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LEXSEE 22 A.L.R.3D 793
American Law Reports 3d
© 1965-1978 by The Lawyers Co-operative Publishing Company; Bancroft-Whitney
Company
© 2010 West Group
Annotation
The ALR databases are made current by the weekly addition of relevant new cases as available from the publisher.
Corporate insider's nondisclosure of information to seller or purchaser of corporation's
stock as manipulative or deceptive device prohibited by § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b))
C. T. Drechsler.
22 A.L.R.3d 793
JURISDICTIONAL TABLE OF STATUTES AND CASES
INDEX OF TERMS
TABLE OF REFERENCES
ARTICLE OUTLINE
ARTICLE:
[*I]
Introductory material
[*1]
[*1a]
Prefatory matters
Scope
This annotation collects the cases which deal with the question whether the nondisclosuren1 by a corporate insidern2
of information to the seller or purchasern3 of stock of the corporationn4 constitutes a "manipulative or deceptive device or contrivance" in contravention of Rule 10b-5n5 as promulgated by the Securities and Exchange Commission
under the authority of § 10(b) of the Securities Exchange Act of 1934.n6 For the sake of brevity, the statute and rule
here under consideration are referred to throughout the annotation as the statute, and the Rule, respectively.
It is assumed for the purposes of this annotation that the person charged with nondisclosure of information actually was
an insider; that he actually failed to disclose some information; and that the person claiming to have been defrauded was
a purchaser or seller of a security within the scope of the statute, the present discussion being strictly limited to the
question as to what kind of nondisclosure violates Rule 10b-5. Other elements of an action under the Rule, such as necessity of reliance upon the nondisclosure, present distinct problems with which this annotation is not concerned.
NOTE: The term "insiders" has been extended from its traditional meaning of directors, officers, and controlling shareholders to include a variety of additional persons who because of their special relationship have access to information
not available to those with whom they are dealing. See 2 A.L.R. Fed. 274.
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22 A.L.R.3d 793, *
[*1b]
Related matters
Duty to disclose material facts to stock purchaser, 80 A.L.R.3d 13
Controlling stockholder's duty to investigate intent and motive of purchaser before selling stock, 77 A.L.R.3d 1005
Dominant shareholder's accountability to minority for profit, bonus, or the like, received on sale of stock to outsiders, 38
A.L.R.3d 738
Duty and liability of closely held corporation, its directors, officers, or majority stockholders, in acquiring stock of minority shareholder, 7 A.L.R.3d 500
Securities Exchange Act provision regarding liability of directors, officers, and principal stockholders for profits on
short-swing speculation in corporation's stock, 40 A.L.R.2d 1346
Civil action by private person under § 10(b) of Securities Exchange Act of (1934 (15 U.S.C.A. § 78j(b)), 37 A.L.R.2d
649
Personal civil liability of corporate officers and directors in case of sale of bonds or stock in violation of statutory requirements, 144 A.L.R. 1356
Market manipulation of securities, 115 A.L.R. 271
Blue Sky Laws, 87 A.L.R. 42
Duty of officer or director of corporation toward one from whom he purchases stock, 84 A.L.R. 615
Liability Under Federal Securities Laws of Sellers of Subprime Mortgage Loans, 43 A.L.R. Fed. 2d 47
Recipients of Corporate Information Other than Directors, Officers, Substantial Shareholders, or Associated Professionals as Subject to Liability for Trading on Material, Nonpublic Information, Sometimes Referred to as "Insider Trading,"
Within § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b)) -- and SEC Rule 10b-5 Promulgated
Thereunder -- Making Unlawful Corporate Insider's Nondisclosure or Manipulation of Information to Seller or Purchaser of Corporation's Stock, 14 A.L.R. Fed. 2d 401
Attorneys, Accountants, Consultants, or the Like As "Insiders" Within § 10(b) of the Securities Exchange Act of 1934
(15 U.S.C.A. § 78j(b)) -- and SEC Rule 10b-5 Promulgated Thereunder -- Making Unlawful Corporate Insider's Use of
Manipulative or Deceptive Device in Connection With Purchase or Sale of Securities, 191 A.L.R. Fed. 623
Persons liable for false registration statement under § 11 of Securities Act of 1933 (15 U.S.C.A. § 77k), 114 A.L.R. Fed.
551
Who may be liable under "misappropriation theory" of imposing duty to disclose or abstain from trading under § 10(b)
of Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b)) and § Rule 10b-5 (17 CFR § 240.10b-5), 114 A.L.R. Fed.
323
Construction of "best-price rule" of Williams Act Amendment (§ 14(d)(7)) to Securities Exchange Act of 1934 (15
U.S.C.A. § 78n(d)(7)) requiring makers of tender offer to offer best price to all securities holders, 100 A.L.R. Fed. 444
When is it unnecessary to show direct reliance on misrepresentation or omission in civil securities fraud action under §
10(b) of Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b)) and SEC Rule 10b-5 (17 CFR § 240.10b-5), 93 A.L.R.
Fed. 444
Applicable state limitations period in actions under § 10(b) of Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b))
and SEC Rule 10b-5 (17 CRF § 240.10b-5), 72 A.L.R. Fed. 763
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"Purchase or sale" requirement as to defendant or victim in criminal prosecutions for violation of § 10(b) of Securities
Exchange Act (15 U.S.C.A. § 78j(b)) and SEC Rule 10b-5, 66 A.L.R. Fed. 848
Exercise of stock appreciation rights, or sale of stock options to issuer as purchase or sale of securities within meaning
of short-swing profits provisions of sec. 16(b) of Securities Exchange Act of 1934 (15 U.S.C.A. § 78p(b)), 61 A.L.R.
Fed. 263
Who is "forced seller" for purposes of maintenance of civil action under sec. 10(b) of Securities Exchange Act of 1934
(15 U.S.C.A. § 78j(b) and SEC Rule 10b-5, 59 A.L.R. Fed. 10
Who is "issuer" or "owner of any security of the issuer" for purposes of enforcing short-swing profits provisions of §
16(b) of the Securities Exchange Act of 1964 (15 U.S.C.A. § 78p(b)), 51 A.L.R. Fed. 785
What constitutes recklessness sufficient to show necessary element of scienter in civil action for damages under sec.
10(b) of Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b)) and Rule 10b-5 of the Securities and Exchange Commission, 49 A.L.R. Fed. 392
Civil liability of employer for violation by employee of § 10(b) of Securities Exchange Act of 1934 (15 U.S.C.A. §
78j(b)) or of Rule 10b-5 of Securities and Exchange Commission (17 CRF § 240.10b-5), 32 A.L.R. Fed. 714
Measure and elements of damages recoverable from insider in private civil action for violation of § 10(b) of Securities
Exchange Act (15 U.S.C.A. § 78j(b)) or SEC Rule 10b-5, 29 A.L.R. Fed. 646
In pari delicto as defense in private action for violation of Securities Act or Securities Exchange Act, 26 A.L.R. Fed. 682
Construction and application of § 14 of Securities Act of 1933 (15 U.S.C.A. § 77n) and § 29(a) of Securities Exchange
Act of 1934 (15 U.S.C.A. § 78cc(a)), voiding waiver of compliance with statutory provisions or rules or regulations, 26
A.L.R. Fed. 495
Proof of improper motive or lack of good faith, and possibility of misuse of inside information, as prerequisites to recovery of short-swing profits under § 16(b) of Securities Exchange Act of 1934 (15 U.S.C.A. § 78p(b)), 22 A.L.R. Fed.
281
Element of scienter as affecting action to enjoin violation of federal securities laws, 21 A.L.R. Fed. 582
Element of scienter as affecting criminal prosecutions for violation of Federal Securities Law, 20 A.L.R. Fed. 227
Who is person "controlling or controlled by" issuer or under "direct or indirect common control" with issuer, so as to be
considered issuer for purpose of defining underwriter under § 2(11) of Securities Act of 1933 (15 U.S.C.A. § 77b(11)), 9
A.L.R. Fed. 639
Construction of 1968 amendments to § 14 of Securities Exchange Act of 1934, dealing with tender offers (15 U.S.C.A. §
78n(d-f)), 6 A.L.R. Fed. 906
What is a "purchase or sale" of securities within the antifraud provisions of § 10(b) of the Securities Exchange Act of
1934 (15 U.S.C.A. § 78j(b)) and of SEC Rule 10b-5 promulgated thereunder, 4 A.L.R. Fed. 1048
Sufficiency, under § 14 of Securities Exchange Act of 1934 (15 U.S.C.A. § 78n) and implementing regulations, of proxy
or information statement incident to merger of corporation, 4 A.L.R. Fed. 1021
Fraud or deceit as "in connection with" purchase or sale of securities within meaning of Securities Exchange Act of
1934 § 10 (b) (15 U.S.C.A. § 78j(b)) and SEC Rule 10b-5, 3 A.L.R. Fed. 819
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Acquisition by corporate insider of corporation's stock as manipulative or deceptive device prohibited by § 10(b) of the
Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b)), 3 A.L.R. Fed. 294
Who is an "insider" within § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b)) -- and SEC Rule
10b-5 promulgated thereunder -- making unlawful corporate insider's nondisclosure of information to seller or purchaser
of corporation's stock, 2 A.L.R. Fed. 274
"Due diligence" defenses under 15 US Code § 77k(b) dealing with false statements made in registration statements, 2
A.L.R. Fed. 180
Recovery of punitive damages by buyers of securities in civil action based on § 17(a) of the Securities Act of 1933 [15
USC § 77q(a)], prohibiting the sale of securities through fraudulent means or misleading statements, 1 A.L.R. Fed. 1007
Civil liability under § 10B and Rule 10B-5: A suggestion for replacing the doctrine of privity. 74 Yale LJ 658
Inside information: Growing pains for the development of Federal corporation law under Rule 10b-5. 65 Col L Rev
1361
Insider liability under Securities Exchange Act Rule 10b-5: The Cady, Roberts Doctrine. 30 U of Chicago L Rev 121
Ruder, Pitfalls in the Development of a Federal Law of Corporations by Implication Through Rule 10b-5, 1964. 59
Northwestern U L Rev 185
Rule 10b-5 -- insider transactions by brokers. 16 U of Miami L Rev 474
SEC enforcement of the Rule 10b-5 duty to disclose material information -- remedies and the Texas Gulf Sulphur Case.
65 Mich L Rev 944
Securities & Exchange Com. Rule X-10B-5: Guided Missile or Flying Saucer? 32 Tex L Rev 197
Securities Regulation: Reliance on material misrepresentation or nondisclosure essential to sustain 10b-5 action. 50
Minn L Rev 759
[*2]
Text of statute and Rule
Section 10(b) of the Securities Exchange Act of 1934 provides that "[i]t shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any
national securities exchange -- (b) To use or employ, in connection with the purchase or sale of any security registered
on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."n7
Rule 10b-5, promulgated by the Securities and Exchange Commission pursuant to § 10(b), provides that "[i]t shall be
unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of
the mails, or of any facility of any national securities exchange,
"(a) To employ any device, scheme, or artifice to defraud.
"(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made, not misleading, or
"(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any
person, in connection with the purchase or sale of any security."n8
[*3]
Summary
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The statute and the Rule promulgated thereundern9 impose upon an insider the duty to speak and to make full disclosure in those circumstances in which silence would constitute fraud.n10
While the courts do not speak in terms of nondisclosure as a manipulative or deceptive device as such, they are agreed
that a corporate insider's nondisclosure in connection with the purchase or sale of corporate stock violates § 10(b) and
Rule 10b-5 promulgated by the Securities and Exchange Commission under § 10 only if the nondisclosure relates to
material facts.n11 However, it has been held that nondisclosure does not violate Rule 10b-5 when the only statement
which could be rendered misleading by the omission was not made until after the sale of the stock.n12
In formulating a general test, the courts have held that a fact is material, and therefore that its nondisclosure will violate
§ 10(b) and Rule 10b-5, if it would affect the value of the stock, or if it would affect the judgment of the other party to
the transaction,n13 or, as it is phrased sometimes, would affect the judgment of a reasonable person under the circumstances.n14
Whether the nondisclosed facts are material by these standards depends upon the circumstances of each case,n15 and
there are a number of specific facts in which the courts were called upon to decide whether they were material or not
within the meaning of the statute.n16 These cases seem to permit the general conclusion that mere expectations or
hopes are not material facts, even if they materialize later,n17 but that nondisclosure of events which had occurred
already or the happening of which had been definitely decided upon is a material fact if it can be shown to have had an
effect on the decision of the other party to the transaction acting as a reasonable person.
[*II]
General principles
[*4]
Duty of disclosure in general
In a number of cases the courts have discussed the duty of an insider to make disclosures generally and have pointed out
the reasons for such duty.
FEDERAL COURTS
Securities & Exchange Com. v Texas Gulf Sulfur Co. (CA2 NY) 401 F2d 833, 2 ALR Fed 190, cert den 394 US 976, 22
L Ed 2d 756, 89 S Ct 1454
Popkin v Bishop (CA2 NY) 464 F2d 714 (recognizing rule)
Jackson v Oppenheim (DC NY) 411 F Supp 659
Reube v Pharmacodynamics, Inc. (DC Pa) 348 F Supp 900
Baumel v Rosen (DC Md) 283 F Supp 128
American General Ins. Co. v Equitable General Corp. (1980, ED Va) 493 F Supp 721
Kuehnert v Texstar Corp. (DC Tex) 286 F Supp 340
Hutto v Texas Income Properties Corp. (DC Tex) 416 F Supp 478
Lessner v Casey (1988, ED Mich) 681 F Supp 415, CCH Fed Secur L Rep P 93932
Britt v Cyril Bath Co. (DC Ohio) 290 F Supp 934 (recognizing rule), revd on other gnds (CA6) 417 F2d 433
Dasho v Susquehanna Corp. (CA7 Ill) 461 F2d 11, cert den 408 US 925, 33 L Ed 2d 336, 92 S Ct 2496, 2498
Myzel v Fields (CA8 Minn) 386 F2d 718, cert den 390 US 951, 19 L Ed 2d 1143, 88 S Ct 1043
Kidwell ex rel. Penfold v Meikle (1979, CA9 Idaho) 597 F2d 1273
Securities & Exchange Com. v Murphy (1980, CA9) 626 F2d 633, CCH Fed Secur L Rep P 97588
SEC v Platt (1983, WD Okla) 565 F Supp 1244, CCH Fed Secur L Rep P 99497
Re Equity Funding Corp. of America Secur. Litigation (DC Ca) 416 F Supp 161 (by implication)
Speaking of the duty to disclose, the court in Securities & Exchange Com. v Texas Gulf Sulphur Co. (1966, DC NY) 258
F Supp 262, pointed out that it is obvious that any director, officer, or employee of a corporation will know more about
his company or have more specialized knowledge as to at least some phase of its business than an outside stockholder
can have or expect to have, and that often this specialized knowledge may whet the speculative interest of the insider
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and may lead him to purchase stock. The court then made a distinction by pointing out that an insider is under no obligation to give the ordinary investor the benefit of his superior financial analysis, but that he violates the statute if he
comes into possession of material information which he uses to his own advantage by purchasing stock prior to public
disclosure.
The general proposition that anyone buying with inside information securities of a corporation has automatically violated Rule 10b-5 was expressly rejected in Schoenbaum v Firstbrook (1967, DC NY) 268 F Supp 385, the court stating
that it regarded such a principle as contrary to both normal business practices and the logic of the rule's admonition. The
court then went on by explaining that the fraud involved in buying or selling on the basis of inside information is based
first on the user's relationship with the corporation being such as to allow him access to information intended only for a
corporate purpose and not for his personal benefit, and secondly upon the inherent unfairness involved where a party
takes advantage of such information knowing it is unavailable to those with whom he is dealing.
