DVM employees refused to give Epprecht any information concerning recent orders, and it appeared to him that everybody in the office was under instructions to permit him access to nothing. On March 23 plaintiff arranged a meeting with the salesmen concerning his new plans to revive the company, but they refused to discuss the matter. McCloskey, formerly a close personal friend, became distant.
During this period Epprecht spoke frequently on the telephone with DeWolf who, according to Epprecht, encouraged his efforts to preserve his role in the company and expressed disdain for McCloskey's managerial skills. DeWolf suggested that Epprecht raise the necessary capital and that he drum up support for himself among the salesmen by attempting to arrange for financial inducements that might cause a change of heart. Epprecht and DeWolf also met at a convention in Florida in late March, and DeWolf reiterated his support for plaintiff's endeavors. But throughout this period McCloskey and the salesmen remained aloof and hostile.
On April 5, a meeting was held in the law offices of DeWolf's Philadelphia counsel to resolve finally the fate of Epprecht and DVM. Plaintiff arrived at the meeting harboring a hope of saving his role at DVM. He was troubled by the unwillingness of the salesmen to speak with him and by his lack of access to reliable financial information. When questioned about the backlog of orders McCloskey responded that the backlog was in the area of $1 million, but Epprecht alleges that it was, in fact, in excess of $2 million. Plaintiff presented a plan closely resembling the March 1 proposal to DeWolf and Kraus. DeWolf and Kraus, through their attorney, scoffed at Epprecht's plan as too little, too late, and they refused to entertain serious discussion about it. Presented with the same alternatives as had been suggested at the March 10 meeting, Epprecht chose to sell out completely. The rest of the day was spent negotiating the details of the agreement, which included as consideration for the 94% interest in DVM capital stock a forgiveness of the debts owing DVM by Epprecht's other corporations.
The gist of plaintiff's claim is that in violation of Rule 10b-5 the defendants failed to disclose or misrepresented the true extent of DVM's backlog of machine tool orders on and before April 5, 1972, thereby inducing plaintiff to sell his stock for less than its true value. There are for practical purposes two groups of defendants both of whom are allegedly involved in the fraud.
The first group is the DVM defendants, comprised of the corporation and its officers, salesmen, and office personnel. The second group is the creditor defendants consisting of Alidor DeWolf and D&K on the one hand, and Glen Kraus and ATW on the other. Only the latter group has moved for summary judgment. The material facts pertaining to both DeWolf and Kraus are virtually identical and we shall dispose of these motions together. These defendants are entitled to summary judgment only if they can show that there is no genuine issue as to any material fact and that they are entitled to judgment as a matter of law.
On its face plaintiff's theory of recovery against Kraus and DeWolf is in a peculiar factual posture. Epprecht is claiming that two large creditors of the corporation of which he was both the president and a controlling director are liable to him for damages attributable to misrepresentations and nondisclosure of material financial information concerning the volume of the backlog of orders pending in his own business on the date he sold his interest to other persons. But there are few per se rules precisely defining the range of persons who may sue and be sued for Rule 10b-5 violations; recovery is not predicated on labels so much as the substance of the transactions. Cf. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975). Judicial construction of § 10(b) has gradually eliminated the requirement of privity as a prerequisite to maintaining an action. Thus liability has been extended to accountants, Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968), cert. denied, 395 U.S. 903, 23 L. Ed. 2d 217, 89 S. Ct. 1740 (1969); bankers, Carroll v. First National Bank, 413 F.2d 353 (7th Cir. 1969), cert. denied 396 U.S. 1003, 24 L. Ed. 2d 494, 90 S. Ct. 552 (1970); and attorneys, Katz v. Amos Treat & Co., 411 F.2d 1046 (2d Cir. 1969), who were not the principals in the challenged stock transaction, but who nonetheless played a substantial role in the fraud. There is no sound reason to assume that a creditor of the defrauded seller is immune from Rule 10b-5 liability by virtue of his creditor status alone. Instead we are required to dissect the disputed transaction and to measure the precise role that Kraus and DeWolf played in Epprecht's sale of his interest in DVM against the elements of Rule 10b-5 liability.
In order to hold any of the defendants liable as primary violators of Rule 10b-5, Epprecht must prove that in inducing him to sell his interest in DVM: (1) a particular defendant misrepresented or failed to disclose a material fact; and (2) the action was taken either knowing that the truth had not been communicated or with reckless disregard for the truth.
It must be emphasized that liability under Rule 10b-5 is not confined to those direct participants who are primarily liable. Often, when an underlying securities fraud is proven, there are actors on the fringe of the transaction who, depending on the degree of their involvement, may be secondarily liable as either aiders or abettors or as co-conspirators. For example, in this case the plaintiff might prove that some or all of the DVM defendants knew of the existence of a much larger backlog of machine tool orders pending on April 5, 1972, and that they deceptively sought to conceal it from Epprecht. The fact-finder could infer from the circumstances that, by some combination of an insufficiently blameworthy state of mind and peripheral involvement, the creditor defendants did not share in the DVM defendants' primary liability. Nevertheless, the law permits the fact-finder to conclude that the creditor-defendants were secondarily liable for aiding and abetting or conspiring with the DVM defendants in a securities fraud.
Relying on the Restatement of Torts, Section 876(b), the Third Circuit in the recent case of Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (1975) (, enumerated three elements of proof for imposing secondary liability on the theory of aiding and abetting a securities fraud. In order to prevail on this theory Epprecht must prove: (1) the underlying securities fraud by the primary violators; (2) the creditor defendants knowledge of the underlying securities fraud; and (3) that the creditor defendants rendered substantial assistance to the primary violators in carrying out the securities fraud.
Rule 10b-5 liability may also be premised on an even more attenuated relation with the underlying violation where a party participates in a conspiracy to defraud. Like its criminal law counterpart, proof of conspiracy to violate Rule 10b-5 requires a plaintiff to prove both an agreement to do the unlawful act and an overt act in furtherance of the conspiracy. Bromberg, Securities Law § 8.5 (540); Ferguson v. Omnimedia, Inc., 469 F.2d 194 (1st Cir. 1972).
The creditor defendants, Kraus and DeWolf, argue that plaintiff's indiscriminate reference to the "defendants" in the fraud counts of the complaint is imprecise, that neither Kraus nor DeWolf misrepresented anything relating to the backlog of machine tool orders and that they had no knowledge of or access to such information.
They invoke in support of their argument several telling passages of Epprecht's deposition testimony which lend considerable support to their argument at first glance. For example, in his deposition testimony Epprecht admits that none of the creditor defendants made misrepresentations to Epprecht with respect to the backlog of orders referred to in Counts I and II, which form the sole basis of his fraud allegations. (Epprecht deposition, at 64). Indeed he admitted at one point that the word "defendants" in Counts I and II did not in fact refer to either Kraus or DeWolf. (Epprecht deposition, at 130-31).
In addition, there were specific questions designed to elicit from plaintiff the degree of knowledge or other involvement he attributed to Kraus and DeWolf in the fraud. It appears that shortly before the April 5 meeting, plaintiff had compiled a list of machine tool orders which he suspected were pending but not properly reported to him. When he showed the list to McCloskey and Murphy they denied that such orders were pending. In connection with DeWolf's knowledge of the list, the following dialogue transpired:
"Q. Did you ever show the list prior to April 5, 1972, to Mr. DeWolf?