Myzel v. Fields
Opinion
LAY, Circuit Judge.
The four cases here considered are actions brought under Securities and Exchange Commission Rule 10b-5, 17 C.F. R. § 240.10b-5 (hereinafter Rule 10b-5), which implements Section 10(b) of the Securities Exchange Act of 1934, 15 U.S. C. § 78a et seq., arising out of the sale of stock of a closed corporation. Trial was held before a jury and jury verdicts totaling $411,000 were returned in favor [727] of the plaintiffs.1 Honorable Earl Larson, the trial judge, overruled the defendants’ motion for new trial and judgment notwithstanding the verdict. The defendants have appealed. We affirm the verdicts and judgment below.
The basic issues are: (1) jurisdiction over intrastate sales, (2) sufficiency of the evidence to support the verdicts, (3) the liability of “controlling” persons and (4) the proper measure of damage.
I. • JURISDICTION. Both Section 10 of the Act (15 U.S.C. § 78j(b)) and Rule 10b-5 require as a jurisdictional basis “the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange.”
The evidence is undisputed that the telephone was used only on an intrastate basis in the solicitation or purchase of each of the appellees’ stock. Appellees claim that federal jurisdiction exists because the telephone is an “instrumentality of interstate commerce” and, therefore, the cases fall within the prohibition of the statute. Despite reasoning to the contrary,2 we are convinced that Congress, in the interest of fairly regulating interstate commerce, intended to supervise those intrastate activities in violation of Rule 10b-5 which are “inimical td the welfare and public policy of the country as a whole.” Nemitz v. Cunny, 221 F.Supp. 571, 574 (N.D.Ill.1963). We hold, consequently, that intrastate use of the telephone comes within prohibition of the Act. See also Bredehoeft v. Cornell, 260 F.Supp. 577 (D.Ore.1966); Lennerth v. Mendenhall, 234 F.Supp. 59 (N.D.Ohio 1964). In interpreting other grants of federal power, it has long been acknowledged that Congress may regulate intrastate activity if simultaneously it is an integral part of or constitutes an instrumentality of interstate commerce. Alstate Constr. Co. v. Durkin, 345 U.S. 13, 73 S.Ct. 565, 97 L.Ed. 745 (1953); Overstreet v. North Shore Corp., 318 U. S. 125, 63 S.Ct. 494, 87 L.Ed. 666 (1943); Pedersen v. Delaware, L. & W. R. R. Co., 229 U.S. 146, 33 S.Ct. 648, 57 L.Ed. 1125 [728] (1913). Thus, in order to protect interstate commerce, intrastate telephonic messages have been placd under the statutory prohibition pertaining to unauthorized publication or use of communications under 47 U.S.C. § 605. Weiss v. United States, 308 U.S. 321, 60 S.Ct. 269, 84 L.Ed. 298 (1939). We recognize that the telephone system and its voice transmission by wire is an integrated system of both intrastate and interstate commerce. Cf. Lipinski v. United States, 251 F.2d 53 (10 Cir. 1958). As such, proof of the interstate telephonic message is not a prerequisite to jurisdiction over a Section 10(b) action. As long as the instrumentality itself is an integral part of an interstate system, nothing in the Constitution requires Congress to exclude intrastate activities from its regulatory control. See Weiss v. United States, supra.
But there exists additional grounds to sustain jurisdiction. It is the rule that where any interstate use is made to perpetuate the original fraudulent concealment or transaction, even though not part of the original solicitation or inducement of sale involved, that nevertheless the subsequent use of interstate facilities in furthering the scheme is sufficient to establish federal jurisdiction.3 Creswell-Keith, Inc. v. Willingham, 264 F.2d 76, 80, 82 (8 Cir. 1959); see also Thomas v. United States, 227 F.2d 667, 670 (9 Cir. 1955) [use of automobile]; Ellis v. Carter, 291 F.2d 270, 274 (9 Cir. 1961) [use of plane]; cf. Boone v. Baugh, 308 F.2d 711 (8 Cir. 1962).
Appellees contended that they were fraudulently induced to sell their stock to the appellants, that the purchases were made by parties (the Myzels) other than the true buyers (the Levines) and that an Illinois corporation owned by some of the appellants was used as a conduit of concealment. The transfers of the stock to the Illinois corporation, although occurring several months and even years later, involved the delivery of checks written by the Illinois corporation on Chicago, Illinois banks to a Minnesota citizen. Cf. Little v. United States, 331 F.2d 287 (8 Cir. 1964). Thus, under appellees’ theory, there was also sufficient evidence of interstate transactions to sustain jurisdiction.
II. SUFFICIENCY OF EVIDENCE. By reason of the jury verdict, and in view of defendants’ motion for judgment notwithstanding the verdict, we set forth from the conflicting evidence, the facts in the light most beneficial to the appellees. See, e. g. Breeding v. Massey, 378 F.2d 171 (8 Cir. 1967).
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LAY, Circuit Judge.
The four cases here considered are actions brought under Securities and Exchange Commission Rule 10b-5, 17 C.F. R. § 240.10b-5 (hereinafter Rule 10b-5), which implements Section 10(b) of the Securities Exchange Act of 1934, 15 U.S. C. § 78a et seq., arising out of the sale of stock of a closed corporation. Trial was held before a jury and jury verdicts totaling $411,000 were returned in favor [727] of the plaintiffs.1 Honorable Earl Larson, the trial judge, overruled the defendants’ motion for new trial and judgment notwithstanding the verdict. The defendants have appealed. We affirm the verdicts and judgment below.
The basic issues are: (1) jurisdiction over intrastate sales, (2) sufficiency of the evidence to support the verdicts, (3) the liability of “controlling” persons and (4) the proper measure of damage.
I. • JURISDICTION. Both Section 10 of the Act (15 U.S.C. § 78j(b)) and Rule 10b-5 require as a jurisdictional basis “the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange.”
The evidence is undisputed that the telephone was used only on an intrastate basis in the solicitation or purchase of each of the appellees’ stock. Appellees claim that federal jurisdiction exists because the telephone is an “instrumentality of interstate commerce” and, therefore, the cases fall within the prohibition of the statute. Despite reasoning to the contrary,2 we are convinced that Congress, in the interest of fairly regulating interstate commerce, intended to supervise those intrastate activities in violation of Rule 10b-5 which are “inimical td the welfare and public policy of the country as a whole.” Nemitz v. Cunny, 221 F.Supp. 571, 574 (N.D.Ill.1963). We hold, consequently, that intrastate use of the telephone comes within prohibition of the Act. See also Bredehoeft v. Cornell, 260 F.Supp. 577 (D.Ore.1966); Lennerth v. Mendenhall, 234 F.Supp. 59 (N.D.Ohio 1964). In interpreting other grants of federal power, it has long been acknowledged that Congress may regulate intrastate activity if simultaneously it is an integral part of or constitutes an instrumentality of interstate commerce. Alstate Constr. Co. v. Durkin, 345 U.S. 13, 73 S.Ct. 565, 97 L.Ed. 745 (1953); Overstreet v. North Shore Corp., 318 U. S. 125, 63 S.Ct. 494, 87 L.Ed. 666 (1943); Pedersen v. Delaware, L. & W. R. R. Co., 229 U.S. 146, 33 S.Ct. 648, 57 L.Ed. 1125 [728] (1913). Thus, in order to protect interstate commerce, intrastate telephonic messages have been placd under the statutory prohibition pertaining to unauthorized publication or use of communications under 47 U.S.C. § 605. Weiss v. United States, 308 U.S. 321, 60 S.Ct. 269, 84 L.Ed. 298 (1939). We recognize that the telephone system and its voice transmission by wire is an integrated system of both intrastate and interstate commerce. Cf. Lipinski v. United States, 251 F.2d 53 (10 Cir. 1958). As such, proof of the interstate telephonic message is not a prerequisite to jurisdiction over a Section 10(b) action. As long as the instrumentality itself is an integral part of an interstate system, nothing in the Constitution requires Congress to exclude intrastate activities from its regulatory control. See Weiss v. United States, supra.
