Chris-Craft and Section 14(e): The Expansion of Lead Underwriters
Chris-Craft and Section 14(e): The E xpansion of Lead Under writers' Liability
Edmund P. Bergan 0
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Recommended Citation Edmund P. Bergan, Jr., Chris-Craft and Section 14(e): Th e Expansion of Lead Underwriters' Liability, 42 Fordham L. Rev. 820 (1974). Available at: http://ir.lawnet.fordham.edu/flr/vol42/iss4/5
In 1968 Congress amended' the Securities Exchange Act of 1934 to include
section 14(e), an antifraud provision closely patterned after rule 10b-5.2
However, section 14(e) expressly applies to tender offers, requests or invitations for
tenders, and solicitations in favor of or opposed to such offers, requests or
invitations. Five years later, in Chris-Craft Industries, Inc. v. Piper Aircraft
Corp.,4 the Second Circuit Court of Appeals handed down a comprehensive
statement of principles controlling the application of the new provision. In the course
of its opinion, the court held a lead underwriter liable on an exchange offer
because the registration statement of the offeror grossly overvalued one of its
major assets and concealed the fact of the impending sale of that asset at a
substantial loss.5 This Comment will analyze the route employed by the court
in predicating lead underwriters' liability on section 14(e). After the facts of
the case are developed briefly, the decision of the court will be analyzed in
terms of its use of rule lob-5 precedent in developing section 14(e), and its
disregard of the express liability parameters of section 11 of the Securities Act
The Second Circuit's opinion climaxed protracted litigation arising out of a
takeover battle between Chris-Craft Industries, Inc. ("CCI") and
Bangor1. Act of July 29, 1968, Pub. L. No. 90-439, 82 Stat. 454, amending 15 U.S.C. § 781, m,
n (1964) (codified at 15 U.S.C. § 781(i), m(d) & (e), n(d), (e) & (f)(1970)).
2. Rule lob-5 provides in part:
"It shall be unlawful for any person ... (a) To employ any device, scheme, or artifice to
defraud, (b) To make any untrue statement of 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." 17 C.F.R. § 240.10b-5 (1973).
3. § 14(e) provides in part:
"It shall be unlawful for any person to make any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made, in the light
of the circumstances under which they are made, not misleading, or to engage in any
fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or
request or invitation for tenders, or any solicitation of security holders in opposition to or
in favor of any such offer, request, or invitation. . . ."15 U.S.C. § 78n(e) (1970).
4. 480 F.2d 341 (2d Cir.), cert. denied, 414 U.S. 910, 924 (1973).
5. Id. at 369-73. For further discussion see text accompanying notes 12-22 infra.
6. 15 U.S.C. § 77k (1970).
Punta Corp. ("BPC") for control of Piper Aircraft Corp. ("Piper").7 The
contest involved an intricate pattern of offensive and counteroffensive tactics of
which only those relevant to underwriters' liability will be developed here.8
From the outset Piper opposed CCI's takeover efforts, and early in the
contest opened negotiations with BPC aimed at preventing the CCI takeover.
Finally, on May 8, 1969, BPC announced its intention to make an exchange offer
for outstanding shares of Piper. Neither the Schedule 13D nor the S-1 filed with
the SEC mentioned that BPC was negotiating a sale of one of its major
assetsBangor and Aroostook Railroad ("BAR")--carried on the books and in the
SEC filings at $18.4 million, for the substantially smaller consideration of $5
million which resulted in a 12 percent loss of BPC shareholders' aggregate book
First Boston Corp. acted as the lead underwriter and dealer manager on the
exchange offer. After examining the books and records of BAR, they questioned
BPC about a possible divestiture of BAR, but were informed that no action
was contemplated at that time.10 First Boston made no effort to verify this
re7. On May 22, 1969, at the height of the takeover battle, CCI brought an action against,
inter alia, First Boston, Piper, and three members of the Piper family alleging violations of
§ 5(c) of the Securities Act, 15 US.C. § 77e(c) (1970) (sale of securities without a filed
registration statement), rule 135, 17 C.F.R. § 230.135 (1973) (constituting certain notices
of offer as § 5 offers to sell), §§ 9, 10(b), and 14(e) of the 1934 Act, 15 U.S.C. §§ 78i, j(b),
n(e) (1970) (§ 9 prohibits market manipulation of securities prices; § 10(b) prohibits
manipulative and deceptive prahtices in the purchase or sale of securities; § 14(e) prohibits
manipulative and deceptive practices in connection with tender offers), and rules lob-S and
lOb-6, 17 C.F.R. § 240.10b-5, -6 (1973) (rule 10b-5 prohibits manipulative and deceptive
practices in connection with the purchase or sale of securities; rule 10b-6 prohibits securities
trading by persons interested in a distribution of securities). 480 F.2d at 355. The court
denied a motion for a preliminary injunction to prevent BPC from obtaining and exercising
control of Piper. 303 F. Supp. 191, 200
. On expedited appeal, the Second
Circuit affirmed and remanded for further proceedings. 426 F.2d 569, 577
(2d Cir. 1970)
(en banc). BPC commenced an action charging CCI with violations of, inter alia, §§ 9(a) (2),
10(b) of the Exchange Act and rules lob-5 and lob-6. This action was tried together with
that initiated by CCI, and dismissed. 337 F. Supp. 1147
, On appeal, the
judgment was affirmed. 480 F.2d at 380-83. An action was brought by the SEC against BPC
on a complaint essentially similar to that of CCI. The district court found certain violations
by BPC but denied injunctive relief. 331 F. Supp. 1154, 1163
. On cross
appeals the judgment was modified. 480 F.2d at 383-92.
8. Factual treatment of the takeover battle is found at 480 F.2d at 349-55; see 337 F.
Supp. at 1130-32. Detailed discussion of the circumstances surrounding the BPC registration
statement, the pivotal event for present purposes, is found at 480 F2d at 366-73; 331 F.
Supp. at 1156-60.
9. 480 F.2d at 353, 366-69; 331 F. Supp. at 1159-62.
10. 480 F.2d at 369. The minutes of the April 1 BPC board meeting reflected that a
committee, including two directors of BAR and two of BPC, was established to study divestiture.
This group was still deliberating when, on May 12, Amoskeag, Inc., offered to purchase BAR
for $5 million cash. The committee reported at the May 21 board meeting that sale to
Amoskeag appeared the best alternative, and continued negotiations. On May 27 the parties
sponse, either through further examination of BPC records or by questioning of
the projected buyer mentioned in board minutes, Amoskeag, Inc."
The Opinion of the Court
Since prior cases had not construed section 14(e) extensively, the court chose
to analyze the section in terms of rule 10b-5 precedents.12 Accordingly, the court
held that the omission of the intended BAR divestiture was a material
misrepresentation in light of the rule lob-5 test of "whether 'a reasonable man would
attach importance [to the fact misrepresented] in determining his choice of
action. ...' "13 The element of scienter was established since the defendants knew
or failed to ascertain by a reasonable investigation that material facts had been
omitted. 14 The court framed the reliance element in terms of whether Piper
shareholders relied on the false registration statement in deciding between the
competing tender offerors, 1r and held that the finding of materiality raised a
presumption of reliance on the misrepresentation.' Similarly, the court held that
materiality raised a presumption of causation.17
The court then sought to determine whether First Boston, as underwriter,
was within the parameters of section 14(e). It reasoned that the securities laws
place upon private parties the primary responsibility for verifying the accuracy
and completeness of disclosure to investors, and sanction civil liabilities for their
failure to do so. These civil liabilities, the court noted, are expressly developed
in section 11 of the Securities Act, which empowers purchasers of registered
securities to hold underwriters liable for material misrepresentations in the
regisentered into a letter of understanding which the board tabled on June 3. 480 F.2d at 367,
371-72 &n.25; 331 F. Supp. at 1157-58.
