These are consolidated appeals from orders of the United States District Court for the Eastern District of Pennsylvania.

The case arises out of the amalgamation of defendants Roan Selection Trust Limited (RST), a Zambian corporation, into American Metal Climax, Inc. (AMAX), a New York corporation, which prior to the consummation of the amalgamation owned 42.3% of the outstanding stock of RST.

The facts as found by the district court indicate that on August 11, 1969, the President of the Republic of Zambia issued the "Matero Declaration" which expressed the Government's intention to acquire a controlling equity interest in operating copper properties within Zambia. At that time RST was a corporation organized under the laws of Zambia and had its principal place of business in that country. Its operations involved primarily the production, smelting and refining of Zambian copper.

After issuance of the declaration, between August 11, 1969, and November 17, 1969, RST negotiated the sale of a 51% interest in its operating assets to the Zambian Government. The chief concern of the corporation in the negotiations was to secure from the Government the right to transfer the corporate domicile and externalize the corporation's non-operating assets. In this manner a significant part of RST's total worth would be free from Zambian exchange controls.

On November 17, 1969, the board of directors of RST approved, in principle, an agreement among RST, the Government of Zambia, and a Zambian dominated corporation called the Industrial Development Corporation of Zambia (INDECO). The agreement provided, inter alia, that:

(a) the mining operations of RST would be merged into a company to be formed under the name Roan Consolidated Mining, Ltd. (RCM) in which INDECO would own 51% and RST would own 36.75%. The remaining 12.25% would be held by other companies known as the Anglo-American Group. These firms maintained a substantial minority interest in certain RST subsidiaries;

(b) INDECO would issue negotiable bonds, guaranteed by the Zambian Government, in the amount of $151 million and RST would be entitled to receive 36.75% of the total issue;

(c) RST, or a company nominated by it, would manage the operations of RCM and act as sales agent for a period of not less than ten years during which period RST or its nominee would receive 1 1/2% of RCM's gross sales revenues and 2% of its profits net of mineral taxes but before income taxes;

(d) the holder of the management contract would maintain a holding of not less than 20% of RCM's outstanding stock;

(e) RCM would pay quarterly dividends, not subject to any restrictive limitation and equal to the net income of RCM after provision for a reserve for exploration and development in an amount approved by the entire RCM board; and

(f) all assets of RST, except those nationalized by Zambia, might be transferred to a new corporation outside Zambia and would consist principally of cash approximating $60 million; a 30% interest in Botswana RST, Ltd. (a Botswanian corporation the assets of which were primarily majority interests in two Botswanian mining companies); Ametalco (a group of corporations wholly owned by RST International Metals Ltd. which, in turn, was a wholly owned subsidiary of RST); the INDECO bonds; and RST's interest in RCM.

Seeking alternative means by which to externalize the RST assets not nationalized by the Zambian Government, the RST board eventually began negotiations with AMAX, a New York corporation. On March 5, 1970, a committee of the RST board approved in principle an agreement to effect the externalization through an amalgamation of RST with AMAX. The agreement provided, inter alia, for:

(1) the consolidation of RST's Zambian operating assets into RCM, 51% of which would be sold to INDECO in exchange for INDECO bonds;

(2) the pro rata distribution to all RST shareholders of (a) the INDECO bonds thus acquired; (b) RST's shareholdings in Botswana RST Ltd.; and (c) RST shareholdings in RCM, except for the 20% interest required to be held by RST or its nominee under the management provision of the Zambian agreement; and

(3) the acquisition of the remainder of RST by AMAX, for which non-AMAX shareholders of RST would be paid approximately $76 million principal amount of 8% AMAX subordinated debentures with common stock warrants attached and $6.3 million in cash.

On April 8, 1970, plaintiff Kohn, as trustee of American Depositary Receipts representing 2000 shares of RST, filed a complaint against the defendants derivatively on behalf of RST and also as representative of all non-AMAX shareholders of RST. Seeking to enjoin the proposed amalgamation, he alleged the following in his complaint:

(1) defendants had violated the disclosure provisions of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78j, and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, promulgated thereunder;

(2) the proposed amalgamation would violate section 7 of the Clayton Act, 15 U.S.C. Sec. 18; and

(3) the terms of the amalgamation evidenced a fraud on non-AMAX shareholders of RST, were unfair to these shareholders' interests in the corporation, and demonstrated a breach of fiduciary duty by AMAX, as a controlling RST shareholder.

