employed by MS&R (Tr. 1689-92). This used a standard IBM computer (Tr. 1709). Royce was adviser on acquisitions for the Carus Company, and (to avoid conflict of interests) would have taken no commission from Rhoades if the sale of MS&R had been made to Carus (Tr. 591). The visit by the Carus brothers took place in the latter part of August, 1967 (Tr. 1705). At that time they told Rhoades Carus would be interested in purchasing MS&R stock (Tr. 1708).
Perhaps somewhat like the layman's view that a contract written in lead pencil is not binding, or the ostentatious ostracism by a corporate sales manager of his opposite number in a competitor firm while they are sitting in the grand jury anteroom waiting to testify in an anti-trust investigation, is the attitude assumed by Rhoades with respect to acquisition negotiations. He seemed to think that newsworthy events ceased to exist upon his disclaimer of interest in them. Although the potential purchasers expressed interest in MS&R, Rhoades considered their interest as non-existent because he had obtained offers of financial support from his cousin and did not need to follow up the leads unearthed by Royce (Tr. 1686, 1708). Nevertheless, the fact that such interest existed on the part of potential purchasers would certainly be a factor affecting the value of MS&R stock in the mind of a reasonable man, and hence a matter required to be disclosed under Rule 10b-5. (See note 14, supra). This was not the type of information available from the company books and records. The financial sophistication of Joseph Rochez would be of no avail in the absence of such knowledge.
With respect to such matters, although an "insider" by virtue of his position in MS&R, Rochez would be an "outsider."
Upon conclusion of the agreement of September 16, 1967, for the purchase of the Rochez stock, Rhoades considered himself the complete owner of the company. After that date he felt no duty to disclose anything to plaintiff, but did not base this view on any specific advice of counsel (Tr. 1714, 1747-48). He promptly began earnest and diligent efforts to dispose of MS&R. On September 18, 1967, he telephoned both Simmonds and Carus (Tr. 1735). The Carus offer was unattractive to Rhoades as it in substance would have required him to earn the purchase price himself out of future profits (Tr. 555-556, 888, 1697-1698). The Simmonds offer fell through both because it was unattractive taxwise to Rhoades, and because Simmonds did not wish to become involved in a possible lawsuit with the Rochez interests. (Tr. 1181-1183, 1188-1189, 1199-1200, 1453-1454, 1742-1743, 1815). The Simmonds offer contemplated exchange of restricted ("lettered") stock of Simmonds for MS&R stock (Tr. 874, 1659).
In April of 1968, through the good offices of WPNB, Rhoades began negotiations with Esterline Corporation (Tr. 625-626), which were consummated by a formal agreement of July 16, 1968 (PX-22). Besides an employment contract (Tr. 1799), Rhoades (and two others to whom he had sold some MS&R stock) received $4,250,000 in cash together with 50,000 shares of Esterline restricted stock (Tr. 1241-1242, 1770, 1773).
In view of the foregoing facts, showing nondisclosure of material information by defendant (with respect to the Simmonds and Carus dealings) before September 16, 1967, it is not necessary to determine the validity of defendant's contention that September 16, 1967, rather than November 13, 1967, is the critical date. If it were necessary to decide, we would be inclined to follow Radiation Dynamics v. Goldmuntz, 464 F.2d 876, 890-891 (C.A. 2, 1972).
While it is true that Rule 10b-5 speaks broadly of fraud "in connection with" the purchase or sale of any security, and events even after the date of transfer of the certificates might well be relevant to demonstrate fraud in the transaction,
and it is also true that the date of transfer would be controlling in a case for recapture of short-swing profits,
it seems common sense to treat the binding commitment to sell with some degree of finality. Theoretically, a nice conflict of maxims might require evaluation: the rule that equity regards as done that which ought to be done, on the one hand, and, on the other, the "bad man" theory of Justice Holmes
that would regard the obligation of a contract as merely the liability to pay damages for its breach, which might well be less than the profitability of non-performance.
It is also unnecessary, in the view we take of the case, to attribute the weight which plaintiff does to defendant's failure to furnish to plaintiff certain financial forecasts prepared by defendant. It is true that many business men have developed through experience and training an extreme precision in their ability to predict with accuracy the results of business operations. Nevertheless, on the whole, such anticipations lack the certitude of historical fact. Many a slip can occur betwixt cup and lip. Expectations, rather than accomplishments, are recorded in such figures.
The testimony here discloses that the use of such financial tools as an aid to management was better known to plaintiff than to defendant. Defendant first saw such a forecast on the desk of Harold E. Cline, an employee of plaintiff. He regarded this forecast as too pessimistic, and made changes in it, which he submitted to plaintiff. (Tr. 924-925, 1019-1021). Thereafter defendant prepared other similar documents, which reflected various assumptions and hypotheses which he envisaged. Apart from his own instruction and amusement, defendant used these "optimistic" forecasts as sales propaganda and furnished them to bankers from whom he was seeking to borrow and to prospective purchasers of the company's stock. He admitted that they were "optimistic" rather than "conservative" predictions.
That defendant was more rosy in his views of the prospects of MS&R than was Joseph Rochez is a notorious fact. Rochez was shocked to hear Rhoades name a high figure as the value of the company when talking on the phone to a prospective purchaser. (Tr. 256-257). Rochez was much more conservative and down to earth in his appraisal of the company's condition. He was much more concerned than Rhoades over the need of money to pay bills as they came due, and of compliance with the company's obligations to its bank. At board meetings Rhoades enunciated optimistic views which Rochez scorned. We are unable to believe that if Rhoades had communicated these optimistic forecasts to Rochez the latter would have viewed them other than with his customary "incredulity" or would have put any credence in them or relied upon them in determining the price to ask for plaintiff's stock.
Moreover, with respect to figures relating to the company's affairs and ascertainable from the company's books, we find that plaintiff could and should and did rely on its own determinations rather than any representations by Rhoades.
Cline, a Rochez employee, was titular and also active head of the MS&R accounting department. (Tr. 1032, 1558, 1583-1584, 1591-1594). After the separation of accounting functions, checks were sent for signature to plaintiff, and had to be accompanied with supporting data regarding the company's bank account (Tr. 981-83; DX-76). There is no testimony that defendant siphoned off company income into other accounts or that the company's books were "doctored" in any way. Nothing except bad feelings and the distastefulness of contacts with Rhoades and employees loyal to him kept plaintiff from learning anything it wished to know about the affairs of MS&R.
Taking the view we do that defendant's nondisclosure prior to September 16, 1967, and nothing else done by defendant, constituted "fraud" in violation of Rule 10b-5, we are confronted with the problem of determining the measure of damages sustained by plaintiff.
At one extreme, defendant could contend that defendant's wrongful conduct was functus officio, and had fully spent its effects, when the Simmonds and Carus negotiations proved abortive; and that hence the damages were nil. On the other hand, plaintiff could contend that it is entitled to its equal moiety of the entire "take" or proceeds received by defendant in the Esterline deal. On principle we prefer plaintiff's position, for the reasons stated in Janigan v. Taylor, 344 F.2d 781, 786 (C.A. 1, 1965). The court there said that where property is sold to the fraudulent party
future accretions not foreseeable at the time of the transfer even on the true facts, and hence speculative, are subject to another factor, viz., that they accrued to the fraudulent party. It may, as in the case at bar, be entirely speculative whether, had plaintiffs not sold, the series of fortunate occurrences would have happened in the same way, and to their same profit. However, there can be no speculation but that the defendant actually made the profit and, once it is found that he acquired the property by fraud, that the profit was the proximate consequence of the fraud, whether foreseeable or not. It is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them.