The opinion of the court was delivered by: MANSFIELD
MANSFIELD, District Judge:
In this action by 13 purchasers of an issue of common stock of Law Research Service, Inc., the complaint charged Ellias C. Hoppenfeld, its President, and Blair & Co., Granbery, Marache Inc., the underwriter of the issue, in three counts with violations of § 17(a) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and common law fraud, and Blair & Co. in two counts with violation of § 12(2) of the 1933 Act and § 15(c) of the 1934 Exchange Act. The jury awarded compensatory damages against all defendants on all counts except the common law fraud counts (as to which it returned a verdict for the defendants) and punitive damages against Hoppenfeld and Blair & Co. on the count charging them with violation of § 17(a) of the 1933 Act.
Cross-claims were also asserted under an indemnity agreement by defendants Law Research Service, Inc. and Hoppenfeld against Blair & Co., and by Blair & Co. against them and a third party defendant, Paul Wiener. Disposition of these cross-claims was deferred pending the jury's verdict, following which the said defendants and third party defendant moved to dismiss the cross-claims. Reserving decision on that motion, this Court submitted the issue of liability on the cross-claims to the jury which found against Law Research Service, Inc. and Hoppenfeld, and in favor of Blair & Co., whereupon Law Research Service, Inc., Hoppenfeld and Wiener moved, pursuant to Rule 50(b), F.R.C.P., to set aside the verdict and for judgment notwithstanding the verdict. For the reasons hereafter set forth, the motions of the said defendants are granted.
The lawsuit arises out of a public offering of 100,000 shares of the common stock of Law Research Service, Inc. pursuant to a Regulation A exemption from registration, in connection with which an Offering Circular admittedly prepared by the defendants and bearing the name of Blair & Co. was distributed to the public. Law Research Service, Inc., which commenced operations in 1964, was engaged in the business of operating a law information retrieval program for the legal profession by applying computer technology to the problems of legal research. In order to carry out its operations, it entered into an exclusive five-year contract, dated June 5, 1963, with the Univac Division of the Sperry Rand Corporation, which obligated Sperry Rand to provide programming, Sperry Rand's Univac III computer time, and certain other services, all at costs set forth in the contract.
In offering the new issue on March 15, 1965 to the public, the Offering Circular referred prominently (on page 5) to "the Sperry Rand contract", which was obviously an attractive feature to the public, since the name Sperry Rand is widely known to the public as a leader in the computer field. Although the Circular described in several paragraphs the Sperry Rand Law Research contract, it misrepresented the relations between the two companies under the contract by omitting mention of the fact that on January 25, 1965, Sperry Rand had written a letter to Law Research terminating the contract effective January 29, 1965 for non-payment of a balance of more than $82,000. The Circular also omitted mention of the important fact that following the termination letter Law Research had instituted a lawsuit in the New York County Supreme Court against Sperry Rand by service of summons upon it and various of its officials and on February 23, 1965, it filed in that lawsuit an affidavit sworn to by its Treasurer and Director, Wiener, swearing that the lawsuit was for breach of contract, fraud and deceit, specific performance and conspiracy. Lastly the Offering Circular omitted entirely any mention of the equally material fact that from January 29, 1965 until at least the date of the Offering Circular (March 15, 1965), and for some time thereafter, Sperry Rand was refusing to furnish vital services to Law Research pursuant to the contract.
The plaintiffs testified that they purchased shares of the new issue of Law Research stock in reliance upon the description of the contract with Sperry Rand, a name which many of them knew favorably as a national concern, and that they would not have purchased their stock if they had known of the termination, lawsuit and refusal to furnish services, since the contract with Sperry Rand was understandably viewed by them as a very important factor in leading them to buy Law Research stock.
