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Securities and Exchange Commission v. Great American Industries Inc.

decided: December 23, 1968.


Lumbard, Chief Judge, and Waterman, Moore, Friendly, Smith, Kaufman, Hays and Anderson, Circuit Judges. Waterman, Circuit Judge (concurring). Irving R. Kaufman, Circuit Judge (concurring). Hays, Circuit Judge (concurring in the result). Moore, Circuit Judge (dissenting).

Author: Friendly

FRIENDLY, Circuit Judge:

This appeal by the SEC from an order of the District Court for the Southern District of New York, 259 F. Supp. 99, denying its motion for a temporary injunction with respect to alleged violations of § 13(a) of the Securities Exchange Act and of Rules 13a-11 and §§ 10(b), 10b-5 thereunder was initially heard by a panel consisting of Judges MOORE and HAYS of this court and Chief Judge Zavatt of the District Court for the Eastern District of New York. Since certain conclusions supporting the majority's decision to affirm ran counter to the position of the majority of the panel in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (1968), which was under advisement at the same time, we determined that this case also should be heard in banc upon the briefs already submitted and the opinions prepared by the panel.

The disposition of the motion for a temporary injunction on the basis of affidavits and of testimony at "private conferences" before the SEC, although apparently acquiesced in by all parties, illustrates the defects in that practice, which we subsequently condemned in SEC v. Frank, 2 Cir., 388 F.2d 486, 490-492 (1968). The SEC's application was supported by a long affidavit of one of its lawyers and a short one from its Chief Mining Engineer; the former gave mere excerpts from various of the press releases and reports of which the SEC complained rather than the full text. Cf. SEC v. Frank, supra, 388 F.2d at 489. Defendants answered with eight affidavits; some but by no means all of the relevant documents were annexed. No witnesses were heard but the SEC furnished the court with transcripts of the testimony it had taken. In his opinion Judge Ryan complained time and again that documents were not quoted in full text or presented as exhibits. As to certain issues the degree of knowledge possessed by corporate officers was critical, yet the judge had to determine this without seeing or hearing them, cf. 388 F.2d at 491. The disorganized record has similarly handicapped us in considering this appeal. We reaffirm our ruling in SEC v. Frank, supra, and further place the Commission on notice that even when exceptional circumstances may warrant dispensing with an evidentiary hearing on a motion for a temporary injunction or the defendants may agree to that course, the district courts are not to accept the kind of moving affidavit that was offered here; the Commission has sufficient facilities to enable it to present documents in full text.

The action concerned a number of press releases, reports, and failure to report and disclose during the winter and spring of 1966, relating to three mining ventures of a company somewhat extravagantly called Great American Industries, Inc. (GAI) -- a sulphur property in California, a copper mine in Arizona, and a sulphur mine in Nevada. Mining was a new activity for GAI which had previously been engaged through subsidiaries in the manufacture and sale of a variety of less glamorous products such as cookies, crackers, rubber goods and soft drinks. From January 1, 1965 to January 1, 1966, the price at which GAI common stock traded on the American Stock Exchange never exceeded $2 per share; the average number of shares traded daily during 1965 was 8,500. In contrast, from January 13, 1966, when GAI announced its first venture into mining until the Commission suspended trading on April 29, 1966, an average of 185,000 shares was traded daily. During this period the price of the stock went as high as 14 5/8; on April 27 the closing price was 10 1/8.

The Commission's complaint alleges three categories of violations. The first is that in press releases and in 8-K reports to the SEC and the American Stock Exchange, GAI made untrue statements of material facts or omitted to state material facts "necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading," in violation of Rule 10b-5 as to the press releases and § 13(a) and Rule 13a-11 as to the reports. See also § 18(a). The second is that the corporation and its officers violated the same provisions by failing to disclose in press releases and 8-K reports that a substantial portion of the consideration for the three properties was known by them to be payable not to the owners but to intermediaries. The third is the opposite side of the latter coin; the SEC contends that in instances when the sellers failed to disclose the large participation of the finders to GAI, they violated Rule 10b-5. Before proceeding further we note that such of defendants' arguments as are based on a narrow construction of the phrase of § 10(b) of the Securities Exchange Act and Rule 10b-5, "in connection with the purchase or sale of any security," have been rejected by our decision in SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 847.