Judge Leahy in Speed v Transamerica Corp. (1951, DC Del) 99 F Supp 808, supp op 100 F Supp 461, petition for an
order to reopen case den 100 F Supp 463, stated the applicable general principles in terms frequently quoted in later
decisions: "It is unlawful for an insider, such as a majority stockholder, to purchase the stock of minority stockholders
without disclosing material facts affecting the value of the stock, known to the majority stockholder by virtue of his
inside position but not known to the selling minority stockholders, which information would have affected the judgment
of the sellers. The duty of disclosure stems from the necessity of preventing a corporate insider from utilizing his position to take unfair advantage of the uninformed minority stockholders. It is an attempt to provide some degree of equalization of bargaining position in order that the minority may exercise an informed judgment in any such transaction."
The court added that one of the primary purposes of the statute was to outlaw the use of inside information by corporate
officers and principal stockholders for their own financial advantage to the detriment of uninformed public security
holders.
And in Connelly v Balkwill (1959, DC Ohio) 174 F Supp 49, affd (CA6) 279 F2d 685, the court stated that it was undoubtedly true that when read as a whole, Rule 10b-5 imposes the duty to speak and to make a full disclosure of material facts in those circumstances where silence would constitute fraud.
After stating that in regard to the legal criteria that should be applied, the court would look to the statute and consider it
in the light of the implemental interpretation given it by Rule 10b-5, and to prior decisions that have dealt with the statute and the Rule, the court in Kohler v Kohler Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR3d 486, added that the statute
was meant to cover more than omitting material facts which ordinarily are badges of fraud and deceit, and that the statute was intended to create a form of fiduciary relationship between so-called corporate "insiders" and "outsiders" with
whom they deal in company securities which places upon the insider duties more exacting than mere abstention from
what generally is thought to be fraudulent practices. As to the question of what the limits of those duties were, the court
said that it was satisfied that the answer could not be confined to an abstract rule, but must be fashioned case by case as
particular facts dictated.
CUMULATIVE CASES
Cases:
Under Rule 10b-5, action for civil damages may not be maintained in absence of allegation of intent to deceive, manipulate, or defraud on defendant's part; some element of scienter is necessary, and liability cannot be imposed for negligent conduct alone. Ernst & Ernst v Hochfelder (1976) 425 US 185, 47 L Ed 2d 668, 96 S Ct 1375, reh den 425 US 986,
48 L Ed 2d 811, 96 S Ct 2194 (not within scope on its facts; disapproving Kohler v Kohler (CA7 Wis) 319 F2d 634, 7
ALR3d 486, supra, to extent it holds negligence alone sufficient for civil liability).
Where a person, in dealing with corporation in a security transaction, denied corporation's directors access to material
information known to him, corporation is disabled from availing itself of informed judgment regarding merits of transaction, and private right of action recognized under Rule 10b-5 is available as remedy for corporate disability. Superintendent of Ins. of State of N. Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 92 S. Ct. 165, 30 L. Ed. 2d 128, Fed. Sec. L. Rep.
(CCH) P 93262 (1971).
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Experienced investor, who purchased stock one month after corporation acquired another company by exchanging its
stock for stock of acquired company, did not trade contemporaneously with insiders and did not suffer disadvantage of
trading with someone who had superior access to information and therefore had no standing to sue, alleging corporate
president's making inaccurate projections of sales and earnings, on basis of "disclose or abstain" rule. Wilson v Comtech
Telecommunications Corp. (1981, CA2 NY) 648 F2d 88.
Posteffective developments which materially alter picture presented in registration statement must be brought to attention of public investors. Effect of antifraud provisions of Act was to require prospectus to reflect any posteffective
changes necessary to keep prospectus from being misleading in any material respect. Securities & Exchange Com. v
Manor Nursing Centers, Inc. (CA2 NY) 458 F2d 1082.
Where securities were subject to trading dominated by insider, there was obligation to disclose material information to
investing public, and this duty gave rise to liability under Act to third persons who, as result of deception practiced upon
public, were prevented from entering into securities transactions with members of public. Crane Co. v Westinghouse Air
Brake Co. (CA2 NY) 419 F2d 787, cert den 400 US 822, 27 L Ed 2d 50, 91 S Ct 41.
Corporate officers were not obligated to volunteer information about negotiations, which they presumed to be
non-public, concerning corporation's sale of technical information and Japanese patents to Japanese company, and Japanese company's purchase of one million shares of corporation's common stock. Defendant officers' statements during
period of negotiations that they were unable to attribute unusually heavy trading in corporation's stock to any corporate
developments were not "untrue" or "misleading" under Rule 106-5, since undisclosed events cannot affect market, and
no rumors or even knowledge of rumors could be attributed to defendants. Zuckerman v Harnischfeger Corp. (1984, SD
NY) 591 F Supp 112, CCH Fed Secur L Rep P 91470.
Corporation had no duty to disclose favorable fourth quarter reports of another corporation and to wait for market to
react to disclosure before announcing tender offer for all shares of that corporation's stock, since such a rule would impose significant burdens on courts and insiders, and since such drastic change from established disclosure requirements
called for legislative, not judicial, action. Billard v Rockwell International Corp. (1981, SD NY) 526 F Supp 218, CCH
Fed Secur L Rep P 98358, affd (CA2 NY) 683 F2d 51, CCH Fed Secur L Rep P 98733.
In private transactions wherein 42 percent of defendant's stock was purchased, defendants' duty to disclose ran only to
those persons actually involved in the transactions; defendants had no duty to disclose to plaintiffs or to public generally
merely because they possessed nonpublic information. Stromfeld v Great Atlantic & Pacific Tea Co. (1980, SD NY) 496
F Supp 1084, affd without op (CA2 NY) 646 F2d 563.
Statute required that one in possession of material inside information about company must either have disclosed it to
investing public before trading in securities in that company, or, if he could not or chose not to disclose information, he
must have abstained from trading in securities concerned while such inside information remained undisclosed. Securities & Exchange Com. v Shapiro (DC NY) 349 F Supp 46.
Policy of full disclosure by securities dealer who recommends transaction imposes duty upon him to have adequate basis for recommendation and to disclose to his customer, toward whom he acts in position of fiduciary, all facts known or
reasonably ascertainable pertaining to customer's purchase. There is also strong policy against taking advantage of "inside information" regarding corporation's affairs, as basis for private gain realized through trading in securities of that
corporation. Wohl v Blair & Co. (DC NY) 50 FRD 89.
As corporate directors, defendants were insiders with obligations to disclose known facts, unavailable to stockholders,
which defendants reasonably should have known would be important to them. Contemplated plan to purchase control
treasury stock would be material fact in stockholders' decision to "buy, sell or hold." Tully v Mott Supermarkets, Inc.
(DC NJ) 337 F Supp 834.
Where vice president of corporation was persuaded by corporate president to resign and to take position with second
company engaged in constructing homes as part of project with which president was directly and first corporation indirectly involved, result of resignation being sale of vice president's stock back to corporation in accordance with prior
agreement, president's statements relating to possible future cooperation between two companies, even though improba-
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ble in light of problems being experienced by second company in meeting FHA and VA building requirements, did not
contain nondisclosures violative of Rule, since vice president was an insider and thus charged with knowledge of the
alleged nondisclosed matters. Harnett v Ryan Homes, Inc. (DC PA) 360 F Supp 878.
Private plaintiff bringing action for nondisclosure must prove scienter -- either intent to deceive or recklessness; summary judgment for defendant corporation and corporate officers was proper in action by former stockholder, where
there was no evidence of scheme to withhold information in order to depress stock price prior to announcement of share
buy-back and all information allegedly withheld was in fact amply disclosed. Gert v Elgin Nat. Industries, Inc. (1985,
CA7 Ill) 773 F2d 154, CCH Fed Secur L Rep P 92308, 3 FR Serv 3d 881.
Nondisclosure may constitute violation of Rule when part of plan of manipulation or scheme to defraud. Financial Industrial Fund, Inc. v McDonnell Douglas Corp. (DC Colo) 315 F Supp 42.
While federal securities legislation has substituted full disclosure approach for that of caveat emptor, full disclosure is
only required where law imposes a duty to speak, and such duty exists only in circumstances which indicate investment
or fiduciary relationship between seller and buyer, or knowledge, actual or implied, on part of seller that unless he
speaks, buyer may act to his detriment. Branham v. Material Systems Corp., 354 F. Supp. 1048, Fed. Sec. L. Rep.
(CCH) P 93988 (S.D. Fla. 1973).
Insider could not purchase shares of stock without disclosing material facts to public. Davis v. Pennzoil Co., 438 Pa.
194, 264 A.2d 597, Fed. Sec. L. Rep. (CCH) P 92646 (1970).
[*5]
Rule that nondisclosure must relate to material facts to constitute a prohibited device
The following cases support the proposition that a corporate insider's nondisclosure in connection with the purchase or
sale of the corporation's stock is prohibited by § 10(b) of the Securities Exchange Act of 1934, and by Rule 10b-5,
only if it concerns a material fact.
Securities & Exchange Com. v Texas Gulf Sulfur Co. (CA2 NY) 401 F2d 833, 2 ALR Fed 190, cert den 394 US 976, 22
L Ed 2d 756, 89 S Ct 1454
Crane Co. v Westinghouse Air Brake Co. (CA2 NY) 419 F2d 787, cert den 400 US 822, 27 L Ed 2d 50, 91 S Ct 41
Dura-Built Corp. v Chase Manhattan Corp. (1981, SD NY) 89 FRD 87
Bolton v Gramlich (1982, SD NY) 540 F Supp 822, CCH Fed Secur L Rep P 98438, later proceeding on other grounds
Terrydale Liquidating Trust v Gramlich (1982, SD NY) 549 F Supp 529, CCH Fed Secur L Rep P 98764
Securities & Exchange Com. v Shattuck Denn Mining Corp. (DC NY) 297 F Supp 470
Shapiro v Merril Lynch, Pierce, Fenner & Smith, Inc. (DC NY) 353 F Supp 264
Healey v Catalyst Recovery of Pennsylvania, Inc. (1980, CA3 Pa) 616 F2d 641
Shamrock Associates v Moraga Corp. (1983, DC Del) 557 F Supp 198, CCH Fed Secur L Rep P 99116
Staffin v Greenberg (1981, ED Pa) 509 F Supp 825, CCH Fed Secur L Rep P 97895, affd (CA3 Pa) 672 F2d 1196,
CCH Fed Secur L Rep P 98465
Sims v Faestel (1986, ED Pa) 638 F Supp 1281, CCH Fed Secur L Rep P 92870, affd without op (CA3 Pa) 813 F2d
399
Steiner v Equimark Corp (1983, WD Pa) 96 FRD 603, CCH Fed Secur L Rep P 99097, 37 FR Serv 2d 210
Reube v Pharmacodynamics, Inc. (DC Pa) 348 F Supp 900
Baumel v Rosen (DC Md) 283 F Supp 128
Securities & Exchange Com. v Blatt (1978, CA5) 583 F2d 1325
Kuehnert v Texstar Corp. (DC Tex) 286 F Supp 340
Sundstrand Corp. v Sun Chemical Corp. (1977, CA7 Ill) 553 F2d 1033
Wright v Heizer Corp. (1977, CA7 Ill) 560 F2d 236
Dasho v Susquehanna Corp. (CA7 Ill) 461 F2d 11, cert den 408 US 925, 33 L Ed 2d 336, 92 S Ct 2496, 2498
Myzel v Fields (CA8 Minn) 386 F2d 718, cert den 390 US 951, 19 L Ed 2d 1143, 88 S Ct 1043
United States v Margala (1981, CA9 Cal) 662 F2d 622, CCH Fed Secur L Rep P 98363
Securities & Exchange Com. v Carriba Air, Inc. (1982, CA11) 681 F2d 1318, CCH Fed Secur L Rep P 98766
SEC v Platt (1983, WD Okla) 565 F Supp 1244, CCH Fed Secur L Rep P 99497
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FIRST CIRCUIT
Rogen v Ilikon Corp. (1966, CA1 Mass) 361 F2d 260
SECOND CIRCUIT
Ruckle v Roto American Corp. (1964, CA2 NY) 339 F2d 24
List v Fashion Park, Inc. (1965, CA2 NY) 340 F2d 457, 22 ALR3d 782, cert den 382 US 811, 15 L Ed 2d 60, 86 S Ct 23,
reh den 382 US 933, 15 L Ed 2d 344, 86 S Ct 305
Hafner v Forest Laboratories, Inc. (1965, CA2 NY) 345 F2d 167
Cochran v Channing Corp. (1962, DC NY) 211 F Supp 239
Schine v Schine (1966, DC NY) 250 F Supp 822
Securities & Exchange Com. v Texas Gulf Sulphur Co. (1966, DC NY) 258 F Supp 262
Securities & Exchange Com. v Great American Industries, Inc. (1966, DC NY) 259 F Supp 99
Ross v Licht (1967, DC NY) 263 F Supp 395
Globus, Inc. v Jaroff (1967, DC NY) 266 F Supp 524 (supporting general rule)
Schoenbaum v Firstbrook (1967, DC NY) 268 F Supp 385 (recognizing rule)
Weitzen v Kearns (1967, DC NY) 271 F Supp 616
THIRD CIRCUIT
Speed v Transamerica Corp (1951, DC Del) 99 F Supp 808, supp op 100 F Supp 461, petition for an order to reopen
case den 100 F Supp 463
Kardon v National Gypsum Co. (1947, DC Pa) 73 F Supp 798
FIFTH CIRCUIT
Reed v Riddle Airlines (1959, CA5 Fla) 266 F2d 314
SIXTH CIRCUIT
Connelly v Balkwill (1959, DC Ohio) 174 F Supp 49, affd (CA6) 279 F2d 685
SEVENTH CIRCUIT
Kohler v Kohler Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR 3d 486
NINTH CIRCUIT
Royal Air Properties, Inc. v Smith (1962, CA9 Wash) 312 F2d 210
Stating that Rule 10b-5 requires that a corporate insider purchasing stock from an outsider must disclose any material
fact known to him by reason of his inside position but not known to the outsider, the court in Ross v Licht (1967, DC
NY) 263 F Supp 395, held that if there is a failure to make such a disclosure, and if the outsider would have been influenced not to make the sale had there been disclosure, then the insider is liable to his seller.
Thus, in Kardon v National Gypsum Co. (1947, DC Pa) 73 F Supp 798, it was held that under any reasonably liberal
construction, Rule 10b-5 applied to directors and officers who, in purchasing the stock of the corporation from others,
Page 10
22 A.L.R.3d 793, *
failed to disclose a fact coming to their knowledge by reason of their position, which would materially affect the judgment of the other party to the transaction.
The duty of disclosure of material facts placed upon corporate insiders by § 78j(b) and Rule 10b-5 has been held in
Kohler v Kohler Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR3d 486, to be necessarily limited to an exercise of fair and
honest business practices under all the circumstances existing at the time of the transaction. This means, according to
the court, that corporate insiders must scrupulously disclose to outsiders those material facts about a corporation's business which in reasonable and objective contemplation might affect the value of the corporation's stock or securities and
which the insiders should reasonably believe are unknown to the outsiders but that it does not mean that corporate insiders are required to search out details that presumably would not influence the person's judgment with whom they are
dealing. The court then summarized the applicable general principle by saying: "The statute and the rule basically call
for fair play and abstention on the part of the corporate insider from taking unfair advantage of the uninformed outsider
or minority stockholder. Such a standard requires the insider to exercise reasonable and due diligence not only in ascertaining what is material as of the time of the transaction, but in disclosing fully those material facts about which the outsider is presumably uninformed and which would, in reasonable anticipation, affect his judgment."
