*1 CORPORATION, CHEMETRON
Plaintiff-Appellee
Cross-Appellant, FUNDS, INC., al.,
BUSINESS et Defend-
ants-Appellants Cross-Appellees.
No. 80-1658. Appeals,
United Court of States
Fifth Circuit.
Aug. 16, 1982.
Rehearing Rehearing En Banc Sept.
Denied
H51 *4 Seikel, Houston, Tex., Funds, for Business & Inc. Elkins, Reasoner,
Vinson Harry & M. Smith, Snodgrass, Jr., John C. B. James Stephen Schwartz, Tarry, C. Charles W. Murchison,Jr., Lents, Houston, John L. Ann Tex., Austin, Tex., Charles A. Wright, David Bintliff. C.
Wood, Gibbs, Campbell, Moody Gary & C. Miller, Ratliff, Gibbs, Debora D. Robin C. Houston, Tex., Austin, F. for Estate of John Jr. Cook, Reynolds, Joe H.
Reynolds, Allen & Jr., Lloyd Cunningham, Murphey R. P. J. Harmon, Tex., Buchanan, Houston, Inger- soll, Rodewald, E. Kyle Buerger, & Carl Deluzio, Jr., Rothenberger, Vincent C. Park, Pa., for Pittsburgh, James G. Cheme- Corp. tron *5 REAVLEY, GEE, Before and WIL- LIAMS, Judges. Circuit GEE, Judge: Circuit
I. INTRODUCTION long-run- We review the latest act in the ning Equities, drama of the Western Inc. (“Westec”) stock scandal. The characters defendants-appellants, cross-appel- include Funds, (“BFI”), a small lees Business Inc. company, business investment John Austin BFI, (“Austin”), and David chairman of (“Bintliff”), Bintliff a businessman and in- plaintiff-ap- The final character is vestor. Corpora- pellee, cross-appellant Chemetron (“Chemetron”). appeal tion The defendants $18,413,160 judgment from a in actual exemplary damages and for violations of laws en- the federal and Texas securities against them on answers tered based special an able interrogatories.1 Despite to Shearman Wade, & Sterling, George job very complex J. in a case the district New York City, Alan R. court, requiring Bromberg, Dallas, we discern several errors Tex., Kenneth Morris, Morris, M. Campbell reversal and remand. prosecuting filing appeal, Austin died after the it. of this his estate is and company, president, new Hall became BELOW AND DISPOSITION
II. FACTS
Austin
made a director.
with the Wes-
quite familiar
This court is
We sketch only those
tec stock scandal.2
September
August
1964 until
From
disposition of this
necessary
facts
for the
engaged
and Hall
in massive
Williams
case.
in-
operations designed
stock
complex
stock. These
crease the value of Westec
BFI,
was a small
corporation,
a Maryland
example,
For
operations
many
took
forms.
prior
formed
company
investment
business
on
a debt to a business associate
repaid
(Hall
Texas,
Houston,
principal
as its
to 1961 with
money
the condition that
be used
cap-
BFI loaned venture
business.3
place of
open
Westec stock on the
market
purchase
exchange
ital
for stock
companies
1964; Williams aided in the financ-
during
warrants,
management ex-
providing
often
deal, although it is not clear
ing of this
on the
representatives
pertise
placing
funds.
BFI was the source of the
whether
companies as
boards of directors of these
instance,
guar-
defendant Austin
In another
growth
encourage
In order to
their
well.
from a
anteed a loan in December 1964
investment,
helped
BFI also
and enhance its
pur-
to Hall that Hall used to
party
third
for these
arrange mergers
acquisitions
compa-
portfolio
Westec stock. BFI
chase
companies.
bought
nies and Westec subsidiaries also
Williams
In late
BFI hired James
addition,
pur-
In
stock was
Westec shares.
(“Williams”)
president
supervise
a vice
chased in the name of various relatives and
chairman of
some of its investments. The
associates of Hall and Williams. In most
Austin.
BFI at
time was defendant
transactions,
appears
BFI
money
these
chairman,
While he was not a full-time
played
have
a role.
each week with
spending substantial
time
resigned from
April
Williams
business,
principal
mortgage-banking
his
BFI,
ap-
although his connections with
firm, he did meet with Williams and discuss
have
a short
time
pear to
continued for
his
times a week.
activities several
have been
departure may
thereafter. His
mergers
acquisi-
Through
series of
terms,
unfriendly
but this is not alto-
Williams,
Geo-Space,
tions orchestrated
*6
time,
gether clear. About this
Austin also
company
a
in which BFI had invested and
BFI distributed
left the Westec board and
grew
for which
responsibility,
Williams had
De-
its Westec shares to its shareholders.
began considering merger
and in 1963
however,
may,
these actions BFI
have
spite
Westec,
with
the Amer-
company
listed on
to influence
control
continued
and
Westec
Exchange.
merger
ican
A
with a
Stock
1965.
until December
company
substantially
listed
would
enhance
September
appearance
1965 marked the
Geo-Space.
the value of BFI’s investment in
acquisition
Bintliff with the
of defendant
Williams,
(“Hall”)
by
assisted
Ernest Hall
by
Compa-
Westec of Camerina Petroleum
Geo-Space,
undertook to consummate the
ny,
owned
Bintliff. Bintliff
partially
merger. They acquired a
in Wes-
foothold
exchanged his Camerina shares for Westec
private
tec with a
purchase
nonmarket
have
appears
shares. This transaction
in August
Westec stock
1963 and elected
manipula-
price
been unrelated to the stock
Williams to the Westec board
there-
shortly
operation.
tion
after. Negotiations
merger
on a
concluded
Chemetron,
corporation with
successfully
September
1964. BFI ex-
a Delaware
Chicago,
changed
Geo-Space
principal place
its
stock warrants for
its
of business
Wil-
Westec,
involvement
when
leaving
began
stock in
BFI in control of
sought
acquire
a Cheme-
Westec.
became chairman of the
liams and Hall
Williams
See,
Commissioner,
denied,
banc),
e.g.,
Williams v.
cert.
Hall,
(5th
1978);
H55 Corporation price of Westec stock subsidiary, through Pan Geo Atlas tron actual negotia- apparent trading, thereby inducing for (“PGAC”), Lengthy Westec. transac- others, deal leading injury to an October 1965 tentative tions to its when tions led discovery boards. subject approval by parties’ collapsed. lengthy both Westec After 14, 1966, received January voluntary and settlement with or dismissal On Chemetron defendants, and notes. stock for its of 53 of against Westec PGAC stock case nonmarket, defendants, BFI, Austin, Bintliff, and a was four and The transaction (“Brazos trial that Cotton Valley Company official testified at Brazos Oil Chemetron played no price Valley”), market of Westec to trial in the Dis- came Southern shares the deal. role in Chemetron’s evaluation of jury trict of Texas before a in 1979. The told claims it was never of the Chemetron legal had been narrowed to viola- claims manipulation would not stock scheme and (1) tions three statutes: section 9 of have made deal had it known. Exchange Act of 15 U.S.C. Securities (2) (1976); 10(b) section of the 1934 § manipulative activities of Hall and Act, 78j(b) (1976), 15 U.S.C. and SEC Williams continued after the Chemetron 10b-5, Rule (1981), C.F.R. 240.10b-5 They transaction. ordered Westec stock in thereunder; and Tex.Rev.Civ.Stat.Ann. loans parties, seeking the names third (Vernon 1966), art. 4004 the Texas anti- purchases. loan finance One such was fraud statute.4 Bintliff, secured defendant which he for Westec received stock as a fee. Bintliff response special In interrogatories, bought party also Westec stock third from a Val- completely exonerated Brazos arranged by in a sale Williams. ley and found section 9 violation. How- scheme, August part ever, judge judgment the trial entered for placed Williams and Hall stock or- large 10b-5, 10(b), Chemetron section under Rule they der could not finance. Bintliff de- and article based on jury’s remain- ap- to finance it. clined Chemetron ing responses. The three defendants were proached to in- finance it but declined and jointly severally held liable for actual Exchange formed Securities Com- $4,726,128 damages of under federal Exchange, mission the American Stock law, state prejudgment $4,817,- interest of suspended trading in Westec stock. 276, exemplary art. damages under At that time largest Chemetron was the $9,452,256, $582,- 4004 of less settlement of Shortly shareholder Westec. after the 500, $18,413,160. liability a total All suspension trading, went into Westec judgment defendants moved n. o. v. or a Chapter reorganization, emerging X as a trial, new which were denied. All now reorganized company in appeal to this court. Chemetron lodges exchanged its Westec with the bank- shares cautionary cross-appeal. *7 trustee in ruptcy receiving shares and reorganized notes in the company. III. ISSUES ON APPEAL failure of an ava- spawned Westec Law A. Federal Securities Claims. litigation. of lanche This suit in 1967 began when Chemetron sued seek- alleged appellants 57 defendants ing recovery many provi- illegally manipulated of its losses under the national securities sions the federal exchange of and Texas securities market for Westec stock plan, laws. Chemetron basically alleged or misleading failed to disclose made state scheme, or conspiracy manipulate to the ments that scheme in two about violation of repealed September pro- disposition. consistency prior 4. Art. 4004 was effective For with 1967, shortly case, complaint ceedings after Chemetron’s in this we refer to the Texas 21, 1967, August by arising throughout. filed on § ch. claim under art. 4004 as Laws, and Tex.Bus. Tex.Gen. reenacted as & (Vernon Comm.Code § 27.01 There change was no in the statute to our relevant (1981), laws, C.F.R. 240.10b-5 enacted 9(a)5 pursuant section of the § federal securities Act, 10(b)7 of the 1934 Exchange Act of to section 15 U.S.C. U.S.C. Securities 9(e)8 of 78j(b) (1976). the 1934 Section 10b-5,6 17 78i(a) (1976), and SEC Rule offering person selling purchas- for sale or provides: or 9(a) 5. Section ing purchase security, (a) any person, offering di- or to the to unlawful for It shall be any security indirectly, by purchase rectly any use or induce sale of the of the mails the or or instrumentality registered exchange or of means on a national securities interstate commerce, facility any any by of national or of the or dissemination of infor- circulation any exchange, price any or for member of a securities mation such the of to the effect that exchange— likely security national securities to fall will or is rise or (1) purpose creating of false or any For the operations because or more of security. the market of one of trading misleading appearance of active in purpose persons for conducted the any security registered aon national securi- price raising depressing the of such or misleading ap- exchange, a false or ties or any pearance respect with to the market for (6) To either alone or with one more effect or any security, (A) effect transaction such to persons any of for other the series transactions security change which involves such the beneficial enter an order or purchase any security reg- of and/or sale thereof, (B) ownership or exchange istered the for on a national securities purchase orders for of stabilizing fixing, purpose pegging, or of security knowledge such order or orders of size, with the security price in contravention of the such sion of such substantially the same regulations as the Commis- rules and substantially time, the same necessary may prescribe appropri- or as price, substantially the same the sale of protection public ate in interest or for any by security, been or entered such has will be of investors. (C) parties, for the same or different or or any to any security or orders sale of enter order for the 6. Rule 10b-5 states: knowledge with the that an or- directly any person, It shall unlawful for size, substantially der at of or orders the same any indirectly, by means or the use of or instru- time, substantially at sub- the same commerce, mentality of the of interstate or stantially price, purchase of the same any any facility or national securi- mails of security, or will such has been be entered exchange, ties parties. or for' the same or different scheme, device, (a) employ any To artifice or (2) effect, with To alone or one or more other defraud, persons, any a series of transactions in secur- any (b) untrue statement of a mate- To make ity registered on a national ex- securities fact rial fact to omit to state material or change creating apparent actual or active necessary in to make the statements order security raising depress- trading in such or or made, light of the circumstances under security, purpose ing price of such for the made, misleading, they or were inducing purchase se- or such sale of act, (c) any practice, engage To or course curity by others. operate operates or would of business which broker, person If a dealer or or other any person, upon in connec- a fraud or deceit selling offering purchasing or for sale or or security. any purchase tion or sale with the offering purchase security, to induce purchase any security regis- the tered on a national securities the circulation or nary or sale of 10(b) declares: 7. Section exchange directly any person, or It shall be unlawful for indirectly, mentality mails, in the ordi- dissemination any means instru- or the use of course of business of information to commerce or of interstate price any security effect that will such any any facility national securi- or likely or is to rise or fall of market because exchange— ties operations any persons one or con- more (b) employ, in connection with the To or use depress- purpose raising ducted for the or any security registered purchase or sale of security. ing (4) prices of such exchange or a ty securi- national securities broker, person If a dealer or or other any manipulative registered, de- or not so (cid:127) selling offering purchasing for sale or ceptive in contraven- or contrivance device make, offering purchase security, *8 regulations as the and tion of such rules security regarding any registered on a nation- necessary may prescribe or as Commission appropriate exchange, purpose al securities of the public the interest or for in the inducing purchase or sale securi- the of such protection investors. ty, any statement which was at the time and light in the circumstances under 9(e) 8. Section reads: made, respect it misleading false or with willfully (e) Any person participates in fact, who any to material and knew or which he any act in violation of ground or transaction subsection had reasonable false or was so believe section, (a), (b), any person (c) this shall liable to misleading. or any purchase consideration, directly or sell se- who shall price For a or received curity broker, which was affected such indirectly or from a dealer or other
H57
Act,
of the trial
78i(e) (1976), creates an
court does not specify
15
which of
§
U.S.C.
express
private remedy for violations
Rule 10b-5’s subsections or combination of
9(a),
private
an
implied
However,
section
cause
subsections it
on.
relies
since the
long
recognized
action has
been
under sec
jury
manipulative
found that
there was a
10b-5,
10(b)
tion
and Rule
see Ernst & stock scheme and that the scheme was not
Hochfelder,
185, 196,
Ernst v.
