Woolf v. S. D. Cohn & Co.

• Decision Date: 03 July 1975
• Docket Number: 74-2449,Nos. 73-4044,s. 73-4044
• Citation: 515 F.2d 591
• Parties: Fed. Sec. L. Rep. P 95,223 Shirley WOOLF and Robert Milberg, Plaintiffs-Appellants, v. S. D. COHN & COMPANY and Sidney D. Cohn, Defendants-Third-Party Plaintiffs-Appellees, v. FIBERGLASS RESOURCES CORPORATION, Third-Party Defendant. Shirley WOOLF et al., Plaintiffs-Appellants, v. S. D. COHN & COMPANY et al., Defendants-Third-Party Plaintiffs-Appellees, v. FIBERGLASS RESOURCES CORPORATION, Third-Party Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 591

515 F.2d 591

Fed. Sec. L. Rep. P 95,223

Shirley WOOLF and Robert Milberg, Plaintiffs-Appellants, v. S. D. COHN & COMPANY and Sidney D. Cohn, Defendants-Third-Party Plaintiffs-Appellees, v. FIBERGLASS RESOURCES CORPORATION, Third-Party Defendant.

Shirley WOOLF et al., Plaintiffs-Appellants, v. S. D. COHN & COMPANY et al., Defendants-Third-Party Plaintiffs-Appellees, v. FIBERGLASS RESOURCES CORPORATION, Third-Party Defendant-Appellee.

Nos. 73-4044, 74-2449.

United States Court of Appeals Fifth Circuit.

July 3, 1975.

Lewis W. Miles, II, Richard E. Reckson, Miami, Fla., for plaintiffs-appellants.

Aaron S. Podhurst, Robert Orseck, Miami, Fla., for defendants-third party plaintiffs-appellees.

Terrence J. Russell, Ft. Lauderdale, Fla., for Fiberglass Resources.

Appeals from the United States District Court for the Southern District of Florida.

Before RIVES, WISDOM and COLEMAN, Circuit Judges.

WISDOM, Circuit Judge:

The plaintiffs-appellants, Shirley Woolf and Robert Milberg, brought this action under the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970) ¹, and rule 10b-5, 17 C.F.R. § 240.10b-5 (1974) ², against S. D. Cohn & Co., a partnership registered as a broker-dealer under the Securities Exchange Act, and S. D. Cohn, a general partner in that company. The appellants sought to recover the balance of the purchase price they had paid for certain convertible debentures of the Fiberglass Resources Corporation which they had subsequently converted into shares of common stock in that corporation and later sold to another major shareholder or to the issuer. They contend that they were induced to participate in the "private placement" of the debentures which were not registered under the Securities Act of 1933, 15 U.S.C. § 77a et seq., by certain material misrepresentations or omissions to state material facts on the part of Cohn and S. D. Cohn & Co. in violation of rule 10b-5.

The defendants filed a "counterclaim" charging that the plaintiffs had concealed from the issuer and from the defendants that they were purchasing the debentures for a number of individuals in addition to themselves and that Milberg was receiving a commission on at least a portion of the transaction. The defendants also filed a third party complaint against Fiberglass Resources Corporation, the issuer, predicated upon the theory that, if there were any misrepresentations or omissions of material facts regarding the sale of the debentures, these were the "sole responsibility" of Fiberglass. They say that the "totality of the representations concerning the financial condition and future prospects" of Fiberglass were "prepared and formulated exclusively by (Fiberglass) for dissemination by the defendants".

The trial court, sitting without a jury, characterized the plaintiffs as "sophisticated investors", and found that the defendants had not violated rule 10b-5. Accordingly, the district court entered judgment in favor of the defendants. We vacate that judgment and remand for further proceedings.

I.

The predecessor of Fiberglass, a firm called Lamtex Industries, Inc., was formed in 1955. From the beginning, it specialized in the manufacture of products out of fiberglass and epoxy resins, particularly pipe, tubing, and casings of various sorts and with various commercial and military applications. The engineering expertise of Jonas Medney, president of Fiberglass, who was involved with Lamtex from its inception, played an important part in product development. In 1960, the firm "went public" with a public offering of registered securities underwritten by S. D. Cohn & Company. The offering was successful and the price of the shares offered rose from the offering price of $5 to $28. In July 1963, Koppers Company acquired Lamtex as a wholly owned subsidiary. In 1965 Koppers financed Lamtex's entry into the manufacture of reinforced plastic pipe. Many technological problems were encountered. New manufacturing equipment had to be designed and the plant had to be rebuilt. Manufacture of the product lines Lamtex had developed before its acquisition by Koppers was carried out at another plant.

