418 F.2d 1276 (2nd Cir. 1969), 583-85, Globus v. Law Research Service, Inc.
|Docket Nº:||583-85, 32766-32768.|
|Citation:||418 F.2d 1276|
|Party Name:||Morton GLOBUS et al., Plaintiffs-Appellees, v. LAW RESEARCH SERVICE, INC. and Ellias C. Hoppenfeld, Defendants-Appellants. BLAIR & CO., GRANBERY MARACHE Incorporated, Defendant-Appellant and Third-Party Plaintiff-Appellant, v. Paul WIENER, Third-Party Defendant-Appellee.|
|Case Date:||September 08, 1969|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued May 15, 1969.
[Copyrighted Material Omitted]
Harold L. Young, New York City (Cooper, Ostrin, DeVarco & Ackerman, Herman E. Cooper, Philip D. Tobin, New York City, on the brief), for plaintiffs-appellees.
Alfred S. Julien, New York City (Julien, Glaser & Blitz, Helen B. Stoller, New York City, on the brief), for defendants-appellants and LRS and Hoppenfeld and third-party defendant-appellee, Wiener.
Douglas M. Parker, New York City (Mudge, Rose, Guthrie & Alexander, Goldthwaite H. Dorr, Robert P. Visser, New York City, on the brief), for defendant-appellant and third-party plaintiff-appellant Blair & Co., Granbery Marache Inc.
Before WATERMAN, SMITH and KAUFMAN, Circuit Judges.
IRVING R. KAUFMAN, Circuit Judge:
This tortuous litigation raises at least two issues of great importance: are punitive damages available in private actions based on § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); and, may an underwriter be indemnified by an issuer for liabilities arising out of misstatements in an offering circular of which the underwriter had actual knowledge? We hold that punitive damages may not be recovered under § 17(a) and that an underwriter may not be indemnified in a case such as this.
The plaintiffs-appellees, purchasers of the stock of Law Research Services, Inc. (LRS), initiated this action against LRS, its president Ellias C. Hoppenfeld, and the underwriter of LRS's public stock offer, Blair & Co., Granbery Marache, Inc. (Blair). They contended that the appellants violated § 17(a) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §
78j(b) , 1 and also committed common law fraud. The essence of their charge is that the offering circular prepared in connection with LRS's offer to sell 100,000 shares of its stock to the public under Regulation A of the Securities and Exchange Commission 2 was misleading since it prominently featured an attractive contract between LRS and the Sperry Rand Corp. (Sperry Rand) while failing to refer to a dispute between the two companies which had led Sperry Rand to terminate some of its services to LRS and in turn caused LRS to file suit against Sperry Rand. Moreover, the plaintiffs contended that Blair's actions violated § 12(2) of the 1933 Act, 15 U.S.C. § 77l(2), and § 15(c) of the 1934 Act, 15 U.S.C. § 78o-c. 3
Judge Mansfield presided over a ten-day trial of these claims, to a jury in the Southern District of New York. The jury returned a verdict in favor of Blair, LRS and Hoppenfeld on the common law fraud claim but also decided that all three had violated both the Securities Act of 1933 and the Securities Exchange Act of 1934. Accordingly, the jury awarded compensatory damages to all plaintiffs totaling $32,591.14 and punitive damages against Hoppenfeld in the amount of $26,812.06 and Blair in the amount of $13,000, based on the violation of § 17(a) of the 1933 Act.
The jury was also called upon to deal with a cross-claim asserted by Blair against LRS, which rested on an indemnity clause included in the underwriting agreement, and against Hoppenfeld and a third-party defendant, Paul Wiener, Secretary-Treasurer of LRS, sounding in tort. At the same time, LRS and Hoppenfeld asserted a cross-claim against Blair, grounded on the same indemnity agreement. On all these cross-claims, the jury found for Blair.
Blair and Hoppenfeld then moved unsuccessfully to have Judge Mansfield set
aside the award of punitive damages. LRS, Hoppenfeld and Wiener, however, moved successfully to set aside the verdict on the cross-claims for indemnity and the entry of judgment, pursuant to Fed.R.Civ.P. 50(b). Judge Mansfield's careful and thorough opinion of July 19, 1968 is reported at 287 F.Supp. 188. In sum therefore, LRS, Hoppenfeld and Blair appeal from the award of damages to appellees and Blair appeals from the Judgment on the cross-claims and third-party action.
