Green v. Jonhop, Inc.

• Decision Date: 16 March 1973
• Docket Number: Civ. No. 71-463.
• Citation: 358 F. Supp. 413
• Parties: Maurie M. GREEN, Plaintiff, v. JONHOP, INC., an Oregon corporation et al., Defendants.
• Court: U.S. District Court — District of Oregon

358 F. Supp. 413

Maurie M. GREEN, Plaintiff, v. JONHOP, INC., an Oregon corporation et al., Defendants.

Civ. No. 71-463.

United States District Court, D. Oregon.

March 16, 1973.

COPYRIGHT MATERIAL OMITTED

Phil Cass, Jr., Riddlesbarger, Pederson, Young & Horn, Eugene, Or., for plaintiff.

Garry P. McMurry, McMurry & Nichols, Portland, Or., for defendant.

OPINION

SKOPIL, District Judge:

Plaintiff, Maurie M. Green, brings this action against two corporations, a defunct corporation, an officer of one of the going corporations, and a securities salesman, for alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. 15 U.S.C. § 78j; 17 C.F.R. § 240.10b-5. He also alleges violation of the Oregon Blue Sky Law. O.R.S. § 59.115. Jurisdiction is based on Section 27 of the Securities Exchange Act of 1934. 15 U.S.C. § 78aa. The case was tried before the Court.

FINDINGS OF FACT

1) Jonhop, Inc. (hereafter "Jonhop"), a small Oregon manufacturer of windshield

cleaning fluid, made a public offering of stock in August, 1968, and was traded thereafter on the over-the-counter market.

2) American Western Securities, Inc. (hereafter "American Western") was the underwriter for Jonhop and was making a market in Jonhop shares during the period relevant to this case. American Western is now dissolved.

3) Alcorn & Black, Inc. is a broker-dealer who employed C. Michael Trotter from July, 1969, to July, 1971.

4) Robert K. Jones is a Director, Executive Vice President and principal shareholder of Jonhop.

5) C. Michael Trotter is now a stock-broker who was a securities salesman at all relevant times herein.

6) In January, 1969, plaintiff spoke on the phone about Jonhop with defendant Trotter, then a securities salesman for American Western. Plaintiff then met Trotter in Portland in February, 1969, to discuss Jonhop as an investment. They went together to talk with defendant Robert K. Jones. Both Trotter and Jones felt that Jonhop had experienced a reversal from previous losses and would have earnings for the current fiscal year ending March 31, 1969. Plaintiff later spoke, at Jones' suggestion, with James Robb, professor of marketing at Portland State University. Robb was optimistic about the future of Jonhop. Green was not told that Robb was a Jonhop Director.

7) Trotter gave plaintiff an American Western "Market Comment" on Jonhop. The comment gave the net sales for Jonhop from 1966 through 1968, and estimated the 1969 figure would be $1,000,000, up from $404,518 in 1968. The optimistic text of the comment related information on the company's operations and future plans. It made no mention of previous substantial losses. The comment ended with a recommendation to buy Jonhop for capital gains. Jones first saw the comment in American Western's office in September, 1968. Although he had no basis upon which to conclude the estimate was accurate, he said nothing to American Western.

8) Plaintiff purchased 2,000 shares of Jonhop stock from American Western, as principal, on February 25, 1969, for $17,500.

9) Plaintiff entered the United States Army but kept in touch with Trotter. In January, 1970, while enroute to Korea, plaintiff read the 1968-69 Jonhop Annual Report which had been sent to his mother's home in Eugene, Oregon, in June 1969. The report emphasized the turnabout in the earnings. Highlights on page 2 pointed out a 134.8% jump in net income, a 117.8% increase in net income per share, and a 122.5% increase in return on sales. The text of the report talked of record sales and profits and the "significant cost reduction" in operating expenses. There was a 55.2% gain in sales over the previous year's record and a corresponding increase of only 12.8% in operating expenses. (Page 3.) The report stressed the "complete reversal of Jonhop's first four years" with several charts and graphs.

The comparative statements of income and loss pointed out the sales increase from $346,355 in 1968,¹ to $537,483 in 1969, the small increase in selling expenses, net income of $21,981 (up from a loss of $63,075), and earnings per share of $.08 (up from a $.45 loss per share). Both net income and earnings had no such reference.

