Appeal from a judgment of the United States District Court for the Southern District of New York, Gerard L. Goettel, Judge, dismissing a complaint under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, which alleged a failure by a corporation and its officers to correct informal financial projections as well as violation of the "disclose or abstain" rule relating to insider trading. Held that appellant did not rely on the informal projections in making his purchases of stock, and that he had no standing to assert a claim of unlawful insider trading. Judgment affirmed.
Before: FEINBERG, Chief Judge, OAKES, Circuit Judge, and NEAHER, District Judge .*fn*
This appeal, dealing with securities regulation, involves both an alleged failure by a corporation and its officers to correct informal financial projections and an alleged violation of the "disclose or abstain" rul relating to insider trading. Suit was brought by appellant Robert W. Wilson, a sophisticated professional investor, who in October 1976 attended a conference with other investors and securities analysts at which one of the appellees, Fred Kornberg, president of appellee corporation Comtech Telecommunications (Comtech), responded to several questions by offering projections of Comtech's sales and earnings for the coming fiscal year. Several months later, on March 10, 1977, Comtech released its financial report for the second quarter of fiscal 1977, revealing significant declines in both sales and earnings. In the meantime, between March 7 and 10, Wilson had purchased a substantial amount of Comtech stock and, according to his calculations, ultimately lost approximately $100,000.
Wilson brought this suit against Comtech and some of its officers under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, alleging that he purchased Comtech stock on the basis of misleading information supplied by appellees. He also claimed that both Comtech's acquisition of R.F. Systems, Inc., on February 8, 1977, by an exchange of stock, and the sale of Comtech stock in late January and early February by appellee J. Preston Windus, Jr., Comtech's treasurer and chief financial officer, constituted unlawful insider trading and provided an independent basis for liability. After a trial without jury, the United States District Court for the Southern District of New York, Gerard L. Goettel, Judge, dismissed the complaint. On appeal, Wilson argues that the projections in October 1976 were material statements, that the corporation and its officers had a duty to correct these statements once it became apparent that the projections were inaccurate, that these officers acted with scienter in failing to make such corrections, and that the misleading projections were significant causal factors in his decision to purchase Comtech stock. He also reasserts his claim on unlawful insider trading.
We affirm the jugment below on the basis that Wilson did not rely on the informal financial projections in making his purchases of Comtech stock and that he had no standing to assert a claim of unlawful insider trading against appellees. We decline to reach the other issues raised in this appeal.
Appellant Wilson is a professional investor who manages his own investments as well as a small hedge fund. Appellee Comtech is a New York corporation which manufactures and sells telecommunications equipment and systems; the other appellees are officers of Comtech.*fn1 In mid-October 1976 Wilson attended the annual conference of the Western Electronics Manufacturers Association (WEMA) at which Comtech's president, Kornberg, held a series of small meetings with securities analysts, investors, and money managers to present information and answer questions about his company.*fn2 Prior to the WEMA conference, Comtech had released its reprot for fiscal 1976 which indicated record results, including a 40% increase over 1975 in sales and a 45% gain over 1975 in earnings per share. The only apparent could on the Comtech horizon was that the backlog of orders at the close of fiscal 1976 was only $9,867,665, down sharply from $23,096,292 at the end of fiscal 1975.*fn3 Believing that analysts would be greatly concerned about the backlog decline, Kornberg's presentations at the conference focused on reasons for the decline, Comtech's potential markets, and the contracts on which it was currently bidding.
After each of Kornberg's presentations, he held a uestion and answer session. Questions at several of the small meetings arose concerning Comtech's expectations for future sales and earnings. As to Kornberg's response to these questions, the district court found:
Mr. Kornberg told the security analysts in answer to questions at the WEMA Conference meetings, including the one attended by plaintiff Wilson, that Comtech sales for the first half of Comtech's fiscal year ended July 31, '77 would be flat and that the second half could be flat if Comtech won new short term contracts in the next 30 to 60 days. Moreover, if additional large contracts were awarded soon, the fourth quarter may show growth.
... Mr. Kornberg indicated at the 1976 WEMA Conference that Comtech's earnings for the first half of fiscal 1977 would be flat.
A. This was in response to questions and was not a part of Comtech's formal presentation;
B. The answers were reasonably believed by Comtech and by Mr. Kornberg to be true at the time made.
Mr. Kornberg indicated at the 1976 WEMA Conference that Comtech sales for the second half of fiscal 1977 would be flat. He also indicated that Comtech could maintain its fiscal 1976 level of ...