Law Research Service is a child of the computer age. In 1960, Hoppenfeld, a lawyer with some background in computer technology, perceived that computers could greatly facilitate legal research. He concluded that a practical system could be developed in which thousands upon thousands of court opinions would be fed into a computer, so that when a legal problem was submitted to the machine it would then select and retrieve all the relevant precedents. For this service, lawyers would be required to pay an annual subscription and a small fee per inquiry. After mulling over the practicability of his conception for some time, Hoppenfeld organized LRS in 1963. He became its founder, president, legal advisor, director and sole stockholder. Wiener, Hoppenfeld's friend of many years, agreed to serve as Secretary-Treasurer of the corporation. Similar ideas for marrying computers to the law have been put forth but it seems that LRS was the first such legal information retrieval system to be tried commercially.
Though Hoppenfeld was familiar with data systems, he recognized that greater expertise was called for if the new company was to become commercially successful. Moreover, he could not afford to purchase the expensive and sophisticated hardware necessary to bring his concept to fruition. Accordingly, on June 5, 1963, he entered into a five-year contract with the Univac (computer) division of the Sperry Rand Corporation. This agreement provided among other things that LRS was to furnish the legal data while Sperry Rand would supply such vital services as computer trial, programming, keypunching and printing. LRS also moved into the Sperry Rand building in New York City.
LRS's information retrieval system became operational in February 1964. By August of that year, the company managed to accumulate some $82,000 in debts to Sperry Rand. During that summer month, Hoppenfeld first met with Malcolm Sanders, a vice president of Blair, to explore ways of getting the $82,000, and other needed funds for the company. Sanders suggested a public offering which would raise not only enough money to cover the debt to Sperry Rand but would permit LRS to expand its computer library to cover decisions of the federal courts as well as those of the New York courts then already on tape.
On September 9, 1964, Sanders wrote Hoppenfeld that Blair was interested in raising $500,000 in new capital for LRS. He indicated that although bank financing or other loans might be arranged for part of the total, 'we would raise the bulk of the money through the sale of equity.' Accordingly, Sanders proposed that LRS retain a 'nationally recognized firm of auditors who will set up principles of accounting which will be used by you in your presentation to investors.' Hoppenfeld testified that Sanders introduced him to a partner in the accounting firm of Arthur Young & Co. (Young) and at Sanders' suggestion, LRS retained the firm to conduct the necessary audit. Arthur Young & Co. served as accountants for both Blair and Blair's counsel, then Nixon, Mudge, Rose, Guthrie, Alexander, & Mitchell (now Mudge, Rose, Guthrie & Alexander and hereinafter Nixon Mudge), which firm subsequently played a role in the preparation of the offering circular. Thereafter, Frederick B. Johnston, an associate of Arthur Young & Co., spent two or three days a
week and occasional weekends between November 1964 and March 1965 at the LRS office, examining all of its books, records and legal files.
During this time, however, dissension had arisen between Sperry Rand and LRS and in October 1964, Hoppenfeld informed both Johnston of Young and Co., and Sanders of Blair, that LRS had served a summons on Sperry Rand in an action based on the debt LRS allegedly owed the computer corporation and the adequacy of the office space alloted to LRS. LRS opted to let this action lapse in December 1964 by not filing a complaint. Hoppenfeld testified he permitted this so that he could continue negotiations with Sperry Rand, whose vice president for legal services, Robert C. Sullivan, refused even to discuss the dispute or anything else with Hoppenfeld while the summons was outstanding.
On January 25, 1965, the crisis began. J. E. Murdock, New York regional manager of Sperry Rand's Univac division, informed LRS by letter that unless it paid $82,897 by Friday, January 29, 1965, Sperry Rand would consider the contract 'terminated.' Hoppenfeld immediately proceeded to the Sperry Rand office in the same building to discuss the matter with Sullivan. whom the LRS president considered to be Murdock's superior. 4 After Hoppenfeld informed Sullivan that the financing was taking longer than expected and that Sperry Rand would be paid out of the proceeds of the public offering, Hoppenfeld testified, Sullivan replied that Sperry Rand's sole interest was getting paid and that if this was achieved all would be well.
Nevertheless, on January 29, Sperry Rand refused to permit LRS to use its computers for processing inquiries for LRS subscribers. It did, however, continue to provide keypunching and other services. 5 On the same day, LRS initiated a suit against Sperry Rand. This new litigation was, like its predecessor, instituted by the service of a summons without a complaint. An affidavit by Wiener submitted with the summons indicated that the cause of action was based on breach of contract and fraud.
These two events of January 29, Sperry Rand's termination of computer services and LRS's lawsuit, are the material facts which the appellees claim...
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