(D.C. Civil Action No. 68-1048) APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA.
Hastie, Van Dusen and Adams, Circuit Judges. Hastie, Circuit Judge, dissenting in part.
VAN DUSEN, Circuit Judge.
In these appeals both parties seek reversal of district court, 353 F. Supp. 795 orders granting judgment with damages against an individual defendant, Charles R. Rhoades, in an action under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),*fn1 and Rule 10b-5*fn2 of the Securities and Exchange Commission, and dismissing such action against a corporate defendant, MS&R, Inc. Plaintiff contends that the damages are inadequate and the judgment should also have been entered against the corporate defendant, whereas defendant Rhoades contends that judgment should have been entered in his favor on the liability issue.
The case arises from the sale of 50% of the issued and outstanding stock of MS&R, Inc. by Rochez Bros., Inc. to Charles R. Rhoades on November 13, 1967, in accordance with an agreement of sale dated September 16, 1967, for the price of $650,000. The interest of Rochez Bros. in MS&R began on July 1, 1964, when Rochez Bros. bought 50% of the stock of MS&R for $272,500. At the same time Rhoades, who already owned 33 1/3% of the MS&R stock, brought his stock ownership up to 50%. This evenly divided stock ownership continued until November 13, 1967, when Rhoades bought out Rochez Bros., thus becoming the sole owner of the stock of MS&R. During this time, Rhoades was full-time Chairman of the Board, Chief Executive Officer, and President of MS&R. Joseph Rochez, the President of Rochez Bros., was a part-time Vice President of MS&R and a member of its three-man Board of Directors. Rhoades ran the business activities of MS&R on a day-to-day basis, while Rochez was primarily concerned with general policy matters in relation to finance and growth of the company.
As a result of increasing dissension between the two men, founded both in personality differences and business disagreements, both Rochez and Rhoades were authorized by the Board in the spring of 1967 to contact prospective purchasers of the company, but these efforts produced no results. At this time, they also began discussing a buy-sell agreement whereby one of them would buy out the other's interest. Finally, on September 11, 1967, Rochez Bros. named the price for which it was willing to sell its stock in MS&R to Rhoades, subject to the condition that the sale should be concluded by noon on September 15 and that Rhoades should put $50,000. in escrow, to be forfeited if no closing occurred. On September 16, 1967, an agreement of sale was executed, under which Rhoades bought the stock of Rochez Bros. in MS&R for $598,000.*fn2a The closing and delivery of the stock certificates to Rhoades took place on November 13, 1967.
Prior to the September 16 agreement, Rhoades answered a newspaper advertisement placed by one Wingate Royce, of New York City, in January or February of 1967. Royce phoned Rhoades, who told Royce that he was interested in discussing financing for MS&R. Rhoades then sent Royce MS&R financial information and made an appointment for Royce to come to Pittsburgh on April 21, 1967. Royce did visit the MS&R plant on that date and was introduced by Rhoades to Rochez, who declined to hire him to find a purchaser for MS&R. Rhoades, however, did agree to retain Royce to find leads and make introductions to bring about the sale of MS&R. Rhoades never informed Rochez Bros. of the employment of Royce or of the negotiations for the sale of MS&R that followed.
Thereafter, in May 1967, Royce brought MS&R as a potential acquisition to the attention of J. Walter English, of Simmonds Precision Products Co. In May 1967, English visited MS&R after Royce had informed Rhoades that Simmonds was a potential purchaser. In late August or early September 1967, Rhoades and his production assistant went to Hartford to visit a Simmonds plant. Upon arrival at the Hartford airport, Rhoades telephoned his Pittsburgh attorney's office to learn how the buy-sell negotiations with Rochez Bros. were progressing. They then visited the plant and dined with Simmonds personnel. On the return trip to Pittsburgh, they rode with Geoffrey Simmonds in the latter's company plane, and Simmonds toured the MS&R plant before continuing to a further destination.
Royce also informed Rhoades of the interest of Carus Chemical Company in acquiring MS&R stock. In the latter part of August 1967, the Carus brothers visited the MS&R plant and told Rhoades that Carus would be interested in purchasing MS&R stock.
Upon conclusion of the agreement of September 16, 1967, for the purchase of the Rochez stock, Rhoades increased his efforts to sell MS&R. On September 18, 1967, he telephoned both Simmonds and Carus and began negotiations that led to offers from both. However, the Carus offer was unattractive to Rhoades since it in effect required him, continuing as director, to earn the purchase price out of future profits of MS&R. The Simmonds offer also fell through, both because Rhoades found it unattractive taxwise and because Simmonds did not wish to become involved in a possible lawsuit with Rochez Bros. Finally, in April 1968, Rhoades began negotiations with Esterline Corporation, through the initiative of Western Pennsylvania National Bank, which resulted in a formal agreement on July 16, 1968, in which Esterline agreed to pay $4,250,000. in cash and 50,000 shares of Esterline restricted stock for the 100% of MS&R stock then held by Rhoades and two other persons to whom he had sold some shares.
Rochez Bros. brought this action under section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5 of the Securities and Exchange Commission with pendent jurisdiction fraud counts under Pennsylvania law.*fn3 The case was tried to the court, which entered judgment on January 22, 1973, in favor of Rochez and against Rhoades in the amount of $402,000., with interest from September 16, 1967.*fn4 The district court on the same day also entered a separate order dismissing the action as to MS&R, the corporate defendant.
Defendant Rhoades contests the district court's decision on the ground that plaintiff failed to demonstrate the following elements necessary to establish liability under section 10(b) of the Securities Exchange Act ...