Before SWAN, WATERMAN and MOORE, Circuit Judges.
Plaintiff brought suit in the United States District Court for the Southern District of New York, seeking damages of $160,293 from numerous individual, partnership, and corporate defendants. The suit was based upon alleged violations of Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b)*fn1, and Rule 10b-5, promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5*fn2 Two of the defendants moved for summary judgment, but the motion was denied by Judge Wyatt in an opinion reported at 222 F. Supp. 798. The case was subsequently tried before Judge Cooper sitting without a jury. At the close of plaintiff's evidence, plaintiff took a voluntary non-suit as to some of the defendants, including Fashion Park, Inc. When the entire trial was completed, Judge Cooper, in an opinion reported at 227 F. Supp. 906, dismissed the complaint as against the remaining defendants.
The crucial facts of the case are for the most part undisputed. Fashion Park is a manufacturer and distributor of men's clothing with headquarters in Rochester, New York. The company had not been prospering for several years preceding the events of this suit, and its factory employees were working only part-time. In September and October, 1960, the manager of the union which represented Fashion Park's employees warned the president and the chairman of the board, Fashion Park's majority shareholders, that he would take a substantial number of employees away from Fashion Park if he could induce another clothing manufacturer to settle in Rochester. In response to this threat, the president of Fashion Park called a directors' meeting for November 4, 1960. Among the directors who attended was defendant Lerner, a minority shareholder.
At the meeting the union manager reiterated his plan to withdraw 300 to 350 employees, and urged the board to consider selling Fashion Park. He told the board that he knew of someone who might be interested in buying the company, but he neither disclosed the name of his prospective purchaser nor any potential purchase terms. The directors then adopted a resolution to the effect that the company seek to negotiate a sale or a merger. Ten days later, the union manager revealed to the president of Fashion Park that the prospective purchaser was Hat Corporation of America, but this information was not relayed to defendant Lerner until the following month. Negotiations between Fashion Park and Hat Corporation began on November 22, 1960, a preliminary understanding was announced on December 7, 1960, and the formal contract of sale was signed on February 3, 1961. By one of the contractual provisions, Hat Corporation agreed to offer $50 per share to all minority shareholders of Fashion Park.
Plaintiff, an experienced and successful investor, had purchased 5100 shares of Fashion Park stock in January, 1959 at $13.50 per share. About November 11, 1960, with the advice of his broker, he authorized the sale of his stock at a net price to him of not less than $18 per share. At that time, defendants Lerner and H. Hentz & Co., as well as another director of Fashion Park, were bidding for Fashion Park stock through the National Quotation Bureau sheets. Plaintiff's broker knew that two directors were bidding for the company's stock, but he did not think it important to disclose this fact to plaintiff, and plaintiff had not sought to learn whether Fashion Park directors were bidding for the stock.
On November 16, 1960, plaintiff's broker called H. Hentz & Co. to invite a purchase of plaintiff's stock at $20 per share. Defendant William P. Green, the partner in H. Hentz & Co. who handled the transaction, contacted Lerner and Beaver Associates to ask if they would like to participate in the purchase. (Green and his brother, defendant Bernard A. Green, are partners in Beaver Associates.) After intensive negotiations between plaintiff's broker and William P. Green, and among Green, Lerner, and Beaver Associates, the sale of the 5100 shares was consummated on November 17, 1960 at $18.50 per share.4300 shares went to Lerner, 400 to William P. Green and his daughter, and 400 to Beaver Associates. Within two weeks after the transaction, Lerner disposed of part or all of his interest in 3137 of the shares, at an average profit of about $1 per share. At the time of the transaction, William P. Green knew that Lerner was a director of Fashion Park; he may not have known of the resolution of November 4, 1960 to sell or merge the company. Neither plaintiff nor his broker knew that H. Hentz & Co. were brokers for a Fashion Park director who was one of the purchasers of the stock, or that the company's management was considering the sale of the company.
