The opinion of the court was delivered by: PALMIERI
PALMIERI, District Judge.
This is an action by a corporation for damages allegedly sustained as a result of material misrepresentations in a prospectus and omissions to state material facts required to be stated therein or necessary to make statements therein not misleading in violation of various sections of the federal securities laws. Defendants include Brunswick Corporation, several officers and directors of Brunswick, brokerage firms connected with the underwriting and distribution of Brunswick's convertible debentures, and Arther Andersen & Co., the accounting firm named in Brunswick's registration statement.
Liability is predicated on § 12(2) and § 17(a)(1)(2) and (3) of the Securities Act of 1933 (15 U.S.C. §§ 77 l (2) and 77q(a)(1), (2), (3) respectively) and §§ 9, 10(b) (and Rule 10b-5, 17 C.F.R. § 240.10b-5 thereunder), 15(c)(1), 18 and 29(b) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78i, 78j(b), 78 o (c)(1), 78r and 78cc(b), respectively. The case was tried by the court without a jury and only two witnesses appeared at trial -- Mr. James F. Urbanek, a vice president of Brunswick Corporation, and Mr. John Raben, an attorney and a partner of Sullivan & Cromwell, who participated in the preparation of the registration statement. Both witnesses were called by the plaintiff. Both were credible and articulate witnesses. Their testimony did not substantiate the plaintiff's case, nor did the depositions and documentary evidence.
The complaint challenges a prospectus and registration statement which became effective January 11, 1961, under the Securities Act of 1933. The registration statement covered the offer and sale by Brunswick of $25,634,400 of convertible subordinated debentures and the common stock issuable upon conversion thereof. The principal defect alleged by plaintiff is that the prospectus, instead of treating a financing agreement with C.I.T. Corporation as a long term debt and revealing the interest charges being paid thereon, treated the C.I.T. debt as a current liability and did not reveal the relevant interest charges and the fact that the rate of interest on the C.I.T. debt was substantially greater than the interest rate being paid for similar credit by Brunswick's major competitor. Plaintiff also alleges that the prospectus was defective and misleading in its use of the accrual method of accounting for installment sales of pinsetters; in the inadequacy of its reserves for bad debts; and in its failure to note the impending saturation of the market for pinsetters.
Defendants answer that the prospectus was issued in full compliance with the rules and regulations of the Securities and Exchange Commission and that it was in no way defective or materially misleading.
The facts, insofar as they are relevant, are these: Plaintiff is a closely owned Delaware corporation engaged in the real estate business which holds, buys and sells securities. Defendant Brunswick was, at the time of the commencement of this action, one of the two leading manufacturers and distributors of bowling equipment. On January 11, 1961, a Registration Statement filed with the S.E.C. by Brunswick on December 5, 1960, and amended on January 6 and 11, 1961, was declared effective with respect to an issue of convertible debentures and the common stock issuable upon the conversion thereof. On that date plaintiff was the owner of approximately 4,900 shares of Brunswick common stock. As a Brunswick shareholder, plaintiff was entitled to subscribe to the debentures and received a copy of the prospectus. Plaintiff did not exercise its rights as to the offered stock, but between January 31, 1961, and January 4, 1962, it wrote and sold puts endorsed by Bache & Co., one of the defendants herein, on at least 31,600 shares of Brunswick common stock. Between May 22, 1961, and August 26, 1962, most of these puts were exercised by the holders thereof and plaintiff was required to purchase and did purchase 31,600 shares of Brunswick common stock at an aggregate cost, less commissions and premiums, of $1,691,667.56. Between June 8 and June 21, 1962, plaintiff sold 12,300 of the 31,600 shares for an aggregate price, minus commissions, of $302,823.85. Plaintiff alleges that at the date prior to the commencement of this action the aggregate market value of the remaining 19,300 shares plaintiff held was $217,125, or $11.25 a share. This, plaintiff claims, results in an aggregate loss of $1,171,718.
The financing agreement which is central to this case was entered into in 1957 by the Brunswick-Murray Automatic Pinsetter Corporation (Pinsetter), a wholly owned subsidiary of Brunswick, and C.I.T. Finance Co. This agreement which was guaranteed by Brunswick provided that Pinsetter would assign to C.I.T. not less than 80% of all installment obligations arising out of the sale of pinsetter equipment and borrow not less than 70% of the face value of the paper so assigned. The agreement provided that Pinsetter would pay C.I.T. interest at an annual rate 6 1/2% over and above the prime lending rate of New York banks in effect as of May 2 of each year during the life of the agreement.
The essence of plaintiff's argument is that this high interest rate and the details of the financing agreement should have been disclosed in the prospectus. Plaintiff does not, however, deny that the agreement was disclosed in Form 8-K filed by Brunswick with the S.E.C. and the New York Stock Exchange in June, 1957, and that the details of the agreement and the interest rate in question was reported by numerous business publications received by plaintiff prior to January 11, 1961.
On August 10, 1966, Judge Edelstein of this court granted defendants' motion for summary judgment on Count One of plaintiff's complaint based on § 11 of the Securities Act of 1933 (15 U.S.C. § 77k) on the ground that plaintiff was not a purchaser within the purview of § 11. Colonial Realty Corporation v. Brunswick Corp., 257 F. Supp. 875 (S.D.N.Y. 1966). The other issues presented in the litigation were not resolved.