Since the duty of disclosure and the question of materiality relate to the time of the transaction, nondisclosure does not
violate Rule 10b-5 when the only statement made which could be rendered misleading by the nondisclosure was not
made until after the sale.
Nondisclosure of substantial corporate losses during the 6-month period prior to the sale of stock by the insiders, and
nondisclosure of the fact that the corporation's inventory had become obsolete and substantially less valuable, were held
not to violate Rule 10b-5, in Joseph v Farnsworth Radio & Television Corp. (1951, DC NY) 99 F Supp 701, affd (CA2)
198 F2d 883, the court granting motions to dismiss for failure to state a claim upon which relief could be granted. The
defendants sold stock on the exchange and 12 days later issued a financial statement for the corporation in which no
reference to the omitted facts was made, and the court, granting the motion to dismiss the complaint of plaintiffs, who
had purchased stock later, declared that defendants, at the time they sold their stock, did not violate the Rule by omitting
to state a material fact "necessary in order to make the statements made, in the light of the circumstances under which
they were made, not misleading," because the statement was not made until 12 days after the last sale by any of the defendants.
CUMULATIVE CASES
Cases:
See Ernst & Ernst v Hochfelder (1976) 425 US 185, 47 L Ed 2d 668, 96 S Ct 1375, reh den 425 US 986, 48 L Ed 2d
811, 96 S Ct 2194, disapproving Kohler v Kohler (CA7 Wis) 319 F2d 634, 7 ALR3d 486, supra, § 4, to extent it holds
negligence alone sufficient for civil liability under Rule 10b-5).
Failure to disclose corporation's financial turn-around in first quarter of fiscal 1962 prior to authorizing sale of investment letter shares was omission to state material fact. Pappas v Moss (DC NJ) 303 F Supp 1257.
See Rorer International Cosmetics, Ltd. v Halpern (1980, ED Pa) 502 F Supp 137, § 17.
See Re Der (1989, BC DC Md) 113 BR 218, later proceeding (BC DC Md) 2 Bankr Ct Rep 294, § 17.
See Issen v GSC Enterprises, Inc. (1981, ND Ill) 508 F Supp 1278, CCH Fed Secur L Rep P 97941, later proceeding
(ND Ill) 508 F Supp 1298, CCH Fed Secur L Rep P 98030, 31 FR Serv 2d 1099, later proceeding (ND Ill) 522 F Supp
390, CCH Fed Secur L Rep P 98325, 33 FR Serv 2d 317, later proceeding (ND Ill) 538 F Supp 745, CCH Fed Secur L
Rep P 98756, 35 FR Serv 2d 283, § 6.
In derivative action brought by minority shareholders against senior corporate officers and directors arising out of redemption offering made by corporation for its own shares of stock, no action would lie under Rule 10b-5 where mere
nondisclosure of directors' motive for transaction was not 10b-5 violation, in that underlying material facts were disclosed. Gieringer v Silverman (1982, ED Wis) 539 F Supp 498, CCH Fed Secur L Rep P 98732.
Page 11
22 A.L.R.3d 793, *
See Alna Capital Associates v Wagner (1982, SD Fla) 532 F Supp 591, CCH Fed Secur L Rep P 99037, § 6.
See Securities & Exchange Com. v National Student Marketing Corp. (1978, DC Dist Col) 457 F Supp 682, § 17.
[*6]
General tests of materiality
Since the nondisclosure of information by an insider constitutes a manipulative or deceptive device prohibited by the
statute only if it relates to a material fact,n18 the question has frequently arisen whether or not a particular fact which
the insider failed to divulge was material.
In a number of cases the courts have laid down certain general tests as to what constitutes a material fact within the
meaning of the Rule, although it has been recognized that each case depends on the particular facts involved.n19 The
test most frequently applied broadly states that a fact is material if it would affect or influence the judgment of the other
party to the transaction.
The standard test of materiality to be applied in cases of nondisclosure under the statute was described in Rogen v Ilikon
Corp. (1966, CA1 Mass) 361 F2d 260, as whether a reasonable man would attach importance to the fact not disclosed in
determining his choice of action in the transaction in question and which in reasonable and objective contemplation
might affect the value of the corporation's stock or securities.
Occasionally reference is made to the reaction of a "reasonable" man. Thus it was held that Rule 10b-5 precludes failure
by the buyer to disclose the full truth so as to put the seller in an equal bargaining position with the buyer, in List v
Fashion Park, Inc. (1965, CA2 NY) 340 F2d 457, 22 ALR3d 782, cert den 382 US 811, 15 L Ed 2d 60, 86 S Ct 23, reh
den 382 US 933, 15 L Ed 2d 344, 86 S Ct 305, the court adding that the basic test of materiality is whether a reasonable
man would attach importance to the fact not disclosed in determining his choice of action in the transaction in question.
Citing List v Fashion Park, Inc. (1965, CA2 NY) 340 F2d 457, 22 ALR 3d 782, cert den 382 US 811, 15 L. Ed. 2d 60, 86
S Ct 23, reh den 382 US 933, 15 L. Ed. 2d 344, 86 S Ct 305, supra, and various other cases as authority, the court in
Securities & Exchange Com. v Texas Gulf Sulphur Co. (1966, DC NY) 258 F Supp 262, defined material information as
information "which in reasonable and objective contemplation might affect the value of the corporation's stock or securities." It emphasized this definition by adding that it is information which, if known, would clearly affect "investment
judgment," or which directly bears on the intrinsic value of a company's stock.
A limitation upon the test of materiality was advanced in Securities & Exchange Com. v Texas Gulf Sulphur Co. (1966,
DC NY) 258 F Supp 262, where the court, after rejecting the contention that material information should be limited to
information which is translatable into earnings, stated that the test of materiality must necessarily be a conservative one,
since many actions under the statute are brought on the basis of hindsight. The court then referred to a statement by a
former member of the staff of the Commissionn20 to the effect that it is appropriate that management's duty of disclosure under Rule 10b-5 be limited to those situations which are essentially extraordinary in nature and which are reasonably certain to have a substantial effect on the market price of the security if disclosed, since a more rigorous standard
would impose an unreasonable burden on management in its securities trading, and since, in addition, such a standard
could involve the courts to an unrealistic degree in the determination of whether certain types of information might have
an impact on the market. The statement concludes with the following sentence: "A finer web might well prevent some
management trading that represents an abuse, but only at the cost of possibly exposing management to meritless litigation in many other cases."
It is probably merely a use of different words when the reference to a "reasonable man" is replaced by a reference to "a
buyer in the market." Thus a material fact was defined in Securities & Exchange Com. v Great American Industries,
Inc. (1966, DC NY) 259 F Supp 99, as such a fact which, concealed or omitted, influenced or should have influenced the
issuer in its decision to issue the stock in question, or would under the circumstances influence a buyer in the market.
Citing List v Fashion Park, Inc. (F) supra, as authority, the court in Ross v Licht (1967, DC NY) 263 F Supp 395, defined a material fact as one "to which a reasonable man would attach importance in determining his choice whether to
make the sale or not."
Page 12
22 A.L.R.3d 793, *
Allegations to the effect that the directors of a corporation failed to disclose the net earnings of the company for the last
quarter, which earnings were substantially in excess of earnings for the similar period of the previous fiscal year, that
the net income for the entire year would be almost double that of the previous year, that the company would declare a
100 percent stock dividend and would increase the cash dividend payable on its common stock, were held in Weitzen v
Kearns (1967, DC NY) 271 F Supp 616, to be sufficient to render it impossible for the court to grant a motion for a
summary judgment in favor of the defendants, since, in the light most favorable to plaintiffs, the court could not conclude that the allegedly undisclosed information was not material.
Thus, it was stated in Speed v Transamerica Corp. (1951, DC Del) 99 F Supp 808, supp op 100 F Supp 461, petition for
an order to reopen case den 100 F Supp 463, that the provisions of the Rule required an insider to disclose any and all
material facts which would be likely to influence persons receiving an offer, in their decision to accept or decline the
offer made.
In some cases a material fact is defined more narrowly as one which would affect the value of the stock. Thus, it was
held that the president and general manager of the corporation owed a duty to the minority stockholders from whom he
was purchasing stock to disclose information affecting the value of the stock which had come to his knowledge as an
"insider," in Reed v Riddle Airlines (1959, CA5 Fla) 266 F2d 314, affirming the finding of the District Court that the
minority stockholder knew that there was a market for the stock, with the result that the nondisclosure was of a fact already known to the stockholder.
There is some expression to the effect that what is a material fact for one person may not be a material fact to another
person. Thus, in the leading case of Kohler v Kohler Co. (1963, CA 7 Wis) 319 F2d 634, 7 ALR3d 486, the court said
that the duty of disclosure of material facts placed upon corporate insiders by § 78j(b) and Rule 10b-5 is necessarily
limited to an exercise of fair and honest business practices under all the circumstances existing at the time of the transaction, and honesty and fairness permit consideration of the actual and normal business acumen of the seller, the court
here noting that the company was dealing with a person who had had many years of intimate acquaintance with the affairs of the corporation, who was closely related to many principals of the corporation, who had extrinsic sources of
sound business advice, and who himself was promoting a speedy sale, and could fairly deal with him in a manner that
might not be fair if plaintiff had been a novice to stock transactions.
CUMULATIVE CASES
Cases:
See Ernst & Ernst v Hochfelder (1976) 425 US 185, 47 L Ed 2d 668, 96 S Ct 1375, reh den 425 US 986, 48 L Ed 2d
811, 96 S Ct 2194, disapproving Kohler v Kohler (CA7 Wis) 319 F2d 634, 7 ALR3d 486, supra, § 4, to extent it holds
negligence alone sufficient for civil liability under Rule 10b-5.
Under circumstances of case involving primarily failure to disclose, positive proof of reliance was not prerequisite to
recovery. All that is necessary is that facts withheld be material in sense that reasonable investor may have considered
them important in making decision. Affiliated Ute Citizens v U. S., 406 US 128, 31 L Ed 2d 741, 92 S Ct 1456, CCH
Fed Secur L Rep P 93443, reh den 407 US 916, 32 L Ed 2d 692, 92 S Ct 2430, reh den 408 US 931, 33 L Ed 2d 345, 92
S Ct 2478.
While stock purchaser's complaint otherwise failed to provide adequate factual substantiation for its accusation that
corporation, directors and accountants created inflated market price for corporation's common stock by disseminating
false and misleading information and omitting material information, purchaser's claim based upon making of $
311,000,000 in undisclosed, allegedly wrongful payments by corporate defendant's foreign subsidiaries stated valid
cause of action for nondisclosure liability under Rule 10b-5. Decker v Massey-Ferguson, Ltd. (1982, CA2 NY) 681 F2d
111, CCH Fed Secur L Rep P 98697, 34 FR Serv 2d 195.
Basic test of materiality was whether reasonable man would attach importance in determining choice of action in transaction, and this encompassed any fact which in reasonable and objective contemplation might affect value of corpora-
Page 13
22 A.L.R.3d 793, *
tion's stock or securities. Securities & Exchange Com. v Texas Gulf Sulfur Co. (CA2 NY) 401 F2d 833, 2 ALR Fed 190,
cert den 394 US 976, 22 L Ed 2d 756, 89 S Ct 1454.
Derivative action brought by defeated tender offerors against trustees of real estate investment trust for failure to disclose material facts with regard to trust's sale of buildings and termination of trust stated cause of action under §
10(b)5, where some trustees did not reveal personal interest or information concerning value of corporate buildings to
other trustees; materiality was determined by assessing whether there was substantial likelihood that reasonable, disinterested director or trustee would have found missing information of actual significance in his deliberations or if he
would have seen it as significantly altering "total mix" of information made available. Bolton v Gramlich (1982, SD NY)
540 F Supp 822, CCH Fed Secur L Rep P 98438, later proceeding on other gnds (SD NY) 549 F Supp 529, CCH Fed
Secur L Rep P 98764.
Material information simply consists of facts which may affect desire of reasonable investors to buy, sell, or hold company's securities; this includes any facts which might affect value of company's stock, such as information about its
earnings and distributions or about events that might affect its future. Securities & Exchange Com. v Shapiro (DC NY)
349 F Supp 46.
Test of materiality is whether reasonable man would attach importance to misrepresentations or omissions in determining choice of action in transaction in question. Colonial Realty Corp. v Brunswick Corp. (DC NY) 337 F Supp 546.
Where corporate officer was admittedly aware of facts that there would be more than few shareholders, his omission to
tell plaintiff of number of shareholders, or to correct impression that another person had given him that there would be
only six or eight investors, was material in sense that reasonable man would have attached importance to it in determining his course of action. Moerman v Zipco, Inc. (DC NY) 302 F Supp 439.
Material information encompassed those facts which in reasonable and objective contemplation might affect value of
corporation's stock or securities. Securities & Exchange Com. v Shattuck Denn Mining Corp. (DC NY) 297 F Supp 470.
Complaint by minority shareholder alleging material omission by defendant in connection with merger that deprived
him of state law injunctive remedy stated cause of action under Rule 10b-5; for such information to be material, plaintiff
had burden of proving reasonable probability of ultimate success in state court injunctive relief action had correct information been received. Healey v Catalyst Recovery of Pennsylvania, Inc. (1980, CA3 Pa) 616 F2d 641.
Test was satisfied whenever device was employed of sort that would cause unreasonable investors to rely thereon and in
connection therewith, so relying, cause them to purchase or sell corporation's securities. Gottlieb v Sandia American
Corp. (CA3 Pa) 452 F2d 510, cert den 404 US 938, 30 L Ed 2d 250, 92 S Ct 274.
See Tully v Mott Supermarkets, Inc. (DC NJ) 337 F Supp 834, § 4.
See Staffin v Greenberg (1981, ED Pa) 509 F Supp 825, CCH Fed Secur L Rep P 97895, affd (CA3 Pa) 672 F2d 1196,
CCH Fed Secur L Rep P 98465, § 10[b].
Information must be such as would have influenced uninformed party's decision with respect to transaction, and information equally accessible to both parties, or which other party in fact knows or should have known, need not be disclosed; mere speculations or opinions as to present value of future earnings did not constitute violations, and mere expectations or hopes were not material facts even if they materialized later, but nondisclosure of events which had occurred already or happening of which had been definitely decided upon was material fact which could be shown to have
had effect on decision of other party to transaction, acting as reasonable person. Rochez Bros., Inc. v Rhoades (1973,
WD Pa) 353 F Supp 795, CCH Fed Secur L Rep P 93932, vacated on other gnds (CA3 Pa) 491 F2d 402, CCH Fed Secur L Rep P 94339, CCH Fed Secur L Rep P 94386, on remand (WD Pa) 390 F Supp 470, affd, in part (CA3 Pa) 527
F2d 880, CCH Fed Secur Rep P 95313, 38 ALR Fed 709 and remanded, in part (CA3 Pa) 527 F2d 891, CCH Fed Secur
L Rep P 95368, cert den 425 US 993, 48 L Ed 2d 817, 96 S Ct 2205.
Failure to disclose facts that reasonably could be expected to influence decision to invest in corporation was material.
Reube v Pharmacodynamics Inc. (DC Pa) 348 F Supp 900.