11. 480 F.2d at 369.
12. Id. at 362. In a footnote, however, the court quoted language from Electronic
Specialty Co. v. International Controls Corp., 409 F.2d 937, 948
(2d Cir. 1969)
, comparing the
circumstances of a tender offer to those of a proxy fight. 480 F.2d at 362 n.14. Proxy
solicitations are governed by Exchange Act regulations which include their own antifraud provision,
17 C.F.R. § 240.14a-9 (1973), which will be discussed in detail in part III Infra.
13. 480 F.2d at 363 (quoting List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir.),
cert. denied, 382 U.S. 811 (1965)) ; 480 F.2d at 363 n.15 (quoting SEC v. Texas Gulf Sulphur
Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969)).
14. 480 F.2d at 364.
15. Id. at 373.
16. Id. at 374, citing Kahan v. Rosenstiel, 424 F.2d 161, 173-74 (3d Cir.), cert. denied,
398 U.S. 950 (1970) (class action against controlling shareholder and others alleging fraud In
connection with tender offer) ; Heit v. Weitzen, 402 F.2d 909, 913 (2d Cir. 1968), cert. denied,
395 U.S. 903 (1969) (class action alleging purchases of securities in reliance on
misrepresentations of issuer) ; List v. Fashion Park, Inc., 340 F.2d 457, 462-64 (2d Cir.), cert. denied,
382 U.S. 811 (1965) (action by single plaintiff alleging sale of securities in reliance on
defendants' misrepresentations during negotiations with plaintiff's broker).
17. 480 F.2d at 374, quoting Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54
(1972). The court stipulated as the measure of CCI's damages "the reduction in the appraisal
value of CCI's Piper holdings attributable to BPC's taking a majority position ...thus
being able to compel a merger at any time." 480 F.2d at 380.
tration statement.' 8 The court thought it consistent to predicate underwriters'
liability to competing tender offerors upon section 14(e). 10 While this latter
section is directed at those who "make" untrue statements,20 the court broadly
interpreted it to include underwriters:
An underwriter by participating in an offering constructively represents that statements
made in the registration materials are complete and accurate.... LW]hen the
underwriter does not speak out, the investor reasonably assumes that there are no undisclosed
material deficiencies. The representations ... are those of the underwriter as much as
they are those of the issuer.21 '
Thus, First Boston would be liable for the materially false registration
statement if it possessed the requisite degree of scienter. Stating that the
information in the BPC board minutes was sufficient to enable First Boston to
"deduce" the registration statement's falsity, the court held that the underwriter's
failure to follow up the answers it received from BPC constituted a "complete
abdication" of its duty to verify them, warranting a finding of scienter."
SECTION 14(e): RuLE lOb-5 vs. RULE 14a-9
Despite the steady expansion of securities fraud liability beyond the common
law tort of deceit, the courts continue to analyze "securities fraud" in terms of
the elements of that common law tort. Thus, First Boston's liability turned on
scienter, materiality, reliance, and causation.
The Chris-Craft court observed the textual similarities between section 14(e)
and rule lOb-5, and chose to develop the antifraud elements of section 14(e)
from rule 10b-5 precedents. 24 Other cases had adopted this approach;2- indeed,
18. 480 F.2d at 369-70. Section 11 provides in pertinent part:
"(a) In case any part of the registration statement, when such part became effective,
contained an untrue statement of a material fact or omitted to state a material fact ... any
person acquiring such security . . . may, either at law or in equity . . .
suein Electronic Specialty Co. v. InternationalControls Corp.2, 0 an action against
an exchange offeror by the target's management, tendering shareholders and
nontendering shareholders, the Second Circuit established rule 10b-5 as the
basis of section 14(e)'s development.2 7 The district court in Electronics Specialty,
on the other hand, had concluded on the basis of section 14(e)'s legislative
history that section 14(a) of the Exchange Act and its antifraud rule 14a-92 8 were
the provisions "most analogous" to section 14 (e).29 In fact, Congress had
analogized proxy fights to tender offers and used the proxy rules as the model for
regulation of tender offers. 30 Thus, in Chris-Craftthe Second Circuit confronted
a split in authority when it sought to develop the principles governing section
14(e). Congress apparently had employed rule 14a-9, while the courts had
relied on rule 10b-5. Ostensibly Chris-Craft adopted the latter approach.
However, analysis reveals that the Chris-Craft formulations of scienter, materiality,
reliance and causation embody precedents developed under rule 14a-9.
Purportedly drawing on Second Circuit rule 10b-5 cases, the court in
ChrisCraft held that scienter meant knowledge or reckless disregard of the truth,
where "reckless" was defined as failure or refusal to ascertain available or
reasonably discoverable facts.31 It is difficult to isolate specific precedent for this
formulation. In fact, until recently there were four different scienter tests in the
26. 409 F.2d 937
(2d Cir. 1969)
27. Id. at 940-41. The court stated that § 14(e) "applies Rule 10b-5 both to the offeror
and to the opposition-very likely, except perhaps for any bearing it may have on the issue
of standing, only a codification of existing case law." Id.
28. § 14(a) provides that no proxy solicitation shall be made in contravention of such
rules as the SEC may prescribe for the protection of investors. 15 U.S.C. § 78n(a) (1970).
The Commission promulgated an antifraud provision, rule 14a-9, 17 C.F.R. § 240.14a-9
(1973), which provides in part:
"(a) No solicitation . . . shall be made by means of any proxy statement . . . or other
communication . . . containing any statement which, at the time and in the light of the
circumstances under which it is made, is false or misleading with respect to any material
fact, or which omits to state any material fact necessary in order to make the statements
therein not false or misleading. .. ." Id.
29. Electronic Specialty Co. v. International Controls Corp., 295 F. Supp. 1063, 1069-72 &
, affd in part, rev'd in part & remanded, 409 F.2d 937
(2d Cir. 1969)
30. The congressional reports state that the similarity between proxy fights and tender
offers warrants imposition of comparable disclosure requirements upon the latter. S. Rep. No.
550, 90th Cong., 1st Sess. 3 (1967) ; H.R. Rep. No. 1711, 90th Cong., 2d Sess. 3 (1968). The
reports further state that when a majority of directors are to be replaced pursuant to a
takeover, shareholders of the target must be given information comparable to that required
by the proxy regulations in connection with the election of directors. S. Rep. No. 550, supra,
at 5; H.R. Rep. No. 1711, supra, at 5. The reports were explicit that regulation of takeovers
must not tip the "balance of regulation" in favor of either incumbent management or the
tender offeror. S. Rep. No. 550, supra, at 4; H.R. Rep. No. 1711, supra, at 4. The cases
reiterate this. Compare Ronson Corp. v. Liquifin Aktiengesellschaft, (Current Binder] CCH
Fed. Sec. L. Rep. 1 94,369, at 95,248-49 (D.N.J. Jan. 11, 1974) with Corenco Corp. v.
