491 F.2d 402. (D.C. Civil Action No. 68-1048)
Hastie, Van Dusen and Adams, Circuit Judges.
Opinion SUR PETITION FOR REHEARING
VAN DUSEN, Circuit Judge.
In his petition for rehearing, defendant Rhoades contends that this court's increase in the amount of damages awarded plaintiff Rochez Bros. by the district court was unwarranted.
First, Rhoades argues that this court misapplied the damage rules of Affiliated Ute Citizens v. United States, 406 U.S. 128, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972), and Janigan v. Taylor, 344 F.2d 781 (1st Cir.), cert. denied, 382 U.S. 879, 15 L. Ed. 2d 120, 86 S. Ct. 163 (1965), in such a way as to make the result penal. Rhoades points out that neither Affiliated Ute nor Janigan considered what effect a plaintiff's knowledge of the non-disclosed facts, subsequent to the transaction out of which the 10b-5 violation arose, would have on the time as of which damages are to be measured. According to the record in this case, in February 1968 Rochez received a telephone call from Royce, who informed him that negotiations had been going on with Simmonds, that an offer had been received from Simmonds in the form of stock, and that in Royce's view, the offer was in excess of $2 million, although the exact amount was not disclosed (N.T. 600-01). Rhoades maintains that while the receipt of such information did not impose any duty on plaintiff to institute suit against him, the "high water mark" of plaintiff's damages should be fixed at the date he received this information, i.e., February 1968. The consequence of this limitation would be to establish the Simmonds offer as the measure for plaintiff's damages, since negotiations for the sale of MS&R to Esterline (the eventual purchaser) did not begin until mid-April 1968.
In support of this limitation on the Janigan "benefit of the bargain" rule of damages, Rhoades relies on the decision in Baumel v. Rosen, 412 F.2d 571 (4th Cir. 1969), cert. denied, 396 U.S. 1037, 90 S. Ct. 681, 24 L. Ed. 2d 681 (1970). In that case, defendants' purchases of stock from plaintiffs in August 1959 were found to have been procured through affirmative misrepresentations of the financial condition of the company and under non-disclosure of material incidents in the corporate operations. Plaintiffs first received information indicating that they might have been defrauded sometime in the fall of 1959,*fn1 but did not renounce their sales to defendants by filing their suits until August 16, 1962. Because this delay of three years was found to be unreasonable and because of the fluctuating character and value of the stocks in question, the Fourth Circuit reversed the trial court and held that plaintiffs were not entitled to the equitable remedy of rescission. Turning to the question of damages, the court applied the Janigan rule, but limited its computation of damages to a period which ended with the first stock split and public offering of March 8, 1961, at which time the trial court found plaintiffs knew, or should have known, of the fraud. To allow damages to be calculated on the basis of the value of plaintiffs' prior interest at the time of the second stock split, on March 19, 1962, as plaintiffs contended, would permit, according to the court, a recovery grossly disproportionate to the harm done and hence constitute a penalty not intended by the Securities Act.
In evaluating the relevance of the Baumel decision to the instant case, it is important to bear in mind that the limitation on the measure of damages there, was, in the words of the Baumel opinion, "because of the volatile nature of first-offering stock prices, and in the circumstances of this case . . . ." 412 F.2d at 576. It is clear from the opinion that the circumstances of overwhelming importance in that case was the unreasonably long delay of plaintiffs in initiating their 10b-5 actions--three years from the time they first had reason to suspect fraud and 18 months from the time they had reason to know for sure that they had in fact been duped--during which the value of their prior interest increased dramatically. Thus, the purpose of the limitation was to prevent a defrauded party from delaying unreasonably the commencement of his suit in order to reap an excessive recovery because of the increased value of speculative property that he had fraudulently been induced to sell. Such a limitation is consistent with the reasoning of the First Circuit in Janigan that "it is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them," 344 F.2d at 786, since in a case like Baumel the defrauded party is no longer himself completely free of wrongdoing and is thus not entitled to windfalls subsequent to his learning of the fraud.*fn2
However, we must note that subsequent to Baumel the Supreme Court in Ute approved of the Janigan rule of damages in terms that are unequivocal and unqualified. 406 U.S. at 155, quoted at p. 13 of the December 21, 1973, opinion of the court, supra. Nothing in that language suggests the sort of limitation applied by the Fourth Circuit in Baumel.
Furthermore, on its facts, the instant case is clearly distinguishable from Baumel. Although Rhoades was able to bargain the price of MS&R up considerably from February 1968 (when Rhoades first learned of the Simmonds offer) to July 16, 1968 (when the agreement to sell to Esterline was signed), the MS&R stock was not of the same highly volatile nature as was the stock in Baumel. More importantly, unlike the plaintiffs in Baumel who waited for three years, Rochez brought this action (on September 11, 1968) within a reasonable time (approximately six months) after first learning that he might have been defrauded. There is no evidence of any intent on the part of Rochez to delay commencing this suit in order to gain windfall profits from the sale of MS&R. On the contrary, Rochez told Royce at the time of their conversation "that he would be perfectly delighted to get together with Mr. Rhoades and me [Royce] and discuss an adjustment and a compromise of the respective interests, and this would leave it up to Mr. Rhoades to make an adjustment and compromise whether he wanted to go through with the [Simmonds] deal or not. If he wanted to go through with the deal, fine. If he didn't that was fine, too." (N.T. 601).*fn3 In the absence of an unreasonable delay, there is no basis, in the Baumel decision, to limit the award of damages by the value of the Simmonds offer in February 1968; to do so might enable a fraudulent seller who anticipated being sued to limit his potential liability merely by informing or having someone else inform the defrauded party of facts suggesting that he was defrauded.
