Fed. Sec. L. Rep. P 95,902 Franklin Savings Bank of New York v. Gustave L. Levy
551 F.2d 521
2d Cir.
1977
Check Treatment

*2 Treasury bills, such as ments the differen- MULLIGAN, VAN Before GRAAFEI- significant tial becomes in investments MESKILL, Judges. LAND and Circuit ninety days of or less when large sums are involved. In 1969 and 1970 the average MULLIGAN, Judge: Circuit commercial transaction involved appeal judgment is an from a of the This having *3 highest rating August its on 1968. Penn Central the investment bank had in its inventory. law, the passage Soon after of this Gold- man, advised Sachs Franklin in writing of Wilson and the late Levy, Gustave anoth- the services the investment bank of- er general Sachs partner and a fered in the commercial paper field. The defendant, February attended the 6 meet- parties transacted business several times ing on behalf dealer. Penn Central before March 1970 when Franklin pur- represented by was O’Herron and David chased from a Penn Cen- Bevan, of chairman that company’s finance $500,000 tral note with a face value of and committee. Penn Central reported that its 26,1970. a of June price date The for 1970 projected great- losses be would paid by $487,958.33. Franklin was On June er than 1969 losses. Central its reorganiza- 1970 Penn filed told O’Herron and Bevan that would petition tion the bankruptcy with United limit place a million amount $5 the of District Court for Eastern States the Dis- paper it carry Penn Central would in its Pennsylvania trict still in reorga- of and is inventory. urged It also nization. Franklin tendered the note and line get coverage 100%bank itsof outstand- payment was never received. ing paper; time, commercial the on February Central formed bank line was only On 50%.5 Feb- merger the of the New York Cen- ruary Penn Central bought back mil- Pennsylvania tral Railroads. It and lion worth of from Sachs. largest the and larg- nation’s railroad sixth Brown Brothers Harriman & an in- corporation. By est nonfinancial the time banking vestment firm pur- which had occurred, bankruptcy there was out- chased as much as 15% of Penn Central’s $82,530,000 standing commercial commercial on February 1970 re- which Penn Central had been unable to company moved that from its list. either refinance or roll over and which was In finding Sachs violated supported bank credit lines. Gold- 12(2) of the 1934 Act and man, Sachs, the largest nation’s the district court found that both dealer, had sold all of buy February back of and removal approximately lenders.4 of Penn from the Brown Brothers February On 1970 Penn Central’s fi- approved list were material facts which af- year nancial statements for both the quality fected the and credit worthiness of quarter and its last publicly were an- the note. The failure of Sachs to year nounced. The loss for the was $56.3 disclose these facts was found to create million, greater times ten than that of the liability under both acts. previous year. quarter, In the fourth lost company had million. Disturbed $13.2 I. 1933 Act news, Goldman, arranged a A. Jurisdiction representatives of meeting with Penn Cen- day 6. jurisdiction tral for The before the For of conference, Wilson, 771(2), scheduled Robert a 15 U.S.C. the statute Comment, supra Chicago generally note at 376-77. The line of credit extended bank on the condition that there will be no “open credit lines are credit Bank lines [that] change in material adverse the financial condi- understandings range informal between Chicago potential tion of the borrower.” Com- revolving the bank and the issuer to formal ment, supra note parties. agreements the two credit between delivery “by be sold of the note payment requires were manually achieved any means or instruments of trans- without use of use of mails, we find that in interstate or communication within portation statutory language and were the mails.” It can not be sufficient or of commerce provide jurisdiction.7 the Penn Central note is a record disputed estab- that while manual delivery may lishes be 12(2).6 security within As the court usual in transactions of this nature in New below, pri- the sales here consisted found City, York written confirmations are impor- delivery marily of the manual tant not for internal keeping record payment, receipt neither of purposes of the banking institutions in- the use of the mails. Af- which occasioned regulatory volved but for their agencies delivery receipt of the note ter the well. however, Goldman, payment a letter to Franklin on March mailed Appellants claim literally *4 confirming the sale. The 1970 confirmation provides jurisdiction only if the cause of date, the name slip contained discount arises in against action this case one who purchaser, security by full amount of the offers or sells a the use of the However, note, amount, the discount rate and the mails. in United States v. Cash in, note, (2d 281 F.2d maturity 673-74 Cir. 1960) date of net discount- discussing the applicability delivery and The 17 price §§ ed instructions. and 24 stated; Act, of the 1933 we only itself revealed its face value and day date. On the same Franklin The of the mails use need not be central Savings a letter to the Bank fraudulent mailed Trust scheme may be bank, entirely Indeed, incidental to it. Company, agent authorizing very case before us only directing alleged it to receive the note from Gold- use of the mails towas confirm man, purchases charge and to Franklin’s already by induced the defendants’ $487,958.33. de- Again in the sum of account No claim is ceit. made that fraudulent the Savings on March 16 Bank Trust Com- matter was mailed or even that the mail- mailed a letter to Franklin pany confirming ings alleged were necessary to the execu- the note had been received its de- tion the unlawful scheme. Bank New pository, Chemical York Trust complete Company, paperwork (Citations omitted.) and to Appellants point out the latter bank mailed a letter to Franklin recognize and we that Cashin involved ven- confirming that its account jurisdictional had been debit- ue comment $487,958.33. ed in the amount of The dis- which we have cited constitutes dicta. jurisdiction However, court found on the trict basis of it generally has been held that the first mailings either or fourth of the mailing of a letter simply con- mailings While all of these were prior described. firms a sale constitutes an appropriate or confirmatory jurisdiction instructional and the actual basis for under the 1933 Act.8 Although period with a Vaugham 6. notes maturation Schillner v. H. Clarke & 134 F.2d 1943); less than nine months and securities issued Benig- 877 Cir. United States v. exempted no, a common carrier are securities un- 95,- Fed.Sec.L.Rep. CCH [Current Binder] 11 3(a)(3), (6) der 15 §§ U.S.C. (S.D.N.Y. 1976); Oct. Welch Foods Inc. 77c(a)(3), (6), they despite exemp- are §§ F.Supp. 1393, v. explicitly tion included within the (S.D.N.Y.1974); Jacobs, Impact A. The 12(2), 771(2). § U.S.C. (“The at § Rule 10b-5 better 3.01[c] rule jurisdictional [specified is that means light of this determination is unneces- 12(2)] (such mails) need be in- sary appellee’s to address additional contention stage of volved at some the transaction and do telephone an intrastate call is a sufficient misleading prospectus transmit not have to jurisdiction. basis for 1933 Act communication.”) or oral Porter, only contrary authority by appel- United States v. 441 F.2d cited Michael, Loss, (8th 1971); Regulation Cir. L. Moses 292 F.2d lants is 3 Creswell-Keith, course, 1961); Inc. v. “Of since the mails or interstate 1959); Willingham, must be used in facilities some manner for the

