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Kuehnert v. Texstar Corporation, 412 F.2d 700 | Casetext
Kuehnert v. Texstar Corporation
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Full title:Albert E. KUEHNERT, Appellant, v. TEXSTAR CORPORATION et al., Appellees
Date published: Jul 2, 1969
412 F.2d 700 (5th Cir. 1969)
allowing defense
Summary of this case from Bateman Eichler, Hill Richards, Inc. v. Berner
May 9, 1969. Rehearing Denied and Rehearing En Banc Denied July 2, 1969.
J. Burleson Smith, Eugene B. Labay, San Antonio, Tex., for William T. Rhame; Vinson, Elkins, Weems Searls, Houston, Tex., Cox, Smith, Smith, Hale Guenther, San Antonio, Tex., of counsel.
Before ALDRICH, GODBOLD, and DYER, Circuit Judges.
Plaintiff Kuehnert brought suit in the district court pursuant to section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j (b), and more particularly the Commission's Rule 10b-5, against W.T. Rhame, a former president of Texstar Corporation, a Texas corporation, sometimes hereinafter the company, and against Texstar itself. After interrogatories had been answered and depositions had been taken, both defendants were granted summary judgments of dismissal on the merits. 286 F. Supp. 340. On this appeal no issue is raised as to Rhame's statements, their materiality or falsity, or Kuehnert's reliance and damage. Rhame says that Kuehnert is barred from recovery by his own conduct. The company raises as a separate defense — a matter not reached by the district court — that Rhame's actions were his own personal affair and were not authorized by it.
Rule 10b-5, 17 C.F.R. § 240.10b-5, reads:
The facts are unusual, but relatively simple. In January 1965 Texstar was negotiating a merger agreement with Coronet Petroleum Company. The Coronet stockholders were to be paid in Texstar stock, the exchange ratio being fixed by a contract signed in March 1965, and based on an independent appraisal of Coronet's assets. Texstar stock in January was selling at around $4.25 a share. Rhame told Kuehnert of the acquisition plans and that Texstar had made some secret discoveries on a very favorable "farmout," as a result of which dividends of $3.00 a year could be expected, and an enormous increase in the value of the stock. Rhame stated that as president, he was having trouble with some of the other directors and stockholders, and that it was to his advantage to keep this information secret while he, and hopefully his friend Kuehnert, bought up enough stock to acquire at least a working control. As a result of this Kuehnert bought on margin a substantial amount of company stock and, because the "farmout" representations were not true, lost it all.
The reorganization was designed to fall under section 368(a)(1)(C) of the Internal Revenue Code of 1954. Coronet would sell all its assets to Texstar for Texstar stock and then, within a year, distribute that stock to its shareholders and dissolve.
Texstar's stock was listed on the American Stock Exchange. Kuehnert's purchases were on the open market, through brokers, and without personal knowledge of the identity of the sellers. Kuehnert concedes that even though he was not, strictly, an "insider," one who buys on the basis of inside information is what one court has termed a "tippee," Ross v. Licht, S.D.N.Y., 1967, 263 F. Supp. 395, 410, and is, by virtue of Rule 10b-5, obliged to make disclosure to the seller. In re Cady, Roberts Co., 1961, 40 S.E.C. 907; SEC v. Texas Gulf Sulphur Co., 2 Cir., 1968, 401 F.2d 833, cert. denied, Coates v. S.E.C., 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). Concededly he made no such disclosure. The district court held that having himself violated Rule 10b-5, Kuehnert could not invoke it in seeking recovery from the defendants.
Kuehnert has alleged no common law action for deceit.
Our agreement with the district court on this point renders it unnecessary to discuss certain other obstacles that Kuehnert might face, but lest it be thought that we consider it irrelevant we mention a matter not referred to by the parties, the possible necessity of privity, or what has been described as a "semblance of privity between the vendor and purchaser of the security." If privity is needed, an extensive examination of the facts would be required, involving many ramifications, unexplored in the briefs or by the court below. We do not, however, pursue this matter.