The approval of both the High Court of Zambia and the RST shareholders was necessary before the amalgamation could be effected. On July 8, 1970, the district court enjoined the distribution of proxy material to RST shareholders, unless defendants included therewith a letter prepared by plaintiff Kohn setting forth his bases for claiming that the proposed amalgamation was unfair. The Court's order specifically provided that inclusion of Kohn's letter was "without prejudice to plaintiffs' claims that [the proxy material] was in substance materially misleading or otherwise violative of Section 10(b) and . . . Rule 10b-5. . . ." This condition was met and the shareholders were sent an Explanatory Statement with Appendices setting forth the details of the RST-AMAX reorganization.

The proxy materials which the shareholders received presented the amalgamation agreement and the Zambian nationalization in the form of one resolution. Thus, there was no opportunity to approve the transfer of RST assets from within Zambia without also endorsing the agreement negotiated between RST and AMAX. At the meeting held August 6, 1970, RST shareholders voted on the resolution. The vote was 85.5% in favor and 14.5% opposed. After this vote was taken the non-AMAX shareholders of RST were polled again as a distinct voting group. The tally of this vote was 66% in favor and 34% opposed.

The way was now clear for presenting the proposed plan of externalization to the High Court of Zambia for its approval. But on August 12, 1970, the district court preliminarily enjoined this presentation, finding that the plaintiff Kohn had demonstrated a strong probability that upon final hearing he would be granted relief and that effectuation of the amalgamation would only complicate the formulation of an appropriate remedy. The following day, however, this court stayed the effect of the district court's order on the condition that defendant AMAX deposit with the court $10 million as security for any injury plaintiffs might suffer. The stay also required that the non-liquid assets of RST be frozen and neither transferred nor assigned until further order of the court.

Thereafter, on August 14, 1970, the High Court of Zambia approved the reduction of capital necessary to complete the amalgamation. This approval was registered on August 15, 1970, and had the effect of cancelling and rendering void all issued shares of RST other than those held by AMAX and its nominees. On August 31, 1970, this court amended its previous order to permit the transfer of RST's externalized assets to RST International, Inc., a Delaware subsidiary of AMAX.

There followed a lengthy trial and, on November 25, 1970, the district court filed its Findings of Fact, Opinion, Conclusions of Law, and Order. The court essentially found that: (1) the High Court of Zambia's confirmation of the reduction of capital did not bar the plaintiffs' claims challenging the amalgamation; (2) the amalgamation was unfair to the non-AMAX shareholders of RST; (3) certain directors of RST, and AMAX as a controlling shareholder of RST, breached their fiduciary duty owed to non-AMAX shareholders of RST; (4) the Explanatory Statement and Appendices sent to RST shareholders was deliberately misleading and thereby violated Section 10(b) of the Securities Exchange Act as well as Rule 10b-5; and (5) plaintiffs failed to prove any violation of the Clayton Act. Plaintiffs were granted injunctive relief and the defendants were ordered to offer plaintiffs as a class, in accordance with each class member's interest in RST as of March 5, 1970, a pro rata share in RST International, Inc.

Defendants AMAX and RST immediately appealed the district court's order of November 25, 1970. Shortly thereafter, on December 3, 1970, plaintiffs filed a motion in the district court requesting that the November 25th order be amended and supplemented. Our court, on motion remanded the record to the district court to permit it to rule on plaintiffs' motion. Thereafter, beginning on January 15, 1971, the district court entered three supplementary orders.

It stayed its earlier order in part, directed the distribution of certain dividend arrearages and accumulated interest and ordered supplemental hearings on the propriety of additional or alternative relief to that specified in the previous order. Kohn v. American Metals Climax, Inc., 322 F.Supp. 1331 (E.D.Pa.1971). Appeals by both sides followed.

This court raised sua sponte the question of whether it has jurisdiction to entertain these appeals. On November 25, 1970, after the close of the trial in this case, the district court ordered rescission of the reorganization in the form of a tender offer to RST's former shareholders. It left open "until after any appeal from its decision the details of implementation." Both RST and AMAX appealed (Nos. 19537 & 19538).1 Then, while expressly retaining jurisdiction, this court remanded the case to permit the district court to rule on plaintiffs' pending Motion to Amend and Supplement the Judgment. The district court sustained the motion and by order dated January 15, 1971 amended its order of November 25th to provide, inter alia, for "supplementary proceedings to determine whether any further or different relief [was] appropriate," (emphasis added). 322 F.Supp. at 1366, 1369. Defendants appealed this order also and plaintiffs cross-appealed (Nos. 71-1099, -1100 and -1101).

