Opinion ID: 109604
Heading Depth: 2
Heading Rank: 6

Heading: Court of Appeals Decision on Liability March 16, 1973

Text: Chris-Craft appealed, and the SEC sought review of the District Court's denial of injunctive relief against Bangor Punta. In the Court of Appeals, each member of the panel wrote separately. All three members of the panel agreed that Chris-Craft had standing to sue for damages under § 14 (e) and that a claim for damages had been established. However, Judges Gurfein and Mansfield, over Judge Timbers' dissent, sustained the District Court's denial of an injunction against Bangor. Court of Appeals Majority Opinion The Court of Appeals directly answered the question concerning Chris-Craft's standing under § 14 (e), which the District Court had not decided. [12] The Court of Appeals based its holding on the statute itself [§ 14 (e)] and such decisional law as there is that has touched on the question. 480 F. 2d 341, 358. The opinion noted that the Second Circuit had on four occasions [13] addressed the issue whether a private cause of action might be implied under § 14 (e). Although acknowledging that no case represented a square holding in this respect, the court interpreted the cases to intimate that such an implied right of action would be reasonable. 480 F. 2d, at 360. The court then noted that Chris-Craft could likely state a common-law tort claim in state court for interference with a `prospective advantage.' Ibid. We will not infer from the silence of the statute that Congress intended to deny a federal remedy and to extinguish a liability which, under established principles of tort law, normally attends the doing of a proscribed act. Id., at 360-361. With respect to the legislative history of § 14 (e), the Court of Appeals expressly acknowledged that the focus of congressional concern was the protection of public shareholders. Given this purpose, the court concluded: We can conceive of no more effective means of furthering the general objective of § 14 (e) than to grant a victim of violations of the statute standing to sue for damages. . . . Particularly in light of the enforcement rationale of [ J. I. Case Co. v.] Borak, [377 U. S. 426 (1964),] we believe it is both necessary and appropriate that [Chris-Craft] should be granted standing to sue for damages. 480 F. 2d, at 361. The court next reviewed the alleged § 14 (e) violations for which Chris-Craft sought damages. In contrast to the District Court's conclusions, the Court of Appeals held that Piper's description of the Chris-Craft offer as inadequate and the failure to disclose the put provision in the Grumman agreement constituted actionable violations of § 14 (e). 480 F. 2d, at 364-365. As to Bangor Punta, the Court of Appeals agreed with Judge Pollack's determination that Chris-Craft had not been injured by the gun-jumping press release of May 8; on the other hand, the court held that the BAR omission in Bangor's registration statement was actionable. The Court of Appeals expressly rejected Judge Pollack's conclusion that the registration statement was unintentionally in error. On the contrary, the Court of Appeals held that Bangor Punta's officers showed reckless disregard in failing to disclose the BAR negotiations, although the court conceded that the officers were not shown to have had an intent to defraud. Id., at 369. First Boston was likewise held culpable because its certification of the registration statement amounted to an almost complete abdication of its responsibility [as an underwriter] . . . . Id., at 373. The Court of Appeals also disagreed with the District Court's analysis of causation. Although agreeing that Chris-Craft failed to show that it would have won the takeover battle, [14] the court relied upon Mills v. Electric Auto-Lite Co., 396 U. S. 375 (1970), as establishing a presumption of reliance and causation applicable to Chris-Craft. Under Mills, so the court held, we must presume that [Bangor's] offer was not so appealing, considering the BAR loss, as to have attracted any takers. 480 F. 2d, at 375. Since [Bangor] eventually acquired only about 51% of the outstanding Piper shares, it is clear that the 7% acquired through its exchange offer was critical to its success. Reliance and causation have been shown. Ibid. In addition to the § 14 (e) claim, the Court of Appeals held that Chris-Craft could recover damages for Bangor's Rule 10b-6 violations; the three block purchases had a presumptively. . . stimulating effect . . . which misled the public. 480 F. 2d, at 378. Since those purchases amounted to 7% of Piper stock, [e]ven arithmetically, it is apparent that the block purchases [by Bangor Punta] . . . were essential to achieve control. Id., at 379. The Court of Appeals then remanded with directions to the District Court to award damages in the amount of the reduction in the appraisal value of [Chris-Craft's] Piper holdings attributable to [Bangor Punta's] taking a majority position and reducing [Chris-Craft] to a minority position. . . . Id., at 380. Damages were to be awarded against all defendants jointly and severally. In addition, without discussing Chris-Craft's abandonment of its claim for equitable relief, the court instructed the District Court to enjoin Bangor for a period of at least five years from voting the Piper shares acquired through the exchange offer and in violation of Rule 10b-6. Ibid. Finally, Judge Timbers, writing in dissent on this issue, disagreed with the conclusion of Judges Mansfield and Gurfein that the SEC request for an injunction against future violations by Bangor Punta had properly been refused. In Judge Timbers' view, the District Court employed an improper proper legal standard in denying the SEC injunctive relief against Bangor. Judge Gurfein's Concurring Opinion Judge Gurfein concurred generally in Judge Timbers' opinion for the court. On the issue of standing, Judge Gurfein agreed with the District Court's approach in considering the matter as one of causation before considering the question of standing. 480 F. 2d, at 393. Under Judge Gurfein's approach, Chris-Craft had standing because Bangor's acquisitions of Piper shares were necessary for control. As to scienter, Judge Gurfein was of the view that mere negligence would not suffice but that `recklessness that is equivalent to wilful fraud' is required . . . . Ibid. (Citation omitted.) Judge Gurfein disagreed, however, with Judge Timbers' analysis of the alleged Rule 10b-6 violations. He refused to indulge the presumption of stimulating effect embraced by Judge Timbers and concluded rather that because the [illegal] block purchases were necessary for control causation was established. . . . 480 F. 2d, at 393. With respect to the SEC action against Bangor Punta, Judge Gurfein, writing for himself and Judge Mansfield, upheld the District Court's refusal to grant a permanent injunction. Applying the abuse of discretion standard, Judge Gurfein concluded that the matter is not so clear that we should substitute our judgment for the judgment of the experienced trial Judge below who sat as a chancellor in equity. Ibid. Judge Mansfield's Concurring and Dissenting Opinion Judge Mansfield concurred in the results reached by Judge Timbers, except with respect to the Piper family's liability. Judge Mansfield agreed that the Piper communications violated § 14 (e), but concluded that Chris-Craft had failed to prove damages resulting from those infractions. Applying the principles of Mills v. Electric Auto-Lite Co., supra , Judge Mansfield stated: [Chris-Craft] must show that it suffered some resulting loss. This it has failed to do. 480 F. 2d, at 401. On the other issues addressed by the majority opinion, Judge Mansfield concluded that Chris-Craft's standing under § 14 (e) rested solely on the policy of vigorous enforcement of the antifraud provisions. 480 F. 2d, at 396. As to scienter, Judge Mansfield concluded that intent to defraud had not been shown. He formulated instead the following test of scienter: In short, the scienter requirement would be met if the corporate officer (1) knew the essential facts and failed to disclose them, or (2) failed or refused, after being put on notice of a possible material failure in disclosure, to apprise himself of the facts under circumstances where he could reasonably have ascertained and disclosed them without any extraordinary effort. Id., at 398. He concluded that the actions complained of satisfied this standard. Like Judge Gurfein, Judge Mansfield declined to indulge the presumption that Bangor's Rule 10b-6 violations actually operated to make its exchange offer deceptively attractive; he concurred solely on the ground that where a party achieves control through violations of the securities laws, the party is liable as a matter of law to an injured competitor. [15]