lishes the general standard that the statement must not be "deceptive or misleading to the reasonable investor. . . ." (p. 863). If specific facts are known and their evaluation is a matter of judgment, they should be set forth at least in condensed form; the corporation's own evaluation is not enough. As the Court of Appeals stated in Texas Gulf Sulphur, "The choice of an ambiguous general statement rather than a summary of the specific facts cannot reasonably be justified by any claimed urgency [to make the facts public as quickly as possible]" (p. 864). In determining whether the pertinent information has been properly set forth, the corporation is not charged with knowledge of all existing information. Under the Texas Gulf Sulphur decision, the responsible corporate officials are not required to do more than exercise "due diligence" to ascertain this information (p. 863). If due diligence would not have revealed more than the responsible corporate officials actually knew, then the corporate statement is to be judged on the basis of known facts. Referring to the question of whether or not there is a duty to correct a misstatement, a suggested analysis is that: "If subsequently ascertained information that would have been discovered in the exercise of due diligence when made, there is a duty under 10b and Rule 10b-5 to correct the prior statement promptly. ... [There is a duty to correct a statement made about a continuing event which later turns out to be false or misleading]. On the other hand, if the subsequent event is not part of a continuing process, and the prior statements were proper as of the pertinent date, . . . Section 10b and Rule 10b-5 should [not] be read to require disclosure when the corporation is not trading in its stock. For example, the fact that a corporation not subject to the reporting requirements has voluntarily disclosed its 1967 earnings in a press release should not require it to announce its 1968 earnings. Otherwise, there would be an implied reporting system created through the back door" (Feurstein, p. 395). There is no question that an insider would be liable under Rule 10b-5 if he trades while in possession of material inside information. Likewise, if inside information is disclosed which later turns out to be misleading, it has been indicated that liability may arise under certain circumstances where this information is not corrected (Feurstein, p. 385). The Texas Gulf Sulphur case raises still another difficult question as to whether any liability can arise under Rule 10b-5 where there has been no trading in securities and no statements have been made. The Commission apparently takes the position that nondisclosure of important news by a corporation and its management when no securities transactions by the insiders are involved does not give rise to a violation of Rule 10b-5. This result may be obtained even though information is deliberately withheld because of the effect that its dissemination would have on the securities market. This conclusion is apparent from the Commission's complaint in the Texas Gulf Sulphur case. First, the Commission sought to secure recovery from only those persons who traded, and then only to the extent of their trading or of trading by others who allegedly bought in reilance on information furnished by the insiders. Second, the Commission requested that the company be enjoined from issuing allegedly false press releases, not that it be compelled to disclose material information. The securities' laws may nevertheless be applicable in a non-disclosure situation even if there are no security transactions. For example, the Commission could secure an injunction compelling a corporation subject to the reporting requirements of the Exchange Act to report a specific event which the Commission's rules explicitly require it to report [1934 Act, § 21 (e), 15 U.S.C. § 78u (e) (1964)]. An investor also might have standing to secure such an injunction, as well as to recover damages resulting from the failure to file. "It should be noted that § 20(c) of the 1934 Act, 15 U.S.C. § 78 (c) (1964), makes it unlawful for any director or officers, without just cause, to hinder, delay or obstruct the making or filing of any report required under the act. Arguably, a violation of this section should give rise to a private right of action for the same reasons that a violation of Rule 10b-5 gives rise to such an action" (Fleischer, p. 1296). The difficult and perplexing questions associated with the development of Rule 10b-5 are compounded by the problem of the scope of damages to be awarded, especially in cases of attempts to obtain individual recoveries for violations that affect investors only in a general manner. It is clear from the opinion that all the judges in the Texas Gulf Sulphur decision were concerned with the potential private damage action. The problem of remedies was not before the court, but the majority opinion by Judge Waterman suggests that there may be different tests for liability depending on whether the remedy sought is an injunction or private damages. The concurring opinion of Judge Friendly and the dissenting opinion of Judge Moore are explicit in expressing concern over potential damage actions. For example, Judge Friendly states, "The consequences of holding that negligence in the drafting of a press release such as that of April 12, 1964, may impose civil liability on the corporation are frightening." "When there is a violation involving improper disclosures concerning securities traded on a stock exchange or in the formal over-the-counter market all investors have a legitimate interest. A dilemma is created because there is no rational basis to sort out particular investors for individual recovery on the basis of privity of reliance. However, if individual recovery is given to all investors, the enormity of potential liability is so great that courts will hesitate to find a violation" (Knauss, (Disclosure Requirements-Changing Concepts of Liability," 24 Bus Law p. 55-1968). The principal reason for this concern is the fact that the ultimate financial burden of any recovery against the corporation will fall upon its shareholders, who may be as innocent as those investors who have been injured by