We think these appeals lie pursuant to 28 U.S.C. Sec. 1292(a) (1), which authorizes appeals from interlocutory orders "granting, continuing, modifying, refusing or dissolving injunctions. . ." The order of November 25, 1970, was at least in part such an order. It provided, inter alia:

(1) that AMAX offer to non-AMAX shareholders of defendant RST a pro rata share in RST, International;

(2) that AMAX be enjoined from causing its agent to mail the transmittal letter to the RST shareholders; and

(3) that AMAX be enjoined from withdrawing from the Court the $10 million in security theretofore deposited.

The January, 1971 orders continued several of these injunctive provisions (e. g., those that enjoin withdrawal of the $10 million in the escrow account). In addition, these orders originated several injunctive provisions, namely: those relating to the payment of dividends on several classes of securities and to the undertaking of the effort and expense of investigating alternatives to the plan proposed before the Zambian government.

These provisions are injunctions within the meaning of section 1292(a) (1). Cf. Sims v. Green, 160 F.2d 512 (3d Cir. 1947). See also Dilworth v. Riner, 343 F.2d 226 (5th Cir. 1965). Given jurisdiction over these aspects of the district court's orders we can review the merits of the entire case as it now rests. See Smith v. Vulcan Iron Works, 165 U.S. 518, 525, 17 S.Ct. 407, 41 L.Ed. 810 (1897). See also Highland Avenue & Belt Rr. Co. v. Columbian Equip. Co., 168 U.S. 627, 630, 18 S.Ct. 240, 42 L.Ed. 605 (1898). As stated by the Smith Court, in construing the statute which section 1292(a) (1) succeeded, this provision authorizes, "according to its grammatical construction and natural meaning, an appeal to be taken from the whole of such interlocutory order or decree, and not from that part of it only which grants or continues an injunction." 165 U.S. at 525, 17 S.Ct. at 410. Accord Allstate Insurance Co. v. McNeill, 382 F.2d 84, 87-88 (4th Cir. 1967) (construing 28 U.S.C. 1292(a) (1)). See also Wright, Federal Courts 400 (1963).

We conclude that the orders of November 25, 1970 as amended by the January orders are appealable. We proceed to consider the district court's holding that in several respects RST's proxy materials violated Rule 10b-5.

A. CREATING THE FALSE IMPRESSION THAT THE AMAXRST

AMALGAMATION WAS A NECESSARY CONSEQUENCE OF THE

The district court held that RST's proxy materials inaccurately portrayed the proposed amalgamation between AMAX and RST. In reaching its decision the court relied principally on the misleading manner in which the nationalization and amalgamation plans were presented. It found that the proxy materials, particularly the descriptive language contained in the initial pages of the Explanatory Statement, were designed to create the false impression that the amalgamation, on the basis of the terms specified by the explanatory materials, was an inevitable consequence of Zambian nationalization. Thus, fraud was found.

Obviously, if nationalization appeared unavoidably imminent and the proxy materials were interpreted as meaning that the proposed amalgamation was the sole method of externalization presently acceptable to the Zambian government, the RST shareholders predictably would not question the absence of alternative proposals for externalization which might be more advantageous to non-AMAX interests. In concluding that such was the intended design of the proxy presentation, the district court based its conclusion primarily on the following passages from the introductory pages of the Explanatory Statement:

"This Explanatory Statement describes the proposal of the RST Board that the shareholders of RST approve this sale to Zimco (the nationalization) as part of their approval of a reorganization of the structure of the RST Group . . . (emphasis supplied) At an early stage of this consideration, Amax raised with RST the possibility of an amalgamation of part of the RST Group into Amax, with a distribution of other RST assets and AMAX securities to the other RST shareholders, as a means of effecting a reorganization to meet the foregoing considerations . . .

Approval is being sought from RST shareholders of the foregoing proposal as a whole. Under the law of Zambia, this proposal, since it involves a reduction of capital of RST, cannot become effective unless confirmed by the High Court for Zambia after it has been approved by the shareholders of RST by a special resolution.

Accordingly, this distribution will enable such RST shareholders to the maximum extent permitted to continue an interest in the Zambian mining operations directly and subject to generally the same tax laws and treaty considerations as pertain to their present RST shares . . . while receiving the other assets being distributed to them free of Zambian exchange control restrictions; and to the extent RST shareholders obtain AMAX common stock by exercising the AMAX Warrants being distributed, they will secure through AMAX an interest in such portion of RCM as AMAX may own.

