Dale v. Rosenfeld, 80
| Decision Date | 01 February 1956 |
| Docket Number | Docket 23715.,No. 80,80 |
| Citation | 229 F.2d 855 |
| Parties | David B. DALE, Plaintiff-Appellant, v. Henry P. ROSENFELD, doing business under the firm name and style of Henry P. Rosenfeld Co., Samson Wallach and Abraham S. Gechtman, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Chadbourne, Parke, Whiteside, Wolff & Brophy, New York City, Ralph D. Ray and Melvin D. Goodman, New York City, of counsel, for appellant.
Irving Bick, New York City, for Henry P. Rosenfeld, appellee.
Louis Levine, New York City, for Abraham S. Gechtman, appellee.
Before HAND, SWAN and FRANK, Circuit Judges.
In January 1948 plaintiff made two purchases of stock in a corporation whose stock was offered for sale by means of a prospectus received through the mails. Having subsequently discovered that statements in the prospectus were untrue or misleading, on April 25, 1949 he brought the present action to rescind his purchases and recover the purchase price. Defendant Rosenfeld, who did business as Henry P. Rosenfeld Co., was the underwriter named in the prospectus and the person from whom plaintiff bought the stock. Defendant Wallach was a salesman of Rosenfeld with whom plaintiff had had dealings; and defendant Gechtman was president of the corporation whose stock he had purchased. The action is based on section 12 of the Securities Act of 1933, 15 U.S.C.A. § 77l, set forth in the margin.1 The case was tried to the court without a jury. Upon completion of the plaintiff's evidence, the trial judge granted the defendants' motion to dismiss the complaint. His findings of fact and conclusions of law were delivered orally. From the resulting judgment, plaintiff has appealed.
The complaint alleges two causes of action. The first charges that the prospectus represented that Rosenfeld was the underwriter of the 93,000 shares offered, that he had agreed to take any shares not sold to the public, and that the corporation would receive $186,000 after deducting underwriting discounts, whereas in fact the underwriter had not made a firm commitment but had merely contracted to use his best efforts to dispose of the 93,000 shares. The second cause of action charges that the prospectus was misleading in failing to refer to foreign exchange difficulties in connection with foreign sales, from which the corporation expected to derive a large part of its income. We agree with the trial court that the prospectus was not proved to be misleading with respect to matters charged in the second cause of action. We disagree with his ruling respecting the first count.
The outside page of the prospectus stated that 93,000 shares were to be offered at a price to the public of $2.625 per share, that the underwriting discounts were $.625 per share and proceeds to the corporation would be $186,000. It referred to Henry P. Rosenfeld Co. as "Underwriter (as defined pursuant to the Securities Act of 1933 as amended)."2 This definition includes a "best efforts underwriting" as well as a "firm commitment," that is, an agreement by the underwriter to take so much of the issue as he has not disposed of to the public.3 The plaintiff understood the prospectus to mean that the underwriter had made a firm commitment. That this is the commonly understood meaning of the word is shown both by dictionary definitions and by the Commission's requirement that a registered company shall state whether the underwriting is a firm commitment or a "best efforts" arrangement.4 Although the company in which plaintiff bought stock was exempted from registration, the standards of disclosure required of a registered company are equally applicable to the prospectus of an unregistered company. And particularly so here, since Rosenfeld and Gechtman in drafting the prospectus made use of an earlier one (Exhibit 7) which had expressly stated that the underwriter was bound only to use his best efforts. The defendants contend that any false or misleading impression that this was a firm commitment underwriting was dispelled by subsequent statements in the prospectus. We think not. The statement, under the heading "Underwriting," that subject to the terms of the underwriting agreement "the Underwriter has agreed to sell for the Corporation and the Corporation has agreed to sell through the Underwriter 93,000 shares * * *" falls far short of contradicting the earlier statements, for it well might mean that the underwriter was obligated to sell all the shares; particularly when followed by six paragraphs purporting to summarize the important provisions of the underwriting agreement but omitting any reference to the extremely important fact that it was only a "best efforts" undertaking by the underwriter. It is true that on cross-examination plaintiff testified that he knew Mr. Rosenfeld was "acting as an agent" in offering the stock, but this does not mean that he understood there was not an underwriter's obligation to sell all the shares. On direct he had testified that he did so believe from reading the prospectus. We need not find that the prospectus contained untrue statements; it is sufficient for the present discussion if it was "misleading." We cannot doubt that it was.
Nor can we accept the argument that the statement in the prospectus that "A copy of the Underwriting Agreement may be examined at the offices of the Underwriter" imposes on a purchaser the necessity of examining it to see whether it may supply information the omission of which made the prospectus misleading. Nothing in the words of the prospectus suggested such necessity. If an issuer or underwriter could so simply avoid the risk of a misleading prospectus, the legislative purpose of requiring full disclosure would be defeated and the statute would have little utility.5 Availability elsewhere of truthful information cannot excuse untruths or misleading omissions in the prospectus. "Readiness and willingness to disclose are not equivalent to disclosure."6
Section 13 of the Act, 15 U.S. C.A. § 77m, requires actions based on section 12(2) to be brought "within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence". The plaintiff actually discovered that the underwriting agreement was only a "best efforts" contract when he attended an annual stockholders' meeting on June 15, 1948. His suit was commenced less than a year thereafter, on April 25, 1949. He did not know of his rights under the Securities Act until he consulted counsel in March or early April 1949. The trial...
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Johns Hopkins University v. Hutton
...of the purchaser's duty to investigate. See also Tentative Draft No. 11, April 15, 1965, of that Restatement on § 540. In Dale v. Rosenfeld, 229 F.2d 855 (2d Cir. 1956), the issue of duty to investigate arose. In that case the Court found that the prospectus in question misrepresented that ......
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Ruby v. American Airlines, Inc.
...297 F.2d 9 (2 Cir. 1961), cert. denied, 369 U.S. 865, 82 S.Ct. 1031, 8 L.Ed.2d 84 (1962), or of reasonable diligence, Dale v. Rosenfeld, 229 F.2d 855, 858 (2 Cir. 1956). See also Baumgartner v. United States, 322 U.S. 665, 670-671, 64 S.Ct. 1240, 88 L.Ed. 1525 (1944); Dalehite v. United Sta......
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Kohn v. American Metal Climax, Inc.
...as the instruction was more demanding than the statute required. 37 The court also relied on a quotation from Dale v. Rosenfeld, 229 F.2d 855, 858 (2d Cir. 1956), to the effect that willingness to disclose is not equivalent to disclosure. Dale, however, was an action under Section 12 of the......
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Fox v. Kane-Miller Corp., Civ. No. 71-600-K.
...or other bulky compilations so as, in effect, to bury the same. See Stier v. Smith, 473 F.2d 1205, 1208 (5th Cir. 1973); Dale v. Rosenfeld, 229 F.2d 855 (2d Cir. 1956). Pertinent also is Chief Judge Brown's observation in Stier, supra at 1208, that "the law will presume that plaintiff would......