The latter cases are inapposite

since concealment was not submitted to the jury here. As

to the former cases, Southwest E & T Suppliers held that

the Texas law of fraud permitted no exceptions to the

above-quoted rule. See 463 F.2d at 1166. “Once a panel of

this Court has settled on the state law to be applied in a

diversity case, the precedent should be followed by other

panels...absent a subsequent state court decision or

statutory amendment which makes this Court’s decision

clearly wrong.” Lee v. Frozen Food Express, Inc., 592

F.2d 271, 272 (5th Cir. 1979) (per curiam). Chemetron has

cited to us only one Texas case—Campbell—decided

since Southwest E & T Suppliers that broadens the rule

it announced. Without more, this single intermediate

A43

appellate opinion, which rests on reasoning that the

Texas Supreme Court refused to adopt, see Tex.R.Civ.P.

483 (West 1980), is insufficient to persuade us that South-

west E & T Suppliers is “clearly wrong.”

Thus, silence alone by the defendants in this case

does not create liability. Premising liability on the jury’s

affirmative answer to Special Interrogatory No. 20 was

error without a jury finding that a confidential relation-

ship existed.

The jury instructions on Texas law did not cure the

failure to submit a special interrogatory that addressed

some factual predicate of a duty to disclose. They simply

stated that liability is created for an omission or con-

cealment of material fact by a person with a duty to

disclose.” There was no explanation of the duty, when it

arises, how it is discharged, and so forth. The jury could

not reasonably have made the required threshold finding

of a factual basis for a duty to disclose before answering

Special Interrogatory No. 20. It was not instructed to do

so, nor was Special Interrogatory No. 20 cast in such

form as to require one. Therefore, either a special inter-

rogatory concerning the basis of the defendants’ duty to

disclose to Chemetron should have been submitted to the

jury, or Special Interrogatory No. 20 should have ad-

dressed it, since it was a material issue. We need not and

do not express any opinion on whether the defendants

had such a duty here. We hold only that such an issue

should have been submitted to the jury. On remand, if

liability under Texas law is submitted to the jury based

solely or in part on nondisclosure, Chemetron must prove

the existence of a confidential relationship under the law

of Texas as we interpreted it in Southwest E & T

Suppliers.

A44

Appellants also challenge the failure of the trial

court to submit a special interrogatory on their intent to

induce action by Chemetron. Chemetron argues that this

element is established by taking the instructions and

interrogatories as a whole. Hence it would have been

needlessly redundant to submit a special interrogatory

on this issue. In so arguing, Chemetron claims that this

element is necessarily part of the alleged manipulative

scheme directed at the investing public at large, which

included Chemetron.

While Special Interrogatory No. 1 covered the issue

of intent to induce action by the public at large,“ Texas

law clearly requires an intent to induce action by the

plaintiff for article 4004 liability. Oilwell Division,

United States Steel Corp. u Fryer, 493 S.W.2d 487, 491

(Tex.1973). Thus, the trial court failed to submit to the

jury a material issue—the defendants’ intent to induce

action by Chemetron. Appellants’ claim of error is well

taken.®*

63. Special Interrogatory No. 1 asked:

Do you find from a preponderance of the evidence that during the

period September 2, 1964 through August 25, 1966, James W. Williams,

directly or indirectly, alone or with others, participated in

scheme to manipulate the stock of Western Equities by effecting a series of

active trading in or raising the price of Western Equities stock for the

purpose of inducing the purchase or sale of such stock by others?

(emphasis added).

64. Special Interrogatory No. 1 is not defective in what it does—ask the

liability under art. 4004: at least one of the conspirators must specifically

defraud the plaintiff.

A45

DEFENDANTS’ BURDEN

SPECIAL INTERROGATORY NO. 25

Do you find from a preponderance of the evidence

that Chemetron’s decision to purchase Westec securities

in January, 1966 would have been the same decision if all

transactions comprising the scheme, plan or conspiracy

to manipulate had been disclosed to Chemetron prior to

the purchase?

The jury answered no.“

Our review of this issue requires some explanation

of the instructions and special interrogatories used by

the trial court. The jury was correctly instructed that

Chemetron had the burden of proving its contentions.““

However, since conspiracy was also alleged, the defend-

ants could avail themselves of the defense of withdrawal

from any such conspiracy. The jury was correctly in-

structed that the defendants had the burden of proof on

this defense.“ As the burden moved back and forth

65. Burden of Proof

Plaintiff has the burden of proving its contentions by a preponderance

of the evidence taking into account the evidence, both direct and circum-

stantial, and the testimony of witnesses that you have heard.

It is important now that you understand what preponderance of the

evidence means. It means to prove that something is more likely so than

balanced, then the plaintiff has not sustained its burden of proof by a

preponderance of the evidence on that question. It does not mean that you

have to believe the side with the most witnesses, but it means that you

should weigh all the testimony which, when considered and compared

with the testimony opposed to it, has the most convincing force and

produces in your minds a belief that what is sought to be proved is more

likely true than not true.

Jury Instruction No. 11.

66. The court’s instruction on this issue declared:

Withdraw

In connection with the term “withdraw” or “withdrew” or “with-

drawal” from a conspiracy as used in this case, you are instructed that a

A46

throughout the 31 special interrogatories, the phrases

“PLAINTIFF’S BURDEN” (abbreviated “PB” for our

discussion here) or “DEFENDANTS’ (or DEFEND-

ANT’S) BURDEN” (“DB”), were used to tell the jury

when there was a change in the burden of proof. Thus,

PB is found at the top of the first page of interrogatories.

DB precedes Special Interrogatory No. 9 on Austin’s

withdrawal, but PB reasserts itself before Special Inter-

rogatory No. 10. DB reappears before Special Interroga-

tory No. 15 on BFT’s withdrawal but gives way to PB on

Special Interrogatory No. 16. DB’s next and final appear-

ance before Special Interrogatory No. 25 is the one at-

tacked here.“ PB appears again before Special Interrog-

atory No. 26.

Under Erie, burden of proof is a substantive issue

governed by state law in a diversity case such as this. See

9 C. Wright & A. Miller, Federal Practice & Procedure §§

2405 and 2409 (1971). Under Texas law the burden of

proof for every element in an action for fraud is on the

plaintiff. Brooks u Parr, 507 S.W.2d 818, 819 (Tex. Civ.

App.—Amarillo 1974, no writ). Thus, Special Interroga-

tory No. 25 erroneously placed the burden of proof on the

defendant.

This court cannot assume th» the jury realized that

the burden of proof in Special Interrogatory No. 25 was

66. Continued

person withdraws from a conspiracy if he engages in affirmative acts

inconsistent with the object of the conspiracy, that is to say acts which

disavow or defeat the purpose of the conspiracy, and by communicating

the abandonment in a manner reasonably calculated to reach co-

2 ̃ Se ae ee eee

“wi wal from a conspiracy” is on the defendants.

Jury Instruction No. 27.

67. There is no special interrogatory on Bintliff’s withdrawal.

A4T

erroneous and therefore ignored it. The trial court had

established a clear written pattern for the jury to follow

when deliberating, and it is reasonable to believe that

they did so despite what their verbal instructions had

been. See Cann v. Ford Motor Co., 658 F.2d 54, 59 (2d Cir.

1981). cert. denied. U.S. , 102 S.Ct. 2036, 72

L.Ed.2d 484 (1982). Thus, the jury instructions cannot

cure this error.

However, it is clear from the record evidence of a

massive manipulative scheme that the jury would have

answered a special interrogatory stating the correct bur-

den of proof the same way. Given the scale of this

scheme, no reasonable corporate investor would have

behaved as Chemetron did if it knew about the scheme,

and no reasonable juror could have reached a different

conclusion. Therefore, the improper placement of the

burden of proof here is not reversible error. See

Sheppard Federal Credit Union v. Palmer, 408 F.2d 1369,

1372 (5th Cir. 1969).**

Appellants’ final complaint about the special inter-

rogatories is the failure to submit one that required the

jury to apportion exemplary damages among them.*®

Since there is no Texas jurisprudence squarely on point,

we are Erie-bound to make an “educated guess” as to

how the Texas Supreme Court would rule. See Nobs

68. We stress that this holding relies on the record in this case. The

evidence as to the extent of the transactions comprising the scheme is clear,

and that is the sole issue in Special Interrogatory No. 25. We intuit no view

here on the sufficiency of the evidence on liability for the scheme.

In the vast majority of cases, the evidence will not be as clear as it was

here, and an incorrect placement of the burden of proof will mandate reversal.

oo. Connecticut General Life Ins. Co. u Breslin, 332 F.2d 928, 934 (5th Cir.

1964).

69. Special Interrogatory No. 31 on exemplary damages lumped all the

defendants together:

A48

Chemical, U.S. A., Inc. u Koppers Co., 616 F.2d 212,

214-15 (5th Cir. 1980). Before making this “educated

guess,” we must explain this issue further so that it can

be properly analyzed.

