Continental Research, Inc. v. Cruttenden, Podesta & Miller

• Decision Date: 27 September 1963
• Docket Number: No. 4-62-Civ. 353.,4-62-Civ. 353.
• Parties: CONTINENTAL RESEARCH, INC., a Minnesota corporation, Plaintiff, v. CRUTTENDEN, PODESTA & MILLER, a partnership residing in the State of Illinois, and Robert A. Podesta, Ernest A. Mayer, John Doe and Richard Roe, individual members of said partnership, Defendants.
• Court: U.S. District Court — District of Minnesota

222 F. Supp. 190

CONTINENTAL RESEARCH, INC., a Minnesota corporation, Plaintiff, v. CRUTTENDEN, PODESTA & MILLER, a partnership residing in the State of Illinois, and Robert A. Podesta, Ernest A. Mayer, John Doe and Richard Roe, individual members of said partnership, Defendants.

No. 4-62-Civ. 353.

United States District Court D. Minnesota, Fourth Division.

September 27, 1963.

Julius F. Bonello, Minneapolis, Minn., for plaintiff.

Henry Halladay and Robert J. Struyk, Minneapolis, Minn., for defendants.

LARSON, District Judge.

The plaintiff, Continental Research, Inc., is a Minnesota corporation with its home office in Golden Valley, Minnesota. The defendant Cruttenden, Podesta & Miller, a securities dealer and broker, was at the times relevant herein a partnership with its home office in Chicago, Illinois.

This is an action in tort for interference with or inducing the breach of a contract between the plaintiff and Harold E. Wood & Company, a Minnesota corporation, with its home office in St. Paul, Minnesota. The legal issues involve the interaction of three sets of events: (1) dealings between the plaintiff and the Wood Company, (2) dealings between the Wood Company and the defendant, and (3) the changes which took place in the national and local securities markets in 1962.

The plaintiff corporation was organized on January 16, 1962, by members of a joint venture which had been formed June 24, 1961, to assist Ned Owens in the development of the invention of an oxygen dispenser. Mr. Owens, a naval aviator in World War II, had become interested in oxygen not only for its high altitude uses, but for its other beneficial effects on the human system. On November 27, 1961, the group applied for a patent on the product, the application for which was still pending at the time of trial. The corporation decided that it would raise the capital necessary to begin production and marketing of the product by selling stock to the public. In pursuit of this goal the plaintiff began discussions with officers of the Wood Company in the latter part of January, 1962. The Wood Company told the plaintiff that the proposed issue had good qualities and should be priced at the $5.00 per share level. On February 1, 1962, the president of the Wood Company, Leo Quist, met with Ned Owens, now president of the plaintiff, and others in the plaintiff corporation to discuss the type of selling agreement to be entered into. The two alternatives available to the plaintiff were either an underwriting contract or a best efforts contract. Under the former the Wood Company would have paid the plaintiff the total dollar amount of the stock issue, which was $250,000, and then would have proceeded to sell the stock to the public at its own risk. Under the latter plan the plaintiff would receive no firm commitment, the risk of the stock sale resting on the issuer. The plaintiff urged the Wood Company to underwrite the issue, stating that it could muster a nucleus of "sophisticated" investors which would insure the success of the issue, but the Wood Company chose to become the selling agent only on a "best efforts" basis. The Wood Company's president testified that although he was quite optimistic about the market at the outset of the year 1962, he began to be concerned after the major steel companies announced an across-the-board price increase in the spring of 1962 but then withdrew the increase. The plaintiff and the Wood Company signed the selling agreement on April 2, 1962, under which the issuer offered 50,000 shares of common stock at a price of $5.65 per share, $0.65 of which would go to the Wood Company as its commission. The offering was registered by the Minnesota Securities Commissioner on May 15, 1962. The issuer wished to comply with the Federal securities law by proceeding under a Regulation A exemption. There was delay in the completion of the Offering Circular in satisfactory form and approval from the Chicago office of the Securities and Exchange Commission was not obtained until August of 1962. This approval, which under Regulation A takes the form of a so-called "no comment letter," was given on August 22 to be effective on August 27. The Offering Circular, dated August 27, 1962, and which is the only permissible selling literature other than the tombstone ad, was then in final form. On August 27, 1962, the so-called tombstone ad, a brief announcement of the offering, was run in the major morning and evening papers in the Minneapolis-St. Paul metropolitan area and an investment publication. The officers and salesmen of the Wood Company also commenced their personal selling efforts, which usually took the form of first sending the offering circular to a prospective buyer and then contacting him later either on the telephone or in person. The selling agreement between the plaintiff and the Wood Company required the latter to use its best efforts for ninety days from the first day of selling, August 27, here. Although more than $20,000 worth of stock was sold through the Wood Company, the only persons to whom sales were made were people whose names had been furnished to the Wood Company by the plaintiff. These people were all friends or relatives of plaintiff's promotion group. Numerous other persons in the metropolitan area who were described as "sophisticated" investors were contacted by the Wood Company's sales force, but not one of them finally bought any of the plaintiff's stock.

