List v. Fashion Park, Inc.

United States Court of Appeals for the Second Circuit · 1965 · Corporations

340 F.2d 457 (1965)

Updated August 22, 2026

CorporationsSecurities fraudRule 10b-5Insider disclosureSection 10(b)insider tradingnondisclosuremateriality

Facts

Plaintiff, an experienced investor, bought 5,100 shares of Fashion Park stock at $13.50 per share and later instructed his broker to sell them for at least a net price of $18 per share. On November 17, 1960, after negotiations through brokers, defendants purchased the shares at $18.50 per share; one buyer, Lerner, was a Fashion Park director, and neither plaintiff nor his broker knew that H. Hentz & Co. were acting for a director purchaser or that Fashion Park's board had adopted a November 4 resolution to seek a sale or merger. At the time of that resolution, the board knew only from the union manager that some unidentified person might be interested in buying the company, and by the date of plaintiff's sale the president had learned only the purchaser's name. Plaintiff later sought the difference between his sale price and the $50 per share later offered to minority shareholders under the eventual Hat Corporation transaction.

Issue

In a civil Rule 10b-5 action based on insider nondisclosure, can a plaintiff recover where the alleged fraud consists of total silence, and if so, must the plaintiff prove both that the omitted facts were material and that disclosure would have influenced his decision to sell? Also, were the insider's identity and the board's preliminary sale resolution actionable omissions on these facts?

Rule

Rule 10b-5 may reach insider purchases involving total nondisclosure; the rule is not limited to affirmative misstatements. In a civil Rule 10b-5 nondisclosure case, the plaintiff must prove materiality and reliance. Materiality asks whether a reasonable person would attach importance to the fact in deciding how to act, and reliance asks whether the plaintiff would have acted differently had the fact been disclosed.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Cleveland, Nora Benton sold shares of Midlake Textiles to a purchaser who was secretly acting for a company director. The buyer made no statements at all about the stock’s value or the company’s prospects; he simply negotiated price through brokers and closed the trade.

If Nora later sues under Rule 10b-5, arguing that the insider’s complete silence itself was deceptive, which is the best statement of the governing rule?

Explanation. The majority held that civil Rule 10b-5 liability is not foreclosed merely because the case involves total nondisclosure rather than affirmative statements. The rule can reach insider silence in a stock purchase. But that does not create automatic liability; the plaintiff still must prove materiality and reliance.