John R. Lewis Inc. v. Newman, 30715.

• Decision Date: 04 August 1971
• Docket Number: No. 30715.,30715.
• Citation: 446 F.2d 800
• Parties: JOHN R. LEWIS INC. and Glenn E. Hinton, Investments, Inc., Plaintiffs-Appellees, v. Hal C. NEWMAN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

446 F.2d 800 (1971)

JOHN R. LEWIS INC. and Glenn E. Hinton, Investments, Inc., Plaintiffs-Appellees, v. Hal C. NEWMAN, Defendant-Appellant.

No. 30715.

United States Court of Appeals, Fifth Circuit.

July 15, 1971.

Rehearing Denied August 4, 1971.

M. R. Irion, Irion, Cain, Magee & Davis, Dallas, Tex., for defendant-appellant on appeal.

D. L. Case, Jack Pew, Jr., Dallas, Tex., for plaintiffs-appellees; Jackson, Walker, Winstead, Cantwell & Miller, Dallas, Tex., of counsel.

Before AINSWORTH, INGRAHAM and RONEY, Circuit Judges.

AINSWORTH, Circuit Judge:

Plaintiff corporations brought this action to recover damages based on the alleged misrepresentations and deceptions of the defendant, Hal C. Newman, in connection with the January 1969 sales by Newman to each of the plaintiffs of 10,000 shares of unregistered stock¹ of Diversa, Inc. On the instructions of the Trial Judge, pursuant to Fed.R.Civ.P. Rule 49(a), the jury returned a special verdict in the form of written findings on individual issues of fact. The jury found, among other things, that the unregistered stock had no market value; that the plaintiffs had purchased it on the assurances of the defendant that he would replace the unregistered shares with the same number of registered, fully marketable shares of Diversa on or before July 2, 1969; and that on July 2, 1969, the fair market value per share of freely marketable shares of Diversa was $10.37½. Based on these findings and on the undisputed evidence that the defendant had refused to comply with the plaintiffs' demand for replacement of the shares, the Trial Judge entered judgment for the plaintiffs in the amount of $103,750 each.

The defendant appeals. We find merit in one of his contentions: that the judgment must be amended to require the plaintiffs, upon satisfaction of the award, to surrender to him the 20,000 unregistered shares. In all other respects, however, we affirm the judgment of the District Court.

I.

The plaintiffs are Washington state corporations engaged in the securities business in Seattle. John R. Lewis is president and one of four stockholders of the corporation that bears his name; Glenn E. Hinton is the sole stockholder of his company. Since about 1958, the plaintiffs have invested on the over-the-counter market, for themselves and their customers, in the stock of Diversa, Inc., a corporation headquartered in Dallas, Texas. In the course of their periodic visits to Dallas, Lewis and Hinton became acquainted with defendant Newman, an independent investor in close touch with the Diversa management and particularly with Gerald C. Mann, Sr., Diversa's president and chairman of the board.

In the latter part of 1968, Lewis and Newman met in Dallas and discussed the possible purchase by the plaintiff corporations of some unregistered Diversa stock. In December of 1968, Newman called Lewis and broached the subject again. There is a conflict in the testimony as to what was said on these occasions. Newman testified that Hinton and Lewis thought that unregistered Diversa stock was a bargain at $10 a share, and wanted to make an immediate and unconditional purchase. Hinton and Lewis testified that unregistered Diversa stock was worthless to them as an investment, and that they took an interest in Newman's proposal only because Newman led them to believe that the proceeds of the sale would go to Diversa and that Diversa badly needed the capital. Lewis and Hinton further testified that they agreed to buy unregistered stock at $10 per share only on the condition that Newman agreed to replace the unregistered stock with registered stock within six months of the sale.

The sale was arranged by the end of December. On or about January 2, 1969, plaintiffs each paid Newman $100,000, and shortly thereafter Newman delivered to each plaintiff 10,000 shares of unregistered Diversa stock. In March, Newman made it apparent that he considered himself bound only to use his best efforts to obtain registered stock for a possible exchange. Negotiations between Lewis, Hinton, Newman and the Diversa management failed, and when July and August came and went without compliance on Newman's part with the plaintiffs' demand, plaintiffs filed this suit.

The jury, in response to the questions submitted by the Trial Judge pursuant to Rule 49(a), found as follows:

1. Newman represented to the buyers that the purpose of the sale of unregistered stock was to enable Diversa to carry on foreign operations and that Gerald C. Mann, Sr. would guarantee that 20,000 shares of freely marketable common stock would be made available for exchange of the shares in question by July 2, 1969.

