Alton Box Bd. Co. v. Goldman, Sachs & Co., 76-1697

• Decision Date: 10 August 1977
• Docket Number: No. 76-1697,76-1697
• Parties: Blue Sky L. Rep. P 71,424, Fed. Sec. L. Rep. P 96,127 ALTON BOX BOARD COMPANY, Appellant, v. GOLDMAN, SACHS AND COMPANY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 916

560 F.2d 916

Blue Sky L. Rep. P 71,424, Fed. Sec. L. Rep. P 96,127

ALTON BOX BOARD COMPANY, Appellant, v. GOLDMAN, SACHS AND COMPANY, Appellee.

No. 76-1697.

United States Court of Appeals,

Eighth Circuit.

Submitted April 12, 1977.

Decided Aug. 10, 1977.

John J. Cole, St. Louis, Mo. (argued), and Joseph S. Von Kaenel, St. Louis, Mo., on appendix, brief and reply brief, for appellant.

Michael M. Maney, New York City, and Jim J. Shoemake, St. Louis, Mo., and Philip L. Graham, Jr. and Charles E. Dorkey, III, New York City, for appellee.

Before LAY, ROSS and HENLEY, Circuit Judges.

LAY, Circuit Judge.

Alton Box Board Company appeals from a judgment of the United States District Court for the Eastern District of Missouri in favor of defendant Goldman, Sachs & Company. On March 31, 1970, Goldman, Sachs, as exclusive dealer, sold a Penn Central Transportation Company short-term, unsecured commercial paper note valued at $625,000 to First National Bank in St. Louis, as agent for Alton, at a discounted price of $599,186.20. The note had a maturity date of September 30, 1970. At the time of the sale, the National Credit Office (NCO), a division of Dun & Bradstreet, Inc. had given its highest rating "prime" to the Penn Central notes. On June 21, 1970, Penn Central filed a petition for reorganization under the federal bankruptcy laws. Alton has never received payment on the note.

Alton brought suit against Goldman, Sachs, alleging that at the time of the sale Goldman, Sachs misrepresented the financial condition and creditworthiness of the Penn Central notes and failed to disclose materially adverse, nonpublic information about Penn Central's financial condition, in violation of § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l (2); § 10(b) of Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R. § 240.10b-5; and Mo.Ann.Stat. § 409.411(a)(2) (Vernon Supp. 1977). ¹ Alton's claim rests, in part, upon its allegation that Goldman, Sachs' representation regarding the prime rating was misleading in light of undisclosed, allegedly material facts relating to that rating. Alton also contends that Goldman, Sachs made misleading representations that the Penn Central notes were creditworthy and that it had a reasonable basis in fact for the opinion it rendered.

In order for Alton to place liability for its loss on Goldman, Sachs under § 12(2) it must establish that: (1) Goldman, Sachs made a false or misleading statement of material fact or omitted to state a material fact "necessary in order to make the statements, in the light of the circumstances under which they were made not misleading", University Hill Foundation v. Goldman, Sachs & Co., 422 F.Supp. 879, 892 (S.D.N.Y.1976); (2) Alton did not know of the untruth or omission; and (3) Goldman, Sachs knew, or in the exercise of reasonable care could have known, of the untruth or omission. See Johns Hopkins University v. Hutton, 422 F.2d 1124, 1128 (4th Cir. 1970), cert. denied, 416 U.S. 916, 94 S.Ct. 1622, 40 L.Ed.2d 118 (1974); University Hill Foundation v. Goldman, Sachs & Co., supra, at 892. The district court found that Goldman, Sachs made no affirmative misrepresentations and that Alton or its agent, First National Bank, had actual or constructive knowledge of all material information alleged to be omissions. ² On appeal Alton challenges these findings. We reverse and remand to the district court with directions to enter judgment for the plaintiff.

I.

One basis of Alton's claim is that Goldman, Sachs failed to disclose the following material facts: (1) that the NCO prime rating was based on misleading information that NCO received from Goldman, Sachs: (2) that Goldman, Sachs had recently reduced and placed limitations on its own inventory of Penn Central commercial paper; and, (3) that Penn Central's bank line credit was below that recommended. Alton contends that disclosure of these facts was necessary in order to make any statement regarding creditworthiness of Penn Central notes, in light of circumstances, not misleading.

Central to the district court's holding is its findings that First National Bank was Alton's agent, and that at the time of the purchase the bank knew the financial condition of Penn Central. The court held that the bank's knowledge, imputed to Alton, barred recovery under § 12(2).

