Full opinion text
LEAHY, Chief Judge. Speed v.-Transamerica: CA 480. Plaintiffs’ amended complaint seeks damages from Transamerica Corporation for alleged fraud and deceit in the purchase from plaintiffs of certain shares of stock of Axton-Fisher Tobacco Company, pursuant to a written offer dated November 12, 1942. Various phases of the litigation have already been reported in Geller v. Transamerica Corp., D.C.Del., 53 F.Supp. 625; Id., 63 F.Supp. 248, affirmed 3 Cir., 151 F.2d 534; Zahn v. Transamerica Corp., D.C.Del., 63 F.Supp 243, reversed 3 Cir., 162 F.2d 36, 172 A.L.R. 495; Friedman v. Transamerica Corp., D.C.Del., 63 F.Supp. 247; Id., 5 F.R.D. 115; Speed v. Trans-america Corp., D.C.Del., 5 F.R.D. 56; Id, D.C., 71 F.Supp. 457. Plaintiffs have sued defendant, Transamerica Corporation, for having purchased from them Class A and Class B stock of the Axtbn-Fisher Tobacco Company at $40 and $12 per share, respectively, pursuant to a written offer dated November 12, 1942, which Transamerica made to all minority stockholders. The complaint alleges at the time of the sale the true value of the Class A stock was more than $200 per share and such value of the Class B stock was in excess of $100 per share. Plaintiffs allege Transamerica deceived them into selling their shares in the manner hereinafter stated. Plaintiffs seek judgment in an amount equal to the difference between the sales price and the alleged true value. The action purports to be a class action on behalf of all Class A and Class B stockholders who accepted the offer. The complaint alleges in accepting Transamerica’s offer, plaintiffs determined the value of their shares in reliance upon the Axton-Fisher annual report for 1941 and its accompanying letter, which Transamerica had caused to be mailed to the Axton-Fisher stockholders. The 1941 report showed the ■ average cost of AxtonFisher tobacco inventory to be $7,516,970, and the accompanying letter showed a decline in sales and net income since 1938; whereas, the complaint alleges, at the time when plaintiffs sold their stock the AxtonFisher .tobacco inventory had a real value in excess of $17,000,000 and its earnings were improving. The complaint further alleges that prior to the time when Transamerica made its offer, it had determined to purchase as many Class A and Class B shares as possible and thereafter to convert its Class A stock into Class B stock, to redeem the remaining Class A stock, and as a final step, to merge or dissolve Axton-Fisher, to the end it might capture for itself the increased but undisclosed value of the Axton-Fisher inventory, all of which Transamerica did. Under these circumstances, the complaint alleges, Transamerica was under a fiduciary duty as a majority stockholder to inform the minority stockholders the real value of the Axton-Fisher inventory was m excess of $17,000,000; that its earnings were improving; and that Transamerica had determined upon a plan which had as its ultimate objective the merger or dissolution of Axton-Fisher; and that if Transamerica had made known these facts to plaintiffs, they would not have sold their stock. The complaint contains four counts. The first count alleges a common law action of fraud and deceit. The last three counts allege violations of the three sub-paragraphs of Rule X-10B-5 of the Securities and Exchange Commission. I previously dismissed count 1, 71 F.Supp. 457. However, that count is regenerated now on a motion of plaintiffs asking me to reconsider that particular decision at this time. The second count, in which the SEC has asked to be joined as amicus, alleges a violation of that portion of the SEC’s Rule X-10B-5 which provides as follows: “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of mails, or of any facility of any national securities exchange “1) To employ any device, scheme, or artifice to defraud, * * * in connection with the purchase or sale of any security.” The third count alleges a violation of that.portion of Rule X-10B-5 which reads as follows: “It shall be unlawful; * * * “3) 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.” The fourth count alleges violation of that portion of Rule X-10B-5 which reads as follows: “It shall be unlawful * * * “2) To make any untrue statement of a material fact or to omit to state a máterial fact necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading or * * * m connection with the purchase or sale of any security.” The substance of counts 2 and 3 is, defendant, prior to November 12, 1942, determined upon a plan to acquire as many shares as possible of Class A and Class B stock of Axton-Fisher Tobacco Company at prices far below their value in fact. The first attack alleged was a letter sent to Axton-Fisher stockholders dated November 12, 1942, which offered $40 for the A stock and $12 for the B stock, but the offer was conditioned upon the acceptance of at least 24,000 shares of the A stock and 18,000 shares of the B stock. The complaint charges defendant Transamerica, prior to November 12, 1942, planned to capture the Axton-Fisher Tobacco Company inventory by merging, dissolving or liquidating Axton-Fisher. In view of such plan, it is charged the letter of November 12, 1942 lacked information concerning the value of Axton-Fisher’s inventory and its increased earnings and the non-disclosure of these matters by Transamerica constitutes a violation of subparagraphs 1 and 3 of Rule X-10B-5. Count 4 in the first amendment made no reference to any plan by Transamerica to merge, liquidate or dissolve Axton-Fisher. It was charged there Transamerica deceived plaintiffs by failing to disclose the value of Axton-Fisher’s inventory and the increase in earnings; and Transamerica’s non-disclosure of these facts constituted a violation of subparagraph 2 of Rule X-10B-5. In a later amendment, however, count 4 charged intent to liquidate. I think this indicates, as I shall explain more fully later, that intent to liquidate, etc., is the heart of the case under plaintiffs’ own theory. Before stating the respective arguments of the parties and the legal issue as it appears to me, it will be necessary to state the facts in almost monotonous detail. The chronological order of important events looks like this: 1941 May 14: (1) Transamerica purchased 80,610 shares of Axton-Fisher B stock, subject to certain options, for $1,000,000. Such purchase enabled defendant to exercise effective control of Axton-Fisher. (2) Through the offices of L. M. Giannini, Transamerica selected Carl B. Robbins to take charge of the operations of AxtonFisher. Robbins’ salary arrangement was agreed to initially by Transamerica. May 24: Transamerica was responsible for the election of a new Board of Directors for Axton-Fisher. October 22: Robbins reported to L. G. Hunt, a representative of Transamerica, that tobacco replacement value exceeded book value by 99.8% December 19: Transamerica entered into an oral agreement with Axton-Fisher to purchase up to $1,000,000 of prior preferred stock to be issued under a plan to be submitted to the SEC. 1942 February 13: Axton-Fisher filed its plan of recapitalization at the San Francisco office of the SEC. ' March 23: SEC issued a deficiency letter. April 21: Transamerica drafted a letter to be submitted by Axton-Fisher with respect to the withdrawal of the plan. May 4-6: Axton-Fisher requested withdrawal of the plan. SEC agreed to the withdrawal. May 7-8: Withdrawal announced