Court Opinion

ID: 9459583
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:24:35.669087+00
Date Added: 2024-06-11T17:36:13.702144
License: Public Domain

HAYS, Circuit Judge
(concurring in part and dissenting in part):
I concur in the denial of appellant Kircher’s motion for a jury trial. I dissent on the issue of the liability of Bertram D. Coleman and Drexel & Co. I believe that Coleman’s conduct with respect to the sale of BarChris stock was a violation of § 10(b) and Rule 10b-5 and that Coleman and Drexel should be held liable for the damages sustained by the plaintiffs.
I. Factual Background
A. Coleman’s Initial Involvement with BarChris
Defendant Coleman was a partner of Drexel & Co., a brokerage and investment banking firm located in Philadelphia. Drexel was the principal underwriter of the 1961 public sale of the BarChris debentures at issue in Escott v. BarChris Const. Corp., 283 F.Supp. 643 (S.D.N.Y.1968). In April, 1961, after Drexel had decided to underwrite BarChris’s debenture offering, Coleman became a director of BarChris. Drexel wanted to have one of its partners in a position to oversee the activities of a company in which Drexel was going to make a substantial investment. Coleman remained on BarChris’s board of directors until March 22, 1962, when he resigned. He returned as chairman of the board in May, 1962, and resigned again in October, 1962, after BarChris instituted bankruptcy proceedings.
In late 1960 a representative of Bar-Chris approached Drexel seeking financial advice. Alternative types of financing were discussed, and Drexel then sought preliminary information about the bowling industry in general and BarChris in particular. The record discloses that during this initial contact between Drexel and BarChris, Coleman was one of two or three Drexel representatives who discussed the financing with BarChris’s representatives, Russo, Kircher, and Vitolo. Coleman was apparently the senior Drexel representative involved in the BarChris financing. Drexel decided to underwrite the financing in early 1961,1 and Coleman was made a member of BarChris’s board of directors in April of that year. The district court’s finding that Coleman, in assuming a BarChris directorship, was acting on behalf of Drexel, is not challenged on this appeal.
The registration statement covering the BarChris issue of debentures was filed with the Securities and Exchange Commission in March, 1961, and became effective on May 16. In Escott, the court found the prospectus contained in the registration statement to be false and misleading in the following respects:
(A) Unfilled Orders on the books of BarChris as of March 31, 1961 were overstated by $4,490,000 or more.
*1312(B) The statement that since 1955, BarChris had been required to repurchase less than % of 1% of customers’ promissory notes discounted with unaffiliated financial institutions, was incomplete and inaccurate as of May 16, 1961, in that it did not disclose that:
(1) the primary obligors of notes of Dreyfuss Bowling Enterprises, Inc., Federal, 947 Bowling Corp. and Stratford Lanes, Inc. that had been discounted by BarChris with James Talcott, Inc. had prior to May 16, 1961, defaulted or were delinquent in the payment of their obligations; and (2) as of May 16, 1961, it had been the practice of James Talcott, Inc. to require the repurchase of notes discounted with it that were in default.
(C) The Prospectus does not disclose the following with respect to the description of BarChris’s business as of May 16,1961:
(1) that BarChris intended to operate Bridge Lanes, Yonkers Lanes and Woonsocket Bowl; and
(2) that BarChris contemplated operating Harlem Lanes, Strat-ford Bowl, Leader Lanes, Federal Lanes and Hart Lanes.
