Securities and Exchange Commission v. Shapiro

• Decision Date: 09 April 1974
• Docket Number: No. 377,73-1120.,695 Dockets 72-1927,377
• Citation: 494 F.2d 1301
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Harris A. SHAPIRO et al., Defendants, Norman Berman, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

494 F.2d 1301 (1974)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Harris A. SHAPIRO et al., Defendants Norman Berman, Defendant-Appellant.

Nos. 377, 695 Dockets 72-1927, 73-1120.

United States Court of Appeals, Second Circuit.

Argued January 21, 1974.

Decided April 9, 1974.

COPYRIGHT MATERIAL OMITTED

David Ferber, Sol., Securities and Exchange Commission (Lawrence E. Nerheim, Gen. Counsel, Jacob H. Stillman, Asst. Gen. Counsel, and Frederic T. Spindel, Securities and Exchange Commission, on the brief), for plaintiff-appellee.

Milton S. Gould, New York City (Ronald H. Alenstein, Lois S. Yohonn, and Shea, Gould, Climenko & Kramer, New York City, on the brief), for defendant-appellant.

Before HAYS, MANSFIELD and OAKES, Circuit Judges.

HAYS, Circuit Judge:

The Securities and Exchange Commission brought this action against defendants Shapiro, Berman and others¹ for violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and the Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5. The district court, finding that violations had been committed, enjoined defendants from further violations of section 10(b) and Rule 10b-5 and ordered defendants to surrender their profits to a trustee. 349 F.Supp. 46 (S.D.N.Y.1972). Defendant Berman brought this appeal.

We affirm.

I.

Shapiro and Berman were partners in a firm which specialized in arranging corporate mergers and acquisitions. In October 1970 they commenced efforts on behalf of Ridge Manor Development Corporation to arrange a merger with Harvey's Stores, Inc. On December 11, 1970, Harvey's rejected their proposal in a letter to Joel Friedland, president and major shareholder of Ridge Manor, from William Richter, chairman of the board of Harvey's.

Later in the month Shapiro and Friedland met and again discussed a merger with Harvey's. Friedland supplied Shaprio with unaudited financial data concerning Ridge Manor's earnings for the outgoing year. With these figures Shapiro and Berman prepared a pro forma consolidated financial statement showing a sharp increase in Harvey's earnings if the two firms merged. In order to alleviate fears expressed by some of Harvey's officials, Shapiro and Berman also collected data concerning the price-earnings multiples of several land development companies.

On January 6, 1971, Friedland, Shapiro, and Berman met with David Rosenbloom, a director of Harvey's and a personal friend of Shapiro and Berman, and presented him with these data in an attempt to rekindle merger talks. Rosenbloom stated that certain of Harvey's officials opposed the merger, but that he viewed the merger favorably. He agreed to raise the issue again with the other members of Harvey's board.

After the meeting Berman purchased Harvey's stock for the first time, buying 100 shares at 71/4.

Rosenbloom's efforts apparently succeeded, for Richter and Gerald Cohen, the two members of Harvey's merger and acquisition team, agreed to meet Shapiro and Berman on January 21 to discuss terms of a possible merger. On January 25 Harvey's executive committee met and drafted a letter setting down Harvey's terms for the proposed merger. One term insisted upon was the purchase of at least 200,000 shares of restricted stock in Harvey's. The letter was delivered to Shapiro on the same day.

On January 25 Berman purchased 400 shares of Harvey's stock at prices ranging from 7 1/8 to 7 3/8.

On the morning of January 26 Shapiro and Berman met again with Richter and Cohen to discuss the terms stated by Harvey's in the January 25 letter. During and after the meeting Shapiro telephoned an acquaintance, Jay Zises, to discuss financing for the merger.

On the afternoon of January 26 Shapiro and Berman visited the office of Danard Unschuld, a New York stock broker and friend of Shapiro. Berman opened an account with Unschuld and purchased 400 shares of Harvey's at 8 1/2. Berman testified that it was possible that during the discussion with Unschuld he mentioned the merger negotiations between Harvey's and Ridge Manor. On the next day Unschuld purchased 100 shares of Harvey's. Over the next two weeks Unschuld on several occasions bought Harvey's stock for his own account and for discretionary accounts controlled by him.