Appellants urge sup- also there is no sold, *5 back brought million of its paper $10 of a material fact or omits to state reducing Goldman, the amount of it in necessary a material fact in order to inventory to below Sachs’ million. $5 statements, in light make the recognizing Goldman, While that Sachs they circumstances under which were urged that there had were valid made, business (the misleading purchaser not not this policy Judge reasons for Metzner knowing omission), of such untruth or no other and who shall not sustain the found that inventories were re- burden of know, Goldman, he proof that did not and in the duced Sachs. 406 at exercise of reasonable care could not have

known, of such untruth or omission On 1970 Penn Central’s

commercial was removed from the finding In that there approved was a violation of list of Brown Brothers Harri- 12(2) the district court’s made Co. It had held as much man & as 15%of only this reference: paper through purchas- the Penn Central Goldman,

In view of the understanding es from Sachs and it between now parties as to the upon purchasing paper. basis which the at ceased Id. 46.9 fraud, purpose executing rejection analogy was directed at an it does not While this they purposes, for venue it is also instructive suffice to show that were on the used after the completion (Emphasis jurisdiction. of the scheme.” in the issue of original.) this statement was derived construing from cases the mail fraud statutes urged Sachs already not the 1933 Act. This court has and. obtain bank line credit of its 100% problems using on the commented involved in outstanding paper. $200 million of guide reading the mail fraud statutes as a Coverage currently The dis- around'50%. analogy apt the 1933 Act. “The is not an one recognized that trict court the increased cover- ignores because it the fundamental fact that age by the dealer was desired because it would purpose of the mail fraud statutes is to marketability paper. increase the How- protect against the ‘use of the United States ever, having it viewed mails in ... furtherance [the] inventory buy back its out of “its exist- schemes,’ . . while the evil which the ing undermining lines of insufficient credit” as in Securities Act is directed is the fraud Cashin, buy solely claim that the back was dealer’s sale of securities.” United States v. (citations omitted). supra, purposes 281 F.2d at 674 for business and not because it Appellants urged alleged evidentiary that with findings. Moreover, appellants ar- precluded from es- gue errors that its materiality could have been tablishing principally that these facts relied evidence that weakened Brown Brothers by Judge Metzner not material. Harriman itself had an unsecured line of respect Sachs’ reduction credit available With to Penn Central and had in inventory, appellants of its Penn Central fact lent million to Penn Central on 30,1970. that the dealer claim that did April On cross-examination of Bock, reduce other inventories was clearly Harry not H. president Franklin, Mr. since the uncontradicted testimo- erroneous the court refused to let him testify as to ny on trial was that there were other in- knowledge whether that Brown Brothers inventory of return of stances lent money Harriman had to Penn Central post-trial their motion for a new trial an April 1970 would have affected his judg- proof offer of of other evidence was availa- significance ment as to the of the removal which would have detailed ble further in- of Penn Central notes from approved ventory reductions and returns to other is- company. Goldman, list of that Sachs also essence, appellants urge argues suers. that the it could have offered on the inventory Penn Central reductions of did significance generally lists evi- any evidence lack of faith in not showing dence that removal from such lists but rather it was necessarily did not relate to the credit wor- by legitimate motivated business considera- thiness the securities. This was also the applicable tions to the subject of other issuers proof of an offer of post-trial well. motion. In view of the strong reliance the court both the buy back and the respect With to Brown Brothers position Harriman, of Brown Brothers Harriman’s removal of Penn Central com preclude was error to appellants from offer- approved list, mercial from its appel ing proof on these issues. trial, point lants out that on the counsel for sought to elicit Franklin on cross-examina Appellants argue could testimony tion did not have violated 1933 Act on *6 this fact to disclose investors. The trial findings made below. argument Their judge permit however refused to ques that, basically below, is as found repre tion to be answered and clearly indicated sentation of Sachs was that that what Brown Brothers Harriman did worthy notes were credit high quality made no difference and that he would not and that this merely constitutes an opinion give any weight. opinion In its below the only opinion actionable if that was dishon court, however, stressed “If investors knew estly recklessly or held. The only authority arranged Sachs had buy for proposition cited for this Myzel Fields, is v. by backs Penn 718, Central of million of its F.2d 734 n.8 1967), Cir. cert. inventory and that denied, Brown Brothers Harri 390 U.S. 88 S.Ct. stopped all, man had buying