See Joseph v. Farnsworth Radio Television Corp., S.D.N.Y., 1951, 99 F. Supp. 701, 706, aff'd., 2 Cir., 1952, 198 F.2d 883, Ruckle v. Roto American Corp., 2 Cir., 1964, 339 F.2d 24, 28 (dictum), Buchholtz v. Renard, S.D.N.Y., 1960, 188 F. Supp. 888; Donovan, Inc. v. Taylor, N.D.Cal., 1955, 136 F. Supp. 552, 553; but see Brennan v. Midwestern United Life Ins. Co., N.D.Ind., 1966, 259 F. Supp. 673; cf. Cochran v. Channing Corp., S.D.N.Y., 1962, 211 F. Supp. 239; Texas Continental Life Ins. Co. v. Bankers Bond Co., W.D.Ky., 1960, 187 F. Supp. 14, rev'd on other grounds sub nom. Texas Continental Life Ins. Co. v. Dunne, 6 Cir., 1962, 307 F.2d 242. For a discussion of the necessity of a "semblance of privity" when stock is bought on the open market see 3 L.Loss, Securities Regulation 1767-71 (2d ed. 1961).
We will also not pause over the fact that with respect to the shares Kuehnert bought between January and March with knowledge that the Coronet merger was to take place, the information he posessed and failed to disclose as to the merger was true and, we would think, material. See List v. Fashion Park, Inc., 2 Cir., 1965, 340 F.2d 457, 462, 22 A.L.R. 3d 782, cert. denied 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60. The precise nicety of Kuehnert's case relates only to purchases made after the proxy material announcing the merger, when all he concealed was the information he had received about the successful drilling and its anticipated financial consequences. Since this information was untrue, we will assume that his then purchases occasioned no harm to anyone but himself. At the same time, the case cannot be as simple as Kuehnert would have it when he argues that it is wrong to circulate false information and therefore he was under a duty not to repeat what Rhame had told him.
Strictly speaking, this may not have been so, but, again, we need not make the possibly complicated analysis. The assumption we have made is the most favorable to Kuehnert.
We have small doubt but that actual illegal conduct should bar recovery. It is true that in certain areas exceptions may exist, as for example, antitrust. See, e.g., Perma Life Mufflers, Inc. v. International Parts Corp., 1968, 392 U.S. 134, 88 S.Ct. 1981, 20 L. Ed.2d 982; Kiefer-Stewart Co. v. Joseph E. Seagram Sons, 1951, 340 U.S. 211, 71 S.Ct. 259, 95 L.Ed. 219; cf. Union Leader Corp. v. Newspapers of New England, Inc., 1 Cir., 1960, 284 F.2d 582, 586-587, cert. denied 365 U.S. 833, 81 S.Ct. 747, 5 L.Ed.2d 744. The guiding principle is one of policy. In private SEC violates the degree of public interest is not comparable to that made apparent by the triple damage provision; we see no sufficient public interest when the only question is one of accounting between joint conspirators. This view is supported by the availability of an unclean hands defense in actions involving SEC proxy requirements. Gaudiosi v. Mellon, 3 Cir., 1959, 269 F.2d 873, cert. denied 361 U.S. 902, 80 S.Ct. 211, 4 L.Ed.2d 157; Studebaker Corp. v. Allied Prods. Corp., W.D. Mich., 1966, 256 F. Supp. 173, 192; cf. Union Pac. RR. v. Chicago N.W. Ry., N.D.Ill., 1964, 226 F. Supp. 400. See also 2 L. Loss, Securities Regulation 955-56 (2d ed. 1961). But cf. Stockwell v. Reynolds Co., S.D.N.Y., 1965, 252 F. Supp. 215. It has been suggested that a true co-conspirator may be deprived of recovery even under the Sherman Act. See Perma Life Mufflers, Inc. v. International Parts Corp., 1968, 392 U.S. 134, 146, 147, 149, 153, 88 S.Ct. 1981, cf. Pennsylvania Water Power Co. v. Consolidated Gas Elec. Light Power Co., 4 Cir., 1953, 209 F.2d 131, cert. denied 347 U.S. 960, 74 S.Ct. 709, 98 L.Ed. 1104; see Note, In Pari Delicto and Consent as Defenses in Private Antitrust Suits, 78 Harv.L.Rev. 1241, 1244-45 (1965).