Page 14
22 A.L.R.3d 793, *
Factor which might influence determination of materiality and related element of reliance was background and experience of noninsider. Insiders must disclose facts coming to their knowledge which would materially affect judgment of
other party to transaction -- a test largely objective as to what was material, and partly subjective as to what would influence seller's decision. Baumel v Rosen (DC Md) 283 F Supp 128.
See Re Der (1989, BC DC Md) 113 BR 218, later proceeding (BC DC Md) 2 Bankr Ct Rep 294, § 17.
See Securities & Exchange Com. v Blatt (1978, CA5) 583 F2d 1325, § 17.
Where insider failed to make disclosure of information by which plaintiff would have been influenced to act differently
than he did without the benefit of such disclosure, insider could not hide behind defense that plaintiff did not appear to
want information; law would presume that plaintiff would have wanted to know information if he had inkling of its existence. Law did not presume that information which was omitted was material, question being one for trier of fact, but
defendant in case like present one had affirmative duty to disclose information to which he had ready access and his
plaintiff did not. Stier v Smith (CA5 Tex) 473 F2d 1205.
See Starkman v Marathon Oil Co. (1985, CA6 Ohio) 772 F2d 231, CCH Fed Secur L Rep P 92290, cert den 475 US
1015, 89 L Ed 2d 310, 106 S Ct 1195, reh den 486 US 1018, 100 L Ed 2d 221, 108 S Ct 1759 § 10[b].
See Arber v Essex Wire Corp. (1974, CA6 Ohio) 490 F2d 414, CCH Fed Secur L Rep p 94357, 18 FR Serv 2d 847, cert
den 419 US 830, 42 L Ed 2d 56, 95 S Ct 53, § 17.
See Dungan v Colt Industries, Inc. (1982, ND Ill) 532 F Supp 832, CCH Fed Secur L Rep P 98663, § 10[a].
In action by minority stockholders who were being "frozen out" in a "going private" merger, it was held that actionable
nondisclosure must be of information that would enable shareholder to make an "informed investment decision." Failure
to inform shareholders of existence of insiders' agreement to pay premium price for certain shares of stock, or of value
of a certain corporate asset, satisfied this test; such matters as loans to insiders without adequate security, breach of fiduciary duty, insiders' motives for engaging in various transactions, and potential negative effect on corporation of various transactions were held not to be matters nondisclosure of which violated Rule 10b-5. Issen v GSC Enterprises, Inc.
(1981, ND Ill) 508 F Supp 1278, CCH Fed Secur L Rep P 97941, later proceeding (ND Ill) 508 F Supp 1298, CCH Fed
Secur L Rep P 98030, 31 FR Serv 2d 1099, later proceeding (ND Ill) 522 F Supp 390, CCH Fed Secur L Rep P 98325,
33 FR Serv 2d 317, later proceeding (ND Ill) 538 F Supp 745, CCH Fed Secur L Rep P 98756, 35 FR Serv 2d 283.
With regard to nondisclosures, issue becomes whether reasonable investor, in light of facts existing at time of nondisclosure and in exercise of due care, would have been entitled to receive full disclosure from party charged, and would
have acted differently had alleged nondisclosure not occurred. If plaintiff satisfies this step, it then becomes necessary to
determine whether misrepresentation or nondisclosure was made with scienter or from lack of due diligence. City Nat.
Bank v Vanderboom (CA8 Ark) 422 F2d 221, cert den 399 US 905, 26 L Ed 2d 560, 90 S Ct 2196.
Misstatement of fact or nondisclosure is considered material if it concerns something that reasonable man would consider important in deciding what he should do in particular transaction. Concept of materiality encompassed those facts
which in reasonable or objective contemplation might affect value of corporation's stock or securities. Lane v Midwest
Bancshares Corp. (DC Ark) 337 F Supp 1200.
See United States v Margala (1981, CA9 Cal) 662 F2d 622, CCH Fed Secur L Rep P 98363, § 17.
Misrepresented or omitted facts became material when, considering complaining parties as reasonable investors, disclosure of undisclosed facts or candid revelation of misleading facts showed that their trading judgment had been effected. Mitchell v Texas Gulf Sulphur Co. (1971, CA10 Utah) 446 F2d 90.
Basic test of materiality is whether reasonable person would attach importance to information given in determining his
choice of action in transaction in question; under this test, information given by director of corporation to be sold, who
Page 15
22 A.L.R.3d 793, *
was also chairman of proposed buyer of corporation, concerning corporation's liquidation, was clearly material. S.E.C.
v. Platt, 565 F. Supp. 1244, Fed. Sec. L. Rep. (CCH) P 99497 (W.D. Okla. 1983).
Test, under which materiality was determined by whether reasonable man would attach importance to fact misrepresented or omitted in formulating his course of action, was satisfied in case of prospectus issued by company attempting
to create new commuter airline, where prospectus failed to clearly establish that some individuals involved with company had been involved in string of airline failures during 1970's, that company was formed only one month after bankruptcy of airline that previously served area, and that company intended to fly upon same routes as bankrupt airline.
S.E.C. v. Carriba Air, Inc., 681 F.2d 1318, Fed. Sec. L. Rep. (CCH) P 98766, 10 Fed. R. Evid. Serv. 1636 (11th Cir.
1982).
Non-disclosure by president of company of fact that patent application for company's major product had initially been
rejected on grounds that product was not novel, of fact that significant number of company's distributorship agreements
had been signed during immediately preceding year and that many of these had already been cancelled, and of fact that
company was involved in expensive antitrust law suit which highlighted antitrust problems with company's distribution,
were material under securities law, since reasonable investor would have considered each of them important in deciding
whether to invest. Alna Capital Associates v. Wagner, 532 F. Supp. 591, Blue Sky L. Rep. (CCH) P 71799, Fed. Sec. L.
Rep. (CCH) P 99037 (S.D. Fla. 1982), order aff'd in part, 758 F.2d 562 (11th Cir. 1985).
See Securities and Exchange Commission v. National Student Marketing Corp., 457 F. Supp. 682, Fed. Sec. L. Rep.
(CCH) P 96540 (D.D.C. 1978), § 17.
Basic test of materiality was whether reasonable man would attach importance to fact not disclosed in determining his
choice of action, and whether in reasonable and objective contemplation fact might affect value of stock. Davis v.
Pennzoil Co., 438 Pa. 194, 264 A.2d 597, Fed. Sec. L. Rep. (CCH) P 92646 (1970).
[*III]
[*7]
Application of principles to particular undisclosed facts
Demand for repayment of loan
Failure to inform a prospective purchaser of stock in a luxury apartment corporation that the individual soliciting the
stock purchase had resigned as a director of the corporation, and that the corporation had received a letter demanding
payment of a loan made to it by another who had refused to accept stock in the corporation in payment thereof, was held
in Royal Air Properties, Inc. v Smith (1962, CA9 Wash) 312 F2d 210, to be omission of material facts and a prima facie
violation of § 10(b) and Rule 10b-5.
CUMULATIVE CASES
Cases:
See IIT v Vencap, Ltd. (DC NY) 411 F Supp 1094, § 17.
See United States v Koenig (DC NY) 388 F Supp 670, § 16.
[*8]
Proposed sale price of stock
The proposed sale to private persons of corporate stock for $ 300 per share and to the public at $ 600 per share where,
prior to this decision by the corporation, plaintiff stockholders had offered to sell to defendant insiders their shares at $
120 per share, were held in Ross v Licht (1967, DC NY) 263 F Supp 395, to be material facts the nondisclosure of which
by defendants violated Rule 10b-5.
CUMULATIVE CASES
Cases:
Page 16
22 A.L.R.3d 793, *
Minority shareholder challenging fairness of merger between winery and distilling corporations on ground two winery
directors who were also officers of distilling company intentionally deceived plaintiff by failing to disclose latter had
authorized purchase of winery stock at price per share higher than actually paid could advance claims under both Rule
10b-5 and breach of fiduciary duty under state law. Jones v National Distillers & Chemical Corp. (1979, SD NY) 484 F
Supp 679.
It was not materially misleading for defendant corporation to fail to tell stockholders of plaintiff corporation that at one
point defendant corporation had been willing to sell its stock in plaintiff corporation to plaintiff corporation at $ 42 per
share and that plaintiff corporation had been willing to pay that price for it, where tender offer disclosed that market
price of stock had gone as high as $ 42 at one point. Electronic Specialty Co. v International Controls Corp. (DC NY)
296 F Supp 462.
Although controlling stockholder may be free to bargain for and receive premium in sale of controlling stock so long as
sale did not result in injury to corporation, issue in present case was whether controlling stockholder could invite some
stockholders, but not others, to participate in sale of controlling stock at premium, and question whether claim was stated under act was analogous to question whether trading by insider on basis of material undisclosed information violated
act. In both situations, insiders "tippees" or "associates" might have used their position to take unfair advantage of other
stockholders, and whether or not there was claim under act would depend on facts developed at trial. Ferraioli v Cantor
(DC NY) 281 F Supp 354, denying defendant's motion for summary judgment.
Company officials made knowing false and misleading statements in selling securities, in violation of § 10(b) of Securities Exchange Act and § 17(a)of Securities Act, by failing to disclose that investors' funds were used for company's
operations, despite statements in offering memoranda that all funds raised would be spent on oil and gas drilling, where
officials were aware that stated drilling costs were double anticipated costs. Securities Exchange Act of 1934, § 2, 15
U.S.C.A. § 78b; Securities Act of 1933, § 17, 15 U.S.C.A. § 77q. S.E.C. v. United Energy Partners, Inc., 88 Fed. Appx.
744, Fed. Sec. L. Rep. (CCH) P 92690 (5th Cir. 2004).
Even though shareholder in disappearing corporation had not yet sold or exchanged his shares pursuant to merger, a
case at least cognizable under § 10(b) was made out by allegation that individual defendants were under duty to consider other factors beside book value of stock in setting exchange rate for stock in merger, and that their failure to do so
constituted breach of fiduciary duty, and by further allegation that statute was violated by failure to notify plaintiff of
these other factors. Nanfito v Tekseed Hybrid Co. (DC Neb) 341 F Supp 234.
In action brought by purchaser of stock against president of corporate holder of same stock, action would not lie, pursuant to § 10(b) where, although corporate holder held 14 percent of outstanding shares of merger prospect and had
publicly announced that he did not consider $ 15 offer per share to be acceptable, such statement was not misleading to
plaintiff, who bought shares of stock after defendant's public announcement but before announcement by target company and its prospective purchaser that merger offer had been withdrawn, inasmuch as defendant was not controlling
shareholder and did not even have representation on board of directors of target company and it was not contended that
he had access to any non-public corporate information, and inasmuch as defendant's holdings of stock was public
knowledge as was his desire to liquidate them; therefore, any conflict of interest which defendant's statements may have
raised was apparent to investors. Feldman v Simkins Industries, Inc. (1982, CA9 Cal) 679 F2d 1299, CCH Fed Secur L
Rep P 98745.
[*9]
Planned liquidation of subsidiary
Increased earnings and increased value of the inventory of the company whose stock defendant corporation was purchasing, in light of the existence of the defendant's plan to merge, dissolve, or liquidate that company and thereby capture for itself the enhanced value of the purchased shares in the form of liquidating dividends which came to defendant,
were held in Speed v Transamerica Corp. (1951, DC Del) 99 F Supp 808, supp op 100 F Supp 461, petition for an order
to reopen case den 100 F Supp 463, to be material facts the nondisclosure of which violated Rule 10b-5. The court said
that the nondisclosure of the inventory profit -- considered abstractly -- may have had little significance, since the asset
or real value of the company to be acquired would not be a significant factor in the absence of a plan to liquidate, but
that where such intention existed, the matter became of vital interest to the minority stockholders, and that the conclu-
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22 A.L.R.3d 793, *
sion became inescapable that the defendant corporation had decided to capture the inventory profit by liquidation and
that it purposely failed to make the disclosures for the express purpose of inducing the minority stockholders to sell their
stock at what appeared to be a good price, but which, in fact, was not.
CUMULATIVE CASES
Cases:
See United States v Koenig (DC NY) 388 F Supp 670, § 16.
Where defendant corporation had definite plans to merge defendant corporation and plaintiff corporation on
share-for-share basis, defendant corporation's minimal disclosure that it would "give consideration" to merger did not
comply with act and regulations. Electronic Specialty Co. v International Controls Corp. (DC NY) 296 F Supp 462.
Failure to disclose, in tender offer materials, availability of appraisal rights in proposed merger, an alternative which
would be of considerable importance in decision of any shareholder who believed, rightly or wrongly, that his shares
were worth more than $ 17.50 per share, was a material omission where terms of tender materials would lead a reasonable shareholder to infer wrongly that only two alternatives open to him were to tender his shares for $ 17.50 per share,
or to receive same amount at time of merger; in other words, shareholder appeared to be faced with choice of "$ 17.50
now or $ 17.50 later," and it was therefore necessary to disclose existence of third choice, the possibility of appraisal, in
order to make statements made in tender materials not misleading. Valente v Pepsico, Inc. (1978, DC Del) 454 F Supp
1228.
See Issen v GSC Enterprises, Inc. (1981, ND Ill) 508 F Supp 1278, CCH Fed Secur L Rep P 97941, later proceeding
(ND Ill) 508 F Supp 1298, CCH Fed Secur L Rep P 98030, 31 FR Serv 2d 1099, later proceeding (ND Ill) 522 F Supp
390, CCH Fed Secur L Rep P 98325, 33 FR Serv 2d 317, later proceeding (ND Ill) 538 F Supp 745, CCH Fed Secur L
Rep P 98756, 35 FR Serv 2d 283 § 6.
[*10]
[*10a]
Planned sale of corporation or corporate assets
Held material fact
In Kardon v National Gypsum Co. (1947, DC Pa) 73 F Supp 798, all the stock of the corporation was owned by the two
plaintiffs and the two defendants. The plaintiffs sold their stock to the defendants and later charged a violation of Rule
10b-5 when they learned that the defendants had had a prior agreement with a third party to sell the bulk of the corporate assets. Holding that the nondisclosure of the agreement constituted a violation of the Rule, the court said that under
any reasonably liberal construction, the provisions of the Rule applied to directors and officers who, in purchasing the
stock of the corporation from others, failed to disclose a fact "common to their knowledge by reason of their position,
which would materially affect the judgment of the other party to the transaction."
It was held that a complaint alleging that the directors who purchased the minority shareholders' stock in the company
violated § 10(b) and Rule 10b-5 by failing to disclose a transaction to sell the company's underlying assets to a group,
which transaction subsequently fell through, and a transaction with another corporation to sell the company's assets,
which transaction was concluded 8 hours before plaintiffs delivered their stock to the defendants, stated a claim upon
which relief could be granted, in Schine v Schine (1966, DC NY) 250 F Supp 822, the court denying a motion to dismiss.
CUMULATIVE CASES
Cases:
Under the antifraud provisions of § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b)) and Rule
10b-5 of the Securities and Exchange Commission (17 CFR § 240.10b-5), in the context of preliminary corporate merger discussions, information which would otherwise be considered significant to the trading decisions of a reasonable
investor is not excluded from the definition of materiality, merely because an agreement-in-principle as to price and
structure has not yet been reached between the would-be merger partners, for (1) disclosure, and not paternalistic with-
Page 18
22 A.L.R.3d 793, *
holding of accurate information, is the policy chosen and expressed by Congress; (2) although pre-agreement discussions may be tentative, the role of the materiality requirement is not to attribute to investors an inability to grasp the
probabilistic significance of negotiations, but to filter out essentially useless information that a reasonable investor
would not consider significant, even as part of a larger mix of factors; (3) the alleged importance of secrecy during the
early stages of merger discussions seems irrelevant to an assessment of whether the existence of the discussions is significant to the trading decision of a reasonable investor, because (a) materiality does not concern the timing of a disclosure, but only the disclosure's accuracy and completeness, and (b) arguments based on the premise that some disclosure
would be premature are more properly considered under the rubric of an issuer's duty to disclose; and (4) although a
bright-line rule at the agreement stage would be easier to follow, (a) ease of application alone is not an excuse for ignoring the purposes of the securities statutes and Congress' policy decisions, and (b) any approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality must necessarily
be overinclusive or underinclusive. Basic Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978, 99 L. Ed. 2d 194, Fed. Sec. L.