Although the plaintiff vigorously contends that the bank was nothing more than a purchasing agent in the transaction, our decision does not require us to pass upon this question. It is conceded that information about Penn Central's financial condition was generally available to both the bank and Alton. However, Alton bases its claim on certain confidential and undisclosed information contained in nonpublic "blue sheets" available only to Goldman, Sachs. It is admitted that neither the bank nor Alton knew of this information at the time of the sale. ³

Since the record demonstrates that none of these facts was known or disclosed to the bank or to Alton, it is difficult for this court to accept the finding that Alton was barred from recovery because "the purchaser had knowledge of such untruth or omission." However, we must decide whether the undisclosed facts were "material" under § 12(2).

II.

Goldman, Sachs asserts that the district court was not clearly erroneous in finding that the undisclosed information in the blue sheets was not material. The resolution of this contention involves two basic questions: first, whether the district court viewed the evidence under the proper standard of materiality within the meaning of § 12(2); and second, whether the undisclosed facts were, both as a matter of law and of fact, material.

A. Proper Standard of Materiality.

The district court made the following statement regarding the non-disclosed facts:

Any facts which plaintiff or its agent were not aware of and can be characterized as omissions in information, are in the opinion of the Court not material to the transaction in question, and even if they had been known, the Court is sure that the plaintiff would not have been deterred from continuing with the transaction.

Alton Box Board Co. v. Goldman, Sachs & Co., 418 F.Supp. 1149, 1154 (E.D.Mo.1976).

Plaintiff challenges the propriety of this standard for determining materiality under § 12(2). Goldman, Sachs does not attempt to defend it. It is, of course, clearly in error.

The Supreme Court, in discussing the general standard of materiality under § 14(a) of the Securities Exchange Act of 1934, ⁴ observed: "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." ⁵ TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2133, 48 L.Ed.2d 757 (1976). Under this test it is not necessary to prove that disclosure of an omitted fact would have caused a reasonable investor to change his decision. Id. Although TSC involved a proxy solicitation and a suit under § 14(a), Goldman, Sachs agrees that the test of materiality is the same under all of the securities statutes. See Gilbert v. Nixon, 429 F.2d 348, 355-56 (10th Cir. 1970); List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir. 1965), cert. denied, 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965).

Thus, we find that the district court's view of materiality under § 12(2) was based upon an improper application of the law.

B. Materiality of Non-disclosed Facts, as a Matter of Law.

We come then to the second question: whether this court can say that the undisclosed facts fail to constitute as a matter of law, facts which a reasonable investor would consider important in making the decision to purchase the notes in question. This question depends, of course, upon the circumstances of the case.

On March 31, 1970, First National Bank, per Alton's instructions, asked Goldman, Sachs for the names of companies issuing commercial paper notes rated NCO prime. ⁶ Goldman, Sachs listed Penn Central as having commercial paper with a prime rating. Alton asserts that in making this representation Goldman, Sachs omitted to state a material fact. The claimed undisclosed, material information is contained in Goldman, Sachs' blue sheet memorandum of February 5, 1970. That memorandum reads, in part, as follows:

Alan Rogers of NCO called me today to express concern over the sharply reduced earnings announced in the newspapers today. He asked if we were continuing to sell the Company's notes and whether I felt that Penn Central had sufficient resources which could be converted to cash to pay down debt, if necessary. I said that Goldman, Sachs was continuing to sell the commercial paper notes of Penn Central Transportation Company. In answer to question number 2, I suggested that the Company has a number of valuable properties and securities, and that I was certain that something could be worked out should it ever become necessary.

Alan said that as a result of my comments, he would continue to carry Penn Central Transportation Company as a prime name.

JACK A. VOGEL.

Alton claims that the NCO rating was based solely on the above information which Vogel gave to Rogers. The district court found, however, that NCO did not rely exclusively on Vogel's statement in rating Penn Central notes. 418 F.Supp. at 1154.

We find nothing disturbing in the fact that NCO, in rating a company, checked with the exclusive dealer of that company's notes to ascertain its continuing relationship with the issuer and to obtain the company's appraisal of the notes. The fact that NCO called Goldman, Sachs and expressed concern was not, standing alone, a material fact that Goldman, Sachs had to disclose. ⁷ We agree with the trial court that Vogel's self-serving comment, "based on what I told him," is not deserving of an inference that the NCO rating was based solely on his statement.

Even assuming Vogel's comment to NCO to be in good faith, as the trial court found, Goldman,...