But there exists additional grounds to sustain jurisdiction. It is the rule that where any interstate use is made to perpetuate the original fraudulent concealment or transaction, even though not part of the original solicitation or inducement of sale involved, that nevertheless the subsequent use of interstate facilities in furthering the scheme is sufficient to establish federal jurisdiction.3 Creswell-Keith, Inc. v. Willingham, 264 F.2d 76, 80, 82 (8 Cir. 1959); see also Thomas v. United States, 227 F.2d 667, 670 (9 Cir. 1955) [use of automobile]; Ellis v. Carter, 291 F.2d 270, 274 (9 Cir. 1961) [use of plane]; cf. Boone v. Baugh, 308 F.2d 711 (8 Cir. 1962).
Appellees contended that they were fraudulently induced to sell their stock to the appellants, that the purchases were made by parties (the Myzels) other than the true buyers (the Levines) and that an Illinois corporation owned by some of the appellants was used as a conduit of concealment. The transfers of the stock to the Illinois corporation, although occurring several months and even years later, involved the delivery of checks written by the Illinois corporation on Chicago, Illinois banks to a Minnesota citizen. Cf. Little v. United States, 331 F.2d 287 (8 Cir. 1964). Thus, under appellees’ theory, there was also sufficient evidence of interstate transactions to sustain jurisdiction.
II. SUFFICIENCY OF EVIDENCE. By reason of the jury verdict, and in view of defendants’ motion for judgment notwithstanding the verdict, we set forth from the conflicting evidence, the facts in the light most beneficial to the appellees. See, e. g. Breeding v. Massey, 378 F.2d 171 (8 Cir. 1967).
Lakeside Plastics and Engraving Co., hereinafter called “LPE,” was organized in 1946 in Duluth, Minnesota, by cousins, Zelman and Clarence Levine. The company was organized as a small plasties corporation to make advertising signs. Upon its original issue there were 1,140 shares of common stock issued to some 17 persons, at a par value of $50 per share. Among the original purchasers were the appellee-plaintiffs, Harry Fields (30 shares), Joseph S. Vertelney (100 shares), Samuel H. King (30 shares), and Gordon M. Cohen (40 shares). In 1948, a sales agency, independent of LPE and entitled Lakeside Plastics Sales Co., hereinafter called “LPS,” was organized in the State of Illinois by Orrin and William Levine, who were also original stockholders and directors of LPE from its inception. Both Orrin and William were brothers of Clarence Levine. From 1953 to sometime in 1957, the stock of LPE became totally vested in the hands of the four Levines and the Illinois corporation, LPS. By Í958, 640 shares of LPE were owned by LPS. At about that time, for a nominal consideration ($600 each), a one-fourth interest in LPS was sold to [729] each of the Minnesota Levines. Then, in December 1961, the 640 shares of LPE were re-acquired by LPE as treasury stock, pursuant to a merger with LPS’s wholly owned subsidiary, Lakeside Properties, Inc., hereinafter called “LPI,” which had received the shares from LPS in July 1959. LPE then retired the 640 shares. The remaining 500 shares of LPE stock, then owned one-quarter each by the Levines, was in turn exchanged for 500,000 shares of a newly formed corporation called Lakeside Industries, Inc., hereinafter called “LII.” In 1962, 150,-000 shares of LII were offered to the public at $9 per share. The appellant-defendants herein are each of the four Levines, Benjamin Myzel, Philip Myzel and LII.
Philip (Phil) and Benjamin (Benn) Myzel, brothers and first cousins of Zel-mair Levine, were living in Duluth, Minnesota. The evidence shows that Benn Myzel was a close friend to each of the appellees. Benn was an early director of LPE, going off the board in 1949 and again assuming a directorship in 1954. According to the appellees, Benn Myzel originally solicited each of them to purchase stock in LPE, portraying it as an opportunity “to get in on the ground floor.” Upon Bonn’s advice, each of the appellees made his purchase in 1946 of the shares in question at $50 par value.
For some time thereafter the growth of LPE was somewhat typical of any small, closely held corporation. From 1946 to 1951, the evidence showed a struggle for sales, a very marginal profit picture and a total lack of return to the appellee stockholders on their investment. Appellees, as well as other stockholders, expressed continued concern throughout this period as to the ultimate soundness of the investment involved. At the 1949 stockholders’ meeting, appellee Fields even moved to dissolve the company in order to salvage a pro rata share of everyone’s investment. LPE had an accumulated deficit in earned surplus at the end of 1951 of some $51,000. Sales in that year were $94,000. In 1952, the gross sales rose to some $249,000. This level had been reached before, in 1948. At the end of 1952, the profit was only $7,500 for the year, whereas the earned surplus deficit was still some $43,000. This 1952 financial picture was fully disclosed at a stockholders’ meeting attended by some of the appellees in June of 1953. It was also known that in 1951 a large' new contract was made with the Blatz Brewing Company for advertising signs. Each of the appellees, as well as the other stockholders, in order to secure a bank loan needed for the accomplishment of this contract, was required to pledge his stock.
In the first four months of 1953, principally because of the completion of the Blatz contract, the company showed a $3QJ)00_ .profit and had nearly topped the total sales of the highest previous year. In the June 1953 meeting this fact, i. e.-the"promising interim financial statement, dated April 30, 1953, was not disclosed nor was there any evidence or testimony reflecting discussion of this particular accomplishment. Despite the fact that the total sales in 1953 were over $541,300, almost double the figure for 1952, the total profit for the year was only $20,000 because of an alleged loss in the last eight months.4 Nevertheless, in 1953 and thereafter, the sales zoomed but the profits remained slim [730] with a reported deficit still in 1956. There were increases in salaries to the various officers, as well as increased commissions to the sales agency during this period. The first earned surplus of the company was $6,700 reported in 1957. As indicated, the total sales in 1953 doubled from 1952, and thereafter in 1954 they were increased to approximately $732,000, reaching a total of over $2,069,000 in 1957. The Levines were fully aware of the sales picture and prospects at all times. In 1958 there was $65,000 profit after taxes.
None, of Jdie appellees realized that the others., had sol3~fH5iFT^^ after -the ..reorganized company issued-a prospectus in 1962; In denying thd'motion for Judgment notwithstanding the verdict, the trial judge, Honorable Earl Larson, emphasized the failure of the purchasers in buying up the appellees’ stock to disclose the April financial statement showing the $30,000 profit. As will be discussed, Benn Myzel was a close business associate of Zelman Levine. It is claimed that Benn Myzel was acting for the Levines throughout his purchases of stock from the plaintiffs in the Le-vines’ overall scheme to obtain all of the outstanding stock of LPE. We will discuss the various representations and transactions in terms of the individual claimants.
Samuel King. King’s 30 shares of stock were purchased directly by Benn Myzel in August 1953. According to King, Benn Myzel represented to hrSf at that time that (1) the stock was not worth anything, (2) the company was making no money, and (3) Myzel had sold his own stock. The evidence showed that King had previously sold his stock in 1950 to his employer for $200, but had bought it back because he did not want to see his employer lose any money on the transaction. It is not clear whether King approached Benn Myzel or whether Benn solicited him, but the evidence is clear that Benn did purchase the stock in August 1953, for $200. Equivalent book value of the shares at the close of 1953 would have brought King $882. The evidence shows that Benn Myzel was issued a new certificate of stock on May 26, 1954, and then this stock was retrans-ferred to LPS on an unknown date sometime prior to December 1954. The actual date of the transfer was not shown on the certificate.
Joseph Vertelney. Vertelney had a B.S. degree in Business Administration from the University of Minnesota, and also had some experience in the buying and selling of stocks. He was first approached by Zelman Levine in August of 1953 to sell his stock. He refused. Later he was approached by Phil Myzel in September 1953. Phil admitted at the trial that at all times in the solicitation and purchase of the Vertelney stock that he was acting for his brother Benn. This fact was not disclosed to Vertelney at any time. Phil Myzel represented to Vertelney that the company was not going anywhere, that his brother Benn was therefore going to get out, and that the company was going to go bankrupt. Vertelney was a director at this time. The last meeting he attended was in June of 1953. The evidence shows that Ver-telney had been active as a director in the years up to and including 1953. According to the minutes of the meetings of the corporation, he had participated in many of the business discussions and transactions. At the time he was approached by Phil Myzel, Vertelney asked whether Benn knew more then he did and Phil Myzel told him, yes, but that the Levines were not telling all they knew even to Benn, suggesting that the company was actually going broke. Subsequently, Vertelney agreed to sell to Phil Myzel his stock, negotiating a price of about $35 per share, approximating $3,-500.
