Taylor v. Janigan

• Citation: 212 F. Supp. 794
• Decision Date: 31 December 1962
• Docket Number: Civ. A. No. 58-1056.
• Parties: Frederick B. TAYLOR, Kenneth W. Bergen, Christopher Hurd, and Howard F. Taylor, Plaintiffs, v. John B. JANIGAN, Defendant.
• Court: U.S. District Court — District of Massachusetts

212 F. Supp. 794

Frederick B. TAYLOR, Kenneth W. Bergen, Christopher Hurd, and Howard F. Taylor, Plaintiffs, v. John B. JANIGAN, Defendant.

Civ. A. No. 58-1056.

United States District Court D. Massachusetts.

December 31, 1962.

Harold M. Willcox, Herrick, Smith, Donald Farley & Ketchum, Boston, Mass., for plaintiffs.

Robert W. Meserve, John R. Holly, Sarkis M. Zartarian, Boston, Mass., for defendant.

CAFFREY, District Judge.

This is a civil action brought by former owners of the common stock of Boston Electro Steel Casting, Inc. (Besco), against John B. Janigan, who, early in 1956, purchased from plaintiffs substantially all of the common stock of Besco as part of one overall transaction. At the time of the purchase, defendant was President, General Manager, and a member of the Board of Directors of Besco. Jurisdiction of this Court is invoked under the provisions of Section 10 of the Securities and Exchange Act of 1934 (15 U.S.C.A. § 78j).

As will be set out at length infra, it is the position of plaintiffs that defendant is liable to them because of his alleged violations of S.E.C. Rule 10b-5 in the circumstances surrounding his acquisition of the stock formerly owned by the plaintiffs.

The factual background which gives rise to this controversy is as follows: Besco was and is a corporation organized under the laws of the Commonwealth of Massachusetts, and does business at a foundry located in the Roxbury district of Boston, Massachusetts. Its business was the manufacture and sale of steel castings which were made only upon receipt of orders from customers. It did not at any time relevant to this case manufacture steel castings and place them in inventory against the possibility of their later sale. Stated another way, its production was directly responsive to orders already in hand.

In April 1952, defendant Janigan commenced his employment as President and General Manager of Besco. During the term of his office with that corporation he devoted himself exclusively and energetically to the management of the company. He worked long days and full weeks, supervised all of the company affairs, and drastically reduced costs and overhead. Over a period of time he reduced personnel from 160 to 35 employees and dispensed with all members of the office staff save himself and his brother-in-law, Harold P. Donn, an accountant. All the company books and records, financial and otherwise, were in the control of the defendant and all entries therein were made either by the defendant or Donn.

Janigan was well-qualified by reason of his background and experience to assume the duties of manager of Besco. He had training in accounting, had earned a graduate degree at the Harvard Business School, and had experience in analyzing small businesses for purposes of buying and selling them. By reason of his extremely close application to the operation of Besco, he became intimately familiar with every material detail of all phases of its business. This familiarity extended to manufacturing, matters of personnel, and particularly to matters of sales and finance. During the relevant years an audit of the financial records of Besco was made at the close of each fiscal year (September 30) by a firm of independent auditors, Lybrand, Ross Bros. & Montgomery. Janigan was the sole source of information relative to the financial condition of the company available to the members of the Board of Directors or the shareholders over and above the auditors' annual report.

The Board of Directors met at regular intervals and the usual practice at these meetings was for Janigan to furnish the directors with interim financial statements covering the month immediately past. At these Board meetings Janigan regularly commented about the state of the company's business and the significance of the information contained in the various financial reports. From time to time he advised the Board with regard to the general status of the business or the status of its relations with a particular customer or customers, depending upon the importance of that customer's business to Besco. He further reported to the Directors with regard to changes in the level of incoming orders, including details about important orders, about the volume of plant activity, and about the existence or non-existence of a backlog of unfilled orders from time to time. He likewise commented with regard to the probable effect of these various changes in the business picture on the financial condition and financial future of Besco.

Janigan's close familiarity with these various aspects of the business derived from the fact that he actually placed the price on all orders as they came in; from the fact that he filed the orders in the open-order file; from his use of that file in the course of ordinary operations; from his visual inspection of casting operations in the foundry and from his visual inspection of casting patterns that had been put out in the pattern room preparatory to their later use in the foundry; from reports made to him by his salesmen and from conversations he had with various customers of Besco; from a so-called day to day statistical book; and last but by no means least from what he described as his "general feel" of the business which, he said, always made him "feel confident you know where you're going as every business man does."

During the period from 1952 to the time of the sale which is the subject matter of the instant litigation, the various reports made by Janigan to the Directors with regard to the state of the company's business were proven accurate by subsequent events, as defendant himself admitted during the course of the trial. I find that over a period in excess of four years, Janigan's performance as President and General Manager of Besco had favorably impressed the Board of Directors and, in fact, indicated a high degree of executive skill on his part. Because of the previously proven accuracy of his various statements as to probable changes and trends in the business, the Directors had every reason to repose, and did repose, trust and confidence in the truth of factual representations made by him about Besco in the latter half of 1956 and early 1957.

During the calendar years 1953 and 1954, Besco experienced a decline in its sales volume and in the amount of unfilled orders on hand, which reached its nadir in the fall of 1954. By that time monthly sales had fallen off to about $25,000, with a corresponding decline in unfilled orders or backlog. This occasioned Janigan to report to the Directors that the company was on a two or three week delivery basis. Starting about this time and consistently thereafter, again and again at various meetings of the Board of Directors Janigan emphasized to the Board the fact that because of the age, if not the actual obsolescence, of plant and machinery, the financial future of Besco was at best doubtful, unless fresh capital could be introduced into its operation for the purpose of modernizing plant and equipment, so that once having rid itself of its archaic manufacturing potential, it might thereafter improve the quality of its castings and thus compete on more even terms with its competitors. Janigan painted the business picture with a very black brush.

In 1955, on several occasions Janigan reported that the business was and apparently would continue running with small but steady losses, which would fluctuate up to about $2,000 a month. In October 1955, he told the Board that the company could "rock along" indefinitely in this fashion since it was not impairing its capital position but was suffering only paper losses (i. e., depreciation losses). During 1955 and 1956 it could fairly be said that the only optimistic note he struck was contingent upon introduction of substantial amounts of fresh capital to improve the equipment. He stressed to the Directors that absent this fresh capital (which continued to remain unobtainable) the financial picture was, at best, a very dark gray.

During the year 1955, interim accounting statements did not indicate an uptrend nor did the September 30 fiscal year-end report so indicate. There had been an apparent profit in May because certain bills incurred therein were deferred until a later month. Because book sales were high due to the shipment of large amounts of inventory, the monthly interim reports for October and November showed total sales figures that were about twice those of the corresponding months in 1954. However, monthly and annual losses continued to be reported.

At the trial Janigan testified that he did not observe in this data any indication of a future uptrend nor did he comment with regard thereto to the Directors. He also testified that he did not report to the Directors that any "firming" of prices had occurred despite an announced price increase in August, because he considered that price rise merely an offset to the increased cost of labor. During the course of the trial he somewhat grudgingly qualified this position and near the end of the trial admitted that he saw in the above-described accounting data a somewhat "volatile" indication of an uptrend and that this had been among the factors he considered when he made his offer. I find that his realization that the accounting data may have indicated an uptrend, however "volatile," was never communicated by Janigan to the Board of Directors at any time prior to their acceptance of his offer.

In the fall of 1955, on the basis of reports furnished with substantial regularity by Janigan, all of which can fairly be...