The opinion of the court was delivered by: BAUMAN
This is an action brought pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78 j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The case was tried before this court, sitting without a jury, and what follows constitutes my findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.
Irving Gordon, the plaintiff, has been employed as a certified public accountant for over twenty years. He is by his own admission an active investor in the stock market; during 1968, the year of the events in question, for example, he had accounts at two or three brokerage firms and perhaps $100,000 invested in securities. As an accountant he prepared balance sheets and profit and loss statements, conducted audits of corporate clients and prepared tax returns.
In June, 1968, entirely by chance, Gordon met two men in the lobby of the hotel known as Caesar's Palace in Las Vegas. One was Howard Mann, an acquaintance of Gordon's for over twenty years; the other was Arnold Lord, a defendant herein, who was at that time a registered representative associated with Phillips, Appel & Walden (P.A.W.), a New York brokerage firm, also a defendant. Mann explained to Gordon that he and Lord had just returned from a trip to the plant of the defendant Elpac, Inc., a California corporation which manufactured industrial machinery. Earlier in 1968 P.A.W. had managed a private placement of Elpac stock that raised approximately $1,500,000 for the corporation. In that transaction Mann had purchased 5,000 shares of Elpac stock at $10 per share. All this came out in the conversation and Lord went on to describe this to Gordon as an "excellent deal"; he told him that the future of Elpac was promising, and that Elpac stock was currently a "very, very hot thing." Against the backdrop of the whirring wheels of Las Vegas, Gordon, who had done accounting work for Mann and who respected his expertise in the market, found his interest powerfully stimulated. He asked how he might avail himself of this apparently splendid opportunity. Lord, with a master's sure touch, informed him that he would be "putting a package together" in the near future a piece of which he might make available to Gordon. Lord added that he could make no promises because "a lot of people are clamoring for" Elpac stock. With this understanding the men parted.
Within a week of his return to New York City, Gordon was called by Mann, who said that he had asked Lord to include Gordon in the next Elpac offering. Lord himself called a day or two later, acknowledged a conversation with Mann, and told Gordon that there would soon be a meeting of those interested in purchasing Elpac stock. In a second phone call Lord said that the number of shares to become available would be 20,000, of which Gordon could purchase 4,500.
The meeting was held in late June, 1968 at the offices of Steinberg and Pokoik, a real estate concern located at 575 Madison Avenue in New York City. Present at the meeting were Stuart Steinberg, Sr., a member of the firm in whose offices the meeting was held; his son Stuart Steinberg, Jr., a stockbroker at P.A.W.; a Mr. Adlman, another P.A.W. broker; Steven Greenberg, described as a promoter for Elpac; Stanley Jacobson, an attorney representing the Steinbergs, and two gentlemen from Philadelphia whose names are presently beyond the recollection of the participants. Also present were Lord and Robert Burr, then president of Elpac
and a defendant in the instant action. With the exception of Lord, Gordon had never met any of these men before, although at the meeting he seemed to become apprised of their respective occupations.
Once assembled the group was informed that Burr wished to sell some of his Elpac stock, that he was desirous of selling 20,000 shares all at once and, consequently, would not sell any fraction thereof. Burr initially asked a price of $12 per share, but Steinberg, Jr. undertook to negotiate a lower price and appeared to have some success. It was Gordon's understanding that the purchasers were to be himself, Steinberg, Jr., Adlman, and the two men from Philadelphia and that Steinberg, Jr.'s purchase was to be approximately twice his own, in the range of 8 or 9,000 shares.
Jacobson questioned Burr persistently and set various conditions that he insisted be met prior to the consummation of the sale. First, Burr was to obtain the consent of the California Commissioner of Corporations to the sale. Second, he was to obtain a resolution of Elpac's Board of Directors consenting to the registration of Burr's stock. Third, he was to guarantee that the stock would be registered not later than April 30, 1969.
