Zweig v. Hearst Corp.

• Citation: 594 F.2d 1261
• Decision Date: 09 April 1979
• Docket Number: No. 76-1647,76-1647
• Parties: Fed. Sec. L. Rep. P 96,851, 4 Media L. Rep. 2616 Richard L. ZWEIG and Muriel Bruno, Appellants, v. The HEARST CORPORATION, a corporation, Alex N. Campbell, H. W. Jamieson, E. L. Oesterle, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1261

594 F.2d 1261

Fed. Sec. L. Rep. P 96,851, 4 Media L. Rep. 2616

Richard L. ZWEIG and Muriel Bruno, Appellants, v. The HEARST CORPORATION, a corporation, Alex N. Campbell, H.

W. Jamieson, E. L. Oesterle, Appellees.

No. 76-1647.

United States Court of Appeals, Ninth Circuit.

April 9, 1979.

Philip M. Brown, David Pick, Alton I. Leib, Beverly Hills, Cal., for appellants.

Wixon Stevens, Los Angeles, Cal., for appellees.

Appeal from the United States District Court for the Central District of California.

Before ELY and GOODWIN, Circuit Judges, and SOLOMON ^*, District Judge.

GOODWIN, Circuit Judge:

Plaintiffs appeal from a judgment denying recovery in their action for damages against a financial columnist who, they allege, purposely used his column to elevate the price of stock in a small company for his own benefit.

Richard Zweig and Muriel Bruno sued Alex Campbell, a financial columnist for the Los Angeles Herald-Examiner; the Hearst Corporation, Campbell's employer; and H. W. Jamieson and E. L. Oesterle, directors of American Systems, Inc. (ASI). Zweig and Bruno alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and of Rule 10b-5, 17 C.F.R. 240.10b-5, as well as common-law fraud and negligence.

Campbell wrote and the Herald-Examiner published a column that contained a highly favorable description of ASI. The plaintiffs alleged that the directors of ASI had made material misrepresentations and omissions in an interview with Campbell and hoped that he would publish false information "puffing" ASI shares. This is essentially what he did, but only after first buying 5,000 shares from the company at a substantial discount below their market price.

Zweig and Bruno claimed that Campbell's column about ASI caused the price of ASI stock to rise, and that they were damaged when they merged their company with ASI in exchange for a quantity of temporarily inflated ASI stock. The plaintiffs were under a contractual duty to exchange stock at the market price as of a time certain. They alleged that Campbell had violated Rule 10b-5 by publishing his column about ASI without disclosing to his readers that he had bought ASI stock at a discount and intended to sell some of it upon the rise in market price that he knew his column would cause. ¹ In addition, plaintiffs contended, Campbell should have revealed to his readers that the column was likely to be republished as an advertisement for ASI in an investment periodical in which Campbell held a substantial ownership interest.

The case against the Hearst Corporation was dismissed by a summary judgment, on the ground that Hearst was not vicariously liable for Campbell's actions. Another panel of this court affirmed. Zweig v. Hearst Corp., 521 F.2d 1129 (9th Cir.), Cert. denied, 423 U.S. 1025, 96 S.Ct. 469, 46 L.Ed.2d 399 (1975).

The case against Campbell, Jamieson, and Oesterle went to trial without a jury in April of 1975. During the plaintiffs' opening statement and again after the testimony of the plaintiffs' first witness, the trial judge indicated that he did not agree with the plaintiffs' theory of liability under Rule 10b-5 as it applied to Campbell. Realizing that a full trial on the merits might be useless, the plaintiffs made an offer of proof and asked the court to rule on Campbell's motion to dismiss in light of this offer of proof.

After considering the plaintiffs' offer of proof, the trial judge granted the motion to dismiss. The judge then issued "Findings of Fact and Conclusions of Law", and entered judgment for Campbell. Zweig v. Hearst Corp., 407 F.Supp. 763 (C.D.Cal.1976). The action against Jamieson and Oesterle has been settled; the only parties to this appeal are Zweig and Bruno (appellants) and Campbell (appellee).

We reverse.

I. The Standard of Appellate Review

In their discussions with the trial court, the parties referred to Campbell's motion as a motion to dismiss pursuant to Fed.R.Civ.P. 41(b). Rule 41(b) provides:

" * * * After the plaintiff, in an action tried by the court without a jury, Has completed the presentation of his evidence, the defendant * * * may move for a dismissal on the ground that Upon the facts and the law the plaintiff has shown no right to relief. The court as trier of the facts may then determine them and render judgment against the plaintiff * * *. If the court renders judgment on the merits against the plaintiff, the court shall make findings as provided in Rule 52(a) (findings of fact and conclusions of law). * * * " (Emphasis added.)