at there is no L.Ed.2d 1143 However that case my doubt in mind that there 10(b) would be no involved of the 1934 Act § and not chance of ever selling as roll over Moreover, of the 1933 Act. § maturing paper.” for 406 F.Supp. at 46. footnote simply relied recites the The court also had earlier said in opin charge of the trial court in that Ap case. ion, “It is the surrounding circumstances pellants admit that imposes liability § buy-back, involved in the and the removal where is there a failure on the part of the of Penn Central from seller to exercise reasonable care. Hill Brown Brothers Harriman’s list Franchises, York American International which creates problem Inc., in 448 F.2d 1971). At this case.” Id. Appellants urge that the same time it is now recognized that posture trial of the court is inconsistent Hochfelder, under Ernst & Ernst v. only surely more so with be even would thought was unsound. This was 40% coverage. unattractive with See because 50% represented. 47 L.Ed.2d 668 less than that 96 S.Ct. In our U.S. view this proper an intent to is im- a defraud criterion constitutes (1976) 12(2). construction of § 10(b) We do Rule 10b-5. On remand district posed § court will address therefore the latter itself to that issue why not understand conduct such further 12(2). applied evidentiary hearings, be if any, should to as in its discre- § standard tion it determine may to necessary. be for liability distinction between the mere of a fact and misrepresentation II. 1934 Act if at appreciated of an is expression have been difficult to make.10 We times A. Jurisdiction however, loath, permit a to to broker-dealer respect 10(b) With Act § liability 10(b) escape under appellants have raised jurisdictional serious fact-opinion recourse to the dichoto- byAct questions. Before determining whether a broker- We have held that where my. 10(b) violation, is there a necessary it is a as to the representation makes dealer decide if note in issue security is a sells, impliedly he he quality covered the 1934 Act. Specifically ex that he has an basis in adequate represents cluded from Act’s definition of a secur Hanly v. he renders. fact 3(a)(10), ity in 15 U.S.C. 78c(a)(10), Commission, Exchange & . “any note . which has a maturity 1969). We see no F.2d at the time issuance of exceeding at why theory is not least reason nine months.” The Penn pur Central note appropriate involving in cases equally chased Franklin from 12(2) of the 1933 Act. maturity a time of slight issuance of an ly became exclu- three more than months. If Here the statute in of the Penn Central notes applied literally source sive there could be admit- professional liability It was a vendor because the com issue. railroad’s recommending for sale to scope mercial would be tedly outside the authorized parties recognize statute the Act. as the an institution observed, undertak- prime paper. Such an and the court invest district this court implies Bogue had con- Manufacturing Zeller v. Electric ing ongoing investigation Corp., (2d Cir.), an de ducted cert. nied, financial condition. If 414 U.S. S.Ct. 38 L.Ed.2d Central’s profes- failed to exercise reasonable held that “the mere fact that assembling evaluating care in has a of less than nine sional data, particularly in view of not take the Rule the financial months does case out of worsening Central, 10b-5, general condition of Penn the note fits the no unless *7 representation paper paper’ then its the was in the tion of ‘commercial reflected worthy high and quality credit untrue The release to is Release.” referred SEC misleading (1961), no how in fact matter hon- Act Release No. 4412 17 C.F.R. Sec. 231.4412, mistakenly exemption view which deals with estly but held. This does security registration insurer as not render Sachs an of a under John claim—liable for catastro- Act. Zeller followed Sanders v. appellants some 1933 Co., Rather, 1075, beyond it in. fact 1079 its control. Nuveen & phe denied, 1009, Cir.), Franklin if 409 U.S. 93 S.Ct. responsible the dealer to cert. makes (1972), 443, 302 which held of estab- L.Ed.2d to shoulder the burden 34 it is unable exempt pro it from the anti-fraud not for that to be lishing that was reasonable 16,1970 paper 1934 must be that the visions of the on March have determined negotiable “(1) quality purveying prime it was paper quality 1305, Misleading g., Corp., F.2d Statement or Rule Stern v. Satra 539 Omission Under 10. E. Loss, 1976); 10b-5?, (2d 3 L. Fordham L.Rev. n.199 1308-09 Prosser, (1961); Torts Regulation W. Jacobs, 1971); What Is a ed. see ordinarily purchased engaged even those in the (2) type of a not business of is, (3) paper dealing in commercial have general public, difficulty recognized types defining legislative to facilitate well it.12 history issued The requirements Act from which the operational business SEC derived current discounting by sparse (4) eligible unenlightening.13 for test type of a courts construing district Penn Cen- Reserve banks.” Other Federal have either not *8 Goldman, In Welch Foods Inc. v. Sachs & Goldman, University Hill Foundation v. 14. See Co., F.Supp. (S.D.N.Y.1974), (S.D.N.Y.1976). F.Supp. Sachs & the district court found that the Penn Central Goldman, any failed to meet *9 530 485, (9th denied, 976, 1454, 489 Cir. cert. 394 89 507 F.2d U.S. S.Ct. 22 Corp.,