After the meeting broke up several of the participants sought an estimate of Elpac's profits in the near future. Burr stated, in the financial cliche of our times, that the corporation had "turned its corner" and would show a profit for July and for the remainder of 1968. He went on to say that the volume of orders indicated that there would also be a profit in 1969. When these statements were made, Gordon asked to see some financial statements and Burr promised to send him monthly unaudited figures from July onward.
Sometime in July, 1968, within two weeks of this meeting, Lord called Gordon, told him that the necessary documents were coming from California, and asked him to come to Lord's office at P.A.W. The two men met there on July 18, 1968. Also present during all or part of this meeting was George James, an associate of Lord's. At this time Gordon executed two documents, a "Statement of Transferee"
which was immediately notarized and a letter to Robert Burr.
When Gordon questioned the need for these documents, Lord explained that they were required in order to expedite the sale of the shares, that "everybody has already done it" and that Gordon was indeed the last to do so. Although Lord denies having made these statements, I find his denials not worthy of belief. Gordon also asked Lord when the transaction would be approved by the California Division of Corporations and when the corporation would authorize registration. Lord responded that these matters were being "worked on". He also repeated the glowing prognosis of the corporation's future that had been given at the Steinberg and Pokoik meeting. It should also be noted that before signing these documents Gordon consulted neither with Jacobson, who by common consent was to act on behalf of all of the prospective purchasers of Elpac stock, nor with Stuart Steinberg, Jr., whose office at P.A.W. was but a few feet from Lord's.
Lord called Gordon on at least two occasions in early August, 1968. On each occasion he explained that "red tape" had caused unforeseen delays in processing the various documents necessary for the transaction, but sought to assure him that everything would be resolved shortly. Gordon repeated his request for the corporate financial statements he had been promised and was told that these too would be forthcoming "soon".
On August 20, 1968, plaintiff received a telegram from Burr in California. In it, Burr stated that he agreed to sell Gordon 4,500 shares of Elpac at $10 per share provided that $45,000 was received at Burr's California bank by 1:00 P.M. the next day. The telegram also recited that the Elpac board had approved the registration of the securities. Gordon immediately called Burr and, finding Lord on another extension in his office, informed both men that he was unable to get the money to California on that day. Burr agreed that receipt of the money on the 22nd would be satisfactory. Gordon then made the necessary arrangements for his bank to wire the funds to California.
On the 22nd Lord and Burr appeared at plaintiff's office, at which time Burr altered the wording of the telegram to reflect the extension of time for payment that he had granted Gordon. Both Burr and Lord then initialed the changes. In the course of their conversation Gordon renewed his already familiar catechism of when the documents approving the sale would be forthcoming, when the monthly financial statements would be furnished, etc. He was told that everything was being taken care of, that the corporation was doing well, and that all of the other members of the group had sent their money as he had.
In the months that followed Gordon was unsuccessful in obtaining not only the documents he had so frequently requested, but also his stock certificates. During September and October he repeatedly spoke to Burr and Lord by phone and was, as usual, assured that all was well. In December, 1968, he was told by Lord that his stock certificates were available at the P.A.W. offices. When Gordon visited these offices in December or January, 1969, no one appeared to have any knowledge of the matter, nor did anyone, including George James, who shared Lord's office, inform him that Lord's employment by P.A.W. had terminated in late 1968.
In the ensuing weeks, Gordon's efforts to contact Lord met with frustration. When he called, Lord would inevitably be out, and when he left messages Lord would fail to return the calls. Gordon finally managed to reach Lord in March, 1969. Lord insisted that the stock was at P.A.W. and told him to pick it up there. On his second trip he met Steinberg, Jr. and began to discuss the Elpac stock offering. Steinberg told him that he had not purchased Elpac stock, nor, so far as he knew, had anyone else who attended the original meeting.
Gordon later placed an indignant phone call to Lord and demanded an explanation. Lord stated that explanations were impossible over the telephone but that he would receive his ...