The transcript reveals that the parties intended the motion to dismiss to test the legal sufficiency of the plaintiffs' claim. The record shows that, notwithstanding the provisions of Rule 41(b), the parties did not expect the trial judge to "try" the facts, but to assume the facts described in the offer of proof. ² In effect, the motion functioned as a motion for summary judgment pursuant to Fed.R.Civ.P. 56.

When a trial court grants a motion to dismiss after the plaintiff presents his evidence, an appellate court will not set aside the trial court's findings of fact unless they are clearly erroneous. Rutledge v. Electric Hose and Rubber Co., 511 F.2d 668, 676 (9th Cir. 1975). However, in reviewing a ruling on a motion for summary judgment the appellate court must decide whether, viewing the facts in the light most favorable to the parties opposing the motion, the moving party is entitled to prevail as a matter of law. ³ Handi Investment Co. v. Mobil Oil Corp., 550 F.2d 543, 546 (9th Cir. 1977). We follow the summary judgment standard of review here.

II. Materiality of Omitted Facts

Campbell wrote four or five columns a week during 1969 as a financial columnist for the Herald-Examiner. In these columns he frequently discussed the financial conditions of small companies in southern California. He often bought the shares of companies that he expected to discuss favorably in forthcoming columns, and then sold the shares at a profit soon after his columns appeared. ⁴

In late May or early June of 1969, Campbell interviewed Jamieson, Oesterle, and another ASI officer to obtain information for a column about ASI. The ASI officials did not give Campbell complete or accurate information. They were silent about problems then confronting ASI. There is no claim that Campbell was a knowing party to any fraud by ASI, but Campbell engaged in no independent research before publishing his story. Campbell also purchased directly from ASI 5,000 shares of its stock. While the bid price of the ASI stock on the day of the purchase was 3 5/8, Campbell paid only $2.00 per share. ⁵

Two days after he bought the ASI shares, Campbell's column about ASI appeared in the Herald-Examiner. The article contained several erroneous statements that cast the company in a more favorable light than it deserved. On this record we assume that Campbell did not know that the misleading parts of his column were false. An inference is permissible that, while he made no effort to portray the facts accurately, he honestly believed the optimistic opinions of his codefendants, who were then (perhaps unknown to Campbell) preparing to close the executory plan of merger with plaintiffs' firm, Reading Guidance Center, Inc. (RGC).

Equally reasonable is the inference that Campbell knew that his column would run up the prices of ASI stock for a short time, during which persons who knew the reason for the increase could unload the stock at a profit. Thus, the trial judge's finding that Campbell had no plan to create the price rise and then sell was premature under the summary-judgment standard of review. Moreover, unless Campbell can produce more evidence than that already in the record to rebut the strong inference caused by his long history of similar dealings, any "finding" that he did not intend to profit from his stock purchase and concurrent column would be of dubious value under the clearly erroneous standard. We therefore presume an intent to profit, the inference urged by plaintiffs, at this stage of the case.

After Campbell's column appeared, the price of ASI stock rose swiftly. The plaintiffs' offer of proof included the opinion of an expert witness that the Campbell column caused a market increase in the number of investors wanting to buy ASI stock, and that this, combined with the "thin float" of the stock (500,000 shares outstanding), led to the dramatic increase in the bid price of the shares. ⁶

On June 5, the day after the article appeared, Campbell sold 2,000 of his 5,000 ASI shares for $5.00 per share, thereby recouping his entire cash investment while retaining 3,000 shares of the stock for future profits.

Plaintiffs Zweig and Bruno did not know of any plan to inflate the price of the stock. Each owned one third of the shares of RGC. In February of 1969, RGC entered into a plan of reorganization by which RGC was to merge into ASI. ASI was to pay the RGC stockholders by transferring enough ASI stock to equal a market value of $1,800,000. The number of shares would be determined by the average closing bid for ASI stock for the five market days preceding the closing date, June 10, 1969.

The plaintiffs were prepared to show that an artificial price rise was caused by the Campbell column and led to a substantial dilution in the interest in ASI that they ultimately received under the merger agreement.

Zweig and Bruno argue that Campbell should be liable under Rule 10b-5 for his omission of these material facts from his column about ASI: (1) that he had invested in ASI stock at a discount price two days before his column was to be published, and intended to sell it on the short-swing rise in price; (2) that he made a practice of "scalping" the stocks of companies about which he wrote by buying their stock shortly before his columns about them were published and then selling the stock at a profit after the columns caused a jump in the market price; and (3)...