Sciences Newbern, M., 488 F.2d Inc. v. L.Ed.2d 756 that exercised rea 1974); G. & 1973); Ferland v. Or 742, (9th professional arriving Cir. care in 745-46 sonable at Florida, Inc., F.Supp. 377 opinion, places upon them ange Groves their erroneous state (M.D.Fla.1974). Where the 690, insurmountable burden. The 705 an almost pure expression rule, submit, is a question upon I place in would ment better forecast, it distinguished from a as opinion, proving the burden of that their defendants terms to call it a state in a contradiction opinion is was based a review of the Knox, 297 Anderson v. See of fact. available and was pertinent data held hon 1961), (9th cert. 702, 720-21 Cir. good F.2d estly and in faith. If the defendants’ 1555, denied, 82 8 S.Ct. 370 U.S. honestly good was thus opinion held Fields, (1962); Myzel v. 386 498 L.Ed.2d faith, there was no of a misstatement mate 1967), cert. n.8 Cir. 734 fact; F.2d rial and there is no need to reach the 1043, 19 denied, 88 S.Ct. 390 U.S. negligence. issue Reynolds (1968); Rotstein v. 1143 L.Ed.2d purchaser that of stock It is seldom (N.D.Ill.1973); Co., F.Supp. & does not secure his broker some ex- 1323, 1328 Hartig, F.Supp. v. Bowman opinion concerning pression wisdom Co., Phillips Reynolds v. & (S.D.N.Y.1971); purchase. If each such is (E.D.Pa.1969). F.Supp. to be a construed statement of material fact” in such instance is that “material fact, the next substantial break in the secu- honestly holds the which he speaker may put market well rities most brokers Bromberg, 1 A. expressed. has While possible out of business. it is SEC, 5.3, Hanly v. at 97 Law value, as to “Representations soundness 1969), we held F.2d ” securities . . . may, and worth of represents implicitly dealer a securities instances, show much more some than opin adequate basis for his he has an judgment “. . . the mistaken of [an] initiated action in that SEC ions. .,” Holmes v. honest man United language of SEC merely tracked we States, 1943), 134 F.2d 33-4445, is and No. No. 34-6721 releases proper culpability measure of should not be 1962; ,we specifically sued might reasonably whether other dealers “implied warranty” may stated at judgment. arrived another have rigidly private enforced in a ac be as damages. tion for case, subsequent events instant