by Robbins; at same time announcement made that thereafter Transamerica would feel free to buy and sell Axton-Fisher stock. May 22: Cullman, a former director of Axton-Fisher and an experienced man in the tobacco business, wrote a letter to Giannini suggesting that Axton-Fisher be liquidated. May 27: Reply by Giannini, stating that he did not think that Transamerica would be interested in liquidation at that time, but suggested that any recommendation be submitted in concrete form. May 28: (1) Robbins, advised of the Cullman letter, visited San Francisco and discussed liquidation with Giannini. (2) Testimony of Robbins that the possibility of liquidation was so real that he procured an oral agreement that in such event Robbins would receive 5% of Transamerica’s profit in lieu of his bonus contract with Axton-Fisher. (3) Testimony of Robbins that Giannini offered him the presidency of Transamerica at $50,000 per year as a method of enabling Robbins to share in Transamerica’s profits with the least tax burden. June 16: (1) Giannini replied to a second letter of Cullman wherein a “concrete plan” was indicated, and suggested that Cullman contact Andrews, vice-president of Transamerica. (2) Memorandum prepared by Giannini in which was stated: (a) Cease recapitalization plans until the six months operating statement was available. (b) Purchase A stock so as to eliminate Cullman as a factor. (3) 2,000 B shares purchased by Transamerica. June 22: Beginning of Transamerica’s extended purchases of A shares. July 1: Robbins forwarded a proposed option for 2,000 B shares held by Transamerica. July 2: Letter from Andrews to Robbins requesting that nothing more be done on recapitalization until success of stock purchase program could be determined. July 7: Reply to Andrews by Robbins, expressing hope that defendant’s purchase program would be successful. July 10-20: Six months operating statement received by Transamerica; operating loss before taxes and other income of $17,241.77. August 29: Maximum Price Regulation for flue-cured tobacco. August 31: (1) Robbins held conference with Giannini in San Francisco. (2) Testimony of Robbins that inventory, taxes, and adverse government regulations relating to operating potential were discussed. September 2: Option for 2,000 B shares given Robbins; $10 per share option price •representing cost to Transamerica. September 11: Report to Axton-Fisher Board by Robbins, expression of hope for solution to recapitalization. September 18: Cullman’s sale of his entire Axton-Fisher holdings (9,430 shares) at $47.50 per share. Robbins influential in negotiating transaction for Transamerica. October 6: Independent auditors presented their report for first 8 months of 1942. November 12: Letter from Transamerica to all Class A and Class B stockholders offering, under certain conditions, to buy A stock at $40 per share, B stock at $12 per share. December 4: Maximum Price Regulation for Burley tobacco. 1943 January 8: Quotas imposed upon Burley tobacco; purchases limited to 90% of historical amounts. January 14: (1) Visit by Robbins to San Francisco. (2) Recommendation by Robbins that liquidation be effected. (3) Offer by Giannini to initiate contacts with other tobacco companies. February 25: Smith, an officer of the Bank of America, reported to Giannini a conversation with Robbins about the value of the tobacco and the amount Robbins hoped to get on a trade with the Big Five. March 7: Transamerica paid $450,000 to Standard Commercial Tobacco Company, to release certain options on Transamerica’s original share purchase. March 16 to April 30: Conferences with Philip Morris about the disposition of Axton-Fisher. Conclusion reached that Philip Morris would only be interested in the inventory of Axton-Fisher. March 29: Transamerica converted its A stock into B stock. April 1: Memorandum prepared by Giannini regarding telephone conversation with Robbins about Robbins’ 5% remuneration and state of Philip Morris negotiations. April 8: Visit by Robbins to San Francisco to relate Philip Morris’ proposal to purchase the inventory, and discussion on Robbins’ 5% compensation. April 28: Purchase by Transamerica of 493 B shares at $42. April 30: At Transamerica’s suggestion, Axton-Fisher resolution for redemption of A stock, notice of redemption mailed. June 3-8: (1) Axman letter addressed to Axton-Fisher reminding Board of A stock liquidation rights. (2) Admission by Robbins that Giannini had advocated liquidation as Axton-Fisher’s sole prospect in February, 1943. June 8: Letter from Dawson to Panario and Schimpff, Transamerica agents, recommending disclosure by Transamerica of A stock liquidation rights. June 15: Axton-Fisher Board meeting; Director’s purpose to rescind April 30 resolution of redemption put off until Transamerica representative could contact Giannini. Letter from Transamerica suggesting personal liability of Directors for rescission read to Board. • June 16: Board modification of April 30 resolution. Redemption became voluntary rather than mandatory. June 28: Letters from Schimpff, Transamerica officer, to Axton-Fisher Diréctors and key officers, protesting rumor that Axton-Fisher was to be liquidated. July 15 : Decision of the Kentucky Court of Appeals that mandatory April 30 resolution was binding. July 16: Complaint in Geller case filed, alleging Transamerica had caused A stock redemption to reap profit by merger or liquidation. July 31: Resignation of old Board and election of members suggested by Transamerica. August 1: Election of Tapp, Vice-President and Finance Committee member of Transamerica, as President of AxtonFisher. August 9: Giannini memorandum suggesting proper price of B stock to be $120 per share. November 5, 17, 19, 20 and 22: Conferences with Philip Morris about acquisition of Axton-Fisher. .November 25: Issuance of printed audit of Axton-Fisher for first ten months of 1943. December 31: Decision in the Geller case holding for defendant. 1944 January 13, 19, 24, 28: Conferences with Philip Morris regarding acquisition of Axton-Fisher. March 14: Conferences between Lybrand, Ross Bros. & Montgomery, auditors and Philip Morris representatives; aspects of dissolution discussed. ■ April 18: Storage agreement providing for warehousing of tobacco inventory. April 27: Recommendation of liquidation by Andrews to Transamerica Board. April 29: Axton-Fisher Board meeting; redemption of preferred stock. May 25: Letter from Andrews to AxtonFisher giving reasons for, and suggesting, liquidation. May 31: Axton-Fisher Board resolution, approving dissolution. This case turns, as the detail-will show later, on the single question as to whether it is a proper inference from all the testimony that Transamerica intended prior to November 12, 1942, to merge, dissolve or liquidate Axton-Fisher. I now turn to a statement of the facts. The Facts Transamerica is a large and powerful investment company which was dominated by the late A. P. Giannini, whose business acumen was said to be legendary. AxtonFisher was a small tobacco company, the controlling shares of which were purchased by Transamerica for $1,000,000. Transamericá’s initial interest in Axton-Fisher consisted in the purchase of'80,610 shares of Class B stock by Capital Company, a wholly owned subsidiary of Transamerica. These shares were acquired from Standard Commercial Tobacco Company pursuant to an agreement dated March 21, 1941, be-' tween Capital