Schiavone & Sons, [1973 Transfer Binder] CCH Fed. Sec. L. Rep. 1 94,099, at 94,433
31. 480 F.2d at 356-57, 363-64.
Second Circuit.3 2 That court's opinion in Lanza v. Drexel & Co. 33 reduced the
confusion by stating the formula as willful or reckless disregard for the truth?34
The opinion, however, defined "reckless" as "the equivalent of knowledge," 3 5 a
stricter reading of the term than that in Chris-Craft?0 Thus, although the court
sought to rely on rule lOb-5 precedent, it in fact adopted a more liberal and
unprecedented scienter test which is more analogous to the prevailing rule 14a-9
standard. The district court in Richland v. Crandal?7 concluded that under rule
14a-9, if defendants "knew or should have known," that would be sufficient.38
In Gould v. American Hawaiian Steamship Co.,39 the trial court was at first
"unwilling to ... rule"40 that scienter was irrelevant under rule 14a-9, but in
a later opinion in the same case the court adopted the negligence standard.4 '
Other cases have followed this approach. 42 Chris-Craft is the first case to
consider in depth the appropriate standard of scienter under section 14(e). Its
departure from rule 10b-5 precedent represents movement towards Professot
Bromberg's conclusion that the negligence standard of rule 14a-9 should apply
to section 14(e). 43
Unlike scienter, the element of materiality under rule 10b-5 was considered
by the Supreme Court in Affiliated Ute Citizens v. United States.44 There, the
Court held that the materiality test in rule lOb-5 damage actions is whether
"a reasonable investor might have considered [omitted facts or
misrepresentations] important in the making of this decision [to sell shares]."a5 Recent lower
court cases are in accord.46 It is not clear whether the materiality test under
rule 14a-9 differs. The Supreme Court in Mills v. Electric Auto-Lite Co.47
apparently held the materiality tests under rule 14a-9 and rule lob-5 to be
identical. 48 Two subsequent lower court cases, however, have indicated in dicta that
the rule 14a-9 materiality test is more stringent than that of rule 10b-5.4
Similar confusion exists concerning the proper materiality test under section 14(e).
Professor Bromberg equates it with the test under rule 10b-5, reading Electronic
Specialty Co. v. InternationalControls Corp.50 to that effect. "' Another com
mentator reads the same case as adopting the "different" rule 14a-9 test.52
ChrisCraft expressly adopted the rule 10b-5 "reasonable investor" test 3 but
simultaneously reaffirmed in a footnote the substantially different and apparently
more stringent wording found in Electronic Specialty,"4 thus perpetuating the
Chris-Craft was equally unclear regarding the element of reliance. The court
observed that, to serve the policy of vigorous private enforcement of the
securities laws, reliance under some circumstances was subsumed into a presumption
arising from a finding of materiality.5r The rule lob-5 cases often reiterated the
necessity of independent proof of reliance.0 0 However, other courts adopted a
variety of techniques to evade reliance as an independent element of rule lOb-5
liability, recognizing that large plaintiff groups find proof of reliance almost
impossible0 In Affiliated Ute Citizens v. United States 8 the Supreme Court held
that in rule lob-5 nondisclosure cases a finding of materiality is a finding of
reliance 9 Cases and commentators reached the same conclusion relative to rule
14a-9. 60 However, the Supreme Court in Mills v. Electric Auto-Lite Co.,61 a
rule 14a-9 nondisclosure case, held that a finding of materiality establishes a
presumption of reliance if plaintiff proves the false proxy solicitation to be "an
essential link in the accomplishment of the transaction, 0 2 a proviso not explicit
in the rule lob-5 cases. Chris-Craft, relying on both Mills and Affiliated Ute
Citizens, thus introduced the question whether the "essential link" proviso of
Mills is the law under section 14(e) .r3
Mills also altered the then prevailing causation test under rule 14a-9 by
holding that materiality plus the "essential link" requirement established a
presumption of causation.6 4 The cases generally had concluded that causation was an
independent element of proof under rule 14a-9.06 Some of the cases so holding
considered rule 14a-9's causation requirement to be more onerous to a plaintiff
than that of rule lOb-S. 8 6
The rule lOb-5 cases themselves complicated the causation issue by holding
that causation is an element in damage actions only.0 7 Further complication of
the issue arose in cases where plaintiff claimed that its damages resulted from
the reliance of parties other than itself. For example, in Crane Co. v.
Westingkouse Air Brake Co., 5 Standard purchased large blocks of Air Brake's shares
on the market and disposed of them off the market, driving the market price of
Air Brake above that of Crane's exchange offer and allegedly inducing Air Brake
shareholders to withhold tender. The court held that these facts established
causation as a matter of law, saying:
"What must be shown is that there was deception which misled [other] stockholders
and that this was in fact the cause of plaintiff's claimed injury." Standard's deception
caused injury to Crane. Crane's tender offer could only be successful if its value...
was attractive in comparison with [the market price of Air Brake stock]. The extent
of the damage will have to be determined by the District Court ...[.T]he causation
requirement is satisfied here to the extent of imposing liability upon Standard ...0.1
Crane apparently was precedent under section 14(e), for cases prior to
ChrisCraft equated the causation tests of rule lOb-5 and section 14(e).7
Urged to do so, the Chris-Craft district court refused to follow Crane and
Mills. The district court distinguished Crane on the ground that the facts there
clearly disclosed causation in fact.7' Furthermore, it distinguished Mills as a
proxy case where the plaintiffs claimed their own deception, not that of third
parties. 72 Thus insisting on proof of causation in fact, the district court held
that CCI failed to establish that the BAR nondisclosure induced Piper
shareholders to reject the CCI tender offer and likewise to tender to BPC.73
On appeal the Second Circuit reversed the district court, claiming that the
Mills presumption had been imported into rule lob-5 by Affiliated Ute
Citizens.74 This conclusion presents difficulties. Affiliated Ute Citizens was concerned
with the reliance element and seems not to have extended the Mills causation
presumption to rule 10b-5.7 5 Thus, the Chris-Craftcourt hurdled two obstacles
71. 337 F. Supp. at 1140.
72. Id. at 1139-41. In footnotes the court emphasized its interpretation of Mills as
applicable only to fact patterns wherein plaintiff seeks recovery for his own detrimental reliance,
rather than that of a third party, by quoting language from Aills which in part reads: "a
shareholder has made a sufficient showing of causal relationship between the violation and
the injury for which he seeks redress if, as here, he proves that the proxy solicitation ... was
an essential link in . . . the transaction." Id. at 1139 n.15 (quoting 396 U.S. at 385).
Apparently, the court believed that the corporate shareholder, as opposed to the corporation itself,
is entitled to a privileged remedial position under the securities laws, for immediately
preceding its distinction of Mills the court resorted to language in J.1. Case Co. v. Borak, 377
U.S. 426, 428 (1964), suggestive of such a conclusion. 337 F. Supp. at 1139 n.14.
