Hohmann v. Packard Instrument Company, Inc., 71-1462.

• Decision Date: 17 January 1973
• Docket Number: No. 71-1462.,71-1462.
• Citation: 471 F.2d 815
• Parties: Arthur J. HOHMANN, Plaintiff-Appellant, and Harold S. Burman et al., Plaintiffs-Appellants, v. PACKARD INSTRUMENT COMPANY, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

471 F.2d 815 (1973)

Arthur J. HOHMANN, Plaintiff-Appellant, and Harold S. Burman et al., Plaintiffs-Appellants, v. PACKARD INSTRUMENT COMPANY, INC., et al., Defendants-Appellees.

No. 71-1462.

United States Court of Appeals, Seventh Circuit.

Argued October 20, 1972.

Decided January 17, 1973.

A. Bradley Eben, Arnold I. Shure, John Enright, Chicago, Ill., for plaintiffs-appellants.

George S. Hoban, Perry L. Fuller, George W. Hamman, Roger W. Barrett, Chicago, Ill., for defendants-appellees.

Before HASTINGS, Senior Circuit Judge, CUMMINGS, Circuit Judge, and GORDON, District Judge.^*

HASTINGS, Senior Circuit Judge.

This long pending litigation first began in 1963 when two actions were filed in the federal district court. The cases were subsequently consolidated for trial and finally proceeded to trial by jury in March 1971. At the conclusion of plaintiffs' evidence, the trial court granted the motions of all defendants for a directed verdict and entered judgment against plaintiffs and for defendants. Plaintiffs appealed. We affirm.

On May 29, 1963, in No. 63-C-953, Arthur J. Hohmann filed his action alleging a violation by defendants of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and Rule 10(b)-5(2) promulgated thereunder, which proscribes the use of a manipulative device or contrivance prohibited by the rules and regulations of the Securities and Exchange Commission. Hohmann is the sole plaintiff and is an investment counselor residing in London, England, and at the time was engaged in the advertising business. This shall be referred to as the Hohmann case.

On June 4, 1963, in No. 63-C-981, Harold S. Burman, Robert L. Burman and Marshall R. Burman, d/b/a Burman Investments, a partnership, (together with Charles Ashbrook, later dismissed as a plaintiff) filed their action (later amended), alleging a violation by defendants of § 11 of the Securities Act of 1933, 15 U.S.C.A. § 77k. They claimed that a prospectus filed with a registration statement of Packard Instrument Company, Inc., for a stock offering in 1963, was untrue and misleading because of the omission of material facts required to be stated therein. The Burmans are three brothers, one of whom filed the action as an attorney. This shall be referred to as the Burman case.

Each of these actions was brought by plaintiffs on their own behalf and as a class action on behalf of persons similarly situated. After extensive discovery and during preparation for trial, the trial court, on June 30, 1967, on motion of defendants, entered an interlocutory order striking the class actions of the two complaints. Hohmann v. Packard Instrument, N.D.Ill., 43 F.R.D. 192 (1967). On appeal, we held the actions were properly brought as class actions and reversed. Hohmann v. Packard Instrument Co., 7 Cir., 399 F.2d 711 (1968).

Remaining as named defendants at the subsequent trial and common to both suits were (1) Packard Instrument Company, Inc. (Packard Instrument), an Illinois corporation located in Brookfield, Illinois, with its principal manufacturing business in Downers Grove, Illinois; (2) Lyle E. Packard, its president, chairman of the board, a director and majority stockholder; (3) A. G. Becker & Co., Incorporated (Becker), an Illinois corporation, of Chicago, which underwrites and sells securities; and (4) Joseph J. Levin, chairman of the executive committee of Becker and also a director of Packard Instrument.

In this consolidated class action the class was defined to be all persons who purchased shares of stock in Packard Instrument during the period from February 19, 1963, through March 26, 1964, inclusive. After a history of intermittent vigorous prosecution and bitter defense from 1963 to March 1, 1971, the case was called for trial by jury on the latter date. The trial proceeded until plaintiffs rested their case on March 11, 1971. On that date the trial court granted the motions of all defendants for a directed verdict and entered judgment against plaintiffs and for all defendants.

The technical nature of the devices manufactured by Packard Instrument causes us to accept its undisputed description of the same on brief and as substantially represented in its prospectus of February 19, 1963, as follows:

"The company\'s products are instruments for the detection and measurement of radioactive isotopes used primarily in tracer studies in scientific research. The principal purchasers of the equipment are research laboratories of universities and colleges, governmental research centers, privately supported research facilities and research hospitals, as well as the United States Government and Veterans Administration Hospitals.