Company, Standard Commercial Tobacco Company, and John M. Harlan, its Trustee under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. Subsequently, Capital Company assigned its interest in the contract to Transamerica. At the time when Transamerica acquired the 80,610 shares of Class B stock of AxtonFisher, the latter company had issued and outstanding .14,136 shares of Preferred stock entitled to preferential cumulative dividends of $6 per share per year, and entitled on redemption or liquidation to $105 per share; 45,465 shares of Class A stock entitled to cumulative dividends of $3.20 per share after the payment of dividends on the preferred stock; and in addition, after the Class B stock received $1.60 per share in any given year, the Class A stock was entitled to participate as a class equally with the Class B stock as a class in the distribution of further dividends. Upon dissolution, liquidation, merger or consolidation or a sale of substantially all of the Axton-Fisher assets, the Class A stock was entitled to receive all unpaid accrued dividends and, in addition, $2 per share for each $1 per share paid upon the Class B stock. The Class A stock was redeemable at $60 per share plus accrued dividends, and was convertible into 'Class B stock, share for share, at the holders’ option at any time prior to the redemption date; 112,012 shares of Class B stock, subject to the preferential rights of the Preferred stock and Class A stock. Dividend defaults had existed on the Preferred stock and the Class A stock since 1937. As a result, the shares of each of these classes had equal voting rights with the Class B stock under the Charter. The contract of March 21, 1941, was negotiated toy L. M. Giannini, who was a director but not an officer of Transamerica. While he was in Washington on other business, persons interested in Standard Commercial Tobacco Company approached him as President of the Bank of America with a view to obtaining a loan for Standard Commercial Tobacco Company. Giannipi recognized that the loan would not be a bankable transaction, but he thought the Axton-Fisher situation was one that had possibilities from Transamerica’s standpoint. Giannini reported his views to Grant, the President of Transamerica. At Grant’s request, Giannini carried forward the negotiations as Transamerica’s special representative. Grant died on March 25, 1941. After Transamerica acquired its interest in Axton-Fisher, W. L. Andrews, Vice-President and Treasurer of Transamerica, was the corporate officer who was actively in charge of the AxtonFisher investment. In the study which Giannini made ■ of Axton-Fisher, he concluded that the deal would be of no interest unless the capital structure of Axton-Fisher could be revamped through a recapitalization. Giannini recognized that at some stage, equity money should be put into the company for purposes of expansion but that the Class A stock was restrictive of future financing. This was because under the terms of the charter, the Class A stock as a class was entitled to participate equally with the Class B stock as a class in the company’s dividends. Because of this extraordinary provision the Class A stock stood to receive one-half of the dividends resulting from any additional investment in the Class B stock. Consequently, before Transamerica purchased the Class B stock, it employed a Mr. Hunt to work out a plan of recapitalization which would be acceptable to AxtonFisher and its stockholders. The plan as originally developed, contemplated the issuance of debentures in exchange for the Preferred and Class A-stock. Transamerica had Hunt go to Louisville to discuss this plan with the Axton-Fisher directors. After receiving their tentative approval, Giannini took the plan up with the officers of Transamerica, who authorized him to proceed with the negotiations. It was only after assurances had been received from the Axton-Fisher directors that the plan developed by Hunt was acceptable, that Transamerica became interested in acquiring the Class B stock. When the purchase of stock was under consideration, Giannini talked to Robbins, who was President of Commodity Credit Corporation, about the possibility of taking a position with Axton-Fisher, if Transamerica purchased its stock. Later, Giannini arranged for Robbins to meet the directors of Axton-Fisher. After Transamerica had acquired its Class B stock, Robbins was employed by the directors. In June of 1941, Robbins became Chairman of the Board, and in September of 1941, Robbins became President of the Company. The recapitalization involving the issuance of debentures, which the directors had tentatively approved prior to Transamerica’s acquiring its shares, became the subject of active consideration immediately after Transamerica purchased its stock, and the debenture plan was revised several times during the summer and early fall On at least two occasions, Cullman, one of Axton-Fisher’s directors, expressed opposition to the debenture plan. , On January 6, 1942, the directors of Axton-Fisher authorized the preparation of a registration statement providing for the issuance of a new 5% cumulative Prior Preferred stock to be offered in exchange for the 6% Preferred stock and Class A stock upon the basis stated in the resolution. Cullman was the only director who voted against this plan. This latter plan was modified in some particulars at the directors’ meeting held on February 10, 1942. On February 11, 1942, Transamerica entered into a written contract with AxtonFisher which obligated Transamerica to underwrite approximately $1,000,000 par value of the Prior Preferred stock to be issued under the plan, provided that prior to April 10, 1942, Axton-Fisher amended its charter so as to authorize the issuance of the Prior Preferred stock. This written contract was an effectuation of an earlier verbal commitment which Andrews made with Robbins on December 19, 1941. Cullman was opposed to this plan and on February 26, 1942, he resigned as a director of Axton-Fisher. The Preferred stock plan was set forth in a registration statement which AxtonFisher filed with the SEC on February 13, 1942. In the normal course of events, the registration statement would have become effective on March 5th, § 8(a), Securities Act of 1933, 15 U.S.C.A. § 77h (a). In the interim, however, the SEC held a hearing on the registration statement, and on March 23, 1942, the SEC issued its customary deficiency statement with respect to the registration statement. Since under the Axton-Fisher By-Laws twenty days’ notice of a stockholders’ meeting was required, the issuance of the deficiency notice on March 23rd made it impossible to clear up the deficiencies in sufficient time to permit the calling of a stockholders’ meeting by April 10th. Hence, Transamerica’s obligation under its underwriting agreement expired on that date; Transamerica advised Axton-Fisher that it was unwilling to extend its commitment. On May 4, 1942, Axton-Fisher wrote the SEC and requested its consent to the withdrawal of the registration statement. On May 7, 1942, Axton-Fisher issued a press release announcing the abandonment of the Preferred stock plan. The announcement stated that Transamerica had advised Axton-Fisher that it (Transamerica) : “will feel free to buy or sell or otherwise trade in the various issues of the company’s outstanding securities if its judgment should in the future dictate such