ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civil Action No. 68-1048).
Staley, Rosenn and Hunter, Circuit Judges.
For the third time, we are presented with an appeal arising from litigation spawned by a fraudulent stock transaction involving Charles Rhoades and Rochez Brothers, Inc. Rochez I*fn1 dealt with the liability of Rhoades for violating Rule 10b-5 of the Securities and Exchange Commission and also with the proper measure of damages; Rochez II*fn2 concerned the secondary liability of M.S. & R., Inc., the employer of Rhoades. Rochez III, the present appeal, asks this court to consider, inter alia, whether the stock that is part of the damage award has been properly valued.
The facts of this case have been exhaustively set forth in prior opinions by this court and by the district court. Rochez I and II, supra notes 1 and 2. It is sufficient, therefore, to summarize the events and procedural poise of this case.
Charles Rhoades was found guilty of violating Rule 10b-5. In determining damages, the district court first established that it would be unjust to award Rochez the full value of what Rhoades received from his sale of MS&R stock. The court reasoned that the increase in value of that stock was due to Rhoades' management abilities. Rochez v. Rhoades, 353 F. Supp. 795, 803-04 (W.D. Pa. 1973). The district court held that the measure of damages should be to place Rochez in the same position it would have been in, had Rhoades disclosed the Simmonds offer.*fn3 That court then determined Rochez's damages and based its estimate of value on the Simmonds offer. This court in Rochez I affirmed Rhoades' liability but vacated and remanded to the district court so that damages could be correctly determined. In his analysis of the measure of damages, Judge Van Dusen applied the "Janigan Rule",*fn4 finding that the personal effort as determined by the district court was not what Janigan had intended as an exception to its rule of damages. Rochez I, supra at 412. Judge Van Dusen then held that the district court "erred when it refused to compute Rochez's damages on the basis of the value Rhoades received for the MS&R stock from Esterline." Rochez I, supra at 412. The court concluded that the "proper measure of damages is the difference between the value of fifty percent of MS&R stock on the basis of the Esterline purchase price and the amount Rochez received from Rhoades for his share of MS&R." Rochez I, supra at 412. On remand, the district court mechanically applied this formula, and it is from this determination that Rhoades appeals.
Appellant has presented several issues for review by this court.
He first contends that Rochez cannot use the rescissional or restitutional rule of damages of Janigan and Affiliated Ute.*fn5 Appellant reasons this is so because Rochez delayed seven months in filing his complaint after having received notice of the fraud. This issue has previously been resolved in Rochez I. Judge Van Dusen found that there was no unreasonable delay in filing the complaint, and the rules of damages announced in Affiliated Ute and Janigan were properly applied. Rochez I, supra at 415-16. We accordingly will not consider this issue.
Appellant next argues that Rochez is limited to recovering tort damages for fraud and deceit. This question has also been decided by this court in Rochez I, and we need not review it again. See Rochez I, supra at 411-12.
The third argument of appellant is that if the rescissional rule applies, the restricted Esterline stock should have been awarded in kind. We believe the Restatement of Restitution, Sections 151 and 202, compels us to reject this argument. A plain reading of these sections and the accompanying comments evinces that Rhoades is not the party having a right to elect whether Rochez is to receive the value of the Esterline stock or the actual shares of Esterline stock. That election is a privilege held by the injured party, Rochez.
Appellant finally contends that the district court erroneously valued the restricted Esterline stock that is part of the damage amount. As we mentioned earlier, Judge Van Dusen remanded the damage issue because the district court improperly determined damages. On remand, the district court applied the damage formula as outlined in Rochez I and, as instructed, evaluated the Esterline stock. Damages were then determined to be $2,125,000 (one-half of the $4,250,000 cash paid by Esterline, less the $598,000 sale price Rhoades got from Rochez, plus the value of 25,000 shares of Esterline restricted stock). The Esterline stock was valued at $1,000,000,000. This figure was based on the market value of Esterline shares at $53 1/2 bid, $54 1/2 asked, less a discount factor between twenty-five and twenty-six percent because of the restrictions on the stock.
Judge Van Dusen's opinion did not specifically instruct the district court to take further evidence regarding the value of the Esterline stock. This would indicate that the question of opening the record to take more evidence was left to the sound discretion of the district court.
Plaintiff, Rochez, filed a motion to open the record and take new testimony.*fn6 Briefs were submitted and arguments were heard regarding whether further evidence should be taken. Rochez specifically asked that testimony be taken on what proper discount factor should be applied to determine the value of the restricted Esterline stock. Arguing in opposition to Rochez's motion to reopen, Rhoades contended that plaintiff failed to carry his burden of proof as to what value should be placed on the Esterline restricted stock. The district court denied plaintiff's motion. The court held that since Rochez had urged all through trial that the Esterline stock should be the measure of damages, it must be assumed that the record would contain all facts relevant to the value of Esterline. The court further held that "judicial economy" requires that it not conduct hearings to allow plaintiff to offer more precise evidence for determining the value of the Esterline stock. The district court then examined the opinion in Rochez I and concluded that the only error in its determination of damages was that the Simmonds stock, instead of Esterline stock, was evaluated. The ...