"The principal product of the company is the Tri-Carb Liquid Scintillation Spectrometer. The instrument is used for detection and measurement of radioactive isotopes. A radioactive sample to be identified and counted is placed in a solution of liquid scintillator and placed between the instrument\'s two photomultiplier tubes. The solution produces an extremely small burst of light or scintillation for each radioactive emanation or particle that occurs in the sample. The scintillations are converted to bursts of electrons within the photomultipliers and greatly amplified to produce electrical impulses. The impulses are further amplified electronically and measured and counted by means of high-speed type circuitry.

"The particular value of the Tri-Carb Spectrometer in research lies in the ability to measure automatically and accurately large numbers of radioactive samples. Radioactive isotopes are used in investigations and research into cancer, cardio-vascular diseases, the etiology of mental diseases, in studies of arthritis, rheumatic fever and nutritional studies of many types. Pharmaceutical firms use the instruments to determine the effects of newly developed drugs on the human body. Industrial research laboratories in the chemical, petroleum, tobacco and food industries also use Tri-Carb Spectrometers.

"The company also produces other instruments for the measurement of radioactivity including an instrument for counting radioactivity in laboratory animals and humans. New products which had been introduced or were about to be introduced in 1963 included gas chromatography equipment and large volume scintillation detectors."

From its incorporation in 1957 the sales of Packard Instrument regularly increased. In April 1961, the company made its first public offering of 100,000 common shares which were traded in the over-the-counter market. The prospectus issued in that offering, in describing the shares, said: "These are speculative securities." In February 1963, a second public offering, the subject of the instant litigation, was made. The company offered 50,000 common shares and a like amount was offered by Mr. Packard. This proposed sale of 100,000 common shares to the public, at $21.50 per share, was through an underwriting group headed by Becker. In connection with this public offering a registration statement, including a prospectus, was filed with the Securities and Exchange Commission, effective February 19, 1963. The proceeds of the shares offered by the company were to be used for a 24,000 square foot addition to its Downers Grove plant, and the balance was to be added to working capital to finance increased inventories and accounts receivable. Pursuant to this public offering, Hohmann purchased 500 shares of stock and Burman Investments purchased 175 shares.¹ Following this public offering Mr. Packard personally still owned 439,200 common shares, representing about 66 per cent of the shares outstanding. No part of the proceeds of the sale of Mr. Packard's stock was to be used by the company. He was the dominant person in the control and operation of the company.

The record shows that on June 30, 1967, AMBAC Industries, Incorporated, acquired all assets of Packard Instrument and assumed its liabilities in this litigation. It was made an additional party defendant in both cases, with a subsequent stipulation that AMBAC would not be mentioned or referred to in the presence of the jury at the trial.

The essence of the consolidated actions is the claim against defendants for monetary damages for alleged violations of the anti-fraud provisions of the federal securities law. No equitable relief is sought. The thrust of the charges is the alleged omission of material facts required to be stated in the prospectus effective on February 19, 1963. In short, a recovery by plaintiffs in this civil action depends upon their proof of concealment by defendants of an existing fact or facts which would have caused or tended to cause plaintiffs, as reasonably prudent investors, to refrain from buying the stock publicly offered on February 19, 1963. A jury trial is appropriate in a damage action alleging such violations. Dasho v. Susquehanna Corp., 7 Cir., 461 F.2d 11, 24 (1972), cert. denied, 408 U.S. 925, 92 S.Ct. 2496, 33 L.Ed.2d 336.

The parties seem to agree that applicable federal securities law is clear and well settled and that this is, as they term it, a "factual" case. Since the case comes to us as an appeal from a judgment for defendants on a directed jury verdict at the close of plaintiffs' evidence in the consolidated trial, the critical question to be answered is whether the trial court erred in holding that plaintiffs had not discharged their required burden of proof to take the case to the jury at that point.

The standards for ruling on a motion for a directed jury verdict have long been well settled in this circuit. These standards find their base in the following statements by the Supreme Court in Gunning v. Cooley, 281 U.S. 90, 50 S.Ct. 231, 74 L.Ed. 720 (1930):

"When, on the trial of the issues of fact in an action at law before a Federal court and a jury, the evidence, with all the inferences that justifiably could be drawn from it, does not constitute a sufficient basis for a verdict for

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