action.” On May 22, 1942, Cullman, the director who had opposed all recapitalization plans, wrote Giannini and urged that Axton-Fisher be liquidated. On May 27, 1942, Giannini replied saying he doubted whether this would meet with Transamerica’s approval, but if Cullman had anything definite in mind, it would receive consideration. On May 28,1942, Robbins arrived in San Francisco to confer with Giannini. What was said between Giannini and Robbins during these conferences is one of the fact issues about which the parties are in sharp dispute. Shortly after the withdrawal of the Preferred stock plan from the SEC, Robbins and Andrews began to work upon another plan of recapitalization. By June 12, 1942, a plan had been developed for the exchange of one share of Prior Preferred stock plus cash for each outstanding share of 6% Preferred stock, and an exchange of two shares of Class B stock plus cash for each outstanding share of Class A stock. This plan, like the Preferred stock plan, required an amendment to the AxtonFisher Charter. The question therefore arose whether it would be possible to get the necessary vote of % of the Class A stock to put through the Charter amendment. Defendant contends that then Transamerica decided to begin the acquisition of Class A stock so- as to have some assurance that the plan would succeed. Prior to this time Transamerica had purchased no Class A stock. After June 16th however, Andrews arranged with the brokerage firm of Merrill-Lynch to offer Transamerica any Class A stock that might come on the market. Between June 22, 1942 and September 10, 1942, Transamerica bought 6,842 shares of Class A stock; and on September 18th and 22d, 1942, Transamerica purchased 9,430 shares of Class A stock from Cullman and associates. These were the only shares of Class A stock purchased by Transamerica prior to making its offer of November 12, 1942. However, the purchases gave Transamerica more than a ten percent (10%) interest in the Class A stock, and therefore it made monthly reports of its purchases to the SEC. In the meantime, in the latter part of August, 1942, Robbins was in San Francisco and again saw Giannini. What took place at this meeting is discussed infra. At this point it is sufficient to note Robbins and Giannini have sharply disagreed in their testimony. On November 12, 1942, Transamerica made its offer to purchase Class A stock at $40 per share and Class B stock at $12 per share. Pursuant to this offer, Transamerica acquired 13,536 shares of Class A stock and 5,707 shares of Class B stock. In January of 1943, Robbins again saw Giannini in San Francisco. Robbins testified that in January the OPA had placed a ceiling price on Burley tobacco, and he advised Giannini that it seemed advisable for Axton-Fisher to realize upon the appreciation in its tobacco inventory. Giannini testified that he did not agree with Robbins, but told him that in view of his strong feeling in the matter, he should see what could be done and submit his proposal to Transamerica on the basis of specific facts. On March 29, 1943, Transamerica converted the 30,068 shares of Class A stock which it then owned, into a like number of shares of Class B stock in accordance with the conversion privilege conferred upon Class A stockholders by the AxtonFisher Charter. On April 30, 1943, Axton-Fisher called for redemption on July 1, 1943 the remaining Class A stock at $80.80 per share, the redemption price fixed by the Charter. At the same time the directors declared a dividend of $26.25 per share upon the Preferred stock for the purpose of paying the accrued dividends in full. Prior to the resolution of redemption being adopted by the AxtonFisher directors, Transamerica, through its attorney, had advised Axton-Fisher that in its opinion the Class A stockholders were entitled to convert their shares up until the redemption date fixed in the redemption resolution. The net effect of Transamerica’s conversion of its Class A stock into Class B stock, the redemption of the remaining shares of Class A stock, and the payment of the dividend arrearages upon the Preferred stock was to give Axton-Fisher a capital structure consisting solely of 6%' Preferred stock and Common stock. In addition, al'l dividend arrearages on the 6% Preferred stock were paid in full. In short, the capital structure was simplified and the Class A stock completely eliminated. Robbins told Judge Dawson that in February of 1943 Giannini had concluded that Axton-Fisher should be liquidated. Dawson said that this statement by Robbins was the reason that the directors passed the resolution of June 16th which attempted to make the redemption of the Class A stock optional with the stockholders instead of mandatory. Robbins’ statement to Dawson that in February Giannini had concluded that Axton-Fisher was to be liquidated, conflicts with Robbins’ testimony in this case. When Robbins threatened to quit AxtonFisher, Transamerica sent Panario and Schimpff to Louisville on its behalf in June of 1943. Both of these persons told Judge Dawson that Transamerica did not contemplate liquidating Axton-Fisher. Furthermore, Transamerica gave Judge Dawson its written assurance it was not contemplating any dissolution, liquidation, merger, or consolidation, or a sale of substantially all of the assets of Axton-Fisher. Nevertheless, the directors of Axton-Fisher adopted the resolution of June 16, 1943 which attempted to rescind the mandatory redemption resolution of April 30th, and to make the redemption optional with the Class A stockholders. On July 16th the Court of Appeal's of Kentucky held in Taylor v. Axton-Fisher Tobacco Company, 1943, 295 Ky. 226, 173 S.W.2d 377, 148 A.L.R. 834, that the resolution of June 16th was invalid and that the resolution of April 30th was binding on all Class A stockholders. On May 31, 1944, Axton-Fisher was dissolved, and on June 20, 1944, it entered into a contract with Philip Morris under which it agreed to sell to Philip Morris, all of its real estate, machinery, equipment, furniture, fixtures, supplies, brands, trademarks, trade names, and some 8,710,000 pounds of tobacco for an aggregate consideration of $8,925,000. Shortly thereafter, Axton-Fisher paid a liquidating dividend to its stockholders, consisting of warehouse receipts for tobacco. This was supplemented in December of 1944 by a cash liquidating dividend of $7.50 per share, and in September, 1946, by an additional cash liquidating dividend of $1.50 per share. 