(D) The statement of Application of Proceeds is inaccurate and incomplete as of May 16, 1961 in that:
(1) the net proceeds of the debenture offering are totally allocated in the Prospectus to construction of a new plant, development of a new equipment line, a loan to BarChris Financial Corporation and additional working capital, and it did not disclose that BarChris intended to apply at least 60% of the proceeds allocated to additional working capital, to the repayment of prior debts and other commitments; (2) BarChris intended to use approximately $1,187,736 of the net proceeds of the debenture offering for the payment of prior debts ($1,067,736) and other commitments ($120,000), namely:
(a) for payment of checks drawn against BarChris’s account with Lafayette National Bank, which amounted to $825,736 as of May 31,1961;
(b) for payment of $242,000 borrowed from the Manufacturers Trust Company; and
(c) for a loan of $120,000 to St. Ann's, Inc.2
B. The Victor Acquisition
Frank Lanza, Jr., met BarChris representatives at a trade meeting in March, 1961 and inquiries were made concerning a possible acquisition of Victor by BarChris. Victor was interested in the prospect of receiving manufacturing space and additional capital from Bar-Chris, and BarChris was interested in diversification, believing that billiard tables would be a suitable complement to the recreational facilities of the bowling alleys it constructed. On July 28, 1961, the first of five formal meetings between representatives of BarChris and Victor was held to negotiate the terms of the exchange. Kircher represented BarChris at all these meetings. The representative and negotiator for the Victor shareholders was Sidney Shul-man, who was present at all five meetings. Shulman had been Victor’s accountant for a number of years and had been retained to represent the Victor shareholders in the negotiations.
At the July 28 meeting, Kircher gave Shulman a copy of the false and mis*1313leading May 1961 prospectus, as well as an unaudited six-month earnings statement. Kircher asserted that BarChris's earnings per share would be $1 by the end of 1961. During the second meeting on August 3, Kircher told Shulman that BarChris’s. backlog of unfilled orders amounted to between $6,000,000 and $7,000,000. The district court’s finding that this figure was a “gross overstatement” is not challenged on this appeal.
On August 17, Shulman was sent copies of BarChris’s six-month financial statement and 1960 annual report. The district court found that these documents contained some of the same misstatements and omissions as the May 1961 prospectus;3 that the six-month statement made additional misrepresentations ; 4 and that the “enthusiastic reference” in the annual report of Bar-Chris’s construction projects and plans in Europe “was seriously misleading.”
Two more meetings, on August 27 and November 3, were held to complete the negotiations and to draft the exchange agreement. The terms of that agreement provided that the Victor shareholders would exchange their shares for $250,000 of BarChris stock, that Clara Lanza would receive $10,000 in cash, and that the Victor managers would be employed by BarChris and would participate in the BarChris pension plan. Because the BarChris shares to be exchanged were not covered by a registration statement, the contract further provided that the Victor shareholders could elect by March 1962 to have BarChris file a registration statement covering those shares that the new shareholders desired to sell. The BarChris board of directors approved the acquisition on November 21. The contract was signed on November 27, and the closing took place on December 14, 1961.5
*1314C. Developments Within BarChris from May to December 1961
During the second half of 1961 Bar-Chris experienced serious business reversals as well as intracorporate discord over managerial deficiencies in the operation of the business. BarChris’s techniques of financing the construction of bowling alleys relied heavily on the financial success of the alleys to enable the operators to meet lease or note payments. The failure of some of the alleys forced BarChris to assume control and to attempt to operate them profitably. Prospects, despite some large orders, were not as rosy as BarChris’s representatives had lead Shulman and plaintiffs to believe. The district court found that the following developments were not disclosed to plaintiffs.
“(1) Hart Lanes and Linden Lanes were at least six months delinquent in their payments as of November, 1961. The existence of this situation had been omitted from the prospectus, rendering false and misleading its statement that since 1955 BarChris had been required to repurchase only one-half of 1% of its customers’ promissory notes. The continued and growing rate of repurchases due to delinquencies was concealed from the plaintiffs.
(2) Talcott advised BarChris in April, 1961, that it would not make any new purchases of notes or other obligations of BarChris’s customers; Talcott maintained that position thereafter.
(3) Plaintiffs were not told that prior to the closing in 1961, BarChris was operating at least eight bowling centers and that all of these were operating at a loss. The operation of bowling alleys by BarChris was concealed throughout the negotiations with Shulman. The omission of any reserves for contingent liabilities and the inclusion of a reserve for the Stratford bankruptcy gave the false and misleading impression that Strat-ford was the only facility which was in trouble and likely to be taken over by BarChris. In fact, BarChris was faced during the early period of negotiations with a substantial prospect that it would have to take over operation of a number of other bowling alleys; that prospect materialized well before the closing with the Lanzas, but nothing was ever said to correct the misleading impressions conveyed by the documents given to Shulman.