The comparative balance sheets showed the last asset entry as:

                                                              Unaudited
                                               March 31       March 31
                                                 1969           1968
                                               --------       ---------
                DEFERRED CHARGES
                Market development costs—
                 less amortization (Note C)    $123,308
                Excess acquisition costs—
                 less amortization (Note D)      87,310
                                               ________
                                               $210,618
                

Note C² refers to a change in accounting policy, adopted in September, 1968, which is intended to account for market development costs. These are non-recurring costs which are incurred in developing a new market. While such costs were previously shown as part of the selling expenses, they are now to be capitalized and amortized over three years. The practical effect of the change is that selling expenses for 1968-69 were reduced by $123,308, and the net income increased by the same amount. If the costs had been shown as selling expenses, the net income would have been reduced to a net loss of $101,327.

Also stressed in the report was the development of the special "fleet formula" by Jones. Termed "An American Business Success Story," the report mentioned it often and featured a separate article on the last page, complete with pictures of Greyhound buses. It was stated that a Greyhound maintenance memorandum instructed its garages to stock Jonhop's formula in 55-gallon drums and that those garages serviced 6,000 coaches.³

10) Prior to leaving for Korea, plaintiff discussed with Trotter the possible purchase of additional shares of Jonhop for the purpose of averaging the cost of all shares.

11) Between January and April, 1970, Trotter corresponded with plaintiff in Korea. In his earlier letters, Trotter thought it a good idea to buy more Jonhop stock at the lower price. Trotter's later letters were much less enthusiastic about Jonhop. He said he had "doubts" and that he was worried about Jonhop's earnings for the current fiscal year. About March 23, 1970, plaintiff gave Trotter a buy order for 1,000 Jonhop shares at 4 1/8 net.

12) Trotter sent plaintiff an American Western "Special Situation Report" along with one of his letters in early March, 1970. That report contained much of the information which had been in the 1968-69 Annual Report, including the $.08 earnings per share for 1968-69. It also predicted a net income per share of $.40 to $.50 for 1969-70, and recommended purchase of Jonhop. Defendant Jones had received that report in the mail in 1969, shortly after its publication, and was aware that it was being sent to Jonhop shareholders. Jones testified that he and Jonhop President Hopper discussed the projection and concluded their figures did not match that projection. Therefore, Jones said that Hopper called Stan Parsons at American Western and objected to the specific projection.

In one of his letters to plaintiff, Trotter quoted Jones as predicting $.40 to $.50 per share earnings. That same prediction was circulating around the brokerage trade in Portland. Jones attended sales meetings at American Western where Jonhop and the Special Situation Report were discussed, but he said nothing about the earnings projection. In another private conversation with Trotter, Jones predicted that earnings for 1969-70 would exceed those of 1968-69. Jonhop issued no written statement nor made any public announcement contradicting the projection.

13) Jonhop had no earnings in the 1969-70 fiscal year but suffered a net loss of $172,271, or $.48 per share.

14) Plaintiff purchased 1,000 shares of Jonhop on April 8, 1970, for $4,125. American Western owned the block of shares sold by Trotter.

15) Plaintiff sold 2,900 shares of Jonhop on June 15, 16, 17 and 18, 1971, for $5,629.50.

16) Plaintiff filed suit on July 1, 1971.

I THE EARNINGS PREDICTION MADE BY JONES

With respect to the predictions made by defendant Jones to plaintiff in February, 1969, that Jonhop would have "earnings" for the current fiscal year, I find no violation of the securities laws. Businessmen are always optimistic about the future, and such a statement does not rise to the level of a material misrepresentation, especially since the statement was true. Jonhop did have earnings for the 1968-69 fiscal year.

Moreover, in such a conversation about the general future expectations for the company, Jones was not required to qualify general statements about future performance by relating a change in accounting method which occurred five months previously. Jones did not know at that time if that change would even affect earnings. Under these circumstances, such an omission would not be material in the sense that a reasonable investor would have considered it important in making his investment decision. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); List v. Fashion Park, Inc., 340 F.2d 457 (2nd Cir. 1965).

II

THE AMERICAN WESTERN "MARKET COMMENT"

I find that the prediction in the American Western "Market Comment" of 1969 sales of $1,000,000 to be a misrepresentation of a material fact within the meaning of Rule 10b-5.⁴ I also find that the failure to mention Jonhop's previous losses was a misleading omission.⁵ Furthermore, plaintiff relied on this comment in making his purchase in February, 1969, of 2,000 shares of Jonhop. It is true that not every inaccurate prediction is actionable under the securities laws. S.E.C. v. R. A. Holman & Co., 366 F.2d 456, 457-458 (2nd Cir. 1966), aff'd on rehearing, 377 F.2d 665 (2nd Cir. 1967). However, grossly inaccurate statements such as this are not just "mildly misleading."

The $1,000,000 estimate was nearly three...