73. Id. at 1139. Conceding arguendo that Piper shareholders were induced to withhold
tender from CCI by the false registration statement, there remains the fact that over half
of the then remaining shareholders, apparently influenced by a bear market, chose not to
tender to BPC, but rather to hold their shares. Brief for First Boston Corp. at 17-18,
ChrisCraft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341
(2d Cir. 1973)
. This remains the
missing link in the factual chain of causation from the BAR nondisclosure to the reduction
in the appraisal value of CCI's interest in Piper occasioned by BPC's "unfairly obtaining
control" which the court stipulates as CCrs injury. 480 F.2d at 375-76, 380.
74. 480 F.2d at 373-76 (citing 406 U.S. 128, 153-54 (1972)).
75. The Chris-Craft court relied on the following language in Affiliated Ute Citizens:
"Under the circumstances of this case ... positive proof of reliance is not (necessary]. All
that is necessary is that the facts withheld be material .... See M1ills v. Electric Auto-Lite
Co., 396 U.S. 375, 384. . . . This obligation to disclose and this withholding of a material
fact establish the requisite element of causation in fact." 406 U.S. at 153-54 (citations
omitted). It is noteworthy that the Court was here supporting its conclusion that the
Affiliated Ute lower court had erred in holding that proof of actual reliance was necessary. Id. at
152. Moreover, Affiliated Ute Citizens involved plaintiffs' sale of stock to defendants at well
under the prevailing market price, to plaintiffs' detriment. The proofs further disclosed that
defendants had knowingly and falsely represented their purchase price to be the going market
price. Id. at 145-48. The only remaining issue was whether plaintiffs could prove (or benefit
from a presumption) that their sales had been in reliance on the misrepresentations.
Causation in fact as an ultimate legal conclusion, then, depended only upon resolution favorable to
plaintiffs of the one remaining issue, reliance. Since reliance was presumed from materiality,
the facts themselves established causation without the aid of further presumption. Thus,
interpretation of the language quoted supra as constructing a presumption of causation Ignores
the factual context giving rise to the language.
in silence. First, it failed to come to grips with the apparently valid distinction
of Mills made in the district court. Second, in Mills plaintiffs sought to set aside
a merger in a court of equity.76 In this light Chris-Craft failed to employ rule
10b-5 precedents distinguishing, for causation purposes, damage actions and
actions for equitable relief.7 7 The Chris-Craft district court had expressly drawn
Purporting to borrow the elements required by rule lOb-5-scienter,
materiality, reliance, and causation-Chris-Craftinstead substituted the causation
doctrine applicable to rule 14a-9. In thus adopting the presumption of causation
developed in Mills, the court lightened the plaintiff's burden of proof under
section 14(e). The question remaining is whether this indirect expansion of implied
underwriters' liability can be justified in view of the narrower boundaries of
express civil liability imposed by Congress in section 11 of the Securities Act.
IMPLIED UNDERWRITERS' LIABILITY VS. SECTION 11
The district court in Chris-Craft observed that CCI had chosen to pursue its
action under "the broad provisions of Section 10 . . . and Rule 10b-5 . . . and
of Section 14(e)," 79 rather than under sections 11 or 12 of the Securities Act
which were formulated expressly for such complaints.8 0 In fact, neither section
11 nor 12 was available to CCI. Section 11 affords a remedy only to purchasers
under the registration statement in questions'-which CCI was not. Nor would
section 12 have embraced CCI as a possible plaintiff.8 2 That this plaintiff brought
suit under the broader provisions of rule 10b-5 and section 14(e), however,
neither necessitates nor justifies the imposition of implied civil liability in excess of
that required by section 11 which was drafted to deal with the realities of
under76. 396 U.S. at 377-81.
77. See note 67 supra and accompanying text.
78. 337 F. Supp. at 1139.
79. Id. at 1138-39.
80. Id. at 1138.
81. 15 U.S.C. § 77k(a) (1970); see note 18 supra. In addition, § 11(a) establishes
reliance as an element of plaintiff's case when plaintiff purchases the security after the release
of an earnings statement covering a period of at least a year from the effective date of the
Section 11(b) provides, inter alia, a defense of due diligence to all parties except the issuer
who can show, generally speaking, that after reasonable investigation they had reasonable
grounds to believe, and did believe, the statements in the registration statment to be true.
Section 11(c) defines "reasonableness" for purposes of the due diligence defenses as "that
required of a prudent man in the management of his own property."
Section 11(e) limits underwriters' liability to the total price at which the securities the
underwriter himself underwrote were offered to the public, and § 11(g) limits plaintiff's
total recovery to the price at which the security was offered to the public. 15 U.S.C.
§§ 77k(a)-(g) (1970).
82. Section 12, 15 U.S.C. § 77 (1970), is an antifraud provision covering
misrepresentations in the course of sales, or offers to sell, of securities. Standing, however, is limited in
terms to the immediate purchaser from the defendant seller, and this strict privity
requirement sharply limits the section's utility. See 1 CCH Fed. Sec. L. Rep. 114765 (noting one
narrow exception to the privity requirement).
writers' functions.8 3 There was nothing to prevent the Chris-Craft court from
construing the new and undeveloped section 14 (e) in accordance with the
boundaries established by section 11 for the purpose of defining underwriters' liability
under section 14(e). While this would place underwriters in a separate category
under section 14(e), it is submitted that neither the legislative history nor the
legal rationale underlying underwriters' civil liability prevents such preferential
Congress enacted section 11 in the belief that the public's loss of confidence
in the integrity of the securities marketplace accounted for the failure of the
private sector to raise industrial financing.8 4 Faced with the problem of insuring
the integrity of the new offerings market without exterminating it as a source
of new capital, Congress defined underwriters' liability in terms of fiduciary
duty.8 5 This was not settled, however, without considerable debate over the
appropriate standard and its ramifications on the market economy. 0 As originally
enacted,8 7 section 11 embodied features which imposed prohibitive business risks
on underwriters,88 with a resulting diminution in the underwriting of new
offerings.89 Accordingly, in the Securities Exchange Act of 1934 Congress amended
83. For a description of the functions of underwriting and the underwriter, see Dooley,
The Effects of Civil Liability on Investment Banking and the New Issues Market, 58 Va. L.
Rev. 776, 784-92 (1972) [hereinafter cited as Dooley]. A succinct history of American
investment banking is found in United States v. Morgan, 118 F. Supp. 621, 635-50 (S.D.N.Y.
84. Dooley 794-95; 77 Cong. Rec. 2982-83 (1933) (remarks of Senator Fletcher); id. at
2918-19 (remarks of Rep. Rayburn); see Landis, The Legislative History of the Securities
Act of 1933, 28 Geo. Wash. L. Rev. 29, 30 (1959).
85. Securities Act of 1933, ch. 38, § 11(c), 48 Stat. 82, as amended 15 US.C. § 77k(c)
86. The Senate was unwilling to make concessions to the industry at the expense of its
conception of the public interest, and spoke of the duty of participants in the distribution
process in terms of strict liability. S. Rep. No. 47, 73d Cong., Ist Sess. 4-6 (1933). The
House sought to insure the public's right to an honest marketplace without deterring any
significant number of public offerings, and accordingly selected the less rigorous standard of
fiduciary duty. H.R. Rep. No. 85, 73d Cong., 1st Sess. 5 (1933). The latter standard
prevailed in the conference committee. Landis, The Legislative History of the Securities Act
of 1933, 28 Geo. Wash. L. Rev. 29, 48-49 (1959).