1. It is not important to name the precise liquidation value of the Class A and Class B shares at the time of the November 12, 1942 letter. It is sufficient here to state that the value in each instance would have been substantially in excess of the offering price. It is a fact that the letter of November 12, 1942 made no statement as to the earning position of Axton-Fisher and made no mention of the obviously greatly increased value of the tobacco leaf inventory. The matters which I have thus far detailed were undisputed. Before discussing the inferences which I shall draw from other facts and before discussing the testimony which I accept in cases where there is dispute, I shall pause to state the contentions of the parties. Stated broadly, plaintiffs contend that the evidence shows that at the time of its offer of November 12, 1942 Transamerica planned to cause a liquidation, merger, consolidation, etc., of Axton-Fisher and that this, plus the non-disclosure of Ax-ton-Fisher’s much increased earnings and its greatly increased tobacco inventory, constituted a violation of Rule X-10B-5 of the Securities and Exchange Commission and that consequently defendant is liable to these plaintiffs in damages. Plaintiffs further contend that defendant violated the provisions of the Securities and Exchange Act even absent a plan to liquidate, etc. They claim that the letter of November 12, even under such circumstances, failed to make adequate disclosure within the meaning of Rule X-10B-5. On the other hand, defendant’s position, also stated broadly, is that the evidence does not justify the inference that there was any determination on Transamerica’s part prior to November 12, 1942, to capture the Axton-Fisher inventory by merging, dissolving or liquidating Axton-Fisher and, even if such proof is present, plaintiffs cannot recover unless they also prove (1) they sold their stock in reliance on the stockholders’ report of 1941 and (2) because of lack of information concerning the value of Axton-Fisher’s inventory and its increased earnings. In addition, the parties disagree as to whether the complaint states a proper class action upon the assumption that a good cause of action is stated. The issue, as I see it, is slightly different from the way the parties- perceive it. I think the single issue here is whether Transamerica at the time it sent the letter of November 12, 1942 planned to capture the Axton-Fisher inventory by merging, dissolving, or liquidating Axton-Fisher. I think the other arguments by the parties (such as increased value of inventory, fair price, etc.) are dependent upon the proper answer to this single inquiry and are not arguments of independent significance. If there was such a plan, failure to make disclosures in the letter of November 12, 1942, would be most significant and constitute a violation of the mentioned subsections of Rule X-10B-5 of the SEC. Before considering the lengthy evidence, I want at this time to commend all the attorneys, including the SEC who appeared as amicus curiae, for the excellence of their arguments and briefs. But this very excellence made my task more difficult. The testimony and the proper inferences to be drawn from it are first considerations. This treatment of the testimony will necessarily be repetitious because the subject matter of the disputed testimony and the subject matter of undisputed facts often coincide and overlap. I shall intersperse through this discussion of the evidence a consideration of the applicable legal principles. The single inquiry, then is, did Transamerica plan to capture the AxtonFisher inventory by merging, dissolving, or liquidating Axton-Fisher at the time it sent its letter of November 12, 1942. There is little direct evidence to support plaintiffs’ charge of such plan. The only direct evidence is, indeed, to the contrary, e. g., the testimony of Giannini that there was no such plan contemplated prior to November 12, 1942. Plaintiffs, however, ask me to find Transamerica had such a plan, purely as a matter of inference, and based primarily on the testimony of Robbins. They claim the direct evidence of defendant is not only unworthy of credence but the only reasonable inference from all the testimony is Transamerica had such a plan at the time it mailed its letter of November 12, 1942. Such inference — that there was such a plan— must be based on the state of mind of Giannini and the Axton-Fisher directors. To ascertain the state of mind of any witness in the case at bar at a particular point in time, I think it plain one must consider facts for a period, for example, both prior and subsequent to November 12, 1942. Behavior rather than words among men and women is most significant in ascertaining intent. Attorney General v. Drummond, 1 Drury & Warren 353, 368 (Lord Chancellor Sugden, “Tell me what you have done under such a deed, and I will tell you what that deed means”.). Although the parties are in dispute, I accept the thesis plaintiffs must show there was a pre-existing intent to liquidate, etc., at the time of the November 12 letter by a preponderance of the probabilities. An important part of plaintiffs’ case is built around Robbins’ testimony. His deposition was taken by plaintiffs on three occasions. These will be considered separately, but the main point emphasized in Robbins’ testimony is that in May 1942 Giannini discussed with him the liquidation of Axton-Fisher and at the same time agreed Robbins should be paid 5% of any profit Transamerica might make as a result of its stock ownership. In considering the credibility to be accorded Robbins’ testimony, I am not unmindful plaintiffs found it necessary to take his deposition on three separate occasions. I do not think, however, this greatly affects Robbins’ credibility because with one exception (this exception deals with the obvious misstatement by Robbins as to the time in 1942 he visited and discussed the liquidation with Giannini in California) the deficiency in his deposition was the fault of plaintiffs’ counsel rather than of Robbins. 2. (a) Robbins’ First Deposition. At the time of the first deposition, Robbins testified in the middle of 1942 Giannini discussed with him the best way of realizing the increased value of Axton-Fisher inventory. Robbins stated this conference made an impression upon him because it was during this conference he obtained Giannini’s' consent to a change in his (Robbins’) employment contract. Under his existing arrangement with Ax-ton-Fisher, Robbins was entitled to 5% of Axton-Fisher profits above a specified historical average. Under the revision which Robbins said Giannini agreed to in “midsummer of 1942” Robbins became entitled to 5% of any profits which Transamerica might make as a result of its stock ownership. True Robbins stated it was his understanding from this conversation Giannini desired him to continue with the operation of Axton-Fisher as though operation of the company was a permanent thing. Robbins did, in fact, so continue the operation of Axton-Fisher as is evidenced, for example, by continued radio advertising of a fairly new brand of cigarettes called “Fleetwood”. Robbins also stated Transamerica had arrived at no express decision, so far as he was informed, in the summer of 1942 to dispose of AxtonFisher. Following Robbins’ deposition, plaintiffs examined Giannini and Andrews. It appeared from this examination that on May 22, 1942, Cullman had written Giannini suggesting Axton-Fisher be liquidated. The testimony indicated Robbins was in San Francisco for the conference with Giannini some time subsequent to the time when Cull-man’s letter was received. This conclusion is enforced by testimony Robbins had seen a copy of Cullman’s letter prior to departing for San Francisco and en route had prepared a draft of reply for Giannini to make to Cullman. The content of this letter indicates that at this time (i. e., en route to San Francisco) Robbins was unsympathetic to liquidation and his interests and energies were being concentrated on making Axton-Fisher a successful company. I am unable to accept defendant’s analysis of this testimony. I agree while on the train Robbins was unsympathetic to liquidation and at that time wished to concentrate his interests and energies in makingAxton-Fisher a successful operating company. But, looking at the record as a. whole, it is abundantly clear