96
425 U.S.
Chemetron,
disclosed to
the trial court’s
1382,
1375,
Ct.
668
S.
L.Ed.2d
judgment could have been based on Rule
(c)
10b-5(a)
(banning
or
fraudulent schemes
While
specifically alleged
vio-
in general),
10b-5(b)
on Rule
(prohibiting
9(a)(1), (2), (4),
lations of
subsections
misrepresentation/nondisclosure),
or
on
(6), the
judge
jury
trial
submitted to the
both.
very jury findings
Thus the
9(a)(2) allegation,
the subsection
di-
section
permitted,
barred
9 relief
without
manipulative
rected at
stock
the
scheme
any inconsistency, relief under Rule 10b-5.
itself.
all
three subsections
submitted, permitting
Rule 10b-5 were
result,
Appellants assail
claiming
jury
appellants
to hold
liable under Rule
overlap
that this
private
imper-
remedies
(Rule
10b-5 for either
the stock scheme
missibly
express remedy
nullifies the
10b-5(a)
(c)),
misrepresen-
and/or
its
limitations of section 9.
question
This
(Rule
5(b)),
tation/nondisclosure
10b—
remedy
whether an implied private
is avail-
both.
able under Rule 10b-5 for activities covered
In response
Special
No.
Interrogatory
express private remedy
section 9’s
is one
6, the
found that
not
impression
Chemetron had
of first
in this circuit.9 Our task
proven
the stock scheme “affected”
possible
is to examine
both of
bases for
stock,
it
price
paid for the Westec
a neces-
liability,
Rule 10b-5
existence of a stock
sary
claim,
of a
element
section
see sec-
and misrepresentation/nondisclo-
scheme
its
finding
9(e),
78i(e).
sure,
tion
impermis-
15 U.S.C.
This
they
to determine whether
any
foreclosed
relief
9.
nullify
under
section
remedies.
sibly
express
section 9
Nevertheless,
9,
judg-
nullify
trial court entered
If both
section
the trial court’s
ment
for Chemetron on its federal
law judgment
legal
based on Rule 10b-5 has no
claim based on Rule
The judgment
support
10b-5.
and must be reversed.
transaction,
person
injured
analysis
act or
and the
so
it without
missed
a footnote.
may
equity
any
1975,
sue in law or in
court
id. at 351 & n.14.
In
the Seventh Circuit
competent
jurisdiction
damages
to recover
in Schaefer v. First National Bank of Lincoln
any
sustained as a result of
act
such
or transac-
wood,
1287,
1975),
509 F.2d
Cir.
1291-93
any
may,
tion.
In
such suit
court
denied,
cert.
425 U.S.
96 S.Ct.
discretion,
require
undertaking
pay-
for the
(1976),
plaintiff
L.Ed.2d
held that a
could
suit,
ment of the costs of such
and assess
file claims under both Rule 10b-5 and
In
costs,
including
reasonable
reasonable
attor-
Raytheon
Mfg.
Fischman v.
fees,
neys’
Every
against
party litigant.
either
(2d
1951),
suggested
the court
in dicta
person
any pay-
who becomes liable
make
remand,
plaintiffs could,
amend
ment under this subsection
recover contri-
complaint
see,
their
to state both
But
claims.
any person
bution as in
cases
contract
from
Lizars,
e.g., Amdur v.
39 F.R.D.
36 n.13
who,
joined
suit,
original
if
in the
would have
(D.Md.1965), aff’d,
1967),
1158
17(a)
sage
by
its terms limited to
analysis,
§
we will address
purposes of
For
securities, we
purchasers and sellers of
(1) is subsection
specific questions:
two
a cause
extremely
imply
reluctant
are
prohibits misrepresenta-
9(a)(4), which
17(a)
significantly
that is
of action
§
tion/nondisclosure,
by the similar
nullified
Congress
that
remedy
than the
broader
10b-5(b),
and
do the
in Rule
prohibition
provide.
chose to
and
schemes
general bans on fraudulent
(c)
574,
(citations and
10b-5(a) and
at 2488
in Rule
Id. at
99 S.Ct.
courses of business
added).
omitted,
It also
emphasis
manipula-
stock
footnotes
specific
on
nullify the bans
that
history
legislative
noted evidence in
9(a)(1),
in subsections
tion schemes found
the exclu-
18(a) was intended to be
section
(2),
(6)?10
n.15, 99
at
remedy,
sive
id. at 573 &
S.Ct.
even the “re-
2487 & n.15 and warned that
Guidance
Circuit
Supreme
Court
laws “will
purposes”
medial
of the securities
Precedent.
broadly
more
justify reading
provision
not
be
questions
of these
analysis
Our
statutory
scheme
language
than its
“it is an elemen
gins
premise
with the
that
578,
at
permit,” id. at
99 S.Ct.
reasonably
statutory
tal canon of
construction
partic
expressly provides
where a statute
Ernst,
scienter is
proof of
Under Ernst &
remedies,
be
remedy
ular
a court must
Rule 10b-5.
private
in a
suit under
required
chary
reading
others into it.” Trans
conclusion,
found
reaching
In
this
the Court
Advisors,
Lewis,
Inc. v.
Mortgage
america
Act
of the 1933
significant
that sections
242, 247,
11, 19,
U.S.
S.Ct.
are
negligence
for mere
allowing recovery
L.Ed.2d 146
to sec-
applicable
subject to restrictions
Supreme
first
Court for
Looking
at
10(b),
tion
425 U.S.
S.Ct.
direction,
that, although
we find
it has not
and observed:
maintaining
yet
question
addressed the
in-
procedural
We think these
limitations
implied
cause
in the face of an
of action
private
judicially
created
dicate
action,
Ernst,
express cause of
see Ernst &
10(b)
damages remedy under §
—which
n.31;
n.31,
at 211
at 1389
U.S.
S.Ct.
comparable
has no
restrictions —cannot
Stores,
Chip Stamps
Drug
Blue
v. Manor
extended,
intent
consistently
with the
n.15,
95 S.Ct.
Congress,
premised
negli-
to actions
on
n.15,
(1975);
1159
81-680,
(Nos.
81-1076),11 agreed
such offerees have no Rule 10b-5 cause of
with the
action,
express
it reviewed the various
rem-
used in
approach
and
Second
District of
Acts,
edies
1934
Wachovia Bank
under the 1933 and
includ- Columbia Circuits.
&
9,
would Trust Co. v. National
ing section
and declared that
Marketing
Student
“[i]t
Congress Co.,
impute
indeed be
cert. denied
(D.C.Cir.1980),
anomalous to
implied requires action because Rule 10b-5 (4) broker, If a dealer or or other scienter, deceit with elements committed person selling offering or for sale or id.14 12(2). not found in sections 11 and See purchasing offering purchase or make, Supreme security, regarding any
With these Court and Fifth Cir- securi- us, guide cuit cases to we turn ty registered now to the on a national securities specific questions before us. purpose inducing for the exchange, purchase security, or sale of such
2. The Misrepresentation
and Nondisclo-
any statement which was at
the time
sure Remedies.
light
and in the
of the circumstances
made,
under which it was
false or mis-
Our examination of this issue be
gins with a comparison of the texts of the
leading
respect
any
with
material
(1976).
allegations
Since the court failed to cross that
with
Wachovia dealt
of artificial
threshold,
question
price
through
it did not reach the
analo-
stock
inflation
numerous oral
gous
presented
to the one
here of
misrepresentations,
including press
whether two
and written
implied
overlap may
pursued
remedies that
releases,
be
reports,
reports.
and unfiled
SEC-filed
simultaneously. See
The elements
to
a Sec-
10(b)
tion
claim
any
To make
statement of a
ap-
have been so often
untrue
(b)
material fact or to
to state a
plied
the lower federal
omit
materi-
courts that
al
necessary
fact
in order to make the
they
can be
in black
stated
letter fashion.
made,
light
statements
in
of
cir-
To
out
the
the
10(b),
make
a claim under
Section
made,
they
cumstances under
which
were
is
which
based on the common
action
law
misleading
not
deceit,
plaintiff
(1)
....
of
must establish
a misstatement
(2)
or an omission
of ma-
added).
17
240.10b-5(b) (emphasis
C.F.R. §
(3)
(4)
terial fact
with
on
made
scienter15
prohibition
9(a)(4)
The
in
cer-
subsection
is
(5)
plaintiff
proxi-
which the
relied
tainly
to
apply
misrepresenta-
intended to
mately
injury.
caused his
in
manipulative
tions made
course
See
schemes
9.
H.R.Rep.
(footnote
banned
section
omitted).
ing a sale
(6) that affected
plaintiff
10b-5(b).
which the
relied20
Rule
selling price.21
purchase or
plaintiffs
Finally,
9(a)(4)’s
subsection
causation
implied
perceive
We thus
tougher
plaintiff
standard is also
for a
—the
10b-5(b)
cause of action under Rule
plaintiff’s purchase
price
or sale
must be
9(a)(4) differ
express remedy of subsection
“affected,”
require-
while “the causation
scienter, intent to
respects,
in at least three
ment is satisfied in a Rule 10b-5 case
sale,
and causation.
purchase
induce
if the
misrepresentation
upon
touches
While Rule
recklessness to
permits
10b-5
reasons
in val-
investment’s decline
supra
see
requirement,
fulfill its scienter
Huddleston,
(emphasis
ue.”
1164 (5) (4) plaintiff,35 relied on or sell- plaintiff’s purchase affected (5) that selling or plaintiff’s purchase affected ing price.31 price.36 9(a)(2). c. The Elements of Subsection 9(a)(6). The Elements Subsection d. of sub to show a violation order subsection a violation of prove suit under sub To 9(a)(2) private
section
in a
suit under
subsection
9(a)(6)
private
in a
9(e),
plead
must
plaintiff
section
(1) a
required to show
(1)
9(e),
plaintiff
transactions
in a
a series of
prove
(2)
security37
trading
of transactions
apparent
or
series
security creating actual
fixing,
pegging,
or
purpose
raising
depressing
made for
security
in that
in vio
security
of that
(2)
stabilizing
price
carried out with
price
security,32
of that
(3)
with scient
rules38
done
(3)
purpose
inducing
for the
lation of SEC
scienter33
(5)
others,34
plaintiff
on which the
relied40
er39
security’s
purchase
sale or
necessity
proving
Brief of
9(e).
scienter. See
31. §
Piper
v. Chris-
as Amicus Curiae
SEC
9(a)(2).
