The opinion of the court was delivered by: MACMAHON
MacMahon, District Judge:
This is an action, brought by the Securities and Exchange Commission ("S.E.C." under Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 of the S.E.C., for an injunction permanently enjoining defendants from violations of the Act and for an order directing defendants to disgorge any profits realized by them from alleged non-public insider transactions in stock of Harvey's Stores, Inc. ("Harvey's") after they had learned of an undisclosed proposed merger between Harvey's, a manufacturer and retail seller of wearing apparel whose stock is traded on the American Stock Exchange ("AMEX"), and Ridge Manor Development Corporation ("Ridge Manor"), a privately-held Florida land company.
Immediately upon filing the complaint, the S.E.C. moved for a prelimary [preliminary] injunction. An evidentiary hearing on the motion was subsequently consolidated, pursuant to Rule 65(a) (2), Fed. R. Civ. P., with an accelerated trial on the merits and the case was tried to the court without a jury.
Defendants Unschuld, Kaplan, Frederick Robinson, Elliot Robinson, Zises, Rosenbloom and Rothberge have consented to the entry of a permanent injunction against them and orders directing disgorgement of the proceeds of their transactions in Harvey's stock during the period in question, and the court has appointed a trustee to take charge of those proceeds. The two remaining defendants, Shapiro and Berman, are contesting the action.
Defendants Shapiro and Berman are partners in a financial consulting business specializing in acquisitions and mergers. Merger negotiations between Harvey's and Ridge Manor began in October 1970, when Shapiro and Berman, acting as finders on behalf of Ridge Manor, approached David Rosenbloom, a Harvey's director and personal friend, with a merger proposal. Rosenbloom brought the matter to the attention of Harvey's board of directors, which, after some consideration, turned it down. The board's decision was communicated directly to Joel Friedland, Ridge Manor's president and major shareholder, by letter dated December 11, 1970, from William Richter, chairman of the board of Harvey's and, with Gerald Cohen, a member of the company's two-man merger and acquisition team.
Apparently undaunted by Richter's letter, Friedland again raised the subject of merger with Shapiro while the latter was vacationing in Florida in late December. As a result of their discussions, Friedland supplied Shapiro with his company's latest financial data, including uncertified year-end figures prepared by the company's accountants. Thereafter, Shapiro returned to New York and, in collaboration with Berman and an accountant, prepared a pro forma consolidated financial statement projecting the expected income of Harvey's and Ridge Manor as a merged entity.
Shapiro and Berman then arranged a January 6 luncheon meeting among themselves, Friedland and Rosenbloom to reactivate Harvey's interest in the merger, at which Shapiro showed Rosenbloom the pro forma statement. Rosenbloom reacted favorably and remarked that he thought the merger made sense and would discuss the matter with the other members of Harvey's board. After the luncheon, Shapiro and Berman made their first purchase of Harvey's stock. Shapiro purchased 500 shares at prices between $7 and $7 1/8 per share, and Berman purchased 100 shares at $7 1/4.
Berman next arranged a meeting on January 21 among himself, Shapiro, Richter and Cohen, at which Richter and Cohen presented the merger terms which would be acceptable to Harvey's and agreed, at Shapiro's and Berman's request, to state the terms in writing. Meanwhile, Shapiro, apparently on his own initiative, spoke with N. Robert Kaplan, a long-time friend and former brokerage customer, about Harvey's stock and suggested to Kaplan that he look into it.
Several days later, on January 25, Harvey's executive committee, consisting of Richter, Cohen, Rosenbloom and Andrew Heine, met and decided to send that afternoon the requested letter setting forth Harveys' terms for the proposed merger. The letter was then delivered by hand to Shapiro at the Regency Hotel in New York. It provided, in substance, that Harvey's would agree to merge with Ridge Manor on condition that all Harvey's outstanding restricted shares be registered with the S.E.C. prior to the closing, that someone purchase at least 200,000 of the restricted srares [shares] at $14.50 per share, and that employment contracts be granted to seven Harvey's executives.
Upon receipt of the letter, Shapiro telephoned Berman in Philadelphia, who, earlier that day, had made his second purchase of Harvey's stock, buying 400 shares at between $7 1/8 and $7 3/8 per share. The next day, January 26, moments after AMEX opened, Shapiro made his second purchase of Harvey's stock, buying 500 shares at between $7 7/8 and $8 per share. On the same day, Benjamin Pakula, a businessman and substantial investor in securities, unaware of the proposed merger, sold 500 shares of Harvey's common stock.