In the purchase proven have

plaintiff’s opinion, implied rather than ex-

defendants’ concerning the credit-worthiness

pressed,1 probably in er-

of Penn Central exposure potential defendants’

ror and that tremendous, running many into millions Requiring prove, defendants

of dollars.2 bright gleam hindsight”, SEC

“in the Sulphur Gulf

Texas J., concurring), (Friendly,

(2d Cir. pur- plaintiff pending Court found that 2. There are at least fifteen such cases 1. The District question the Penn Central note without against chased defendants in the Southern these Dis- F.Supp. it was offered sale. when York and a substantial number in trict of New concluded, however, “[w]hen 46. He Foods, See other District Courts. Welch Inc. v. paper, Sachs sold this it was under- holding out stood that (S.D.N.Y.1974). high credit-worthy quality.” Id. at 46-47. added). (Emphasis a total face amount in excess District Court for the United States South- one million of dollars.3 It was a District of New York entered on Janu- ern policy $100,- not to make Sachs’ sales under following ary nine-day a bench 000. This was neither a market nor an Metzner, trial before the Hon. Charles M. investment vehicle in which widows and Judge. Defendants-appellants, District orphans sought refuge. general part- Sachs & Co. and its Sachs), statute, New (Goldman, were found to have York State enacted a ners N.Y. Banking 1971), Act Law 235.12-a (McKinney violated Securities § § 1, 1968, 77/(2), June 15 U.S.C. effective § allowed sav- Exchange ings Act of banks to invest in Securities U.S.C. paper. commercial 78j(b), Exchange and the only permitted Com- banks were pur- Such 10b-5, Rule 17 C.F.R. 240.10b-5. mission chase which an independent rating Transportation Company, 1. Penn Central indicated, another recent commentator has paper, wholly is a owned subsidi- issuer significant change 1960’s a decade of Central, publicly ary holding of Penn held changes the commercial market. “The distinguish company. There is need them included a tenfold increase in out- will here and the two entities be referred to standing paper, emergence commercial as Penn Central. hereafter holding companies banks and bank as issuers paper, recovery complaint pleaded dealer- 2. The also violations 17(a) placed 77q(a), 15 U.S.C. from one-fifth to one-third of total New York Martin N.Y. outstandings, replacement General Business and the of commer- 352-c, Judge and the common Law law. corporations cial banks nonfinancial as the 17(a) Metzner did not reach the merits of the § primary purchasers directly of both dealer and claim. Neither do we. Schweitzer, placed paper.” Paper Commercial Act the Securities of 1933: A Role for Comment, Paper The Commercial Market Registration, 63 Geo.L.J. Acts, 39 U. of and the Securities 362, 364, Chi.L.Rev. (1972) [Chicago Comment], As designated by the State Banking service general partner and a given highest rating. defendant, Board named called Jonathan O’Her- (NCO), Office a subsidiary ron, National Credit a Penn Central vice president, attempt- Bradstreet, service, Dun & an approved .of ing to convince Penn to buy back paper “prime”, had rated the Penn Central some of the approximately million of

