Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 78 C 3274 - STANLEY J. ROSZKOWSKI, Judge
Before WOOD and FLAUM, Circuit Judges, and BROWN, Senior District Judge.*fn*
This case involves a family squabble between the plaintiff Joseph Michaels and his uncles, defendants Ralph Michaels and Everett Michaels.*fn1 Joseph claims that when he sold his stock in the family business, the Hyman-Michaels Company ("the Company"), to the Company in January of 1976, his uncles misstated and withheld material information that, if revealed, would have affected his decision to sell. Joseph subsequently brought this action alleging that his uncles and the Company had violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 and had committed common-law fraud. Joseph's complaint also charged his uncles with a breach of a fiduciary duty and the Company with a breach of the warranty provision of the contract for the sale of stock. The parties tried the case before a jury in November, 1983, and the jury found for Joseph and against his uncles on the 10b-5, fiduciary duty, and common-law fraud claims, but against Joseph and for the Company on the warranty claims. The jury assessed damages at $750,000 and also awarded Joseph $200,000 in punitive damages on the common-law fraud claim. The district court subsequently denied defendants' motion for judgment nothwithstanding the verdict or a new trial, awarded Joseph prejudgment interest, and directed a verdict for Joseph on the Company's counterclaim.
This appeal raises a number of issues. The defendants argue that they did not violate section 10(b) or Rule 10b-5 because (1) the withheld information was immaterial as a matter of law, (2) they did not possess the requisite scienter, and (3) the plaintiff did not rely on any misstatement and would have sold his stock even if he had known the withheld information. The defendants also challenge several of the district court's evidentiary rulings, its denial of their motion for a new trial, and the directed verdict for the plaintiff on the Company's counterclaim. We affirm.
The Hyman-Michaels Company was in the business of purchasing, processing, and distributing scrap iron and steel. In mid-1975, Everett owned or controlled approximately fifty percent of the outstanding voting common stock of Hyman-Michaels, Ralph owned or controlled approximately thirty-six percent, and Joseph owned fourteen percent. On January 27, 1976, Joseph agreed to sell his shares to the Hyman-Michaels Company for three hundred dollars a share. Three days later, Joseph delivered the stock, resigned from his offices in the Company, and received $981,276.73. In July, 1976, Everett and Ralph sold the assets of the Company for approximately $13.4 million plus lifetime employment contracts. Joseph claims that Everett and Ralph withheld three material facts from him: (1) that the Continental Illinois National Bank ("Continental Bank") had not said "no" to the Company's loan request; (2) that Everett and Ralph decided to retain a professional financial firm to obtain a purchaser for Hyman-Michaels assets; and (3) that Ralph had met with Angus Littlejohn in London and that Littlejohn had agreed to contact some prospective purchasers.
Between 1966 and 1976, Hyman-Michaels negotiated with approximately ten different companies in unsuccessful attempt to sell either the Company's assets or the stock owned or controlled by Ralph, Everett, and Joseph. In mid-summer 1975, Ralph began discussions with the Commercial Metals Company ("Commercial Metals") designed to effect a sale of the assets of Hyman-Michaels. The two parties discussed prices, based on asset value, of approximately $14 million. On September 5, 1975, while the Commercial Metals negotiations were ongoing, Ralph, Joseph, and Al Moeng (a Hyman-Michaels financial officer) met with Angus Littlejohn, a consultant to International Carbon & Minerals Corporation ("ICM"), and John Samuels, the chairman of ICM, to discuss the possibility of ICM acquiring Hyman-Michaels. A purchase price in the range of $12 to $14 million was mentioned, but Ralph terminated the meeting without further pursuing Samuels's proposal because Ralph felt that the ongoing discussions with another company (Commercial Metals) precluded such a dialogue. Ralph told Littlejohn and Samuels that he would contact them if negotiations with the other company fell through.
The Commercial Metals negotiations ended in December, 1975. Worried about Everett's health and the possible problems for Hyman-Michaels if Everett would die and his shares go into probate, Ralph suggested that the Company borrow money and buy back Everett's common stock for three hundred dollars per share. This price was less than the stock's book value, but Everett agreed to accept three hundred dollars because Ralph said that was all the Company could afford. Ralph and Al Moeng consequently contacted Bruce Simons, a loan officer at Continental Bank, about borrowing the approximately three million dollars needed to buy out Everett. Ralph also advised Joseph that all three shareholders would need to sign a "unanimous stockholders consent" before the Company could borrow money for Everett's shares.
