Ross v. Licht

United States District Court for the Southern District of New York · 1967 · Corporations

263 F. Supp. 395 (1967)

Updated August 22, 2026

CorporationsSecurities fraudRule 10b-5Insider tradingDuty to disclose1934 Actinsider dutymaterial fact

Facts

Plaintiffs inherited 62.5 shares of Class A stock in National Hospital Supply and wanted to sell them. After Ross, acting for both plaintiffs, discussed a sale at $7,500 with Charles Licht, a group of defendants acquired the shares on May 4, 1961 through attorney Linderman without revealing that National was then planning a private stock sale at $300 per old share and a public offering equivalent to $600 per old share. The court found that defendants devised a scheme using nominal purchasers and backdated minutes to conceal the real insider buyers and the pending financings. Plaintiffs testified, and the court found, that they would not have sold at $120 per share had those planned offerings been disclosed.

Issue

When corporate insiders and closely connected persons buy shares from outside stockholders without making affirmative statements, does Rule 10b-5 impose a duty to disclose planned private and public offerings known through inside access? If so, what damages follow from the nondisclosure?

Rule

Under Rule 10b-5, a corporate insider purchasing stock from an outsider must disclose any material fact known by reason of his inside position but unknown to the outsider. A fact is material if a reasonable person would attach importance to it in deciding whether to sell, and liability exists where the seller would have acted differently had the fact been disclosed. A non-officer or non-director is an insider if he has such a relationship to the corporation that he has access to information that should be used only for a corporate purpose and not for personal benefit.

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

In Cleveland, Nora Patel inherited shares of a closely held medical supply corporation and told the company’s president, Daniel Mercer, that she wanted to sell. Daniel quietly arranged to buy her shares through an attorney while knowing the corporation had already decided to conduct a private stock sale at $280 per share and was preparing a public offering expected to value the old shares at roughly $550 each; he said nothing, and Nora later proves she would not have sold had she known.

Is Daniel most likely liable under Rule 10b-5 for the purchase?

Explanation. The majority held that insider purchasers have an affirmative duty to disclose material facts known by reason of their inside position but unknown to the outsider. Planned private and public offerings at much higher values were material because a reasonable seller would attach importance to them in deciding whether and at what price to sell. Silence alone can violate Rule 10b-5, and reliance is satisfied if the seller would have acted differently.