Wilson v. Comtech Telecommunications Corp.

• Decision Date: 29 April 1981
• Docket Number: D,No. 599,599
• Citation: 648 F.2d 88
• Parties: Fed. Sec. L. Rep. P 97,970 Robert W. WILSON, Plaintiff-Appellant, v. COMTECH TELECOMMUNICATIONS CORP., Fred Kornberg, J. Preston Windus, Jr., Donald R. Campbell, John E. Rosenblum, Milton L. Deever, and Gerard R. Nocita, Defendants-Appellees. ocket 80-7642.
• Court: U.S. Court of Appeals — Second Circuit

Page 88

648 F.2d 88

Fed. Sec. L. Rep. P 97,970

Robert W. WILSON, Plaintiff-Appellant, v. COMTECH TELECOMMUNICATIONS CORP., Fred Kornberg, J. Preston Windus, Jr., Donald R. Campbell, John E Rosenblum, Milton L. Deever, and Gerard R. Nocita, Defendants-Appellees.

No. 599, Docket 80-7642.

United States Court of Appeals Second Circuit.

Argued Feb. 23, 1981.

Decided April 29, 1981.

Jack David, New York City (Steven Finell, Nancy F. Brodie, David & Finell, New York City, on the brief), for plaintiff-appellant.

Harry I. Rand, New York City (Amy Adelson, Paul Chessin, Botein, Hays, Sklar & Herzberg, New York City, on the brief), for defendants-appellees.

Before FEINBERG, Chief Judge, OAKES, Circuit Judge, and NEAHER, District Judge. ^*

OAKES, Circuit Judge:

This appeal, dealing with securities regulation, involves both an alleged failure by a corporation and its officers to correct informal financial projections and an alleged violation of the "disclose or abstain" rule relating to insider trading. Suit was brought by appellant Robert W. Wilson, a sophisticated professional investor, who in October 1976 attended a conference with other investors and securities analysts at which one of the appellees, Fred Kornberg, president of appellee corporation Comtech Telecommunications (Comtech), responded to several questions by offering projections of Comtech's sales and earnings for the coming fiscal year. Several months later, on March 10, 1977, Comtech released its financial report for the second quarter of fiscal 1977, revealing significant declines in both sales and earnings. In the meantime, between March 7 and 10, Wilson had purchased a substantial amount of Comtech stock and, according to his calculations, ultimately lost approximately $100,000.

Wilson brought this suit against Comtech and some of its officers under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, alleging that he purchased Comtech stock on the basis of misleading information supplied by appellees. He also claimed that both Comtech's acquisition of R.F. Systems, Inc., on February 8, 1977, by an exchange of stock, and the sale of Comtech stock in late January and early February by appellee J. Preston Windus, Jr., Comtech's treasurer and chief financial officer, constituted unlawful insider trading and provided an independent basis for liability. After a trial without jury, the United States District Court for the Southern District of New York, Gerard L. Goettel, Judge, dismissed the complaint. On appeal, Wilson argues that the projections in October 1976 were material statements, that the corporation and its officers had a duty to correct these statements once it became apparent that the projections were inaccurate, that these officers acted with scienter in failing to make such corrections, and that the misleading projections were significant causal factors in his decision to purchase Comtech stock. He also reasserts his claim on unlawful insider trading.

We affirm the judgment below on the basis that Wilson did not rely on the informal financial projections in making his purchases of Comtech stock and that he had no standing to assert a claim of unlawful insider trading against appellees. We decline to reach the other issues raised in this appeal.

I. FACTS

Appellant Wilson is a professional investor who manages his own investments as well as a small hedge fund. Appellee Comtech is a New York corporation which manufactures and sells telecommunications equipment and systems; the other appellees are officers of Comtech. ¹ In mid-October 1976 Wilson attended the annual conference of the Western Electronics Manufacturers Association (WEMA) at which Comtech's president, Kornberg, held a series of small meetings with securities analysts, investors, and money managers to present information and answer questions about his company. ² Prior to the WEMA conference, Comtech had released its report for fiscal 1976 which indicated record results, including a 40% increase over 1975 in sales and a 45% gain over 1975 in earnings per share. The only apparent cloud on the Comtech horizon was that the backlog of orders at the close of fiscal 1976 was only $9,867,665, down sharply from $23,096,292 at the end of fiscal 1975. ³ Believing that analysts would be greatly concerned about the backlog decline, Kornberg's presentations at the conference focused on reasons for the decline, Comtech's potential markets, and the contracts on which it was currently bidding.