it was Giannini and not Robbins who made the decisions. I think a necessary inference is. while this was Robbins’ opinion and desire, it was not what Giannini wanted.. He had a strong urge to capture the huge-tobacco inventory with its high and increased value. This conclusion is enforced: by the circumstance a change in the method of compensating Robbins was discussed.. I appreciate that at a later date Giannini stated Robbins’ understanding of the-agreement was not in accordance with his; but there is no dispute a changed method of compensation was discussed at some time, and such an agreement was related in some way, at least, to the value-of Transamerica’s investment in the Ax-ton-Fisher stock. (b) Robbins’ Second Deposition. During Robbins’ second deposition he fixed the date of his conferences with Giannini as in late August of 1942. He testified he conferred with Giannini in San Francisco and gave him a detailed inventory of AxtonFisher’s leaf tobacco, which showed flue-cured tobacco valued at OPA prices and the burley tobacco at market prices. The reason for the two standards for prices was the maximum price regulation for Burley tobacco did not go into effect until December 4, 1942. Robbins stated he told Giannini the federal taxes then in effect, placed a great pressure on corporations owning inventory which had appreciated. His view was for liquidation, thereby capturing the inventory profit subject only to a 25% capital gains tax, rather than undertake to capture the profit through operations, which profits were subject to the 90% excess profits tax. Robbins then testified, as he did in the first deposition, there was no decision at that time as to whether to liquidate which he was advised about. He also testified, as he did before, he told Giannini there would be disadvantage to the company should it cease advertising and selling new products and consequently give notice to the tobacco industry the company was planning to liquidate. After making this statement, Giannini instructed him to carry on for the time being as usual. In this second deposition Robbins reiterated the fact liquidation was such a predominant possibility he. asked to have a change in bonus arrangement. Robbins testified further that one of the important reasons for the trip was to discuss inventory values and stated he had a fiscal inventory prepared before going to San Francisco. He stated Giannini seemed to be “quite happy about the possibility of capturing the great inventory profit through liquidation” and that Giannini indicated that liquidation “was an imminent possibility”. Defendant shows, I think, the conference did not take place in August or September but rather at a prior time. Defendant also shows that at this conference, whatever the time may be, Giannini’s recollection was the bonus option was not discussed. Defendant attaches much more significance to Robbins’ mistake in the time of the conference than I do. Moreover, I do not think Giannini’s recollection (And he was not sure of it) on the bonus matter outweighs Robbins’ direct testimony because only after the huge profit was realized did Giannini say that his understanding of the bonus agreement was far different from Robbins. In view of the great difference in the bargaining power of Giannini and Robbins and because of the controlling importance such a matter would be personally to Robbins, and because of his unequivocal testimony on the subject at the time of the first deposition, I accept Robbins’ statement that the method of bonus payment was discussed at a meeting some time in the summer of 1942. Accordingly, I do not think Robbins’ second deposition, as such, affects his credibility to any significant extent. (c) Robbins’ Third Deposition. During his third deposition Robbins said it was quite evident to him, at that time, he had not dined with the Gianninis in late August or early September (as he stated in his second deposition) but that the dinner party had taken place in May 1942. It was at that time, Robbins said, Giannini agreed to the new method of bonus payment and offered him the presidency of Transamerica. According to Robbins, Giannini told Robbins he would have a large sum of money coming to him and it would be taxable as ordinary income. He suggested, according to Robbins, it might be advantageous from a tax standpoint to work the amount out as president of Transamerica so that the payments could be spread over a period of time. Robbins stated he objected to this because in effect he would be working twice for the same money. It appears that on July 1, 1942, Robbins wrote Giannini from Louisville and enclosed a draft of an option under which Robbins was given the right at any time prior to August 1, 1945, to purchase 2,000 shares of Class B stock belonging to Transamerica at $10 per share, with interest at 3% from August 1, 1942, and in his letter Robbins said: “I hope that the enclosures will effectuate what you have in mind which is very much appreciated * * * Defendant argues from this that the existence of this agreement indicates there was no other agreement relative to 5% of any profit Transamerica might take out of its investment. I have examined this August 1 memorandum far differently than defendant does. I think it is most significant. Even if it be assumed it weakens the existence of the 5% bonus arrangement testified to by Robbins, it still is of controlling importance in showing that Robbins was worrying about his “future” and method of compensation. Robbins, in view of his personal historical earnings record, was receiving handsome compensation. I think it a fair and perhaps inescapable inference the reason for the request for other methods of compensation was the realization by Robbins that, in a short but uncertain future time, he would be losing his good paying position. This inference is aided by the circumstance that the demands of Robbins did not take place until after the conference with Giannini in 1942. Though Robbins was so much against liquidation or merger that he prepared a memorandum on the train for Giannini to use as an answer to Cullman’s proposal, it is nevertheless obvious Giannini did not accept Robbins’ advice. In fact, Robbins stated every time he came away from a meeting it was with the 'impression that liquidation was a distinct possibility. Moreover, the August 1 memorandum is important for added reasons. It supports Robbins’ contention a change in compensation was discussed at the.May meeting and that Gihnnini’s statement relative to the taxability of the compensation payment caused Robbins to seriously ponder the best ways taxwise for the compensation to be paid. Robbins testified Giannini suggested Robbins take it out as president of Transamerica because of the great tax disadvantage of a lump sum payment. Consequently, I think the reason for the option agreement was Robbins had given some thought to the tax situation and decided this would be the way to capture part of the profit resulting from the liquidation in the most advantageous tax way possible. Defendant also attaches importance to the failure of Robbins to make any memorandum of his agreement with Giannini and from his statement that he does not propose to attempt to collect it even though, under the alleged agreement, he, Robbins, is entitled to -approximately $450,000. I am unable to attach the significance to these “facts” which defendant does. It is apparent