The first press release of which the SEC complains was issued by Walter S. Mack, chairman of GAI, on March 21, 1966. Although a final paragraph dealt also with the California sulphur property, the SEC's criticism relates to a preceding one concerning the Arizona property which we reproduce in the margin.*fn1 Mack had acquired the option to the Arizona mine on the advice of Arthur D. Little, Inc., a reputed engineering firm, and later of another enginer, Dr. Edward Van Dornick. The Little report, dated March 18, 1966, had characterized the property as "a potentially promising ore deposit" which should be explored "to accurately determine its potential value." The report estimated the cost of such an evaluation at $72,000 plus the $50,000 down payment required to obtain an option.

While injunctive relief would hardly be warranted if this issue stood alone, the release, perhaps unintentionally, created an exaggerated impression. We refer particularly to the sentence, "Mr. Mack stated that he is advised that the mine can be in production within 90 to 120 days and will ship its concentrated ore to one of the large existing smelters in Arizona, at not too great a distance." Although literally true, this scarcely conveyed what was the fact, namely that GAI then had no intention of putting the mine in production unless the additional investigations during the 60-day period of the option showed that this would be warranted. The difference between what was said and what should have been is illustrated by a clarifying press release dated April 12, stimulated by the SEC's suspension of American Stock Exchange and over-the-counter trading in GAI stock on March 31. This attributed the SEC's action to reports and rumors emanating from others and made clear, "It is not now known whether or not there is a commercially mineable ore body at the property." The release went on to say that GAI had exercised its option, which had 45 days still to run.*fn2

Despite the April 12 release GAI filed with the SEC on April 13 an 8-K report prepared by defendant Marren with the aid of defendant Stolz. After reciting the acquisition of all the stock of Basin Mining Company, the owner of the Arizona property, the report continued:

Investigation by Great American Industries, Inc., indicates that this mine can be operated within a period of 90 days on a basis which will produce an operating profit of approximately $50,000 a month. It is also anticipated that substantial ore reserves will be available for development on a larger basis which would involve the installation of equipment and an investment of more capital funds as a result of which the net profit may be increased to $3,000,000 a year.

Complaint by the Commission's staff resulted in a letter from the company's counsel on April 14 acknowledging that the statements concerning the Arizona property were inconsistent with the press release, claiming they were included "through inadvertence," and enclosing a substitute page which replaced the quoted passage by the following:

Investigation by Great American Industries, Inc. indicates that this mine can be operated within a period of 90 days. It is not now known whether or not there is a commercially mineable ore body at the property. The Company has no reports establishing the existence of such an ore body. Only limited exploratory work has been done thus far, and further exploration is intended.

The difference between the two versions is too great for rescue on the basis, advanced by the district judge, of being "not an admission of guilt but rather the act of prudent business men to avoid unnecessary conflict and perhaps litigation with a Government agency." 259 F. Supp. at 107-108. Experienced counsel for GAI took no such view; conceding that the statement in the initial filing was wrong, they sought to excuse it as inadvertent. In view of the prompt correction no harm seems to have been done -- indeed GAI contends the report had not been placed in the public file either of the Commission or the ASE until the substitute page was filed. The Commission, however, cannot be expected to have the time, the resources or the material to enable it to police 8-K reports as quickly and thoroughly as it did here. The statute places the duty of filing correct reports on the issuer; while inadvertence and prompt correction after complaint are mitigating circumstances and may affect liability for damages, they do not defeat the SEC's right to injunctive relief. See SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d 833, 864 (concurring opinion of Friendly, J.).

On April 15 the SEC lifted the suspension on trading. Twelve days later Mack issued another press release announcing the proposed acquisition of the Nevada claims, the third of the properties, and commenting on the other two. As to the Arizona property he stated that the "machinery and equipment was now being ordered which should put this property into production in about 90 days." As to the California property the release said that "additional drilling and exploratory work is now being carried on by the mine owners on the 340 acres of sulphur bearing deposits in California under option to Great American but results on this work will not be available for 60 days." Again the SEC complained and rectification was made by an amplifying press release the next day, April 28. As to the Arizona properties this was simply a reaffirmation of the statement in the April 12 release and the corrected 8-K report "that it is not now definitely known whether or not there is a commercially mineable ore body at the property." The deficiency as to the California property was much more serious. The April 28 release disclosed that the two engineering firms retained by GAI as to this property, Arthur D. Little, Inc. and Behre, Dolbear and Co., had reported "that their investigation of the claims have not indicated sufficient promise of commercially mineable ore bodies to justify further expenditure by Great American on such investigations. Consequently, the Company has terminated the work by these engineering firms and will concentrate its efforts on the Nevada claims." In other words, the California venture had disappeared for the time being and would be revived only if further work by the sellers should induce GAI to take a new interest.*fn3

The final item under this heading is that GAI's 8-K report for April, 1966, included a "feasibility study" of the Nevada properties. This had been prepared by Canyon State Mining Corp., one of the sellers, but the report did not disclose this. Obviously this was an omission of a material fact; GAI in effect recognized this by including a reference to it in a subsequent 8-K report.