(4) It was also undisclosed that BarChris was attempting to sell and lease back two parcels of real estate in order to obtain much-needed working capital and that the estimated earnings figure of $1 per share for 1961 depended in large measure on the completion of such sales and leasebacks by the end of that year.
(5) Neither plaintiffs nor their representatives were told that some time after May, 1961, Pugliese loaned BarChris $90,000 or $100,000. Nor was it disclosed that early in December, 1961, Russo and Vitolo loaned the company $48,000 and $50,000, respectively. These non-disclosures were especially deceptive since the prospectus had stated that during the three years ending February 28, 1961, the officers of BarChris had made advances to the company totalling $155,615 and that all such advances had been repaid. As of the date of the prospectus the actual advances were $430,615, of which only $4,000 had been repaid. Deepening the earlier deception via the prospectus, the later non-disclosures concealed the very poor cash position of BarChris.
(6) Neither plaintiffs nor Shulman learned at any time before the closing that the BarChris general ledger relating to its accounts with its banks showed negative cash balances on or about November 30, 1961, totalling over $600,000. The largest among these was the negative balance in the ledger account for Lafayette National Bank of $442,234.64 representing checks drawn but not cashed beyond the $119,490.60 balance shown on that bank’s statement.” *1315Despite these adverse business developments, six press releases and reports were issued by BarChris, the context of which varied from questionable optimism to downright misrepresentation.6
The intracorporate conflicts and criticisms peaked in December. On November 30, Vitolo announced that he intended to resign the presidency of BarChris; the board was considering Russo to fill that post. On December 6, at a special meeting of the board of directors, at which Coleman was present, Kircher presented a statement, endorsed by two other officers, Birnbaum and Trilling, which contained the following:
“It is our considered judgment that Mr. Russo has been thrust into the position of being considered for [the presidency of the company] as a result of management’s refusal to recognize, evaluate and solve the underlying management problem, rather than being positively chosen on the basis of the recognition that he possesses the capabilities required to serve in this office. On this premise we cannot, in good conscience, concur with any recommendation which would permit him to exercise the powers and responsibilities of the office of chief executive.
One might say that the success of BarChris to date belies any weakness in management. On the contrary, the success of the Company and its rapid expansion as a result of a booming industry have contributed to concealing these weaknesses, which only now begin to show up when the industry is losing its explosive growth, competition is becoming keener and earnings begin to wane. Such factors as low down payments, poor credit risks, high financing costs, poorly written contracts, improper documentation, inadequate cost estimation and the like, which, when they appear in a booming industry, tend to be lost in the shuffle, take on a different light in today’s market. We make no criticism of occasional errors of judgment, which result in losses or excessive costs. However, when a consistent pattern of organizational laxity and faulty judgment become apparent, we believe that management must appraise the situation and initiate such action as is deemed necessary in the circumstances to correct the deficiencies noted.
Some of the past mistakes that have recently come to light and have damaged or may damage the Company include the practice of the execution by Mr. Russo of legal documents without legal representation. Of a number of examples, one which was recently brought to the attention of the Board of Directors was Stratford Bowl, in which ease an improperly executed document resulted in the Company losing its position as a secured creditor in a bankruptcy proceeding and resulting in the exposure to substantial loss. This lack of legal representation has resulted in improper filings and other deficiencies which placed the Company in an unsecured position as against any Trustee in Bankruptcy in situations having an aggregate value in excess of |1,000,000. Fortunately, the former condition was resolved with a minimal loss to the Company, and the *1316latter condition has been substantially remedied through the efforts of our legal department. This same lack of legal representation has contributed to the signing of a turnkey contract— Bridge Lanes — where an underlying lease precludes financing of the $400,000 interior package, because of provisions in the lease which prohibit the filing of chattel mortgages, conditional bills of sale or bailment leases, which are the instruments through which such sales are financed.”