At the request of Zises, Berman arranged a meeting for January 28. At the meeting Shapiro and Zises discussed financing for the merger with Richter, Cohen, Rosenbloom, and Andrew Heine, of Harvey's executive committee. Zises requested an exclusive agency for 90 days for selling the restricted shares in Harvey's, during which time Harvey's would pursue no other mergers. The representatives of Harvey's rejected this proposal and left the meeting because at the time Harvey's was also discussing a merger with Liberty Circle Corporation. On the same day or the next day Liberty Circle accepted in principle a plan under which it would be acquired by Harvey's. During the following week Harvey's continued merger discussions with Liberty Circle without concluding an agreement.

Meanwhile, on January 28 Berman discussed with Frederick Robinson, a large shareholder in Harvey's, the purchase of some of Harvey's restricted stock. At least twice in the next two weeks Robinson purchased Harvey's stock.

On February 4 Harvey's executive committee again met with Shapiro and Berman and representatives of Ridge Manor. At the meeting an updated pro forma consolidated balance sheet containing non-public information for the merged companies was circulated. The parties reached no final accord, but did agree on a public announcement that Harvey's was conducting merger negotiations with two unidentified companies. The announcement, made the next morning, was the first public disclosure of the merger discussions.

On February 5 Joel Friedland discussed with Maurice Wilkens, representative of an institutional investor, the purchase of Harvey's restricted stock. Later in the week he told Wilkens he expected the merger to be consummated within two or three weeks. Meanwhile Friedland continued discussions with Richter.

On February 8 Berman sold 600 shares of Harvey's stock at prices ranging from 18 to 18 3/4.

On February 9 Harvey's executive committee met with representatives of Ridge Manor. The parties drafted, without signing, a "letter of intent" incorporating the provisions of the proposed merger. They also agreed on a public announcement, released the next day, that Harvey's was conducting further negotiations with two companies and identifying Ridge Manor as one. On February 11 representatives of Harvey's and Ridge Manor met again to discuss details of the merger. Negotiations continued for the next several days.

On February 16 Berman purchased 500 shares and two calls on Harvey's stock at 22.

On February 18, in response to a request from the American Stock Exchange (AMEX), the parties issued four announcements which disclosed, respectively, that Harvey's and Ridge Manor had agreed in principle to merge, Ridge Manor's earnings for 1970, the expectation of a split in Harvey's stock after the merger, and that the merger was subject to AMEX approval.

After the third announcement Berman purchased 500 shares of Harvey's at between 23 5/8 and 23 3/4.

In the middle of March the AMEX approved the merger, but by this time Friedland had begun to question the wisdom of the merger. On April 3 Harvey's agreed to merge with Liberty Circle. On April 5 Harvey's and Ridge Manor met again, but Friedland's dissatisfaction prompted Harvey's to withdraw from the deal.

On February 24 and March 8 and 9 Berman sold his entire holdings in Harvey's at prices ranging from 21 to 22 1/2.

II.

A. Violations of Section 10(b) and Rule 10b-5.

The SEC claims that the foregoing facts establish violations of section 10(b) of the Securities Exchange Act and of the Commission's Rule 10b-5 in that Berman traded in the stock of Harvey's Stores while possessing material, non-public information about the company without disclosing that information to those with whom he traded.

Appellant concedes that he traded while in possession of information which did not become public until February 18. However, he denies that this information was material because the possibility of a merger was always remote, Harvey's was well-known to be acquisitionminded, and Harvey's was engaged in constant merger talks.

Facts are material for purposes of Rule 10b-5 if a "reasonable investor might have considered them important in the making of an investment decision." Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 154, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972). See also Mills v. Electric Auto-Lite Co., 396 U.S. 375, 385, 90 S. Ct. 616, 24 L.Ed.2d 593 (1970). Whether facts relating to a future event are material depends "upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity." SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L. Ed.2d 756 (1969).

Appellant argues that the cases establish a rule as to when information concerning merger negotiations becomes material. We cannot find such a rule. Appellant relies primarily on our decisions in List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir.), cert. denied, 382 U. S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965), and Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876 (2d Cir. 1972).² In List the defendant, who was a director of Fashion Park, purchased stock in the company from plaintiff. Two days prior to the sale Fashion Park commenced negotiations which ultimately led to a merger. However, defendant was unaware of these negotiations at the time of the purchase. He knew only that Fashion Park's board had resolved to seek a merger or sale and that there might be an unidentified purchaser on the horizon. We affirmed the decision of the district court that...