Rep. (CCH) P 93645, 24 Fed. R. Evid. Serv. 961, 10 Fed. R. Serv. 3d 308 (1988) (disagreed with by multiple cases as
stated (CA5 La) CCH Fed Secur L Rep P 93801).
In action alleging nondisclosure by corporation that sale of certain of its divisions would be on restrictive terms, including covenant for continued employment of certain executives and employees of parent corporation, summary judgment
for corporation would be denied; it was for jury to determine whether omitted information was public knowledge at
time of omission, and to evaluate nature of effects of various market factors. Re Union Carbide Corp. Consumer Products Business Secur. Litigation (1987, SD NY) 676 F Supp 458, CCH Fed Secur L Rep P 93806, later proceeding (SD
NY) 718 F Supp 1099.
In action brought by allegedly defrauded seller of stock against companies and individuals, claim of direct violation of
Rule 10b-5 by broker would be dismissed, where broker was not officer or director of companies and did not deal directly with plaintiff; however, count alleging conspiracy to violate Rule 10b-5 on part of all defendants, alleging that
defendants aided-and-abetted scheme to defraud plaintiff by reacquiring stock from her without informing her of pending sale of companies to third party, was sufficient to support aiding and abetting claim against broker. Martin v
Pepsi-Cola Bottling Co. (1986, DC Md) 639 F Supp 931, CCH Fed Secur L Rep P 92786.
Undisclosed fact that defendants were seriously considering selling company at substantial profit once they had acquired plaintiff's stock was unquestionably material since, had plaintiff been fully informed of information regarding
company's financial successes over three year period and of defendant's plans to sell company, this knowledge would
have been substantial factor in negotiating sales price of stock. Dungan v Colt Industries, Inc. (1982, ND Ill) 532 F
Supp 832, CCH Fed Secur L Rep P 98663.
Even though none of named minority stockholders sold stock in response to second tender offer or in reliance upon representations made by directors, claim was stated under federal statute for failure to disclose that insiders were secretly
offered premium inducing them to breach their fiduciary duties to corporation and all its shareholders, and failure to
reveal plans of acquiring corporation to exploit assets and business of acquired corporation for benefit of acquiring corporation's own conglomerate insurance interest. Rothschild v Teledyne, Inc. (DC Ill) 328 F Supp 1054.
Directors not only breached their fiduciary duties to defendant corporation by secretly selling their "support" to outsider
attempting to acquire control over defendant corporation, but they also violated Rule by failing to disclose their true
relationship with tender offeror and their substantial personal interest in furthering success of second tender offeror.
Hogan v Teledyne, Inc. (DC Ill) 328 F Supp 1043.
See SEC v Platt (1983, WD Okla) 565 F Supp 1244, CCH Fed Secur L Rep P 99497, § 6.
[*10b]
Held not material fact
The fact that the campany's board, with a potential purchaser on the horizon, had resolved to sell or merge the company,
because the company had not been prospering for several years and the union manager planned to withdraw 300 to 350
employees, was held not material in List v Fashion Park, Inc. (1965, CA2 NY) 340 F2d 457, 22 ALR3d 782, cert den
382 US 811, 15 L Ed 2d 60, 86 S Ct 23, reh den 382 US 933, 15 L Ed 2d 344, 86 S Ct 305, the court affirming the decision of the lower court that the prospects for a sale of the company at a price profitable to the shareholders were too
Page 19
22 A.L.R.3d 793, *
remote to have influenced the conduct of a reasonable investor, because at the time the resolution was adopted, the
company directors only had before them the statement of the union manager that he knew of some unidentified person
who would be interested in buying the company, because by the time plaintiff sold his stock to defendant director,
nothing more had occurred except that the president of the company had learned the name of the potential purchaser,
and because within 2 weeks after he bought plaintiff's stock, defendant disposed of part or all of his interest in 3,137 of
his 4,300 shares at an average profit of only about one dollar per share.
CUMULATIVE CASES
Cases:
Failure to disclose, prior to self-tender, struggle over control of corporation, plans to thwart takeover and details regarding eventual acquisition of control was not material where defendant's position as controlling majority stockholder was
fully disclosed in tender offer materials and where there was no substantial likelihood that detailed history as to how
defendant acquired control would have assumed actual significance in deliberations of reasonable shareholder considering whether to tender his shares. Similarly, corporate officer's thoughts about majority stockholder, possible acquisition of corporation by another company when there were no firm offers for acquisition, and future earnings prospects
were tentative and speculative and not required to be disclosed. Failure to disclose that transaction price in self-tender
situation was unfair did not state a claim under federal securities laws. Staffin v Greenberg (1981, ED Pa) 509 F Supp
825, CCH Fed Secur L Rep P 97895, affd (CA3 Pa) 672 F2d 1196, CCH Fed Secur L Rep P 98465.
Disclosure of information by tender offer target which would simply reinforce, rather that correct or modify, statements
made is not required by Rule 10(b)(5); thus company which informed shareholders that hostile takeover offer was
"grossly inadequate" and that company was exploring other possibilities had no duty to disclose "soft" information such
as speculative asset appraisals and details of search for and preliminary negotiations with "white knight." Starkman v
Marathon Oil Co. (1985, CA6 Ohio) 772 F2d 231, CCH Fed Secur L Rep P 92290, cert den 475 US 1015, 89 L Ed 2d
310, 106 S Ct 1195, reh den 486 US 1018, 100 L Ed 2d 221, 108 S Ct 1759.
See Securities & Exchange Commission v Geotek (DC Cal) 426 F Supp 715, §§ 15.
[*11]
Negotiations as to sale of company's major product
Where plaintiff, who was president, secretary, and largest single stockholder of a research and development corporation,
entered into inconclusive negotiations with an aluminum company for the purpose of producing an aluminum container
suitable for commercial exploitation and 3 months later plaintiff was dismissed as president and secretary and prevailed
upon to sell his stock in the corporation and it appeared that prior to the sale of the stock by plaintiff, negotiations with
the aluminum company were revived and significant technological progress was made at approximately the same time,
and both facts were not disclosed to plaintiff, it was held in Rogen v Ilikon Corp. (1966, CA1 Mass) 361 F2d 260, that a
summary judgment in favor of the defendant corporation should be reversed on the ground that the evidence raised issues of facts as to a material nondisclosure to plaintiff stockholder in violation of the statute and the Rule. After stating
that the applicable test was whether a reasonable man would attach importance to the fact not disclosed in determining
his choice of action in the transaction in question, the court said that a trier of fact could find that plaintiff, who was the
former key founder of the corporation, might be impressed by the reactivation of interest and might take heart from the
fact that a large company had seen enough merit in the new process to ask for concrete proposals, regardless of the final
outcome of such negotiations, and with the possibility of their collapse in mind.
CUMULATIVE CASES
Cases:
Purchasers of common stock stated cause of action for federal securities fraud by alleging corporate insiders', officers',
nondisclosure that illegal payments had been given to government officials to expedite approval of drug manufacturers'
products was fraudulent and misleading, where nondisclosure was preceded by statements extolling manufacturers' ability to obtain approvals of its products, creating impression for reasonable shareholder that manufacturers had particular
expertise in obtaining approvals which would result in continued growth and income, nondisclosure artificially inflated
Page 20
22 A.L.R.3d 793, *
price of common stock, and information, once revealed, resulted in lower stock prices and subjected company to serious
criminal penalties and sanctions. Re Par Pharmaceutical, Inc. Secur. Litigation (1990, SD NY) 733 F Supp 668, CCH
Fed Secur L Rep P 95253, stay den (SD NY) CCH Fed Secur L Rep P 95633.
[*12]
[*12a]
Planned increase in cash dividends or payment of stock dividends
Held material fact
The question whether earning trends are a material information the nondisclosure of which may constitute a manipulative or deceptive device prohibited by the statute was discussed in Weitzen v Kearns (1967, DC NY) 271 F Supp 616. It
appeared in this case that Solitron Company offrred, pursuant to a registration statement filed with the Securities and
Exchange Commission, several million dollars' worth of convertible debentures with the proviso that these debentures
would first be offered solely to officers and employees of Solitron and only thereafter to other persons on a "first come,
first serve" basis. All the debentures were subscribed to by the preferred offerees and no debentures were offered or sold
to others. A number of stockholders brought action against the directors of the company, alleging that at the time the
offer of convertible debentures was made, the directors of the company were in possession of material inside information concerning the affairs and prospects of the company, including knowledge that the net earnings of the company
for the last 9 months were substantially in excess of earnings for a similar period of the previous fiscal year; that the
company's net income for the entire year would be almost double that of the previous year; that the company would
declare a 100 percent stock dividend; and that the company would increase the cash dividend payable on its common
stock. Plaintiff stockholders contended that by causing Solitron to issue the convertible debentures to themselves, the
directors violated the statute as well as the Rule. The directors moved for summary judgment, contending among other
reasons therefor, that the allegedly undisclosed inside information was not material. They argued that to be material,
information must represent a significant departure from the corporation's previous activity or financial condition, that it
must be essentially extraordinary in nature, and reasonably certain to have a substantial effect on the market price of the
security if disclosed, and, in addition, contended that all of the allegedly undisclosed earnings figures were fully consistent with the corporation's past earnings performances and that the Solitron stock was a highly speculative electronics
issue, the market price of which bore little or no relation to earnings. Plaintiff stockholders on the other hand argued that
past earnings trends were not necessarily reliable indicators of future earnings and that information as to earnings has
traditionally been regarded as material, since it might affect in reasonable and objective contemplation the value of a
corporation's securities. Holding that the foregoing summary was sufficient to indicate the impossibility of deciding the
issue of materiality on a motion for summary judgment, the court said that determinations as to the materiality of information in fraud actions involve complex considerations of law and fact, and that since all inferences from the facts must
be considered in the light most favorable to the plaintiff, the court could not conclude that the allegedly undisclosed
information was not material.
[*12b]
Held not material fact
Where a corporation issued a certain number of shares of its stock to plaintiff in payment for legal services under an
agreement obligating the company to repurchase the stock at a certain named minimum price per share, and upon request by plaintiff, the company repurchased the shares of stock at the agreed minimum price, it was held in Hafner v
Forest Laboratories, Inc. (1965, CA2 NY) 345 F2d 167, that no cause of action under the statute was stated by plaintiff,
who alleged that the corporation had failed to disclose two material facts. Specifically, plaintiff alleged in this connection that the company had refused to give him the current market price of its stock when requested and had failed to
inform him of an impending 4 percent stock dividend, notice of which was mailed to the shareholders approximately 3
weeks later. Affirming the judgment of the District Court, which had rendered a judgment of dismissal, the court pointed out that the company had not misrepresented the market price and that current price information on the stock was
available to the public in the National Daily Quotation Sheets. With respect to the impending stock dividend, the court
did not fully accept the holding of the trial judge to the effect that declaration of a stock dividend is not a material fact,
since it leaves each shareholder with precisely the same interest in the corporation as before, by pointing out that the
market may in some instances place value on the declaration of a stock dividend. While admitting that if the transaction
had been initiated by the corporation or if plaintiff had bargained as to the terms of the repurchase, there might be a
question whether plaintiff's allegations would raise issues not amenable to disposition on the pleadings, the court said
that in the present case, the company's role in the transaction was entirely passive, since it simply accepted the terms of
Page 21
22 A.L.R.3d 793, *
plaintiff without question, and that under these circumstances, the company was not required to disclose a stock dividend to him before announcing it to the other shareholders.
[*13]
Reduction in dividend
Manipulation of market price and purposeful reduction of dividends in order to buy out minority stockholders cheaply
may be actionable under Rule 10b-5. In Cochran v Channing Corp. (1962, DC NY) 211 F Supp 239, a stockholder of
Agricultural Insurance Company brought an action against Channing Corporation, which was claimed to have dominated the policies of Agricultural Insurance Company, and against certain directors of both companies, on the ground
that Channing Company and the individual defendants had engaged in a scheme aimed at acquiring for Channing Company the ownership of Agricultural's shares at the lowest possible price, and had, in order to carry out such program,
withheld from the public any disclosure of their aim, and had caused the directors of Agricultural Insurance Company to
reduce the quarterly dividend on its stock for the purpose of facilitating their purchasing program and of acquiring additional shares at depressed prices. Plaintiff then alleged that because of the dividend reduction and lack of information as
to Channing's program of purchases, he sold 500 shares of Agricultural's stock which he would not otherwise have sold,
at a price reflecting the depressing effect of the dividend reduction and at a price below what he could have obtained
later after disclosure of Channing's purchasing program. Denying the motion of defendants to dismiss the complaint for
failure to state a claim upon which relief could be granted, the court said that in the instant case, defendants not only
failed to disclose the material fact, namely, the true reason for the cut in the dividend rate, but were themselves responsible for its very existence.
CUMULATIVE CASES
Cases:
See Good v Zenith Electronics Corp. (1990, ND Ill) 751 F Supp 1320, § 17.
[*14]
Anticipated or actual mining discovery
Mere knowledge that the company was acquiring property rights in the area in which productive ore samples were subsequently taken was held not material information in Securities & Exchange Com. v Texas Gulf Sulphur Co. (1966, DC
NY) 258 F Supp 262, where the insiders had no detailed knowledge as to the drilling and sampling. Similarly, it was
held that the results of two inconclusive drillings did not constitute information that could be deemed material inasmuch
as the most that could be said of the individual defendants' knowledge after the drilling of the first test core was that
they had "hopes, perhaps with some reason," that it would lead to a mine, and since the core of the second test drilling,
drilled on the same section as was the first drilling, establishing that the first had not gone down dip and indicating a
vertical plane on that section containing mineralization, still did not indicate that the mineralization extended beyond
that plane, and did not necessarily indicate a commercially mineable deposit. Only after the drilling of the third test core
had disclosed real evidence that a body of commercially mineable ore might exist did the court hold that those with
knowledge of the drilling results had material information which it was reasonably certain, if disclosed, would have had
a substantial impact on the market price of the corporation's stock, and that they were therefore under a duty not to use
such material information to their personal advantage without first disclosing it to the public.
CUMULATIVE CASES
Cases:
Knowledge of possibility, which was more than marginal, of existence of mine of vast magnitude indicated by remarkably rich drill core, would be important to reasonable investor and might have affected price of stock, and Court of Appeals' disagreement with finding by trial court that such knowledge was not material inside information did not go to his
findings of basic fact, as to which "clearly erroneous" rule would apply, but to his understanding of legal standard applicable to them. Securities & Exchange Com. v Texas Gulf Sulfur Co. (CA2 NY) 401 F2d 833, 2 ALR Fed 190, cert den
394 US 976, 22 L Ed 2d 756, 89 S Ct 1454.
Page 22
22 A.L.R.3d 793, *
Failure by individual corporate officers to disclose results of drilling for ore violated no duty so long as defendants did
not purchase or recommend stock or calls or accept stock options, but that Rule 10b-5 would be violated where there
was trading while in possession of material undisclosed information. Astor v Texas Gulf Sulphur Co. (DC NY) 306 F
Supp 1333.
