The opinion of the court was delivered by: TENNEY
Mallinckrodt Chemical Works ("Mallinckrodt") filed this action against Goldman, Sachs & Company ("Goldman, Sachs"), Dun & Bradstreet, Inc. ("Dun & Bradstreet") and Manufacturers Hanover Trust Company ("Manufacturers Hanover"), alleging violations of Sections 12(2) and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77l(2), 77q(a); Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); the New York Martin Act, N. Y. General Business Law § 352-c, and the common law. Jurisdiction is based on Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a); Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa; diversity of citizenship, 28 U.S.C. § 1332(a); and the doctrine of pendent jurisdiction. The action against Goldman, Sachs and Manufacturers Hanover having been settled prior to trial, the issues as against Dun & Bradstreet alone have been tried to the Court. This action is one of many instituted against Goldman, Sachs and others arising out of the sale by Goldman, Sachs of the commercial paper of Penn Central Transportation Company ("PCTC").
Against Dun & Bradstreet the complaint asserts violations of Section 10(b) of the Securities Exchange Act of 1934 (Third Cause of Action), the New York Martin Act (Fourth Cause of Action), and claims of fraud and negligence under the common law of the State of New York (First and Second Causes of Action). The acts alleged to constitute violations of law consist of alleged misrepresentations and alleged omissions.
Defendant Goldman, Sachs is a partnership engaged in the business of investment banking, purchase and sale of commercial paper, securities brokerage, and related financial activities. Its principal office is in New York City, and there are other offices located in St. Louis, Philadelphia, Chicago, Los Angeles and other cities. Plaintiff Mallinckrodt is a Missouri corporation with its principal place of business in St. Louis. At all times pertinent hereto Lester Gluesenkamp was its Assistant Treasurer and was responsible for short-term investments. Gluesenkamp held degrees in accounting, banking and finance, was a trained financial analyst, and in 1968-70 had made at least 93 purchases of commercial paper totalling over 41 million dollars on behalf of Mallinckrodt. According to Gluesenkamp, Mallinckrodt had a criterion that it would only purchase commercial paper rated "prime ".
On April 1, 1970, as a result of a debenture offering, Mallinckrodt had $5 million in surplus funds to invest in short-term money market instruments. Gluesenkamp testified that on that date he telephoned Russel Pope of Manufacturers Hanover in New York City to inquire about available investments; that Pope suggested an issue of PCTC notes and explained that PCTC was the product of a merger of the Penn Central and New York Central railroads, that it had suffered an operating loss the previous year but was nevertheless rated "prime ". Gluesenkamp did not recall any mention of PCTC's actual earnings or assets by Pope. It is not disputed that Gluesenkamp purchased $1 million of PCTC commercial paper on April 1, 1970 through Manufacturers Hanover. This was the first time he had purchased commercial paper through that bank.
Gluesenkamp testified that he spoke with Robert Harre, sales manager of the St. Louis office of Goldman, Sachs, about plaintiff's prospective funds for investment. Gluesenkamp had dealt with Goldman, Sachs since 1965, purchasing commercial paper from them on an average of three to four times per month and talking with them regularly. Gluesenkamp further testified that on April 1, 1970 he had asked Harre what securities Goldman, Sachs had available and that Harre suggested PCTC among others. Harre repeated in effect what Pope had told Gluesenkamp earlier, including the fact that PCTC was rated "prime ". Harre did not recall any mention of the rating. However, it is not disputed that on April 1 or 2, 1970 Gluesenkamp purchased $500,000 of PCTC commercial paper from Goldman, Sachs.
As will be seen hereinafter, there is a substantial basis for skepticism as to the reliance by Gluesenkamp on the "prime" rating quoted for the PCTC paper. First, however, it is necessary to place the defendant Dun & Bradstreet in the context of this litigation.
During the relevant period Dun & Bradstreet had a division called the National Credit Office ("NCO") which assigned credit ratings to its subscribers. Although defendants Manufacturers Hanover and Goldman, Sachs were subscribers, Mallinckrodt was not.
NCO assigned a "prime" credit rating to "[companies] with a net worth or capital funds (net worth plus long term subordinated loans) in excess of $25,000,000, which also meet NCO requirements and credit judgment in all other respects."
Paragraphs 36 and 46 of the complaint, which charge a violation by Dun & Bradstreet of Section 10(b) of the Securities Exchange Act of 1934, allege three specific material misrepresentations by NCO to Mallinckrodt:
"(a) The promissory notes of Penn Central were of 'prime' quality;
(b) Penn Central had a sound earnings record, a strong balance sheet and an excellent financial reputation;
(c) Penn Central was financially free of weak points, such as heavy debt position, insufficient bank lines, etc."
