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Radiation Dynamics Inc. v. Goldmuntz

decided: July 5, 1972.


Lumbard, Waterman and Feinberg, Circuit Judges.

Author: Waterman

WATERMAN, Circuit Judge:

This action was commenced in the United States District Court for the Southern District of New York by the appellant, Radiation Dynamics, Inc. (RDI) in May 1968. In its complaint RDI charged that the thirteen defendant-appellees had violated, inter alia, Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5, when in the summer of 1964 the defendants purchased from the plaintiff 6500 shares of stock in a company then known as Technical Research Group, Inc. (TRG), without disclosing to plaintiff allegedly material inside information which plaintiff alleged was known to the defendants, being information that TRG at that time had general plans to seek a merger and that at the time the defendants purchased plaintiff's TRG stock, TRG was conducting merger negotiations with Control Data Corporation which negotiations led ultimately to a merger between those two corporations. The case was tried before the Honorable Milton Pollack and a jury. After all the evidence had been submitted the trial judge determined that the plaintiff had "failed to produce a scintilla of evidence" that the defendants Hollybrook Co., John M. Hollern and Conley Brooks, individually and under the trade name and style of Allbrook Co. (hereinafter referred to as the Minnesota Group) had any knowledge of the allegedly material inside information and, accordingly, directed a verdict dismissing the complaint against that group of three defendants, D.C., 323 F. Supp. 1097. The case against the remaining defendants was submitted to the jury which decided by answering questions given it in a special verdict that the defendants Lawrence Goldmuntz, Philip A. Fisher, individually and under the trade name and style of Fisher & Co., and a group of eight defendants hereinafter referred to as the California Group*fn1 did not "have material information as to a reasonably possible acquisition or merger with Control Data" at the time that the "commitment[s]" for the sale of the stock purchased by them were made. Judge Pollack entered judgment for the defendants on March 26, 1971.

In its appeal from the judgment, RDI has broadly challenged Judge Pollack's handling of the trial. RDI strongly asserts that the circumstantial evidence which it marshaled against the Minnesota Group was more than ample to get its case to the jury. Moreover, it levels a volley of complaints against the district court's charge to the jury at the end of the trial. Scattered throughout RDI's brief are contentions that the judge misstated the law so as to favor the defendants, that the plaintiff was denied "equal time" in the summation of the evidence given to the jury by the court, and that the special verdict form "destroyed any chance that the appellant might otherwise have [or] still had to secure a proper jury determination." Indeed, RDI characterizes the District Court's handling of the case as one of "relentless opposition . . . to the appellant's case theory." We are unable to agree with any of the appellant's numerous objections to its treatment by the court below. Accordingly, we affirm the judgment below and will discuss the legal contentions of the parties in greater detail after an exposition of the facts in the case.

As we indicated in the first paragraph of this opinion, the significant events involved in this case are the sales of the TRG stock and the merger of TRG and Control Data. These events unfolded over a period of many weeks and, although they are to some extent overlapping in time, for the sake of clearly presenting the facts involved in each of them as those facts were developed at trial, we have treated each of them separately here.

The Sales of the TRG Stock :

The 6500 shares of TRG stock involved in this case were originally part of the portfolio of stocks held by a small investment trust known as deVegh International, Limited, and they were purchased by the plaintiff in mid-1964 as part of an RDI plan designed to stave off economic disaster for RDI. RDI at the time had assets totalling a few million dollars, was a company interested in the advanced technological field, and it appears from the record had not enjoyed great success since its incipience in 1958. In the spring of 1964, RDI badly needed working capital and the marketable securities in the deVegh portfolio, including the TRG stock here under consideration, presented RDI with the means of obtaining that capital. Prior to the acquisition of the portfolio, the RDI management had evolved two alternate routes by which these securities could be turned into cash. The simplest plan was to resell the marketable securities quickly. The alternate route involved the creation of a subsidiary corporation which would hold the assets acquired from deVegh. The corporate stock of that subsidiary would then be pledged as collateral for a substantial loan. With these two alternatives in mind, RDI signed a purchase agreement with deVegh on June 11, 1964, whereby it contracted to acquire deVegh's assets in exchange for 42,150 shares of RDI common stock. After a series of delays, this deal was finally closed on July 30, 1964.

As might be expected, the two alternative modes of financing had, prior to the signing of the purchase agreement, been the subject of a good deal of investigation by RDI management and, in particular, by Harvey Cohen, the Secretary and General Counsel, for RDI. As a part of that investigation Cohen made a telephone call in late May to Lawrence Goldmuntz, a defendant-appellee herein, who was then the chief executive of TRG. At that time TRG was a company engaged in research and development in the technological and scientific fields and it had assets totalling in the neighborhood of three and a half million dollars. Its stock was not registered or traded on any securities exchange and there was no regular market for its shares. Apparently the main purpose behind Cohen's telephone call was to check into the likelihood of there being a market for the TRG shares for, during their conversation, Goldmuntz referred Cohen to a possible purchaser, Aerojet General Corporation, which, having purchased a small block of the TRG stock a short time earlier, then owned 15% of the TRG stock. Goldmuntz also told Cohen that if a sale to Aerojet could not be arranged he might be able to refer Cohen to other possible purchasers. When it became clear by June 24 that Aerojet was not interested in acquiring the TRG stock then in the deVegh portfolio Cohen followed up on Goldmuntz's suggestion and again called Goldmuntz.