Although full magnitude of ore deposit discovered could not be precisely determined, nevertheless where expert testimony showed that corporation knew or could have conservatively computed reserves to be over $ 200,000,000, press
release which painted a bleak and gloomy picture, stating that rumors of substantial copper discovery were without factual basis, that most areas drilled revealed minerals without value, and that more drilling would be required for proper
evaluation, was inaccurate, misleading, and deceptive with respect to material matters. At some point in time after publication of curative statement, however, stockholders should no longer be able to claim reliance on deceptive release,
sell, and then sue for damages when stock value continued to rise. Mitchell v Texas Gulf Sulphur Co. (CA10 Utah) 446
F2d 90, cert den 404 US 1004, 30 L Ed 2d 558, 92 S Ct 564, reh den 404 US 1064, 30 L Ed 2d 754, 92 S Ct 734.
Although corporation and their executives owed duty to stockholders to keep them reasonably informed as to mineral
discoveries, nevertheless there was duty not to make information public until company could first protect itself by acquiring mineral interests in adjoining lands. Reynolds v Texas Gulf Sulfur Co. (DC Utah) 309 F Supp 548.
[*15]
Identity of purchaser or seller
That one buyer of plaintiff's stock was a director of the company which had resolved to sell or merge that company,
where plaintiff was an experienced and successful investor in securities, actively solicited the sale to defendants, did not
ask his broker whether any insiders were bidding for stock in the corporation, the only restriction plaintiff placed on his
broker related to price, his broker suggested that five points would be a nice profit, to which plaintiff agreed, and where
his broker knew that two directors were bidding but did not think it necessary to inform plaintiff of this, was held in List
v Fashion Park, Inc. (1965, CA2 NY) 340 F2d 457, 22 ALR3d 782, cert den 382 US 811, 15 L Ed 2d 60, 86 S Ct 23, reh
den 382 US 933, 15 L Ed 2d 344, 86 S Ct 305, not to be a material fact the nondisclosure of which would violate Rule
10b-5.
That the stock issued by the corporation to the party selling mining property to it was going to be distributed among
several other people, including the finders of the property, was held in Securities & Exchange Com. v Great American
Industries, Inc. (1966, DC NY) 259 F Supp 99, not a material fact, even assuming that the defendants, two directors and
the chairman of the board of the corporation, knew all of the details of the arrangements between the finders and the
party selling the property.
The identity of the purchasers of corporate stock from the sellers was held in Ross v Licht (1967, DC NY) 263 F Supp
395, not to constitute a material fact requiring the corporate insider to disclose under the statute where it appeared that
the sellers had been actually soliciting a sale to the insiders and other stockholders long before the insiders had sold
their stock, and where, in addition, it appeared that they were required first to offer their stock to the other stockholders,
including the insiders, the court adding that it did not believe that the sellers cared as to who bought their shares.
CUMULATIVE CASES
Cases:
See Securities & Exchange Com. v Blatt (1978, CA5) 583 F2d 1325, § 17.
See Myzel v Fields (CA8 Minn) 386 F2d 718, cert den 390 US 951, 19 L Ed 2d 1143, 88 S Ct 1043, § 17.
In sale of stock of one corporation to another corporation, conflict of interest by individuals who owned corporation
selling stock and were directors of corporation purchasing stock was material fact, and nondisclosure of such fact to
minority shareholders of purchasing corporation violated Rule 10b-5. Kidwell ex rel. Penfold v Meikle (1979, CA9 Idaho) 597 F2d 1273.
Page 23
22 A.L.R.3d 793, *
Entry of investment programs controlled by defendant into certain property acquisition contracts with four so-called
"secret" companies, which companies were owned and controlled by defendant, was failure to disclose material information in violation of federal securities laws, where defendant failed to disclose either affiliated status of those secret
companies or fact that contracts were entered into at profit to secret companies and, thereby, to defendant himself; failure to disclose that investment program contracted with drilling company wholly owned and controlled by defendant
was violation of federal securities laws, where over half of funds appropriated to drilling company were in fact diverted
by defendant for personal use; numerous contentions that defendant failed to disclose material facts such as, inter alia,
manner of transacting business, dollar amounts of costs as result of property acquisitions, fair market value of properties
transferred between affiliates, "dry hole" drilling, numerous discrepancies in accounting procedure, allocation of overhead expenses, amount of commissions and selling expenses, and pledging of same property for two loans were not
nondisclosures of material facts in violation of federal securities acts. Securities & Exchange Commission v Geotek,
(DC Cal) 426 F Supp 715.
See Blasdel v Mullenix (DC Okla) 356 F Supp 924, § 17.
[*16]
Details of financial or accounting methods
It was held that nondisclosure by the insider, in negotiating a sale of stock to the company by a stockholder who had
many years of intimate acquaintance with the affairs of the company, of details of the pension plan or the accounting
method of how the annuities funding was treated on the company books, did not violate § 10(b), in Kohler v Kohler
Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR3d 486, even though a different method of accounting, if adopted, would have
increased the book value of the company, where the financial data shown was not factually inaccurate.
It was held that the insider's nondisclosure of the corporate accountant's worksheet containing data as to the final year of
operations, and in which the accountant valued two other corporations for comparative purposes in projecting Kohler
Corporation's stock values, in negotiating a sale of stock to the company by a stockholder, did not violate § 10(b)
where the worksheet utilized accountant's speculation and approximating rules of thumb, and it was a reasonable inference that, as an accountant, he knew that his worksheet projections were speculative at best, in Kohler v Kohler Co. (F)
supra.
It was held that the insider's nondisclosure of the receipt by the company of an excess profits tax refund, in negotiating a
sale of stock to the company by the stockholder, who had many years of intimate acquaintance with the affairs of the
company, did not violate § 10(b), where mere inquiry, if the stockholder was troubled with the information he had,
would have disclosed the financial details of the audit for the year in question, including the tax refund, in Kohler v
Kohler Co. (F) supra.
CUMULATIVE CASES
Cases:
See Ernst & Ernst v Hochfelder (1976) 425 US 185, 47 L Ed 2d 668, 96 S Ct 1375, reh den 425 US 986, 48 L Ed 2d
811, 96 S Ct 2194, disapproving Kohler v Kohler (CA7 Wis) 319 F2d 634, 7 ALR3d 486, supra, § 4 to extent it holds
negligence alone sufficient for civil liability under Rule 10b-5).
Complaint based on fact that corporation allegedly failed to disclose that substantial amount of its income for particular
fiscal year was derived from various overcharges on government contracts was sufficient to meet requirements of "in
connection with the purchase or sale of any security," clause of SEC rule, even though purpose of not disclosing original malfeasance was to further defraud government, since false information was circulated to large segment of investing
public. Heit v Weitzen (CA2 NY) 402 F2d 909, 3 ALR Fed 803, cert den 395 US 903, 23 L Ed 2d 217, 89 S Ct 1740.
Rule 10b-5 did not require disclosure of precise ratio of cash to notes, or terms under which notes were payable or collateralized, where evidence revealed that disclosures made by corporation board fully and fairly described purchase and
sale of stock. Gluck v Agemian (1980, SD NY) 495 F Supp 1209.
Page 24
22 A.L.R.3d 793, *
Press release issued by corporate president in connection with filing of SEC report did not omit material facts in that it
failed to disclose, inter alia, (1) that corporation was in default on loan agreement where, by date of release, bank had
amended loan agreement so as to cure any events of default then existing, (2) exact cash flow deficit where it did disclose losses, negative cash flow, and downward adjustments in previous year's finances amounting to almost $ 7 million, and (3) that utility subsidiaries were insolvent for about six days where officers desired to prevent creditors from
filing involuntary Chapter XI petitions until corporation could prepare voluntary Chapter XI petition. United States v
Koenig (DC NY) 388 F Supp 670.
Although major investor in corporation did not control corporation's board of directors at time board sought shareholder
approval of charter amendment increasing number of authorized shares of common stock, for purpose of allowing investor to exercise warrants that it held, investor assumed responsibility for inadequacy of information disclosed to
shareholders where investor undertook to control and supervise corporation's communications to its shareholders, and
investor breached its duty of full disclosure under Rule 10b-5 by failing to disclose any of the material facts concerning
the transaction. Wright v Heizer Corp. (1977, CA7 Ill) 560 F2d 236.
Seller's omission to disclose existence of liabilities not contained in balance sheet constituted omission to state "material
fact," notwithstanding whether failure to do so was intentional or merely negligent. Lane v Midwest Bancshares Corp.
(DC Ark) 337 F Supp 1200.
See Securities & Exchange Commission v Geotek (DC Cal) 426 F Supp 715, § 15.
In discussing general future expectations of corporation with prospective purchaser of stock, director, who was also
principal shareholder, was not required to qualify general statements about future performance by relating change in
accounting methods adopted 5 months previously, and thus nondisclosure did not constitute violation of Rule. Green v
Jonhop, Inc. (DC Or) 358 F Supp 413.
[*17]
Other facts
CUMULATIVE CASES
Cases:
Issuer of securities did not have duty to disclose to investors that it had paid analysts to publish favorable information
about company prior to private placement, and thus failure to disclose payments could not form basis of securities fraud
claim under § 10(b), where analysts disclosed that they received payments to tout stock. Securities Act of 1933, §
17(b), 15 U.S.C.A. § 77q(b); Securities Exchange Act of 1934, § 10(b), as amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. §
240.10b-5. Garvey v. Arkoosh, 354 F. Supp. 2d 73 (D. Mass. 2005).
Duty to disclose inside information to purchaser of corporate stock, as required by Securities and Exchange Act of 1934
(15 U.S.C.A. § 78j(b)), was not violated by corporation which examined and commented on several earnings forecasts
prepared by outside analysts but did not disclose its own, less favorable forecasts. Elkind v Liggett & Myers, Inc. (1980,
CA2 NY) 635 F2d 156.
In action against corporation and its chief executive officer charging that defendants violated § 10(b) in connection
with the purchase of plaintiff's stock in the corporation, defendants' failure to reveal possible plans for introducing new
line of clothing, details of acquisition of new company or educated guesses as to economic forecast did not constitute
material nondisclosure. Harkavy v Apparel Industries, Inc. (1978, CA2 NY) 571 F2d 737.
There were no omissions of material facts in corporation's alleged assurances to potential stock purchasers that it expected to receive hazardous waste disposal permits for which corporation was then applying, since corporation stated on
several occasions that process of obtaining permits was arduous and that success was not guaranteed. In re Hunter Environmental Services, Inc. Securities Litigation, 921 F. Supp. 914, Fed. Sec. L. Rep. (CCH) P 99257 (D. Conn. 1996).
Allegation that corporate principal who prepared response to tender offer failed to disclose that (1) corporation violated
tender offer rules, (2) principal had full-time employment and commitments, and (3) principal was bound by covenant
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22 A.L.R.3d 793, *
not to compete stated claim for material misrepresentation. Gerber v Computer Assocs. Int'l (1994, ED NY) 860 F Supp
27.
In securities fraud action arising out of sale of all capital stock of small cosmetics company, where defendant-owners
disclosed fact that previous year's gross sales figure included account which had stopped doing business with company,
identified account by name, described it as either "large" or "major" account, disclosed circumstances surrounding account's departure, informed plaintiff purchaser of approximate monthly sales figure being achieved by company since
departure of account, and permitted plaintiff's accountant to review general ledger and cash book, defendants' failure to
indicate precise amount of business attributable to lost account did not constitute material omission of fact or breach of
duty of disclosure. Wollins v Antman (1986, ED NY) 638 F Supp 989, CCH Fed Secur L Rep P 92895.
See Zuckerman v Harnischfeger Corp. (1984, SD NY) 591 F Supp 112, CCH Fed Secur L Rep P
91470, § 4.
Securities analyst who was limited partner in underwriter of stock offering of corporation violated § 10(b) of Securities
Exchange Act of 1934 (15 U.S.C.A. § 78j(b)) in failing to have prospectus amended to reflect fact that corporation had
recently invested in stocks underwritten by underwriter. SEC v Scott (1983, SD NY) 565 F Supp 1513, CCH Fed Secur
L Rep P 99236, affd (CA2 NY) 734 F2d 118, CCH Fed Secur L Rep P 91476.
Duty to disclose inside information to purchaser of corporate stock, as required by Securities and Exchange Act of 1934
(15 U.S.C.A. § 78j(b)), was not violated by corporation or broker failing to make prior disclosure of existence of $ 1
billion construction contract recently entered into by corporation where no evidence showed that either corporation or
broker acted other than in good faith in timing of disclosure. State Teachers Retirement Board v Fluor Corp. (1980, SD
NY) 500 F Supp 278.
Information as to exchange basis of shares of two corporations involved in contemplated merger was material. Nathanson v. Weis, Voisin, Cannon, Inc., 325 F. Supp. 50, Fed. Sec. L. Rep. (CCH) P 92998, 26 A.L.R. Fed. 671 (S.D. N.Y.
1971).
Memorandum furnished to investor by insider contained following omissions violative of Rule: that insider had serious
financial problems, that insider intended to use substantial portion of invested funds for his own personal use, and that
insider's corporation was under obligation for significant amount of money and did not have funds to meet that obligation if called upon to do so. IIT v Vencap, Ltd. (DC NY) 411 F Supp 1094.
Rule 10b-5 was violated where stockbroker induced client to invest $ 100,000 in venture company in exchange for $
93,000 note and 7,000 shares but did not disclose to client that he received 47 per cent of company's stock, in part for
obtaining client's $ 100,000, and that client's investment was only cash invested. Barthe v Rizzo (DC NY) 384 F Supp
1063.
Where insider failed to disclose that corporation's earnings would drop from 85 cents to 12 cents per share (decline of
over 85 percent), that corporation anticipated little or no profit for fiscal year, and that earnings projected from next
fiscal year were substantially lower, such information was material. Shapiro v Merrill Lynch, Pierce, Fenner & Smith,
Inc. (DC NY) 353 F Supp 264.
Possibility of merger was not so remote that information about it could not reasonably have influenced those with
knowledge of it to change position with respect to selling stock, and therefore was material and should have been disclosed by insider having such knowledge. Securities & Exchange Com. v Shapiro (DC NY) 349 F Supp 46.
Insider was not obligated to confer upon outside investors, benefit of his superior financial or other expert analysis by
disclosing his educated guess or predictions. Even if saturation of bowling market had been proved, prospectus of
bowling equipment manufacturer did not have to contain prediction of such saturation. Colonial Realty Corp. v Brunswick Corp. (DC NY) 337 F Supp 546.
Act not violated by nondisclosure of (1) absence of advance consultation of merger with independent directors, (2) fact
that negotiations were carried on by individuals in management who did not own stock, (3) prior bargaining position,
(4) failure of company directors to discover and adjudge faithless motives for their actions and to announce such dis-
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22 A.L.R.3d 793, *
covery in reporting products of their managerial efforts and judgment, (5) failure to report parent corporation had happier financial prospects because of prospective merger, (6) lack of effort to protect minority shareholders by insisting on
minimum value of stock in event of market decline, and (7) failure to disclose hope to have claims on subsidiary paid
after merger. Stedman v Storer (DC NY) 308 F Supp 881.
President insider had obligation to inform investing public that negotiations for acquisition of oil refinery previously
announced in press release as having been agreeably concluded were now reopened, and that terms formerly agreed
upon were abandoned, and failure to correct misleading impression constituted fraud under act. Securities & Exchange
Com. v Shattuck Denn Mining Corp. (DC NY) 297 F Supp 470.