87. Securities Act of 1933, ch. 38, § 11, 48 Stat. 82, as amended 15 US.C. § 77k (1970).
88. Plaintiff's sole burden was to prove a material misrepresentation in the registration
statement; reliance and causation were eliminated, even by way of affirmative defense.
Actions could be commenced within two years after discovery of the fraud, to a maximum
of ten years after the offering. Standing extended to all holders of registered securities
without regard to privity. In effect, underwriters and others stood accountable for all trading
losses incurred by holders of registered securities at any time within ten years of the offering.
Dooley 803-05. See also Douglas & Bates, The Federal Securities Act of 1933, 43 Yale L.J.
171, 174-77 (1933); James, The Securities Act of 1933, 32 Mich. L. Rev. 624, 648-5S (1934).
89. Some members of Congress blamed the decrease in underwriting activity on § 11. 78
Cong. Rec. 4984, 8709-10 (1934) (remarks of Senator Thomas); id. at 6877 (remarks of
Rep. Bacon). Industry spokesmen and financial leaders also urged limitation of the civil
liabilities to stimulate the new issues market. Id. at 6203-08 (Washington Post surveys
inserted into record on motion of Senator Hastings).
section 11,90 decreasing underwriters' potential civil liability. 1 It is clear,
therefore, that Congress recognized the necessity for protecting underwriters from
exposure to excessive liability, and acted both to safeguard the integrity of the
marketplace and to allow underwriters a standard of liability reasonably related
to the risks of their role in the market structure.
The ability of lead underwriters0 2 to avoid section 11 liability hinges on their
ability to meet the standards of "due diligence" developed in section 11 (b) (3).
Due diligence imposes a duty of reasonable investigation intended to secure
independent verification of the accuracy and completeness of the disclosure in the
registration statement.93 Courts have examined the requirements of due
diligence imposed on underwriters in Escott v. BarChris Construction Corp.'"and
Feit v. Leasco DataProcessingEquipment Corp.05
In BarChrisa construction firm filed a registration statement which included
a substantial understatement of its contingent liabilities, marked overstatement
of quarterly earnings, gross profits and backlog, and nondisclosure of significant
officers' loans and customer delinquencies. 90 The lead underwriters'
investigation, conducted through counsel, included intensive questioning of BarChris
90. Securities Exchange Act of 1934, ch. 404, § 206, 48 Stat. 907 (codified at 15 U.S.C.
§ 77k (1970)).
91. The maximum period of limitations was reduced from ten to three years. 15 U.S.C.
§ 77m (1970). An underwriter's liability was limited to the aggregate public offering price of
the securities which he himself underwrote. Id. § 77k(e). This enabled the underwriter to
determine, in advance of the underwriting, the extent of the business risk imposed by civil
liability. Lack of causation was made a defense. Id. In addition, a reliance requirement
aimed at purchasers acquiring registered securities a significant interval after the offering was
introduced. Id. § 77k(a). For discussion of these amendments, see 3 L. Loss, Securities
Regulation 1725-28 (1961); Dooley 806-08. The amendments also altered the standard of
due diligence from a fiduciary duty to that of "a prudent man in the management of his own
property." 15 U.S.C. § 77k(c) (1970). Professor Dooley considers this change "cosmetic."
Dooley 806 n.41. See 3 Loss, supra, at 1726.
92. It is common practice for an issue to be underwritten by several investment bankers
who together form the underwriting group. However, the group usually relies on one of Its
number to perform the investigatory and advisory functions preceding the actual marketing
of the issue. This underwriter usually will act as the lead underwriter on the distribution of
the issue as well. Dooley 784-92.
93. 15 U.S.C. § 77k(b) (3) (1970). This section reduces an underwriter's duty to uncover
misrepresentations in portions of registration statements prepared by "experts" or public
officials by allowing the underwriter to rely upon their representations (in the absence of
actual or constructive knowledge of misrepresentations). Id § 77k(b) (3) (C), (D). An
"expert" is defined as "every accountant, engineer, or appraiser, or any person whose profession
gives authority to a statement made by him." Id. § 77k(a)(4). When the underwriter is
himself the expert, or when he is dealing with a part of the registration statement not
prepared by an expert, the duty of the underwriter remains unchanged from that of a prudent
man in the management of his own property. Id. § 77k(b)(3) (A), (B). See 3 L. Loss,
Securities Regulation 1726-27 (1961) ; Dooley 795.
94. 283 F. Supp. 643
95. 332 F. Supp. 544 (E.D.N.Y. 1971).
96. 283 F. Supp. at 654-80.
management and study of a Dun & Bradstreet report on BarChris. The
underwriters then delegated to a "very junior associate" of counsel, working on his
first registration, the task of examining the board minutes and major contracts
of BarChris. The associate spent one day on these tasks and failed to uncover
several major discrepancies.9 7
The court rejected the lead underwriters' claim of due diligence, emphasizing
two aspects of the investigation which it felt to be inadequate. First, the
underwriters (through counsel) failed to make a reasonable attempt to verify
independently management's representations concerning certain details of BarChris'
financial posture. Secondly, the court found unreasonable the lack of
independent verification-indeed, lack of even sufficient examination-of the key
contracts and board minutes. 98
In Leasco, which involved an exchange offer for control of an insurance
company, the question of due diligence centered on representations concerning the
target company's cash reserves. The insurance company possessed a reserve of
approximately $100 million above that required by state regulations (a "surplus
surplus"). Leasco's registration statement disclosed neither the existence of the
surplus surplus nor Leasco's desire to obtain it for its own expansionary goalsP9
The lead underwriters acted only as dealer managers on the distribution and
left preparation of the registration statement entirely to Leasco's counsel. On
the basis of an intensive investigation and several meetings with the Leasco
management, both counsel and the underwriters concluded that it would be
impossible to make a sufficiently reliable estimate of the surplus surplus to justify
its inclusion in the registration statement.100 The underwriters believed that the
insurance company's hostility to the takeover was the reason for Leasco's
inability to aid in such estimation. Actually, Leasco failed to apprise the
underwriters that the insurance company's refusal to aid in estimating surplus surplus
had begun to dissipate fully three weeks prior to the effective date of the
Upon suit brought by shareholders of the insurance company, the court
upheld the underwriters' due diligence defense. The opinion noted that the
underwriters observed many expressions of the target's refusal to cooperate, justifying
their conclusion that the surplus surplus could not be estimated reliably. The
underwriters knew that Leasco and the target had executed a contract effectively
ending the latter's resistance to the takeover, but they also received a letter from
Leasco's counsel stating that the target would not assist in an estimate of surplus
surplus despite the contract. The court deemed the letter conclusive in
establisbing the underwriters' due diligence defense insofar as it showed that even an
exhaustive examination could not uncover that which was unknown.' 02
97. Id. at 692-95.
98. Id. at 697.
99. 332 F. Supp. at 549-52.