In early 1968 technological difficulties incident to fully automated production of reinforced plastic pipe were, according to Mr. Medney, largely solved. Nonetheless, at that time Koppers made known its willingness to sell the pipe production facilities. (Koppers wished to retain that portion of the Lamtex subsidiary engaged in the manufacture of the original product lines, and did so.) Mr. Medney had served as president of the Lamtex subsidiary since 1965. Because of his familiarity with the development of the firm and his technological expertise, he became interested in forming a new company to purchase the facilities of the Lamtex subsidiary involved in pipe production. He approached Sidney Cohn of S. D. Cohn & Co., who had supervised the 1960 public offering of Lamtex shares. Mr. Cohn devised a "front money deal" involving the sale of debentures of the company newly formed to acquire the Koppers plastic pipe facilities, the Fiberglass Resources Corporation. He hoped to take advantage of the exemption from the registration requirements of the 1933 Act for "transactions by an issuer (of securities) not involving any public offering" afforded by § 4(2) of the Act, 15 U.S.C. § 77d(2) (1970).

Fiberglass accordingly authorized the issue of $600,000 principal amount of 61/4 percent subordinated convertible debentures. For its services in connection with the sale of the debentures, Fiberglass agreed to pay S. D. Cohn & Co. 71/2 percent of the principal amount of the debentures sold, in accordance with the debenture agreement entered into by Fiberglass and the purchasers. Mr. Cohn testified at trial, however, that he also received 10 percent of the debentures issued. He conceded that this was a larger commission than that usually charged by an underwriter, but stated that this was not uncommon in private placements with which he was familiar. He did not seek approval of this level of compensation from the National Association of Securities Dealers or any other regulatory body. Mr. Cohn further testified that he was certain that the full extent of his compensation was disclosed to the investors. He could not remember how this information had been disclosed, but he thought that it was in the debenture agreement. Examination of that document reveals disclosure only of compensation in the amount of 71/2 percent of the principal amount sold. There is no mention of an additional 10 percent participation in the debentures.

The testimony regarding the disclosure of material information respecting the Fiberglass Resources Corporation made to the offerees of these debentures is, of course, in conflict. In part, this conflict is attributable to the fact that Miss Woolf, Mr. Milberg, and Mr. Cohn had close business relations among themselves in a variety of transactions before the sale of the Fiberglass debentures, and therefore their communications regarding the Fiberglass transaction were informal. Mr. Milberg had been employed as the manager of the Miami office of S. D. Cohn & Company from March 1969 to December 1970. He had extensive first-hand knowledge of the investment business; had worked for Bache & Co.; and had worked for brokerage businesses in Miami. Mr. Cohn was often his houseguest when he visited Miami to keep in touch with the office there. Miss Woolf, an attorney who had practised in Florida for twenty-eight years, was the owner of the office building in which S. D. Cohn's office was located. She was a friend of Mr. Milberg and had made substantial investments in the stock market through the defendants in the amounts of $200,000, $150,000, and $100,000, before she purchased the Fiberglass debentures. She had had dealings with Mr. Cohn before, at least in her capacity as landlord.

Mr. Cohn testified that he informed Mr. Milberg of the investment opportunity presented by the Fiberglass debentures. All information, he said, was imparted orally. He said that he never had any direct contact with Miss Woolf, but that Mr. Milberg served as an intermediary between them. He understood at the time that Mr. Milberg was acting as an investment advisor for Miss Woolf. He conceded that he had some conversations with Miss Woolf respecting Fiberglass, but he said these took place "long after" the sale of debentures had been completed.

The plaintiffs introduced a "summary" consisting of nineteen typewritten, single-spaced pages, including a four-paragraph introductory statement, a "history" of the operations of the predecessors of the proposed Fiberglass Resources Corporation, Lamtex, and the Lamtex subsidiary of Koppers, a description of the "market" the new company hoped to serve and of the "principals" who would manage the new company, and "five year financial projections". This document was prepared by Mr. Medney and his assistant, Mr. Klimpl, at the request of Mr. Cohn. Mr. Medney testified that he revised the document to take into account suggestions and criticisms Mr. Cohn had made regarding the first draft. Mr. Cohn, however, testified that he did not intend that this "summary" be circulated to offerees of the debentures. Testimony at a deposition, introduced at trial, casts some doubt on whether this summary was circulated among prospective purchasers, for, when asked about the financial projections contained in the summary, Mr. Cohn said "I did not believe them. I instructed all our investors not to believe them. Certainly Mr. Milberg knew better than to believe them."

There is no suggestion in the record why Mr. Cohn would request the summary and suggest changes in the draft but later conclude that the projections contained in the summary were unworthy of belief. He did testify that his firm needed a source for the representations it made to prospective purchasers, and that this was the reason he had asked Mr. Medney to prepare...