The evidence showed that although Phil Myzel was at all times acting for Benn, nevertheless Phil Myzel did not retrans-fer the stock certificate to Benn until May 26, 1954. At that time, and on the same day, Zelman Levine issued a new certificate to Benn Myzel. He in turn endorsed the stock certificate to LPS, and in December 1954, another new [731] certificate was issued to LPS representing in part the Vertelney stock. LPS at that time was owned exclusively by the two Levine brothers in Chicago, William and Orrin.
Gordon Cohen. This stock was bought by Benn Myzel in the latter part of November 1953. According to Cohen, although Benn Myzel did not represent the stock as worthless or the company in bankruptcy, he nevertheless did not offer any encouragement, and in fact represented to him that (1) the company was in a “very difficult condition,” (2) it may or may not make it, (3) he (Myzel) gets nothing from the company and he was sure that Cohen would not either, and (4) that it did not look any better for the future. On this basis Cohen sold the stock to Benn, receiving $1,800 for his 40 shares. Myzel agreed to pay Cohen so much a month, and completed paying for the stock in mid-1954. The stock was transferred on the books to Benn in October 1955. This stock was assigned by Myzel to LPS at an unknown date, but sometime before March 12, 1958, when a new certificate representing this stock was issued to LPS.
Harry Fields. His 30 shares were bought by Phil Myzel, acting undisclosed for Benn. Phil represented to Fields in early 1954, that LPE (1) was doing very badly and (2) was on the verge of bankruptcy, and on March 9, 1954, Fields sold his stock to Phil Myzel for $900. LPE issued the certificate to Phil Myzel on May 26, 1954. This was not transferred to Benn Myzel until October 20, 1955. At sometime before March of 1958, the Fields’ stock was ultimately assigned to LPS along with Cohen’s.
We will briefly touch upon other significant factual evidence. From August through December 1953, Benn Myzel received checks from LPS in various amounts ranging from $500 to $1,532.50 and totaling some $4,453.93. Benn Myzel expressed surprise in receiving these checks but added that they were some form of a commission paid for a favor to the Levines in getting some monies due from LPE to LPS released in connection with a factor’s lien on a bank loan. Orrin Levine thought the checks were for loans extended to him. The entire matter is shrouded in contradictions by the appellants. Appellees claim the checks were commissions for buying the stock without disclosing that the true purchasers were the Levines. As the trial court observed, “the timing and the manner of payment were significant” and the proper inference was for the jury under the circumstances.5
Benn’s sale of all his stock to LPS was pursuant to two transactions. In the first lot involving 140 shares, he was paid approximately $10,000 by LPS, through cash and a note payable. His transfer of Vertelney’s (and possibly King’s) stock to LPS took place on May 26, 1954. LPS made payment of $3,750 by check,- dated January 19, 1955, and a note for $7,000 executed January 5, 1955. Payments on the note, starting April 8, 1955, and continuing through December 13, 1956, totaled $7,312.37. Secondly, according to a 1958 agreement, Myzel transferred 255 additional shares to LPS in consideration of $10,000 in cash from LPS. LPS as early as June 1957 was considered to be equally owned by the four Levines. A contract for $35,000 payable by LPE was executed in June 1957 ostensibly as a fee for Benn’s services as “management consultant.” At the trial it was admitted by the Levines and Benn Myzel that,the $35,000 was at least partially a consideration for the transfer of some of the stock involved in the March 1958 agreement with LPS.
During the period of 1953 to 1958, LPS and the Levines, through various transactions, purchased all remaining shares from all other minority stockholders. These transactions are not before us, nor do we intend the jury verdict; or our holding, in any way to reflect upon the [732] acquisition of stock from other stockholders.
For simplification, we have charted the various acquisitions below.
[733] In reviewing the sufficiency of the evidence in a jury trial, we said in Commercial Union Assurance Co. v. Berry, 359 F.2d 510, 516-517 (8 Cir. 1966):
“In considering the sufficiency of the evidence, we must take that view thereof which tends to support the conclusion of the jury and must accept as established all inferences favorable to that result.”
******
“The mere possibility that the jury could have found otherwise than they did is not enough to upset its findings where such are based on substantial testimony and are not entirely unreasonable. Circumstantial evidence may point to different and opposite results. It is for the jury to say which is the correct one.”
In Lavender v. Kurn, 327 U.S. 645, 653, 66 S.Ct. 740, 744, 90 L.Ed. 916 (1946), the Supreme Court laid down the rule followed by courts of appeal.
“Only when there is a complete absence of probative facts to support the conclusion reached does a reversible error appear. But where * * * there is an evidentiary basis for the jury’s verdict, the jury is free to discard or disbelieve whatever facts are inconsistent with its conclusion.”
See also Bankers Life & Casualty Co. v. Kirtley, 307 F.2d 418 (8 Cir. 1962).
The sufficiency of the evidence and the integrity of the verdict are best reviewed in the light of those cases arising under Rule 10b-5, in terms of (1) misrepresentation or nondisclosure, (2) materiality, (3) some form of scienter or intent and (4) reliance.
A. Misrepresentation or nondisclosure.
[734] B. Materiality,7 These nondisclos-ures assume materiality when considered in the context of the affirmative representations made severally to the appel-lees. Phil Myzel’s statement to Vertelney that Benn was “going to get out” of the company could be considered actionable as a misstatement of another’s intent or state of mind. See Restatement of Torts § 530 and § 525, comment b (1938). Benn’s statements to King that he himself had sold his stock, that it was worthless and that the company wasn’t making any money were misleading. See (e. g., Janigan v. Taylor, 344 F.2d 781 (1 Cir. 1965); cf. Rogen v. Ilikon Corp., 361 F.2d 260, 266-267 (1 Cir. 1966). Phil’s statements to Fields that the company was on the “verge of bankruptcy” or “in bad shape” were material in view of the nondisclosures. And Benn’s statements to Cohen that “he was not getting any money from the company” become significant with the discovery of Benn’s commissions commencing in August 1953. Evidence that Benn consistently avoided mentioning his continued possession of the stock or his directorship in LPE and that when questioned by ap-pellee Fields in 1955 he responded, “it’s a good thing we got out of it,” was undoubtedly damaging to his credibility.
Materiality encompasses those facts “which in reasonable or objective contemplation might affect the value of the corporation’s stock or securities * * * ” to the seller. Kohler v. Kohler Co., 319 F.2d 634, 642, 7 A.L.R.3d 486 (7 Cir. 1963). See also List v. Fashion Park, Inc., supra. But it also should be considered that material information “need not be limited to information which is translatable into earnings. * * * ” SEC v. Texas Gulf Sulphur Co., 258 F.Supp. 262, 280 (S.D.N.Y. 1966).
A sale of stock preceded by a statement that business was “about the same” was sufficient to sustain a Rule 10b-5 action by stockholders and directors against another director in Janigan v. Taylor, supra, 344 F.2d at 785. The court said:
“Viewed against a background of past fluctuations, we might not find the misrepresentation to be of the importance intimated by the court’s opinion. Certainly it could not be claimed that the change presaged the dramatic improvement that occurred subsequently in the company’s affairs, or that the defendant could have any thought that it did. On the other hand, even as a new upswing not uncharacteristic of the business, plus some promising overtones, we could not find that as a matter of law the true situation was fairly disclosed, within the heavy requirements of the Act, by the single statement that things were ‘about the same.’ ” (Our emphasis)
Under the circumstances the jury had a right to consider whether the estimates of LPE’s financial prospects uttered by both Myzels were given in bad faith for the purpose of misleading.8
C. Scienter. Proof of “sci-enter,” i. e., knowledge of the falseness of the impression produced by the statements or omissions made, is not required [735] under Section 10(b) of the Act. In Dale v. Rosenfeld, 229 F.2d 855, 858 (2 Cir. 1956), the court of appeals said: “Readiness and willingness to disclose are not equivalent to disclosure.” See also Ellis v. Carter, supra, 291 F.2d at 274; SEC v. Texas Gulf Sulphur Co., supra, 258 F.Supp. at 277. However, under the court’s instructions the jury was required to find “deceptive or manipulative conduct” consisting of “misrepresentations or omissions” made with “the intent of inducing plaintiffs to sell their stock.” By this phrasing, which in fact was more demanding than the broader express terms of the statute and the rule, the jury was in effect told that appellants had to be found conscious wrongdoers before liability ensued. We fail to see any prejudice to appellants here.