The Board believes it has a duty to point out to shareholders that, if the Resolutions are not approved by the shareholders, the Board of RST must continue to work with representatives of Zambia for the acquisition by Zambia of 51% interest in the Zambian mining, smelting and refining operations of its subsidiaries in accordance with the announced policy of Zambia to acquire such an interest. The Board believes that the results of such a course would be substantially less in the interests of shareholders than the present proposal."

Defendants contend that certain parts of the materials, other than those quoted above, accurately point out that amalgamation and nationalization were independent. We have reviewed the materials and do not agree with this contention. Indeed, an examination of the proxy materials suggests that its authors made a studied effort to avoid stating explicitly that either amalgamation and nationalization were absolutely independent or they were absolutely interdependent. Of course, it is the defendants' position that regardless of this observation it was not necessary for the materials to state specifically that the two transactions were independent, since "manifestly and obviously the Zambian government would have no conceivable reason to require that RST distribute assets to its shareholders, amalgamate with AMAX, or exercise its contractual right to remove its assets from Zambian jurisdiction." The point is, however, that the proxy materials made such a "manifest and obvious" impression unreasonable since they suggested to the reader that amalgamation and nationalization were required to be a unitary package. The fact that defendants can demonstrate that the Zambian government had no reason to require that RST distribute assets to the shareholders is not sufficient to overcome the effect of the language employed in the proxy materials. We therefore agree with the district court that the language of the Explanatory Statement impermissibly suggests that nationalization and amalgamation were interdependent and, under the circumstances, was a material misrepresentation.B. LINKING AMALGAMATION AND NATIONALIZATION IN A UNITARY

Amalgamation and nationalization were presented for a shareholder vote as a unitary proposal. Shareholders could not approve one while rejecting the other. The choice was to accept both or to reject both. The district court found that this unitary presentation, without the proponents thereof giving reasons therefor, was a manipulative scheme to coerce shareholder approval of the amalgamation. It concluded that this linking reinforced the false impression that the two actions were interdependent.

The defendants contend that compelling business reasons dictated that the proposals be presented in unitary form. The foundation for these compelling reasons was that if the shareholders approved the nationalization agreement but rejected the amalgamation, Zambia then would have nationalized RST's property without RST having taken advantage of its bargained-for right to externalize its non-nationalized assets. In other words, if nationalization and externalization did not proceed simultaneously, the RST assets remaining non-nationalized would be subject to substantial political risks.

Defendants' argument fails to explain why RST could not have sought approval of the externalization plan first, followed by nationalization. It also does not explain why alternative externalization plans could not have been presented simultaneously with the plan for nationalization. In any event, we agree with the district court that it was a material violation not to have disclosed to the shareholders the alleged compelling business reasons for presenting the proposals in one package.

C. THE IMPLICATION THAT SHAREHOLDER APPROVAL WAS

We have serious doubt as to the correctness of this ruling by the district court. However, because this issue is closely connected with the violation found concerning the linking of the amalgamation and nationalization proposals and because of our agreement with some of the lower court's findings of other violations of Rule 10b-5, we do not decide whether the district court correctly decided that defendants' proxy materials violated the Rule by implying that shareholder approval was prerequisite to nationalization.

D. FAILURE TO DISCLOSE THAT EXTERNALIZATION WAS

DISCRETIONARY AND NEED NOT HAVE BEEN SIMULTANEOUS

The district court also found that RST should have disclosed in the proxy materials that externalization of assets was discretionary under the agreement with Zambia and, if approved, need not have been simultaneous with nationalization. The court held that failure to disclose this fact violated Rule 10b-5 because it contributed to creating the false impression that amalgamation was required to be concomitant with nationalization. We agree.

E. FAILURE TO DISCLOSE ALTERNATIVE PLANS FOR EXTERNALIZATION

The district court found the failure of the proxy materials to disclose that RST had considered plans for externalization other than the proposed amalgamation of RST and AMAX to be a material omission. Likewise, it found the failure of the materials to note that, in fact, one such alternative involving RST's becoming an international mining house had been approved by the RST Board before the AMAX transaction was negotiated also to be violative of the Rule. Because the underlying findings of the district court are somewhat inconsistent and because we have sustained several other findings of Rule 10b-5 violations, we do not decide whether failure to disclose alternatives was a material omission in the proxy.F. FAILURE OF THE PROXY MATERIALS TO ADEQUATELY DISCLOSE

THE BASIS UPON WHICH RST'S ASSETS WERE EVALUATED

The district court held that a "clear presentation of the values assigned the RST assets . . . and the basis upon which the evaluations were made were crucial to an informed shareholder vote, and the omission of these facts from the explanatory materials was material." The court suggested that the proxy materials intentionally contained no presentation of RST's asset values because these assets were substantially undervalued by the terms of the AMAX-RST negotiations.