Meanwhile, on the morning of January 26, Shapiro, Berman, Richter and Cohen had met to review Harvey's letter proposal. Richter reiterated the condition that 200,000 of Harvey's restricted shares be purchased at $14.50 per share before the merger could be consummated. This provision was designed to enable holders of the restricted shares, Richter and Cohen among them, to sell, if they wished, their investment in Harvey's at the time of the merger without taking a loss. During the meeting, Shapiro telephoned Jay Zises, a business acquaintance, to ask if Zises could arrange financing for the restricted shares. The meeting ended without any further progress and, an hour later, Shapiro delivered to Zises financial information on the merger, including the pro forma statement and Ridge Manor's year-end figures.
The same afternoon, Shapiro and Berman visited Danard Unschuld, a New York stock broker and sometime business partner of Shapiro's at Unschuld's office at C. B. Richard, Ellis & Co.. Shapiro introduced Berman to Unschuld and suggested that Berman open an account with Unschuld, which he did. Berman testified that "it is possible" that at the time he may have told Unschuld about the Harvey's-Ridge Manor merger negotiations. In any event, Berman purchased, through Unschuld, 400 shares of Harvey's stock at $8 3/8 per share, his third purchase of Harvey's stock since negotiations began. The next day, January 27, Unschuld, himself, purchased 100 shares of Harvey's at $9 3/8 per share for his own account.
The next development in the negotiations was a January 28 meeting between Richter, Cohen, Heine and Rosenbloom of Harvey's, and Zises and Shapiro. The meeting was arranged by Berman, at the request of Zises, and Zises presented a proposal to meet Harvey's terms by financing the purchase of Harvey's restricted stock. The meeting ended abruptly and, according to defendants, hostilely, when Zises asked for a ninety-day exclusive agency to arrange the financing.
Throughout this period, parallel merger discussions were in progress between Harvey's and Liberty Circle Corporation, a privately-held dress manufacturer. On January 28 or 29, Representatives of Liberty Circle orally stated to Harvey's board their acceptance "of the concept of being acquired by Harvey's." Were these two companies to merge, it was estimated that Harvey's per share earnings for the year ending January 31, 1971 would increase from 29 to between $1.25 and $1.50. Defendants, although unaware of Liberty Circle by name, knew as early as mid-January 1971, that Harvey's was negotiating for the acquisition of some company other than Ridge Manor.
On the afternoon of January 28, Shapiro and Berman made their third and fourth purchases, respectively, of Harvey's stock. Shapiro purchased 500 shares at $9 1/2 to $9 3/4 per share, and Berman purchased 200 shares at $9 1/2. Unschuld also brought 200 shares at $9 3/8.
On January 28 and 29, Douglas Lipp, an accountant and office administrator and investor in securities, unaware of the proposed merger between Harvey's and Ridge Manor or of the negotiations with Libetry [Liberty] Circle, sold 400 shares of Harvey's stock.
Meanwhile, in Philadelphia, on January 28, Shapiro and Berman met with representatives of the Robinson family, including Shapiro's friend, Frederick I. Robinson, holders of a large block of restricted Harvey's stock, to persuade them to sell their holdings, as part of the merger, to Ridge Manor. The meeting represented further efforts by the finders, Shapiro and Berman, to meet Harvey's demand that 200,000 of restricted shares be bought out at $14.50 at the time of merger. The Robinsons were noncommital but insisted on equal treatment with Harvey's controlling shareholders. At the meeting, Shapiro and Berman informed Frederick Robinson that Harvey's was negotiating with Ridge Manor and supplied him with the financial details of the deal, including the pro forma earnings statement for the merged company and the Ridge Manor year-end figures.
On February 2, 1971, as the result of an inquiry by a Dow Jones reporter, an announcement on the Dow Jones tape quoted Bernard Hirsh, then president of Harvey's, as saying that he could not explain the sharp increase in the price of Harvey's stock. Hirsh, in charge of Harvey's retail sales operations, was apparently unaware of the merger negotiations. At the time of the announcement, 1:30 P.M., the stock was up $1 3/4 ...