D. Reliance.9 Professor Loss points out that in cases of nondisclosure, if reliance is a prerequisite of a Rule 10b-5 action, it is “little more than a formal requirement.” 3 Loss 1765. However the Court of Appeals for the Second Circuit in List v. Fashion Park, Inc., supra, 340 F.2d at 463, best states the rule that should govern this phase of a Rule 10b-5 suit:
“On the other hand, we do not agree with certain overtones in the opinion of the trial court concerning the meaning of ‘reliance’ in a case of non-disclosure under Rule 10b-5. The opinion intimates that the plaintiff must prove he actively relied on the silence of the defendant, either because he consciously had in mind the negative of the fact concealed, or perhaps because he deliberately put his trust in the advice of the defendant. Such a requirement, however, would unduly dilute the obligation of insiders to inform outsiders of all material facts, regardless of the sophistication or naivette of the persons with whom they are dealing. * * *
“The proper test is whether the plaintiff would have been influenced to act differently than he did act if the defendant had disclosed to him the undisclosed fact. Speed v. Transamerica Corp., 99 F.Supp. 808, 829; Kardon v. National Gypsum Co., 73 F.Supp. 798, 800 (E.D.Pa.1947). To put the matter conversely, insiders ‘are not required to search out details that presumably would not influence the person’s judgment with whom they are dealing.’ Kohler v. Kohler Co., supra, 319 F.2d at 642. This test preserves the common law parallel between ‘reliance’ and ‘materiality,’ differing as it does from the definition of ‘materiality’ under Rule 10b-5 solely by substituting the individual plaintiff for the reasonable man.”
Compare Hafner v. Forest Laboratories, Inc., 345 F.2d 167 (2 Cir. 1965), and Kohler v. Kohler Co., supra, with Dale v. Rosenfeld, supra, and Vine v. Beneficial Finance Co., 374 F.2d 627 (2 Cir. 1967).
Fields, Cohen and King were not familiar with the business. They were entirely dependent upon the advice of the Myzels when they bought and when they sold. Their uncertainty about the company, as well as their total trust in one one who was not only their close friend but also a financial advisor and relative to the operators of the company, raises questions of fact that could only be resolved by the jury. Would these particular men have been impressed with the trutih of the total sales picture when they were solicited to sell their stock? Would they have reacted differently had they known of the company’s $30,000 profit in the first four months of the year? Would they have inflated their views of value had they known the true purchasers of the stock? AH of these questions might have been answered “no” but here, upon sufficient evidence, they were an[736] swered “yes.” See Rogen v. Ilikon, supra. See also Prosser, Torts § 103 at 732 (3d ed. 1964):
“ ‘The design of the law is to protect the weak and credulous from the wiles and stratagems of the artful and cunning, as well as those whose vigilance and security enable them to protect themselves,’ and ‘no rogue should enjoy his ill-gotten plunder for the simple reason that his victim is by chance a fool.’ ”
We are faced with a more difficult problem in the recovery of appellee Vertelney. Here was a man trained in financial matters, who was active on the Board of Directors of LPE through the June 1953 meeting. The trial court informed the jury that he was an “insider” as a matter of law. As such he presumably had superior knowledge of the financial status of the business, as well as its prospects and business policies. As stated in Kohler v. Kohler Co., supra, there is no duty to disclose information to one who reasonably should already be aware of it. Nor is there the necessity for one insider to “search out details” for another insider, in the same sense that such a duty might exist toward others less informed. See Hafner v. Forest Laboratories, Inc., supra.
Hindsight reaction to an improvident sale by an insider to a stranger or even another insider, based upon nondisclosed facts equally known or available to both parties, ordinarily would not be considered within the protective basis of Rule 10b-5.10 Cf. Heekenkamp v. Kennedy, 267 F.2d 887 (8 Cir. 1959). In Shappirio v. Goldberg, 192 U.S. 232, 241-242, 24 S.Ct. 259, 261, 48 L.Ed. 419 (1904), it was stated:
“When the means of knowledge are open and at hand or furnished to the purchaser or his agent and no effort is made to prevent the party from using them * * * he will not be heard to say that he has been deceived to his injury by the misrepresentations of the vendor.”
If Vertelney had been misled solely by Phil Myzel’s statements or non-disclosures regarding the company’s value, and on that basis alone had sold his stock, recovery would be denied. On the surface, at least, he was more conversant with the financial affairs of the company than Phil Myzel. He was in a position to investigate or make an effort to inform himself as to corporate values. As a director Vertelney is chargeable with a degree of notice of those facts which the corporate books and the directors’ meetings would fairly disclose.11 Kohler v. Kohler Co., supra, 319 F.2d at 641-642; cf. Hafner v. Forest Laboratories, Inc., supra, 345 F.2d at 168; see also 3 Fletcher, Cycl. Corp. § 1169 at 861-62 (1965) and 19 C.J.S. Corporations § 762, at pp. 109-110 (1940). Yet the record is silent as to any effort on his part to call Benn Myzel or the Levines or to make any valued judgment of the situation. If anything, Vertelney was grossly negligent. The time gap, 1953 to 1962, between the sale and the discovery of the fraud seriously bothers us not only as to Vertelney, but as to all of the appellees. At times the appellees’ testimony joins that of appellants in taxing even the most credulous mind. Yet, we cannot usurp the traditional function of the jury as to credibility, so that when sufficient evidence appears, if the jury believes it we are bound to accept the factfinder’s verdict, even though we might have found otherwise.
However, there are circumstances involved here which we feel [737] create a jury question as to Vertelney’s naked reliance in this particular case. Accompanying Phil Myzel’s pessimism about the financial status of LPE was the affirmative statement that Benn was “going to get out” for the reason that “he doesn’t think they are going anywhere.” The evidence showed this was important to Vertelney. Here again represented was the picture of the trusted friend and advisor who had lost faith in the enterprise. When this misrepresentation is conjoined with the nondisclosure of Phil’s agency for Benn, a new consideration emerges. Cf. Strong v. Repide, 213 U.S. 419, 433, 29 S.Ct. 521, 53 L.Ed. 853 (1909). The testimony of both Phil and Benn Myzel demonstrates unequivocally that Phil was making the purchase secretly for Benn. In addition, the jury could determine from all the facts that Benn was “controlled” by the Levines. Vertelney had just the month before refused to sell to Zelman Levine. As previously stated, the test of justifiable reliance in Rule 10b-5 actions is a subjective test, and not simply a “reasonable man” test. List v. Fashion Park, Inc., 340 F.2d 457, 463 (2 Cir. 1965). By such labyrinthine transfers (see chart, supra), the true identity of the purchaser was effectively hidden from even a most alert director or insider. The jury could reasonably infer that the subsequent circuitous transfer of the stock from Phil to Benn eight months later, with immediate reassignment to LPS, then controlled by the Illinois Levines, was intended as an artifice to effectuate concealment from a person known by the appellants to be a man with business acuity.
The jury could well consider under the particular setting involved that there was created a diminished necessity in Vertelney’s thinking of such inquiry as he might have made had he known that Benn or the Levines wanted to increase their holdings. Phil Myzel was a close friend of Vertelney. Although this in itself does not here, in our opinion, necessarily create a fiduciary relationship, it is a factor to be considered. See 23 Am.Jur., Fraud and Deceit § 159 at 966-67; 1 Harper & James, Law of Torts § 7.8 at 563 (1956). Vertelney knew that the Levines and Benn (not Phil) were intimately involved in the success or failure of LPE. The nondisclosure of the identity of the true purchasers assumes greater significance with Vertelney than with the other appel-lees. He valued Benn’s relationship to the Levines and knew of his early expectations and enthusiasm toward the company, for he relates “He [Benn] is the one who pushed it so far, I would have thought that if he would get out, I better get out too.” In a similar fact situation the Court of Appeals for the Second Circuit held that a concealed insider who was the true purchaser of stock “ * * * was bound to disclose the facts within his knowledge which the seller would naturally want to know and would -learn if not diverted from inquiry. He could, in short, deal openly and leave the seller to investigate as he chose or deal secretly and be bound to disclose the facts pertinent on the question of value.” Broffe v. Horton, 172 F.2d 489, 494 (2 Cir. 1949); see also Barnes v. Eastern & Western Lumber Co., 205 Or. 553, 287 P.2d 929 at 943 (1955).
