Titan Group, Inc. v. Faggen, 239

• Decision Date: 01 April 1975
• Docket Number: No. 239,D,239
• Citation: 513 F.2d 234
• Parties: Fed. Sec. L. Rep. P 95,042 TITAN GROUP, INC., Plaintiff-Appellant, v. Harold FAGGEN, Defendant-Appellee. ocket 74-1694.
• Court: U.S. Court of Appeals — Second Circuit

Page 234

513 F.2d 234

Fed. Sec. L. Rep. P 95,042

TITAN GROUP, INC., Plaintiff-Appellant, v. Harold FAGGEN, Defendant-Appellee.

No. 239, Docket 74-1694.

United States Court of Appeals Second Circuit.

Argued Oct. 25, 1974.

Decided April 1, 1975.

Lawrence M. Powers, Steven E. Gross, Martin M. Green, Anderson, Green, Fortus and Lander, St. Louis, Mo., for plaintiff-appellant.

Burton S. Cooper, Edward Labaton, Joel C. Feffer, Sheib, Shatzkin & Cooper, New York City, for defendant-appellee.

Before WATERMAN, OAKES and GURFEIN, Circuit Judges.

WATERMAN, Circuit Judge:

Titan Group, Inc. (Titan) commenced its action in the United States District Court for the Southern District of New York against Harold Faggen seeking the rescission of four contracts Titan had entered into with Faggen. Titan alleges that the defendant had violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970) and Rule 10b-5 promulgated under the 1934 Act, 17 C.F.R. § 240.10b-5 (1973), by making false and misleading statements and by failing to disclose material facts in connection with negotiations leading to Titan's acquisition of four actuarial companies owned by Faggen. Faggen counterclaimed for the principal and interest on promissory notes which he had received in payment for his companies. After a bench trial, Judge Tyler dismissed Titan's claim for contract rescission and awarded Faggen $5,500,000 plus interest on his counterclaim. Titan appeals from the dismissal of its complaint and from the award to Faggen on Faggen's counterclaim.

We affirm the results reached below.

At the heart of this appeal lies the question of the appropriate legal significance to be accorded two memoranda Faggen prepared which were presented to Titan in the discussions prior to the drafting and execution of the contracts. Therefore it is necessary to recount in some detail the facts before the trial judge.

In 1968, Faggen began to consider selling his actuarial companies and he engaged in tentative discussions with several potential purchasers of them. Titan was a conglomerate with a concentration in real estate and construction. At this time Titan, under new management control, was seeking to diversify, and, additionally, it wanted to enhance its cash position. A New York lawyer, Benjamin Robinson, who had close professional ties with Faggen, was Chairman of Titan's Board of Directors. ¹ Aware of perhaps complementary interests, Robinson introduced Faggen to Anthony Frank, the president-director of Titan. When serious negotiations began another attorney, Edmund Kaufman, an attorney with considerable experience in corporate acquisitions, was brought in as Titan's special counsel.

Kaufman and Faggen met for the first time on September 6, 1968. Faggen presented Kaufman a copy of the tax returns of his largest company for the last fiscal year and, also, a memorandum of adjustments to earnings. These adjustments added to the income reported on these tax returns the income of Faggen's three smaller companies, and noted certain possible economies relative to pension funding, liability for city and state taxes and payments for salaries, and also noted the existence of certain non-recurring expenses, and of individually earned accounting fees. The calculations of the memo, which also deducted some $45,000 for investment income, increased Faggen's income for that year from $288,494, the sum reported, to $571,476.

A second and final meeting between Faggen and Kaufman took place on October 2, 1968. Faggen brought to this meeting the tax returns for all his four companies for the past five years, and the companies' client ledgers and employment records. After examination of the tax records and discussion of possible adjustments, the meeting concluded with a tentative agreement on the acquisition, subject to approval by Titan's Board of Directors and a further working out of the details of the contract. The agreed-upon price of the Faggen companies was $5,500,000, to be paid in 10-year 4% convertible notes of Titan. The principal sum was ten times the estimated adjusted annual earnings of the Faggen companies.

Prior to a meeting of Titan's Board of Directors on October 9, 1968, Faggen, at the request of Kaufman, prepared another memorandum which was to be presented to the board. The memorandum briefly described the companies and placed some emphasis on the computer system under development there. Accompanying the memorandum were two exhibits: one showed pre-tax adjusted net income for the preceding four fiscal years, ² and the other was an analysis of new clients. Copies of this memorandum were not distributed at the board meeting, but Titan's president, Frank, orally presented the earnings figures and the securities holdings of the Faggen companies.

The board approved the Faggen acquisition at this meeting but reserved a final approval pending an analysis of it by the executive committee. Subsequent to the board meeting Kaufman and an associate in Robinson's law firm prepared the contract. McIntyre, Titan's treasurer-director, and another Titan employee reviewed the financial basis of the transaction and found the Faggen adjustments to reported income to be reasonable. On December 2, 1968 the contracts were executed.

Difficulties arose after the merger. A disappointed employee of Faggen left immediately afterward, taking with him some clients. The data processing system encountered high startup and hardware expenses and never became profitable. Nonetheless, the actuarial side of the Faggen companies continued to show good profits. Titan between 1968 and 1972 withdrew.$2.1 million in cash and securities from them. In 1972, Titan, under new management control, notified Faggen that Titan was no longer going to pay interest on his notes and commenced this action to rescind the contracts. Faggen treated the non-payment of interest as a default, and counterclaimed for the principal sum of the promissory notes and for accrued unpaid interest thereon.

The appellant's principal contention is that there were material misrepresentations and omissions by Faggen in the memorandum presented by him at the first meeting between Kaufman and him and in the memorandum prepared for presentation to the Titan Board of Directors. These alleged failings involve primarily the adjustments to earnings, the analysis of clientele, and the capacity of the computer program under development. The adjustments to income reflected anticipated earning increases that a publicly held company attempting to maximize income would realize after succeeding to the management of a privately held company which had minimized income for tax purposes. Titan complains that in three areas pension funding, salaries, and travel and entertainment expenses no reduction in expenses occurred, and that in his original memorandum Faggen had misrepresented potential savings. In the memorandum prepared for the board meeting, Faggen had stressed the computer program under development and had listed new clients of his companies. Titan claims that this memorandum had misrepresented the present capacity of the computer program and had failed to list lost clients.

After a bench trial, Judge Tyler rejected the claims of Titan, and found that Titan had not relied in any way on Faggen's representations. The inducement for the contract, the judge found, lay elsewhere: that Chairman Robinson was strongly in favor of the acquisition, that the Faggen companies had a good liquid asset position, that the Faggen companies were profitable, and that the possibility of melding together actuarial and real estate companies was attractive. He found that these broad considerations, rather than interstitial details of client lists or of immediate data processing capacity, sparked Titan's acquisitive interest. As to the...