While the Company was negotiating with Continental Bank for a loan, Ralph told Joseph that, after Everett's stock was purchased, Ralph would own or control about seventy-five percent of Hyman-Michaels's voting stock with Joseph owning approximately twenty-five percent of that stock. Ralph also said that he intended to place his wife and his son-in-law on Hyman-Michaels's Board of Directors when Everett left the Company. Joseph consequently became concerned about what would happen to his family if he or Ralph died, given Ralph's wife's apparent ill-will toward Joseph's wife. Joseph therefore sought advise from Harrison Fuerst, a friend who practiced law in Cleveland, Ohio. Fuerst suggested that Joseph ask Ralph to accept one of three proposals: (1) that Hyman-Michaels offer Joseph a buy-sell agreement for his stock; (2) that Ralph and Joseph place their stock in a voting trust so that each would have equal votes; or (3) as a last and least desirable alternative, that Hyman-Michaels purchase Joseph's stock at the same time and for the same price it purchased Everett's stock.
Joseph and Fuerst presented these proposals to Ralph, Moeng, and Marvin Chapman, the Company's lawyer, on January 4, 1976. Either Ralph or Chapman rejected the first two proposals, but Ralph agreed to ask Continental Bank for an additional one million dollars to buy Joseph's shares along with Everett's. Ralph said, however, that he thought that Joseph's request would "kill the deal" and that, as far as Ralph was concerned, Joseph was "out" of Hyman-Michaels no matter what Continental Bank said. After this meeting, Ralph and Chapman went to Everett's house to report what had happened; Everett agreed that the Company should buy out Joseph. When Chapman related Joseph's desire not to be kicked out of the Company and lose his job, Everett responded, "I don't give a damn."
On January 5, 1976, Ralph and Moeng went to Continental Bank and requested the additional financing to buy Joseph's stock. Later that day, Simons told Ralph that the bank would not loan Hyman-Michaels either the three million dollars originally requested or the four million dollars unless the loan were secured with Ralph's personal guarantee. Moments later, Joseph was summoned to Moeng's office, where Ralph told him, "Joe, you're out. The bank has said no." Ralph reiterated that Joseph was relieved of all duties at Hyman-Michaels.
Joseph also claims that Ralph and Everett never told him that they had decided to retain a professional financial firm to locate a purchaser for the Company. On January 5, 1976, Charles Aaron met briefly with James Gorter of the investment firm of Goldman, Sachs & Co. ("Goldman, Sachs"). Aaron told Gorter only that he represented a company that might be interested in seeking a buyer. On January 24, 1976, Ralph told Littlejohn that Hyman-Michaels was considering retaining Goldman, Sachs. As it turned out, the Company never retained Goldman, Sachs or any other investment firm.
The third alleged misrepresentation concerns Ralph's contact with Angus Littlejohn in London on the 23rd and 24th of January. Prior to his departure for Europe, Ralph told Joseph that he (Ralph) would try to reactivate interest in a purchase of Hyman-Michaels and promised to report any such interest to Joseph. On January 23, 1976, Ralph telephoned Angus Littlejohn and told him that Hyman-Michaels was no longer negotiating with Commercial Metals. Ralph asked Littlejohn if ICM and John Samuels were still interested in buying Hyman-Michaels. At Littlejohn's request, Ralph agreed to stay in London an extra day and meet Littlejohn for lunch.
After his telephone conversation with Ralph, Littlejohn sent the following telex to John Samuels in New York:
RALPH MICHAELS OF HYMAN MICHAELS COMPANY CHICAGO, WHOM I AM SEEING TOMORROW, JUST TOLD ME THAT THE PROPOSED SALE OF THEIR COMPANY COLLAPSED [sic] RECENTLY AT THE VERY LAST MINUTE.
I PRESUME THAT WE [ICM] WOULD NOT BE INTERESTED AT THIS STAGE BUT WOULD APPRECIATE YOUR OPINION AS TO WHETHER IT MIGHT APPEAL TO DAVID.
IF THIS IS TO BE PURSUED PLEASE GIVE ME TIME TO FIRST ESTABLISH A POSITION AS BROKER WITH RALPH.
"David" referred to David Lloyd-Jacob, the executive director of Consolidated Gold Fields in North America ("Consolidated") and the president of Azcon Corporation ("Azcon"), who had toured Hyman-Michaels Hegewisch yard with Ralph in 1974. By telex dated January 24, 1976, but not received by Littlejohn until January 26, 1976, Samuels responded, stating that Lloyd-Jacob "would ...