Court Opinion

ID: 9459584
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:24:35.675589+00
Date Added: 2024-06-11T17:36:13.706508
License: Public Domain

TIMBERS, Circuit Judge, with whom OAKES, Circuit Judge,
joins, concurring in part and dissenting in part:
I concur with the majority in affirming the denial of Kircher’s motion for jury trial, but I dissent from the majority’s affirmance of the dismissal of the complaint as to Coleman and Drexel & Co.
I join in Judge Hays’ eminently sound opinion.
In view of this appeal’s rather long gestation period,1 during which there have been a number of decisions in our Court under § 10(b) and Rule 10b-5 and related antifraud provisions of the federal securities laws, I should like to make clear my position with respect to the standard which I believe should be the basis for the imposition of liability upon Coleman and Drexel.
In short, since I believe that Coleman’s conduct constituted reckless disregard for the truth, I would hold Coleman and Drexel liable on that basis under the settled law of this Circuit, without the necessity of reaching the question whether liability may be imposed here for mere negligent conduct.
The following facts in my view demonstrate that Coleman acted in reckless disregard for the truth. He was added to the BarChris board of directors at the behest of Drexel to protect its substantial investment in BarChris. He was the most experienced member of the board with regard to financial and business matters. He was aware that Bar-Chris was acquiring Victor through an exchange of stock since he had voted for *1321the acquisition in his capacity as a director. He was aware that BarChris had suffered many business reversals and that it suffered from severe intra-corporate dissension. Yet he did not know whether this unfavorable position had been disclosed to Victor.
It became clear at the “point of crisis” meeting held on December 6, 1961 that one of the symptoms of BarChris’ lack of effective leadership was a “refusal to accept the fact that basic problems exist[ed] within the Company”. Until that time not even the board of directors had openly recognized “the management’s inability to cope with the existing problems”. Moreover, it was revealed at that meeting that only recently had certain mistakes and problems “come to light”. Coleman’s experience should have told him that, since neither the board nor the management of Bar-Chris would openly admit to themselves until the “point of crisis” meeting that they had serious problems, and since certain mistakes and problems had just recently been discovered, management obviously had not revealed these matters to outsiders such as Victor. But Coleman made no effort whatsoever to discover whether such information had been disclosed.
One of the most significant facts hidden from Victor was that BarChris was suffering internal strife. The very nature of this fact should have caused Coleman to suspect that it had not been revealed to Victor. Intracorporate dissension is a sensitive and delicate matter which management typically (although improperly under the circumstances of this case) considers to be within the confidence of the corporation. There is a natural reluctance to expose the matter to “outsiders”. Moreover, all concerned usually experience an optimism (unjustified in the present case) that the problem is not as serious as it seems and promptly will be resolved. Under these circumstances, there was reason to suspect that the disputing parties — the management of BarChris — had not informed Victor of the problem. Yet Coleman, who was not a party to the internal strife, made no attempt to determine whether Victor had been apprised of this crucial fact.
These facts, as well as others more fully set forth in Judge Hays’ opinion, make it clear to me that Coleman’s conduct constituted reckless disregard for the truth. Circumstances known to Coleman put him on notice that certain material facts in all likelihood had not been disclosed to Victor. Moreover, Coleman had ready access to sources of information which, had he used them, would have apprised him that these material facts had not been disclosed. We have held that such conduct subjects a person to liability under the antifraud provisions of the securities laws. Cohen v. Franchard Corp., 478 F.2d 115, 123 (2 Cir. 1973), slip op. 2819, 2834 (April 11, 1973); Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 362-364 (2 Cir. 1973), slip op. 4897, 4929-33 (March 16, 1973); Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 445 (2 Cir. 1971). A person cannot avoid liability by pleading ignorance where his knowledge and experience tell him that certain events or circumstances known to him require that further inquiry be made. Chris-Craft Industries, Inc. v. Piper Aircraft Corp., supra, 480 F.2d at 369-373, slip op. at 4944-51. Coleman should be held liable even though he may not have definitely known whether the material facts had been misstated or omitted because it was evident that he had seen “the seagulls on the water”2 and had ignored them.
Finally, in not reaching the scienternegligence issue in the instant case, I wish to make it clear that I do not necessarily disagree with Judge Hays’ views on that issue.3 Since the record *1322before us so clearly demonstrates Coleman’s reckless disregard for the truth, I would limit our holding to that basis of liability in this case. SEC v. National Securities, Inc., 393 U.S. 453, 465 (1969). And I would leave to another day the adjudication of the scienter-negligence issue — in a case where the only basis for imposition of liability in a private action for damages under § 10(b) and Rule 10b-5 is negligence. This is not that case.

. Judgment was entered in the district court on October 13, 1970. The appeal originally was argued before a panel of this Court on September 16, 1971. It was reargued before this Court sitting en banc on November 1, 1972.

. As experienced mariners know, well in advance of a storm seagulls assume a V-formation on the surface of the water, heading into the wind to weather the storm. When old salts see this, they take heed and prepare for the storm.

. Especially since it is well recognized that Judge Hays’ views on the meaning of *1322Rule 10b-5 for years have been in the vanguard of important developments in this area. See, e. g., Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6 (1971), unanimously rev’g 430 F.2d 355 (2 Cir. 1970) (Hays, C. J., dissenting) ; Schoenbaum v. Firstbrook, 405 F.2d 215 (2 Cir. 1968) (en banc opinion by Hays, C. J., reversing panel decision from which Hays, C. J., dissented), cert. denied, 395 U.S. 906 (1969).