Under the circumstances we conclude, although not without great difficulty, that all of the appellees presented sufficient proof of an “assortment” of nondisclosures and positive misrepresentations to carry their respective cases to the jury.
III. LIABILITIES OF CONTROLLING PERSONS. The trial court instructed that the Levines were liable for the acts of Benn and Phil Myzel “if they knew or should have known” that the My-zels were “purchasing” the stock for the Levines “or with the intention of reselling” to them. The court referred to ap-pellees’ contention that “a plan” existed to obtain the stock for the Levines, and added that if such existed the Levines would be liable for any fraud that the Myzels committed. The trial court emphasized that the Levines must “know and approve” of the Myzel activities in [738] order to be liable. The court added that there could be no liability of the Levines “if they had not sought to have the My-zels obtain it.”
The liability of the Levines is governed neither by principles of agency nor conspiracy. The trial court obviously was not aided by appellees’ vacillation on the conspiracy argument. Nor are we. Section 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78t, reads simply:
“(a) 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 good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
“(b) It shall be unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this chapter or any rule or regulation thereunder through or by means of any other person.”
Although it might now be argued that it would have been better to instruct in the language of the statute, neither side requested it. Appellants claim that the court should have instructed on the Levines’ exculpation by reason of “good faith” or “not ’inducing” the acts. This argument must fail under Fed.R.Civ.P. 51, requiring specific objection at the time of trial. Hindsight argument is not helpful. In view of the given instruction, there existed apparent justification for appellants’ trial counsel not to request, but to avoid the language of the statute. The statute is remedial and is to be construed liberally. It has been interpreted as requiring only some indirect means of discipline or influence short of actual direction to hold a “controlling person” liable. See Hawkins v. Merrill Lynch, Pierce, Fenner & Beane, 85 F.Supp. 104 (W.D.Ark.1949); Lorenz v. Watson, 258 F.Supp. 724 (E.D.Pa.1966); Geismar v. Bond & Goodwin, Inc., 40 F.Supp. 876 (S.D.N.Y. 1941). Cf. Brennan v. Midwestern United Life Ins. Co., 259 F.Supp. 673 (N.D.Ind.1966); MacClain v. Bules, 275 F.2d 431 (8 Cir. 1960); Whittaker v. Wall, 226 F.2d 868, 871-872 (8 Cir. 1955).
We are then faced with the problem whether the instruction as given was prejudicial in view of the exception appellants made at the trial. Since the language of the statute is less restrictive than the court’s instruction, the statute encompasses the direction given, and no prejudice to appellant could have resulted. Cf. 3 Loss 1808-11. Furthermore, under common law principles, a principal is liable for the deceit of his agent committed in the very business he was appointed to carry out. This is true even though the latter’s specific conduct was carried on without knowledge of the principal. See Oddo v. Interstate Bakeries, Inc., 271 F.2d 417, 423 (8 Cir. 1959).
The objection appellants raised is that the instruction omits as a prerequisite to liability that under the “plan” the Levines also must know that the method to be used by the Myzels would be unlawful, relying upon common law conspiracy cases.12 However, where the evidence shows the “controlling person” is the actual intended beneficiary of the stock purchase, “control” under the Act does not require knowledge of the specific wrongdoing any more than a principal must know in advance of his agent’s fraud. All that is required is that the controlling person “directly or indirectly” induces the purchase. Under such circumstances, if the direct pur[739] chaser fails to disclose material information in violation of Rule 10b-5, the “controlling person” cannot excuse himself, even under the “good faith” clause of Section 20(a). To hold otherwise would vitiate the plain meaning of Section 20 (b), that one cannot do indirectly through another what he cannot do himself. Therefore, even assuming arguendo, that there was failure to properly instruct under a civil or criminal conspiracy theory, the language of Section 20 obviates any possible prejudicial effect. Furthermore, the court not only required the Levines to know of Myzels’ activities, but required “approval” of them, before they were responsible. Such requirements are neither explicit not implicit in the Act. We think this qualified instruc-ton adequately protected the rights of all appellants.
IV. “INSIDER” INSTRUCTION. The trial court charged the jury that Benn Myzel was “an insider” as a matter of law. The court then added:
“An insider is a person who because of his position or intimate association with a corporation has greater knowledge of the financial affairs of the corporation. Because of his superior knowledge, an insider has a duty to disclose known facts not available to the plaintiffs and which he should reasonably have known would be important to the plaintiffs in determining the value of the stock which they held.”
The court also made the definition applicable to Vertelney. The definition is accurate. The problem is its necessity and applicability.
Appellants made specific objection to the charge and renew it here. It is urged that at the very least, whether Benn Myzel was an insider is a question of fact. Section 10 and its counter- ■ part Rule 10b-5 do not relate only to “insiders” as restrictively defined 'in Section 16(b) of the Act, 15 U.S.C. § 78p (b). See 3 Loss 1445. Section 10(b) relates to “any person” who uses “manipulative or deceptive” practices. Proof of a purchaser’s status as “an insider” is, therefore, not essential to a Rule 10b-5 violation.
Of course, if Benn Myzel was acting for or on behalf of the Levines in the stock purchase, under those circumstances he was chargeable with the duties of an insider as a matter of law. See 3 Loss 1452, n. 26. The Levines, as well as Vertelney in 1953, were all directors, and therefore may be charged with a greater knowledge of the financial condition of the corporation. But whether Benn Myzel was acting for the Levines was itself a jury question: It would have been error to charge that Benn Myzel was an insider on this theory alone.
Although it has been said that construction of Rule 10b-5 “has imposed special burdens upon insiders”13 (see Cochran v. Channing Corp., 211 F.Supp. 239, 242 (S.D.N.Y.1962)), and that “the aim of * * * Rule 10b-5 is to deter misconduct by insiders * * * ” (List v. Fashion Park, Inc., supra, 340 F.2d at 463), nevertheless the expressed policy of the Act is to prevent fraud by “any person.” Congress did not intend for courts to become lost in conclusory language, but to effectuate the desirable ends of the Act. See also Knauss, A Reappraisal of the Role of Disclosure, 62 Mich.L.Rev. 607 (1963-64); O’Neal, Close Corporations, § 8.16 at 153 (1958); Fischer v. Kletz, 266 F.Supp. 180, 187-188 (S.D.N.Y.1967).
As a practical matter, the rule has. been applied primarily to insiders. As. stated in Kohler v. Kohler Co., supra, 319 F.2d at 642:
“[Cjorporate insiders must scrupulously disclose to outsiders those material facts about a corporation’s business which in reasonable and objective contemplation might affect the value of the corporation’s stock or securities [740] and which the insiders should reasonably believe are unknown to the outsider.”
See also Speed v. Transamerica Corp., 88 F.Supp. 808, 828-829 (D.Del.1951).
The lower court’s instruction indicates that “because of [the insider’s] superior knowledge” he has a duty to disclose. This is only partially accurate. Actually, his duty arises because of Rule 10b-5. Thus, the instruction applies regardless of the status of the person charged with violation of the Act. Therefore, the objection could only relate to the court’s direction that because Myzel had “intimate association” with LPE he had, as a matter of law, “a greater knowledge of the financial affairs” of it or had “superior knowledge.” •
But these general facts are not really disputed by appellants. Zelman Levine and Benn Myzel both described Benn as a “financial consultant” and “advisor” to the corporation. Zelman Levine “constantly” talked business with Benn. When Zelman Levine was cross-examined we find ample description of the relationship:
“Q. At least from a very early time he [Benn Myzel] acted — whether as a close friend or not — he did act as a surety or endorser on certain obligations of L.P.E.? A. Definitely.