Ordinarily the SEC and the courts discourage presentations of future earnings, appraised asset valuations and other hypothetical data in proxy materials. See Union Pac. R. v. Chicago & Nw. Ry., 226 F.Supp. 400, 408-09 (N.D.Ill.1964). But see Gerstle v. Gamble-Skogmo, Inc., 298 F.Supp. 66 (EDNY 1969) (presentation of book value misleading when substantially less than fair market value). We think this general rule should apply here. No truly reliable estimates of value ever materialized. The figures which the district court concluded should have been disclosed were all advanced by the parties during negotiations only and as part of their bargaining strategies. Under such circumstances we think the district court was not warranted in concluding that the omission from the proxy materials of the RST asset valuations was material.

G. INADEQUATE DISCLOSURE OF THE UNIQUE BENEFITS AMAX WAS TO

The district court found that the benefits AMAX was to obtain as a result of the amalgamation were inadequately disclosed to the RST shareholders. In view of the close ties between AMAX and RST we agree that such disclosure would have been particularly important. The benefits accruing to AMAX included: (1) an increase of $7 million in annual income; (2) an improvement of $134 million in cash-flow during the period 1970 to 1975; (3) an improvement of $91 million in the corporation's balance of payments; and (4) the acquisition of high-yielding assets. We think the district court was justified in concluding that the piecemeal presentation of these benefits scattered throughout the proxy materials and the appendices was inadequate disclosure under the securities laws.

Defendants contend that although their own presentation may indeed have been piecemeal, the shareholders were fully apprised of the benefits accruing to AMAX by means of the letter of plaintiff Kohn which was included in the proxy materials sent pursuant to court order and which urged the shareholders to vote against the proposal. It is true that proxies need not contain information contained in other solicitation material as long as the proxies clearly refer to such other material. See Rule 14a-5, 17 C.F.R. Sec. 240.14a-5(c). But a reading of Rule 14a-5 in its entirety reveals that its sole purpose is to control the manner of presentation of data within proxies. It is aimed at reducing repetition within materials sent to stockholders. It does not authorize opposing sides in proxy contests to use one another's materials by reference. Consequently, any otherwise material violation of the disclosure rules is not obviated by referring to materials of an opposing soliciting party. The result is the same even if the issue is considered apart from Rule 14a-5. If McConnell v. Lucht, 320 F.Supp. 1162 (SDNY 1970), can be read to the contrary, we disagree with it.

Indeed, of decisive importance here, Kohn's letter set forth his attack on the fairness of the amalgamation. He did not purport to set forth the other material misrepresentations in the proxy statement. His position on this point was preserved in the court's order.H. STATEMENT THAT RST SHAREHOLDERS WOULD, BY VOTING FOR

THE PROPOSAL, OBTAIN THE MAXIMUM POSSIBLE INTEREST

The district court found misleading the language in the proxy materials to the effect that the proposal allowed the RST shareholders to continue their direct interest in Zambian mining operations "to the maximum extent permitted." The Statement claimed:

Accordingly, this distribution will enable such RST shareholders to the maximum extent permitted to continue an interest in the Zambian mining operations directly and subject to generally the same tax laws and treaty considerations as pertain to their present RST shares . . . while receiving the other assets being distributed to them free of Zambian exchange control restrictions; and to the extent RST shareholders obtain AMAX common stock by exercising the AMAX Warrants being distributed, they will secure through AMAX an interest in such portion of RCM as AMAX may then own.

The court found this statement misleading because of its implication that the shareholders by adopting amalgamation would receive the maximum interest allowable in the RCM shares and other assets.

On analysis it becomes clear that as to the RCM shares the shareholders did in fact receive the maximum interest it was permissible to distribute. Had there been no amalgamation with AMAX, it is not true that RST shareholders could have obtained a higher percentage of RCM stock. Under the Agreement with Zambia, 51% of the RCM stock was owned by Zambia and 12 1/4% belonged to the Anglo-American Corporation Group which owned a minority interest in several RST subsidiaries. The remaining 36 3/4% was to be divided between AMAX and the other RST shareholders. However, under the terms of the Zambian Agreement, the holder of the management contract had to retain a 20% interest in RCM. Thus, only 16 3/4% remained available for distribution to the RST shareholders and they received this percentage pursuant to the amalgamation proposal. The disproportionate amount of RCM shares received by AMAX was due to the 20% clause in the Zambian nationalization agreement and not due to the amalgamation. Breach of the 20% clause would have precipitated forfeiture of the management contract and eventuated an unfortunate loss of a potentially profitable asset. We conclude that the Explanatory Statement was not misleading as to the proportion of RCM stock available for distribution to the non-AMAX shareholders of RST and hold that the district court's finding to the contrary was clearly erroneous.