The purposes of exemplary damages are the punish-

ment of an intentional act by a defendant and the deter-

rence of future misbehavior. See Pace v. McEwen, 574

S.W.2d 792, 801 (Tex.Civ.App.—El Paso 1978, writ ref’d

n.re.); Collins u Miller, 443 S.W.2d 298, 302

(Tex.Civ.App.—Austin 1969, writ ref’d n.r.e.). Therefore,

art. 4004 requires willfulness or knowledge on the part of

the defendants before exemplary damages are permit-

ted.7°

69. Continued

“What sum of money, if any, if now paid in cash, do you find from a

preponderance of the evidence that plaintiff Chemetron is entitled to as exem-

plary damages?” Appellants complain of the use of the phrase “entitled to”

because it may improperly imply that the purpose of exemplary damages is

compensation for the plaintiff instead of punishment for the defendants. See

Courtesy Pontiac, Inc. u Ragsdale, 532 S.W.2d 118, 122 (Tex.Civ.App—Tyler

1975, writ ref’d n.r.e.). However, the use of this phrase, in and of itself, is not

reversible error so long as “whether, when read as a whole and in conjunction

with the general charge the interrogatorſy] adequately present(s] the con-

tested issue[ ] to the jury.” Dreiling, 511 F.2d at 774. We review the use of this

phrase in conjunction with the instructions on exemplary damages infra and

note here only that while the phrase should not be used because of its possible

misleading implications, its use does not constitute reversible error per se,

since Texas appellate opinions have often held persons “entitled to” exem-

plary damages. See, ¢.g., Wise u Pena, 552 S.W.2d 196, 202 (Tex.Civ.App.—

Corpus Christi 1977, writ dism'd); Irwin u Whirley, 538 S.W.2d 150, 152

(Tex.Civ.App.—Waco 1976, no writ); Briggs u Rodriguez, 236 S.W.2d 510, 516

(Tex.Civ.App.—San Antonio 1951, writ ref’d n.r.e.).

70. Art. 4004 declares:

[All persons wilfully making such false representations or promises or

knowingly taking advantage of said fraud shall be liable in exemplary

damages to the person defrauded in such amount as shall be assessed by

the jury, not to exceed double the amount of the actual damages suffered.

(emphasis added). As reenacted in Tex.Bus. & Comm. Code § 27.01 (c)

(Vernon 1968), these requirements are maintained:

A person who willfully makes a false representation or false promise,

and a person who knowingly benefits from a false representation or false

A49

In Special Interrogatory No. 26, the jury applied

article 4004’s willfullness or knowledge requirement to

each defendant:

If you have found that a scheme or plan to ma-

nipulate the stock of Western Equities existed in

answer to Special Interrogatory No. 1, or if you have

found that a conspiracy existed in answer to Special

Interrogatory No. 7, and if you have found that the

existence of that plan, scheme or conspiracy was a

material fact which was not disclosed to Chemetron

in answer to Special Interrogatories 20 and 22, do

you find from a preponderance of the evidence that

any of the defendants willfully concealed the exis-

tence of such material fact or knowingly took advan-

tage of said activity?

Answer by naming said defendants, if any.

Business Funds, Inc. Yes._. No

John F. Austin, Jr. Yes_. No

David C. Bintliff wun PO

Brazos Valley Cotton

Oil Company Yes. No—

(emphasis added). In response, the jury held BFI, Austin,

and Bintliff each to have willfully concealed or know-

ingly taken advantage of the scheme. Chemetron claims

that this finding fulfills article 4004’s requirement and

justifies the joint and several liability for punitive dam-

ages imposed in Special Interrogatory No. 31.

70. Continued

promise, commit the fraud described in Subsection (a) of this section and

are liable to the person defrauded for exemplary damages not to exceed

twice the amount of actual damages.

(emphasis added).

A50

We disagree for several reasions and hold that the

affirmative answers to Special Interrogatory No. 26 were

but a threshold to further consideration of exemplary

damages by the jury. First, there is the language of the

statute itself. Article 4004 expressly requires joint and

several liability for actual damages but has no such ex-

press requirement for exemplary damages:

All persons making the false representations or

promises and all persons deriving the benefit of said

fraud, shall be jointly and severally liable in actual

damages, and in addition thereto, all persons

wilfully making such false representations or prom-

ises or knowingly taking the advantage of said fraud

shall be liable in exemplary damages to the person

defrauded in such amount as shall be assessed by the

jury, not to exceed double the amount of the actual

damages suffered.

(emphasis added)“ The parallel language of the actual

and exemplary damage provisions is striking and renders

the differences significant, particularly since the statute

is penal in nature and must be strictly construed,

Westcliff Co. v. Wall, 153 Tex. 271, 267 S.W.2d 544, 546

(1954). The elements of willfulness and knowledge were

expressly added to the exemplary damage provision,

while the joint and several liability requirement is con-

71. Tex.Bus. & Comm.Code § 27.01 retains the difference:

(b) A person who makes a false representation or false promise, and a

person who benefits from that false representation or false promise, com-

mit the fraud described in Subsection (a) of this section and are jointly

and severally liable to the person defrauded for actual damages...

(c) A person who willfully makes a false representation or false prom-

ise, and a person who knowingly benefits from a false representation or

false promise, commit the fraud described in Subsection (a) of this section

and are liable to the person defrauded for exemplary damages not to

exceed twice the amount of actual damages.

(emphasis added).

A51

spicuously absent. Examination of art. 4004 leads us to

conclude that the Texas Legislature chose not to impose

joint and several liability for exemplary damages.“

There is ample support in the case law for this inter-

pretation of the statute. Texas courts have long followed

several criteria for the evaluation of exemplary damage

awards made by a jury in its discretion.

The first, that exemplary damages be reasonably

proportional to actual damages, see Southwestern In-

vestment Co. u Neeley, 452 S. W. 2d 705, 707 (Tex.1970), is

governed primarily by statute in cases of fraud—art.

4004 permits exemplary damages to be no more than

double the actual damages suffered. The remaining crite-

ria are:

the nature of the wrong, the character of the conduct

involved, the degree of culpability of the wrongdoer,

the situation and sensibilities of the parties con-

cerned, and the extent to which such conduct offends

a public sence of justice and propriety.

Schutz u Morris, 201 S.W.2d 144, 147 (Tex.Civ.App.—

Austin 1947, no writ). Texas law imposes additional cri-

teria for evaluating corporate liability for exemplary

damages. See Ledisco Financial Services, Inc. u

Viracola, 533 S.W.2d 951, 957 (Tex.Civ.App.—Texarkana

1976, no writ); accord, Wooley v. Southwestern Portland

Cement Co., 272 F.2d 906, 907 (5th Cir. 1959). These

criteria demand individual consideration of each defend-

ant’s conduct, situation, sensibilities, and culpability by

the jury, consideration that is denied by failing to appor-

tion exemplary damages.

72. This conclusion is reinforced by the Legislature's reenactment of art.

4004 in § 27.01 where the same parallel structure was retained. See supra nn.

A52

In a case like this with several conspirators (and

many other conspirators not before the court) who may

have had varying degrees of intent or knowledge, who

participated in the scheme in different ways over a long

period of time, and who performed in a variety of capaci-

ties (an investor, a corporation, and its chairman), the

purposes of exemplary damages are ill served by render-

ing all defendants jointly and severally liable. Joint and

several liability for exemplary damages in these circum-

stances enables coconspirators to shift the burden of

those damages onto their less culpable confederates. This

undermines their deterrent and punitive purposes. Cf.

Northwestern National Casualty Co. u McNulty, 307

F.2d 432, 440 (Sth Cir. 1962) (insurance for punitive dam-

ages blunts punishment and deterrent purposes by shift-

ing burden from wrongdoer to insurance company). Each

defendant vigorously contested his own liability at trial

and on appeal, and the evidence as to the liability of each

varies considerably. The jury should have been permitted

to assess exemplary damages against each defendant in

accordance with its evaluation of that defendant.

Our conclusion is buttressed by the line of Texas

cases that have either upheld separate consideration of

exemplary damages for each defendant in a multi-

defendant case or supported the principle of separate

consideration. In Schutz, the court said:

Where two or more wrongdoers together take part in

the wrong, it is entirely possible that one may be

prompted by malice, while the other is not. Or it may

be that though both be guilty, the culpability of one

is much greater than that of the other, thus warrant-

ing a greater penalty.

A53

201 S. W. ad at 147 (citations omitted); see Norton Refrig-

erated Express, Inc. u Ritter Brothers Co., 552 S. W. 2d

910, 913 (Tex.Civ.App—Texarkana 1977, writ ref’d

n. x. e.); Walker u Kellar, 226 S. W. 796, 798 (Tex. Civ. App.

—San Antonio 1920, writ ref’d). Schutz sustained sepa-

rate consideration; Norton recognized that it may be

necessary in some cases but held it unnecessary under

the “unusual” facts of that case; and Walker required it

for one late-joining conspirator against whom the evi-

dence was weaker.

Chemetron cites Crisp v. Southwest Bancshares

Leasing Co., 586 S.W.2d 610, 615 (Tex.Civ.App.—

Amarillo 1979, writ ref’d n.r.e.), for the proposition that

“{ejach party to a fraudulent transaction is responsible

for the acts of others done in furtherance of the scheme.”

However, Crisp is inapposite. It involved only joint and

several liability for actual damages, since exemplary

damages apparently were not awarded at trial. See id. at

612-13. Crisp does not create joint and several liability

for punitive damages.

Statutory interpretation, Texas case law, and our

evaluation of the facts in this case indicate that separate

consideration of the amount of exemplary damages for

each defendant is required.“

b. Jury Instructions.

The defendants claim that they were prejudiced be-

cause the jury was not correctly instructed, in Jury In-

73. He ee

emotional distress due to the abduction of a child, a federal district court

ee ae ea peng cud ges Ap e

this disposition is in

apportionment was on appeal,

— Sith ton — ef teana tate fee Fenslage u Dawkins, 629 F.2d

1107, 1109, 1111 (Sth Cir. 1980).

A54

struction No. 32,7 on the purposes of exemplary dam-

ages or how they differ from compensatory damages. The

standard of review on this issue was recently summa-

rized:

“(T]he test is not whether the charge was faultless in

every particular but whether the jury was misled in

any way and whether it had understanding of the

issues and its duty to determine those issues.” Our

jurisprudence mandates that we consider the charge

as a whole, viewing it in the light of the allegations

of the complaint, the evidence, and the arguments of

counsel.