“Q. Almost from the very beginning of its inception? A. Yes, sir.
“Q. With respect to whether he was a close friend or not — he was a blood relative — and he was also at some time a business confidant? A. Definitely.
“Q. A consultant and advisor, and I assume that he intimately knew the affairs of your company? A. Yes.” 14
Where facts are undisputed and the evidence is susceptible of but a single inference, the question of one’s status of relationship is one of law for the court. See, e. g., Wooddale, Inc. v. Fidelity & Deposit Co. of Md., 378 F.2d 627, 630-631 (8 Cir. 1967).
Objection is made that the court’s charge implies that Benn Myzel had actual knowledge of the specific misrepresented or nondisclosed financial figures, e. g., the interim financial statement of April 30, 1953. This contention is based on a misreading of the instruction. The court simply charged that Myzel had “a duty to disclose known facts * * * ” leaving to the jury determination whether or not Myzel’s knowledge encompassed any of the particular facts that would be material to the appellees.
V. DAMAGES. Plaintiffs prayed for alternative relief of either recision or money damages. Upon a motion by defendants to have plaintiffs elect remedies,15 the district court ruled [741] that the actions for recision or money damages were not inconsistent, since defendants admitted having disposed of the LPE stock involved, making its return impossible. The trial court treated the action as one at law for money damages. In their complaint and throughout the trial, the plaintiffs insisted upon their right of trial by jury, and the court, relying upon Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962), and Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959), properly refused to strike the ease from the jury docket. See Halladay v. Verschoor, 381 F.2d 100 (8 Cir. 1967); cf. also Richland v. Crandall, 259 F.Supp. 274 (S.D.N.Y.1966).
The problem encountered on the damage question which bothered appellants’ trial counsel, and which is again raised on appeal, was how recision and recisional damages could be determined by a jury,16 when the remedy of recision is available solely in an equitable action. Black v. Boyd, 248 F.2d 156 (6 Cir. 1957); Union Pac. R. R. Co. v. Syas, 246 F. 561 (8 Cir. 1917); Wilhelm v. Consolidated Oil Corp., 84 F.2d 739 (10 Cir. 1936); see McClintock, Equity § 84 (2d. 1948). Appellees urge in reply that law and equity are fused under modern federal practice (Fed.R.Civ.P. 2) and, therefore, they have the right to disaffirm the contract and still seek damages at law. However, although legal and equitable causes have lost their procedural distinctions, and may now be joined in one action, the substantive and remedial distinctions still properly persist. See Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527 (10 Cir. 1962); Bradley v. United States, 214 F.2d 5, 7 (5 Cir. 1954); Bereslavsky v. Kloeb, 162 F.2d 862, 863 (6 Cir. 1947); McClintock, supra, § 20, 2 Moore, Fed. Pract. |J 2.02 (1966). See also SEC v. Capital Gains Research Bur., Inc., 375 U.S. 180 at 193, 84 S.Ct. 275, 11 L.Ed.2d 237. The nature of the relief sought, not the statute which creates the right, determines the legal or equitable remedy. Straley v. Universal Uranium & Milling Corp., 289 F.2d 370, 373 (9 Cir. 1961). Thus, a jury still cannot rescind a bargain, and without recision accomplished, the bargain stands in the way of restitution. But in an action at law a jury may award recisional damages if the contract has already been mutually rescinded or is otherwise set aside by law. See, e. g., Lydle v. Scott, 157 [742] F.Supp. 729 (N.D.Ohio 1957); Annot., 95 A.L.R. 1000 (1935); see also Schaefer v. Telex, Inc., 132 F.Supp. 140, (D.Minn. 1955). Here, neither the jury nor the court was required to rescind the agreement, Section 29(b) of the statute itself declares the sale void, once there is found a violation of Rule 10b-5. 15 U.S.C. § 78cc(b); cf. Goodell v. Accumulative Income Corp., 185 Minn. 213, 240 N.W. 534 (1932). If the contract was void as a matter of law, the plaintiff was entitled to restitution of what he sold, or, since restoration of the stock was here impossible, an equivalent money judgment. The law is well settled that “where an action is simply for the recovery and possession of specific real or personal property, or for the recovery of a money judgment, the action is one at law.” Whitehead v. Shattuck, 138 U.S. 146, 151, 11 S.Ct. 276, 277, 34 L.Ed. 873 (1891); 3 Loss 1851. See Halladay v. Verschoor, supra; cf. Blazer v. Black, 196 F.2d 139 (10 Cir. 1952).17
Appellants also argue that they were entitled to the equitable defense of laches, an issue upon which neither the judge nor the jury passed. However, the doctrine of laches is not applicable where the action was properly tried at law to a jury. See Straley v. Universal Uranium & Milling Corp., 289 F.2d 370 (9 Cir. 1961). The applicable measure of the timeliness of the suit was the Minnesota statute of limitations, and the trial judge correctly instructed on that basis. See Holmberg v. Armbrecht, 327 U.S. 392, 395, 66 S.Ct. 582, 584, 90 L.Ed. 743 (1946), wherein it is said:
“As to actions at law, the silence of Congress has been interpreted to mean ■ that it is federal policy to adopt the local law of limitation.”
The fact that plaintiffs’ original prayer was for reeision or for damages in the alternative would not change the applicability of the state limitations statute as opposed to laches. See Cope v. Anderson, 331 U.S. 461, 463-464, 67 S.Ct. 1340, 91 L.Ed. 1602 (1947); Lydle v. Scott, D.C., 157 F.Supp. 729; 3 Loss 1772-1773.
Reeision calls for cancellation of the bargain, and the return of the parties to the status quo ante; where this is impossible because of the disposal or retirement of the stock, then equivalent value of the stock at the time of resale (cf. In re Liebig, 2 Cir., 255 F. 458 (1918)) or at the time of judgment (cf. Strong v. Repide, supra, 213 U.S. at 421-422, 29 S.Ct. 521), should be the proper measure of damage.18
[743] But where there exists no market value of the stock, the stock is no longer in existence, and there clearly has been a fluctuation in value since the time of the original sale, then what restitutional damages are to be awarded must depend upon the facts of the particular case. As stated in the Restatement of Restitution § 151:
“Where a person is entitled to a money judgment against another because by fraud, duress or other consciously tor-tious conduct the other has acquired, retained or disposed of his property, the measure of recovery for the benefit received by the other is the value of the property at the time of its improper acquisition, retention or disposition, or a higher value if this is required to avoid injustice where the property has fluctuated in value or additions have been made to it.” 19
See also Restatement of Restitution § 65 and illustrations 17 and 18.
The Levines converted each share of LPE into 1,000 shares of Lakeside Industries, Inc. (LII) in 1961. The market price of LII was $9 per share when originally issued for public sale in 1962. If the highest restitutional damage had been allowed on the basis of market price at the time of the notice of the conversion, Vertelney’s verdict could have been $900,000; Cohen’s verdict, $450,-000; and King and Fields could have recovered $270,000 each. The book value of LII stock at the time of public sale in 1962 was, according to appellants’ evidence, $1.53 per share. The actual value found by the jury for damages shows that Vertelney received $2.12 per share of LII; Cohen, $2,125 per share of LII; Fields, $2,266 of LII per share; and King, $1,533 per share of LII. We refuse to speculate on the reasons for the variances in the valuations awarded. Approximation is all that is necessary. Palmer v. Connecticut Ry. & Lighting Co., 311 U.S. 544, 61 S.Ct. 379, 85 L.Ed. 336 (1941); see also American Fire Apparatus Co. v. NLRB, 380 F.2d 1005 (8 Cir. 1967). Since the awards are well within the provable damages possible we cannot agree with appellants’ contention of excessive damages.
Appellants claimed at trial that appel-lees had positively elected to affirm the contract by seeking a jury trial and thereby had limited their recovery to damages at law based upon the “out of pocket” measure governing actions for tortious deceit. As we have observed, this supposition was not correct. Nevertheless, the trial court informed counsel that since the stock could not be returned he was treating the action as one for money damages.20 We think it is clear that [744] the court disregarded appellees’ claim for recisional damages and instructed the jury in terms of tort damages as applicable to property of undetermined, fluctuating value.