Alleged nondisclosures in stock prospectus, if proven, would constitute violations of Securities Exchange Act of 1934,
section 10(b), where prospectus stated that company was in compliance with all consumer protection requirements
when in fact (1) success of its advertising, promotion, and marketing program depended on deceptive, illegal practices
and violated various consumer protection laws, (2) program resulted in abnormal number of consumer complaints, and
(3) company misrepresented its chairs as "custom-fitted." Craftmatic Secur. Litigation v Kraftsow (1989, CA3 Pa) 890
F2d 628, CCH Fed Secur L Rep P 94805, 15 FR Serv 3d 948.
Where statement purported to be consolidated financial statement of subsidiary as well as parent corporation, failure to
list subsidiary liability was misrepresentation of true value of stock of parent corporation. Gottlieb v Sandia American
Corp. (CA3 Pa) 452 F2d 510, cert den 404 US 938, 30 L Ed 2d 250, 92 S Ct 274.
In class action charging that corporate management, by means of material omissions and misrepresentations, fraudulently inflated price of common stock of corporation, allegations that corporate management failed to disclose motives
or to characterize management conduct as breach of duty constituted claims not dismissible for failure to state claim. Re
Ramada Inns Secur. Litigation (1982, DC Del) 550 F Supp 1127, CCH Fed Secur L Rep P 99011.
Computer manufacturer's alleged failure to inform stock purchasers of manufacturer's decrease in European sales was
not actionable, since manufacturer disclosed both large drop in earnings and much smaller drop in sales. Vosgerichian v
Commodore Int'l (1994, ED Pa) 862 F Supp 1371, CCH Fed Secur L Rep P 98450.
Duty to disclose inside information to purchaser of corporate stock, as required by Securities and Exchange Act of 1934
(15 U.S.C.A. § 78j(b)), was not violated by former president and principal shareholder of corporation who sold substantially all outstanding stock of corporation without disclosing to purchaser that corporation was in violation of certain
marketing agreements where seller refused to make representations concerning compliance with agreements, purchaser
had actual knowledge of situation, purchasers accepted situation as business risk, and information was thus not material
to purchaser's investment decision. Rorer International Cosmetics, Ltd. v Halpern (1980, ED Pa) 502 F Supp 137.
Failure to disclose to stockholders that amalgamation with another company was inevitable consequence of nationalization by Zambian Government was material and fatal omission under federal securities laws. Also material was an omission to explain course of negotiations and basis of evaluation of assets, failure to identify directors who negotiated with
other corporations, and failure to inform that both corporations were being advised by same lawyers. Kohn v American
Metal Climax, Inc. (DC Pa) 322 F Supp 1331.
Rule 10[b]-5 was violated by insiders failing to make material disclosures of proven ability of corporation to borrow
from reputable banking house, of fact that corporation's sales of properties far exceeded expectations, and of exhibition
of audit report to stockholders which was not entirely accurate because method of accounting employed did not note
potential profits. Baumel v Rosen (CA4 Md) 412 F2d 571, cert den 396 US 1037, 24 L Ed 2d 681, 90 S Ct 681, 688.
Statement in press release issued by owner and developer of outlet shopping malls stating that sale of three outlet centers would provide substantial capital to fund development and reduce debt was not material misstatement or omission
actionable under Securities Exchange Act based on failure to disclose that company did not have loan for ongoing construction project, requiring use of sales proceeds to fund construction rather than reduce debt, or failure to disclose that
properties obtained by company were deteriorated; failure to secure loan actually kept company's debt from rising,
statement was generalized and future-oriented, and company had no duty to disclose condition of acquired properties.
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22 A.L.R.3d 793, *
Securities Exchange Act of 1934, § 10(b), as amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5. Graff v. Prime
Retail, Inc., 172 F. Supp. 2d 721 (D. Md. 2001).
In action by investors in limited partnership against securities broker-dealer, who, as principal of general partner in limited partnership, failed to inform investors that predecessor limited partnership had settled law suit for approximately $
500,000, and misinformed investors that new limited partnership had been formed to allow limited partner of predecessor to withdraw from operational side of business when real purpose was to avoid disclosure of settlement, debt to investors would not be dischargeable in bankruptcy, where debtor, as majority stockholder in and controlling person of
general partner in limited partnership, owed to investors, as limited partners, duty to deal fairly and truthfully, and
where information concerning settlement was material as relevant to investors as reasonably prudent investors. Re Der
(1989, BC DC Md) 113 BR 218, later proceeding (BC DC Md) 2 Bankr Ct Rep 294.
In Securities Exchange Act proceeding arising out of defendant corporate-insiders' purchase at sheriff's sale of plaintiff's
stock formerly held as security on plaintiff's defaulted promissory notes, defendants' failure to disclose during pre-sale
settlement negotiations with plaintiff that corporation would shortly offer conversion privileges of common stock to
preferred stock constituted § 10b-5 violation, where plaintiff entered into settlement agreement consenting to sheriff's
sale on condition that defendants bid $ 4.50 per share, where corporation announced exchange offer two days after sheriff's sale which in turn caused price of stock to rise to $ 7 per share by end of same month, and where plaintiff could
have entered protective bid at sale had he known of exchange offer and not entered into settlement agreement; "forced
sellers" are nonetheless "sellers" under Rule 10b-5. Falls v Fickling (1980, CA5 Ga) 621 F2d 1362.
In stockholders' derivative suit charging deceptive nondisclosure of material facts pertaining to stock repurchase program initiated by management of defendant corporation, failure of controlling stockholders or corporate officials to disclose motive for entering into transaction did not constitute "deception" requisite for Rule 10b-5 violation even where
motive was allegedly to retain position of control over corporation; although there was adequate disclosure of size and
scope of stock repurchase plan and of effect of program to decrease corporation's capital and surplus, question of fact
arose as to whether corporate management failed to disclose that repurchase plan was to be carried out in manner that
would artificially inflate price of stock for defendants' personal benefit, which nondisclosure would constitute deceptive
or manipulative device under Rule 10b-5, and trial judge erred in granting defendants' motion for summary judgment
before completion of discovery. Alabama Farm Bureau Mut. Casualty Co. v American Fidelity Life Ins. Co. (1979, CA5
Fla) 606 F2d 602, reh den (CA5 Fla) 610 F2d 818.
Counsel's failure to disclose his personal knowledge that majority shareholder would need to acquire additional stock
under "pooling of interest" accounting method, and that he and his law partner were beneficial owners of shares held in
trust in subsequent stock merger purchase by majority shareholder, which purchase was accomplished at better rate of
return for counsel than for other shareholders, constituted nondisclosure of material facts in violation of Rule 10b-5
where defendant's action in first instance would have significantly affected decision of shareholders about purchase,
and, in second instance, would have prevented majority shareholder's misstatement about ownership of shares. Securities & Exchange Com. v Blatt (1978, CA5) 583 F2d 1325.
Purchaser of stock in closely held corporation was liable to seller (who was purchaser's brother) under Rule 10b-5
where purchaser failed to disclose to seller that he had obtained new financing for corporation that substantially increased value of stock. Dupuy v Dupuy (CA5 La) 551 F2d 1005, CCH Fed Secur L Rep 96048, reh den (CA5 La) 554
F2d 1065 and cert den 434 US 911, 54 L Ed 2d 197, 98 S Ct 312.
Development of market in stock, "pink sheet" price, and corporate acquisition were in public domain and were not exclusively inside information, and therefore there was no duty or obligation on part of purchaser of shares to disclose.
Johnson v Wiggs (CA5 Tex) 443 F2d 803.
Investors' securities fraud complaint sufficiently alleged that nondisclosure of officers' 33-1/3% interest in a series of
company transactions with distributor worth $ 7.5 million were material in light of company's yearly expenses ranging
from $ 43.3 million to $ 152 million; additionally, complaint sufficiently alleged that $ 256,000 loan to officer's parents
was material, and thus required disclosure. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R.
§ 240.10b-5. Zagami v. Natural Health Trends Corp., 540 F. Supp. 2d 705 (N.D. Tex. 2008).
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22 A.L.R.3d 793, *
Insider's failure to inform proposed buyer about declining value of corporate stock after buyer had agreed to buy but
before final stock transfer occurred was omission of material fact sufficient to sustain jury verdict, where insider had
continuing duty to disclose to buyer that previous statements of representations by him were no longer valid and were
now misleading in light of new information to which insider had access. Hutto v Texas Income Properties Corp. (DC
Tex) 416 F Supp 478.
Asset appraisals based on uncertain predictions regarding future economic and corporate events were not material facts
which should have been included in tender offer materials distributed to shareholders. Radol v Thomas (1985, CA6
Ohio) 772 F2d 244, CCH Fed Secur L Rep P 92289, cert den (US) 91 L Ed 2d 562, 106 S Ct 3272, later proceeding
(SD Ohio) 113 FRD 172.
Failure by manager of county utility district to disclose to investing public payment she received from underwriter as
part of illegal kickback scheme in connection with issuance of bonds, which omission was material inasmuch as investor, had he known of payments, could have concluded that investment in bonds was unwise because kickbacks increased
costs of offering or because quality of management was suspect, rendered manager liable as aider and abettor to underwriter for violation of federal securities laws. Securities & Exchange Com. v Washington County Utility Dist. (1982,
CA6) 676 F2d 218, CCH Fed Secur L Rep P 98643.
In sale of stock by shareholder to closely-held corporation there was no violation of act in failing to disclose role of
management of corporation in controlling price, failing to disclose book value of stock, and failing to disclose other
material facts concerning corporate earnings, corporate activity, and corporate plans, where it was reasonably inferable
that sellers knew price was set by management, where book value and other financial data was readily available to
sellers, and where lower court found price received by sellers was fair and reasonable assessment of value at time of
sale; test of materiality is whether reasonable man would have attached importance to undisclosed facts in determining
his choice of action in particular transaction in question. Arber v Essex Wire Corp. (CA6 Ohio) 490 F2d 414, CCH Fed
Secur L Rep P 94357, 18 FR Serv 2d 847, cert den 419 US 830, 42 L Ed 2d 56, 95 S Ct 53.
Statement to potential subscribers of shares that others had already invested $ 190,000 coupled with failure to disclose
that other investments might be conditioned upon repurchase agreement and opportunity to cancel consent to subscription agreement constituted violation of § 10b. Hidell v International Diversified Invest. (CA7 Ill) 520 F2d 529.
Even if consulting corporation's disclosures regarding its profitability were imperfect, failure to disclose was immaterial
as a matter of law, under the "move the market" rule, in shareholder's action against corporation for securities fraud
connected with corporation's improper use of pooling method of accounting to account for acquisition of four other
corporations; consulting corporation's stock prices did not fall, but rose after it disclosed accounting errors. Securities
Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5. Grimes v. Navigant Consulting, Inc., 185
F. Supp. 2d 906 (N.D. Ill. 2002).
Defendants' failure to provide information regarding value of company's stock, at time minority stockholder expressed
his desire to sell, did not constitute material omission giving rise to fraud in sale of securities; company always redeemed stock for $ 100, stockholder never requested any materials regarding value of stock, and fiduciary duty owed to
minority stockholders did not include duty to automatically reveal materials regarding value of stock when shareholder
expressed desire to sell. Scarabello v Reichle (1994, ND Ill) 856 F Supp 404, CCH Fed Secur L Rep P 98154.
Stockholders who alleged corporation violated Rule 10b-5 by nondisclosure that company forecast of increased profit
was based on assumption dollar would weaken against foreign economy, that company did not use foreign currency
options, that company had no basis to expect profit improvement, and that personal computer line had reduced sales and
higher expenses stated claim where jury could find corporation made false or misleading statements, corporation should
have disclosed product information sooner, stockholders could prove reliance, and corporation may have acted recklessly. Good v Zenith Electronics Corp. (1990, ND Ill) 751 F Supp 1320.
In action brought by purchasers of corporation's common stock against insiders of corporation for failure to disclose
material loan details in corporation's annual reports, defendants would be denied summary judgment where, although
defendants never engaged in any face-to-face transactions with plaintiffs, by publishing annual report, accuracy and
completeness of which is relied upon by investing public, defendants shared special fiduciary relationship with plaintiffs
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22 A.L.R.3d 793, *
and, therefore, defendants had affirmative duty, under Rule 10b-5, to disclose facts material to investing public in annual report. Issen v GSC Enterprises, Inc. (1982, ND Ill) 538 F Supp 745, CCH Fed Secur L Rep P 98756, 35 FR Serv
2d 283.
Nondisclosure in prospectus of fact that corporation was subject to special risk of having its tax assessments increased
was not material violation of Rule, where possibility that existing tax assessment might be altered in future years did not
constitute anything other than general risk, and where property tax assessor lacked unlimited discretion to change assessments. Guaranty Ins. Agency Co. v Mid-Continental Realty Corp. (DC Ill) 414 F Supp 1331, motion to vacate den
(DC Ill) 414 F Supp 1334.
Jury could find in favor of seller of corporate stock under act where insiders failed to disclose (1) increased sales in
1953, (2) April 1953 interim financial statements showing successful contract and $ 30,000 profit, (3) potential of 1954
sales or at least president's optimism over prospects for future, and (4) identity of controlling purchasers. Myzel v Fields
(CA8 Minn) 386 F2d 718, cert den 390 US 951, 19 L Ed 2d 1143, 88 S Ct 1043.
Corporate officer's misrepresentation of value of stock and nondisclosure of insiders' conflicts of interest in their use of
corporate funds to purchase stocks for themselves in attempt to freeze out public shareholders constituted violation of
Rule 10b-5; under test of materiality of whether reasonable investor could respond to fact's disclosure by protecting
himself from possible financial loss facts in question were material since public shareholders could have protected
themselves by selling stock before freeze-out or could have exposed plan and forced it to be aborted. United States v
Margala (1981, CA9 Cal) 662 F2d 622, CCH Fed Secur L Rep P 98363.
In criminal action by government against insiders who allegedly manipulated stock prices in effort to coerce directors of
corporation to permit take over by insiders, indictment's failure to allege any omission by insiders to disclose material
facts was not fatal to prosecution, where failure to disclose that market prices were being artificially depressed operated
as deceit on marketplace and was omission of material fact. United States v Charnay (CA9 Nev) 537 F2d 341, cert den
(US) 50 Law Ed 2d 610, 97 S Ct 527, 97 S Ct 528.
See S.E.C. v. Geotek, 426 F. Supp. 715, Fed. Sec. L. Rep. (CCH) P 95756 (N.D. Cal. 1976), judgment aff'd, 590 F.2d
785, Fed. Sec. L. Rep. (CCH) P 96766 (9th Cir. 1979), § 15.
Cancellation by corporation's largest customer of all future orders for certain product would likely be viewed by reasonable investor to alter total mix of information available, and thus was material nonpublic information, prior to its
disclosure, for purposes of investor's insider trading claims against corporation's officers. Securities Exchange Act of
1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5. Backe v. Novatel Wireless, Inc., 607 F. Supp. 2d 1145
(S.D. Cal. 2009).
There were no untrue statements or failure to disclose material fact in offer to purchase corporation's debentures by reference to foreclosure and failure of creditor to advise prospective sellers of money necessary to be put into corporation
to get it on its feet, where all debenture holders knew of corporation's financial problems and of creditor's right to foreclose, creditor's offer was twice amount for which securities could have been sold on market, foreclosure was possibility, and creditor had no definite plans to rehabilitate corporation prior to offer. Allen v. H. K. Porter Co., 452 F.2d 675,
Fed. Sec. L. Rep. (CCH) P 93313 (10th Cir. 1971).