The court below also found that the presentation of the proposal concealed the fact that "if there were no amalgamation . . . the stockholders of RST would have been entitled to their own pro rata interest in all of the assets acquired by AMAX, including the disproportionate interest in . . . the management contract, the Ametalco group, and their interest in the miscellaneous assets." The Statement does not refer to other assets split disproportionately between AMAX and the other RST shareholders, however. Rather, it refers generically to "mining operations." The management contract, the Ametalco group, and the miscellaneous assets, specified by the district court as misleadingly treated in this part of the Explanatory Statement, were not actually "mining operations." We therefore conclude, contrary to the district court, that the quoted excerpt from the Statement accurately described the situation with respect to the RCM shares and that no improper implication existed concerning the other assets pointed to by the court below.I. CONFLICTS OF INTEREST OF RST DIRECTORS AND BANKING ADVISERS

The district court found that the interests of individual RST directors in the amalgamation proposal were insufficiently disclosed in the proxy materials. While we recognize the necessity for shareholders to be informed of the extensive conflicts of interest here present, we cannot agree with the district court's conclusion that such were not adequately disclosed.

Directly after the paragraph of the Explanatory Statement which sets forth the recommendation of the RST Board this heading appears in boldfaced type: "6. Interests of Directors, Advising Bankers and Others." The text of this section and the parts of the Statement Appendices referred to therein fully document all the relevant conflicts of interest. We think this presentation satisfied the equal prominence rule.

The recommendation of the RST Board also is in boldfaced type. Appearing in Item 5 of the Statement, it urges shareholders to approve the proposal. The third paragraph of Item 5 states that, except for six directors who abstained from voting due to their positions with AMAX, the RST Board was unanimous in its approval of the amalgamation proposal. The paragraph immediately following then states that Item 6 and Appendix O describe the "interests in the proposal of directors of RST and others and provide information concerning the directors of RST who are also directors or officers of AMAX or its largest shareholder, Selection Trust Limited. . . ." Item 6 initially refers the reader to Appendix O. It then proceeds to disclose AMAX's 42.3% ownership of RST and the interrelationship between AMAX and RST resulting from the fact that certain named individuals were officers and/or directors of both companies. Item 6 also sets forth the shareholdings of various individuals in AMAX and RST. Appendix O contains comprehensive information about the interrelationship of RST directors with AMAX and Selection Trust Limited. It also lists the shareholdings of these individuals in AMAX and RST.

The fact, relied upon by the district court, that the RST Board recommendation appears in boldfaced type whereas only part of the disclosures of conflicting interests so appears does not in our view, violate the equal prominence rule. Nor is the rule violated because some of the interest disclosures were made only in the Appendices. Reasonable latitude in this area is important if nit-picking is not to become the name of the game.

The district court considered it particularly important that the identities of the four participants in the AMAX-RST negotiations be disclosed. Prain and Vuillequez, RST officers, were negotiators for RST and were also interested in AMAX either as directors or through stock ownership. Donahue and MacGregor, AMAX officers, were negotiators for AMAX. They also were directors of RST. Undeniably, disclosure of these dual loyalties might have dramatized more clearly the conflicts of interest existing here. However, considering the Explanatory Statement in its entirety, we think the district court's finding on this point exacts undue disclosure in this particular case. The exhaustive explication of RST directors' conflicts of interest sufficed to alert the shareholders of possible bias affecting the AMAX-RST negotiations.

The district court also found that the possible allegiances of N. M. Rothschild & Sons with AMAX and RST were insufficiently disclosed. The firm was the financial adviser of RST during the amalgamation discussions. Its opinion approving the final proposal appears boldfaced at the outset of the Explanatory Statement. Item 6 of the Statement notes that Rothschild had performed sundry services for AMAX in earlier transactions and that the consideration paid had approximated $46,000. The reader also is referred to Appendix O where the Rothschild shareholdings are disclosed. It is revealed that the firm held almost 53,000 shares of RST stock and none of AMAX. We think these disclosures adequately document the Rothschild firm's interests in AMAX and RST and conclude that the district court's finding to the contrary was clearly erroneous.