926,
It
noted
Inc.,
1,
§
should
Industries,
97 S.Ct.
430 U.S.
Craft
9(a)(2)’s
reach
be limited
SEC rules
(1977),
n.*.
e. A of Rule and 10b-5(a) (c) implied under a Rule and action (c) 9(a)(1), and and Subsections impermissibly Congress’ nullifies deliberate (2), (6). and express and careful limitations on the statu 9(a)(1), (2), tory remedy of subsections and We note several elements 9(a)(1), (2), (6).47 make a violation of subsections
and more difficult to prove than viola 10b-5(a) (c). Legislative tion of Rule and History of 1933 and Proper Scope 1934 Acts and the First, causation, previously, as discussed Rule 10b-5. is much easier prove under Rule 10b-5 Second, than under section 9.42 under Rule Any doubts about the results reached un- 10b-5, recklessness can fulfill the scienter analysis der Huddleston are laid to rest requirement. However, may by analysis recklessness an not undertaken in Huddle- ston, Wachovia, not be used to fulfill section 9’s scienter or Ross—the intent of Con- requirement, as we gress legislative history noted our discussion revealed Third, 9(a)(4).43 of subsection while Rule and structure of the 1933 and 1934 Acts. 10b-5(a) (c) structure, and presumption Reviewing history create a and we plaintiff reliance conclude that in the coherent compre- can be rebut- and defendant, ted by controlling section 9 hensive scheme for securities aids established,48 plaintiff Congress with fraud that presumption.44 no such section Fourth, 9(a)(2), only remedy and as to subsection is the for the fraud in this there is an requirement intent to induce case. (c). 10b-5(a)
found in Rule
very
9 is
Section
considered
heart
“[t]he
10b-5(a)
(c)
SEC,
require
Report
Proposals
Rule
therefore
of the Act.”
proof
creating
high
additional
of facts
Amendments of the
Act of 1933
Securities
proof
compared
Exchange
er burden of
when
sub
Act of
and the Securities
fact,
9(a)(1), (2),
(6).
Print,
sections
Cong.,
Rule H.R.
77th
1st
Comm.
Sess.
10b-5(a)
(c)
procedural
create a lower burden of
With its
and substantive
Lacking
limitations,
proof.45
easing
specific
trade-off for this
it takes aim at several
Mahar,
Ellenberger
plain-
&
Item 18. To have it oth-
44. Shores
also further
reduce the
could,
Judge
long
proof
erwise
as Chief
Cardozo said
tiffs burden of
of reliance under Rule
ago,
10b-5(a)
(c)
render
“in
permits
defendants liable
an indetermi-
insofar as it
reliance
nate amount
for an indeterminate
time
“integrity
marketplace.”
on the
See 647
Corp.
indeterminate
class.”
Ultramares
interpreted,
F.2d at 471.
If Shores is so
and we
Touche,
170, 179-80,
255 N.Y.
174 N.E.
thusly,
interpreting
forbear from
our conclu-
(1931),
Ernst,
quoted
in Ernst
&
proof is rein-
sion as to the relative burden of
n.33,
types
1389; Ruder,
210-11, 96
U.S. at
S.Ct. at
acknowledged
tually all
to be
known and
Liability
Civil
Under Rule 10b-5: Judicial
addition, section 9
in 1934.
harmful
Legislative
Revision of
Intent?
57 Nw.L.
rulemaking power to reach
gives
SEC
(1963).
Rev.
649
not known in
manipulation
of stock
types
per se at that
proven
or not
harmful
1934
Not
clear intent
is such
of nullifica-
(c),
9(a)(6), (b), and
15
See
U.S.C.
time.
§
10(b)’s legislative
tion absent from section
(c). However,
78i(a)(6), (b),
Con
and
§
history,
history
but that
demonstrates
wisdom, laid
legislative
in its
down
gress,
opposite
10(b)
in-
section
was never
—that
private liability under section
limits on
supplant
tended to
traduce the remedies
SEC,
private
nor
parties,
Neither
and limitations of section 9 or the other
limits,
those
go
courts
around
express
of the 1933 and
Acts.
remedies
1934
rulemaking power
how
matter
broad
inception through
From its
various amend-
"form,
Court
Supreme
10(b)
since the
has made
final
appears,
ments and into its
section
always
provi-
clear that the “administration of a feder was
intended as a “catchall”
sion to reach
not
power
statute is not the
to make law.”
activities
covered or antici-
al
Ernst,
pated
provisions
in other
of the Acts.
&
at
96
at
Ernst
425 U.S.
S.Ct.
1391;
Aaron,
at
see
hearings,
In House committee
Thomas
1952;
Industries,
Piper v.
Chris-Craft
Corcoran, an official of the
ad-
Roosevelt
Inc.,
n.27,
S.Ct.
U.S.
drafting
ministration who assisted in the
n.27,
(1977). Equally
That
concerned about
subsection
catch-all clause
prevent manipulative
scope
by
devices. I do
section 9
evidenced
any objection
think there
kind
legislative
to that
drafting,
history,
meticulous
and
of a clause. The Commission
have
should
investigation
the massive
led to it.
authority
manipula-
deal with
See,
new
e.g., S.Rep.No.1455,
Cong.,
73d
2d Sess.
tive devices.
(1934), reprinted
Ellenberger
in 5
54-55
&
Mahar,
(known
Item 21
as the Fletcher
Exchange Regulation,
Stock
Be
Hearings
Comm,
Report);
Cong.,
73d
H.R.Rep.No.1383,
2d fore the House
on Interstate
(1934), reprinted
in 5
Sess.
Ellenber-
Commerce,
Foreign
Cong.,
73d
2d
Sess.
Mahar,
nullify
&
To
ger
Item 18.
section
(1934),
Mahar,
reprinted
Ellenberger
in 8
&
implication
violate the
by
would
“cardinal
Landis,
added).
Item
(emphasis
J. M.
repeals
principle
by
construction
FTC
Commissioner
one of the Act’s
implication are not favored.” Silver v. New draftsmen,
interpretation
substantiated this
341, 357,
Exchange,
York Stock
10(b):
gives
general
section
“[I]t
1246, 1257,
1167
report
the Senate
committee
securities acts unless committed by an
proposed
which studied
bill summarized
over-the-counter broker or dealer. 8 SEC
10(b)
(b)
as
Ann.Rep.
(1943);
section
follows: “Subsection
10
see Securities Ex-
by
reg-
change
1934,
authorizes the Commission
rules and
15(c),
Act of
15
§
U.S.C.
prohibit
regulate
78o(c).
the use of
ulations
Viewing
§
the rule as an “addi-
any
manipulative
deceptive prac-
other
protection
tional
investors,”
8 SEC
tices which it finds detrimental
to the inter-
Ann.Rep.
(1943),
10
the Commission fash-
S.Rep.No.792,
ests of the investor.”
73d
ioned it to
applicable
“make
to the pur-
Cong.,
(1934),
18
reprinted
securities,
2d Sess.
in 5
chase of
the same broad anti-
Mahar,
Ellenberger
(emphasis
provisions
&
Item 17
fraud
which the Congress has
added).
Fletcher,
Finally,
imposed
Senator
17(a)
Sen-
in Section
of the Securities
Act,
sponsor
1933,
ate
of the
declared in the floor
Act of
in connection with the sale of
10(b) gave
debates that section
securities.”
SEC'
Ward La France Truck
“power
forbid-any
Corp.,
373,
other devices.” 78
13 S.E.C.
n.8
To ac-
Cong.Rec.
added).
complish
2271
(emphasis
this end the Commission . . .
copied the language
17(a)
of section
purpose
In line with the catchall
of sec-
the Securities Act . . . and applied it “in
10(b),
tion
the conference committee broad-
connection with
purchase
or sale of
rulemaking power
ened the SEC’s
to in-
any security,”
being
the reach of
interest,
protection
public
clude
of the
10(b).
section
See also Birnbaum v. New-
protection
well as
of investors. H.R.Conf.
port
Cir., 1952,
Steel Corp., 2
193 F.2d
Rep.No.1838,
Cong.,
73d
2d Sess. 32-33
;
Loss,
463 3 and 6
Securities Regula-
(1934),
Mahar,
reprinted
Ellenberger
in 5
&
(2d
tion
1961),
1424-1427
ed.
3617 (Supp.
Supreme
Item 20. The
Court and this cir-
1969).
2d ed.
cuit have consistently interpreted section
430 F.2d at
(emphasis added);
ac
See,
10(b)
Aaron,
e.g.,
as a catchall.
446
cord,
Ernst,
Ernst &
n.32,
tation, completely incongruous avoid require express it would either an piece legislation out of the repeal so two stat- repeal implication or an question. utes in The two strong inescapable. as to be materia unquestionably pari are Acts 124-25; accord, F.Supp. at Ernst & together construed to make and must be Ernst, 210-11, 425 U.S. at at 1389. S.Ct. Looking at them as a consistent whole. Judge Kirkpatrick thereupon held that simply possible one statute it is subject under Rule 10b-5 suit would be to Congress, having prescribed in elaborate of the express restrictions remedies that which procedural requirements detail applied. F.Supp. at 124-25. Thus the enforce civil fulfilled in order to must be plaintiffs could not evade the restrictions of attaching carefully to a defined liability express by pleading remedies Rule 10b- violation, casually would have type of 5.51 all in a later section. Nor nullified them reasoning Judge Kirkpatrick in from can an intention to do so be deduced Rosenberg applied has been by two recent 29 of the general provisions Sec. Supreme opinions, Chip Pip- Court Blue 78bb, is, 1934,15 Act of U.S.C.A. which Chip, er. In Blue the Court held that provided by this rights “The and remedies 10b-5, acquire standing under Rule private chapter shall in addition to and all plaintiffs purchasers must be either or sell- exist rights other and remedies securities, ers of the so-called Birnbaum ” equity .. .. As a matter of at law or in holding rule.52 This relied part on the chapter” provide any fact “this does not principle that would indeed be anoma- “[i]t 10(b). the violation of remedies for Sec. impute Congress lous to an intention to general law Those remedies arise expand plaintiff class for a judicially torts, liability to implied which attaches civil cause of beyond action the bounds comparable express the violation of a criminal statute. delineated causes Co., of action.” 421 at point Gypsum in Kardon v. National S.Ct. at 1925. D.C., Act F.Supp. was not that the remedy, provided itself a civil but Piper, the Supreme Court was con- nothing there was in it to indicate that fronted with a claim that the Birnbaum in- Congress intended to withhold from rule applies plaintiffs pursuing private
jured parties
right
recover
dam-
Court,
remedies under Rule 10b-6.53 The
ages
normally
violations of
attends
however, decided the standing issue on a
“The
Undoubtedly
a criminal statute.
ground,
narrower
holding that a frustrated
rights
provided by
and remedies
tender offeror has no Rule 10b-6 cause of
chapter” referred to in Sec. 29 were in-
against
action
the successful offeror based
rights
tended to be the
and remedies
solely
gain
on a failure to
control. 430 U.S.
did,
which the Act of 1934
Sec.
Alternatively,
78r,
78i, 78p
U.S.C.A.
argued
private
§§
SEC as amicus curiae
that a
expressly provide for violations of those
plaintiff
relying on Rule 10b-6 can avail
9(e)’s
interpretation
standing
sections. No other
can
itself of section
requirement
case,
early
Mon-
51. To like effect
is another
to such cases as are not within the
tague
America,
Corp.
v. Electronic
former.
F.Supp.
(S.D.N.Y.1948),
(citations omitted);
Id.
see In re Bache &
where
10(b)
Fed.Sec.L.Rptr.
court concluded that “Section
...
[1972-73 Transfer Binder]
clearly
sup-
93,571
(CCH)
(§
remedy
Rule X-10B-5 were
not intended to
9 exclusive
for activ
¶
plant
covers,
coverage)
(N.Y.
Section 11 of the 1933 Act.”