The evidence we have summarized compelled a finding that the deficiencies in the press releases and reports were not merely negligent, as alleged with respect to the April 12 press release in SEC v. Texas Gulf Sulphur Co., supra, but something more. The Commission was entitled to an injunction against their repetition.


In this section of the opinion we state the facts as to the division of the consideration paid by GAI for the three properties, GAI's knowledge thereof, and the releases and reports with respect thereto:

(1) The California property.

In November 1965 defendant Matusow, whom Mack had known for a year and a half and believed to be a real estate broker, called Mack's attention to this property, owned by Consolidated Sulphur Corporation. Later Matusow introduced Mack to Kenneth Porter, president of Consolidated. They worked out a letter agreement wherein Consolidated granted GAI a 90 day option, pending reports by the two engineering firms GAI had retained. If GAI decided to make the purchase, it was to pay "to the owners of the property" 1,600,000 shares of its stock and $250,000 in cash. Porter testified before the SEC that he had agreed with Matusow that a "group" consisting of Matusow, defendant Lester and one Frank Howard were to receive 600,000 of these shares for their "services," although it does not appear that Mack ever saw Howard. The moving affidavit of the SEC attorney alleged that defendant Seagraves was to receive half of Lester's share; Lester denied this and Seagraves' affidavit says he was never to get anything except as a stockholder in Consolidated Sulphur.

GAI's 8-K report filed on February 15, 1966, recited the arrangement to issue 1,600,000 shares and said nothing about the destination of the 600,000. Judge Ryan found there was no direct evidence that GAI or any of its officers knew of the latter and evidently refused to infer such knowledge; this surely was not clearly erroneous.

(2) The Arizona property.

Mack first heard of this property from defendant Beard who owned it, apparently through ownership of all the shares of Basin Mining Company. Matusow soon appeared on the scene. The option agreement of March 21, 1966, providing for a purchase price of $50,000 plus 200,000 shares of GAI stock, was with Beard. The later agreement of April 5, 1966, was with Beard as the "Stockholder" of Basin; he represented himself as owning all its stock and warranted that he would take and hold the GAI shares for investment and not with a view to sale or distribution. In fact, as acknowledged in Beard's affidavit, he had agreed early in the winter that if Matusow could obtain $50,000 to enable him to pay off a bank debt, he would give Matusow fivesixths of any stock received in addition. Matusow later informed Beard that he had retained defendant Pagnani to handle the legal work and that Pagnani was to receive one-sixth of any stock -- this to come out of Matusow's share. The press release of April 12 and the 8-K reports of that month referred to the issuance of 200,000 GAI shares without mentioning that only one-sixth would go to Beard. The District Court found, however, 259 F. Supp. at 107:

"There is no evidence that the corporate-defendants knew about this private agreement, although they knew Matusow as a finder who was connected with Beard and had been rather active in the negotiation of this deal, and they knew Pagnani as Beard's attorney. They undoubtedly knew that Matusow and Pagnani were to be compensated by Beard."

We must accept these findings.

(3) The Nevada property.

This property was called to Mack's attention in April 1966 by Beard and Matusow. It was owned by Pacific Sulphur Company, a consortium representing three interests, Crofoot Lumber Co., Commonwealth Silver Co., and Canyon State Mining Co. The contract dated April 22, which the SEC has not produced, evidently provided for the issuance of 300,000 GAI shares, then selling in the $11-$14 range. These were to be distributed 17,340 to Crofoot,*fn4 and 41,300 each to Canyon and Commonwealth, and 200,000 to Matusow, Pagnani and Beard, with the former to retain 2/3 or 134,000 shares and the latter 33,000 each. Matusow guaranteed Crofoot that its shares would be worth $250,000. Press releases of April 27 and 28, 1966, and an 8-K report filed on May 11 said only that GAI had purchased the Nevada claims for 300,000 shares of its common stock "which are to be taken by the sellers for investment and not for public distribution."*fn5 In this instance GAI and its officers did have knowledge of the peculiar division of the consideration.