Smith v. Borg-Warner Corp., 626 F.2d 384, 386 (5th Cir.

1980) (citations omitted), quoting Borel v. Fibreboard

Paper Products Corp., 493 F.2d 1076, 1100 (5th Cir. 1973),

74. Jury Instruction No. 32 said in full:

Exemplary Damages Under Texas Law

If you find that the plaintiff is entitled to actual damages as a result of

having proved against any defendant or defendants all of the required ele-

ments of the Texas actionable fraud statute, Texas law permits the jury to

award the plaintiff exemplary damages in addition to actual damages under

certain circumstances. To be entitled to exemplary damages, the plaintiff must

award exemplary damages not to exceed twice the amount of actual damages.

If you, the jury, should find from a preponderance of the evidence in this

case that the plaintiff is entitled to a verdict for actual or com

damages, and should you further find that the act or omission of the defend-

ants or defendant which caused the actual injury or damage to the plaintiff was

willfully done or with an intention to knowingly benefit from such, you, the

jury, may in the exercise of your discretion, add to the award of actual dam-

ages such amount as you shall agree to be proper as exemplary. In any event,

that amount may not exceed twice the amount of actual damages.

Whether to make any award of exemplary damages in addition to the

actual damages is a matter exclusively within the province of the jury.

A55

cert. denied, 419 U.S. 869, 95 S.Ct. 127, 42 L.Ed.2d 107

(1974). While the standards for evaluating jury instruc-

tions in a diversity case are federal, the substance of

those instructions must adhere to state law. Reyes u

Wyeth Laboratories, 498 F.2d 1264, 1289 (5th Cir.), cert.

denied, 419 U.S. 1096, 95 S.Ct. 687, 42 L.Ed.2d 688 (1974).

Looking at the contested instruction, we see the fol-

lowing: (1) the jury was never informed of the purposes

of exemplary damages (deterrence and punishment of

extraordinary misconduct); (2) the jury was correctly

cautioned several times that an award was discretionary;

and (3) it was properly told what criteria article 4004

required (intent or knowledge) for exemplary damages.

In the arguments of Chemetron’s counsel we find in-

stances where counsel informed the jury of the nature of

punitive damages. Next, we have the “entitled to” lan-

guage of Special Interrogatory No. 31, which may be

misleading on the purposes of exemplary damages but is

not reversible error in and of itself. See supra note 69.

Finally, Chemetron sought punitive damages in its com-

plaint and, we note without intimating any view on the

sufficiency of this evidence, did present evidence in sup-

port of its claim.

Against this backdrop, the defendants point to Texas

and federal standard jury instructions on exemplary

damages as proof of the trial court’s error.“? However, it

your by way

punishment.” 1 State Bar of Texas, Texas Pattern Jury Charges § 11.10 (1969).

Federal judges are advised to tell the jury:

(Tyhe law permits the jury, under certain circumstances. to award

example or warning to others not to engage in such conduct.

A56

is scarcely error per se to decline to follow pattern or

form book instructions. Nor does Erie compel the use of

pattern state instructions, since the manner of giving

jury instructions is controlled by federal law, Foster u

Ford Motor Co., 621 F.2d 715, 717 (5th Cir. 1980), and a

pattern charge is but one procedure for instructing the

jury—other procedures may be used so long as they cor-

rectly describe the applicable state law. See Platis u

Stockwell, 630 F.2d 1202, 1207 (7th Cir. 1980); Wright u

Albuquerque Auto-Truck Stop Plaza, 591 F.2d 585, 587

(10th Cir. 1979); Stafford u Southern Farm Bureau

Casualty Insurance Co., 457 F.2d 366, 367 (8th Cir. 1972)

(per curiam). Pattern instructions are merely some evi-

dence that an instruction is advisable.

Although it is a close question, we hold that these

instructions and the language of Special Interrogatory

No. 31 are not erroneous under Smith —they did not

mislead the jury or create misunderstanding of the is-

sues. The special interrogatory and the instructions

made clear to the jury that an award of exemplary dam-

ages was discretionary. The special interrogatory and

instructions did not erroneously tell the jury or even

imply that exemplary damages were mandatory. Com-

pare nn. 69, 74 with Crowell-Collier Publishing Co. u

Caldwell, 170 F.2d 941, 944-45 & n.9 (5th Cir. 1948).

While the preferable course would be for the trial judge

to instruct on the purposes of exemplary damages, in this

case Chemetron consistently sought exemplary damages

and presented its case through evidence and argument in

a way that made the purposes of exemplary damages

75. Continued

9 ag & Blackmar, Federal Jury Practice & Instructions § 85.11 (3d ed.

).

A57

clear to the jury. Given the presentation of Chemetron’s

case, we hold that the jury was not misled or confused by

the “entitled to” language of Special Interrogatory No.

31 or by the jury instructions.

While so holding, we reiterate that the issue is close

and that a trial judge must be extremely careful to keep

exemplary damages within their proper sphere to pre-

vent a jury from assessing them for invalid or specula-

tive reasons. See Lee v. Southern Home Sites Corp., 429

F.2d 290, 294 (5th Cir. 1970). In future trials and particu-

larly if this cause is retried, the “entitled to” phrase

should not be used. In addition, we suggest that an in-

struction on the purposes of exemplary damages will

often be found helpful to the jury, enabling it better to

distinguish their proper function from that of compensa-

tory awards.

2. ARTICLE 4004 AND TxxAS COMMON LAW or CIVIL

CONSPIRACY.

The defendants challenge their liability as

conspirators for violating article 4004. Since we have

already found reversible error in the Texas judgment, it

is necessary to discuss only one of these challenges, that

of Bintliff. Bintliff claims that even if he joined the al-

leged conspiracy, he joined it well after Chemetron’s

purchase of Westec stock, and therefore he cannot as a

matter of law be held liable for any fraud in connection

with that purchase under article 4004. We address this

claim to resolve it and to clarify Texas law should this

case be retired on the remand that we order.

The elements necessary for liability under article

4004 have already been outlined. See supra Slip op. p.

A58

4219, p Bintliff correctly asserts that since he was

not involved in the Chemetron transaction, his conduct

does not fulfill those elements, particularly the require-

ment of having fraudulently induced Chemetron, not the

public at large, to purchase Westec shares. See supra Slip

op. 4221, p. ; Oilwell Division, United States Steel, 493

S.W.2d at 491. However, the Texas common law of civil

conspiracy does provide a legal mechanism that could

render Bintliff liable to Chemetron for its purchase of

Westec shares. We describe this mechanism but express

no opinion on whether the evidence in this case renders

Bintliff liable, leaving that to the finder of fact if there is

a new trial.

Texas recognizes the ancient common-law doctrine

that civil conspiracy consists of a combination by two

or more persons to accomplish an unlawful purpose or to

accomplish a lawful purpose by unlawful means.’”

Fenslage v. Dawkins, 629 F.2d 1107, 1110 (5th Cir. 1980),

quoting Schlumberger Well Surveying Corp. v. Nortex

Oil & Gas Corp., 435 S.W.2d 854, 856 (Tex.1968). Unlike

criminal conspiracy, civil conspiracy itself does not cre-

ate liability—the conspirators must pursue an

independently unlawful purpose or use an independently

unlawful means before they can be held liable. See, e.g.,

Marmo u Lachman, 602 S.W.2d 350, 352 (Tex.

Civ.App.—Texarkana 1980, no writ).

In this case, Chemetron alleged and offered proof

that the continuing conspiracy Bintliff joined had both

an unlawful purpose—market manipulation—and was

pursued via unlawful means, including inducing the pub-

lic to buy or sell Westec stock in violation or article 4004.

None of the conspirators had specific sellers or buyers in

mind when the conspiracy began or as it progressed. As

each transaction occurred, however, the conspirators

A59

could meet the criteria for violating article 4004 by de-

frauding that particular buyer or seller. This case deals

with only one fraudulent act in this broad conspiracy and

with only one member of the public defrauded,

Chemetron.

This is where Bintliff misunderstands the interaction

of article 4004 and Texas civil conspiracy law. He claims

that he cannot be liable to Chemetron unless he person-

ally fulfills all of article 4004’s criteria. That is true in a

nonconspiracy case. But if this court were to accept his

argument in this conspiracy case, we would completely

abolish civil conspiracy law in Texas. The purpose of civil

conspiracy law is to hold conspirators who knowingly

and jointly pursue an illegal purpose or use illegal means

liable even though all the conspirators do not perform or

even know of all the acts done in furtherance of the

conspiracy. See, e.g., Bourland v. State, 528 S.W.2d 350,

354 (Tex.Civ.App.—Austin 1975, writ ref’d n.r.e.); Glenn

H. McCarthy, Inc. u Know, 186 S. W. 2d 832, 838

(Tex.Civ.App.—Galveston 1945, writ ref’d w.o.m.).