2. These representations were material and made to induce the plaintiffs to purchase the stock and were relied on by plaintiffs in purchasing the stock for $10 per share. They were also false.

3. Newman failed to disclose to the plaintiffs that the shares were being sold for his own account, and that he had purchased the shares at $5 per share shortly before the sale to plaintiffs was consummated, from an affiliated company of Diversa.

4. A reasonable man would attach importance to such undisclosed facts in determining whether to purchase the stock for $10 per share.

5. If said facts had been disclosed to plaintiffs, they would have regarded them as material in deciding whether or not to purchase the stock for $10 per share.

6. Newman entered into a verbal agreement with Lewis that the unregistered shares purchased would be replaced by Newman with a like number of fully marketable shares by July 2, 1969.

7. The unregistered stock had no market value on or about January 2, 1969, and none on or about July 2.

8. The fair market value of freely marketable shares of stock of Diversa on or about July 2, 1969, was $10.37½.

9. Newman, in making the representations in connection with the sale, acted without malice.

The $207,500 judgment entered for plaintiffs on the special verdict is general in form. The appellees contend that the verdict and judgment are consistent with each of the theories advanced in their complaint, i. e., common law fraud, breach of contract, and violation of anti-fraud provisions of the federal securities laws — specifically, Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)) and Section 10(b) of the Securities Exchange Act of 1934 (15 U.S. C. § 78j(b)), as supplemented by SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. This Circuit has never squarely determined whether a private civil action for damages lies for violations of Section 17(a).² It is now established beyond dispute, however, that such an action lies for violations of Section 10(b) and Rule 10b-5,³ and we hold that the jury's verdict sustains a judgment for plaintiffs under these provisions.⁴ The state-law theories are not well briefed by the parties on appeal. Accordingly, and without prejudice to appellees' contention that the verdict will also sustain a judgment in their favor on these counts, we proceed to consider the appellant's points of error in the context of Section 10(b) and Rule 10b-5.

II.

Appellant attacks the special verdict on three grounds. He argues that the jury was incorrectly instructed, that the evidence was insufficient to support certain of its findings, and that the Trial Judge erred in failing to submit to the jury certain interrogatories offered by appellant's counsel. We find the first two contentions to be without merit, and reject the third on the ground that the appellant's failure to move in timely fashion below precludes review.

Newman contends that the brief instructions of the Trial Judge were incomplete and in part incorrect. We discern no substantial error. The Trial Judge instructed the jury that the term "material" as used in the interrogatories pertaining to Newman's alleged misrepresentations meant "of solid or weighty character, substantial, of consequence, not to be dispensed with, important." The conventional test for materiality in cases arising under Section 10(b) and Rule 10b-5 is whether a reasonable man would attach importance to the fact misrepresented in determining his course of action in the transaction in question. See List v. Fashion Park, Inc., 2 Cir., 1965, 340 F.2d 457, 462, cert. denied, 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60; Gilbert v. Nixon, 10 Cir., 1970, 429 F.2d 348, 355-356, and cases cited therein. The purport of the conventional test and the one on which the jury was instructed appear to us, in the context of this case, to be the same. In any event, we are unable to discern any prejudice to the appellant.⁵ Cf. Delancey v. Motichek Towing Service, Inc., 5 Cir., 1970, 427 F.2d 897, 902. Newman also contends that the charge did not properly apprise the jury of the importance of "the peculiar knowledge, interest and years of experience of the plaintiffs in the security business, and with reference to the stock in question." Normally it is enough, for purposes of Section 10(b) and Rule 10b-5, that the defendant's misrepresentations be material, and that the plaintiff rely on them to his detriment. See Reyos v. United States, 10 Cir., 1970, 431 F.2d 1337, 1347-1348; List v. Fashion Park, supra, 340 F.2d at 462; 2 A. Bromberg, Securities Law: Fraud — SEC Rule 10b-5, §§ 8.3, 8.6 (1969). There was no evidence in this case of past dealings between plaintiffs and defendant which might have put them on notice that Newman was not acting for Diversa as he purported to be, or that he would refuse to perform as he agreed to do. We hold that the instructions given by the Trial Judge were adequate and complete. Cf. L'Urbaine Et La Seine v. Rodriguez, 5 Cir. 1959, 268 F.2d 1, 5.

Newman contends that the evidence was insufficient to support most of the jury's findings. The principal witnesses in the case were Lewis, Hinton, and Newman himself. The testimony of Lewis and Hinton amply supported the jury's findings as to the facts surrounding the transaction. Its finding on the fair market...