The court’s instructions effectively (for the facts at hand) combine forms of recovery which are encompassed in several possible legal theories: deceit, conversion by fraud, money had and received and unjust enrichment (quasi-contractual obligation lying in assumpsit at common law.) 21 Yet the court instructed upon the tort concept that to be recoverable the damages must be proximately caused by the defendants.22
The court told the jury23 (1) that the least amount that could be [745] recovered would be “the difference between the selling price of the stock and the actual value of the stock when sold.” This, of course, is similar to the traditional “out of pocket” theory of damages recoverable for deceit. A party may seek this as his measure of damage rather than rescind where the stock has depreciated in value or the wrondoer has later sold the stock at a loss. See 3 Loss 1793. Since the stock increased rather than decreased in value, this measure of damage was actually contra to appellees’ interest in full restitution. We fail to see any prejudice to appellants under this part of the instruction. (2) A higher amount could be recovered if the jury found that upon full disclosure the plaintiffs would nevertheless have sold to defendants, but at a higher price. Then the measure of the damages would be the difference between what they actually received and the higher price. (3) And finally, if the jury found that the plaintiffs, upon a complete disclosure, would have retained the stock, then the jury could consider “the subsequent increases in the value of the stock over * * * a reasonable period.”
Appellants’ specific exceptions at the time of the trial were directed to the court’s allowing the jury to determine the actual value at the time of sale by considering the subsequent history of the company for a reasonable time after the sale. Appellants argued that the court had failed to state any limitation as to what “a reasonable time” period included, and further urged that there was no evidence of any events occurring after the sale which would have a bearing on the value at the time of the sale.
The “out of pocket” theory is the measure of damages early adopted in pre-Erie federal cases involving fraud and deceit. See, e. g., Smith v. Bolles, 132 U.S. 125, 10 S.Ct. 39, 33 L.Ed. 279 (1889); Sigafus v. Porter, 179 U.S. 116, 21 S.Ct. 34, 45 L.Ed. 113 (1900); Towle v. Maxwell Motor Sales Corp., 26 F.2d 209 (8 Cir. 1928). However, where fungibles such as corporate stock have no ready market value and actually fluctuate in value, different measures or modified versions of the same theory become more appropriate. Galigher v. Jones, 129 U.S. 193, 200, 9 S.Ct. 335, 32 L.Ed. 658 (1889); In re Salmon Weed & Co., 53 F.2d 335, 340-343 (2 Cir. 1931). As stated in Hawkins v. Mellis, Pirie & Co., 127 Minn. 393, 149 N.W. 663, 664 (1914):
“When stock in a corporation has not figured in the markets, and there have been no sales or dealings therein, its actual value must be determined at the fair price which a person who desires to buy would be willing to pay, taking into consideration the original capital, how far there has been profit or loss in the business carried on, the assets and liabilities, the future prospects, [746] and everything that goes to affect the value of the shares of stock.”24
Actually, damage for tortious conversion by deceit provides a comparable legal remedy. Roehrich v. Holt Motor Co., 201 Minn. 586, 277 N.W. 274 (1938); Holland v. Bishop, 60 Minn. 23, 61 N.W. 681 (1895); In re Franklin Saving & Loan Co., 34 F.Supp. 585 (E.D.Tenn.1940); Annot., 95 A.L.R. 615 (1935); 89 C.J.S. Trover & Conversion § 41. Cf. Nephi Processing Plant, Inc. v. Talbott, 247 F.2d 771 (10 Cir. 1957). The federal courts have historically approved a rule of damages for conversion of stock measured by the price at the time of conversion or the highest intermediate value reached within a reasonable time after notice of the conversion by the plaintiff, 25 whichever is greater. In Galigher v. Jones, supra, 129 U.S. at 200, 9 S.Ct. at 337, the Supreme Court said:
“Other goods wrongfully converted are generally supposed to have a fixed market value at which they can be replaced at any time'; and hence, with regard to them, the ordinary measure of damages is their value at the time of conversion, or, in case of sale and purchase, at the time fixed for their delivery. But the application of this rule to stocks would, as before said, be very inadequate and unjust.” (Our emphasis)
In SEC v. Capital Gains Research Bur., Inc., 375 U.S. 180, 194, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963), the Court commented:
“There has also been a growing recognition by common-law courts that the [747] doctrines of fraud and deceit which developed around transactions involving land and other tangible items of wealth are ill-suited to the sale of such intangibles as advice and securities, and that, accordingly, the doctrines must be adopted to the merchandise in issue.”
In Janigan v. Taylor, 344 F.2d 781 (1 Cir. 1965), the Court of Appeals for the First Circuit faced a similar problem of damages where the seller of securities was the party defrauded. As Chief Judge Aldrich realistically points out, in such an instance justice required that the “out of pocket” theory reflect future accretions.26 Cf. Staker v. Reese, 82 W.Va. 764, 97 S.E. 641, 646. But appellants urge the Janigan rule has its limitations, where the wrongdoer himself creatively contributes to the value of the property, such as an artist who paints a valuable picture with wrongfully acquired paints. However, such factors are not any more present here than in Janigan. As in the latter case, the appellants all functioned as directors and salaried officers of their respective corporations in building up the business of LPE. It is argued that “extraordinary contributions” were made by the Levines, such as their personal guaranties on bank loans for working capital and their introduction of new lines of business. But these are not totally unforeseeable in the growth of a closely held corporation. But foreseeable or not, as stated by the court in the Janigan case:
“[I]f the property is not bought from, but sold to the fraudulent party, future accretions not foreseeable at the time of the transfer even on the true facts, and hence speculative, are subject to another factor, viz., that they accrued to the fraudulent party. It may, as in the ease at bar, be entirely speculative whether, had plaintiffs not sold, the series of fortunate occurrences would have happened in the same way, and to their same profit. However, there can be no speculation but that the defendant actually made the profit and, once it is found that he acquired the property by fraud, that the profit was the proximate consequence of the fraud, whether foreseeable or not. It is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them.” 344 F.2d at 786.
It is also argued by appellants that the Janigan theory is solely an equitable remedy for accounting27 similar to the theory of constructive trusts. Cf. Marcus v. Otis, 168 F.2d 649 (2 Cir. 1948). The objection raised is that “conscious wrongdoing” must be involved and that none exists here. Appellants contend, therefore, that damages for innocent nondisclosure do not extend to accretional value but only to “out of pocket” losses. The same argument can traditionally apply to cases of innocent conversion. See Restatement of Restitution §§ 154, 155, 203.
But there exists no apparent reason to apply different rules of damage to different violations under the Act. The act of nondisclosure is the evil proscribed, not the motive that induced iL Appellants’ argument fails to consider that the common law concept of fraud under the security laws has now been enlarged under Rule 10b-5 to include even innocent nondisclosures which may amount to manipulative or deceptive conduct. See Ellis v. Carter, 291 F.2d 270 (9 Cir. 1961); Dale v. Rosenfeld, 229 F.2d 855 (2 Cir. 1956); compare S.E.C. [748] v. Capital Gains Research Bur., Inc., 375 U.S. 180, 200, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). Such conduct is prohibited within the definition of Rule 10b-5. The violation of the rule connotes “unfairness” or “wrongdoing.” And as the 'Supreme Court said in SEC v. Capital Gains Research Bur., Inc., supra, 375 U.S. at 195, 84 S.Ct. at 284:
“Congress intended the investment Advisers Act of 1940 to be construed like other securities legislation ‘enacted for the purpose of avoiding frauds,’ not technically and restrictively, but flexibly to effectuate its remedial purposes.” (Our emphasis)
However such arguments may run, they are to no avail here. We have previously observed in discussing “scienter” that the trial court required the jury to find that the “manipulative or deceptive” conduct consisting of misrepresentation or nondisclosures under Rule 10b-5 be done with the “intent of inducing” the sale. This sufficiently refutes appellants’ contention that there was no finding of “conscious wrongdoing.”