100. Id. at 561-62.
101. Id. at 556-59, 562.
102. Id. at 581-83. The letter in question, a copy of which went to the dealer managers,
read in part: "Certified financial statements of Reliance... are not included ... since that
Certain important similarities and dissimilarities between Leasco and
BarChris and between these two cases and Chris-Craftinvite examination. The
relative inexperience of BarChris in public offerings and the speculative nature of
its industry demanded intense involvement of the underwriter in the registration
process; neither factor was present in Leasco or Chris-Craft. Consequently the
underwriters in these cases assumed, with justification, less prominent roles. 10 3
In addition, there was a vast difference in the degree of independent
investigation needed to cure defects in the respective registration statements--if
investigation could cure the defect at all. BarChris involved numerous
misrepresentations covering diverse areas of its financial involvements: many of these,
however, could have been discovered with relatively little additional effort. In
contrast, the underwriters in Leasco faced the easily concealed fact of the
target's willingness to help estimate surplus surplus. Chris-Craft more nearly
resembles Leasco in these respects than it resembles BarChris.
In Chris-Craft, inspection of corporate minutes disclosed the formation on
April 1 of a committee to consider disposal of BAR and that committee's May 21
report that a sale to Amoskeag appeared the best solution. Presumably, First
Boston also knew that the BPC board bad disapproved Amoskeag's first offer
on June 3. Even if receipt of this contradictory information imposed a duty
upon First Boston to make further investigation, 10 4 the fact is that there was
no resource to which First Boston could turn with any substantial chance of
successfully uncovering the deception. The court suggested further inspection
of BPC records or conference with Amoskeag officials. 0 r In reality, the only
existing business record mentioned by the court which contradicted the
representations of BPC officials" was the May 27 letter of understanding between
BPC and Amoskeag. Assuming that BPC officers did leave this sensitive
document among its records subject to the underwriter's inspection, the likelihood
of its discovery by feasible search procedures through the voluminous records
of a large corporation is small. 10 6 Furthermore, the court pointed to nothing
indicating that Amoskeag officials would prove more amenable. Finally, First
Boston had no business dealings with Amoskeag which would give it any
opportunity as a matter of right or business courtesy to investigate Amoskeag's
records to verify its answer. Thus, the suggested further reasonable investigation
probably would have availed First Boston nothing.
Because of the close factual parallels between Chris-Craft and Leasco and
the particular care with which Congress defined the duties of underwriters, °7
it is suggested that the court in Chris-Craftshould have adopted the standards
of due diligence set forth in section 11, rather than those developed for rule
lOb-5, in defining underwriters' liability under section 14(e). Chris-Craft
presented the issue as a matter of first impression and thus gave the court an
unqualified opportunity to incorporate into the new section 14 (e) the carefully
developed and intentionally limited parameters of section 11.
An explanation for Chris-Craft's failure to take advantage of this situation
may lie in the progressive expansion of implied civil liability under rule lob-5
(and now section 14(e)) to the point that the express civil liability provided
in section 11 almost has been supplanted. In contrast to the careful drafting and
amending of section 11, rule lob-5 began almost casually.'08 At the time neither
its drafters nor the SEC contemplated a private right of action under the rule,10 9
but the courts soon established implied civil liability. 10 At an early date the
courts limited use of rule 10b-5 to defrauded purchasers or sellers of securities."'
But later cases extended standing to parties not purchasers or sellers in the
conventional sense. 11 2 Moreover, it appears settled that action under rule lOb-5 is
not barred by the availability of the express liability provisions of section 11.
The net effect is to create a plaintiff class far in excess of that contemplated by
section 11,114 and thereby increase indirectly the liability of potential defendants
by subjecting them to suits by an enormous class of plaintiffs.
In addition, rule 10b-5 extends the scope of underwriters' liability beyond two
limits set by the 1934 amendments to section 11."1r First, the statute of
limitations governing rule lOb-5 actions is that of the forum, 116 almost invariably
longer than the three-year maximum applicable to section 11.117 Second,
damages recoverable under rule lob-5 are limited neither to the underwriter's actual
participation in the offering nor to a maximum representing a business risk
ascertainable at the time of the offering.118 The aggregate result of supplanting
section 11 with rule lob-5 is destruction of the balance section 11 sought to
strike between investor protection and market survival.
Thus, the realistic choices of investment bankers are to accept increased... liability
risks or to avoid such risks by foregoing the activity of underwriting. There are reasons
to expect that they will choose the latter course .... The "boycott" of 1933-34
demonstrates that investment bankers are sufficiently risk averse to forego underwriting
activity when the attendant liability risks exceed... acceptable levels. 110
Application of section 14(e) to underwriters and other defendants without
discrimination will exacerbate this danger. The section 14(e) plaintiff class
exceeds that of rule lob-5 in the exchange offer context, for by its terms section
14(e) discards the purchaser-seller limitation.1 20 The application to section
14(e) of the more liberal causation doctrines of rule 14a-9 will produce more
frequent recoveries for this enlarged plaintiff class.' 2 ' By adoption as the
measure of damages the decline in the appraisal value of CCI's minority interest
caused by the fraud of its competitor, Chris-Craft produces a standard which
Standing Under Birnbaum: The Case of the Missing Remedy, 24 Hastings L.J. 1007 (1973).
Recently, the Seventh Circuit abandoned Birnbaum's purchaser-seller rule entirely. Eason v.
General Motors Acceptance Corp., 490 F.2d 654
(7th Cir. 1973)
, cert. denied, 42 U.S.L.W.
3595 (U.S. April 23, 1974), noted in 42 Fordham L. Rev. 688 (1974).
113. This is the preponderant view. See Stewart v. Bennett, 359 F. Supp. 878, 880-86
(D. Mass. 1973) (collecting cases). The only limitation on rule lOb-S's availability would be
its own scienter requirement. Id. at 884-85; see notes 31-43 supra and accompanying text.
114. E.g., Colonial Realty Corp. v. Brunswick Corp., 257 F. Supp. 875 (S.D.N.Y. 1966)
(plaintiff purchaser of securities not issued pursuant to the registration statement in
question denied § 11 standing but granted rule lob-5 standing); see Dooley 816.
115. See note 91 supra.
116. Charney v. Thomas, 372 F.2d 97, 99-100 (6th Cir. 1967); Errion v. Connell, 236
F.2d 447, 455 (9th Cir. 1956); see Dack v. Shanman, 227 F. Supp. 26
117. 15 U.S.C. § 77m (1970).
118. Dooley 824-27; see Herbst v. Able, 47 F.R.D. 11, 18
; note 91
119. Dooley 841.
120. See Bromberg, The Securities Law of Tender Offers, 15 N.Y.L.F. 459, 548-55 (1969).
121. See text accompanying notes 64-78 supra.
is alien to section 11's limitation of liability to sums ascertainable in advance
of the underwriting. 122
Chris-Craft'sfailure to examine the policies and market realities underlying
section 11 stands in marked contrast to the Second Circuit's recent admonition:
To argue that a section of the 1934 Act, which neither by its terms nor its history
manifests a similar attention to the careful balance struck in Section 11 ...is to
thwart, not serve, the purpose of Congress and the dictates of sound policy: "To impose
a greater responsibility [than that imposed by Sections I1 and 12] ...would
unnecessarily restrain the conscientious administration of honest business with no
compensating advantage to the public."' 2 3
Future cases face the choice of accepting Chris-Craft'sexpansion of
underwriters' liability or reconsideration of the issue in light of the parameters of section
11. These cases must effectuate the congressional judgment that underwriters'
liability in excess of the well defined limits of section 11 eventually may drive
underwriters out of existence and thus eliminate large parts of the securities
market place. In the context of section 14(e), effectuation of that judgment will
involve restriction of underwriters' liability to the parameters of section 11. This
special status for underwriters will not contravene the policy of investor
protection, for the clear alternative will be the loss to investors of the business of
122. See note 17 supra.
123. Lanza v. Drexel & Co., 479 F.2d 1277, 1309
(2d Cir. 1973)
(quoting H.R. Rep. No.