from all the. dealings with' Giannini that he was a person of domineering personality and he would not have countenanced a request by an underling that he put his word: in writing. From Robbins’ statement that he does not propose to collect the money I certainly attach no significance adverse to plaintiffs. If the agreement was oral, his chances of obtaining a judgment are negligible. There is a further problem of the statute of limitations. But more than this, this'argument of defendant, I think-, cuts against it. If Robbins now has no hope of collecting some $450,000 which he claims due him as compensation, it seems obvious he has that much less reason to tell anything -but the truth. On the other hand, Giannini (at least at the time the depositions were taken) had a very strong interest in the outcome of this litigation. The above conclusion is enforced, I think, by a circumstance which defendant nevertheless thinks favors it. Giannini states it was not until Robbins’ visit to San Francisco in April, 1943, that Robbins discussed with him, for the first time, the possibility of obtaining a 5% participation in-any profit Transamerica might make on its Axton-Fisher inventory. According to Giannini, on March 31, 1943, Robbins spoke-to him on the telephone about the negotiations which were going on with Philip Morris looking to a sale of the Axton-Fisher stock. Giannini stated at this time Robbins proposed that he be permitted to- buy five per cent, of the AxtonTFisher stock owned by Transamerica at its average cost. After this telephone conversation, Giannini-sent the following telegram to Robbins:“On thinking over your telephone conversation it is my fixed opinion that you should come out here promptly stop there must he-no question about this matter regards Mario-Giannini.” Subsequently, about the middle-of April, Robbins went to California and at that time Giannini told him his request of 5% participation in Transamerica stock was preposterous. Plaintiffs argue that unless there had been a prior understanding between Robbins and Giannini, Giannini would have turned down the proposal which Robbins made on March 31 instead of making what was apparently a counter-offer. Plaintiffs also urge that unless there had been a prior understanding between Robbins and Giannini there would have been no reason for Giannini to request Robbins to come to the coast for further discussion. It is hardly credible from the evidence as a whole that Giannini would have requested Robbins to come to the coast for discussion if there had not been at least a prior understanding between them. Again, it is important to remember the respective positions of Giannini and Robbins. Giannini was a domineering personality. Robbins must supplicate. He could never demand. Moreover, since Axton-Fisher has ceased to exist and since Robbins has stated that he does not propose to try to recover the bonus payment which he claimed was due him, these facts persuade me that his testimony is entitled to great weight. In making this statement I am not unmindful of the numerous inaccuracies and even inconsistencies in the testimony of Robbins. But the inconsistencies are in minor matters after a lapse of a substantial period of time. It must also be remembered the testimony of Robbins must be considered vis-a-vis that of Giannini, who had a vital interest in the outcome of this litigation. I am not impressed by defendant’s argument plaintiffs’ case is weak because it relies almost entirely upon Robbins’ conversation with Giannini and the mere fact that Giannini personally might have concluded it was to Transamerica’s interest to liquidate Axton-Fisher does not prove that Transamerica reached such a conclusion. Such a contention is at war with the reality of how a banker’s mind works. From the testimony as a whole, it is palpable so far as decisions were concerned Transamerica as well as AxtonFisher were dominated by Giannini. When an important matter arose affecting Ax-ton-Fisher and Transamerica, both Robbins and Cullman did not go to either board' of directors but discussed the matter personally and privately with Giannini, at Giannini’s home. Plaintiffs succeeded in proving (and this will be discussed more fully later) that Giannini planned to liquidate Axton-Fisher to capture the inventory profits before November 12, 1942;' and this leaves me with the only realistic inference that can be drawn —that Transamerica had- a similar intent. I conclude the specific treatment of the Robbins depositions and related matters. I shall refer to them again generally after I discuss the other evidence bearing on intent as of November 12, 1942. 3. I shall now consider more specifically the letter of November 12, 1942. It will be observed no information relative to the operations of Axton-Fisher was given the minority stockholders. The letter did provide: “Any inquiries regarding the offer may be addressed to us.” Concededly, at the time the letter was mailed, the operating position of Axton-Fisher had vastly improved. This fact was well known to the directors of the company and consequently to Transamerica. But, if Transamerica did not at that time intend to liquidate, etc., Axton-Fisher and capture the inventory profit, I think it would specifically have advised the stockholders as fully as possible. It would not have sought to make the stockholders “dig” the information for themselves by making additional inquiries. A radical improvement in the operating position of the company was obviously a matter which every stockholder would be interested in. Transamerica knew this and consequently the intentional imposition of this burden on the individual stockholder helps to persuade me that Transamerica planned to liquidate, etc., Axton-Fisher at the time it mailed the letter. The non-disclosure of the inventory profit according to historical and orthodox practices may have had little significance —considered abstractly. The reason could be urged that while such fact might not be known to each individual shareholder, it would, however, be known in tobacco and financial circles. This knowledge would, of necessity, be reflected or discounted in the price at which the stocks sold on the public exchanges. In fact, plaintiffs and the SEC both reluctantly admitted the asset or real value would not be a significant factor in the absence of a plan to liquidate, etc. But, it assumes importance as another and added indication of Transamerica’s reluctance to inform the minority stockholders of a matter which vitally interested them. Had there been no plan to liquidate, .etc., Transamerica could have given information on both the vastly improved earnings of Axton-Fisher and the vastly increased value of the tobacco leaf industry and still secure the stock at about the stated prices, which were substantially above the market value. This conclusion is demonstrated by the circumstance that Cullman did sell his stock at $47,50 a share, whereas the price offer contained in the letter of November 12, 1942 • was $40 a share. He was unquestionably an expert in corporate and tobacco matters and undoubtedly was able to secure through superiority of bargaining power a greater price than other stockholders could have received. He was- aware both of the improved operating earnings of the company and the vastly increased value of the tobacco leaf industry. The price offered in the letter of November 12, 1942 was