In so hold-
ities it
no Rule 10b-5
ing, the court observed:
Sup.Ct.1972).
statutory
The settled rule of
construction is
52. The rule is named after the case in which it
that,
special statutory provi-
there is a
where
Newport
Corp.,
originated,
Birnbaum v.
Steel
affording
remedy
particular specif-
sion
denied,
(2d
Cir.),
cert.
1169
provided precisely the
(the
“any security”)
remed[y]
or sale of
it con-
purchase
grounded
part
appropriate.”
sidered
Middlesex County
since Rule 10b-6 is
true,
Sewerage Authority v. National
Supreme
9.
If that
is
Sea Clam-
section
Association,
1,
reasoned,
(1981).
mers
plaintiff
Court
must also
response
the correct
attempts
Thus
such
9(e) standing
the other section
re-
meet
pioneered
as this to evade section 9 is that
quirements.54
plaintiff
Since
failed to
by Rosenberg and endorsed in Blue
9(e)’s
Chip
price” criteri-
meet section
“affected
Piper:
and
if the action
styled
as one
on,
standing.
there was no section 9
A
10b-5,
under Rule
yet addresses section 9
party may
selectively pick
choose
and
activities, section 9’s limitations
ap-
should
among
requirements,
depending
on
ply.55 Rule 10b-5 has been extended well
they
whether
aid his case. See 430 U.S. at
beyond its gap-filling purpose as originally
45-46,
This is such a case. Section 9 encom-
Because we have found that permitting a
passed
scheme.
granted
this
Yet relief was
Rule
remedy
10b-5
impermissi-
here would
10b-5, defying
under Rule
the intent of bly nullify the section 9 remedy and is
Congress
legislative
as revealed in the
his-
“unnecessary to ensure the fulfillment of
tory
the Acts.
history,
From that
“we Congress’ purposes”
enacting
the 1934
compelled
Act,
are
Congress
Industries,
to conclude that
477,97
Santa Fe
atU.S.
urged
position
may
54.
SEC
on the Court.
since the SEC
administer
Curiae, supra
See Brief of the
SEC Amicus
securities laws
in conformance with con-
intent,
Aaron,
gressional
note
at 191-94.
see
56. Because we Chemetron’s condition it is delivered at the time of the judge’s (1) of the trial denial of a persons directed making repre- contract. All the false judgment notwithstanding verdict and the ver- promises persons sentations or ing and all deriv- regarding Special Interrogatory (the dict No. 6 fraud, jointly the benefit of said shall be answer to which foreclosed 9§ relief because severally damages, and liable in actual and in jury found that the scheme had not “affect- thereto, persons wilfully making addition all price paid stock) ed” the for its Westec and representations promises such false or or (2) denial of a federal securities law claim aris- knowingly taking advantage of said fraud ing out of its 1969 sale of its Westec stock to exemplary damages shall be liable in to the trustee, bankruptcy IV, see infra section we person defrauded in such amount as shall be pretermit discussion of numerous other issues by jury, assessed not to exceed double appeal they raised on insofar as are directed at damages the amount of the actual suffered. the federal securities law claims. 49(a) provides: 58. Rule 57. Former Tex.Rev.Civ.Stat.Ann. art. 4004 Special (Vernon 1966)(reenacted may require Verdicts. The court as Tex.Bus. a & Comm. jury (Vernon n.4, 1968), special supra to return Code 27.01 a see verdict in the special finding upon declared: form of a written each issue of may fact. In that regard event the court Actionable fraud in this State with jury questions suscepti- submit to the to transactions in written real estate or in stock in corporations joint categorical companies or ble of may stock shall or other brief answer or representation consist of either a false of a submit spe- written forms of the several fact, past existing prom- or findings material or might false properly cial which be made ise to do some act in the future which is pleadings evidence; may under the or it made as a material inducement to another use submitting such other method of the is- party to enter into a contract' and but for requiring sues and findings the written there- promise party said would not have appropriate. on as it deems most The court entered into said contract. Whenever a give jury explanation shall to the such promise complied thus made has not been concerning instruction the matter thus sub- by party making with ble falsely it within a reasona- may necessary mitted as to enable the time, presumed it shall be that it was jury findings upon to make its each If issue. made, fraudulently and the bur- doing in so the court omits issue of fact party making den shall be on the it to show by pleadings by evidence, raised or good pre- that it was made in faith but party right by jury each waives his to a trial complying vented from therewith the act of the issues so omitted unless before the God, public enemy equita- some jury retires he demands its submission to the jury. As to an issue omitted without such persons guilty ble reason. All of such fraud person shall be liable to the defrauded for all or, finding; demand the court make a if suffered, damages damages actual the rule of so, it faiis to do it shall be deemed to have being the difference between the value of the finding judgment made a in accord with the property represented or as it would have special on the verdict. promise fulfilled, been worth had the been (emphasis added). property and the actual value of the in the apply We in light these criteria of several no merit in this claim. We see circuit, holdings preserves clarify meaning. a claim their party “[T]he being judge denied must submit all material issues by proposing either raised error evidence,” interrogatory by objecting pleadings Simien special interrogatory Kresge before special v. S. S. 566 F.2d proposed Huddleston, 640 F.2d 1978),60 although has retired. none must be sub- Lewis, Fredonia, and Hen John R. through special at 550. mitted twice redundant in- contrary. Either are not terrogatories, rietta Angelina Casualty Co. v. purpose of di Bluitt, serves the ultimate method attention to the
recting the trial court’s
requirement
The limits
the submission
is to assist the
preferred
method
issue.
recently
were
outlined:
interrogato
by proposing special
trial court
There is no doubt
judge
must
ries,
long
fatal so
failure to do so is not
but
*21
clearly and properly
jury
instruct
the
timely, comprehensible objection is
as a
regard
with
to the resolution
key
is-
jury.
the
id.
before submission to
See
made
given
sues in a
case.
there is
party
each
requirement
A
is that
de
final
[appellant’s]
no basis for
apparent as-
must
siring
preserve
the claim
error
sumption that because an issue
impor-
et
v. Rodri
object.
L’Urhaine
la Seine
See
case,
tant
to the outcome of a
the jury
1,
1959).
(5th
Our
268 F.2d
4
Cir.
guez,
must be instructed to supply
specific
a
that all
of the record indicates
examination
informing
answer
the court how they re-
preserved their claims of error
appellants
solved that
party
one issue. No
is enti-
timely objections.59
with
special
tled to a
verdict on each of the
turn now to the asserted errors.
We
multi-faceted, multitudinous issues essen-
tial
to the
a given
resolution of
case.
49(a)
special
allows
ver
Rule
Co.,
Miley Oppenheimer
318,
v.
&
637 F.2d
the trial court.
dicts at
the discretion of
(5th
334
Cir.
the
trial court also has discretion over
submitted, a
scope
of the issues
nature
holdings,
Guided
these
we turn
only for abuse. Loff
discretion reviewable
law
to the
of fraud in Texas. Each of the
540,
Roberts, 386 F.2d
land Brothers Co. v.
following elements must be established in
denied,
1967), cert.
546
permit
(1)
order to
recovery:
charged
the
778,
1040,
88
Appellants requires also review of this Our issue some special explanation special submit a of the instructions and ure of the trial court to purchase Special Interrogatory inducing of No. 1 asked: or sale such stock 63. by others ? you preponderance of the Do find from (emphasis added). September during period evidence that 25, 1966, August through James W. Special Interrogatory 64. 1 is not No. defective Williams, directly indirectly, alone or with or jury in what it does —ask the whether there others, participated plan in a or scheme to conspiracy. was a scheme or But as our dis- Equities by manipulate the stock of Western reveals, cussion of Texas law infra the exist- effecting of transactions in the stock n a series conspiracy ence of a civil alone does not create creating ap- Equities, of Western actual or liability under art. 4004: at least one of the trading raising price parent of active conspirators specifically must defraud Equities purpose stock for the of Western plaintiff. proof every trial the burden of interrogatories used court. element correctly that Cheme- jury was instructed plaintiff. action for is fraud on the Brooks conten- proving of tron had the burden Parr, 507 S.W.2d 819 (Tex.Civ.App. conspiracy since was also tions.65 writ). Thus, Special —Amarillo them- alleged, could avail the defendants No. 25 Interrogatory erroneously placed the defense withdrawal from of the selves on proof burden the defendant. jury was correct- conspiracy. such jury This court cannot assume that the defendants had ly instructed that proof Special realized that the burden of proof on this defense.66 As burden Interrogatory No. 25 was erroneous throughout moved back and forth burden ignored therefore it. The trial had court special interrogatories, phrases the 31 pattern established a clear written for the (abbreviated BURDEN” “PLAINTIFF’S here) jury “DE- to follow when deliberating, “PB” for our discussion and it is (or DEFENDANT’S) BUR- FENDANTS’ they reasonable to believe that so de did (“DB”) jury were to tell DEN” used spite what their verbal instructions had there in the change when burden been. See Cann v. Ford Motor Thus, at the proof. top PB found denied, (2d 1981), cert. page interrogatories. precedes DB first -, 2036, 72 L.Ed.2d Interrogatory 9 on Special No. Austin’s (1982). Thus, the jury cannot instructions withdrawal, but PB itself before reasserts cure this error. reap- Special Interrogatory No. DB However, it is clear from record evi- pears Special Interrogatory before No. 15 manipulative dence of a massive scheme gives way BFI’s but to PB on withdrawal that the would special have answered a Special 16. DB’s next Interrogatory on No. interrogatory stating the correct burden of appearance Special final Inter- before proof way. the same rogatory No. 25 the one attacked here.67 Given the scale of this Special appears again Interroga- scheme, PB before corporate no reasonable investor No. tory would have behaved as Chemetron if it did scheme, knew about the and no reasonable Erie, is a proof Under burden juror could have reached a different conclu- governed by substantive state in a issue law Therefore, improper placement sion. diversity Wright case such as this. See 9 C. proof the burden Miller, here is not reversible & A. Federal Practice & Procedure Sheppard 2405 and 2409 Under Texas law error. See §§ Federal Credit Union Jury 65. Burden of Proof Instruction No. 11. proving Plaintiff has the burden of its con- 66. The court’s preponderance instruction this issue de- tentions of the evidence *24 evidence, clared: taking into account the both direct circumstantial, testimony and the wit- Withdraw you nesses that have heard. In connection with term the “withdraw” or you important It is now that understand conspir- or “withdrew” “withdrawal” from a preponderance what means. of the evidence acy case, you in as used this are instructed prove something It means to that is more person conspiracy that a withdraws from a if likely greater weight so not so. the than It is engages he in affirmative acts inconsistent upon any ques- of the If believable evidence. object conspiracy, with the of the is to you, you tion submitted to should find that say purpose acts which disavow or defeat the balanced, equally is the evidence then the conspiracy, by communicating of the plaintiff proof its has not sustained burden of reasonably in abandonment a manner calcu- preponderance of the evidence on that co-conspirators. lated to reach Because question. you does It not mean that have to defense, prov- is a withdrawal burden of witnesses, believe the side with the most but ing conspiracy" “withdrawal from a on the is you weigh it means that should all the testi- defendants. which, mony compared when considered and Jury Instruction No. 27. it, testimony opposed with the has the produces your convincing most force and in special interrogatory 67. There is no on Bintliff’s sought minds a that what is to be belief withdrawal. proved likely than true. is more true not
1175 Palmer, 1369, (5th 26, v. In Special Interrogatory Cir. No. jury 1969).68 applied article 4004’s willfulness or knowl- edge requirement to each defendant:
Appellants’ final complaint about special interrogatories is the failure to or you If have found that scheme required submit one that to appor manipulate stock Western plan to exemplary damages tion among them.69 Equities existed In- Special in answer there is no jurisprudence Since Texas 1, you No. if found terrogatory or have squarely on we point, are Erie-bound to in conspiracy that a existed answer guess” make an “educated as to how the 7, Special Interrogatory you No. and if Supreme Texas Court would rule. See have the existence of that found Chemical, U.S.A., Nobs Koppers Co., Inc. v. was plan, conspiracy scheme or a material 212, F.2d 1980). Before fact was not disclosed Cheme- making this guess,” “educated we must ex Special Interrogatories tron answer to in plain this issue further so that it can be 22, you a preponder- do find from properly analyzed. ance of the evidence that of the damages purposes exemplary are willfully defendants concealed the exist- act by of an intentional punishment knowingly ence or of such material fact deterrence of future mis defendant and the advantage activity? took of said McEwen, Pace v. 574 S.W.2d behavior. See defendants, naming Answer said if 1978, writ (Tex.Civ.App. Paso — El any. Miller, e.); n. r. v. 443 S.W.2d ref’d Collins (Tex.Civ.App. writ — Austin Therefore, e.). requires n. r. art. 4004 ref’d knowledge part of the willfulness or on damages are exemplary before
defendants
permitted.70 holding exemplary damages relies on the infra and note here We stress that 68. phrase be used be should that while as to the in this case. evidence record misleading implications, comprising possible the transactions extent cause clear, per sole reversible error is the issue scheme not constitute its use does Interrogatory Special opinions No. We no se, appellate intuit often have Texas since sufficiency damages. of the evidence on exemplary here on the view persons to” “entitled held liability scheme. Pena, See, S.W.2d e.g., Wise v. cases, majority of the evidence In the vast writ (Tex.Civ.App. Corpus Christi — here, it clear as and an will not as Whirley, dism’d); 538 S.W.2d Irwin proof placement of the will burden incorrect 1976, writ); Briggs v. (Tex.Civ.App. — Waco General mandate reversal. Connecticut (Tex.Civ.App. Rodriguez, 236 S.W.2d Breslin, Life Ins. Co. v. n.r.e.). 1951, writ ref’d —San Antonio 70. Art. 4004 declares: Interrogatory exemplary Special 31 on No. rep- making persons wilfully such false [A]ll together: damages lumped all the defendants knowingly taking promises resentations money, any, paid if if sum of now “What advantage liable in fraud shall be said cash, you preponderance do find from of the person damages exemplary defrauded plaintiff evidence that entitled by the be assessed such amount as shall damages?” Appellants complain exemplary jury, double the amount not to exceed phrase the use of the “entitled to” because damages suffered. actual imply purpose may improperly of ex added). (emphasis reenacted Tex.Bus. & As *25 emplary damages compensation is for the (Vernon 1968), 27.01(c) these re- Comm.Code punishment plaintiff of for the defend instead quirements are maintained: Pontiac, Ragsdale, Courtesy See Inc. v. ants. willfully repre- person a who makes false A 118, (Tex.Civ.App. Tyler 122 S.W.2d — person promise, false and a who sentation or 1975, n.r.e.). the of writ ref’d use representa- knowingly from a false benefits itself, phrase, of is not reversible this in and promise, commit the fraud de- tion or false “whether, long so as when read as a error (a) and in of this section scribed Subsection conjunction general the and in with whole charge person exem- to the defrauded for are liable plary damages interrogatorjy] adequately the exceed twice the not to jury.” present[s] the contested to the issue[] damages. of actual amount Dreiling, 774. the of 511 F.2d at We review use added). (emphasis phrase conjunction the this with instructions jury impose joint and added). response, liability the several for exem- (emphasis BFI, Austin, and each have plary damages.72 held Bintliff knowingly or taken ad- willfully concealed ample support There is in the case law claims vantage of the scheme. Chemetron interpretation for this of the statute. Tex- re- 4004’s finding this fulfills article long as courts have followed several criteria and sever- quirement justifies joint and exemplary damage for evaluation of damages imposed in liability punitive al for by awards made a in its discretion. Special No. Interrogatory first, exemplary The damages rea- hold disagree We for several reasons and sonably proportional damages, to actual see Special answers to In- the affirmative Neeley, Southwestern Investment Co. v. were terrogatory No. 26 but threshold 705, (Tex.1970), governed pri- is S.W.2d dam- exemplary further consideration of marily by statute in cases of fraud —art. First, ages is the lan- by jury. there permits exemplary damages to be no guage of the statute itself. Article damages more than double the actual suf- expressly requires joint liability several and remaining fered. The criteria are: damages express actual but has no such wrong, the nature the character of requirement exemplary damages: involved, the conduct the degree culpa- persons making representa- All the false bility wrongdoer, the situation and or promises persons deriving tions and all concerned, parties sensibilities and fraud, jointly the benefit shall be of said the extent which such conduct offends damages, severally liable in actual public justice sense of propriety. thereto, persons and in all addition wilful- Morris, (Tex. v. Schutz 201 S.W.2d ly making false or representations such Civ.App. writ). Texas — Austin promises taking knowingly the advan- imposes law additional criteria for evaluat tage of said fraud shall be liable in exem- corporate ing liability for exemplary dam damages plary person defrauded in Services, ages. See Ledisco Financial Inc. amount shall by such be assessed Viracola, (Tex.Civ. 533 S.W.2d jury, not to exceed double amount App. accord, no writ); — Texarkana damages the actual suffered. Wooley v. Southwestern Portland Cement (emphasis added).71 parallel language These exemplary damage provi- the actual and criteria demand individual consideration of striking sions is and renders differences conduct, situation, each defendant’s sensi significant, particularly since the statute is bilities, and culpability jury, consid penal strictly in nature and must be con- eration that failing appor denied Wall, strued, Westcliff Co. v. 153 Tex. exemplary tion damages. S.W.2d elements In a case like this with conspira- several knowledge express- willfulness and were (and many tors ly conspirators other not damage added to the be- exemplary provi- sion, court) fore who joint liability while the have varying several had requirement degrees Ex- of intent or conspicuously knowledge, absent. who partic- ipated amination of art. 4004 us to leads conclude the scheme ways in different over Legislature long period time, the Texas chose performed and who promise, 71. Tex.Bus. & Comm.Code 27.01 retains sentation or false commit the fraud difference: (a) described in Subsection of this section 0s) person represen- person A who makes a false and are liable to the defrauded for person promise, exemplary tation or damages false who not to exceed twice the representation benefits from that false damages. amount of actual promise, false commit the fraud described (emphasis added). (a) jointly Subsection section and are severally person liable to the defrauded Legisla- 72. This conclusion is reinforced damages... for actual . ture’s reenactment of art. 4004 in § 27.01 (c) person willfully A who false makes a parallel where the same structure was retained. representation promise, person or false and a supra nn. knowingly repre- who benefits from a false *26 (an investor, (citations capacities corpo- a S.W.2d at 147 variety omitted); a see ration, chairman), purposes the Refrigerated Express, Norton Inc. v. Ritter by ren- exemplary damages are ill served Co., (Tex.Civ. Brothers 552 S.W.2d severally dering jointly all defendants App. e.); writ ref’d n. r. — Texarkana liability for exem- Joint and several liable. Kellar, (Tex. Walker v. 226 S.W. damages in these circumstances en- plary Civ.App. Antonio ref’d). writ — San coconspirators to shift the burden of ables separate consideration; Schutz sustained damages culpable their less con- those onto recognized Norton may that it be necessary their deterrent federates. This undermines in some cases but held it unnecessary under purposes. Cf. Northwestern punitive case; the “unusual” facts of that and Walk Casualty McNulty, v. National Co. required late-joining er it for one conspira 1962)(insurance puni- for tor against whom the evidence was weaker. damages punishment blunts and deter- tive Chemetron cites Crisp v. Southwest shifting purposes by burden from rent Leasing Bancshares 586 S.W.2d Each wrongdoer company). to insurance (Tex.Civ.App. writ — Amarillo vigorously contested his own lia- defendant e.), ref’d n. r. for the proposition that appeal, on and the evi- bility at trial and a party to fraudulent transaction is “[e]ach varies con- liability as to the of each dence responsible the for acts of others done in siderably. jury per- should have been furtherance of the scheme.” exemplary damages mitted to assess Crisp inapposite. is It only joint involved with against each defendant in accordance liability and several for actual damages, that defendant. its evaluation of exemplary damages since apparently were by the line of Our conclusionis buttressed not awarded at trial. See id. at 612-13. upheld sepa- cases that have either Texas Crisp joint does not create and several lia exemplary damages rate consideration of bility punitive damages. each defendant in a multi-defendant Statutory interpretation, law, Texas case supported principle separate case or and our evaluation of the facts in this case Schütz, In the court said: consideration. separate indicate that consideration of the wrongdoers together Where two or more exemplary amount of damages for each de- part wrong, entirely take required.73 fendant is possible may prompted by that one Jury b. Instructions. malice, while the other is not. Or it though guilty, culpa- they be that both be defendants claim that prejudiced were bility greater of one is much than that of because the jury was not other, instructed, warranting greater pen- correctly thus in Jury Instruction No. 32,74 alty. purposes on the of exemplary damages conspiracy parent exemplary In a recent civil case cumstances. To be entitled to seeking damages damages, plaintiff prove for emotional distress due to must that such child, willfully the abduction of a federal district court defendant or defendants failed to applying apportioned exemplary Texas law disclose a material fact or that such defend- damages among conspirators. Although knowingly advantage ant or defendants took apportionment challenged appeal, was not of the failure to disclose a material fact. disposition interpreta- is in accord with our jury permitted such instances to award Dawkins, Fenslage tion of Texas law. See exemplary damages not to exceed twice the 1107, 1109, damages. amount of actual you, jury, prepon- If should find from a Jury Instruction No. said full: derance of the evidence in this case that Exemplary Damages plaintiff Under Texas Law is entitled to a verdict for actual or you plaintiff compensatory you damages, If find that is entitled to and should fur- damages having proved actual as a result of ther find that the act or omission of the against defendant or defendants all of defendants or defendant which caused the required injury damage plaintiff elements of the Texas actionable actual statute, permits willfully fraud Texas law done or with an intention to know- plaintiff exemplary such, damages ingly you, jury, may award the benefit from discretion, damages your addition to actual under certain cir- the exercise of add to the *27 1178 they compensatory purposes exemplary dam- of but damages