For cases involving unclean hands in labor disputes see Florida E.C. Ry. v. Brotherhood of Locomotive Engineers, 5 Cir., 1966, 362 F.2d 482; NLRB v. Fickett-Brown Mfg. Co., 5 Cir., 1944, 140 F.2d 883; Sanders v. De Lucia, S.D.N.Y., 1967, 266 F. Supp. 852, 857, aff'd, 2 Cir., 379 F.2d 550.
In the first place, we are not convinced of any difference in substance between a successful fraud and an attempt. The statutory phrase "any manipulative or deceptive device," 15 U.S.C. § 78j(b), seems broad enough to encompass conduct irrespective of its outcome. The Commission may act under sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, 15 U.S.C. § 77q(a)(1), (3), and under 10(b), involved here, to enjoin a potential fraud or prosecute a fraud that failed, without proof of actual loss to any victim. N. Sims Organ Co. v. SEC, 2 Cir., 1961, 293 F.2d 78, 80 n. 3, cert. denied 368 U.S. 968, 82 S.Ct. 440, 7 L.Ed.2d 396; Hughes v. SEC, 1949, 85 U.S.App.D.C. 56, 174 F.2d 969; Trussell v. United Underwriters, Ltd., D. Colo., 1964, 228 F. Supp. 757, 767. The absence of actual harm to his vendors, as far as Kuehnert was concerned, was a pure fortuity. Kuehnert's intention differed from Rhame's, but it was no more commendable. In determining whether a plaintiff's hands were unclean equity has customarily looked to intent. Thus, when plaintiff and defendant had conspired together to cheat plaintiff's creditors, and instead the defendant cheated the plaintiff, no relief was given. Ford v. Caspers, N.D.Ill., 1941, 42 F. Supp. 994, 997-998, aff'd, 7 Cir., 128 F.2d 884. Accord, Precision Instrument Mfg. Co. v. Automotive Maintenance Mach. Co., 1945, 324 U.S. 806, 814-815, 65 S.Ct. 993, 89 L.Ed. 1381; New York Football Giants, Inc. v. Los Angeles Chargers Football Club, Inc., 5 Cir., 1961, 291 F.2d 471; Shinsaku Nagano v. McGrath, 7 Cir., 1951, 187 F.2d 753, 758. Although Kuehnert is not seeking equitable relief the doctrine remains applicable, since it expresses a general principle equally suited to damage actions. Union Pac. R.R. v. Chicago N.W. Ry., N.D.Ill., 1964, 226 F. Supp. 400, 410; cf. Maltz v. Sax, 7 Cir., 1943, 134 F.2d 2, 5, cert. denied 319 U.S. 772, 63 S.Ct. 1437, 87 L.Ed. 1720; 4 J. Pomeroy, Equity Jurisprudence 989 (5th ed. 1941). But cf. Straley v. Universal Uranium Milling Corp., 9 Cir., 1961, 289 F.2d 370, 373. The tippee should be encouraged to disclose, before trading, what he believes on a reasonable basis to be true, because disclosure allows the free market to probe and evaluate his information, accepting what is true and discrediting what is false. Indeed, had Kuehnert fulfilled his statutory obligations here, it is likely that Rhame would have been immediately exposed and Kuehnert saved from any appreciable harm.
Although Kuehnert's status as a tippee makes the defenses of unclean hands and in pari delicto available, their application rests with the discretion of the court. Precision Instrument Co. v. Automotive Maintenance Mach. Co., supra; Republic Molding Corp. v. B.W. Photo Util., 9 Cir., 1963, 319 F.2d 347, 350. The question must be one of policy: which decision will have the better consequences in promoting the objective of the securities laws by increasing the protection to be afforded the investing public. Peoples Sec. Co. v. SEC, 5 Cir., 1961, 289 F.2d 268, 271; List v. Fashion Park, Inc., supra. Common law technicalities are to be avoided, SEC v. Capital Gains Research Bureau, Inc., 1963, 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237; A.T. Brod Co. v. Perlow, 2 Cir., 1967, 375 F.2d 393, not merely in judging the plaintiff's claim but also in assessing defendant's responses. It is true that if a tippee has no remedy against an insider's private falsehoods, little deterrent against such conduct will exist; the insider may have free rein. But, as against this, there is another danger. If a tippee can sue he has, in effect, an enforceable warranty that secret information is true. It is then he that will have free rein. If what he is told is false, he can recover against his informer. If it is true, he will, of course, be liable to his vendors or vendees, but here he may well be protected by the difficulties of discovery. It may be relatively easy to trace insiders; tippees are another matter.
