argued as amended june 15 1977.: February 24, 1977.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA Civil No. 74-1078.
Adams, Kalodner*fn* and Hunter, Circuit Judges.
At issue in this appeal is whether the defense of in pari delicto stands as a bar to a lawsuit brought by "tippees" against a "tipper"*fn1 pursuant to section 10(b) of the Securities Exchange Act of 1934*fn2 and rule 10b-5*fn3 promulgated thereunder.
Before reviewing the facts of this case, it is necessary to take note of the procedural posture of the litigation. Since this is an appeal from the grant of summary judgment for the defendants, we are obliged, of course, to consider the record in the light most favorable to plaintiffs. We then must determine whether the district judge erred in concluding that no issue of material fact remained and that defendants were entitled to a verdict as a matter of law.*fn4
This suit was instituted in 1974 by William Tarasi, Virginia Harrigan and George Sampas against the Pittsburgh National Bank and S. Robert Mialki, an officer of the Bank and manager of its branch in Verona, Pennsylvania. The plaintiffs alleged that they purchased the stock of Meridian Industries, Inc. on the strength of information given to them by Mr. Mialki; that such information was false and misleading; and that the false and misleading information caused them to incur losses of $22,000.
Mr. Tarasi, a resident of the Pittsburgh area who operates a used car lot and a small contracting business, was the first of the plaintiffs who had contact with Mr. Mialki. Although he has dabbled in real estate speculation in both Pennsylvania and Florida, the record indicates that he has not had extensive experience with securities investments. In the course of his past business dealings, Mr. Tarasi had employed PNB as his bank and Mr. Mialki as his personal banker. As a result of the latter relationship, Mr. Tarasi and Mr. Mialki became friends, and had known each other for about five years before the incidents that led to this lawsuit.
Beginning in November of 1971, Mr. Tarasi alleged, Mr. Mialki had numerous discussions with him about two corporations: Meridian Industries and Paragon Plastics. According to Mr. Tarasi, Mr. Mialki stated that a merger between Meridian and Paragon was going to take place, that the Bank was behind the merger, and that "big shots" from the Bank were investing heavily in the securities of the two companies. Mr. Mialki indicated to Mr. Tarasi that it was too late to get on the Paragon "bandwagon," but that an investment in Meridian would still be a wise one. In particular, Mr. Mialki purportedly told Mr. Tarasi that Meridian common stock, which was then selling at eight dollars a share, would probably double in value because of the planned merger. Mr. Tarasi testified in his deposition that Mr. Mialki had represented that the date he was giving him was "hush-hush" and could not be repeated to anyone. In response to these disclosures, Mr. Tarasi purchased 1200 shares of Meridian common stock on the open market at 8 1/4 per share. Mr. Tarasi did not reveal, in connection with his purchase of Meridian stock, the information he had received about the planned merger between Meridian and Paragon.
The second plaintiff, Mrs. Harrigan, is an aunt of Mr. Tarasi.*fn5 According to the record, Mr. Tarasi asked Mr. Mialki for permission to inform Mrs. Harrigan that Meridian was a good investment opportunity. At a luncheon attended by Mrs. Harrigan, Mr. Tarasi and Mr. Mialki, the two gentlemen had a discussion about Meridian. When Mrs. Harrigan expressed interest, Mr. Tarasi recommended that she purchase shares in Meridian. Mr. Mialki made a general statement to the effect that Meridian was "good stock."
After the luncheon, Mrs. Harrigan proceeded to direct inquiries about Meridian to her regular banker and to a broker. Although the broker apparently recommended against purchasing the stock, Mrs. Harrigan said to him that she thought it would be a sound buy. Before acquiring the securities, however, she decided to speak to Mr. Mialki again. Another luncheon took place, at which time Mrs. Harrigan asked Mr. Tarasi whether Meridian was a sound investment. Mr. Tarasi said that Meridian was good stock and then gestured towards Mr. Mialki who added that the Bank was behind it. The record indicates, nonetheless, that the proposed merger between Paragon and Meridian was not mentioned to Mrs. Harrigan. Mrs. Harrigan purchased 100 shares of Meridian common stock on the open market at 8 7/8 per share, but did not disclose her discussions with Mr. Mialki and Mr. Tarasi in connection with her dealings in the stock.
Mr. Sampas, the third plaintiff, is a member of the Florida bar engaged in the general practice of law. He declared in his deposition that his practice does not involve securities law matters. Mr. Sampas is also a long-time friend of Mr. Tarasi. In December of 1971, Mr. Sampas attended a luncheon with Mr. Tarasi and Mr. Mialki, during which the Paragon-Meridian merger was mentioned. Sensing that a lucrative investment possibility existed, Mr. Sampas joined in the conversation. He avers that he also wanted to get additional information from Mr. Mialki because he believed that Mr. Tarasi knew very little about securities investments.
The ensuing discussion essentially repeated the information that Mr. Mialki had previously supplied to Mr. Tarasi. Mr. Mialki stated that a merger between Paragon and Meridian was imminent, and that executives of the Bank were making heavy investments in both corporations. He also said that, although it was too late to purchase Paragon so as to reap the benefits of the merger, investment in Meridian was still a wise idea since its common stock would probably double in value.
Upon receiving such information, Mr. Sampas purchased a number of three-month "call" options for Meridian stock. During this period of time, Mr. Sampas kept in continuous communication with Mr. Mialki in order to learn when the merger would be consummated and when would be the best time to exercise his options. At every juncture, Mr. Mialki reassured him as to the prospects for the merger and for the appreciation in value of his investment.
As the time for the exercise of the options began running out, Mr. Sampas grew quite concerned because the merger had not taken place and he stood to lose his investment. He contacted Mr. Mialki, who advised him that the Securities and Exchange Commission had delayed the merger but that it would surely go through. When Mr. Sampas asked whether Meridian's stock would increase in value, Mr. Mialki represented that it would.
Mr. Sampas then approached Shirley Wolff - a member of the law firm with which he was associated and an experienced investor in securities - and explained his predicament with regard to the "calls." Ms. Wolff agreed to purchase 1000 shares of Meridian, and Mr. Sampas promised to split any of his profits with her and to bear any of her losses.
In his deposition, Mr. Sampas averred that he realized that the information about the Paragon-Meridian merger which he had received from Mr. Mialki was in the nature of a "tip," and that Mr. Mialki had learned of the proposed merger through his position at that bank.
Mr. Sampas did not disclose his knowledge of the proposed merger when he purchased the "call" options nor did he divulge to Ms. Wolff what he knew of the proposed merger or the Bank's interest in it while arranging for her purchase of the Meridian stock. And this information was not revealed in connection with Ms. Wolff's purchase on the open market.
The merger between Paragon and Meridian did not occur,*fn6 and the value of the Meridian stock declined to about one dollar per share. Mr. Tarasi reimbursed Mrs. Harrigan for her losses,*fn7 and Mr. Tarasi and Mr. Sampas each purchased 500 shares of Meridian stock from Ms. Wolff at the price that she originally had paid for it. The present lawsuit was then filed in the Western District of Pennsylvania.
After extensive discovery, the defendants moved for summary judgment. In granting their motions, Judge Willson ruled that the plaintiffs were in pari delicto and thus could not recover, even if they could prove that Mr. Mialki had violated the securities laws. This ...