In addition to seeking compensatory damages the complaint sought punitive damages against all of the defendants, alleging that they had acted fraudulently, wantonly and with reckless disregard for the consequences of their conduct and that they had committed a gross fraud, involving high moral culpability that was aimed at the public generally. Judged by such well-established criteria there was ample evidence to support an award of punitive damages against Hoppenfeld and Blair & Co. There is no dispute about the fact that Hoppenfeld was fully aware of the termination letter, the lawsuit and Sperry Rand's refusal to render services, and that he omitted these most material facts from the Notification and Offering Circular, obviously for the reason that if the facts had been revealed to the public, it might have been difficult, if not impossible, to induce the public to invest in the new issue. Although Hoppenfeld was undoubtedly the primary wrongdoer, there was ample evidence in the record to support a finding that Blair & Co. also had knowledge of the essential, material facts omitted from the Offering Circular and was guilty of deliberate wrongdoing in distributing the Circular without revealing these facts. Hoppenfeld testified, for instance, that he furnished the essential facts both to Blair & Co. and Arthur Young & Co., Certified Public Accountants, who were brought by it into the picture to conduct the audit and handle accounting matters in connection with the new issue.
Although Hoppenfeld at trial first indicated reluctance to implicate Blair & Co., he did eventually testify flatly that in February 1965 he advised Mr. Sanders of Blair & Co., who was in charge of the issue, about the lawsuit that had been begun on January 29, 1965 against Sperry Rand. (See stenographic minutes, pages 145 to 149) In addition to such direct testimony, there was considerable evidence from which an inference of knowledge on Blair & Co.'s part could be drawn, including repeated references to a lawsuit in February 1965 correspondence between Hoppenfeld and Arthur Young & Co. and specific references in such correspondence and communications to the Sperry Rand termination letter of January 25, 1965.
In view of the fact that there was evidence from which an inference of fraudulent, wanton and willful misconduct involving high moral culpability and disregard for the public could be drawn, Walker v. Sheldon, 10 N.Y. 2d 401, 223 N.Y.S. 2d 488, 179 N.E. 2d 497 (1961); Roginsky v. Richardson-Merrell, Inc., 378 F.2d 832 (2d Cir. 1967); Smith v. Little, Brown & Co., 273 F. Supp. 870 (S.D.N.Y. 1967), the Court submitted to the jury the question of whether punitive damages should be awarded. In its original charge the Court instructed the jury that such damages could be awarded only for conduct deemed to be against the public interest which involved high moral culpability and acts that were the result of gross fraud. (See Appendix A hereto) Walker v. Sheldon, 10 N.Y. 2d 401, 405, 223 N.Y.S.2d 488, 179 N.E.2d 497 (1961). At the time when these instructions were given, there was submitted to the jury not only the claims based on alleged violations of §§ 12(2) and 17(a) of the 1933 Act and §§ 10(b) and 15(c) of the 1934 Act, but also a count charging common law fraud in violation of New York law.
During the course of its deliberations, the jury sent out a note inquiring whether it must find common law fraud in order to award punitive damages. The Court then instructed the jury as follows:
"I have already instructed you that punitive damages are intended to penalize or punish a defendant for certain kinds of conduct deemed to be against the public interest which involve a high moral culpability.
"Now, the standard for determining whether or not punitive damages should be imposed in any case such as this is not whether the technical requirements of common law fraud as distinguished from Federal Securities Law fraud are established, the standard is whether the conduct of a defendant involved a high degree of moral culpability of a type that would in effect constitute moral turpitude or dishonesty and a wanton indifference to one's obligations.
"Now, having that standard in mind, it, of course, would be much more likely that one would have to find an intent to defraud in order to find any punitive damages. However, I pointed out that there was one other difference between common law fraud and the Federal Securities Act fraud and that is that the reliance is slightly different. The reliance under common law fraud has to be what is called justifiable reliance as distinguished from the standard that I mentioned earlier, which was whether or not the plaintiff, if he had known the omitted facts, would have been likely to take a different course of action or whether the plaintiff would have been influenced to act differently than he did act if the defendants had disclosed to him the omitted facts.
"Punitive damages are not recoverable under one of the Securities Acts involved, known as the 1934 Act. However, there is nothing to preclude recovery of them in a suit under the other Federal Security Act known as the 1933 Act.
"So what I am saying to you is that while it would be much more likely that you would have to find an intent to defraud before you could find punitive damages, that is not an absolute requirement. The test is whether there is high moral culpability or such gross fraud and deceit upon the public that it shows, evinces, what somebody has described as moral turpitude or such a wanton dishonesty as to imply an indifference to one's obligations.
"I think that is the best I can give you on this subject. If it is inadequate, you may request ...