certainly a fair price to the public minority stockholders of AxtonFisher — but only under the assumption that no liquidation etc., was to take place. My difficulty with the letter of November 12, 1942, as respects defendant, then, is this: If liquidation, etc., was not intended at that time, why would it not have made the disclosures which it knew any stockholder would wish to know? The price offered was still a very fair one. In fact, it was some 33%% above the market price. The increased value of the inventory was certainly reflected in the market price of the shares; it is even probable that increased earnings were discounted or reflected in the current market price. I think the inescapable conclusion is Transamerica had decided to capture the inventory profit by liquidating, etc., Axton-Fisher and that it purposely failed to make the mentioned disclosures for the express purpose of inducing the minority stockholders to sell their stock at what appeared to be a good price, but, in fact, was not. Indeed, the price offered was so generous as to indicate there was, in fact, a preexisting intent to liquidate, etc., and that Transamerica wanted to get the stock and rid itself of other stockholders at a price which would be a bargain, when Transamerica decided the time was ripe to capture the inventory appreciation. I think this circumstánce is of paramount importance because it is an indication that in this respect, at least, Transamerica overplayed its hand. ¡ 4. There are two parts of the testimony which superficially support defendant’s contention there was no plan for liquidation, etc., at the time of the letter of November 12, 1942. The first is Giannini had told Robbins to continue to operate the business of Axton-Fisher as if it were to be a permanent thing. Defendant argues this shows there was no plan for liquidation at this time. This completely misconceives the setting in which such statement was made. At the time of the statement, Giannini had been informed of the enormous benefits through liquidation, etc., of AxtonFisher. He had also been specifically advised in case Axton-Fisher were sold to one of the major tobacco companies there would be an important item of going concern value. The necessary inference, I think, from Giannini’s statement was that he wished to safeguard this valuable right until the time was right for negotiations with the other tobacco companies. The second part of the testimony which superficially supports defendant’s position is that historically Transamerica did not purchase for quick profits but rather purchased for semi-permanent investment. The historical record of Transamerica undoubtedly supports this contention. The weakness of the argument, however, is that in a few months after November 12, 1942, Transamerica did conduct feverish negotiations for the disposition of Axton-Fisher stock for the purpose of capturing inventory profit and consequently showed ■conclusively it was not adverse to> making a quick profit when such policy was indicated. I have detailed what I consider the master facts. I have considered certain other facts which I have drawn from the record. I accept, as a fact, that at the time the letter of November 12, 1942 was mailed Transamerica planned to capture the Ax-ton-Fisher inventory by merging, dissolving, or liquidating Axton-Fisher. In making this finding I am not unmindful there are certain disparities in the evidence which I have relied on, and I am not unmindful plaintiffs have the burden of showing their theory of the case is more probable than not. I think my conclusion is supported principally by my finding Robbins had an agreement for 5% of the profit to be realized from such a “deal”, and from the impossibility of explaining the non-disclosures in the November 12, 1942 letter on any other basis. The new bonus arrangement, as I have just indicated, is more significant in reaching the conclusion a definite plan to liquidate, etc., was in existence prior to the letter of November 12, 1942. Notwithstanding numerous conflicts in Robbins’ testimony, I have no doubt there was such an oral agreement giving Robbins a 5% interest in any profit from the Axton-Fisher deal. This conclusion is based on several factors. For example, after Cullman had suggested liquidation to Giannini, Giannini was anxious to purchase Cullman’s stock to “eliminate Cullman as a factor.” Robbins at the suggestion of his employer expended great effort in the purchase of the stock from Cullman and other stockholders in 1942. Moreover, the Lorillard-Philip Morris American tobacco negotiations in early 1943 were too' zealously performed to suggest that Robbins did not expect compensation. It is hardly credible Robbins would have exerted vast labors to rid Transamerica and himself of his AxtonFisher monetary livelihood if there was no such arrangement in existence. Finally, perhaps most pertinent of all, is the telephone conversation and subsequent conference in the early part of 1943 between Robbins and Giannini relative to the alleged oral agreement. Negotiations were pending at that time with Philip-Morris for the purchase of Axton-Fisher’s holdings. It is plain this — the numner of compensation and not the amount — was what annoyed Giannini. He was strongly opposed to any such transfer to Robbins because, as I suspect he knew, it would have placed his commitment to Robbins beyond recall — perhaps weaken his hand in bargaining with the other major tobacco companies. This inference as to the existence and significance of the 5% bonus arrangement finds added justification, I think, in the admitted memorandum of August 1, 1942. This memorandum persuades me, as indicated before, that something very definitely was in the air by which Robbins was going to lose his lucrative position. The memorandum indicates he was preparing for that eventuality as zealously as possible. Where there has been a direct conflict in the evidence between Robbins and Giannini I have in most instances accepted the testimony of Robbins not only because he, unlike Giannini, is unaffected by the outcome of this litigation, but more importantly, because the objective facts, e. g., non-disclosures in the letter of November 12, 1942, better support the testimony of Robbins. Since I find the existence of such a plan to be a fact, it follows defendant must respond in damages. 5. Plaintiffs ask me to reconsider the granting of defendant’s motion to dismiss count 1 which, in substance, is a common law action for fraud and deceit. I originally dismissed count 1 on the authority of Geller v. Transamerica Corp., supra. The complaint in the Geller case and the original complaint, here, did charge at the time of the November 12 letter there was a scheme by Transamerica to capture the inventory appreciation by liquidation, etc. These two decisions were made at the pleading stage and it is significant in the Geller case, which is the basic decision affirmed by the Court of Appeals, the pertinent allegation on intefit to' capture inventory appreciation was made only on information and belief. Upon reflection, and after reviewing the whole record after trial, I have concluded to grant plaintiffs’ motion to reconsider my opinion on count 1 and to permit it to stand. The Geller case was argued and decided on a slightly different theory than has been framed now in the Speed case at bar. The Geller case was principally concerned with the existen