Notes

being which amounts to Judge Metzner’s in the record for con- port fact, a statement of a material mailing by Savings Bank is also liable 12(2). clusion under Section Company was foreseeable Gold- Trust In the preceding para- man, mailings one of the Sachs. graph 10(b) of its in finding liabil- the district court was the upon by relied ity under the court referred to mailing by Sachs itself of the Goldman, Sachs’ failure to disclose certain slip to Franklin. This would confirmation material facts. appears Thus it that Judge appellants’ well contention that negate as Metzner’s basis for liability among the banks and the communications failure was the to disclose the same facts normally by messenger dealer were which he upon liability. based by mail. We conclude that there was suffi- principally omitted facts Those relied jurisdic- cient use of the mails here to find court below are as by the follows: of the 1933 Act. tion February On B. Merits place Penn Central it would advised million on the a limit of of Penn $5 12(2) imposes liability upon: Section carry which it would in its inven- Central Any person who— tory. had been run- (2) offers to sell or sells ning up to million of the dealer’s prospectus means of a or oral commu- inventory. On nication, which includes an untrue state-

reached the issue tral applied “four-prong” Metzner Judge finding 10(b) liability14 no or have Penn Central and found to the test loosely four-prong followed test.15 We the last three criteria. compliance with jurisdictional not reach this issue in any do note not within the he found the finding The that the event. 1934 Act was it was not 3(a)(10) exemption because merits, violated must be reversed on the despite rating its as such NCO. prime remand will be and the limited to finding was based on the Judge Metzner’s 1933 Act in accordance with our di- the case which indicated that merits of concluding paragraph rections of this precarious was in a financial opinion. on the date of transaction plight Appellants 1970. would have us March B. Merits light of subsequent Zeller in Su- overrule Chip cases such as Blue of the district court was preme Court Stores, Drug prior Supreme written to the Stamps v. Manor U.S. Court’s deci (1975) Hochfelder, Ernst Ernst 44 L.Ed.2d 539 sion in & 95 S.Ct. J., concurring), they inter- U.S. S.Ct. L.Ed.2d 668 (Powell, reading a literal where Court announced that in pret requiring private damage liability If we fail to take that drastic to find 1934 Act. order urge that we 1934 Act the alternatively plaintiff must step, appellants Act “scienter” as a necessary to hold that the 1934 does establish element. read Zeller type normally sold in that case was defined apply Scienter to mean Judge embracing market. “a mental state intent to de in the commercial Zeller, ceive, manipulate, revisited the or defraud”. Friendly, the author of Id. at 194 n.12, Here, Bank of Exchange National 96 S.Ct. trial court question F.2d 1126 Chicago v. Touche Ross & 544 made Sachs inten ap- tionally withheld parties and both information from Frank encouragement in his further lin at the time of this transaction peal find in an attempt plaintiff. This circuit has never considered to defraud the The court views.11 “prime quality”, meaning limiting of the term found that Sachs was Judge Friendly Exchange purchased In National Bank since the notes were investment day explicitly left “for another the status under and not commercial reasons were securi- with a of nine Act of a note the 1934 1934 Act. Id. at ties under the 240-41. purchased that was for invest- months or less” Box Board Co. v. Alton purposes. n.19. That 544 F.2d at 1138 (E.D.Mo.1976), day arrived. still has not merely Judge cited Metzner’s court be- finding the low in Penn Central commercial Comment, supra Chicago at 386-87. was a within the at issue cover- Schweitzer, supra note at 1251 n.29. 13. See age Act.