This principle also covers late-joining conspirators

such as Bintliff. See, e.g., State v. Standard Oil Co., 130

Tex. 313, 107 S.W.2d 550, 560 (1937). Standard Oil cited

Corpus Juris as authority for this proposition. Turning to

Corpus Juris Secondum, we find this rule of law;

“Persons having knowledge of a conspiracy who enter

into it after its inception and before its consummation

are liable for all acts previously or subsequently done in

pursuance thereof.” 15A C. J. S. Conspiracy § 19, at 659

(1967), citing, e.g., Standard Oil. Accord, 12 Tex. Jur.3d

Civil Conspiracy § 4 (1981); 16 Am. Jur.2d, Conspiracy §

56 (1979); 1 Eddy on Combinations § 376 (1901). This

immemorial common-law principle has been widely ac-

A60

cepted, see, e.g., Industrial Building Materials, Inc. u

Interchemical Corp., 437 F.2d 1336, 1343 (9th Cir. 1970);

Ratner v. Scientific Resources Corp., 53 F.R.D. 325, 329

(S. D. Fla. 1971), appeal dism’d for want of juris., 462 F.2d

616 (5th Cir. 1972) (per curiam); Blackstone Industries,

Inc. v. Andre, 232 Ga. 715, 208 S.E.2d 815, 816 (1974), and

is simply a restatement of another well-settled principle

of conspiracy law “that one who knowingly joins a con-

spiracy even at a later date takes the conspiracy as he

finds it,” Myzel v. Fields, 386 F.2d 718, 738 n.12 (8th Cir.

1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19

L.Ed.2d 1143 (1968).

Bintliff satisfies the conditions imposed by section

19. He joined the conspiracy after its inception but before

its consummation. “A conspiracy, especially one which

contemplates a continuity of purpose and a continued

performance of acts, is presumed to continue until there

has been an affirmative showing that it has terminated

... United States u Etheridge, 424 F.2d 951, 964 (6th

Cir. 1970). Consummation of the market manipulation

scheme had not occurred before Bintliff’s membership in

the conspiracy because ample record evidence demon-

strates that the purpose of the conspiracy, market manip-

ulation, was still pursued by the conspirators well after

his entrance. This continuing conspiracy involved many

illegal acts, some occurring before and some after

Bintliff’s entrance. The defrauding of Chemetron was but

one illegal act done in furtherance of the conspiracy, not

its consummation.

Civil conspiracy principles do not require that

Bintliff have intended to defraud a specific party, only

that he knowingly have joined the conspiracy intending

to defraud its general targets. See, e.g., Schlumberger,

A61

435 S. W. ad at 855-57; Switzer u Joseph, 442 S.W.2d 845,

849 (Tex.Civ.App.—Austin 1969, no writ). These princi-

ples do not render Bintliff liable without regard to his

intent--Texas conspiracy law in fact substitutes two in-

tent requirements for the article 4004 intent require-

ment. Chemetron must prove that (1) one of his

coconspirators violated article 4004 and that (2) Bintliff

knowingly joined the conspiracy intending to defraud the

investing public. We need not repeat the elements of the

former requirement, and the Texas Supreme Court has

laid out the criteria for latter:

“A ‘conspiracy to defraud’ on the part of two or more

persons means a common purpose, supported by a

concerted action to defraud, that each has the intent

to do it, and that it is common to each of them, and

that each has the understanding that the other has

that purpose.”

Schlumberger, 435 S.W.2d at 857 quoting Brumley u

Chattanooga Speedway & Motordrome Co., 138 Tenn.

534, 198 S.W. 775, 776 (1917) (emphasis in Texas opin-

ion).

If a jury accepts Chemetron’s proof that Bintliff

_ knowingly agreed to participate in the alleged conspiracy

to defraud the public and the jury also finds that one of

his coconspirators violated article 4004 by defrauding

Chemetron, Bintliff must be held liable to Chemetron

under a long-established rule in Texas: [A person] hav-

ing once entered the conspiracy, however late, becomes

in law a party to every act previous or subsequently done

by any of the others in pursuance of it.” Standard Oil

Co., 107 S. W. ad at 560 (cited in, e.g., Logan u Barge, 568

S.W.2d 863, 868 (Tex.Civ.App.—Beaumont 1978, writ

ref'd n.re.); Mims u Bohn, 536 S.W.2d 568, 570

(Tex.Civ.App.—Dallas 1976, no writ) ). Thus, Bintliff can

A62

be held jointly and severally liable for the actual dam-

ages resulting from the previous act of his fellow

conspirators, the defrauding of Chemetron.““

Bintliff raises a final argument on this issue that we

must address. He claims that while he may be liable for

actual damages under article 4004 and Texas conspiracy

law based on the acts of his coconspirators, he cannot be

held liable for exemplary damages based on their acts.

76. We note that the interaction of art. 4004 and Texas civil conspiracy law

to render Bintliff liable here arguably may raise due process problems. We

think not.

Although art. 4004 and the conspiracy law applied here are civil, not

reasonably understand

Rose u Locke, 423 U.S. 48, 49, 96 S.Ct. 243, 244, 46 L. Ed. ad 185 (1975)

(per curiam). The due process clause requires that the law give sufficient

warning of forbidden conduct. Id. at 50, 96 S.Ct. at 244. This right to fair

expansion precise

statutory . Bouie u City of Columbia, 378 U.S. 347, 352, 84 S.Ct.

1697, 1701, 12 L.Ed.2d 894 (1964). Since art. 4004 is an old statute based

658 & n.6 (1971); exemplary damages were also available in Texas at

common law without statutory authorization, Briggs u Rodriguez, 236

8.W.2d 510, 515 (Tex.Civ.App.—San Antonio 1951, writ ref’d n.r.e.); civil

since the 19th century, see State u Racine Sattley Co., 63 Tex.Civ.App.

663, 134 8. W. 400, 404 (1911, no writ); and exemplary damages have been

available for civil conspiracy in Texas since at least 1908, see St. Louis &

Southwestern Ry Co. u Thompson, 102 Tex. 89, 113 8. W. 144, 147 (1908).

A63

Earlier in this opinion, we held that the wording of

article 4004 and Texas case law require individual as-

sessment of exemplary damages under article 4004. See

supra Slip op. p. 4226, at . While civil conspiracy law

can be used to render Bintliff liable for actual damages

under article 4004, we agree with him that punitive dam-

ages can only be assessed against him based on his con-

duct. The purpose of punishment and deterrence would

not be served by imposing exemplary damages without

regard to Bintliff’s individual conduct.“ No Texas case of

which we are aware has ever ignored individual culpabil-

ity and awarded exemplary damages against civil

conspirators on a joint and several basis. See, e. g.,

Fenslage, 629 F.2d at 1109, 1111 (Texas diversity case

apportioning exemplary damages among civil

conspirators).

This is not to say that, as a matter of law, Bintliff

cannot be liable for punitive damages here since he

76. Continued

Art. 4004 codified the common law of fraud and concomitant exem-

damages, see Bordwine, supra, at 658 & n.7, changing (enlarging)

only the measure of actual damages, see El Paso Development Co. u Ravel,

339 S.W.2d 360, 363-64 (Tex.Civ.App.—E] Paso 1960, writ ref'd n.r.e.), cited

with approval in Stanfield u O Boyle, 462 S. W. 2d 270, 272 (Tex. 1971), but

the common law of civil conspiracy in Texas has never been displaced by

statute or altered by a Texas court. Given this precedent, our decision

today is not an unforeseeable judicial expansion of a narrow statute; it is

merely the application of time-honored principles of Texas law that Texas

courts have used to the present day. See, ¢.g., Fenslage, 629 F.2d at 1110

(1980 diversity case applying Texas law); Bourland, 528 S.W.2d at 354

(1975 case holding that civil conspirators are liable despite failure to

perform or know of all acts done in furtherance of conspiracy); Glenn H.

McCarthy, Inc., 186 S.W.2d at 838 (1945 case with holding identical to

Bourland).

TT. This result also avoids the possible due process problems of imposing

exemplary damages, which are punitive in nature, on Bintliff without regard

to his intent to commit the act for which he is punished. See Marshall u

Isthmian Lines, Inc., 334 F.2d 131, 135 (Sth Cir. 1964) (criminal penalties

require intentional conduct); Prosser, Torts § 2 at 9—10 (4th ed. 1971) (puni-

tive damages a criminal law concept).

A64

joined the conspiracy late. Article 4004 permits exem-

plary damages against persons who “knowingly takle

advantage” of fraud. Thus, if Chemetron can prove that

Bintliff knowingly took advantage of the defrauding of

Chemetron, he can be held liable for exemplary damages.

C. Other Issues on Appeal.

We address three other allegations in order to guide

the trial court if there is a new trial on remand.

1. THe IN Pari DELICTO INSTRUCTION.

Appellants claim that it was error to deny them an in

pari delicto instruction as to Chemetron. The grant of

this defense is within the discretion of the district court.

Wolfson v. Baker, 623 F.2d 1074, 1082-83 (5th Cir. 1980),

cert. denied, 450 U.S. 966, 101 S.Ct. 1483, 67 L.Ed.2d 615

(1981), and review of this discretion is limited to its

abuse. Prior cases limit this discretion and hold that this

defense is only available to defendants under the circum-

stances outlined in Woolf u 8.D. Cohn & Co., 515 F.2d

591, 601-05 (5th Cir.), on petition for rehearing, 521 F.2d

225, 226-28 (1975) (per curiam), vacated and remanded

on other grounds, 426 U.S. 944, 96 S.Ct. 3161, 49 L.Ed.2d

1181 (1976).

One important circumstance is the effect of the dis-

pute on the investing public. If the fraud is worked only

between the parties to the lawsuit, the public is not

affected. If, however, as here, the fraud affected the pub-

lic, use of in pari delicto is disfavored because it will

hinder bringing of securities fraud cases. See id. at 602-

03; 521 F.2d at 227-28. This circumstance must be given

“substantial weight” in determining whether to permit

this defense. 515 F.2d at 604.

A65

[E]ven in a case where the fault of plaintiff and

defendant were relatively equal, simultaneous and

mutual, the court might still reject the defense if it

appeared that the defendant’s unlawful activities

were of a sort likely to have a substantial impact on

the investing public, and the primary legal responsi-

bility for and ability to control that impact is with

defendant.