J. FAILURE TO DISCLOSE THAT RST'S BANKING ADVISERS DID NOT

The district court found that insufficient emphasis was given by the proxy materials to the fact that the endorsement of RST's investment advisers was not based on an independent survey of the assets and operations of RST. The bankers' approval of the proposed amalgamation relied solely on data supplied by the RST management. This fact is disclosed in Appendix Q. However, no reference is made to this appendicized disclosure at the outset of the Explanatory Statement where the investment advisers' approval of the amalgamation proposal appears. Considering that disclosure of the basis for the advisers' recommendation was of signal importance, we find no error in district court's conclusion that the failure to direct the readers to the disclosures made in Appendix Q constituted a material omission violative of Rule 10b-5.

K. THE FAILURE TO DISCLOSE THE ROLE OF THE LAW FIRM,

Sullivan & Cromwell is a New York law firm which the district court found had "placed itself in a clear position of conflict of interest" by "advis[ing] RST in its negotiations with the Zambian Government and continu[ing] to represent both AMAX and RST even after the amalgamation was proposed." 322 F.Supp. 1362. The firm had represented both RST and AMAX for over thirty-five years preceding this litigation. The court felt that it was a material omission from the proxy statement not to disclose the capacity in which the firm acted during the nationalization and amalgamation negotiations. As expressed in the district court's opinion, "[i]t would be important for shareholders, in evaluating the advice of RST directors to vote in favor of the amalgamation, to know that through December, 1969 RST was being advised by lawyers who were also advising AMAX" Id.

We do not think the record supports the court's finding that Sullivan & Cromwell's activities created a conflict of interest which the defendants were obligated to disclose. Defendants admit that representation by Sullivan & Cromwell of both AMAX and RST continued until late December, 1969. They admit also that this was during the period when amalgamation with AMAX was a possible alternative under consideration by the RST management. Defendants contend, however, that at no time during this period were the interests of AMAX opposed to those of the other RST shareholders. Rather, the conflict first arose when AMAX and RST commenced to negotiate amalgamation of RST with AMAX as a means of externalization. Defendants say that when this occurred Sullivan & Cromwell immediately advised RST that it could not represent it in such negotiations and that, pursuant to Sullivan & Cromwell's recommendation, RST retained new counsel for purposes of the amalgamation bargaining. In fact the district court found that from the outset of the RST-AMAX negotiations RST was represented by the New York firm of Winthrop, Stimson, Putnam & Roberts, as well as by English counsel.

From a review of the record we find that three dates emerge as pivotal in analyzing the district court's conclusion that a conflict of interest existed as to Sullivan & Cromwell's representation. The first is December 11, 1969, the date on which MacGregor on behalf of AMAX proposed amalgamation to RST. Next is December 22, 1969, when the RST Board gave final approval to the Zambian-RST Agreement. Finally, there is January 9, 1970, the date of the first amalgamation negotiating session between RST and AMAX.

No evidence in the record permits an inference that after December 22, 1969, when the Zambian negotiations had ended, Sullivan & Cromwell advised RST to any extent concerning alternative means of externalization. Thus, the only period which need be considered is that from December 11, 1969, through December 22, 1969. During this time the Zambian negotiations still were not concluded. Consequently, the interests of RST and AMAX in these negotiations properly could be represented jointly by one counsel without any suggestion of a conflict of interest. Nothing in the record demonstrates that during this time Sullivan & Cromwell attempted dual representation of AMAX and RST concerning the amalgamation proposal. We do not consider the firm's efforts to advise RST generally concerning the several alternatives for externalization then being discussed as evidencing such a conflict.

We therefore conclude that the district court's finding that there was a material omission arising from the failure of the proxy materials to disclose the role of Sullivan & Cromwell was based on a clearly erroneous factual premise that the firm was in a conflict of interest position with respect to the negotiation of the terms of the amalgamation.

We have affirmed several findings of the district court that the proxy material violated 10b-5. It is equally clear that the district court found that such misrepresentations were material. We agree because we are satisfied that the proxy violations related to subject matter "[which] might have been considered important by a reasonable shareholder who was in the process of deciding how to vote." Mills v. Electric Auto-Lite, 396 U.S. 375, 384, 90 S.Ct. 616, 621, 24 L.Ed.2d 593 (1970). Although Mills involved section 14, we are satisfied that the quoted materiality test is equally applicable to an alleged 10b-5 violation. Finally, we do not believe it is a defense to a finding of material violations of 10b-5 to say that some stockholders "discovered" the misrepresentations before the vote and thus were not misled, and therefore, since they were the class representatives, the entire class is precluded from obtaining any remedy. Compare Crane Co. v. Westinghouse, 419 F.2d 787, 797 (2nd Cir. 1969). We think those alleging a violation of Rule 10b-5 have an obligation to show a fraudulent and material misrepresentation and that, to the extent a reliance factor is required, in the present context it is encompassed by the finding that the misrepresentation was material.