However, prior to June 21, 1970 (when PCTC filed a petition for reorganization pursuant to Section 77 of the Bankruptcy Act), Gluesenkamp had never written or talked to anyone at NCO and, as already noted, Mallinckrodt was not a subscriber to NCO services. No one from NCO ever told Gluesenkamp that PCTC had a sound earnings record, a strong balance sheet, an excellent financial reputation, was financially free of weak points, had no heavy debt position, or anything at all about bank lines. Prior to June 21, 1970 any information Gluesenkamp received explaining the NCO rating system, individual ratings, or the scope of its activities, was secondhand, allegedly obtained through conversations with Goldman, Sachs personnel. Harre, with whom he frequently conversed on investment matters, had no recollection of any such conversations. Gluesenkamp's lack of knowledge of NCO's ratings is evidenced by his belief that the "prime" rating required a company to have assets of $25 million, while the actual criteria is $25 million in net worth or capital funds.
There is no evidence to justify Gluesenkamp's interpretation on April 1, 1970 of the alleged representation that PCTC paper was "prime" as meaning that PCTC "had a sound earnings record, a strong balance sheet and an excellent financial reputation," or that PCTC "was financially free of weak points, such as a heavy debt position, insufficient bank lines, etc." After the purchases, Goldman, Sachs sent Gluesenkamp its green, yellow and white sheets containing financial information on PCTC, including the former's information sheet of February 18, 1970 detailing PCTC's 1969 preliminary earnings report.
Since any "reliance" by Mallinckrodt on misrepresentations or omissions by NCO rests on the testimony of Gluesenkamp, that testimony must be weighed with great care. Gluesenkamp's claim that Mallinckrodt had a criterion that it would only purchase commercial paper rated "prime" by NCO and that this was conveyed to both Manufacturers Hanover and Goldman, Sachs is not supported by documentary evidence. Moreover, this is disputed both by Pope of Manufacturers Hanover, with whom Gluesenkamp was dealing for the first time, and by Harre of Goldman, Sachs, with whom he had had past dealings. It was not until PCTC had filed for reorganization on June 21, 1970 that Gluesenkamp asked Pope for a letter stating that NCO had rated PCTC "prime" on April 1, 1970 and also wrote NCO to inquire about its rating system, even though Mallinckrodt was not a subscriber. There is no question that PCTC commercial paper was rated "prime" from August 1968 through April 1 or 2, 1970. The fact that Gluesenkamp relied on the independent judgments of Goldman, Sachs and Manufacturers Hanover, however, is not evidence of his reliance on NCO.
Through its division NCO, defendant Dun & Bradstreet typically enters into appraisal agreements with issuers of commercial paper and with institutions engaged in the sale of commercial paper, such as Goldman, Sachs, providing such subscribers with its rating and publication services. Pursuant to the subscription agreement, NCO sends a subscriber lists of companies issuing commercial paper together with the ratings assigned by NCO to those companies. In addition, a subscriber may register to receive reports and bulletins concerning any specific issuer in which it may be interested. In the main, those bulletins consist of financial information released by the issuer, which NCO passes along to its subscribers, together with news judged important by NCO and its opinions with respect to such matters.
It appears that the issuance of a "rating" was a selling point for the appraisal agreements. However, the agreements between NCO and its subscribers who sought information pertaining to various commercial paper issuers cautioned as follows:
"2. NCO shall not be responsible for any loss caused by the neglect, error or misconduct of agents, attorneys, or employees, in procuring, collecting, and communicating, or failing to communicate said information to the subscriber, nor is the correctness of the said information guaranteed in any manner, by NCO.
"3. If NCO, its agents, attorneys or employees shall furnish suggestions as to the advisability of extension of credit, it is understood that the correctness thereof is in no wise guaranteed and they shall not be liable in connection therewith."
In addition, all information NCO provided pursuant to the subscription agreement carried the following legend:
"THIS REPORT MAY NOT BE REPRODUCED IN WHOLE OR IN PART IN ANY FORM OR MANNER WHATEVER. It is furnished by NATIONAL CREDIT OFFICE in strict confidence at your request under your Subscription Agreement for your exclusive use as a basis for credit, insurance, marketing and other business decisions and for no other purpose. These prohibitions are for your own protection -- your attorney will confirm the seriousness of this warning. Apprise NATIONAL CREDIT OFFICE promptly of any question about the accuracy of information. NATIONAL CREDIT OFFICE does not guarantee the correctness of this report and shall not be liable for any loss or ...