85, 73d Cong., 1st Sess. 10 (1933) in a discussion of directors' duty to disclose under rule
32. This is the conclusion of Bucklo , Scienter and Rule 10b-5 , 67 Nw. U.L. Rev. 562 , 576 n. 64 ( 1972 ) , based on an examination of SEC v . Great Am. Indus ., Inc., 407 F.2d 453 , 463 ( 2d Cir . 1968 ) (en banc) (Hays , J., concurring in result) , cert. denied , 395 U.S. 920 ( 1969 ) ; id . at 464 ( Moore , J., dissenting); SEC v . Texas Gulf Sulphur Co., 401 F.2d 833 , 855 ( 2d Cir . 1968 ) (en banc) (Waterman, J., for the court), cert . denied, 394 U.S. 976 ( 1969 ) ; id . at 867- 68 (Friendly, J., concurring); id. at 869- 70 (Hays, J., concurring & dissenting) ; id. at 870 (Moore , 3 ., dissenting).
33. 479 F.2d 1277 ( 2d Cir . 1973 ).
34. Id . at 1304-06.
35. Id . at 1305.
36. See text accompanying note 31 supra. Consistent application of rule lob-5 scienter formulations to § 14(e) will result in as many versions of scienter under the section as exist under the rule . Concerning rule 10b-S, the circuits are not in accord. The Ninth Circuit has adopted a negligence standard . Royal Air Properties , Inc. v. Smith , 312 F.2d 210 , 212 ( 9th Cir . 1962 ) ; Ellis v . Carter , 291 F.2d 270 , 274 ( 9th Cir . 1961 ) ; Bucklo, Scienter and Rule 10b-5 , 67 Nw. U.L. Rev. 562 , 581 - 84 ( 1972 ) ; see White v . Abrams, Nos. 71 - 2068 , 71 - 2069 , 71 - 2076 , 71 - 2077 (9th Cir. March 15 , 1974 ). Seventh Circuit cases contain dicta dispensing with any requirement of scienter . Parrent v. Midwest Rug Mills , Inc., 455 F.2d 123 , 126 - 27 ( 7th Cir . 1972 ) ; Kohler v . Kohler Co., 319 F.2d 634 , 637 ( 7th Cir . 1963 ) ; Bucklo, supra, at 584- 87 . The same is true of the Eighth Circuit . Vanderboom v. Sexton , 422 F.2d 1233 , 1238 - 39 (8th Cir.), cert. denied, 400 U.S. 852 ( 1970 ) ; Myzel v . Fields , 386 F.2d 718 , 734 - 35 ( 8th Cir . 1967 ), cert. denied, 390 U.S. 951 ( 1968 ) ; Bucklo, supra, at 587- 88 . Authority in the Tenth Circuit is split regarding the existence of a scienter requirement . See Bucklo , supra, at 588- 90 . Compare Gilbert v. Nixon , 429 F.2d 348 , 357 ( 10th Cir . 1970 ) with Stevens v . Vowell , 343 F.2d 374 , 379 ( 10th Cir . 1965 ).
37. 262 F. Supp . 538 (S.D.N .Y. 1967 ).
38. Id . at 553 n. 12 (emphasis added).
39. 331 F. Supp . 981 ( D. Del . 1971 ) (on cross motions for summary judgment ).
40. Id . at 998.
41. 351 F. Supp . 853 , 865 (D. Del . 1972 ) (on motions to modify grant of partial summary judgment). The court examined at length three standards of culpability: strict liability, scienter as previously developed under rule lOb-S, and negligence, reaffirming the lastmentioned after a detailed discussion of prior cases, congressional intent, policy operatives, and possible conflicts with other provisions of the securities laws . Id. at 858-6S.
42. GerstIe v. Gamble-Skogmo, Inc., 478 F.2d 1281 , 1298 - 1301 ( 2d Cir . 1973 ); Union Pac. R.R. v. Chicago &N.W. Ry ., 226 F. Supp . 400 , 408 - 09 (N.D. Ill1 .964); Central Foundry Co. v. Gondelman, 166 F. Supp . 429 , 440 (S.D.N .Y. 1958 ).
43. 2 A. Bromberg , Securities Law: Fraud-SEC Rule 10b- 5 , § 8.4, at 204.79 ( 1973 ) [hereinafter cited by volume as Bromberg]; see id . at 204 . 71 - 72 .
44. 406 U.S. 128 ( 1972 ).
45. Id . at 153-54; accord, List v. Fashion Park, Inc., 340 F.2d 457 , 462 (2d Cir.), cert. denied, 382 U.S. 811 ( 1965 ) ; see SEC v . Texas Gulf Sulphur Co., 401 F.2d 833 , 849 ( 2d Cir . 1968 ) (en banc), cert . denied, 394 U.S. 976 ( 1969 ).
46. Sonesta Int'l Hotels Corp . v. Wellington Associates, 483 F.2d 247 , 251 ( 2d Cir . 1973 ) ; SEC v . First Am. Bank & Trust Co., 481 F.2d 673 , 679 ( 8th Cir . 1973 ); Crane Co . v. Westinghouse Air Brake Co., 419 F.2d 787 , 797 ( 2d Cir . 1969 ), cert. denied, 400 U.S. 822 ( 1970 ).
47. 396 U.S. 375 ( 1970 ).
48. Id . at 384 & n.6. The Court cites for its formulation of the rule 14a-9 materiality test List v . Fashion Park, Inc., 340 F.2d 457 , 462 (2d Cir.), cert. denied, 382 U.S. 811 ( 1965 ) (rule lob-5 action) and General Time Corp . v. Talley Indus., Inc., 403 F.2d 139 , 162 ( 2d Cir . 1968 ), cert. denied, 393 U.S. 1026 ( 1969 ) (rule 14a-9 action) .
49. Republic Tech . Fund Inc. v. Lionel Corp., 483 F.2d 540 , 551 n. 11 ( 2d Cir . 1973 ); Gerste v. Gamble-Skogmo, Inc ., 478 F.2d 1281 , 1301 - 02 ( 2d Cir . 1973 ). But see Rosenblatt v . Northwest Airlines , Inc., 435 F.2d 1121 , 1126 ( 2d Cir . 1970 ).
50. 409 F.2d 937 ( 2d Cir . 1969 ).
51. Bromberg , The Securities Law of Tender Offers , 15 N.Y.L.F. 439 , 597 ( 1969 ) ; see Elco Corp . v. Microdot Inc., 360 F. Supp . 741 , 752 (D. Del . 1973 ).
52. Hamilton , Some Reflections on Cash Tender Offer Legislation , 15 N.Y.L.F. 269 , 290 - 91 ( 1969 ). Professor Hamilton does not attempt a reconciliation of this interpretation of Electronic Specialty with the case's manifest adoption of rule 10b-5 as the basis of § 14(e) principles . 409 F.2d at 940 , 944 - 46 .
53. 480 F.2d at 362 -63.
54. Id . at 362-63 n.14; accord, Gulf & W. Indus., Inc. v. Great Ad. & Pac . Tea Co., 476 F.2d 687 , 696 ( 2d Cir . 1973 ).