or how differ from is not review on issue reversible error and of ages. supra The standard of this in itself. See recently sought note 69. Finally, puni- was summarized: and, damages complaint tive its in we note charge was test is not whether the “[T]he intimating any without view the on suffi- but whether every particular faultless evidence, ciency of present this did evidence way and jury any the was misled in support of its claim. understanding it of the is- whether had is- duty sues to determine those Against backdrop, the defendants jurisprudence Our mandates that sues.” to point jury Texas and federal standard whole, charge we the as a view- consider exemplary damages proof instructions on as ing light allegations the of the it in of the of the trial court’s error.75 it is evidence, argu- and the complaint, the scarcely per error se to decline follow ments of counsel. pattern or form book instructions. Nor Corp., 384, Borg-Warner compel v. 626 F.2d Erie the pattern Smith does use of state (5th instructions, 1980) (citations omitted), quot 386 Cir. since the of giving manner v. ing Paper Borel Fibreboard Products is jury instructions controlled federal Corp., 1076, (5th 1973), law, Co., 715, 493 F.2d 1100 Cir. Foster v. Motor Ford 621 F.2d denied, 127, (5th 1980), cert. 419 42 717 pattern charge Cir. and a (1974). procedure one instructing L.Ed.2d 107 but While standards evaluating jury- procedures jury may long instructions in a diversi be used so —other they federal, correctly as ty applicable case are describe the the substance of those Stockwell, state law. See Platis v. instructions must law. F.2d adhere state (7th 1980); Laboratories, Cir. v. Reyes Wyeth Wright Albu- v. 498 F.2d Plaza, querque denied, Stop Auto-Truck (5th Cir.), cert. 1979); Stafford South- (1974). L.Ed.2d ern Farm Casualty Bureau Insurance instruction, at the Looking contested we 1972) (per cu- (1) the following: jury see the was never riam). Pattern merely instructions are exemplary of the purposes informed of some evidence instruction is advisa- (deterrence damages punishment of ex- ble. (2) traordinary misconduct); jury was correctly Although cautioned several times that an it close question, is a we hold discretionary; award was was that these language instructions and the properly Special told what criteria article re- Interrogatory No. 31 not are errone- (intent quired knowledge) or for exemplary they ous under did not mislead the Smith — In damages. arguments or jury Cheme- create misunderstanding the is- tron’s we counsel find instances where sues. The special interrogatory and the jury counsel informed nature instructions clear made that an Next, punitive damages. we have the “en- of exemplary award damages discre- language titled Special Interrogatory tionary. to” The special interrogatory and in- may misleading No. which erroneously structions did not the jury tell you Texas, damages punishment.” award actual such amount as 1 State Bar of Texas agree proper exemplary. Jury Charges shall to be as Pattern 11.10 event, any may amount exceed twice judges jury: Federal are advised to tell damages. the amount of actual permits jury, law under certain [T]he exemplary Whether to make award of circumstances, injured per- ... award the damages damages in addition to actual punitive exemplary damages, son in or- exclusively province matter within the punish wrongdoer der to for some extra- jury. ordinary misconduct to serve an ex- ample warning engage pattern others not suggest 75. The Texas instructions following exemplary damages: such conduct. instruction on “ Blackmar, Jury ‘Exemplary damages’ 3 Devitt & Federal Practice & means an amount (3d you your ed. as an Instructions 85.11 discretion award example penalty by way to others and aas *28 exemplary damages that he not involved in the imply even that serts since was transaction, 74 with mandatory. Compare nn. his were Chemetron conduct does Caldwell, Publishing elements, Co. v. particularly not fulfill those Crowell-Collier (5th & Cir. n.9 requirement having fraudulently in- course would be for preferable Chemetron, public large, While not the duced purposes judge trial to instruct on the purchase supra to Westec shares. See ease exemplary damages, this Cheme- 1173; Division, United States p. Oilwell consistently sought exemplary dam- tron Steel, at 491. S.W.2d through evi- ages presented its case conspiracy the Texas common law of civil argument way in a that made dence provide legal does mechanism that could purposes exemplary damages clear to render Bintliff liable to for Chemetron jury. presentation Given the of Cheme- purchase of Westec shares. We de- case, jury tron’s we hold that express scribe this mechanism but opin- no to” by misled or confused “entitled lan- ion on whether the evidence in this case guage Special Interrogatory No. 31 or liable, renders Bintliff leaving that jury instructions. finder of fact if there is a new trial. the, we holding, While so reiterate recognizes Texas the ancient judge is close and that a trial must be issue common-law doctrine conspiracy that civil extremely keep exemplary careful to dam- “ consists of ‘a combination two or more ages proper sphere prevent within their to persons accomplish an purpose unlawful assessing from them for invalid or to accomplish a lawful purpose by unlaw Lee speculative reasons. See v. Southern ” Dawkins, ful means.’ Fenslage v. Corp., Home Sites F.2d 1980), quoting 1970). In future trials and particularly Schlumberger Well Surveying Corp. v. Nor retried, if this cause is the “entitled to” tex Corp., Oil & Gas 435 S.W.2d addition, phrase should not be used. we (Tex.1968). conspiracy, Unlike criminal civ suggest an purposes instruction on the il conspiracy itself does not create liabili exemplary damages will often be found ty conspirators pursue must inde helpful jury, enabling it better to —the pendently purpose unlawful distinguish proper their or use an inde function from that pendently unlawful means before compensatory they awards. can See, e.g., be held liable. Markman v. Lach 2. Article 4004 and Texas Common Law man, (Tex.Civ.App.— S.W.2d Conspiracy. of Civil 1980, writ). Texarkana challenge liability defendants their case, In this alleged and of- conspirators violating article 4004. proof fered the continuing conspiracy we already Since have found reversible er- joined Bintliff had both an unlawful pur- judgment, ror in the Texas it is necessary to pose manipulation was pur- —market —and only discuss one of these challenges, that of means, sued via unlawful including induc- Bintliff. Bintliff claims that even if he ing public buy or sell Westec stock in joined the alleged conspiracy, joined he violation of article 4004. None of the con- well after purchase Chemetron’s of Westec spirators specific buyers had sellers or stock, and therefore he cannot as a matter mind when the conspiracy began or as it of law be held liable for fraud in con- progressed. occurred, As each transaction purchase nection with that under article however, conspirators could meet 4004. We address this claim to resolve it violating criteria for article 4004 de- clarify law Texas should this case be frauding particular buyer or seller. retried on the remand that we order. This case only deals with one fraudulent act necessary liability The elements under conspiracy in this broad and with one defrauded, already public article 4004 have been outlined. member of the Cheme- correctly as- Bintliff tron. supra p. is where Bintliff misunder Bintliff satisfies This the conditions im stands the interaction of article 4004 and posed by joined section 19. He the conspir He conspiracy Texas civil law. claims that acy inception after its before but its con he cannot liable to Chemetron unless he “A summation. conspiracy, especially one all of article 4004’s crite personally fulfills which contemplates continuity purpose nonconspiracy true in a case. ria. That is and a performance acts, continued accept argu were his But if court presumed to continue until there has been case, conspiracy we would ment in this com an affirmative showing that it has termi *29 civil law in pletely conspiracy abolish Texas. ” nated . . . . United v. Etheridge, States purpose conspiracy of civil law is to 951, (6th 424 964 Cir. Consum conspirators knowingly joint hold who mation of the market manipulation scheme ly pursue illegal illegal or use purpose had not occurred before Bintliff’s member though conspira means even liable all ship conspiracy ample in the because record tors know perform do not even of all the evidence demonstrates the purpose acts the conspiracy. done in furtherance of the conspiracy, manipulation, market See, State, 350, e.g., v. 528 Bourland S.W.2d pursued by still 1975, conspirators well after (Tex.Civ.App. 354 writ ref’d — Austin e.); Knox, n. McCarthy, continuing r. H. Inc. v. his This Glenn entrance. conspiracy 832, (Tex.Civ.App 186 S.W.2d 838 many illegal acts, involved some occurring . —Galves 1945, m.). ton ref’d w. writ o. before and some after Bintliff’s entrance. The defrauding of Chemetron was but one principle late-join This also covers illegal act in done furtherance the con See, ing conspirators e.g., such as Bintliff. spiracy, Co., 313, v. not its State Standard Oil 130 Tex. 107 consummation. 550, (1937). S.W.2d 560 Standard Oil cited Civil conspiracy do principles require Corpus this authority proposi Juris for that Bintliff have intended to defraud a Turning Secondum, tion. to Corpus Juris specific party, only that he knowingly have we find rule of having this law: “Persons joined conspiracy intending to defraud knowledge a conspiracy who enter into it general its targets. See, e.g., Schlumber after inception and before its consumma ger, 855-57; 435 at S.W.2d Switzer v. Jo
tion are
for all
previously
liable
acts
seph,
845,
442
(Tex.Civ.App.—
S.W.2d
849
done
subsequently
pursuance
thereof.”
1969, writ).
Austin
principles
These
do
Conspiracy
19,
(1967),
15A
C.J.S.
659
§
not render Bintliff
regard
liable without
citing,
Accord,
e.g.,
Oil.
12
Standard
Tex.
his
conspiracy
intent —Texas
law
(1981);
Jur.3d
in fact
Conspiracy
Civil
4
16 Am.
§
Jur.2d, Conspiracy
(1979); 1 Eddy
56
on substitutes two intent requirements
for the
(1901).
376
Combinations
This
immemo
article 4004 intent
requirement. Cheme
rial
principle
common-law
widely
has been
tron
prove
(1)-
must
one
his cocon
see,
accepted,
e.g.,
Building
Industrial
Ma
spirators violated article
4004 and that
terials,
Corp.,
Inc. v. Interchemical
437 F.2d
knowingly joined
Bintliff
the conspiracy in
1336,
(9th
1970);
Cir.
Ratner v. Scien
tending to
investing
defraud the
public.
325,
tific
Corp.,
Resources
53 F.R.D.
329 We
repeat
need not
the elements of the
(S.D.Fla.1971), appeal
dism’d
want of
former
requirement, and the Texas Su
juris.,
1972)
(per
F.2d 616
preme
has
Court
laid out the criteria for the
Industries,
curiam); Blackstone
Inc. v. An
latter:
dre,
(1974),
Ga.
S.E.2d
“A ‘conspiracy to
on the part
defraud’
simply
restatement
another
well-
two
persons
or more
means a common
settled principle
conspiracy
law “that one
purpose, supported by a concerted action
joins
who knowingly
conspiracy
even at a
defraud,
that each has the intent
to do
later
conspiracy
date takes the
as he finds
it,
it,”
them,
and that
each
common to
Myzel
Fields,
738 n.12
1967),
denied,
and that each has the understanding
cert.
late. Article 4004 dam- the defendant’s unlawful activities were against persons ages “knowingly who tak[e] likely of a sort to have a substantial Thus, . advantage” . . fraud. if Cheme- impact investing public, on the knowingly tron prove can that Bintliff took primary legal responsibility for and abili- defrauding Chemetron, advantage of the ty impact to control that is with defend- exemplary can be held dam- he liable for ant. ages. Id. opinion petition In the Woolf Appeal. C. Other Issues on rehearing, the court equal- likened this simultaneous criterion to the “vital” cooper- We allegations address three other or- *31 coconspirators ation of required to accom- guide to the if is a new der trial court there plish conspiratorial scheme. 521 F.2d trial on remand. In Pari Delicto Instruction. standards, Given these the evidence Appellants claim that it was error persuade that, does not us even if Cheme deny pari to them an in delicto instruction party tron was a conspiracy, to the it was a to grant as Chemetron. The of this defense party. “vital” The trial court well could court, is within the discretion of the district have “primary concluded that the legal re Baker, 1074, v. Wolfson F.2d 1082-83 sponsibility” conspiracy lay for the with the denied, 1980), 966, (5th Cir. cert. Therefore, defendants. he did not abuse his 1483, (1981), 101 S.Ct. 67 L.Ed.2d and discretion in denying this defense. review this discretion is limited its limit, abuse. Prior cases this discretion and 2. Use of the Zero-Value Theory in Mea- hold that defense is available to suring Damages. defendants under circumstances out Special 30, Interrogatory Nos. lined in v. D. & Woolf S. Cohn 515 F.2d addressing law, federal and Texas respec- (5th Cir.), petition 601-05 for on tively, the jury found had there been
rehearing,
(per
F.2d
226-28
disclosure of
manipulative
scheme prior
curiam), vacated and remanded
other
on
receipt
Chemetron’s
of Westec stock on
grounds, 426 U.S.
14, 1966,
January
“the real and actual val-
L.Ed.2d 1181
ue” of that stock would have been zero.
important
One
circumstance is the
appeal
Defendants
use
the zero-value
investing pub-
effect of
on
dispute
theory
presentation
in Chemetron’s
possible
Lines, Inc.,
proc-
1964)
77. This result also avoids
an
due
problems
imposing exemplary
(criminal penalties
damages,
require
conduct);
ess
intentional
nature,
Prosser,
punitive
1971) (puni-
which
on
2§
are
Bintliff with-
Torts
ed.
regard
damages
concept).
out
to his intent
the act
commit
for
tive
a criminal
law
punished.
which he is
See Marshall v. Isthmi-
case,
the answers to
scheme been
theory upon
Appellants
disclosed.
argue
30 are
Interrogatory Nos.
that even if the
Special
Westec stock had no mar-
points on the
They
appeal
value,
also
other
based.
ket
it had an intrinsic value repre-
damages.
assets,
measure
senting the
tangible and intangible,
Westec,
article 4004 includes
exclusively
almost
The briefs are directed
this intrinsic value in the term “actual val-
validity
theory
of the zero-value
ue.”
points under federal law. We need
related
questions
federal law
since
not decide
The resolution
requires
of this debate
an
has no feder-
we have held that Chemetron
inquiry
initial
damages
into the nature of
action for this fraud. Therefore
al cause of
under article 4004. The seminal case on
analysis
theory
of this
and the other
our
damages
Texas,
common law
for fraud in
performed according
points
appeal
Hesse,
George
v.
100 Tex.
All
of such fraud shall be
paid
amount
property.