Complaint was made of the trial court’s cautionary instruction directing the jury not to consider the financial condition of LPS unless the relationship of LPS and LPE was found to bear upon the determination of the value of the LPE stock. Consideration of (l)'the total business interdependence of the two companies, (2) the valid inference of participation in the fraud by LPS and its alter egos, William and Orrin Levine, (3) the use of LPS as a conduit of the fraudulent drive for total ownership, (4) the use of LPE funds to pay Benn Myzel for LPE stock transferred to LPS, (5) the exclusive sales arrangement between LPE and LPS and (6) the ultimate “gratuitous” division of LPS and LPE among the Levines, demonstrates that the companies could have sufficient “relationship” to one another to affect value of the LPE stock not only in 1953 but in subsequent years as well. And although we are dealing with an instruction, appropriate is our observation that relevancy of evidence is a matter upon which the discretion of the trial judge will remain undisturbed absent clear finding of abuse. Frohmann v. United States, 380 F.2d 832 (8 Cir. 1967); Cotton v. United States, 361 F.2d 673 (8 Cir. 1966).
Appellants final attack on the damage instruction urges that the Securities Exchange Act, § 28(a), 15 U.S.C. § 78bb(a), provides and also limits recovery to “actual damages” as follows:
“[N]o person permitted to maintain a suit for damages under the provisions of this chapter shall recover * * * a total amount in excess of his actual damages on account of the act complained of.”
However, we feel the only effect of this provision is to prohibit punitive damages, which otherwise might be available in some states in civil actions under the Securities Exchange Act of 1934. See 3 Loss 1624; see also, Pappas v. Moss, 257 F.Supp. 345 (D.N.J.1966); Meisel v. North Jersey Trust Co. of Ridgewood, New Jersey, 216 F.Supp. 469 (S.D.N.Y. 1963); Mills v. Sarjem Corp., 133 F.Supp. 753, 770 (D.N.J.1955). Express civil relief is not provided under Section 10(b) or Rule 10b-5, notwithstanding the long existence of section 28(a).28 Nevertheless federal law provides a remedy. Cf. J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). In Kohler v. Kohler Co., 208 F.Supp. 808, 825 (E.D.Wis. 1962), aff’d 319 F.2d 634, 7 A.L.R.3d 486 (7 Cir. 1963) (relying upon “buyer” cases); and Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527, 533 (10 Cir. 1962) (a “buyer” case) it was stated that the term “actual damages” limits recovery to the .“out of pocket” measure. We feel that the philosophy of Janigan v. Taylor, supra, 344 F.2d at 786-787, is more suitable as reflecting [749] an approach to damages involving defrauded sellers and in no way violative of Section 28(a). It is not “punitive” to award a plaintiff the equivalent value of his stock, (where the jury finds that with' full disclosure he would have retained it until the higher price gained by the wrongdoer was reached. This is “the antithesis of punishment.”' Compare Sunbeam Corp. v. Golden Rule Appliance Co., 252 F.2d 467 (2 Cir. 1958). See Speed v. Transamerica Corp., 135 F.Supp. 176, 186-194 (D.Del.1955), modified on other grounds, 235 F.2d 369 (3 Cir. 1956).
Although the trial court fashioned and submitted to the jury a remedy for the particular facts, we fail to see any prejudice to appellants. The damages given essentially reflect a proper measure of damages for deceit based upon an unknown fluctuating value of stock of a closed corporation under the particular circumstances surrounding the case. The trial court was faced with great difficulty in instructing upon these issues and did an excellent job. His approach on instructions was fair to the appellants under, the circumstances prevailing.
VI. THE SUCCESSOR CORPORATION. In December 1961 the four Le-vines transferred all their holdings of LPS stock to LPE. Lakeside Properties, Inc. (LPI), a subsidiary of LPS, transferred the 640 shares of LPE stock to LPE at the time LPI was merged with LPE. The merger company was renamed Lakeside Industries, Inc., a Minnesota corporation, and subsequently a new Delaware corporation of the same name, Lakeside Industries, Inc., became the successor of the merged company. It was at this time that the Levines exchanged their 500 shares of the merged corporation’s stock for 500,000 shares of common stock of LII, the currently existing Delaware corporation.
Appellants urge that the newly organized corporation is not liable as a successor corporation, since (1) LPE did not itself receive anything of value in the stock exchanges, (2) if any fraud existed, the corporation itself was a victim, since corporate funds were used in purchasing the corporation’s stock for the officer’s own benefit, and (3) to impose liability on the new corporation would' prejudice the rights of bona fide public stockholders.
The corporation laws of Minnesota provide:
“Liabilities not affected. The liabilities of the constituent corporations or of their shareholders, directors, or officers, shall not be affected nor shall the rights of creditors or of any persons dealing with such corporations be impaired by the consolidation or merger, and any claim existing or action or proceeding pending by or against any of such constituent corporations may be prosecuted to judgment as if such consolidation or merger had not taken place, or the consolidated or surviving corporation may be proceeded against or substituted in its place.” M.S.A. § 301.45(1) (1945).
The fact that bona fide public stockholders might indirectly be prejudiced by the corporation’s payment of indebtedness incurred by a predecessor corporation is not persuasive. Stockholders are presumed to invest with knowledge of proper corporate liabilities. If any harm exists by reason of the corporation’s legal liabilities wrongfully caused by its officers or directors, such damage can be corrected through proper proceedings.
Appellees posited their case upon a “plan” by appellants to get sole control of LPE by 100% ownership of stock. The jury accepted this theory of the case. In so doing, it considered evidence that LPS acquired part of the stock with monies paid by LPE. LPS carried the stock as assets. LPE eventually gained possession of its own stock and upon the vote of the only other holders of stock, the Levines, this stock was retired. It is well settled that acts of managing officers or directors constitute “business * * * of the corporation, though unauthorized by its charter.” See Ballantine, Corporations § 111 at 273 (Rev.ed. 1946). Thus, any deceit prac[750] ticed by the corporation’s officers or agents acting on behalf of the corporation, even though ultra vires, binds the corporation. See Brennan v. Midwestern United Life Ins. Co., 259 F.Supp. 673, 681 (N.D.Ind.1966).
And, in an action for tortious damage, the fact that LPE retired the treasury shares rather than selling them is immaterial. It has long been held that a party is responsible for tortious wrongdoing though, as perpetrator thereof, he realized no benefit from it. See James-Dickinson Farm Mtg. Co. v. Harry, 273 U.S. 119, 123, 47 S.Ct. 308, 71 L.Ed. 569 (1926). The same rule has been upheld in Rule 10b-5 cases. See e. g., Fischer v. Kletz, 266 F.Supp. 180, 187-188 (S.D.N.Y.1967).
VII. GOLDFINE AND ROSE TRANSACTIONS. Objection is made as to the relevancy of Zelman Levine’s purchase, through Benn Myzel, of Ida Goldfine’s stock and LPS’s acquisition, again through Benn, of Maurice Rose’s stock. We have examined these transactions and find that they could be relevant to the entire picture involved. The admitted undisclosed control of Myzel by Zelma Levine in dealing with the Goldfine stock could properly aid in weighing the credibility of the Levines’ denial of control of Myzel in dealing with appellees. The jury disbelieved that denial. The Goldfine and Rose transactions give credible support to the accepted inference of undisclosed control throughout all the transactions. The evidence again is well confined within the discretionary finding of relevancy by the trial judge. Frohmann v. United States, 380 F.2d 832 (8 Cir. 1967).
Many of the questions presented upon this appeal turned upon the sufficiency of the evidence to support the verdict. Appellees, therefore, submitted a supplemental printed record consisting of 583 pages. Appellees also moved for a dismissal of the appeal or at least that the scope of review be limited because of the alleged inadequacy of the appellants’ printed record. Cf. Sublette v. Servel, Inc., 124 F.2d 516 (8 Cir. 1942). However, very little of the supplemental record was of help to the court in deciding the case. Under the circumstances our rules (Eighth Circuit Rule 10(c)) provide a means to amend or supplement the record when necessary. Cooperation of counsel in this regard should not be a problem. We feel counsel for appellants were in good faith in preparation of the original record. The great majority of the supplemental record is superfluous and vio-lative of our Rule 10(c). Under the circumstances, we hold that appellees’ costs for preparation of the supplemental record should not be taxed against the appellants. See Milwaukee Ins. Co. v. Kogen, 240 F.2d 613, 618 n. 2 (8 Cir. 1957).
Judgments affirmed.
Footnotes
386 F.2d 718 (Myzel v. Fields) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.