Butler Aviation Int., Inc. v. Comprehensive Designers, Inc., 510

• Decision Date: 08 January 1970
• Docket Number: Docket 34387.,No. 510,510
• Citation: 425 F.2d 842
• Parties: BUTLER AVIATION INTERNATIONAL, INC. and Paul S. Dopp, individually and on behalf of all of the stockholders of Butler Aviation International, Inc., Plaintiffs-Appellees, v. COMPREHENSIVE DESIGNERS, INC., Defendant-Appellant, and Winston, Perry & Co., Inc., N G C Capital Management, Inc., successor to Wygod, Weis, Florin, Inc., Walter R. Garrison and Anthony M. Waltrich, Defendants.
• Court: U.S. Court of Appeals — Second Circuit

425 F.2d 842 (1970)

BUTLER AVIATION INTERNATIONAL, INC. and Paul S. Dopp, individually and on behalf of all of the stockholders of Butler Aviation International, Inc., Plaintiffs-Appellees, v. COMPREHENSIVE DESIGNERS, INC., Defendant-Appellant, and Winston, Perry & Co., Inc., N G C Capital Management, Inc., successor to Wygod, Weis, Florin, Inc., Walter R. Garrison and Anthony M. Waltrich, Defendants.

No. 510, Docket 34387.

United States Court of Appeals Second Circuit.

Argued January 6, 1970.

Decided January 8, 1970.

John W. Castles, III, New York City (Lord, Day & Lord, New York, N. Y., Roger C. Ravel, Franklin B. Velie and Eugene F. Bannigan, New York, N. Y., of counsel), for plaintiffs-appellees.

Donald J. Zoeller, New York City (Mudge, Rose, Guthrie & Alexander, New York, N. Y., William P. Ford, New York, N. Y., of counsel), for defendant-appellant.

Before LUMBARD, Chief Judge, and FRIENDLY, Circuit Judge, and JUDD, District Judge.^*

FRIENDLY, Circuit Judge:

On this expedited appeal, Comprehensive Designers, Inc. (CDI) asks us to reverse a preliminary injunction issued by the District Court for the Southern District of New York in an action brought on November 21, 1969, by Butler Aviation International, Inc. (Butler), the target of an exchange offer by CDI, and joined by Butler's president, individually and on behalf of all of Butler's stockholders. Plaintiffs claimed, among other things, that CDI had violated § 14(e) of the Securities Exchange Act and the SEC's Rule 10b-5 under said Act. The court conducted a hearing on December 18 and 19. Acting with the speed required in light of the expiration date of the exchange offer, January 12, 1970, Judge Cannella, in an opinion dated December 24, 1969, found that Butler had established a great likelihood of success on the claims that CDI had misrepresented its earnings and had thereby violated the statute and rule above cited, and that consummation of the exchange offer would work irreparable damage to Butler and stockholders who had accepted the offer. Referring to our suggestion in Electronic Specialty Co. v. International Controls Corp., 2 Cir., 409 F.2d 937, 947 (1969), that where a plaintiff has made a case for relief, this should normally be granted before rather than after consummation of an exchange offer, he issued a preliminary injunction against CDI's declaring the exchange offer effective or taking any steps to consummate it.

We think the evidence warranted the district court in censuring CDI at least for the following:¹ (1) the issuance of a press release which reported its president as having forecast earnings of 60¢ per share for the fiscal year ending April 30, 1969, and earnings of 20¢ per share for the last quarter of that year, at the stockholders' meeting held on September 17, 1968, when in fact he had said merely that such earnings "could be conceivable" if certain favorable developments occurred; (2) CDI's failure to attempt to correct the release despite recognition of its inaccuracy; (3) CDI's issuance of a press release on December 11, 1968, reporting second quarter earnings which were said to reinforce its "confidence in previously projected improvement during the third and fourth quarters of the fiscal year and the balance of the calendar year 1969," a statement that could have been taken as confirming the exaggerated press release of September 17, 1968; (4) CDI's statement of its nine months results, issued in March 1969, reporting that the results of the third quarter of fiscal 1969 "reflect continued improvement over the preceding quarters," when, on what CDI now claims to be the correct facts (although these may not have been known to it at the time), there was no improvement over the second quarter; and (5) a portion of the letter to stockholders in the annual report issued around August 20, 1969, after CDI had begun to consider an exchange offer for Butler, which referred to an improvement in earnings in the last quarter of the fiscal year ended April 30, 1969, over the results recorded in the preceding quarter, when in fact the only justification then known to CDI for reporting an improvement was an undisclosed change from the company's previous accounting practice of reflecting all year-end adjustments in the last quarter.²

What is much more dubious is the effect of these delinquencies on the recipients of the exchange offer, made by CDI on November 19, 1969, on the basis of a full prospectus on file with the SEC. We are not required to pass in detail upon the parties' exhaustive arguments, based upon analysis of market behavior in the weeks ensuing after the various misstatements, that these did or did not affect the market price of CDI at those times.³ Simply as a matter of common sense it seems apparent that any significant effect of the first four misstatements on the market price would have been largely dissipated by the annual report for fiscal 1969 issued on August 20, showing earnings of only 33¢ per share as against the 52¢ (or 54¢ with poolings included) earned in fiscal 1968 and the 60¢ mentioned in the press release of September 17, 1968. This was three months before the making of the exchange offer and nearly five months before the date now set for expiration. There was a...