the corporation's violation. Currently, this problem is centered around cases of two types: (1) insider trading in publicly owned companies where the insider transaction takes place on the stock exchange or in the organized over-the-counter market (an example would be the Texas Gulf Sulphur case), and (2) misstatements or omissions of material filed with the commission under the 1934 Act (an example would be the BarChris case). In both of these situations, it is virtually impossible to identify particular plaintiffs who suffer injury to a greater degree than any shareholder or any investor or potential investor in the particular security. Although under Rule 10b-5 the prohibited behavior must be "in connection with a purchase or sale," the plaintiff need not be a purchaser or seller if he sues derivatively. Conflicting views on the right to private recoveries have been expressed. Feurstein, advocating the continued right of private remedies, suggests that: "Although the problem of damages seems to be a difficult and perplexing one in this context, there is no reason to hold the statute and rule inapplicable in order to solve it. The courts have repeatedly stated that the requirements of proof in a private action for damages are both stricter and more extensive than in a Commission enforcement action. The private right of action has been implied because it is 'a necessary supplement' to Commission enforcement. It should be allowed only to the extent that . . . it makes the Securities Exchange Act work. ... I believe that the courts have acted wisely in treating problems about the extent of damages as separate and not allowing their concern with these problems to deny the investing public the benefits of Commission enforcement that, standing by itself, is not only unobjectionable but desirable" (p. 403). Knauss, however, believes that the solution to the dilemma is that no individual recoveries should be allowed. He suggests that when the violation under Rule 10b-5 affects interests of all shareholders and investors, the remedy should take a form limited to the following: "1. internal action by the SEC-The Commission is given authority to investigate whether any person has violated or is about to violate any provision of the Securities Act and to publish information concerning such violation. . . . In addition, in the proper circumstances the SEC can stop trading in the security involved. . . . It is submitted that in the majority of cases these internal sanctions and the potential publicity surrounding them will accomplish the principal goal.... "2. an injunction action-In all instances of violation of the Securities Acts or regulations the SEC can seek from a federal court a formal injunctive remedy. Without question an injunctive remedy is available to the SEC to force filing or corrections in a required report. An injunction should also be allowed for misleading statements in press releases and other voluntary statements without need to show personal gain or corporate purpose. . . . In almost every instance of violation the corporation itself would be a proper party, and individual shareholders should be able to bring injunctions in derivative actions. "3. restitution-In cases where the defendants have profited from the violations, such as insider trading situations, the SEC should seek as part of its injunction, ancillary relief in the form of a restitution action for the disgorgement of profits. . . . Under Section 27 of the 1934 Act, which gives the courts power to fashion appropriate remedies, the selection of the recipient could be left to judicial determination. The alternative I would suggest is that the amount recovered be returned to the corporation. . . . If there were profits to the defendants in the case involving the filing of false or misleading data, then these profits should also be disgorged and returned to the corporation. "4. criminal sanctions-In instances where willfullness can be determined the SEC should not hesitate to institute criminal sanctions" (p. 57). A valid criticism to this latter approach, as Knauss suggests in his article, is that it puts a greater enforcing burden upon the SEC and that a court which denies private remedies in cases of this type removes the incentive for private actions. Several remedies are available to persons injured by misleading, inadequate, or non-disclosed corporate news. The Commission's two main objectives, full disclosure and antifraud, are achieved by enforcement of the same measures. The Securities Act of 1933 and the Exchange Act of 1934 provides the SEC with three basic enforcement tools; first, administrative proceedings; second, civil proceedings; and third, criminal prosecutions by the U.S. Attorney. Although primary emphasis is on Rule 10b–5, other enforcement procedures are available both for the private litigant and for the Commission. Among the civil liabilities are those which are explicit and those which are implied. Explicit civil liabilities are spelled out in such sections as Sections 11 and 12(2) of the 1933 Act and Sections 9, 16(b), and 18 of the 1934 Act. Outstanding among the implied civil liabilities are such sections as Section 17 of the 1933 Act and the liabilities flowing through Rule 10b-5 from Section 10(b) of the 1934 Act. There are others, of course, such as Sections 7, 14, and 15 of the 1934 Act. Section 11 of the 1933 Act involves civil liabilities for misleading statements made in registration statements. It requires that there be an "untrue statement of a material fact or an omission of a material fact" in the registration statement. This generally means that full disclosure is required of all "matters which an average prudent investor ought to be reasonably informed before purchase." Any person acquiring the security may sue under this section. Defendants include all signers of the registration statement including attorneys, directors of or partners in the issuer at the time of filing, persons named in the statement with their consent as being or about to become directors, experts whose work formed part of the registration statement, and underwriters. No privity is required between the plaintiff and the defendant since the plaintiff can sue regardless of whom he purchased