The opinion of the court was delivered by: POLLACK
This is one of a series of cases in this Court arising out of a contest between Bangor Punta Corporation ("Bangor Punta") and Chris-Craft Industries, Inc. for control of Piper Aircraft Company ("Piper") -- a struggle from which Bangor Punta emerged, in September, 1969, with control of Piper.
In this action the Securities and Exchange Commission ("Commission") asks the Court to enjoin Bangor Punta from violating the Securities Act of 1933, 15 U.S.C. § 77a, et seq., (1971), and the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq., (1971) and to order Bangor Punta to make an offer of rescission to holders of Piper stock who exchanged their shares for securities of Bangor Punta, pursuant to an exchange offer of July, 1969.
The Commission charges that Bangor Punta's registration statement and prospectus dated July 18, 1969 pertaining to the Piper exchange offer were materially deficient in failing to disclose an alleged decision to sell Bangor Punta's 98.7% stock interest in the Bangor and Aroostook Railroad ("BAR") at a price far below its carrying value on Bangor Punta's books and financial statements.
The Commission further charges that Bangor Punta intentionally deferred the closing of that sale in order to avoid making and exposing the necessary write-downs until the exchange offer was completed.
Bangor Punta denies that the sale had been decided on in the June to August period that year or that there was then a reasonable probability of a sale. It contends that it was not required to make any reference in the prospectus of July 18, 1969 to the sale or to any steps leading to sale.
The evidence adduced upon trial established the following facts.
On or about May 29, 1969, Bangor Punta filed with the Commission a registration statement and prospectus for an offering of its securities to holders of Piper common stock in exchange for their shares of Piper. The registration statement became effective on July 18, 1969 and the prospectus was sent thereafter to all Piper shareholders. On this offering, Bangor Punta obtained 111,628 shares of Piper Aircraft or about 7% of the 1,644,790 shares of Piper Aircraft common stock outstanding.
There is no information in the prospectus suggesting consideration or pendency of a sale of the BAR interest in June, July or August, 1969. Bangor Punta did sell its stock in BAR to Amoskeag Corporation ("Amoskeag") on October 2, 1969 at a price of $5 million in cash plus certain contingent payments described below.
The historic cost of BAR's assets, less depreciation and other accounting adjustments and less liabilities was about $29.8 million. However, the financial statements in the prospectus carry Bangor Punta's interest at $18.4 million, a figure which reflects an appraised value of the BAR shares as of September, 1965. The history of this figure is as follows.
Until 1961, BAR was an independent company. It then became a subsidiary of The Bangor and Aroostook Corporation (the "Corporation") which had been formed as a holding company. During 1960 and 1961 the Corporation offered its securities to BAR shareholders in exchange for their BAR shares and acquired more than 98% of BAR's outstanding shares. Based on the market price of BAR shares on the New York Stock Exchange before they were delisted in 1961, the Corporation's interest was worth $8.1 million and the Corporation carried the BAR interest at this figure in its financial statements.
In 1964, the Corporation combined with Bangor Punta (a wholly-owned subsidiary of Punta Allegre Sugar Corporation). Although Bangor Punta could have shown its equity in the net assets of the BAR at $29.8 million, it elected to carry forward the figure appearing on the books of the Corporation, viz., $8.1 million. It is claimed that this was done because of a strong possibility that BAR was to be disposed of promptly. By September, 1965, that possibility had evaporated. But, instead of restating the carrying value of BAR at the amount of Bangor Punta's equity interest in BAR on a historical cost basis (which would have resulted in a carrying figure of $29.8 million) or at its or its predecessor's cost, Bangor Punta obtained an appraisal from investment banking houses with knowledge of the railroad industry. Based on their recommendation as to approximate fair market value Bangor Punta restated the BAR holding at $18.4 million -- approximately $10 million less than its equity in the underlying net asset value of the railroad on an historical cost basis and $10 million more than the former carrying figure. The difference between the former carrying figure of $8.1 million and the new appraised value of $18.4 million was credited directly to Bangor Punta's earned surplus, by-passing the profit and loss account. This treatment had been the subject of inquiry by the Commission in connection with a prior registration statement and, after explanations were made, the Commission dropped the matter.
Except for minor accounting adjustments the $18.4 million carrying value of BAR established in 1965 remained unchanged and was reflected in the 1969 registration.
Bangor Punta's management had, for some time, sought a means of separating out BAR in a way which would permit its continued operation as a railroad. Discussions to that end were held within Bangor Punta in 1967 and 1968 and continued into 1969. Several methods were speculated on: viz., the creation of a New England Railroad System by combining the BAR with the Maine Central and Boston and Maine Railroads; an acquisition of the Delaware and Hudson Corporation and combination of its railroad with the BAR; a spin off of BAR or a rights offering to the Bangor Punta stockholders. Prior to April of 1969 there seemed to be no prospect of a buyer for the railroad.
On April 1, 1969, Bangor Punta appointed a committee to study the possible divestiture of BAR. The committee consisted of Curtis M. Hutchins, a director and member of the Executive Committee, Gordon Robertson, Co-Chairman of the Board and Chairman of the Executive Committee, Robert G. Stone and George H. Siel, Directors of the railroad. Messrs. Hutchins and Robertson were both past presidents of the railroad. This was a highly knowledgeable group on matters pertaining to the railroad and its problems.
Some weeks after the Committee was appointed Amoskeag Company through its president, Frederic C. Dumaine, made an offer to C.M. Hutchins to purchase the railroad for $5 million in cash. Dumaine had long and active experience in the railroad business as an operator. Amoskeag was a registered investment company with investments in the Maine Central Railroad Company among other enterprises. Dumaine's price was merely the amount of the savings in operating expenses which he estimated could be effected if the Maine Central and BAR were combined.
Hutchins told Dumaine -- in response to the latter's query -- that Bangor Punta might dispose of its interest in the railroad if the price were right. As for Dumaine's offer of $5 million -- for either the assets or the stock
Hutchins responded that this was exceedingly low but that he would convey the offer to the management. Essential details -- including the railroad's cash flow figures, its balance sheet and a five year forecast, both cash and profit and loss -- were furnished to Dumaine at a second meeting with Hutchins. Dumaine reaffirmed the $5 million offer as his highest price. Hutchins explained that he had no authority except to explore possibilities of divestiture of the railroad; he had no power of decision.
Hutchins and the Committee members with whom he conferred concluded that sale of BAR stock to Amoskeag at the profferred price of $5 million was the "best course for Bangor Punta to pursue."
The company's independent auditors were asked about the accounting treatment which would be afforded a sale of the railroad for $5 million. On May 20, 1969, they reported that such a sale would be treated on the financial statements of Bangor Punta as an extraordinary loss of about $13.5 million.
On May 21, 1969, at a meeting of Bangor Punta's Board of Directors, Hutchins, speaking for all the members of his Committee, stated that there were three possibilities for the future of BAR. Bangor Punta might (1) keep the railroad in its present status, (2) continue to seek to merge it with another railroad, or (3) sell BAR at the best possible price. He discussed each of these possibilities. In respect of the third possibility, he stated that the only person he knew who might be interested in a purchase was Dumaine, of Amoskeag. He reported that ...