There was insufficient evidence that corporation had firm plans to expand capacity of refinery to 175,000 barrels per
day within two years to support dissident shareholders' claim that defendants committed federal securities fraud and
common law fraud, breach of fiduciary duty and breach of express warranty under Kansas law by not informing them of
that planned expansion before buying out their interests. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. §
78j(b); 17 C.F.R. § 240.10b-5. Koch v. Koch Industries, Inc., 969 F. Supp. 1460 (D. Kan. 1997).
Rule 10b-5 was violated where, in addition to several misrepresentations, insider failed to disclose to purchaser that
insider, not corporation, was owner of stock transferred to purchaser, that insider's remaining stock was being sold to
third person, and that liabilities of corporation were substantially in excess of assets. Blasdel v. Mullenix, 356 F. Supp.
924, Blue Sky L. Rep. (CCH) P 71082, Fed. Sec. L. Rep. (CCH) P 94047 (W.D. Okla. 1971).
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22 A.L.R.3d 793, *
See S.E.C. v. Carriba Air, Inc., 681 F.2d 1318, Fed. Sec. L. Rep. (CCH) P 98766, 10 Fed. R. Evid. Serv. 1636 (11th Cir.
1982), § 6.
Failure by president of company to disclose that he had been enjoined from selling unregistered securities and that price
of turnkey drilling contract was substantially less than amount of money being raised from investors constituted material omission of fact where plaintiff reasonably relied upon information defendant gave and testified that he would not
have bought securities if defendant had disclosed these facts. Upton v Trinidad Petroleum Corp. (1979, ND Ala) 468 F
Supp 330.
See Alna Capital Associates v. Wagner, 532 F. Supp. 591, Blue Sky L. Rep. (CCH) P 71799, Fed. Sec. L. Rep. (CCH) P
99037 (S.D. Fla. 1982), order aff'd in part, 758 F.2d 562 (11th Cir. 1985), § 6.
Information contained in comfort letter drafted by accountants of one principal describing financial status of that corporation, particularly significant adjustments in financial statement of corporation indicating it was losing money or
breaking even, rather than making money, and inaccuracy of nine-month financial statements given initially, was material fact within meaning of Rule 10b-5 in merger of two corporations where principals in merger failed to disclose contents of letter to shareholders who approved merger or to purchasers of stock of merged corporation since such information would have had significance to reasonable investor and would have tended to affect voting. Securities and Exchange Commission v. National Student Marketing Corp., 457 F. Supp. 682, Fed. Sec. L. Rep. (CCH) P 96540 (D.D.C.
1978).
Corporation could not begin program of purchasing own stock in open market for purpose of creating investor interest
and thereby driving up price, without disclosing that purpose to public, such information being material. Davis v. Pennzoil Co., 438 Pa. 194, 264 A.2d 597, Fed. Sec. L. Rep. (CCH) P 92646 (1970).
FOOTNOTES
n1 For the purposes of this annotation, a wrongful negative response to a question concerning whether one
has knowledge of any material facts is deemed a misrepresentation rather than a nondisclosure.
n2 A corporate insider is a person who, because of his position in the corporation, is in the possession of information not usually available at the same time to the general public.
n3 As distinguished from nondisclosure in a proxy-statement.
n4 It is assumed that such person is not himself an insider who has equal access to the information allegedly
not disclosed to him.
n5 17 CFR § 240, 10b-5. The text of the Rule is stated infra § 2.
n6 15 U.S.C.A. § 78j(b). The text of the statute is set out infra § 2.
n7 15 U.S.C.A. § 78j(b).
n8 17 CFR § 240, Rule 10b-5.
n9 § 2, supra.
n10 § 4, infra.
n11 § 5, infra.
n12 § 5, infra.
n13 § 5, infra.
n14 § 5, infra.
n15 § 6, infra.
n16 §§ 7-16, infra.
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22 A.L.R.3d 793, *
n17 See, for instance, List v Fashion Park, Inc. (1965, CA2 NY) 340 F2d 457, 22 ALR3d 782, cert den 382
US 811, 15 L Ed 60, 86 S Ct 23, reh den 382 US 933, 15 L Ed 344, 86 S Ct 305.
n18 § 5, supra.
n19 Kohler v Kohler Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR3d 486.
n20 Fleischer, Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf
Sulphur Proceedings, 1965, 51 Va L Rev 1271.
JURISDICTIONAL TABLE OF STATUTES AND CASES (Go to beginning)
JURISDICTIONAL TABLE OF STATUTES AND CASES
FIRST CIRCUIT
Rogen v Ilikon Corp. (1966, CA1 Mass) 361 F2d 260
SECOND CIRCUIT
Cochran v Channing Corp. (1962, DC NY) 211 F Supp 239
Globus, Inc. v Jaroff (1967, DC NY) 266 F Supp 524 (supporting general rule)
Hafner v Forest Laboratories, Inc. (1965, CA2 NY) 345 F2d 167
List v Fashion Park, Inc. (1965, CA2 NY) 340 F2d 457, 22 ALR3d 782, cert den 382 US 811, 15 L Ed 2d 60, 86 S Ct 23,
reh den 382 US 933, 15 L Ed 2d 344, 86 S Ct 305
Ross v Licht (1967, DC NY) 263 F Supp 395
Ruckle v Roto American Corp. (1964, CA2 NY) 339 F2d 24
Schine v Schine (1966, DC NY) 250 F Supp 822
Schoenbaum v Firstbrook (1967, DC NY) 268 F Supp 385 (recognizing rule)
Securities & Exchange Com. v Great American Industries, Inc. (1966, DC NY) 259 F Supp 99
Securities & Exchange Com. v Texas Gulf Sulphur Co. (1966, DC NY) 258 F Supp 262
Weitzen v Kearns (1967, DC NY) 271 F Supp 616
THIRD CIRCUIT
Kardon v National Gypsum Co. (1947, DC Pa) 73 F Supp 798
Speed v Transamerica Corp (1951, DC Del) 99 F Supp 808, supp op 100 F Supp 461, petition for an order to reopen
case den 100 F Supp 463
FIFTH CIRCUIT
Reed v Riddle Airlines (1959, CA5 Fla) 266 F2d 314
SIXTH CIRCUIT
Connelly v Balkwill (1959, DC Ohio) 174 F Supp 49, affd (CA6) 279 F2d 685
SEVENTH CIRCUIT
Kohler v Kohler Co. (1963, CA7 Wis) 319 F2d 634, 7 ALR 3d 486
NINTH CIRCUIT
Royal Air Properties, Inc. v Smith (1962, CA9 Wash) 312 F2d 210
FEDERAL COURTS
Page 32
22 A.L.R.3d 793, *
American General Ins. Co. v Equitable General Corp. (1980, ED Va) 493 F Supp 721
Baumel v Rosen (DC Md) 283 F Supp 128
Bolton v Gramlich (1982, SD NY) 540 F Supp 822, CCH Fed Secur L Rep P 98438, later proceeding on other grounds
Terrydale Liquidating Trust v Gramlich (1982, SD NY) 549 F Supp 529, CCH Fed Secur L Rep P 98764
Britt v Cyril Bath Co. (DC Ohio) 290 F Supp 934 (recognizing rule), revd on other gnds (CA6) 417 F2d 433
Crane Co. v Westinghouse Air Brake Co. (CA2 NY) 419 F2d 787, cert den 400 US 822, 27 L Ed 2d 50, 91 S Ct 41
Dasho v Susquehanna Corp. (CA7 Ill) 461 F2d 11, cert den 408 US 925, 33 L Ed 2d 336, 92 S Ct 2496, 2498
Dura-Built Corp. v Chase Manhattan Corp. (1981, SD NY) 89 FRD 87
Healey v Catalyst Recovery of Pennsylvania, Inc. (1980, CA3 Pa) 616 F2d 641
Hutto v Texas Income Properties Corp. (DC Tex) 416 F Supp 478
Jackson v Oppenheim (DC NY) 411 F Supp 659
Kidwell ex rel. Penfold v Meikle (1979, CA9 Idaho) 597 F2d 1273
Kuehnert v Texstar Corp. (DC Tex) 286 F Supp 340
Lessner v Casey (1988, ED Mich) 681 F Supp 415, CCH Fed Secur L Rep P 93932
Myzel v Fields (CA8 Minn) 386 F2d 718, cert den 390 US 951, 19 L Ed 2d 1143, 88 S Ct 1043
Popkin v Bishop (CA2 NY) 464 F2d 714 (recognizing rule)
Re Equity Funding Corp. of America Secur. Litigation (DC Ca) 416 F Supp 161 (by implication)
Reube v Pharmacodynamics, Inc. (DC Pa) 348 F Supp 900
SEC v Platt (1983, WD Okla) 565 F Supp 1244, CCH Fed Secur L Rep P 99497
Securities & Exchange Com. v Blatt (1978, CA5) 583 F2d 1325
Securities & Exchange Com. v Carriba Air, Inc. (1982, CA11) 681 F2d 1318, CCH Fed Secur L Rep P 98766
Securities & Exchange Com. v Murphy (1980, CA9) 626 F2d 633, CCH Fed Secur L Rep P 97588
Securities & Exchange Com. v Shattuck Denn Mining Corp. (DC NY) 297 F Supp 470
Securities & Exchange Com. v Texas Gulf Sulfur Co. (CA2 NY) 401 F2d 833, 2 ALR Fed 190, cert den 394 US 976, 22
L Ed 2d 756, 89 S Ct 1454
Shamrock Associates v Moraga Corp. (1983, DC Del) 557 F Supp 198, CCH Fed Secur L Rep P 99116
Shapiro v Merril Lynch, Pierce, Fenner & Smith, Inc. (DC NY) 353 F Supp 264
Sims v Faestel (1986, ED Pa) 638 F Supp 1281, CCH Fed Secur L Rep P 92870, affd without op (CA3 Pa) 813 F2d
399
Staffin v Greenberg (1981, ED Pa) 509 F Supp 825, CCH Fed Secur L Rep P 97895, affd (CA3 Pa) 672 F2d 1196,
CCH Fed Secur L Rep P 98465
Steiner v Equimark Corp (1983, WD Pa) 96 FRD 603, CCH Fed Secur L Rep P 99097, 37 FR Serv 2d 210
Sundstrand Corp. v Sun Chemical Corp. (1977, CA7 Ill) 553 F2d 1033
United States v Margala (1981, CA9 Cal) 662 F2d 622, CCH Fed Secur L Rep P 98363
Wright v Heizer Corp. (1977, CA7 Ill) 560 F2d 236
CODE OF FEDERAL REGULATIONS
17 C.F.R. § 240.10b-5
17 CFR § 240.10b-5
INDEX OF TERMS (Go to beginning)
Accountants, failure to disclose financial methods to § 16
Accounting or financial methods, details of § 16
Annuities, accounting on books of § 16
Anticipated or actual mining discovery § 14
Apartment corporation, demand for repayment of loans to § 7
Application of principles to particular undisclosed facts §§ 7- 16
Broker, failure to disclose identity of purchaser by § 15
Buyer, identity of § 15
Buyer in the market, test of materiality as determined by reaction of § 6
Corporate losses of substantial amount § 5
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Corporation or corporate assets, planned sale of § 10
Demand for repayment of loan § 7
Directors, nondisclosure by §§ 5, 6, 10[a], 15
Dividends --planning increase in cash dividends or payment of stock dividends § 12
-planning reduction in § 13
Duty of disclosure, generally § 4
Earnings --earning trends as material information § 12[a]
-material information, necessity that nondisclosure involve § 6
Excess profits tax refund § 16
Experienced person, nondisclosure to §§ 6, 15, 16
Extraordinary in nature, duty of disclosure as limited to situations which are of § 6
Fair and honest business practices as test of duty of disclosure § 5
Financial or accounting methods, details of § 16
Financial statement issued after sale, effect of nondisclosure in § 5
General principles §§ 4- 6
General tests of materiality § 6
Identity of purchaser or seller § 15
Inconclusiveness of negotiations for sale of major product, effect of § 11
Increase in cash dividends or payment of stock dividends, planning of § 12
Inquiries, failure to make § 15
Introductory material §§ 1- 3
Inventory of corporation as obsolete, nondisclosure of § 5
Liquidation of subsidiary, planning of § 9
Loan, demand for repayment of § 7
Market for the stock, nondisclosure of § 6
Materiality --general tests of § 6
-necessity of § 5
Mining, anticipated or actual discovery § 14
Negotiation as to sale of company's major product § 11
Net earnings in excess of past similar periods § 6
Officers, nondisclosure by §§ 5, 10, 11
Pension plan, nondisclosure of treatment on company books § 15
Person with knowledge of corporate affairs, nondisclosure to §§ 6, 16
Prefatory matters § 1
Product of company, negotiation as to sale of § 11
Proposed sale price of stock § 8
Purchaser, identity of § 15
Purposeful reduction of dividends to induce sellout by minority stockholders § 13
Reasonable man, materiality as determined by reaction of § 6
Reduction in dividend § 13
Related matters § 1[b]
Repurchase of stock, prior agreement by persons having right of § 12[b]
Research and development corporation, negotiations to sell major product of § 11
Rules and statute, text of § 2
Sales --negotiations as to sale of company's major products § 11
-negotiations as to sale of stock to another corporation § 13
-planned sale of corporate or corporate assets § 10
-proposed sale to private persons of corporate stock § 8
-proposed sale price of stock § 8
Scope of annotation § 1[a]
Seller, identity of § 15
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Statute and rules, text of § 2
Stock dividends, planning increase in § 12
Subsidiary, planned liquidation of § 9
Substantial effect on market price of security, necessity that disclosure involve § 6
Summary § 3
Tax refund § 16
Test of materiality, generally § 6
Text of statute and rules § 2
Unreasonable burden on management, strict standards as imposing § 6
Value of stock, necessity that information affect § 6
TABLE OF REFERENCES(Go to beginning)
Annotations
See the related annotations listed in § 1[b]
REFERENCES
The following references may be of related or collateral interest to the user of this annotation.
A.L.R. Quick Index, Securities Regulation
Am. Jur. 2d, Securities Regulations (lst ed, Securities Acts) §§ 44, 46, 46.1
Am. Jur. 2d, Securities Regulation -- Federal §§ 462, 484, 519 et seq
Failure To Disclose Material Facts To Stock Purchaser, 11 Am. Jur. Proof of Facts 2d 271
ARTICLE OUTLINE (Go to beginning)
I.
Introductory material
§1
Prefatory matters
§ 1[a]
Scope
§ 1[b]
Related matters
§2
Text of statute and Rule
§3
Summary
II.
General principles
§4
Duty of disclosure in general
§5
Rule that nondisclosure must relate to material facts to constitute a prohibited device
§6
General tests of materiality
III.
Application of principles to particular undisclosed facts
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22 A.L.R.3d 793, *
§7
Demand for repayment of loan
§8
Proposed sale price of stock
§9
Planned liquidation of subsidiary
§ 10
Planned sale of corporation or corporate assets
§ 10[a]
Held material fact
§ 10[b]
Held not material fact
§ 11
Negotiations as to sale of company's major product
§ 12
Planned increase in cash dividends or payment of stock dividends
§ 12[a]
Held material fact
§ 12[b]
Held not material fact
§ 13
Reduction in dividend
§ 14
Anticipated or actual mining discovery
§ 15
Identity of purchaser or seller
§ 16
Details of financial or accounting methods
§ 17
Other facts