The contract could not be closed as scheduled because of the suspension of trading in GAI on April 29 and a suit brought by a person claiming to have had a purchase contract with Crofoot. Later it was renegotiated so that Matusow, Beard and Pagnani would each receive 15,000 shares, Crofoot's portion was raised to 44,232 shares and Canyon's and Commonwealth's to 105,384 each, GAI assumed Matusow's guarantee to Crofoot, and other changes favorable to GAI were made.


On this appeal the Commission's contention that failure by GAI and its officers to disclose the large portions of the consideration going to persons who were not owners must thus be limited to the Nevada property, as to which alone they were found to have had knowledge.*fn6 As to this, the April 27 and 28 press releases and the 8-K report for that month at least omitted to state a material fact which the company had a duty to disclose; indeed the reference to the issuance of the 300,000 shares to "the sellers," with only Pacific Sulphur so identified, could well be said to be an "untrue statement of a material fact."

This court has defined a material fact as a fact to which "a reasonable man would attach importance * * in determining his choice of action in the transaction in question." SEC v. R. A. Holman & Co., 366 F.2d 456, 459 (2 Cir. 1966), quoting List v. Fashion Park, Inc., 340 F.2d 457, 462 (2 Cir.), cert. denied sub nom. List v. Lerner, 382 U.S. 811, 86 S. Ct. 23, 15 L. Ed. 2d 60 (1965). We have further developed our views on materiality in SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 849. That reasonable traders in stock of a company buying mining property would be influenced by knowledge that the vendors were willing to pay two-thirds of the price to persons who could produce a buyer would not appear to require extended argument. A person learing that GAI had issued 300,000 shares of its stock, worth some $3,600,000 at then market prices, for the Nevada properties, might well have a different idea of the properties' value if he knew the owners were in fact receiving only $1,200,000, with the difference going to intermediaries who had effected the sale. Such knowledge would not cease to have been material even if the mine later turned out to have been a bargain. This is not to say that any variation of a finder's fee from conventional norms would be so material as to require disclosure; willingness to pay intermediaries two-thirds of the price (the fraction being here subject to some slight reduction for Matusow's guarantee of the value of the Crofoot stock) is so unusual as to raise legitimate question in the mind of a prospective purchaser of GAI stock whether GAI had not been "taken" and whether the Nevada mine was worth anything like what GAI was paying for it. Even if we were to assume that GAI and its officers did not realize the materiality of the distribution of the 300,000 shares, our holding in SEC v. Texas Gulf Sulphur Co., supra, with respect to TGS's April 12 press release in that case settles that Rule 10b-5 (2) authorizes the granting of injunctive relief. While the trial judge might still have been within the bounds of allowable discretion in holding that no sufficient case for issuing an injunction had been made if this episode stood alone, see concurring opinion of Friendly, J., in SEC v. Texas Gulf Sulphur, supra, 401 F.2d 833, the failure to disclose the known destination of 200,000 of the 300,000 shares must be considered along with the misleading releases and reports considered in section I of this opinion. As in SEC v. Texas Gulf Sulphur Co., supra, our decision is limited to injunctive relief; we intimate nothing as to liability for damages.


The SEC seems to regard the case against the defendants who failed to disclose to GAI the large payments to be made to "finders" as identical with that against GAI and its officers for failure to reveal what the company knew. The argument runs as follows: First, the large proportion of the consideration to go to the finders was "a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." -- a position with which we have expressed sympathy in section III. Second, Rule 10b-5 condemns an omission to state such a fact by "any person," by the use of certain specified means of communication presumably present here, "in connection with the purchase or sale of any security." Finally, the omission was "in connection with" these defendants' proposed purchases of stock from GAI.

It must be conceded that imposing on sellers of property or finders a duty of full disclosure to a buyer issuing securities in exchange, with a consequent duty on the part of the latter to publicize material facts so disclosed, would increase the protection afforded investors and traders by the securities laws. On the other hand, to read Rule 10b-5 as placing an affirmative duty of disclosure on persons who in contrast to "insiders" or broker-dealers did not occupy a special relationship to a seller or buyer of securities, would be occupying new ground and would require most careful consideration. Without attempting to predict the result of such consideration, distinctions might be drawn, for example, according to the importance of the transaction, between between sellers of property and finders, or between finders acting solely for such sellers and those having a special relationship with the issuer. We are loath to undertake this task where, as noted at the outset, the record is so unsatisfactory. We find there is no need for doing so.