After each of Kornberg's presentations, he held a question and answer session. Questions at several of the small meetings arose concerning Comtech's expectations for future sales and earnings. As to Kornberg's response to these questions, the district court found:

Mr. Kornberg told the security analysts in answer to questions at the WEMA Conference meetings, including the one attended by plaintiff Wilson, that Comtech sales for the first half of Comtech's fiscal year ended July 31, '77 would be flat and that the second half could be flat if Comtech won new short term contracts in the next 30 to 60 days. Moreover, if additional large contracts were awarded soon, the fourth quarter may show growth.

Mr. Kornberg indicated at the 1976 WEMA Conference that Comtech's earnings for the first half of fiscal 1977 would be flat.

A. This was in response to questions and was not a part of Comtech's formal presentation;

B. The answers were reasonably believed by Comtech and by Mr. Kornberg to be true at the time made.

Mr. Kornberg indicated at the 1976 WEMA Conference that Comtech sales for the second half of fiscal 1977 would be flat. He also indicated that Comtech could maintain its fiscal 1976 level of earnings in fiscal 1977 on contracts already in backlog.

A. This was in response to questions and was not a part of Comtech's formal presentation;

B. The answers had a reasonable basis and were expressly qualified by statements also made by Mr. Kornberg, that in order to achieve those levels of earnings, Comtech would have to receive substantial new contracts and that the next 30 to 60 days were critical.

(Emphasis added.) Wilson did not purchase Comtech stock at that time.

On December 24, 1976, Comtech issued its first quarter report for fiscal 1977 (ending October 31, 1976) to shareholders. In a section headlined "Outlook," the report stated: "As can be seen from the accompanying statement, our profit position continues as strong as ever. The combination of a strong product line, a diversified business, modern facilities and new products in advanced stages of development gives us confidence for the future." Again, Wilson did not purchase Comtech stock at that time.

By the end of January 1977 it began to be apparent that Comtech would not achieve the results projected at the WEMA conference. First, sometime in mid-January, three customers requested deferments of substantial deliveries scheduled for the second quarter, thus preventing recognition of sales to them in that quarter under Comtech's method of accounting. Then on February 7, 1977, appellee Windus discovered that the contract value and backlog on a major contract, "Project 488," had through error been overstated by some $325,000, meaning that Comtech's profits on the job had also been overstated. In order to correct this, Comtech was compelled to record no profit on the $823,747 in sales recognized on Project 488 in the second quarter, thus reducing the earnings per share reported for the quarter by .07. Finally, on February 8, 1977, Comtech closed a deal to acquire R.F. Systems, Inc., by exchanging over 51,000 shares of Comtech stock for stock of the acquired company. The additional costs associated with this acquisition, as well as those costs related to Comtech's move to a new building and its increased efforts in the area of research and development, all contributed to the second quarter decline. Meanwhile, between January 24 and February 7, Windus had sold 1,600 of his 1,800 shares of Comtech stock, but without knowledge of the Project 488 clerical errors.

On February 25, 1977, Comtech's monthly financial report for January 1977, setting forth the decline in sales and earnings, was distributed to all the appellees. However, Comtech's independent auditors had to review the second quarter results before they could be released to the public. This regular quarterly review began in late February and concluded on March 7. On March 8, 1977, Comtech's Audit Committee and Board of Directors approved the second quarter results, including the adjustment made because of the Project 488 errors. But Comtech delayed disclosure of the report for one day because its general counsel requested time to consider whether an explicit statement should be made with respect to these errors. Counsel decided by late afternoon on March 9 that no such statement was necessary and on the next morning Comtech released the operating results for the second quarter.

As already mentioned, Wilson had not purchased Comtech stock either after the WEMA conference or after reading the "Outlook" comment in the first quarter report of late December. He also was aware of Comtech's accounting methods and knew that Comtech's quarterly operating results were "historically erratic and volatile," though he was of the belief that the company's volatility had stabilized. On or about March 4, 1977, Comtech was again brought to Wilson's attention, this time by a broker, Fred Stein, during a luncheon conversation at the restaurant La Caravelle in Manhattan. Stein noted that the price of Comtech stock had declined and urged Wilson to buy now. Wilson reviewed his file on Comtech that afternoon, finding among his papers a February 1977 "Research List" issued by Faherty & Swartwood, a market maker for the stock, projecting fiscal 1977 earnings of $1.50-$1.60 per share. Wilson then telephoned broker Thomas...