Before FRIENDLY, Chief Judge, and OAKES and TIMBERS, Circuit Judges.
This is a striking example of a case that never should have been claimed for jury trial, as plaintiffs' counsel did. That, coupled with what appears to have been a lack of preparation in addition to visibly inept trial conduct on the part of plaintiffs' counsel, is about all that distinguishes this from what otherwise would be an uncomplicated appeal.
We cannot emphasize too strongly our disapproval of the dubious judgment of counsel in claiming for jury trial a case involving such issues as "scienter" and "reliance" under the antifraud provisions of the federal securities laws. It is one thing to try such cases before our district judges who have become knowledgeable and experienced in dealing with such difficult problems. But it is quite another thing to expect a jury to comprehend such issues, even assuming an utterly perfect charge.
Plaintiffs, representing a class of purchasers of shares in a limited partnership, appeal from a judgment entered on a jury verdict in the Southern District of New York, Lloyd F. MacMahon, District Judge, in favor of defendants Franchard Corporation, Louis A. Siegel and Seymour Young on the issue of liability in a class action brought to recover damages for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), of Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1972), and of Section 352 of the N.Y. General Business Law (McKinney 1968).
The chief issue raised on appeal is the propriety of the trial judge's charge to the jury. Subordinate issues are raised with respect to the judge's conduct of the trial.
EVENTS LEADING TO INSTANT LITIGATION
Louis Glickman is a well known real estate syndicator. He was responsible for the creation of the many Glickman enterprises and was founder and first president of the Association of Real Estate Syndicators, Inc. Although not named as a defendant in the instant action, he was involved in the syndicate which is at the center of this action.
Franchard Corporation (Franchard) is a New York corporation. It was organized in 1960 for the purpose of taking over the ownership and operation of many properties previously owned and operated by entities in the Glickman organization, as well as real estate syndicates formed by the Glickman organization. It was known as the Glickman Corporation until 1963. The takeover by Franchard was accomplished by the various Glickman enterprises exchanging their holdings and assets for stock in Franchard. Additional Franchard stock was sold to the public. Glickman himself became a principal stockholder, president, and director of Franchard.
Wedgwood House Associates (Associates) is a limited partnership syndicate organized under New York law to acquire ownership of two New York City properties - Wedgwood House, a residential apartment building on Fifth Avenue, and land on 34th Street upon which was to be built Warren House, another apartment building. Associates also was to build Warren House.
Glickman Corporation of Nevada (Venada) is a Nevada corporation wholly owned by Glickman. It became the net lessee of both Wedgwood and Warren Houses.
Louis A. Siegel and Seymour Young, together with Glickman, were the general partners in Associates. Siegel and Young also were senior vice president and vice president, respectively, directors and shareholders of Franchard. They also were officers and directors of Venada.
In October 1960, Glickman conceived the idea of syndicating the purchase of Wedgwood House and Warren House. At that time Wedgwood House had almost been completed. The construction of Warren House had not yet begun, the land on which it was to be built not even having been cleared of existing structures. Venada entered into a contract for the purchase of Wedgwood House and the land on which Warren House was to be built. A limited partnership, Associates, was then formed. See N.Y. Partnership Law, Art. 8, § 90 et seq. (McKinney 1948). It consisted of three general partners - Glickman, Siegel, and Young - and an original limited partner, Joseph E. Low.*fn1 Glickman subscribed to 17 general partnership units, Siegel and Young each subscribed to 1 1/2 general partnership units, and Low subscribed to one limited partnership unit. Each unit represented a capital contribution of $5,000. Thus, the total capital contribution of Glickman, Siegel, Young and Low was $105,000.
In order to raise the additional $6,645,000 necessary to assume the Venada purchase contract, to construct the buildings, and to pay all expenses connected with the acquisition and formation of Associates itself, Associates offered to the public units and half-units of limited partnership interests at $5,000 and $2,500 per unit, respectively.*fn2 The general partners, together with various experts such as architects, engineers, and attorneys, prepared literature to promote the sale of the limited partnership interests in Associates. A flyer and a brochure served as the selling documents from October 1960 to December 31, 1960.
On January 1, 1961, Section 352-e of the New York General Business Law became effective. Section 352-e required that, before an offering concerning the syndication of real estate could be made to the public, a "prospectus" or "offering statement" must be filed with the state Attorney General containing specified information. N.Y.Gen.Bus. Law § 352-e(1)(a), (b) (McKinney 1968). It also required that all advertising in connection with the offering be consistent with the information set forth in the prospectus and that all advertising literature be filed with the Attorney General prior to dissemination. Section 352-e(1)(c), (5). To comply with this provision, Associates prepared and filed a new prospectus. This new prospectus and a new flyer served as the selling documents from January 1, 1961 until February 1961, by which time all the units had been sold.
The selling documents represented, among other matters, that it was "anticipated" that distributions to partners would amount to an 11% per annum return on their investment;*fn3 that the two apartment houses were to be operated by Venada as net lessee and not by Associates; that Venada's net lease required it to pay to Associates an amount sufficient to cover the mortgages and taxes on the two properties, plus sufficient funds to make distributions to the partners at the anticipated rate; that Franchard had been engaged to maintain Associates' books and records and to employ independent certified accountants; and that Glickman, Siegel, and Young were officers and directors of Franchard and Venada. The selling documents also set forth the income to be received by Venada from rental of the Associates' buildings, the proposed expenses of operation, and the expected profit. The projections were made "on the basis of the rentals provided in leases already signed by tenants of Wedgwood House, the prevailing rental rates and expenses in substantially comparable buildings, the knowledge and experience of the management and engineering staff of Glickman Corporation of Nevada and other appropriate investigation and analysis." Brochure dated September 12, 1960 at 9; Prospectus dated January 1, 1961 at 11.
Beginning January 10, 1961, distributions were paid to the partners of Associates at the rate of 11% per annum on the original capital contributed. Distributions on this basis were made monthly throughout 1961 and 1962. In January 1963, however, Venada defaulted in its obligations under the net lease. In March 1963 it was evicted.
Venada's default under the lease can be traced to events beginning in October 1960. At that time, Glickman began secretely 'borrowing" Franchard's funds to cover on a short term basis his personal obligations as well as those of Venada. From October 31, 1960 to December 1960, Venada defaulted in rent payments due to three other Glickman syndications in amount of $296,329. These funds were "borrowed" from Franchard. Franchard then was repaid and a new cycle of borrowing began. Venada also would have defaulted on its first rent payment to Associates, but was able to borrow the necessary funds from Franchard.
This "borrowing" continued undiscovered until May 1962. At that time Glickman became unable to cover up the loans because, among other reasons, his holding in various enterprises declined substantially in value. On May 3 and 4, a meeting of Franchard's board of directors was called to discuss Glickman's questionable use of Franchard's funds. Stringent limitations were imposed on Glickman to insure that he would not engage in any further "borrowing" of Franchard's funds.*fn4 When it was discovered in December 1962, however, that Glickman had violated his commitments to the board, he was forced to resign as an officer and director of Franchard. He thereafter also resigned as a general partner in Associates.
Venada's financial condition worsened so that in February 1963 it filed a petition for an arrangement under Chapter 11 of the Bankruptcy Act. Shortly thereafter it was evicted ...