Plaintiff brought suit on February 24, 1961, claiming the difference between the price ($18.50) at which he sold his 5100 shares of Fashion Park stock and the price ($50) which Hat Corporation subsequently offered to Fashion Park's minority shareholders. He alleged that defendants had conspired to buy his stock and then to sell it at a substantial profit, and that they had failed to disclose to him material facts in their possession which would have affected his decision to sell his stock. Insofar as is pertinent to this appeal, the undisclosed facts, alleged to be material, upon which plaintiff relied to support his allegations, were that one of the buyers of his stock was a director of Fashion Park, and that the Fashion Park board, with a potential purchaser on the horizon, had resolved to sell or merge the company. In the opinion dismissing the complaint, the trial court held that there was insufficient evidence of a conspiracy, that plaintiff would have sold even if he had known that one of the buyers was a director of Fashion Park, and that the undisclosed possibility that Fashion Park might be sold was not a material fact.
Plaintiff appeals from the decision of the trial court rejecting his claim that he was damaged by defendants' non-disclosures.He also appeals from the dismissal of his claim that there was a conspiracy among defendants, but he apparently relies upon this ground only if we choose to reverse the other adverse holdings of the trial court. Finally, upon appeal, he now alleges for the first time that defendants impliedly misrepresented to him that the stock he sold was worth only $18.50 per share. We affirm the decision of the trial court rejecting the claim that plaintiff was damaged through defendants' non-disclosures. Therefore we need not independently review the dismissal of the claim that there was a conspiracy to damage him. As for the allegation of misrepresentation, we decline to consider a claim not presented to the trial court which raises substantial issues of fact, requiring resolution, such as the ascertainment of the true value of plaintiff's shares on November 17, 1960.
The general principles governing suits such as this were definitively set forth in the often cited case of Speed v. Transamerica Corp., 99 F. Supp. 808, 828-829 (D.Del.1951), aff'd, 235 F.2d 369 (3 Cir. 1956):
"It is unlawful for an insider, such as a majority stockholder, to purchase the stock of minority stockholders without disclosing material facts affecting the value of the stock, known to the majority stockholder by virtue of his inside position but not known to the selling minority stockholders, which information would have affected the judgment of the sellers. The duty of disclosure stems from the necessity of preventing a corporate insider from utilizing his position to take unfair advantage of the uninformed minority stockholders. It is an attempt to provide some degree of equalization of bargaining position in order that the minority may exercise an informed judgment in any such transaction."
Moreover, "a broker who purchases on behalf of an insider and who has knowledge of inside information would seem to be under the same obligation to disclose as the insider who purchases directly." III Loss, Securities Regulation 1452 (2 ed. 1961).
At the outset, defendant Lerner contends that the courts have never applied Rule 10b-5 in a civil suit involving total non-disclosure. By "total non-disclosure" defendant presumably means that there was no significant communication bearing upon value by buyer to seller except for offer, counteroffer, acceptance, or rejection. The trial judge made no findings relative to this contention, but we are prepared to assume with defendant that, in the sense defendant uses the term, there was a total non-disclosure by defendants to plaintiff.
Although there may be no square holdings in civil suits under Rule 10b-5 involving total non-disclosure, there are ample dicta to the effect that "lack of communication between defendant and plaintiff does not eliminate the possibility that Rule 10b-5 has been violated." Cochran v. Channing Corp., 211 F. Supp. 239, 243 (S.D.N.Y.1962); see Speed v. Transamerica Corp., supra, 99 F. Supp. at 829. Apparently there are no dicta to the contrary in any of the cases. Furthermore, in the leading case of Strong v. Repide, 213 U.S. 419, 29 S. Ct. 521, 53 L. Ed. 853 (1909), the Supreme Court found common law fraud by an insider in the purchase of stock from a minority shareholder, even though "perfect silence was kept" by ...