[There follows a description of specific instances of what were alleged to be serious mistakes in the management, particularly by Russo, of various aspects of the business. Kircher then continued:]
“The weaknesses of BarChris are the result of a lack of strong, effective leadership. Some symptoms of this basic problem are evidenced by the following conditions:
1. Refusal to accept the fact that basic problems exist within the Company;
2. The acceptance of the thought that all of the Company’s ills can be cured by additional cash coming into the Company;
3. The inability of top management to make prompt decisions which results in confusion and lack of accomplishments at lower echelons;
4. The complete lack of long-range planning;
5. The excessive concern over the price of the Company’s stock and the tendency to make decisions based upon the reaction of the stock market to such decisions.
We feel that BarChris is at a point of crisis. This crisis cannot be solved by wishful thinking of [sic] the perpetuation of ineffective leadership. The Board of Directors must exercise its responsibilities by recognizing the management’s inability to cope with the existing problem, and must take such action as it considers necessary to prevent the continuation of ineffective leadership which ultimately can only result in substantial damage to the Company and its stockholders.”
It is to be noted that this statement was made at the board meeting of December 6, eight days before the closing of the Victor transaction. The plaintiffs were never informed of the conditions revealed by the statement or of the existence of strife within the Company. Coleman made no attempt to ascertain whether these matters had been or would be disclosed to plaintiffs.
II. The Decision of the District Court
The district court held that plaintiffs were fraudulently induced by various misstatements and by failure to disclose material facts to exchange their Victor stock for that of BarChris, and it would be difficult to find a record more replete with evidence of such fraud. Indeed the fraudulent nature of the transaction is not challenged on this appeal. The issue on appeal is the determination of who is liable for the fraud. The district court held that Vitolo, Russo, and Kircher were liable under § 10(b) and Rule 10b-5, § 20(a),7 and the doctrine of common law fraud; that Pugliese was not liable under § 10(b) and Rule 10b-5 and that he had established a “good faith” defense to the imposition of liability under § 20(a). The court further held that plaintiffs had not established that there was a conspiracy among Pug-liese, Friedman, and Ballard to deceive plaintiffs after the December 14 exchange so as to delay their action for rescission. These holdings are not challenged.
The district court found — and the majority affirms — that Coleman and Drex-el were not liable for the misrepresentations and omissions of the BarChris management in their information to the Victor shareholders. The district court’s ruling was based upon two conclusions, one of fact and one of law. The plaintiffs argued below that Cole*1317man knew or should have known that misstatements and omissions to state material facts about BarChris’s business and financial position had characterized the information disseminated by corporate officials to the public, that Coleman nevertheless voted to approve the Victor acquisition, and that Coleman is liable because he did not advise plaintiffs, or see to it that they were advised, of BarChris’s true position. The district court found as a matter of fact that “Coleman neither participated in nor knew of any deception practiced upon the plaintiffs . . . .” The record clearly shows that Coleman made no affirmative misstatements to plaintiffs or to Shulman. As for the facts surrounding the negotiations of the exchange, as the majority opinion notes, the district court found:
“Coleman was not aware or even suspicious that plaintiffs were being deceived during' the negotiations with Kircher. At least until after the closing, he had no knowledge or belief that any hard figures published by BarChris were false or misleading. He knew of some negative developments — of customer defaults, declining new orders and the stringent cash situation. He came to know, too, a week or so before the closing, that there was dissension among the officers. He had no reason to suspect that Kircher had not disclosed all these facts to plaintiffs. . . . ”
The district court concluded that Coleman’s inquiries and investigations were sufficient as a matter of law to satisfy the requirements of § 10(b) and Rule 10b-5.
[Coleman] was under no duty to investigate more than he did at the material times or to seek out and advise the plaintiffs in any way.
In addition, the district court found that Coleman was a “controlling person” within the meaning of § 20(a) of the 1934 Act, but that he had established a good faith defense to the imposition of liability for the acts of the other defendants.
III. Liability Under Section 10(b), Rule 10b-5, and Section 20(a)
The question presented to this en banc court is whether the director of a corporation should be liable to the purchasers of that corporation’s shares when he fails to make any inquiry about the actions of his co-directors and the Company’s officers with respect to the representations made in connection with the sale of stock.