Prior to 1961 Harold E. Wood, founder of the Wood Company, had been a long-time friend of Robert Podesta, managing partner of the defendant. Mr. Podesta was in Denver, Colorado, when he learned that Harold Wood had been killed on October 7, 1961, in an automobile accident. He called Leo Quist, whom he also knew, to inquire about the well-being of the deceased's family, to express his sorrow over the accident, and to inquire generally of the future plans of the Wood Company. The nature of the defendant's operation is such that it is always looking for ways to expand its branch offices. Mr. Podesta and Mr. Harold Wood over the years had frequently mentioned the possibility of affiliating, but no serious negotiations had ever been undertaken. In his telephone conversation with Mr. Quist, Mr. Podesta told him that if he later considered an affiliation with a larger securities concern, Mr. Podesta would appreciate Mr. Quist's calling him in Chicago. Mr. Quist did not contact Mr. Podesta immediately.

For several years prior to 1962 the securities market for "local" issues had been good in the metropolitan area of Minneapolis-St. Paul. A "local" issue is stock in a corporation which has its home office here. Numbers of issues in new and unseasoned business ventures were offered to the public with considerable success. At the outset of 1962 the national securities market was enjoying prosperity; the Dow-Jones averages (indicating the relationship of current prices to prices in former years) were high and the volume of sales was substantial. During the spring of 1962 the market apparently wavered slightly, reflecting some concern over the unsuccessful attempt of the major steel companies to raise their prices, but continued relatively strong into the month of May. The market situation changed drastically in the latter part of May. On May 28 prices fell sharply on the New York Stock Exchange and other exchanges. Prices rapidly declined elsewhere; both national and local issues were hit hard by a wave of pessimism which swept the country. The "big break" caused several things to happen insofar as the parties in this case are concerned.

The dealings between the plaintiff and the Wood Company were affected because sophisticated investors had neither the financial interest nor the financial means to purchase the stock being offered by the plaintiff. A sophisticated investor was described in various ways by experts at the trial. His sophistication was alternatively described to be a function of his knowledge of the market, his general economic position in life, or his current tax situation in regard to capital gains and losses. One expert said that a sophisticated investor was one who knew as much about the market as the salesman who came to call on him; he fully appreciated the risks involved in untried corporations without being given a full and formal disclosure. Another described a typical sophisticated investor as a man in business with a large current income who invested some of his funds in proven securities but also had funds with which to speculate. A third description portrayed a man who will buy speculative issues because he has large capital gains and does not object to some losses due to his high tax bracket. By August 27, 1962, a number of these people had no unrealized capital gains and in many cases their paper gains had turned to losses, unrealized or otherwise. This took away the tax incentive for buying a stock such as that being offered by the plaintiff, which was uniformly described as a speculative issue. Also, for those who had the means to buy, there were numerous local issues with proven success and established earnings record which were selling at 50%-60% of their price level of some three months before. These established issues were being offered (though seldom taken) at the same general price level at which the plaintiff's stock was being offered. Although most of the witnesses who professed to know anything about initial offerings of unseasoned corporations said that the plaintiff's product was above average in potential, they all agreed that sale of that type of an issue in the fall of 1962 through normal channels was flatly impossible. There was little demand for any sort of stock but no demand for an untried local issue. The decline in the price level of nationally listed securities "bottomed-out" in the summer and the Dow-Jones averages began to climb in the fall, but this was only because of the need for large...