Id. In the Woolf opinion on petition for rehearing, the

court likened this equal-simultaneous criterion to the

“vital” cooperation of coconspirators required to accom-

plish the conspiratorial scheme. 521 F.2d at 228.

Given these standards, the evidence does not per-

suade us that, even if Chemetron was a party to the

conspiracy, it was a “vital” party. The trial court could

well have concluded that the “primary legal responsibil-

ity” for the conspiracy lay with the defendants. There-

fore, he did not abuse his discretion in denying this de-

fense. ;

2. UsE OF THE ZERO-VALUE THEORY IN MEASURING

DAMAGES.

In Special Interrogatory Nos. 27 and 30, addressing

federal and Texas law, respectively, the jury found that

had there been disclosure of the manipulative scheme

prior to Chemetron’s receipt of Westec stock on January

14, 1966, “the real and actual value” of that stock would

have been zero. Defendants appeal the use of the zero-

value theory in Chemetron’s presentation of its case, the

theory upon which the answers to Special Interrogatory

Nos. 27 and 30 are based. They also appeal other points

on the measure of damages.

A66

The briefs are directed almost exclusively to the

validity of the zero-value theory and related points under

federal law. We need not decide any federal law questions

since we have held that Chemetron has no federal cause

of action for this fraud. Therefore our analysis of this

theory and the other points on appeal is performed ac-

cording to Texas law to guide a trial on remand.

We first consider an issue other than the theory it-

self. Defendunts allege that Chemetron’s expert who ad-

vanced th zero-value theory improperly incorporated

pcst-purchase events in his damage assessment. The text

ot sriicie 4004 expressly describes what evidence is rele-

vant to a damage calculation:

All persons guilty of such fraud shall be liable to the

person defrauded for all actual damages suffered, the

rule of damages being the difference between the

value of the property as represented or as it would

have been worth had the promise been fulfilled, and

the actual value of the property in the condition it is

delivered at the time of the contract.

(emphasis added).

It is clear from article 4004 that any events occurring

after January 14, 1966, may not be considered in assess-

ing actual damages. Thus, the experts on damages and

the jury may not consider, for instance, manipulative

transactions after that date, the revelation of the scheme

to the SEC, the cessation of trading in Westec stock, or

the bankruptcy of Westec. Other considerations such as

an assumption that prepurchase transactions were ille-

gal, may be used if they meet the standard tests for the

admission of evidence, adequate foundation and the like.

We leave these issues to the discretion of the trial judge

on remand.

A67

As to the zero-value theory, Chemetron contends

that “actual value” in article 4004 refers only to the

market value of the Westec stock, and the market value

of Westec stock would have been zero had the scheme

been disclosed. Appellants argue that even if the Westec

stock had no market value, it had an intrinsic value

representing the assets, tangible and intengible, of

Westec, and that article 4004 includes this intrinsic value

in the term “actual value.”

The resolution of this debate requires an initial in-

quiry into the nature of damages under article 4004. The

seminal case on common law damages for fraud in Texas,

George v. Hesse, 100 Tex. 44, 93 S.W. 107 (1906), clearly

distinguished between the two remedies available to de-

frauded purchasers. The first is an action for cancellation

and rescission of the contract induced by the fraud, one

which restores both parties to the status quo. The second,

a tort action for deceit, compensates the defrauded pur-

chaser for the difference between the actual value of the

property received and the amount paid for that property.

This second cause of action, sounding in tort and using

an out-of-pocket measure of damages, was expanded by

article 4004 into a benefit-of-the-bargain measure of dam-

ages in stock and real estate fraud cases. See El Paso

Development Co. v. Ravel, 339 S.W.2d 360, 363

(Tex.Civ.App.—El Paso 1960, writ ref’d n.r.e.), cited with

approval in Stanfield u O Boyle, 462 S. W. 2d at 272 (Tex.

1971).

In assessing damages in stock fraud cases under ei-

ther article 4004 or the common law, Texas courts have

employed the standard of value used by the damaged

party. Thus, if a damaged party used the market value in

striking its bargain, that became the standard. See, e. g.,

A68

Chandler u Butler, 284 S. W. 2d 388 (Tex.Civ.App.—

Texarkana 1955, no writ); cf. Patterson v. Wizowaty, 505

S.W.2d 425 (Tex.Civ.App.—Houston 1974, no writ)

(measure of damages in stock conversion suit based on

market value of stock at time of conversion). However,

where there is no market for the stock or where it is

allegedly worthless, the intrinsic value of the assets,

tangible and intangible, represented by the stock is used.

See, e.g., K. W. 8. Manufacturing Co. u McMahon, 565

S. W. 2d 368 (Tex.Civ.App.—Waco 1978, writ ref’d n.r.e.);

Beckwith u Powers, 157 S. W. 177, 180 (Tex.Civ.App.—El |

Paso 1913, no writ). And in those cases where a damaged

party valued stock by reference to the value of underly-

ing assets, damages are calculated by reference to the

value of those assets. See, e. g., Reed u Holloway, 127

S. W. 1189 (Tex.Civ.App.1910, no writ). Using the dam-

aged party’s standard of value is eminently sensible,

since it awards that party its anticipated benefit of the

bargain while avoiding speculative and conjectural dam-

ages based on unanticipated benefits of the bargain. Such

speculative and conjectural damages are forbidden under

both article 4004 and the Texas common law of fraud.

George, 93 S.W. at 108; El Paso, 339 S.W.2d at 363-64.

Based on these principles of Texas law, the use of the

zero-value theory here was erroneous. The parties estab-

lished a trading value different from and below the mar-

ket value of Westec stock on the date of the transaction.

There is no evidence that Chemetron contemplated the

higher market price as a benefit of its bargain.

Chemetron was making an investment in Westec, which

is why it used the company’s assets in establishing a

price for the transaction. Unless Chemetron expected to

benefit from the market price, it is speculative and con-

jectural to award damages based on it.

A69

Even if Chemetron did anticipate the market price as

a benefit of the bargain, the damages here would still be

speculative or conjectural. The zero-value theory posits

that during the panic after the disclosure of a scheme the

stock will have no value. Such a panic period is an unpre-

dictable phenomenon—its duration, effect on stock

prices, and so forth are highly speculative and conjec-

tural. See Beecher v. Able, 435 F.Supp. 397, 402—06

(S. D. N. v. 1977). Aggravating these characteristics is the

fact that Chemetron would be selling an unusually large

amount of stock—ten percent of all Westec stock. Select-

ing a measure of damages based on such an unreliable

and volatile market risks awarding the plaintiff a wind-

fall rather than damages. We find that Texas law cannot

countenance a zero-value theory of damages.

Therefore, on remand, the zero-value market theory

may not be used. Indeed, no theory that uses market

value to set damages can be used, since market value

played no role in the striking of the bargain. Chemetron

must prove that the value it placed on the Westec stock

(which ignored market value) was reduced by the fraud.

The difference between the amount Chemetron paid (rep-

resenting the value it placed on the Westec stock) and

this reduced value, if any, represents the damages “ac-

tually suffered” and recoverable by Chemetron.

3. THe ADMISSION OF WILLIAMS’ SECURITIES FRAUD

CONVICTION.

Defendants argue that the probative value of ad-

mitting Williams’ securities fraud conviction into evi-

dence was outweighed by its prejudicial effect. The con-

viction came into evidence in a short, two-question collo-

quy at the conclusion of Williams’ lengthy, complicated

A770

testimony on the scheme and was also mentioned in

closing argument.

In assessing the relevance and prejudice of this evi-

dence in a civil case under Fed.R. Evid. 403, 7s the trial

judge has broad discretion, reviewable only for abuse.

Rozier v. Ford Motor Co., 573 F.2d 1332, 1347 (5th Cir.

1978). The threshold issue here is the relevance of the

conviction. If it is irrelevant, we need not reach the

question of whether its probative value is substantially

outweighed by its prejudicial effect. We believe that the

conviction is certainly relevant. Two crucial elements of

Chemetron’s case were (1) that the plan to manipulate

the market was illegal and (2) that Williams’ conduct was

illegal. Williams’ conviction is relevant to both elements.

While Chemetron did explore at length with the jury the

scope of the manipulation, its purposes, and its ultimate

results, the defendants hotly contested the existence and

the illegality of the scheme and the illegality of Williams’

conduct. The probative value of his conviction rose when

these issues were vigorously contested. See United

States v. Beechum, 582 F.2d 898, 914-15 (5th Cir. 1978 (en

banc), cert. denied, 440 U.S. 920, 99 S.Ct. 1244, 59

L.Ed.2d 472 (1979).

Having passed the relevancy threshold, we must now

consider whether the trial judge abused his discretion

when he decided that the “danger of unfair prejudice”

posed by the conviction did not “substantially outweigh”

its probative value. The task for the court in its ascer-

tainment of probative value and unfair prejudice under

rule 403 calls for a commonsense assessment of all the

78. “Although relevant, evidence may be excluded if its probative value is

substantially outweighted by the danger of unfair prejudice, confusion of the

issues, or misleading the jury, or by considerations of undue delay, waste of

time, or needless presentation of cumulative evidence.”

71

circumstances surrounding the extrinsic offense.” Id. at

914. We find this advice on the meaning of “unfair prej-

udice” in the Notes of the Advisory Committee on the

federal evidence rules:

“Unfair prejudice” within its context means an un-

due tendency to suggest decision on an improper

basis, commonly, though not necessarily, an emo-

tional one.. . In reaching a decision whether to ex-

clude on grounds of unfair prejudice, consideration

should be given to the probable effectiveness or lack

of effectiveness of a limiting instruction. See Rule

106 [now 105] and Advisory Committee’s Note there-

under. The availability of other means of proof may

also be an appropriate factor.