It is not profitable in considering a case such as this merely to characterize the allegedly unlawful conduct as either negligent or wilful and to impose liability only if the conduct was wilful. Neither the Act nor the Rule creates such a simple dichotomy. The purposes of the Act and the Rule are not furthered by a mechanical application of labels. • The relationship of the parties and the transaction involved must be analyzed in order to determine whether the Act and the Rule impose a duty on one party with respect to the other and the nature of that duty. In making this analysis Section 10(b) and Rule 10b-5 “must be read flexibly, not technically and restrie-tively” so as to further Congress’s broad remedial purpose in enacting the statute. Superintendent of Insurance of the State of New York v. Bankers Life and Casualty Co., 404 U.S. 12, 92 S.Ct. 169 (1971).
Section 10(b) and Rule 10b-5 imposed upon Coleman, as a member of the board of directors of the corporation selling the securities, a duty toward these plaintiffs. Ruckle v. Roto American Corp., 339 F.2d 24 (2d Cir. 1964); Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir. 1968) (en banc), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). These provisions impose upon a director of a corporation that is selling its shares the obligation not to defraud the purchaser by either misstating or omitting to state material facts. A director cannot escape that duty by failing to inform himself *1318of the facts and developments relevant to the sale of securities.
Coleman was added to the BarChris board at the behest of Drexel. His assignment was to oversee BarChris’s business and financial operations with a view to protecting Drexel’s substantial investment in BarChris securities. The fact that Drexel had a representative on the board was important to these plaintiffs. The district court found that “Coleman was a respected and weighty member of the BarChris board” and that he was a “controlling person” within the meaning of § 20(a). He was probably the most sophisticated member of the board in terms of financial and business experience. As a director Coleman had voted for the acquisition of the Victor stock. During the negotiation period Coleman knew that BarChris had experienced reverses. He learned at the “point of crisis” meeting, eight days before the closing, of the details of Bar-Chris’s unfavorable position and of the intracorporate dissension.
Despite Coleman’s experience, important corporate position, and knowledge of corporate adversity, he made no attempt to inquire as to the course of the negotiations Kircher was conducting with plaintiffs and Shulman or as to the information about BarChris being conveyed to the Victor shareholders on which the negotiations were based. He did not inquire at the “point of crisis” meeting or subsequent thereto, whether the Victor shareholders had been informed of the unfavorable position of BarChris.
Coleman argued that because he was an “outside” director with respect to the negotiations with Victor, he had no duty to intervene. I disagree. The distinction between an “inside” and an “outside” director is irrelevant in this context, because Coleman did nothing at all. As a director, Coleman had a duty to keep himself adequately informed as to the activities of the corporation. He could no more close his eyes to the purchase of Victor than he could to other important corporate developments. SEC v. Frank, 388 F.2d 486, 489 (2d Cir. 1968). See Levine v. SEC, 436 F.2d 88, 90 (2d Cir. 1971). Cf. SEC v. Great American Industries, Inc., 407 F.2d 453, 463 (2d Cir. 1968) (en banc) (Hays, C. J., concurring), cert. denied, 395 U.S. 920, 89 S.Ct. 1770, 23 L.Ed.2d 237 (1969).
Although Coleman knew that Bar-Chris’s condition had worsened considerably, he made no effort to ascertain whether Kircher had conveyed that information to the Victor shareholders. Coleman’s vote to approve the exchange of shares was a representation to plaintiff purchasers that he had sufficiently inquired as to the facts upon which the negotiations were based and that he was satisfied with the correctness of those facts. The representation was false.
The appellees vigorously urge and the majority holds that decisions of this court have established that liability in damages for a violation of § 10(b) and Rule 10b-5 cannot be predicated upon the defendant’s mere negligence. Close examination of the decisions of this court reveals that this question has not previously been decided.
In Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951) and O’Neill v. Maytag, 339 F.2d 764 (2d Cir. 1964) the negligent failure to fulfill a duty was not in issue. Any language in those cases indicating that active fraud is a requisite in a 10b-5 suit is irrelevant to the instant case. In List v. Fashion Park, Inc., 340 F.2d 457, 464 n. 5 (2d Cir.), cert. denied, 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965), the question was specifically left undecided. An oft-quoted statement that a private damage suit under § 10(b) cannot be based on negligence but requires “some” scienter appears in SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 855. However as to the individual defendants, the court necessarily found scienter and the question of the corporation’s liability for negligent misstatement was left unresolved.
In Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968), cert. denied, 395 U.S. 903, 89 S.Ct. 1740, 23 L.Ed.2d 217 (1969), the *1319court, in passing on the legal sufficiency of a 10b-5 claim for relief, held that the allegation of the individual defendants’ actual knowledge of the falsity of certain statements in a corporation’s annual report was sufficient. Statements in the opinion concerning the possible insufficiency of allegations based on negligence were therefore unnecessary to the decision. In Globus v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir. 1969), cert. denied, 397 U.S. 913, 90 S. Ct. 913, 25 L.Ed.2d 93 (1970), this court held that there was sufficient evidence of actual fraud to support the jury verdict. It was therefore not necessary to decide whether a charge to the jury requiring a finding of negligence alone would have been correct, and the court specifically said that it did not deal with that issue. Id. at 1291. See also Moerman v. Zipco, Inc., 302 F.Supp. 439, 446 (E.D.N.Y.1969), affirmed on opinion below, 422 F.2d 871 (2d Cir. 1970). Finally, in Shemtob v. Shearson, Hammill & Co., 448 F.2d 442 (2d Cir. 1971), the court, while stating in dictum that “it is insufficient to allege mere negligence,” actually held only that the complaint failed to state a claim for relief under 10b-5 on the ground that the suit was a “garden-variety customer’s suit against a broker for breach of contract . . . . ” Id. at 445.
Thus this court has not yet adjudicated the scienter-negligence issue.
Other circuits have ruled that scienter is not a necessary element of a 10b-5 claim for relief. See Ellis v. Carter, 291 F.2d 270, 274 (9th Cir. 1961); Royal Air Properties, Inc. v. Smith, 312 F.2d 210, 212 (9th Cir. 1962); Stevens v. Vowell, 343 F.2d 374, 379-380 (10th Cir. 1965); Myzel v. Fields, 386 F.2d 718, 734-735 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968); City National Bank v. Vanderboom, 422 F.2d 221, 229-230 (8th Cir.), cert. denied, 399 U.S. 905, 90 S.Ct. 2196, 26 L.Ed.2d 560 (1970). Cf. SEC v. Van Horn, 371 F.2d 181, 185 (7th Cir. 1966).
The legislative purpose behind the enactment of § 10(b) and the promulgation of Rule 10b-5 — the protection of investors by requiring the full disclosure of correct information in connection with the purchase and sale of securities —would be advanced by requiring a person in Coleman’s position to acquaint himself with developments in important intercorporate negotiations. The fact that he did nothing to inform himself of the progress and character of the negotiations, at least after the “point of crisis” meeting, was a breach of a duty he owed as a director and a “controlling person” to the Victor shareholders. That Coleman’s failure to act was negligent as opposed to calculated should not insulate him from liability when action on his part might have prevented the fraud perpetrated by the corporation whose activities he was under a duty to supervise. I would hold, therefore, that Coleman’s negligent “omission to state material facts” to the purchasers of BarChris stock was a violation of § 10(b) and Rule 10b-5, and that Coleman should be held liable for the damages which the plaintiffs suffered.
The district court held that Drexel could be liable only for the failures of its nominee and agent Coleman on a theory of respondeat superior, and that, as Coleman had been exonerated, Drexel won “its case by virtue of the dismissal against both Coleman and Ballard.” Because of my view on Coleman’s liability I would also reverse the district court’s determination with regard to the liability of Drexel & Co.
Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (1970) provides:
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in *1320good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
It seems clear that this section was designed to govern the type of relationship that existed between Coleman and Drex-el as well as the kind of transaction that is involved in this case.
Coleman was placed on BarChris’s board of directors at the behest of Drex-el to protect Drexel’s financial stake in the operations of BarChris. The relationship between Drexel and Coleman constitutes control by Drexel within the meaning of § 20(a) and establishes that Drexel did in fact induce Coleman to act or not to act. Myzel v. Fields, supra, 386 F.2d at 738, quoted with approval in Moerman v. Zipco, Inc., supra, 302 F. Supp. at 447.