With respect to the Arizona property there was evidence concerning defendants Beard, Matusow and Pagnani that went considerably beyond non-disclosure. The purchase agreement recited that the stock of Basin Mining Company was owned by Beard "and others, less than ten (10) in number, who have beneficial interests therein." Marren, vice president of GAI, stated in discussing the closing of the Arizona transaction, "When I asked specifically who were the other individuals with a benefit interest in Basin Mining Company, Mr. Beard [the seller] said that they were local associates of his. I noted that paragraph 11 of the purchase contract stated that 'the parties agree that no broker or finder has brought about the transaction contemplated by this agreement.'" Matusow and Pagnani were present when these statements were made. Beard's affidavit did not deny the statement attributed to him. Matusow's asserted he told Marren "that the others were Pagnani and me"; Pagnani's claimed that his function was solely to render legal services and, inferentially, that GAI knew this. Even if we accept Matusow's version, it was so far from the full truth, namely, that Matusow and Pagnani were to receive five-sixths of the consideration -- four-sixths of this going to Matusow for "finding" -- as to run foul of the principle that "One party to a business transaction is under a duty to disclose to the other before the transaction is consummated * * * such additional matters known to him as he knows to be necessary to prevent his partial statement of the facts from being misleading. * * *" Restatement of Torts 24.551(2) (b) (Tent. Draft No. 12, April 27, 1966). Whatever the situation might otherwise have been, Marren's question required those present at the closing to speak up and clarify what was meant in the purchase agreement by "finders" and "local associates," and to explain their financial relationship. This duty was not discharged. Since the conduct of Beard, Matusow and Pagnani constituted common law fraud "in connection with" the purchase of securities, Rule 10b-5 is plainly applicable, see SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195, 84 S. Ct. 275, 11 L. Ed. 2d 237 (1963); 3 Loss, Securities Regulation 1435 (1961 ed.), and the SEC was entitled to an injunction against them irrespective of Matusow's later involvement in the California property.

This leaves only the propriety of the denial of a temporary injunction with respect to Lester and Seagraves, who were concerned with the California mine alone. Here the record is quite confusing. While Lester admitted that he knew 37 1/2% of the GAI shares were to be allotted to Matusow and that he and Howard were each to receive one-third of the allotment, he claimed that his share was to be paid for relinquishing an oral agreement to buy the property. As noted above, Lester denied that Seagraves was to have any part of his share and Seagraves asserted that he was never to get anything save as a stockholder of Consolidated Sulphur.

On this state of the record the judge was surely justified in denying a temporary injunction with respect to Seagraves. And, even on the SEC's view of the law, it is arguable that Lester reasonably supposed Matusow had revealed the facts to GAI. It would be most unwise for us to move into new legal ground from such a soggy factual base. Rather we shall vacate the denial of a temporary injunction against Lester and Seagraves and remand the issue to the district court which, if the SEC should choose to pursue this dispute, relating to events of two and a half years ago, can consolidate the application for a temporary injunction against these two defendants with a final hearing. See F.R.Civ.P. 65(a) (2).

We therefore reverse so much of the judgment as declined to issue a temporary injunction against defendants GAI, Mack, Marren, Stolz, Beard, Matusow and Pagnani and direct the issuance of an appropriate injunction. We vacate so much of the judgment as declined to issue a temporary injunction against defendants Lester and Seagraves and remand for further proceedings consistent with this opinion.

WATERMAN, Circuit Judge (concurring):

I concur in Judge FRIENDLY'S opinion. The area of the law into which the Securities and Exchange Commission has now moved is an area in which perceptive regulatory proceedings have been long overdue when it is recognized that the intent of Congress was to protect individual outside investors who buy and sell corporate securities on national exchanges from receiving incomplete or inaccurate information from corporate officers and corporate management. In adjudicating the Commission's regulatory efforts in the area, we must, of course, move on a case-by-case basis, and with care, as in SEC v. Texas Gulf Sulphur, 401 F.2d 833 (2 Cir. Aug. 13, 1968) but with the Congressional mandate to protect investors always in mind. As stated in the concurring opinions of my brothers KAUFMAN and HAYS, there is a world of difference on the one hand between cash buy-sell agreements and agreements to compensate finders in cash and, on the other, those agreements when management arranges to have blocks of stock be the consideration. For now, in view of the somewhat casual and confused record before us here, I am content with Judge FRIENDLY'S conservative disposition of the issues presented to us in the present case.