28 U.S.C.A. Fed. Rule of Evidence 403 at 102—03 (1975).

The defendants could have requested, but apparently

did not, a limiting instruction that is their right under

Rule 105.7 Once evidence admissible for one purpose but

inadmissible for another is admitted, the trial court can-

not refuse a requested limiting instruction. Lubbock

Feed Lots, Inc. u Iowa Beef Processors, 630 F.2d 250, 266

(5th Cir. 1980). In all likelihood, a limiting instruction

would have effectively alleviated the appellants’ con-

cerns in this case. We also note that defendants began,

but abandoned, cross-examination of Williams on the

issue of his conviction, another method they could have

used to minimize any prejudicial effect.

79. Limited Admissibility

When evidence which is admissible as to one party or for one purpose

but not admissible as to another party or for another purpose is admitted,

the court, upon request, shall restrict the evidence to its proper scope and

instruct the jury accordingly.

(emphasis added).

72

The Notes also mention consideration of other

means of proof. One aspect of such consideration must be

whether Williams' conviction is redundant of other less

pre judicial evidence. Rozier is instructive on this issue.

In Rozier the issue was defendants’ negligence in manu-

facturing the car in which plaintiff's decedent was killed

when it ignited after being hit from behind by another

car. The trial court admitted into evidence the guilty plea

on charges of manslaughter of the driver of the other car.

On appeal, this court held this to be an abuse of discre-

tion. The court noted that the criminal conviction had

limited probative value since it duplicated already ample

evidence of the obvious cause of the auto accident in that

case. See 573 F.2d at 1348. The court also held its rele-

vance as evidence of legal cause “attenuated at best,”

since it had nothing to do with the issue in the case: the

legal liability of the allegedly negligent defendant auto

manufacturer for injuries in a car accident. Id. This lim-

ited relevance was held to outweigh the confusion it

could cause the jury as it assessed the legal causes of the

tort. Id. Therefore, the auto company’s introduction of

the conviction was barred.

This case is quite different from Rozier. While the

cause of the accident was obvious in Rozier, here the

legality of the alleged scheme was strongly disputed be-

tween the parties. The relevance of this conviction is not

at all attenuated. In Rozier there was a danger that the

two forms of causation, the obvious cause of the accident

and the disputed proximate (legal) cause of the death,

would be confused. The conviction was not at all relevant

to the dispute over proximate cause. Here, however,

Williams’ activities were pivotal in proving the crucial

issue in this case: proximate cause and legal liability.

A773

Unless he had done something illegal, his alleged

superiors and coconspirators could not be held liable.

Finally, there was little chance of jury confusion suffi-

cient to outweigh the evidence’s relevance. The jury was

clearly and repeatedly told that defendants’ liability was

a separate issue from Williams’ liability.

Undue prejudice could also have resulted had the

conviction been repeatedly emphasized to the jury or had

Chemetron introduced the conviction of other

. conspirators. See United States u Fleetwood, 528 F.2d

528, 535 (5th Cir. 1976). However, neither of these events

occurred. We therefore hold that the trial judge did not

abuse his discretion in admitting evidence of Williams’

securities fraud conviction.

IV. CROSS-APPEAL ISSUES

Chemetron lodges a cautionary cross-appeal on

several issues. This appeal is triggered since we have

reversed the judgment under section 10(b) and Rule

10b—5.

A. Denial of Directed Verdict and J.N.O.V. on Special

Interrogatory No. 6.

In Special Interrogatory No. 6 the jury found that

the price paid by Chemetron for its Westec stock was not

“affected by” the fraudulent scheme. Therefore, the de-

fendants could not be liable under section 9. See § 9(e), 15

U.S.C. § 781(e). Chemetron appeals the denial of a di-

rected verdict or judgment withstanding the verdict on

this issue and advances an interpretation of “affected by”

in support.

The gist of Chemetron’s interpretation is that every

price of a stock being manipulated is a false price until

AT4

the manipulation is revealed and the market reacts.

Therefore, all transactions, whether on or off the market,

during a manipulation and before its relevation are at

false prices, and all are “affected by” the manipulation as

a matter of law. In support of this far-reaching interpre-

tation, Chemetron cites no case law, only general pas-

sages from the legislative history of the 1934 Act on the

importance of open and honest securities markets.

This interpretation of section 9(e) would obviate its

causation requirement. Given Congress’ numerous care-

ful substantive and procedural restrictions on a section

9(e) private cause of action, we cannot countenance an

interpretation of 9(e) that works at cross-purposes to

Congress’ intent by effectively reading section 9(e)’s

causation requirement out of the statute. At a minimum,

“affected by” plainly must mean that the manipulated

price influenced or was responsible for the purchaser’s or

seller’s price.“ See Crane Co. u American Standard,

Inc., 603 F.2d 244, 251—53 (2d Cir. 1979) (transaction

before manipulation not actionable; transaction after ma-

nipulation not actionable absent allegation and proof of

effect on sale price); Rosenberg v. Hano, 121 F.2d 818, 821

(3d Cir. 1941) (price of stock purchased before alleged

manipulation occured not “affected” under section 9);

Kerrigan v. Merrill Lynch, Pierce, Fenner & Smith, 450

F.Supp. 639, 647 (S.D.N.Y. 1978) (sale at predetermined

net book value price cannot be “affected by” alleged ma-

nipulation under section 9(e) ). The Supreme Court has

characterized section 9 as designed to recover an “im-

80. Since this minimum definition cannot be satisfied in this case, we

express no opinions on the degree of responsibility or influence required by

§ 9(e) for the existence of other restrictions on the § 9(e) causation require-

ments.

AT5

proper premium exacted for . .. stock.” Piper, 430 U.S. at

46, 97 S.Ct. at 951.

Under this minimum definition, the jury verdict was

amply supported by the evidence. W. W. Whitnell, an

officer of Chemetron, testified at trial that he was “the

person primarily in charge of determining what would be

a fair price for the [Westec] stock.” He served as the

“leading negotiator for Chemetron in connection with

the Chemetron/Westec deal.” In deposition testimony

that he reaffirmed at trial, Whitnell said that the

negotiators struck a bargain for the nonmarket transac-

tion in October 1964. This bargain was approved by the

parties and led to the January 1966 exchange of stock.

For purposes of the bargain, Westec shares were to be

valued at $14 per share, a price below its market trading

price in both October and January. When asked how the

$14 figure was arrived at, he responded: “[W]e felt that

$14 was a fair price based on the fundamental value of

the company. We were not influenced by the market. I

have long ago learned that market prices have nothing to

do with fundamental values.”

Thus, just as in Crane, Rosenberg, and Kerrigan, it is

clear that the allegedly manipulated market price of the

Westec shares in no way influenced or was responsible

for the nonmarket price Chemetron paid for its Westec

stock. Chemetron did not base its price on the market

price or even use it as a factor. Therefore, it paid no

“improper premium” for the Westec stock it purchased.

While Chemetron was apparently aware of the market

price, it was completely ignored or totally discounted in

its Westec negotiations. Mere awareness of the allegedly

manipulated market price will not suffice under section

9e).

A776

B. Collateral Estoppel.

Chemetron argued in its proposed pretrial order that

Bintliff be collaterally estopped from relitigating certain

factual issues adjudicated adversely to him is Cosmos

Bank v. Bintliff, Civ. Action No. 67—H—590 (S.D. Tex.

1975). The trial court denied Chemetron’s proposal, and

it appeals.

It is necessary to detail the facts at some length in

order to analyze this question correctly. Cosmos Bank

was one of the many cases arising out of the Westec

collapse. The instant case, Cosmos Bank, and many

others were consolidated for the purposes of pretrial

proceedings in 1970. Cosmos Bank came to trial before

Judge Hannay without a jury from December 17, 1974,

until February 12, 1975. On May 1, 1975, the trial judge

filed and entered a lengthy “Memorandum and Order”

detailing his findings of fact and conclusion of law. Based

on those findings and conclusion, judgment for over

$700,000 in damages and interest was to be awarded to

the plaintiff. Plaintiff filed a motion for judgment on May

9, and on May 16 Bintliff filed his motion in opposition to

entry of judgment.

On May 29, Bintliff’s counsel wrote the United States

District Clerk, saying that Bintliff and Cosmos Bank

would settle only if the trial judge would sign an order

preventing use as offensive collateral estoppel of the

findings and conclusions.“ On May 30, Cosmos Bank and

Bintliff filed their joint motion and proposed order.

81. This is the text of the letter:

Since I talked to you last, Mr. Bintliff has offered to settle this matter

for a sum which Cosmos has agreed to accept. The settlement is, however,

contingent on the Judge's en wes bee ae ey 0 anced iy nga

Bintliff against the use of the Judge's findings and conclusions in other

litigation. Accordingly, [the attorney for Cosmos] and I will be filing

ATT

However, the trial judge refused to sign the order be-

cause it ordered a new trial for which, the trial judge said

in a letter to counsel, It here is, in my opinion, no ba-

sis.” The trial judge proposed a different order and

threatened to act on plaintiff’s pending motion for judg-

ment unless his proposed order was promptly agreed

to. The parties accepted that order, and the judge

signed and entered in on June 17, 1975, dismissing the

case with prejudice and withdrawing and setting aside

the findings of fact and conclusion of law.“ Chemetron’s

proposed pretrial order contained 158 findings of fact

taken verbatim from the 221 findings of fact made by the

court and then set aside in Cosmos Bank. However, the

trial judge refused to estop Bintliff from relitigating

those facts, a refusal Chemetron appeals.

81. Continued

promptly a joint motion for relief designed to meet Mr. Bintliff’s problems

and I would appreciate it if the Judge would consider our previously filed

motion for judgment only in the event that he decides to deny the joint

motion which is about to be filed.