from. No scienter is a good defense for anyone other than the issuer, but mere lack of knowledge is not sufficient. Where experts are not relied upon, the defendant must show that he made a reasonable investigation of the facts stated in the registration statement, that he had reasonable grounds to believe the facts therein to be true, and that he did in fact believe them to be true. Where experts are relied on, the defendant must show that his reliance was in good faith, but he need not show that he made any investigation of the facts set forth. The plaintiff need not show reliance on the false statements for recovery. If the plaintiff knew, however, that a misleading statement had been made in the registration statement when he purchased the security, he would be barred from any recovery under Section 11, Damages under this section cannot exceed the offering price of the issue. The usual measure of recovery is the price paid less the price at the time of suit or time of sale. Under Section 12(1), any person who offers or sells a security in violation of Section 5 is absolutely liable to the purchaser. Section 12 (2) is a more general fraud provision in which participants are liable for misleading statements, in general, in a sale. Under both Section 12(1) and 12(2) privity is required and liability runs only to the seller's immediate buyer. Unlike 12(1), which is an absolute liability section, scienter is a defense to 12(2). Section 12 covers both distributors and traders. Under this section, it is only the sale that is illegal, not the securities. Section 17 is a general fraud provision covering any fraud involved in the offer or sale of securities in interstate commerce, etc. Any person in the offer or sale is covered. The person who violates Section 17 becomes civilly liable under Section 12(2). Arguably, the availability of Rule 10b-5 remedy makes Sections 12 (2) and 17 unimportant. Rule 10b-5 has all of the advantages of these sections and none of the disadvantages. The advantages of 10b-5 over 12 (2) are that 10b-5 has no statute of limitations, while 12 (2) has a one-year statute of limitations. Under 10b-5 little or no privity is required, as it is under 12(2), and under 10b-5 recission can be obtained rather than recovery of the sales price of the security. Section 18 of the 1934 Act provides for civil remedies against any person in connection with the filing of reports required under the act. Today this section has practically no use, primarily because of a requirement that the plaintiff must show that he relied upon false or misleading statements, and that the price of the security was affected by such a statement. The total influence that corporate publicity has on our society, whether it be in the form of investment information or product advertisement, is enormous. Our economic structure could not function without public investment in private enterprise; yet without control over the flow of corporate publicity no investor would have an intelligent basis for forming a judgment of the value of the securities he buys or sells. To maintain the investor confidence needed to keep the system working, the securities laws impose important obligations upon corporations and provide the means by which these obligations are enforced. APPENDIX IX COMMENT OF VOLKSWAGEN OF AMERICA, INC., ON THE TESTIMONY OF RALPH NADER REGARDING THE CASE OF BOLLARD V. VOLKSWAGEN OF AMERICA, INC., AND TEXT OF JUDICIAL FINDING AND DEFAULT JUDGMENT IN THAT CASE A. LETTER DATED DEC. 7, 1971, FROM GERARD C. FALLON, CORPORATE ATTORNEY, VOLKSWAGEN OF AMERICA, INC., TO SENATOR BIBLE, CHAIRMAN, SENATE SMALL BUSINESS COMMITTEE VOLKSWAGEN OF AMERICA, INC., Hon. ALAN BIBLE, DEAR MR. CHAIRMAN: In his appearance before the Small Business Committee on November 9, 1971, Mr. Nader stated that "Volkswagen was apparently willing to lose this case (Bollard v. Volkswagen of America, Civil Action 178453, U.S. District Court for the Western District of Missouri) and pay the damages to avoid disclosures which could get into the hands of other potential plaintiffs. Their answers would have become a matter of public record for all the world to see." The statement is contrary to fact. It disregards the facts which are fully set forth in the record. It is true that the court without a hearing entered an order imposing sanctions in that case. However, it is untrue that Volkswagen is willing to lose this case. It regards the claim as without merit and is vigorously resisting the action. No judgment has been entered and no payment has been made. Volkswagen has never deliberately withheld information from the plaintiff. Since February of this year, the plaintiff has had in his possession all of the information which he sought however extensive and expensive it may have been for Volkswagen to collect. This material is now and was then "a matter of public record for all the world to see." There is presently pending before the court a motion to relieve us of the sanction imposed by the court. Until such time as that motion is decided, we will have to limit our comments to the above statement of fact. Sincerely, GERARD C. FALLON, B. AMENDED FINDING THAT PLAINTIFF IS ENTITLED TO DEFAULT JUDGMENT FOR PLAIN TIFF... AND DEFAULT JUDGMENT FOR PLAINTIFF AND AGAINST DEFENDANT VOLKSWAGEN OF AMERICA, INC., FILED FEB. 19, 1971, BY CHIEF JUDGE WILLIAM H. BECKER, IN BOLLARD V. VOLKSWAGEN OF AMERICA, INC., CIVIL ACTION NO. 17845-3, U.S. DISTRICT COURT, W. D., MO. (W. DIV.). IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MISSOURI, WESTERN DIVISION [Civil Action No. 17845-3] MARGARET CARROLL BOLLARD, PLAINTIFF v. VOLKSWAGEN OF AMERICA, INC., ET AL., DEFENDANTS AMENDED FINDING THAT PLAINTIFF IS ENTITLED TO DEFAULT JUDGMENT FOR PLAINTIFF AND AGAINST DEFENDANT VOLKSWAGEN OF AMERICA, INC., ON THE ISSUE OF LIABILITY, AND DEFAULT JUDGMENT FOR PLAINTIFF AND AGAINST DEFENDANT VOLKSWAGEN OF AMERICA, INC. This is a suit brought against the manufacturer and the distributor of an allegedly defective Volkswagen automobile which alleged defects caused, in 1969, severe injuries to plaintiff while riding as a passenger in the Volkswagen driven 1 The testimony referred to will be found in part 2 of these hearings, at p. 1068.Committee editor. |