Essential to recovery under any of the above-mentioned statutory provisions is a determination that there was contained in this prospectus an untrue statement of material fact or an omission of material facts required to be stated therein or necessary to make statements therein not misleading.
Additionally, § 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, upon which plaintiff primarily relies, requires findings of reliance, scienter, and causation. See generally, Bromberg, Securities Law, Vol. II, 8.3-8.6 (1970). It is not possible to make these findings in the case at bar.
The parties do not dispute that defendants fully complied with S.E.C. regulations in the preparation of the prospectus and registration statement. Such compliance creates a strong presumption of regularity:
[When] nothing material is held back from the [S.E.C.] and the Commission itself considers that a certain matter need not be disclosed, it does not seem likely that a court in an action under § 11 or § 12(2) will "out Herod Herod" and impose liability for the omission. Loss, Securities Regulation, Vol. III, p. 1691 (2d edition).
The test of materiality in this circuit has long been "whether 'a reasonable man would attach importance [to the fact misrepresented] in determining his choice of action in the transaction in question.'" List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir. 1965), cert. denied 382 U.S. 811, 86 S. Ct. 23, 15 L. Ed. 2d 60 (1965). Accord, Chasins v. Smith, Barney & Co., 438 F.2d 1167 (2d Cir. 1971). The operational expenses of a company -- e.g., hourly labor rates, prices of materials and supplies, and other costs of doing business -- have not been generally considered items meriting special consideration in a prospectus. This situation is analogous.
Moreover, the requirement of reliance has been constantly reiterated in this circuit to maintain an action under Rule 10b-5. List v. Fashion Park, supra. A claim of reliance cannot be maintained in a case such as this where there is a great deal of evidence indicating that plaintiff knew or should have known of the interest rate in question. Pursuant to the requirements of the Securities Exchange Act, the C.I.T. financing agreement was disclosed in a Form 8-K report filed by Brunswick with the S.E.C. and the New York Stock Exchange in June, 1957. The prospectus clearly referred to the financing agreement in no less that five places, explaining that it had been filed as part of the registration statement and could be obtained from the S.E.C. The agreement was also reported in numerous financial publications. The precise interest rate in question was mentioned in Fortune, November 1959; Barron's, April 28, 1958; and a Loeb, Rhoades Report on Brunswick in October, 1960. This last report was sent by Loeb, Rhoades to plaintiff. Under these circumstances plaintiff cannot claim ignorance of a matter of public record and common knowledge.
Any claim of reliance is also dissipated by plaintiff's long history of transactions in the stock in question. The evidence amply proves that plaintiff had been writing puts on Brunswick stock long before he saw the prospectus on which he claims to have relied.
Finally, plaintiff has failed to prove scienter on the part of any of the defendants herein, whether this is to be interpreted as "actual knowledge of falsity," Heit v. Weitzen, 402 F.2d 909, 914 (2d Cir. 1968) cert. denied, 395 U.S. 903, 89 S. Ct. 1740, 23 L. Ed. 2d 217 (1969), or "recklessness equivalent to wilful fraud," S.E.C. v. Texas Gulf Sulphur, 401 F.2d 833, 888 (2d Cir. 1968), cert. denied, Coates v. S.E.C., 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969). The testimony at trial, particularly that of James F. Urbanek, a vice president of Brunswick and former officer of Arthur Andersen & Co., the accounting firm involved in the preparation of the prospectus, demonstrates that the accounting judgments here disputed were made in good faith and based on generally accepted accounting principles.
Crucial to plaintiff's failure of proof in this case is the absence from trial of Milton E. Selig, the secretary-treasurer and 97% stock owner of plaintiff, Colonial Realty. In spite of the court's admonition that Selig's testimony would be vital on the subject of reliance and materiality and that Selig's credibility would be very much in issue, Selig refused to appear, and plaintiff attempted to have his deposition introduced into evidence. In so doing, plaintiff relied on Rule 32(a)(3)(B), F.R. Civ. P., which provides:
The deposition of a witness, whether or not a party, may be used by any party for any purpose if the court finds:
(B) that the witness is at a greater distance than 100 miles from the place of trial or hearing. . . .
Plaintiff has cited authority for the literal application of this rule whether or not the absent party or witness offers an adequate excuse for his absence. Richmond v. Brooks, 227 F.2d 490 (2d Cir. 1955); Klepal v. Pennsylvania Railroad Co., 229 F.2d 610, 612 (2d Cir. 1956); Houser v. Snap-On Tools Corp., 202 F. Supp. 181 (D. Md. 1962). (But note the court's comment at 202 F. Supp. at 189 that "this proposition is less certain where the deposing officers are deemed to be the party itself.") The inappropriateness of such an application is readily apparent in a case such as this where a party (and as a 97% stockholder Selig can hardly be considered anything else) institutes a million dollar lawsuit in this court and then seeks to label himself a witness and avail himself of the 100 mile rule thereby avoiding first hand scrutiny of his story and credibility by the court. But it is not necessary to apply such a rule here as plaintiff has not convincingly demonstrated that Selig is in fact without a 100 mile distance of this courthouse. Using the shortest route between Selig's home in Bala Cynwyd, Pennsylvania, and the courthouse, i.e., the Pennsylvania ...