IRVING R. KAUFMAN, Circuit Judge (concurring):

My dissenting brother, Judge MOORE, leaves the impression that the majority is dealing with startling new principles, ignoring that what we say today follows in the wake of SEC v. Texas Gulf Sulphur Corp., 401 F.2d 833 (2d Cir. decided Aug. 13, 1968). I therefore have no difficulty in concurring in the majority opinion. And since the record is quite obfuscated as to the defendants Lester and Seagraves, I agree that we are compelled to remand their cases for further hearings.

Inasmuch as these cases are of great importance to the financial and business community, I believe it appropriate to add this caveat: Those who buy or sell securities may no longer assume that the unmended fences of common law fraud will remain the outer limits of liability under Rule 10b-5. Prof. Bromberg has succinctly stated that the rule's proscription is considered to be "closer to unfairness than what either lawyers or laymen usually think of as fraud." A. Bromberg, Securities Law: Fraud: SEC Rule 10b-5, para. 1.1 at 5 (1968).

Thus, in the Arizona affair -- and perhaps in the California transaction as well -- the finder defendants received exorbitant fees for the performance of minimal services. They were awarded such a disproportionate percentage of the total consideration paid for the property that, were this arrangement disclosed, it would clearly have indicated the property could not be worth the price paid. This is not, as Judge MOORE hypothesizes, similar to a marital transfer where there could be other plausible explanations for the proposed allocation. Matusow and Pagnani performed the services that finders usually perform and, on the abbreviated record before us, it is idle speculation to attribute their actions to an alleged joint venture especially in the light of their deliberate misrepresentations to G.A.I. of how the proceeds would be allocated. Here, had G.A.I. known of the proposed allocation of the proceeds, it might well have refused to proceed with the negotiations. Accordingly, in not revealing the percentage of the purchase price that was destined for the finders, the defendants failed to disclose a material fact.

While it is true that in the usual business transaction a seller need not disclose how he intends to dispose of the money paid him, this was not an ordinary transaction. The excessive harvest being reaped by those who had sown but little was so extraordinary that I question the propriety of the failure of the finder defendants to disclose it.

My basic text is that the property was not sold for cash but for securities. The limits of "fraud" under the securities law are not identical with those of common law deceit -- an appropriate standard were this a cash transaction.

In a cash transaction, only the buyer and the seller are affected by a "fraud." If the buyer does not get the best price, only he, and no one else, is harmed. Where the buyer pays with securities, however, it is not too difficult to discern that many others will perforce be affected because the issuance of the new securities is likely to influence the market for the outstanding stock of the company. (Throughout the relevant period, it should be noted, G.A.I.'s stock was traded very actively -- on the occasions when the SEC permitted it to be traded.) Thus, the injury is not exclusively to those who are parties to or participate in the negotiations, but to passive shareholders, potential purchasers, and an ever-increasing circle of others. It seems clear to me that this potential for spreading damage caused by the failure of the finders to disclose a material fact would warrant injunctive relief. I hasten to add, however, that it should not be inferred from what I have said that I am expressing any view on the propriety of a private action for damages.

I am reluctant to see the limitations of the tort of deceit stenciled onto the securities laws lest the resulting maze lead us into the common law morass of overfine distinctions which would frustrate the securities statutes. As an illustration, the common law would distinguish between partial disclosure and nondisclosure. Common law cases have held, for example, that the owner of a dwelling, although he knows full well that his home is riddled with termites, can unload it with impunity upon a buyer (without disclosure), and go on his happy way. E.g. Swinton v. Whitinsville Sav. Bank, 311 Mass. 677, 42 N.E.2d 808, 141 A.L.R. 965 (1942). See Prosser, Torts, 711 (3d ed. 1964) (calling such cases "singularly unappetizing"). The Securities and Exchange Commission, seeking to enjoin manipulation of such "intricate merchandise" as securities, H.R.Rep. No. 85, 73rd Cong., 1st Sess. (1933) 8, should not be fettered by such a wholehearted embrace of the doctrine of caveat emptor.

In sum, any claim that material facts were withheld in a transaction in connection with the sale or purchase of securities must be scrutinized with care, whether or not there would ...

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