decided as amended january 3 1980.: December 21, 1979.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 76-3423)
Before Adams, Rosenn and Weis, Circuit Judges.
In this securities case, the plaintiff alleged that he sold his stock in a close corporation for an inadequate price because of misrepresentations by the only other shareholder. Finding violations of rule 10b-5 as well as fraud under state law, the district court ordered defendant to pay damages of a "rescissory nature." The award consisted of one-half the company's revenues, less certain expenses, together with a provision for similar payments in the future. We conclude that a proper remedy would have been rescission coupled with restitution in an amount to be determined in an accounting. Because the record is inadequate for an accounting, we remand for further proceedings on that aspect of the case.
Glick and Campagna each owned fifty percent (50%) of the stock in Washington Marketing & Financial, Inc. (WMFI), a company they formed in January 1974 to arrange and finance computer equipment leases, particularly with the federal government. Campagna was the president and devoted all his time to the corporate business, for which he was to receive a salary of $36,000.00 per year. Glick acted as a board director from the inception of the company until he resigned in September 1975. He spent most of his time, however, in his work as an investment banker. In addition to the $2,000.00 that he invested in the WMFI stock, Glick loaned the corporation $10,000.00.
In 1974, Campagna, acting on behalf of WMFI, secured an assignment of another company's equipment on lease to the National Security Agency. As a result of that agreement, if the agency renewed its lease on July 1, 1975 for one year, on July 1, 1976 for 90 days,*fn1 and on October 1, 1976 for one year, WMFI would receive rentals of $15,000.00 per month beginning on October 31, 1976. During the period of the lease and its renewals, the agency had the option to buy the equipment, to cancel on 30 days' notice, or to renegotiate the payments downward at the end of each fiscal period.
Because of the rapid technological changes in the computer industry and the fact that agency operations depend on the availability of appropriations, investment in computer leases to the government is highly speculative. The return on such leases, however, is commensurately high and, to meet the risks, Lloyds of London issues policies to some organizations guaranteeing against lease cancellations. But in 1975, it would not insure WMFI. Campagna, in an effort to solve this difficulty, entered into negotiations with the EFM Capitol Corporation, another computer leasing company insured with Lloyds, to get the benefit of its policy and thus improve WMFI's ability to secure financing. Glick was aware of and participated to a limited extent in the preliminary negotiations. He did not know, however, that during June and July of 1975 WMFI and EFM agreed to proceed on a transaction-by-transaction basis and divide the profits equally.
In mid-September 1975, Campagna told Glick that WMFI was out of funds and behind on its withholding taxes, that the joint venture with EFM was not going to be consummated, that business prospects were not bright, and that WMFI was in serious financial difficulty. Glick then resigned as director, apparently concerned about his personal liability for WMFI nonpayment of withholding taxes.
Three months later, at Campagna's suggestion, he and Glick met again. On this occasion, Campagna told Glick that WMFI was in dire straits, and that although the corporation did expect to receive "some funds in the very near future from some small transactions that were about to close," he saw no future in continuing to operate. Campagna said he wanted to place WMFI "in a dormant or limbo position" and go to work for EFM. In fact, he had become a full-time employee of EFM in October because of Lloyds' insistence that only transactions negotiated directly by EFM employees would be insured. Indeed, in November, Campagna had become president of EFM. In addition, Campagna knew, but did not disclose to Glick, that in late 1975 WMFI-EFM contracts to lease equipment to the International Telephone & Telegraph Company, the Veterans Administration, and the Department of Commerce had been or were about to be concluded, resulting in income to WMFI of about $68,000.00.
When Glick became concerned about the $10,000.00 he had loaned to the corporation, Campagna said that he was sure the money could be repaid provided Glick sold his stock back to WMFI at its original cost, $2,000.00. In subsequent telephone conversations, Glick said that his stock should reflect some value because of the possibility that the National Security Agency lease would be renewed. Campagna responded that "there was a very slight possibility of such a renewal," that he attached no weight to that possibility in valuing the stock, and that in his opinion $2,000.00 was a proper repurchase price. In November, however, in an unsuccessful attempt to obtain a loan from a financial institution, Campagna had represented that the National Security lease equipment was likely to remain with the agency "a very long time."*fn2
In January 1976, Glick transferred his stock to WMFI in return for $2,000.00 and repayment of the $10,000.00 loan. Six months later he received a copy of literature intended for public distribution which revealed that WMFI was receiving income of $30,000.00 per month from a computer lease and that Campagna had served as president of EFM from November 1975 to May 1976. In September 1976, Glick learned that the National Security lease had been renewed and that it accounted for the income received by WMFI. After failing in his attempts to negotiate an adjustment with Campagna, Glick filed suit.
The complaint alleged, Inter alia, common law fraud and a violation of rule 10b-5, 17 C.F.R. § 240.10b-5 (1979), and demanded judgment against Campagna and WMFI for (1) rescission of the sale of Glick's stock, and (2) damages in excess of $100,000.00. The answer included an assertion that the plaintiff was dilatory in seeking to rescind.
The district court found that in negotiating for the sale of Glick's stock, Campagna deliberately misrepresented his belief about the possibility of renewal of the National Security Agency lease, the existing financial condition of WMFI, and the corporation's future prospects. The findings also establish that Campagna intentionally failed to disclose to Glick the profitable WMFI-EFM transactions, his employment with EFM, as well as certain loans made by WMFI to EFM and the representative of an associated firm. The trial judge determined that Campagna's conduct was designed to induce Glick to sell his stock back to WMFI at a grossly undervalued price. The court held that Glick, as a reasonable person, relied on these misrepresentations and that he would not have sold the stock for $2,000.00, "or any price even close thereto," had he been informed of the true state of affairs. Defendants accordingly were found liable to plaintiff under both the Securities Exchange Act and the pendent state law claim.
The court entered judgment for the plaintiff in an amount consisting of all monies that Campagna received that were either payments made to WMFI or to which it was entitled, less ...