In Mallinckrodt Chem. Works Release’s four (S.D.N.Y. F.Supp. necessary exemption Sachs & under criteria Zeller for found the notes not “issued to the court finding the 1934 Act. In recognized types oper- well of current facilitate prime placed great emphasis not the court requirements” past ational business but to fund subsequent on the fact of Penn Central’s insol- applied capital expenditures. The court also vency. purchase test and found that the nature of the paper through Goldman, inventory in Penn Central establish that Sachs intended to backs, it knew both that there buy defraud the bank. Rather than remand to bank credit lines for this retry were insufficient the issue of 10(b) intent under or to outstanding and that this paper still reconsider the issue jurisdiction under removed from the list of had been the 1934 possibly under some new for- Harriman on adopted by circuit, Brown Brothers mula we think that that these facts Judge logically Metzner determined and in the judicial interests of and that were material Sachs economy the remand should be limited sole- them to Franklin. The required to disclose ly 12(2) to the merits of the § claim. The concluded, “Having court then decided judgment below is reversed and the matter disclosing without these mate- sell the notes remanded consistent with this opinion. facts, Goldman, rial is liable to the 10(b).” for a violation of plaintiff Section GRAAFEILAND, VAN Circuit Judge, F.Supp. apparent at 47. It is from a concurring part and dissenting in part: reading opinion that the court full I concur with the majority that the judg- possessed never found that appealed from must be reversed and deceive, manipulate or an intent to defraud. the matter remanded. I do not argue any that there was Appellee does not agree proper test of defendants’ express finding rather that such but liability 12(2) under is they whether exer- required by Ernst & Ernst can be scienter professional cised reasonable care in evalu- from the facts found the court. inferred ating financial data. appropriate We do not believe that this is Although here, is often spoken particularly since trial court refus- of as a negligence statute, testimony description ed to admit had a decided is not completely accurate. Before bearing good on the issue of faith vel defendants put can be burden of showing We reverse the non Sachs.16 they care, exercised 10(b) reasonable finding liability plaintiff under but do not must first establish that on that issue. made an un- remand true statement of a “material fact” or omit- sought Franklin below rescission While ted to state a “material fact” necessary in damages variety on a of claimed viola- to make the order statements not mislead- of common law and state tions and federal ing. statutory provisions, supra see any damages Construing event its will be limited to an expression so as $500,000plus interest and costs. If Frank- to make it a statement of requires fact liability fancy establish on the merits legal lin cannot some rather footwork. This hardly of the 1933 it can accomplished under result has been graceful most liability ly where the establish forecast of future See, require Rule 10b-5 which it to earnings. g., Act and e. Marx v. Computer trial, Goldman, attempted 16. At to intro- urged dollars. Counsel for Levy, duce evidence that Gustave L. senior “badge admission of this evidence as a of inno- partner of that firm was the trustee for a blind good rejected cent stating, faith” and the trial court Annenberg, personal a close trust of Walter friend and then the American Ambassador to Objection “I don’t need it for this trial. rejection sustained.” The of this evidence Britain, buy with sole discretion Great gives position appellants credence to the stock held in the trust. The trust sell common that the court below did not consider “scien- 180,000 approximately shares of contained ter” to be an element in the 10b-5 case. In stock worth over million. good Sachs had acted in would have established that while The evidence University faith in Hill Foundation the district Levy all other stock in the blind trust he sold court noted that it had based its conclusion on retained the Penn Central stock nonetheless evidence, trust, including Annenberg underpriced. believed it was because he Judge been record before Metz- fact, 160,000 he shares of it until after retained University Hill Foundation v. ner. reorganization petition was filed and then Co., supra, 895 n.15. ultimately many sold it at a loss of millions of