55. 480 F. 2d at 357 (citing Affiliated Ute Citizens v . United States , 406 U.S. 128 , 153 - 54 ( 1972 ) (rule 10b-5 violation); Mills v . Electric Auto-Lite Co ., 396 U.S. 375 , 385 ( 1970 ) (rule 14a-9 violation)).
56. List v. Fashion Park, Inc., 340 F.2d 457 , 462 - 63 (2d Cir.), cert. denied, 382 US. 811 ( 1965 ) ; Reed v . Riddle Airlines , 266 F.2d 314 , 319 ( 5th Cir . 1959 ) ; Kohler v . Kohler Co., 208 F. Supp . 808 , 823 (E.D. Wis . 1962 ), aff'd, 319 F.2d 634 ( 7th Cir . 1963 ).
57. Mader v. Armel , 402 F.2d 158 , 160 - 62 ( 6th Cir . 1968 ), cert. denied, 394 U.S. 930 ( 1969 ) (stockholders' class action; held plaintiffs need not prove individual reliance); see Crane Co . v. Westinghouse Air Brake Co., 419 F.2d 787 , 797 ( 2d Cir . 1969 ), cerL denied, 400 U.S. 822 ( 1970 ) (reliance "plays little role in nondisclosure cases"); Vine v . Beneficial Fin. Co., 374 F.2d 627 , 635 (2d Cir.), cert. denied, 389 U.S. 970 ( 1967 ) (reliance not required when defendants intended a forced sale to result and success of the scheme required no volitional act); H.K . Porter Co. v. Nicholson File Co., 353 F. Supp . 153 , 165 (D.RI .)v aff'd, 482 F.2d 421 ( 1st Cir . 1973 ) (following Vine, supra) . Contra, Neuman v. Electronic Specialty Co., [1969-70 Transfer Binder] CCH Fed. Sec. L. Rep. 1 92 , 591 , at 98 , 703 - 04 (ND. I1 . 1969 ) (action by nontendering cash tender offerees against target).
58. 406 U.S. 128 ( 1972 ).
59. Id . at 153-54.
60. Gould v. American Hawaiian S.S. Co., 319 F. Supp . 795 , 801 (D. Del . 1970 ); Note, False and Misleading Proxy Statements, 3 Ga. L. Rev. 162 , 188 ( 1968 ) ; see Union Pac . R.R. v. Chicago & N.W. Ry., 226 F. Supp . 400 , 411 (N.D . fI1 . 1964 ). But cf . Barnett v. Anaconda Co., 238 F. Supp . 766 , 771 (S.D.N .Y. 1965 ).
61. 396 U.S. 375 ( 1970 ).
62. Id . at 385.
63. See note 55 supra and accompanying text .
64. 396 U.S. at 385.
65. Penn Cent . Sec. Litigation, [Current Binder] CCH Fed. Sec. L. Rep . ff 94 ,318, at 95 , 089 - 90 (E.D. Pa. Nov. 19 , 1973 ); Cohen v . Colvin , 266 F. Supp . 677 , 685 (S.D.N .Y. 1967 ); Barnett v . Anaconda Co., 238 F. Supp . 766 , 773 -74 (S.D.N .Y. 1965 ).
66. Globus , Inc. v. Jaroff, 266 F. Supp . 524 , 530 -31 (S.D.N .Y. 1967 ) ; see Barnett v . Anaconda Co., 238 F. Supp . 766 , 772 , 775 (S.D.N .Y. 1965 ); Lockwood, Corporate Acquisitions and Actions Under Sections 10(b) and 14 of the Securities Exchange Act of 1934 , 23 Bus. Law. 365 , 369 ( 1968 ). Contra, Seeburg-Commonwealth Litigation , [ 1972 -73 Transfer Binder] CCH Fed. Sec. L. Rep . 1193 , 802 , at 93 , 450 (S.D.N .Y. 1972 ) (semble).
67. The leading case so holding is Mutual Shares Corp . v. Genesco, 384 F.2d 540 , 546 - 47 ( 2d Cir . 1967 ). Authorities supporting the requirement of causation in damage actions Indude List v . Fashion Park, Inc., 340 F.2d 457 , 463 (2d Cir.), cert. denied, 382 U.S. 811 ( 1965 ); Trussell v . United Underwriters , Ltd., 228 F. Supp . 757 , 771 (D. Colo . 1964 ) ; 2 Bromberg § 8.7 , at 213; cf. Wittner v. Ghen , ( 1964 -66 Transfer Binder] CCH Fed. Sec. L. Rep . U191, 623 , at 91 , 324 (S.D.N .Y. 1966 ). Authorities supporting no requirement of causation in private actions for equitable relief include Kahan v . Rosenstiel , 424 F.2d 161 , 173 (3d Cir.), cert. denied, 389 U.S. 950 ( 1970 ) ; Britt v . Cyril Bath Co., 417 F.2d 433 , 436 ( 6th Cir . 1969 ); Neuman v . Electronic Specialty Co., [1969-70 Transfer Binder] CCH Fed. Sec. L. Rep. ff92 , 591 , at 98 , 703 - 04 (NJ). Ill1.969).
68. 419 F.2d 787 ( 2d Cir . 1969 ), cert. denied, 400 U.S. 822 ( 1970 ).
69. Id . at 797 (citation omitted).
70. Emmi v. First-Mfrs. Nat'l Bank , 336 F. Supp 629 , 636 - 37 ( D. Me . 1971 ); Neuman v . Electronic Specialty Co., [1969-70 Transfer Binder] CCH Fed. Sec. L. Rep. Ii 92 ,591, at 98 , 703 (N.D . MI11 .969).
106. See note 10 supra and accompanying text. The conflict between the concept of reasonable investigation as interpreted to require complete, independent verification on the one hand, and the limitations inherent in specific feasible search procedures on the other, has received scant attention in the courts . The commentators have considered the problem at some length . See, e.g., Comment, Escott v. BarChris: "Reasonable Investigation" and Prospectus Liability Under Section 11 of the Securities Act of 1933 , 82 Harv. L. Rev. 903 , 910 - 16 ( 1969 ) ; Comment, BarChris: Easing the Burden of "Due Diligence" Under Section 11 , 117 U. Pa . L. Rev. 735 ( 1969 ).
107. See notes 84-91 supra and accompanying text.
108. See Conference on Codification of the Federal Securities Laws , 22 Bus. Law. 793 , 922 ( 1967 ) (account of the drafting of rule lOb-5 ).
109. "[The Rule) was intended to give the Commission power .... It had no relation in the Commission's contemplation to private proceedings." Id. The release accompanying rle lob-5 stated: "The new rule closes a loophole in the protections against fraud administered by the Commission ... . " SEC Securities Exchange Act Release No. 3230 (May 21 , 1942 ).
110. Kardon v. National Gypsum Co. , 69 F. Supp . 512 (E.D. Pa . 1946 ) ; see Janigan v . Taylor , 344 F.2d 781 ( 1st Cir .), cert. denied, 382 U.S. 879 ( 1965 ).
111. Birnbaum v. Newport Steel Corp., 193 F.2d 461 ( 2d Cir .), cert. denied, 343 Us . 956 ( 1952 ).
112. The various extensions of the Birnbaum Doctrine are developed in Comment, lob-S