The opinion of the court was delivered by: WARD
Robert J. Ward, District Judge.
In 1968 plaintiffs each purchased common stock of defendant Mastercraft Electronics Corporation ("Mastercraft"), which was then selling at between five and six dollars per share. This action arises from plaintiffs' allegations that the individual defendants and Mastercraft manipulated the price of the stock by disseminating to the public false and misleading information concerning the business prospects of the corporation. Plaintiffs seek to recoup their losses, basing their theory of recovery on Sections 10(b) and 27 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78aa (1971), and Securities Exchange Commission Rule 10b-5 (17 C.F.R. 240.10b-5) thereunder.
I. Mastercraft, a Delaware corporation, was formerly known as First Standard Corporation ("First Standard"), a public corporation whose stock was being traded over-the-counter. Defendant Dayon was chairman of the board of directors of Mastercraft and was its largest stockholder. Defendant Gluskin, an attorney, was the secretary of Mastercraft and was also a director.
In January, 1968, First Standard acquired the assets of Mastercraft Electronics Corporation, a private familyowned New York corporation ("Mastercraft, N.Y."). First Standard then changed its name to Mastercraft.
In order to raise capital for Mastercraft, defendants issued over 200,000 shares of common stock of Mastercraft to its employees, who were formerly employees of Mastercraft, N.Y., and who had each owned a small percentage of the private corporation.
Although this stock was not registered with the Securities and Exchange Commission as required by Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e (1971), and it bore a legend restricting its resale without compliance with that Act, Gluskin wrote a letter advising Mastercraft's transfer agent that the stock could be reissued to the employees without the legend, and it was so reissued. The employees endorsed the reissued stock certificates in blank and surrendered control of them to Gluskin, who delivered them to broker dealers. A substantial number of these unregistered shares were then sold to the public.
The proceeds of these sales were placed in a bank account in Gluskin's name. The employee record holders received an amount sufficient to pay the taxes assessed against them on the sale. Gluskin kept a portion of the money himself, and the rest of the proceeds were turned over to Mastercraft.
At trial Gluskin asserted that the employees were at all times the beneficial owners of the stock and that the sales were exempted from the Securities Act's requirement of registration. Nevertheless, in connection with these transactions Gluskin and Dayon were indicted in January, 1971 (71 Cr. 57). Subsequently, Gluskin pleaded guilty to an information, and before Judge Frankel on December 23, 1971, the following colloquy transpired:
The Court: In other words, the new company was taking this money and then using it for its corporate purposes, and would it be fair to say that the naming of these receiving and shipping people was a fake?
The Court: It wasn't really their stock?
The Defendant: That's right.
In addition, Dayon pleaded guilty to Count One of the indictment.
At the time of the taking of his plea on October 1, 1971, he stated: "I knew that by giving stock to these nominees that I was doing wrong."
In order to facilitate the sale of the unregistered Mastercraft stock defendants prepared and sent a letter to shareholders ("the shareholder letter").
This letter was misleading and was sent for the express purpose of "making a market" for ...