Court Opinion

ID: 8880188
Source: CourtListenerOpinion
Date Created: 2022-11-26 20:20:11.475238+00
Date Added: 2024-06-11T17:06:36.274103
License: Public Domain

IRVING R. KAUFMAN,
Circuit Judge (concurring):
My dissenting brother, Judge MOORE, leaves the impression that the majority is dealing with startling new principles, ignoring that what we say today follows in the wake of SEC v. Texas Gulf Sulphur Corp., 401 F.2d 833 (2d Cir. decided Aug. 13, 1968). I therefore have no difficulty in concurring in the majority opinion. And since the record is quite obfuscated as to the defendants Lester and Sea-graves, I agree that we are compelled to remand their cases for further hearings.
Inasmuch as these cases are of great importance to the financial and business community, I believe it appropriate to add this caveat: Those who buy or sell securities may no longer assume that the unmended fences of common law fraud will remain the outer limits of liability under Rule 10b-5. Prof. Bromberg has succinctly stated that the rule’s proscription is considered to be “closer to unfairness than what either lawyers or laymen usually think of as fraud.” A. Bromberg, Securities Law: Fraud: SEC Rule 10b-5, ¶ 1.1 at 5 (1968).
Thus, in the Arizona affair — and perhaps in the California transaction as well —the finder defendants received exorbitant fees for the performance of minimal services. They were awarded such a disproportionate percentage of the total consideration paid for the property that, were this arrangement disclosed, it would clearly have indicated the property could not be worth the price paid. This is not, as Judge MOORE hypothesizes, similar to a marital transfer where there could be other plausible explanations for the proposed allocation. Matusow and Pagnani performed the services that finders usually perform and, on the abbreviated record before us, it is idle speculation to attribute their actions to an alleged joint venture especially in the light of their deliberate misrepresentations to G. A. I. of how the proceeds would be allocated. Here, had G. A. I. known of the proposed allocation of the proceeds, it might well have refused to proceed with the negotiations. Accordingly, in not revealing the percentage of the purchase price that was destined for the finders, the defendants failed to disclose a material fact.
While it is true that in the usual business transaction a seller need not dis*463close how he intends to dispose of the money paid him, this was not an ordinary transaction. The excessive harvest being reaped by those who had sown but little was so extraordinary that I question the propriety of the failure of the finder defendants to disclose it.
My basic text is that the property was not sold for cash but for securities. The limits of “fraud” under the securities law are not identical with those of common law deceit — an appropriate standard were this a cash transaction.
In a cash transaction, only the buyer and the seller are affected by a “fraud.” If the buyer does not get the best price, only he, and no one else, is harmed. Where the buyer pays with securities, however, it is not too difficult to discern that many others will perforce be affected because the issuance of the new securities is likely to influence the market for the outstanding stock of the company. (Throughout the relevant period, it should be noted, G. A. I.’s stock was traded very actively — on the occasions when the SEC permitted it to be traded.) Thus, the injury is not exclusively to those who are parties to or participate in the negotiations, but to passive shareholders, potential purchasers, and an ever-increasing circle of others. It seems clear to me that this potential for spreading damage caused by the failure of the finders to disclose a material fact would warrant injunctive relief. I hasten to add, however, that it should not be inferred from what I have said that I am expressing any view on the propriety of a private action for damages.
I am reluctant to see the limitations of the tort of deceit stenciled onto the securities laws lest the resulting maze lead us into the common law morass of overfine distinctions which would frustrate the securities statutes. As an illustration, the common law would distinguish between partial disclosure and nondisclosure. Common law cases have held, for example, that the owner of a dwelling, although he knows full well that his home is riddled with termites, can unload it with impunity upon a buyer (without disclosure), and go on his happy way. E. g. Swinton v. Whitinsville Sav. Bank, 311 Mass. 677, 42 N.E.2d 808, 141 A.L.R. 965 (1942). See Prosser, Torts, 711 (3d ed. 1964) (calling such cases “singularly unappetizing”). The Securities and Exchange Commission, seeking to enjoin manipulation of such “intricate merchandise” as securities, H.R.Rep. No. 85, 73rd Cong., 1st Sess. (1933) 8, should not be fettered by such a wholehearted embrace of the doctrine of caveat emptor.
In sum, any claim that material facts were withheld in a transaction in connection with the sale or purchase of securities must be scrutinized with care, whether or not there would have been liability at common law for such a deed.