This
person
liable to the
defrauded for all ac-
action,
second cause of
sounding in tort and
suffered,
damages
tual
the rule of dam-
using
out-of-pocket
measure
damages,
ages being the difference between the
expanded by
article 4004 into a benefit-
property
represented
value of the
or as of-the-bargain measure of damages in stock
prom-
it would have been worth had the
and real estate fraud cases. See El Paso
fulfilled,
ise been
and the actual value of
Ravel,
Development Co. v.
339 S.W.2d
property
in the
it is deliv-
condition
363 (Tex.Civ.App.
Paso
writ ref’d
— El
ered at the time of the contract.
e.),
n. r.
approval
cited with
Stanfield
added).
(emphasis
O’Boyle,
(Tex.1971).
at 272
S.W.2d
*32
It
is clear from article 4004 that
In assessing damages in stock fraud cases
occurring
January
events
after
under either article 4004 or the common
may
assessing
not be considered in
actual
law,
employed
Texas courts have
the stan
damages. Thus,
experts
damages
the
on
by
dard of value used
damaged
the
party.
consider,
jury may
instance,
the
Thus, if
damaged party
a
used the market
date,
manipulative transactions after
that
value in striking
bargain,
its
that became
SEC,
the revelation of the scheme to the
See, e.g.,
the standard.
Butler,
Chandler v.
stock,
trading
the cessation of
in Westec
or 284
(Tex.Civ.App.
S.W.2d 388
— Texarkana
bankruptcy
the
of Westec. Other consider-
1955, writ);
no
cf.
Wizowaty,
Patterson v.
ations,
assumption
prepur-
such as an
that
erroneous. The
established a trad-
Fraud Conviction.
ing value different
from and below the
argue
Defendants
the proba
market value of
stock on the
Westec
date of
tive
admitting
value of
Williams’ securities
the transaction.
is no evidence
There
fraud
into
conviction
evidence was out
contemplated
higher
market
weighed by
prejudicial
its
effect. The con
bargain.
as a benefit
price
Cheme-
viction
short,
came into evidence in a
two-
Westec,
tron
making
an investment
question
colloquy at
conclusion of Wil
why
company’s
which is
it used the
assets in
lengthy, complicated
liams’
testimony on
establishing
price
transaction.
the scheme and was also mentioned in clos
expected
Unless Chemetron
to benefit from
ing argument.
price,
speculative
the market
it is
and con-
In assessing the relevance
jectural
damages
prejudice
based on it.
award
of this
evidence in civil case under Fed.R.
anticipate
Even if Chemetron did
403,78
judge
Evid.
the trial
has broad discre-
price
bargain,
market
as a benefit of the
tion,
reviewable
for abuse.
Rozier
the damages
speculative
here would still be
Ford Motor
theory posits
conjectural.
The zero-value
The threshold issue here
after the
during
panic
disclosure
relevance of the conviction.
If it is irrele-
aof
scheme the stock will have no value.
vant,
question
we need not reach the
panic
unpredictable
is an
period
Such
probative
substantially
whether its
value is
duration,
phenomenon
effect on stock
—its
*33
outweighed
prejudicial
by its
We
effect.
prices,
highly speculative
and so forth are
believe that the conviction is certainly rele-
conjectural.
Able,
Beecher v.
See
vant. Two crucial elements of Chemetron’s
F.Supp.
(S.D.N.Y.1977). Ag-
402-06
(1)
case
the plan
were
to manipulate
gravating these
characteristics is
fact
illegal
the market was
that Wil-
selling
Chemetron would be
an un-
illegal.
liams’ conduct was
usually large
Williams’ con-
percent
amount
stock —ten
viction is
Selecting
of all Westec
relevant
both elements.
stock.
a measure of
While
damages
length
based
explore
on such
unreliable and
did
with the
volatile
awarding
plaintiff
market risks
the scope
manipulation,
of the
pur-
its
relevant,
“Although
delay,
evidence
be ex-
or
of undue
considerations
waste
time,
substantially
presentation
probative
cluded if its
value is
needless
cumulative
outweighed by
danger
prejudice,
of unfair
evidence.”
issues,
misleading
jury,
confusion of the
results,
limiting
the defend
instruction would have effectively
and its ultimate
poses,
appellants’
alleviated the
concerns in
the existence and the
hotly
ants
contested
case. We also note that
illegality
began,
and the
defendants
illegality of the scheme
abandoned,
but
value of
cross-examination Wil-
probative
conduct. The
Williams’
conviction,
liams on the issue of his
another
rose when these issues were
his conviction
they
method
could have used to minimize
vigorously contested. See United States
any prejudicial effect.
Beechum,
914-15
denied,
1978) (en bane), cert.
The Notes also mention consideration of
(1979).
B. Collateral because it which, ordered a new trial for argued proposed pretrial in its judge counsel, the trial said a letter to is, collaterally estopped “[tjhere order that Bintliff be my opinion, no basis.” The relitigating from judge proposed certain factual issues ad trial a different order and judicated adversely him in Bank plaintiff’s Cosmos threatened to act on pending mo- Bintliff, (S.D. judgment Civ. Action No. 67-H-590 tion for proposed unless his order Tex.1975). The trial promptly agreed court denied Cheme was parties to.82 The ac- order, proposal, appeals. tron’s and it cepted signed and the judge your 81. This is the text of the letter: I have studied Joint Motion for dis- last, you missal of the above matter. While I favor Since I talked to Mr. Bintliff has your agreement willing offered to settle and am settle this matter for a sum which sign agreed accept. provides Cosmos has order dismissal that settle- is, however, contingent Judge’s my previous findings ment on the withdrawal of clusions, and con- entering protect proposed a form of granting order which will form of order against Judge’s is, unacceptable. Mr. Bintliff findings the use my a new trial is There litigation. opinion, and conclusions in other no basis for newa trial. Accordingly, attorney for I [the enclosing Cosmos] acceptable I am an order that is filing promptly joint will be motion for you to me. If want me to enter this order as designed prob- relief to meet Mr. Bintliff’s part your agreed you settlement each of appreciate Judge lems and I would if the approve place should it at the indicated and previously would consider our filed motion promptly. return it district [the clerk] judgment only in the event that he de- Otherwise, up I will take for consideration deny joint cides to motion which is about pending judgment Plaintiffs’ motion for to be filed. my findings and conclusions. (emphasis added). (emphasis added). read, pertinent part: 82. The letter to counsel *36 17, 1975, dismissing prevent relitigation used to
entered it on June
issues and to
promote judicial economy.
id. at
withdrawing and
326-
prejudice
case with
and
31,
However,
at 649-651.
S.Ct.
order
findings
and
setting aside the
of fact
con-
problems
use,
to avoid
with the doctrine’s
proposed pre-
clusion of law.83 Chemetron’s
adopted
general
guide
Court
a
rule to
findings
trial order contained 158
of fact
the lower courts:
findings
taken verbatim from the 221
general
rule
should be that in cases
by
made
the court and then set aside
fact
plaintiff
easily
joined
where a
could
have
judge
the trial
Cosmos Bank.
in the earlier action or where . . . the
relitigating
Bintliff from
estop
refused to
application
estoppel
of offensive
would be
facts,
appeals.
a
those
refusal
defendant,
unfair
to a
a trial
judge
we
preliminary
As a
issue
must de
should
allow the
use of offensive col-
estoppel
which offensive collateral
cide
estoppel.
lateral
rules,
federal,
apply.
Texas or
Because
Id. at
at 651.
S.Ct.
brought
this case was
in federal court based
step
application
The first
in the
of this
question
pendent jurisdiction
on federal
and
rule is to determine whether Chemetron
estoppel
prior
and the
claim is based on a
joined
could have
the Cosmos Bank suit.
court,
will apply
case in federal
we
federal
We
possible.
find that that was not
As the
v. Price
rules. See Stovall
Waterhouse
Westec cases were filed in Houston or
652 F.2d
York,
transferred from New
nearly all of
The Supreme Court’s
landmark
them
placed
Judge Hannay’s
were
dock
Shore,
Hosiery
case of Parklane
Co. v.
Wyndham
Bintliff,
et. See
Associates v.
(1979),
U.S.
stock,
cause of
not to create another
never had sufficient notice of this claim
fact,
to which
precisely the use
In
that is
the pretrial
shortly
until
conference held
judge put
trial
evidence
August
trial
and September
before
set
he also
judgment,
In the
transaction.
years
more than ten
after the 1969
in that
received
off the value Chemetron
pro-
“sale.” When Chemetron submitted its
awarded,
damages
against
transaction
posed pretrial
containing
order
claim
accepted.
setoff that Chemetron
conference,
naturally
defendants were
Second,
federal rules do not
while the
objected.
surprised
response
to a
legal theory
of a
require statement
order
subsequent
Chemetron,
motion
the trial
relief,
Hostrop
see
v. Board of
to obtain
judge, in October
barred claim based
College District No.
Junior
on the 1969 transaction and
limited
use
denied,
1975), cert.
of evidence about the 1969 “sale” to one
(1976),
48 L.Ed.2d
S.Ct.
issue:
claim
9 “forced sale”
is so novel
section
Corpora-
ORDERED that Chemetron
counsel would have had to
defendants’
will
tion
not be barred from submitting
prescient to be on notice of it from
most
regarding
evidence
its sale of Westec
original complaint
discovery.
simply
24, 1969,
stock
June
as that sale re-
appears
of “forced sale”
While the doctrine
to establishing
lates
the measure of dam-
10b-5,
under Rule
see
to be well entrenched
ages as an element of its cause of action
Miramon,
over four WILLIAMS, of “extensive JERRE Judge, S. Circuit Here, trial, aration.” eve of over concurring part and dissenting part. years filed, twelve complaint after the was I concur in all parts Judge opin- Gee’s “sale,” years over ten the 1969 after A, except III, ion Part the Federal Securi- years very after ten pretrial extensive ties Law particularly claims. I my note work, Chemetron to supplement. moved portions concurrence in majori- those delay Given this and lack of diligence undue ty opinion to Judge Reavley which directs in moving supplement, Chemetron had his dissenting views. showing delay burden of Judge opinion Gee’s rules out any liability inadvertence, oversight, due to or excusable under federal law for the stock manipula- neglect. Gregory, F.2d at 203. It has tions of James Williams and par- those who advanced, comprehend, we any nor do ticipated responsible in or are who for his meeting reasons burden. We detect activities. The opinion is meticulously rea- prejudice undue as well. That Chemetron soned. difficulty I have with it is that would immediately add this claim before it leads to a result borders on the trial suggest complaint in search of a spite absurd. the reasoning, I cannot Rich, wrong. F.R.D. at conclude Congress intended such Balanced against these “substantial rea- *42 result. deny possible prejudice sons” to is the The Court, defendants the before Busi- Chemetron of of leave supple- denial Funds, (BFI) ness Inc. and David Bintliff ment. That is prejudice preclusion of a responsible are for the manipulations of section 9 claim on the 1969 based transac- Austin, Williams and John tion. Chairman of legal Given the weakness of that BFI, upon theory which lawsuit is pri- and the fact that Chemetron’s this based. Wil- mary liams was have engaged (1) cause of action arose out of its found to in a origi- purchase securities, nal relating purchase of the Westec scheme this to the or sale of prejudice stock, Finally, judicial is slight. (2) econo- which included misstatements or
H95
facts,
(4)
(3)
made
commit
than one
of material
more
offense
omissions
to make
scienter,
(5) upon which Chemetron
with
responsibility more
prove.
difficult to
injury,
relied,
causing
(6)
Chemetron’s
true,
quite
It
as the opinion
for
touching upon the loss in value
out,
points
10(b)
Court
that Section
was
are
We have held
these
stock.
created as a “catch-all.” It was intended to
10(b) of the
required by
elements
Section
transgressions
cover
other than those cover-
See,
and Rule 10b-5.
Huddleston
statute
by
specific requirements
ed
of Section
MacLean,
&
640 F.2d
Herman
9(a) and
of
a number
other sections of the
activities
But because Williams’
statute.