It was either during the June 24 conversation or in one they had only a few days thereafter that Goldmuntz, himself, agreed to buy 500 shares of the deVegh TRG stock at $46 per share.*fn2 It appears also that during one of these conversations Cohen asked Goldmuntz to see if anyone else at TRG would be interested in acquiring some of the deVegh TRG stock, and with his letter of July 10 confirming his own agreement to buy 500 shares Goldmuntz included an order by one Fred Mayer to buy 200 shares.*fn3 The letter contained a proviso to the effect that Goldmuntz would purchase the stock "provided [it] becomes available by the end of July 1964." We have above stated that the deal between deVegh and RDI was closed on July 30 and, in turn, Goldmuntz formally completed his 500-share transaction with RDI on August 17.

During the telephone conversation of June 24 between Cohen and Goldmuntz, Cohen was also referred to one Philip Fisher, a defendant-appellee. Fisher, a San Francisco investment advisor, who did business under the trade name and style of Fisher & Co., was an acquaintance of Goldmuntz and he had a degree of familiarity with the affairs of TRG.*fn4 Shortly before June 24 Goldmuntz had been on the west coast and had been in contact with Fisher. He had learned that in late 1963 Fisher had arranged for the purchase from deVegh of about 3000 shares of TRG stock and had attempted unsuccessfully to obtain an additional 3000 shares in early 1964. Goldmuntz knew that Fisher was still interested in obtaining a substantial portion of deVegh's block of TRG and on June 24 Goldmuntz conveyed this information to Cohen.

RDI acted quickly and, two days thereafter, by telegram and confirming letter, it offered 3000 shares of the deVegh TRG stock to Fisher at $46 per share. Fisher answered, confirming the offer as to such particulars as the stated price per share and the number of shares offered, but he also informed RDI that his interest in the stock was not on his own behalf but rather on behalf of a group of Californians whom we have designated in this opinion as the "California Group." In a letter dated June 29, 1964, Fisher listed the prospective purchasers and suggested the mechanics by which the sales to the California Group might be made. He proposed that when RDI was in a position to make firm offers it make them directly to the individuals in the group. RDI acted upon Fisher's suggestion and offers were mailed off by RDI on July 14, to remain in effect until July 30. It was stated in these offers that the closing between RDI and deVegh was scheduled for July 20 and that RDI would then close the deal between it and its own purchasers on July 23.

The closing between deVegh and RDI did not take place on the twentieth as scheduled, and on that date Cohen wrote to Fisher asking that the buyers from California refrain from sending in their acceptances, because, as Cohen told Fisher, certain developments had occurred which might prevent the completion of the RDI-deVegh transaction. Actually, some members of the California Group had already accepted RDI's offer, but Fisher told RDI that RDI would not be required to honor those acceptances and that he would see to it that no further acceptances were sent in until he was notified that RDI was in a position to sell the TRG stock it was offering. Finally, on July 28, Fisher was told by Cohen that the RDI closing with deVegh was definitely taking place on July 30 and that the remaining acceptances should be sent in as soon as possible. Those acceptances were received by RDI by the end of July and the sales by RDI of the block of TRG stock to the California buyers were closed on August 3, 1964.

Cohen sought advice from Fisher about disposing of the remaining 2800 shares of TRG stock in the deVegh portfolio, and in early July, Fisher suggested that RDI engage the services of the investment banking firm of Smith, Barney & Company. Smith, Barney & Company had, in a previous year, investigated TRG, and, therefore, it appeared to Fisher that it might be in a good position to place the stock. On July 15 Cohen engaged the firm as RDI's agent and broker to sell the 2800 shares of TRG stock. By mid-August Smith, Barney & Company had arranged to place the stock with its Minneapolis customers, John M. Hollern and Conley Brooks. Hollern and Brooks managed investments for a large family group in Minnesota. A partnership, Allbrook & Co., acted as nominee to hold the investments Brooks managed. Hollybrook & Co. acted as nominee to hold the investments managed by Hollern. Hollern, Brooks and the entities they managed have been designated for the purposes of this appeal as the "Minnesota Group." The RDI's TRG stock formally passed to the Minnesota Group on August 31.

The Merger

The above summarized events which culminated in the sale by RDI of the shares of TRG stock which originally had been part of the deVegh portfolio unfolded over a period of somewhat more than two months. During that period events also occurred which led to the merger between TRG and Control Data. We turn now to that part of the story.

Plaintiff-appellant contended below that at the time it acquired and sold TRG stock the financial situation of TRG had caused that company to decide actively to seek and to pursue a merger with another company, and that "the Control Data-TRG merger [did not spring] fullblown like Minerva from the forehead of Zeus." The defendants do not deny this. Indeed, Goldmuntz's previously mentioned trip of June 22 to the west coast was to explore the possibilities of a merger between TRG and Aerojet General Corporation, the company which Goldmuntz had suggested to RDI's Cohen might be interested in acquiring more stock in TRG. Needless to say, in light of the subsequent events, a merger with Aerojet did not materialize. RDI contends, however, that the significance of merger discussions between Aerojet and TRG reflected a determination by TRG to seek a merger with any larger company, any company which could provide it with the additional financial resources it needed to enable it to carry forward production of devices based upon the ideas on which TRG had done research and development.

The evidence points strongly to the conclusion that during the first half of 1964 the possibilities of a TRG merger with some other company had been discussed by the officers of TRG and that there was sentiment among certain of those officers favoring such a course of action. Notably, Dr. Kay,*fn5 one of TRG's vice presidents, strongly took the position that TRG should be acquired by a larger company. During those discussions the representative of the Aerojet General minority stock interest on the TRG Board of Directors urged that ...

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