If the tippee here should be held liable to an innocent third party the most he could obtain from his insider friend would be contribution. 15 U.S.C. § 77k(f), 78i(e); 3 L.Loss, Securities Regulation 1737-40 (2d ed. 1961); Douglas Bates, The Federal Securities Act of 1933, 43 Yale L.J. 171, 178-81 (1933) (suggesting contribution should be on a purely pro rata basis); see deHaas v. Empire Pet. Co., D.Colo. 1968, 286 F. Supp. 809, 815-816. There is no right to indemnity between those in pari delicto. See Handel-Maatschappij H. Albert De Bary Co. v. Faradyne Electronics Corp., S.D.N.Y., 1964, 37 F.R.D. 357; cf. Behar v. Savard, S.D.N.Y., 1958, 21 F.R.D. 367, 369-370; see generally, 3 L.Loss, Securities Regulation 1829-36 (2d ed. 1961).
We have often indicated the inappropriateness of invoking broad common-law barriers to relief where a private suit serves important public purposes. * * * Both Simpson [v. Union Oil Co., 377 U.S. 13, 84 S.Ct. 1051, 12 L. Ed.2d 98 (1962)] and Kiefer-Steward [Co. v. Seagram Sons, 340 U.S. 211, 71 S.Ct. 259, 95 L.Ed. 219 (1951)] were premised on a recognition that the purposes of the antitrust laws are best served by insuring that the private action will be an ever-present threat to deter anyone contemplating business behavior in violation of the antitrust laws. The plaintiff who reaps the reward of treble damages may be no less morally reprehensible than the defendant, but the law encourages his suit to further the overriding public policy in favor of competition. A more fastidious regard for the relative moral worth of the parties would only result in seriously undermining the usefulness of the private action as a bulwark of antitrust enforcement. And permitting the plaintiff to recover a windfall gain does not encourage continued violations by those in his position since they remain fully subject to civil and criminal penalties for their own illegal conduct.
Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 138-39, 88 S.Ct. 1981, 1984, 20 L.Ed.2d 982, 990 (1968).
The massive increase in filings of 10b-5 cases, the publication of textbooks on 10b-5, and the conduct of symposiums for interested attorneys indicate that the private suit will be a major weapon — and may be the most important weapon — in attainment of the policies exemplified by the Act and the Rule.
Practicing Law Institute sessions on 10b-5, held in New York and the West Coast, are reported to have had 1,000 lawyers present at each. Financial World, Jan. 15, 1969, p. 28, col. 1.
In pari delicto, with its "complex scope, contents, and effects," has proved a hindrance to the enforcement of federal statutory regulations through the medium of "private attorneys general." See Perma-Life Mufflers v. International Parts Corp., supra. Application of it, and the unclean hands doctrine, as judicially-imposed restraints on 10b-5 litigation will hinder in similar fashion the effective weapon of the private suit.
allowing defense at court's discretion
In Kuehnert, we held that the in pari delicto defense is available to defendants under certain circumstances in private suits for violation of the securities laws. There the plaintiff, a "tippee," brought suit to recover under Rule 10b-5 from a corporation whose stock he had purchased and from an insider who had allegedly given him misleading information.
In Kuehnert, the Fifth Circuit held that this approach is proper because (1) the statutory phrase "any manipulative or deceptive device," 15 U.S.C. § 78j(b), seems broad enough to encompass conduct regardless of its outcome, and (2) in determining whether a plaintiff's hands were unclean, equity has customarily looked to intent.
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In Kuehnert v. Texstar Corp., 412 F.2d 700 (5th Cir. 1969), the plaintiff was a "tippee" who sought to recover, upon Rule 10b-5, from the insider who had supplied him with allegedly misleading information and the corporation in which he had invested.
stating that there is no difference in substance between a successful fraud and an attempt
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