(emphasis added).

82. The letter to counsel read, in pertinent part:

I have studied your Joint Motion for dismissal of the above matter. While

I favor your agreement to settle and am willing to sign an order of dismissal

that provides for withdrawal of my previous findings and conclusions, the

proposed form of order granting a new trial is unacceptable. There is, in my

opinion, no basis for a new trial.

I an enclosing an order that is acceptable to me. If you want me to enter

this order as a part of your agreed settlement each of you should approve it at

the place indicated and return it to (the district clerk] promptly. Otherwise, I

will take up for consideration Plaintiffs’ pending motion for judgment on my

findings and conclusions.

(emphasis added).

83. The order stated:

The joint Motion of Plaintiff, Cosmos Bank, and Defendant, David C.

Bintliff, having been heard by the Court; and it appearing to the Court that

Plaintiff, Cosmos Bank and Defendant, David C. Bintliff, have agreed upon a

compromise settlement of all claims causes of action which were, or could have

been asserted by and between them in the above-styled cause, and as a part of

settlemen

AT78

As a preliminary issue we must decide which offen-

sive collateral estoppel rules, Texas or federal, to apply.

Because this case was brought in federal court based on

federal question and pendent jurisdiction and the estop-

pel claim is based on a prior case in federal court, we will

apply federal rules. See Stovall v. Price Waterhouse Co.,

652 F.2d 537, 540 (5th Cir. 1981).

The Supreme Court’s landmark case of Parklane Ho-

siery Co. v. Shore, 439 U.S. 322, 99 S.Ct. 645, 58 L.Ed.2d

552 (1979), established the criteria for the use of offen-

sive collateral estoppel. In Parklane the precise question

was “whether a party who has had issues of fact adjudi-

cated adversely to it in an equitable action may be col-

laterally estopped from relitigating the same issues

before a jury in a subsequent legal action brought against

it by a new party.” 439 U.S. at 324, 99 S.Ct. at 648. The

question in this case is nearly identical. The Court

initially expressed its approval of the offensive use of the

doctrine if it can be used to prevent relitigation of issues

and to promote judicial economy. See id. at 326—31, 99

S.Ct. at 649—651. However, in order to avoid problems

with the doctrine’s use, the Court adopted a general rule

to guide the lower courts:

83. Continued

THEREFORE, it appearing to the Court that pursuant to the Compro-

mise Settlement Agreement of Plaintiff, Cosmos Bank, and Defendant,

ATS

The general rule should be that in cases where a

plaintiff could easily have joined in the earlier action

or where...the application of offensive estoppel

would be unfair to a defendant, a trial judge should

now allow the use of offensive collateral estoppel.

Id. at 331, 99 S.Ct. at 651.

The first step in the application of this rule is to

determine whether Chemetron could have joined the

Cosmos Bank suit. We find that that was not possible. As

the Westec cases were filed in Houston or transferred

from New York, nearly all of them were placed on Judge

Hannay’s docket. See Wyndham Asscciates v. Bintliff,

398 F.2d 614, 619—20 (2d Cir.), cert. denied, 393 U.S. 977,

89 S.Ct. 444, 21 L.Ed.2d 438 (1968). He entertained mo-

tions to consolidate for various purposes. Some cases

were consolidated for all purposes, including trial, but

Judge Hannay expressly consolidated Cosmos Bank and

Chemetron “for purposes of pretrial proceedings and

none other.” (emphasis added). This order, supported by

the Court’s thorough familiarity with the cases, see id.,

demonstrates to us that consolidation was carefully con-

sidered and rejected. The reasons for rejection are obvi-

ous, since Chemetron began with far more defendants

(57) than Cosmos Bank (4), involved far more transac-

tions, and was in general much more complex. Basically,

only Bintliff's participation was common to both cases.

Thus, deference to the expertise of the trial court and

our own analysis of the two cases convinces us that

Chemetron could not have joined Cosmos Bank.

The second step in our analysis is possible unfairness

to defendant Bintliff. The Court in Parklane gave several

examples of possible unfairness to the defendant that

should block the use of offensive collateral estoppel. The

A80

first was that if the defendant was sued in the first action

“for small or nominal damages, he may have little incen-

tive to defend vigorously, particularly if future suits are

not foreseeable.” 439 U.S. at 330, 99 S.Ct. at 651

(citations omitted). That is not true in this case. The

damages in Cosmos Bank were over $400,000, plus inter-

est, eventually totalling over $700,000, hardly small or

nominal damages” in absolute terms. In this case on

remand, Bintliff does face the possibility of damages

greater than those he faced in Cosmos Bank. ** However,

he knew other cases such as this one bearing on the same

issues and requesting larger damages were pending, as

evidenced by the common discovery procedure and his

eagerness to settle and avoid offensive collateral estop-

pel. He had every incentive to defend vigorously in

Cosmos Bank.

Another unfair situation is where “the judgment

relied upon as the basis for estoppel is itself inconsistent

with one or more previous judgments in favor of the

defendant.” Id. (footnote omitted). There is no such

inconsistency here because there are no previous

judgments.

“Still another situation where it might be unfair to

apply offensive collateral estoppel is where the second

action affords the defendant procedural opportunities

84. On remand in this case Bintliff faces only state law liability, since this

opinion has eliminated any federal liability. He may not even face state liabil-

ity, since we kave held that Chemetron must prove some additional elements

of an art. 4004 claim not proven in the original trial. If Bintliff is held liable

under art. 4004, his actual damage liability will be joint and several, while any

punitive damages will be individual. Actual damages will probably be reduced

on remand, since this court has rejected the zero-value theory. Finally, as a

late-joining conspirator, Bintliff's punitive damages could be considerably less

than his fellow defendants.

All in all, Bintliff’s exposure to higher damages in thi: zase is not severe

enough to prevent the use of offensive collateral estoppel.

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unavailable in the first action that could readily cause a

different result.” Id. at 630—31 (footnote omitted). The

Court suggested that such procedural obstacles could be

an inconvenient forum inhibiting full discovery or the

availability of witnesses. Id. at 631 n.15. There are no

such procedural problems here. Indeed, Cosmos Bank

was originally filed in New York, and Bintliff had it

transferred to Houston, where he lives, for convenience.

See Wyndham Associates, 398 F.2d at 616—17; In re

Westec Corp., 307 F.Supp. 559, 563 Sch. B.

(J.P.M.D.L.1969) (per curiam). We perceive Bintliff to be

at no disadvantage due to the Cosmos Bank procedures.

If anything, in these cases Chemetron has been inconven-

ienced by the forum as an out-of-state corporation.

The Parklane Court did not consider its list of con-

siderations exhaustive. See 439 U.S. at 331, 99 S.Ct. at

651. To seek others, we turn to our circuit’s precedent.

Even before Parklane, the circuit “had stressed the im-

portance of fairness in the particular circumstances of a

given case when a litigant sought to invoke offensive

collateral estoppel.” Hicks v. Quaker Oats Co., 662 F.2d

1158, 1171 (5th Cir. 1981). Canvassing our precedent, we

discover these criteria, many repeated in Parklane: (1)

party against whom estoppel is asserted must have had a

“full and fair“ opportunity to litigate the issue in the

prior case: (2) application of the doctrine must not create

“injustice”; (3) application of the doctrine must not con-

travene any “overriding public policy”; (4) parties who

are defendants in both actions must be closely scruti-

nized to avoid unfairness; (5) the issue to be concluded

must be identical to that involved in the prior action; (6)

in the prior action the issue must have been “actually

litigated”; and (7) and determination made of the issue in

the prior action must have been necessary and essential

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to the resulting judgment. See Johnson v. United States,

576 F.2d 606, 614—15 (5th Cir. 1978).

Criteria 1, 2, 4, and 6 have been covered already.

Criterion 3 requires us to consider view that settlements

are “highly favored in the law.” Pearson v. Ecological

Science Corp., 522 F.2d 171, 176 (5th Cir. 1975), cert.

denied, 425 U.S. 912, 96 S.Ct. 1508, 47 L.Ed.2d 762 (1976).

But the reason that settlements are favored is that they

avoid litigation. Id. Here Bintliff settled only to avoid

offensive collateral estoppel, not litigation, since the en-

tire trial had run its course, and only the judicial act of

signing a final, known adverse, judgment was left.“

As to criterion 5, there is no question that the factual

issues are the same. Criterion 7, because it appears to

require a “judgment,” leads us to an evaluation of

whether we should require the final ministerial act of

entering final judgment before giving collateral estoppel

effect to the findings of fact of the trial court.“

The general rule in this circuit is that there must be

“judicial finality” before collaterial estoppel can be in-

voked. Since judicial finality has been assumed without

analysis to require entry of final judgment, a settlement

85. It may have been arguable in the first Chemetron trial that the Cosmos

Bank settlement avoided litigation by avoiding an appeal. There are two

problems with this argument. First, the amount of work necessary to pursue

an appeal in Cosmos Bank seems relatively small compared to the judicial and

adversary effort required to undertake years of discovery and several weeks of

trial. Therefore, the savings of legal resources by settling after a full trial were

nominal. Second, that argument has no force now, since this issue has come

before an appellate court.