I cannot
wrong
But
see what is
purchase
or selling
to “affect”
failed
with the
of a
use
catch-all. As the
stock,
finding
according
of
price
found,
9(a).
Williams did not violate Section
responsible
jury,
Williams and those
of
complete
But he
inwas
and literal violation
are
Court to
by
for his actions
found
this
10(b).
of
Hence
application
Section
of a
of-
have committed
federal securities
“catch-all.”
all.
fense at
that,
significant
opinion
The
for the
evaluating this case it is of
Court concedes
have
what the result would
“Rule
been
speculate
aid to
10b-5 has
extended well beyond
suit
brought
only
had
its
purpose
been if Chemetron
gap-filling
as originally envi
10(b) and not referred to
under Section
by Congress
10(b)
sioned
in Section
9(a) at all. I
the result
should think
Section
proposed by
major
SEC.” The
altera
An offense
is clear.
was committed
course,
scope
10(b),
tion of the
of Section
10(b) and Rule
defendants under Section
finding
was the
of an implied private right
All
met.
It
requisites
were
10b-5.
Rule
action under
10b-5 in Kardon v.
only
an additional element
because
National Gypsum
F.Supp.
(E.D.
9(a)
proven
under
not
offense
Section
was
Pa.1946).
private
remedy is now well
respon-
that the defendants are freed of all
established, see Ernst & Ernst v. Hochfeld
having
securities
sibility for
violated federal
er,
185, 196,
overtly
law. This is an
unrealistic view of
(1976).
pattern
L.Ed.2d 668
The earlier
law, and I cannot
that Con-
conceive
the statute was found in
specific provi
contemplate
gress would
such a result.
9(e)
sion in Section
for a civil
remedy
If it were true that
some un-
damaged
those
manipulation
stock
manipulation
usual kind of stock
schemes under Section
but with no com
cognizable
9(a),
could
under Section
parable
remedy provision
civil
in Section
opinion’s
majority
analysis
then the
would
10(b),
leaving 10(b)
gov
thus
violations to
But
be correct.
such is not this case. The
ernmental
enforcement. But
the subse
through
engaged
Williams
in a
defendants
judicial
quent
interpretation
creation
manipulations
different kinds of
number
a civil
under
remedy
10(b)
Section
not
must
designed to
the value
and deceits
enhance
narrowing
be taken
the scope
as
of Section
These
and de-
manipulations
of the stock.
10(b).
10(b),
a broadening
It was
of Section
unique
ceits were
nor unusual
such
narrowing.
not a
At least some
were “ma-
offenses.
of them
asserted, however,
It is
that we are bound
deceptive”
or contri-
nipulative
devices
by the
analysis
this Court in Huddleston
clearly
10(b)
vances
the core of a Section
MacLean,
v. Herman &
with decisions broader 10(b) “catch- en federal 17(a) by and the Section the Securities Acts lower tion .,” 534, major 640 provisions Sec- courts. . . F.2d 541. The The substantive all.” ity opinion beginning discusses found to these cases 17(a) the statute were tion at 10 and also But these MSP MSP 29. pro- from the substantive be different not controlling cases are at all in Cheme Court found 10(b). The visions Section supra, Blue Chip Stamps, tron’s situation. charged 10(b) offense that Section person that a only held who was neither a different, circum- and in some required purchaser nor a seller claim the could not re- than stronger, proof stances 10(b). already benefits of Section had This Therefore, 17(a). quired Section law been the under the rule since Birnbaum the majority in Huddleston which analysis 1952. Birnbaum v. Newport Corp., Steel 10(b) urges is that if does opinion Section (2d Cir.), denied, 461 193 F.2d cert. 343 U.S. requirements not make some additional 956, 1051, 72 96 S.Ct. L.Ed. 1386 charged offenses in section it over the other Hochfelder, 185, v. Ernst & Ernst 425 U.S. was analysis cannot used. But this not a 1375, (1976) 47 96 S.Ct. L.Ed.2d 668 held holding because the part of that case 10(b) scienter, only requires that Section upheld remedy, overlapping nor Court negligence that a mere claim of not cog is holding. necessary was it to the Industries, Green, nizable. Santa Fe v. Inc. second, compelling more rea- But 462, 1292, 430 97 S.Ct. 480 U.S. 51 L.Ed.2d son, analysis that the Huddleston did not (1977) minority that where held' stock at upon all or evaluate detail a focus option to purchase merger holders’ in a case, where, person as in this situation fairly presented situation there was no manipulations in deceitful stock engaged 10(b) Piper violation. v. Indus Chris-Craft clearly be in would violation Section Inc., tries, 1, 926, 430 U.S. 97 51 S.Ct. while who 10(b) person another did the (1977) L.Ed.2d 124 held that there was no thing but was with his ac- charged same 14(e) private cause action under Section having a serious and harmful addition- tions relating practices to fraudulent in a tender go would impact al free. offer situation. Court held also that points clearly in its Huddleston out foot 10(b) apply specific Section did not 7, 542, 640 authority note only tender offer situation because the alle in favor overwhelmingly existence of gation was that the opportunity gain recognizing that conduct covered the target company control of had been express liability provisions the 1933 interpreted defeated. Court Section acts 1934 also be covered Section 10(b) being only maintaining aimed 10(b). This view is confirmed footnote 9 orderly market for the distribution secu majority opinion. v. Ray Fischman manipulative from rities free influences and Mfg. 783, (2d theon 188 F.2d Cir. was aimed at tender offers as such. 1951) established this rule. It was stated as Moving to claimed further restrictive in Bromberg, of law in 1 A. rule Securities terpretations, Reding Touche Ross & v.Co. 2.4(1), Law: Frau d SEC Rule 10b-5 § ton, 560, 442 U.S. 61 L.Ed.2d (1967). Particularly noted should be (1979) only held that the keeping record the case of v. Schaeffer First National requirements 17(a) of Section do not create Lincolnwood, (2d Bank of private provi cause of action under that denied, 1975), cert. S.Ct. Advisors, sion. Transamerica Mortgage (1976) holding 48 L.Ed.2d 186 that a Lewis, Inc. v. 444 U.S. S.Ct. can file plaintiff claims under both Section (1979) L.Ed.2d 146 held Inves 10b-5, Rule the same situation as in 80b-l, tor Act Advisor’s §U.S. the instant case. private did not create cause of action. argued But Huddleston these cases County Sewerage Authority Middlesex Assn., and these authorities are somewhat in now National Sea Clammers Supreme as a result of recent doubt Court 69 L.Ed.2d held
1197
suggested
It
Federal Water Pollu-
is
that if we allow
that neither the
the
Sec-
10(b)
Act,
remedy
1251 nor the
tion
case
Control
33 U.S.C.
we
tion
have
Protection,
provisions
Research and
eliminated the
of
9(a).
Sanctuar-
Section
Marine
argument
a The
Act of
33
1401 created
same
can be turned
ies
U.S.C.
around
damages.
way.
for
It
the other
If
cause of action
we do
allow
private
in remedy
10(b),
be noted that
these three cases
under Section
we
should
have elimi-
10(b)
private
of ac- nated
refusing
recognize
causes
Section
as it relates to manipu-
deceptive
have no
lative
pur-
under the statutes
relevance
and
schemes in the
tion
situation
is
chase
sale
all
Chemetron’s
because
and
of securities. And this is
private
contrary
precise
established that
there is a
to the exact
well
and
wording
10(b),
of action
Section
and
of the
There
no denying
cause
under
Section.
is
majority opinion
expansion
10(b)
concedes this.
of
has
Section
weakened
of
impact
9(a).
Section
But
expan-
that
States,
Finally, Chiarella
United
place
sion
long
took
before this ease. This
proposition Bintliff conspiratorial agreed scheme. damages particular wrongs liable in *46 $3,000,000 guarantee days. loan for 30 long committed before his involvement in 3,000 Westec, worth His fee was shares of conspiracy.1 the $150,000on the market. Furthermore, the evidence in this record Bintliff Finally, July guaranteed in prove is insufficient as a matter of law to $3,000,000 He re- day, a 3 loan for Hall. joined that Bintliff in a scheme to create $216,000 guarantee per- ceived fee in, apparent trading actual or active or to half his re- immediately mission to sell of, price raise the Westec stock for the the first maining shares from transaction. purpose unlawful of fraudulently inducing August When Bintliff discovered in purchase general the of Westec stock the by longer get that Williams and Hall could no public. financing purchases, for their Westec he The evidence that and Wil- shows Hall realized that the Westec market was about engaged manipulative liams were in a crash, remaining and he sold his shares. price scheme to enhance the of Westec stock September August from 1964 until prove This evidence does not tend to 1966. As representatives of both Westec joined Bintliff ever in the conspirators’ pur- Funds, and Business which controlled Wes- pose purchase to induce the of Westec stock tec, they had reasons many to desire the general the by public through manipulation long-term price enhancement of the market Rather, of the market. the evidence shows of Westec The only against stock. evidence engaged that Bintliff in three arm’s-length Bintliff part is that he took in three trans- transactions with conspirators actions which occurred months after the high price he exacted a for his services. It January 1966 sale of stock to Chemetron. conspira- was irrelevant to him whether the These three transactions are not sufficient long-range manipulation tors’ scheme was prove circumstantial evidence to that Bint- if, indeed, he was even aware of successful— joined liff ever in the conspirators’ broad scope. acting Bintliff was for his own purpose general public to induce the to buy purposes, conspirators’ not to advance the Westec stock. stock, purpose. the Westec purchasing attempting quick profit
The
he was
to make a
first two Bintliff
took
transactions
place
price
on the difference between the sale
May 1966. Williams offered to sell
60,000
Bintliff
and the market
price;
guaranteeing
shares Westec stock at
$40
loan,
a share when the market price
taking advantage
was
he was
of the con-
$50
share. Bintliff
spirators’
made the deal and re-sold
need for
desperate
financing.
by
development
of a
Standard Oil was an action
the State of
tion
the victims
land
statutory penalties
developers’ attorney
Texas to recover
and obtain
fraud. The
was
liable
held
injunctive
against
restitution, despite
relief
the members of an
his
for the full amount
agreement
that violated the state
antitrust
fraud
claim that he first became aware
laws;
attempt
it was not an
inception
to recover dam-
The
well after
of the scheme.
ages
particular anti-competitive
however,
showed,
attorney
acts. See
evidence
Thus,
only thing
107 S.W.2d at
profited
incep-
had
from the scheme from its
prove
state needed to
in Standard
tion,
Oil
fraudulent
and that after he learned of its
membership
conspiracy
in the
itself.
it,
joined
intending
perpetuate
nature he
against
State,
his
(Tex.Civ.
the fraud
the investors and to retain
Bourland v.
It
is not
Restatement
it,
conspiracy, concealed
(1982); accord,
knew of the
Judgments
Ashe
Schlumberger, supra.
it.
profited
Swenson,
from
436, 443,
damages
Bintliff liable in
as a civil
To hold
(1970);
Quak
settlement sacrifice the findings
peal liability, from but the
subsequent preclusion use of may make it pos-
more difficult to settle cases in this
ture. Wright Miller, supra, & at 318
(footnote omitted).
Finally, majority’s holding is unfair
to Bintliff. As the majority acknowledges, primary reason that Bintliff settled
Cosmos Bank was to avoid application estoppel. collateral He well- relied on
settled rules of deciding law in to settle. gave
He up right appeal, his the exercise
of which would either delayed have the trial prevented,
in this case or practical for all
purposes, the use of estoppel collateral judicial
this case. He saved the system a
certain appeal possible and a retrial and appeal,
second and saved his adversary ad- expense
ditional time and collecting dam- Nevertheless,
ages. today majority dis-
regards justifiable his reliance interests and
deprives primary him of the benefit of his
bargain. majority says that the rules estoppel collateral are based on “fair-
ness,” nothing but I see fair about the
majority’s decision.
George BASIARDANES,
Plaintiff-Appellant, *50 GALVESTON,
CITY OF
Defendant-Appellee.
No. 81-2239. Appeals,
United States Court of
Fifth Circuit.
Aug.