IV. Reliance
Coleman and Drexel contended on this appeal that reliance is a necessary element of a claim for relief under § 10(b) and Rule 10b-5, and that the district court’s finding that plaintiffs, through their agent Shulman, relied on the oral and written misrepresentations is clearly erroneous.
The liability which I find in this case results from the failure of Coleman to speak. In this type of 10b-5 case, affirmative reliance is not necessarily an element of the claim for relief. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). “In nondisclosure cases, reliance has little if any rational role.” 2 A. Bromberg, Securities Law —Fraud: SEC Rule 10b-5 at 209 (1967). See 6 L. Loss, Securities Regulation 3876-80 (1969). Even assuming, however, that reliance is a distinct element of the claim for relief in all 10b-5 cases, I believe that had Coleman fulfilled his obligations as a director, plaintiffs and Shulman might well have acted differently. List v. Fashion Park, Inc., supra.
V. Conclusion
I would reverse the dismissal of the complaint as to defendants Coleman and Drexel & Co.

. Escott v. BarChris Construction Corp., supra, at 693.

. In the instant action Judge Frankel ruled that the defendants were collaterally es-topped from contesting these findings, a ruling that is not challenged on this appeal.

. “(1) The 1960 sales figure was overstated by $653,900.
(2) The figure for 1960 net operating income was stated to be $1,746,347 whereas it should have been $1,496,196.
(3) The figure for total current assets was stated to be $4,581,963; it should have been $3,914,332.
(4) The figure for contingent liability on the alternative method of financing (sale-leaseback) as of December 13, 1960, was stated to be $750,000. An additional $457,045 should have been included relating to Asbury Lanes and Torrington Lanes. The sum of $81,250 relating to Capitol Lanes should n.ot have been included because this was a direct liability of BarChris, not contingent. The contingent liability figure, after these additions and subtractions, was understated by $375,795.”

. “(1) As with the annual report and the prospectus, the net sales and gross profit figures in the earnings statement were overstated.
(2) Current assets were overstated in the balance sheet because there was a grossly inadequate reserve in accounts receivable against customers’ defaults. This is true even if we accept, as the court does, that this is a matter on which there is latitude for variable accounting judgments. The purported judgment reflected in the BarChris six-month statement is well below any a rguable lower limit.
(3) The earnings statement showed an operating income of $617,229. This figure was overstated, again because of the inadequate reserve against customer defaults. Similarly lacking was a reserve for notes on which BarChris was contingently liable.
(4) The statement of net earnings (listed as $237,007) and the earnings per share figure (20 cents per share) were grossly inflated. If the undisclosed adverse circumstances had been taken into account, the earnings for the period would have been sharply reduced or erased.
(5) The financial statement told about some non-consolidated subsidiaries (note 1), but failed entirely to mention other such subsidiaries which had been set up to operate repossessed bowling centers or alleys built “on speculation” and never sold.
(6) The financial statement was misleading in that a substantial amount of customers’ notes were already past due, thus increasing the possibility that Bar-Chris would become directly liable if the customers defaulted.”
The district court also found that at the November 3 meeting Kircher orally represented that BarChris’s financial situation would be better than that for the previous year.

. The number of shares received by plain-by the mean value of the BarChris stock tiffs was arrived at by dividing $250,000 for 30 days prior to the closing.

. The following reports were issued:
June 20, 1961: Letter to Shareholders July 19, 1961: “Record Sales and Earnings Reported by BarChris for First Six months”
August 2, 1961: “BarChris Issues Explanation of Revised Six Months Statement”
October 3, 1961: “An Important Report to the Financial Community”
October 31, 1961: “BarChris Reports Record Sales, Earnings for Nine Months Ended September 30”
November 22, 1961: “BarChris Declares 4% Stock Dividend”
Plaintiffs admit that they neither saw nor relied upon these documents. The district court held that as plaintiffs’ claims for damages were based on the amount they paid to the trustee for the return of the stock, not the market price of BarChris stock which might have been artificially raised by the statements in these reports, plaintiffs could not base their damage claim on misrepresentations in documents they never saw.

. Securities Exchange Act of 1934 § 20(a), 15 U.S.C. § 78t(a) (1970).