86. The only significant difference between this case and Perklane is that

the Parklane judgment was entered in the underlying case and was affirmed on

appeal, see 439 U.S. at 325, 99 S.Ct. at 648, thus satisfying even the toughest

judicial finality requirement. In this instance, while the case was fully liti-

A83

with no final judgment on the merits has been said to bar

_ collateral estoppel. See, e. g., Kaspar Wire Works, Inc. u

Leco Engineering & Machine, Inc., 575 F.2d 530, 538 (5th

Cir. 1978); Associates Capital Services Corp. v. Loftin’s

Transfer & Storage Co., 554 F.2d 188, 189 (5th Cir. 1977)

(summary calendar) (per curiam). However, none of our

cases have fully considered the “judicial finality” re-

quirement in an offensive collateral estoppel case such as

this one. Loftin’s summarily denied the defensive use of

collateral estoppel on a jurisdictional issue by the de-

fendant in that case. In Kaspar the issue was the res

judicata or collateral estoppel effect of a prior consent

judgment dismissing a suit between the same two par-

ties. Particularly relevant to our case, the court expressly

acknowledged that the “final judgment” requirement is

relaxed in the case of collateral estoppel. See 575 F.2d at

538 n.11. Most important, Kaspar and Loftin's predated

the watershed case on offensive collateral estoppel,

Parklane, which, as we stated recently, created a “need

to redefine the doctrine of collateral estoppel,” Migues v.

Fibreboard Corp., 662 F.2d 1182, 1187 (5th Cir. 1981).

Given Kaspar’s reservation of the question of finality in

the collateral estoppel context and the guidance of

Parklane, the definition of “judicial finality” for pur-

poses of offensive collateral estoppel is an open question

in this circuit.

As the Second Circuit pointed out in Kurlan u

C. I. R., 343 F.2d 625, 628 n.1 (2d Cir. 1965), “general

expressions that only final judgments can ever have col-

lateral estoppel effect are considerably overstated.” In

Kurlan the court upheld giving collateral estoppel effect

to the opinion of an appellate court even though the case

had been settled on remand. The Kurlan court was acting

based on sound precedent.

A84

In Zdanok v. Glidden Co., Durkee Famous Food Divi-

sion, 327 F.2d 944, 955 (2d Cir.) (Friendly, J.), cert. de-

nied, 377 U.S. 934, 84 S.Ct. 1338, 12 L.Ed.2d 298 (1964),

cited with approval in Johnson, 576 F.2d at 614, the court

held:

Dealing with this very question of the kind of final-

ity of judgment necessary to create an estoppel, we

pointed out, quite recently, that collateral estoppel

does not require a judgment “which ends the litiga-

tion...and leaves nothing for the court to do but

execute the judgment,” Catlin v. United States, 324

USS. 229, 233, 65 S.Ct. 631 [633], 89 L.Ed. 911 (1945),

but includes many dispositions which, though not

final in that sense, have nevertheless been fully liti-

gated. Lummus Co. v. Commonwealth Oil Refining

Co., 297 F.2d 80, 89 (2d Cir. 1961), cert. denied, 368

U.S. 986, 82 S.Ct. 601, 7 L.Ed.2d 524 (1962), and cases

cited. As we there said, ‘Finality’ in the context

here relevant may mean little more than that the

litigation of a particular issue has reached such a

stage that a court sees no really good reason for

permitting it to be litigated again.

The Second Circuit has reaffirmed these principles

several times. See, e.g., United States ex rel.

DiGiangiemo v. Regan, 528 F.2d 1262, 1265 (2d Cir. 1975),

cert. denied, 426 U.S. 950, 96 S.Ct. 3172, 49 L.Ed.2d 1187

(1976). Other circuits agree with these principles as well.

“‘Finality’ in the sense of 28 U.S.C. § 1291 is not re-

quired” for collateral estoppel. Miller Brewing Co. u

Joseph Schlitz Brewing Co., 605 F.2d 990, 996 (7th Cir.

1979), cert. denied, 444 U.S. 1102, 100 S.Ct. 1067, 62

L.Ed.2d 787 (1980).

A85

Thus, the finality requirement does not necessarily

demand the ministerial act of executing a judgment. It

does not elevate form over substance in that fashion—

the accurate definition of “finality” in the offensive col-

lateral estoppel context in “fully litigated.” In this in-

stance, the facts of Bintliff’s activities found in Cosmos

Bank have been found again by the jury in Chemetron.

Thus, they have been twice fully litigated. That Judge

Hannay felt he had rendered a fully litigated, fair, and

correct adjudication on the merits in Cosmos Bank is

evidenced by his refusal to sign an order granting a new

trial because such an order had “no basis” and by his

threat to enter judgment.

A recent opinion in the Ninth Circuit reinforces our

conclusion here. In Aetna Casualty & Surety Co. u

Jeppesen & Co., 440 F.Supp. 394 (D.Nev.1977) (ruling on

motion for summary judgment), 463 F.Supp.94 (1978)

(judgment), vacated on other grounds and remanded,

642 F.2d 339 (9th Cir. 1981), the district court confronted

an issue very similar to the one we face: can a plaintiff

not a party to a prior case invoke offensive collateral

estoppel against the defendant when that case had been

fully litigated as to liability but settled before trial on the

issue of damages and entry of final judgment? In its

ruling on the motion for summary judgment, the trial

court carefully and thoroughly reviewed the need for

“finality,” discussing the concepts and cases we have

cited, see 440 F.Supp. at 401—06, and held that both case

law and equity compelled an affirmative answer to the

question, id. at 405—06. 57.

87. On appeal, the court did not reach the merits of the ruling on offensive

collateral estoppel. Because of this, we cite the district court’s opinion in

Aetna only for the persuasive value of its reasoning.

A86

In conclusion, we have held that “although the deci-

sion to apply offensive collateral estoppel rests in the

discretion of the trial judge,...this discretion is not

unbounded and must be channeled through the consider-

ations of fairness listed in Parklane, along with any

other considerations of fairness which the trial judge

deems appropriate.” Hicks, 662 F.2d at 1172—73 (citation

and footnote omitted). We have analyzed the Parklane

considerations and this circuit’s considerations, and

Bintliff neither points out nor do we see any others that

would render the use of offensive collateral estoppel

against Bintliff in any way unfair “in the particular cir-

cumstances” of this case.“ Tactically he chose to litigate

fully Cosmos Bank, risking an adverse decision. He lost

on that risk, and only when he lost did he decide to settle,

fearing offensive collateral estoppel. Yet now he seeks to

avoid the consequences of that loss by elevating form

over substance. He cannot have it both ways. The

findings of fact against Bintliff in Cosmos Bank are suffi-

ciently final to permit their use in this case. On remand,

Bintliff should be collaterally estopped from relitigating

those facts.

C. Federal Securities Law Claims Against Bintliff

Based on Chemetron’s Alleged 1969 “Forced Sale” of its

Westec Shares to the Bankruptcy Trustee.

Chemetron claims tht it should have been permitted

to submit to the jury claims against Bintliff under sec-

tions 10(b) and 9, and Rule 10b—5, arising out of an

88. One last contention that Bintliff may raise but has not is the denial of

his seventh amendment right to a jury trial on the facts at issue here, since

Cosmos Bank was a bench trial. However, Parklane addressed this seventh

amendment problem and found this use of offensive collateral estoppel consti-

tutional. See 439 U.S. at 333—37 & n.24, 99 S.Ct. at 652—655 & n.24.

A87

alleged “forced sale” of its Westec stock to the Westec

bankruptcy trustee in June 1969.

The scope of this issue on appeal can be quickly

narrowed. Since we have held that the fraud at issue here

gives rise only to a section 9 cause of action, the “forced

seller” doctrine of Rule 10b—5 cannot be applied. That

leaves the issue of whether the 1969 claim is cognizable

under section 9. However, we need not reach the merits

of this claim, since it is quite evident from the proceed-

ings below that Chemetron has been less than diligent in

pursuing this claim and gave the trial judge ample cause

to deny its submission to the jury.

Chemetron’s 1967 complaint asserted many causes of

action and described the alleged manipulative scheme as

well. However, that complaint could allege nothing about

the 1969 transaction with the bankruptcy trustee. Its

only reference to the bankruptcy was to say that

[Westec] is currently undergoing reorganization in a

proceeding under Chapter X of the Bankruptcy Act”

caused by the manipulative scheme. This was enough,

Chemetron claims, to put the defendants on notice of a

possible claim arising out of a possible bankruptcy “sale.”

Chemetron argues that further notice, if necessary, was

provided by discovery in August 1974, when defendants

were informed of the terms of the “sale.”

As a result of the complaint and discovery,

Chemetron asserts that there was adequate notice of

this claim under Fed.R.Civ.P. 8’s liberal pleading doc-

trine. However, Chemetron neglects the strictures of

Fed.R.Civ.P. 9:

(b) Fraud, Mistake, Condition of the Mind. In all

averments of fraud or mistake, the circumstances

constituting fraud or mistake shall be stated with

A88

particularity. Malice, intent, knowledge, and other

condition of mind of a person may be averred gener-

ally.

While Rules 8 and 9 must be read in conjunction, see

Powell, Inc. v. Abney, 83 F.R.D. 482, 487 (S.D.Tex.1979),

Rule 9(b) still requires that defendants be fairly apprised

of the claims against them, including the “conse-

quenceſs] of the fraud,” Gross u Diversified Mortgage

Investors, 431 F.Supp. 1080, 1088 (S.D.N.Y.1977), aff’d

mem., 636 F.2d 1201, 1203, 1206 (2d Cir. 1980), and par-

ticularly of “the purchase or sale transactions...

effectuated by reason of the misrepresentations,” Rich v.

Touche Ross & Co., 68 F.R.D. 243, 247 (S.D.N.Y.1975).

Therefore, the 1967 complaint in and of itself did not

satisfy Rule 9(b) because it did not even mention the

1969 sale. Rules 8 and 9(b) required that Chemetron

amend or supplement its complaint with a short, concise

statement stating a claim based on the 1969 transaction.

Nor do we think discovery here afforded adequate

notice of this claim to the defendants in the absence of a

sufficient

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