Finally, even if we were to apply Baumel's limitation on the Janigan rule to this case, the measure of damages would remain just as we held it to be in the December 21, 1973, opinion of the court, supra. The information which Rochez received from Royce in February 1968 was uncertain and incomplete. Rochez could not be sure that Royce was telling the truth about the Simmonds offer or that he was even working for Rhoades. The exact amount of the Simmonds offer was not revealed, and in any case that offer was made in the course of continuing negotiations which had not yet been and never were successfully completed. Also, no mention was made of the negotiations with Carus. Thus, at that time Rochez's position was analogous to that of the plaintiffs in Baumel when they first learned that they might have been defrauded. However, the court in Baumel set as the time limit for assessing the value of plaintiffs' prior interest not the point at which they first realized that they might have been defrauded (fall of 1959), but the date of the public offering of the company's stock (March 1961), when they learned or should have learned for certain that their sale of stock had been fraudulently induced. In this case, Rochez could not be certain that he had been defrauded until he met with Royce in August 1968, which was after the sale of MS&R to Esterline. During that meeting, Rochez saw for the first time the agreement whereby Rhoades employed Royce to aid him in finding a buyer for MS&R and Royce's daily diary containing a number of entries relating to telephone conversations that he had with Rhoades concerning the negotiations with Simmonds and/or Carus. (N.T. 101-102). Furthermore, there is no evidence in the record to suggest that constructive knowledge could be imputed to Rochez of these matters, and the district court made no such finding here. Thus, if any time limitation should be imposed in assessing damages in this case, it would be August 1968. Such a "limitation" would mean that Rochez could recover no more than the difference between the price at which he sold his share of MS&R to Rhoades and the value of a 50% share in MS&R at the price at which Rhoades sold to Esterline in July 1968. That, of course, is precisely the measure of damages that this court has ruled to be appropriate in this case.
Second, Rhoades also argues that there can be no recovery under Section 10(b) of the Act in this case since the trial court found that at the time of the transaction Rochez Bros. received the fair market value for the MS&R stock it sold to Rhoades, and hence plaintiff suffered no economic harm. Assuming, without deciding, that the district court's finding on this point is not clearly erroneous,*fn4 we nevertheless hold that Rhoades' fraudulent conduct did cause Rochez financial injury. The district court found, and this court has affirmed, that if Rochez Bros. had known of the facts which Rhoades failed to disclose to it, it would not have sold its stock in MS&R for $598,000. in November 1967, since it would have had reason to believe, as subsequent events confirmed, that a greater gain would have been realized by retention of the stock. See Baumel v. Rosen, 412 F.2d at 573.*fn5 Rhoades cites no cases holding that a defrauded seller may not recover unless he received for his stock a price that was less than its market value at the time that such seller sold it, and neither Janigan nor Ute was predicated upon that circumstance. The reasoning of the First Circuit in Janigan that "it is simple equity that a wrongdoer should disgorge his fraudulent enrichment," 344 F.2d at 786, would apply with equal force whether or not the defrauded seller received less than market value for his stock. It is true that in Ute the Supreme Court held that a defrauded seller's damages are the amount of defendant's profits in those cases where the defendant received more than the seller's "actual loss." 406 U.S. at 155. However, the clear intent of the Ute rule of damages, read in its entirety and in light of Janigan, is to give a defrauded seller the benefit of whichever measure of damages provides the greater recovery: either the difference between the sale price of the stock in the fraudulent transaction and its fair market value at that time or the amount of the fraudulent buyer's profit on resale. In light of the Supreme Court's adoption of this liberal approach to damages, the words "actual loss" should not be read to create a requirement that the defrauded seller should sell his stock for less than its fair market value at the time of the fraudulent transaction. Indeed, to do so would create the anomalous result that a defrauded seller in the above circumstance would receive no recovery, while one who had received even a small amount less than the market value for his stock would recover not the difference between what he received and the fair market value but the full amount of defendant's profit on resale.
Rhoades' reliance on the conclusion of the district court that the increased value of MS&R was attributable to his own special efforts and that, therefore, Rochez was not entitled to recover the amount of Rhoades' profits has been considered and rejected in the December 21, 1973, opinion, supra at pp. 14-15.
A majority of the above panel votes to deny the petition for rehearing and joins in this opinion. Judge Hastie has no objection to this opinion, but adheres to the views expressed in ...