We come finally to a consideration of defendants' attack on the remedy granted by the district court. By one of its supplementary orders entered in January 1971 the district court determined that those minority stockholders who elected to take under the terms of the amalgamation were also entitled to damages to compensate them for the loss resulting from the undervaluation of certain assets involved. Defendants insist that the district court was foreclosed by the Zambian decree from inquiring into the fairness of the amalgamation.

It is not entirely clear whether the district court's finding of unfairness was based on a finding of a violation of Rule 10b-5 or of some other corporate fiduciary law. Insofar as the Rule violations are concerned we are convinced that the district court was not free to ignore the Zambian decree. The decree involved the conduct of a Zambian corporation. It was entered by judicial action pursuant to statutory authority after a hearing on due notice. In these circumstances the district court could not look behind the decree even at the behest of American security holders. Canada Southern Ry. v. Gebhard, 109 U.S. 527, 3 S.Ct. 363, 27 L.Ed. 1020 (1883). If the district court's finding of unfairness can be said, doubtfully, to be based on some state corporate fiduciary law we think the same basic considerations we have mentioned require that comity be afforded the Zambian decree.

Consequently, we conclude that the district court was in error to the extent it determined that damages should be awarded on the basis of its finding that the amalgamation was unfair.

Our consideration of the effect to be given the Zambian decree does not end the matter. We say this because the district court found and we have affirmed its findings as to several material violations of Rule 10b-5. Those findings do not relate to the terms of the merger and thus do not impinge upon our ruling giving effect to the fairness finding of the Zambian decree. Rather the findings go to the adequacy of the disclosure. Thus, they may have influenced the stockholder vote regardless of the fairness of the amalgamation. In these circumstances we think the court is obligated to provide a remedy. Otherwise the Congressional policy implicit in federal securities regulation in this country would be seriously frustrated. Mills v. Electric Auto-Lite, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed. 593 (1970).

The district court ordered that defendants should offer plaintiffs' class the right to exchange what they received for a proportionate interest in RST International. The district court reasoned that since rescission was not feasible the most appropriate and equitable way to implement the finding of a violation of Rule 10b-5 was to grant the minority stockholders of RST equity participation in RST International, the receptacle for most of the assets of RST Limited. We think this exchange was a reasonable means of remedying the proxy rule violations in a case where rescission was not practical.

The plaintiffs argued to the district court that the exchange offer remedy would subject those accepting it to a loss of Zambian tax credits to which they were entitled on their old holdings. The court ordered supplementary hearings to determine the legality and feasability of a so-called twinning plan, presumably designed to give them securities which might avoid the loss of the tax credit. It ordered further hearings to determine, alternatively, whether monetary relief should be granted for the loss of the tax credit by those accepting the exchange offer.

Even on this record we think the twinning proposal is so far removed from business reality that its approval could not withstand review. We therefore reverse the order of the district court to the extent it directs further proceedings as to its feasibility. Nor do we think the district court was free to grant damages for loss of the Zambian tax credit to the members of plaintiffs' class who elected to accept defendants' exchange offer. We say this because the impetus for the reorganization was the desire to externalize assets. Given this pervasive business reason, it is evident that once twinning is determined inappropriate there could be no retention of the tax credit. It was therefore not a proper element of damage even by way of implementing the exchange offer.

We conclude that it was error for the district court to order further proceedings on these matters.

Since we have concluded that the district court was not warranted in ordering additional proceedings looking to the possibility of granting further relief to the class, it is unnecessary for us to reach defendants' argument that the district court's action in ordering further hearings violated the stipulation that a jury trial was waived on the condition that there be a "single unitary final hearing."

Appeals Nos. 19,175 and 19,176 will be dismissed as moot. The orders from which the other four appeals were taken (Nos. 19,537, 71-1099, 19,538, 71-1100) will be affirmed as modified in this opinion. In view of our disposition of defendants' appeals, plaintiff's appeal (No. 71-1101) will be dismissed.

ADAMS, Circuit Judge (concurring and dissenting).

Although I concur in much of the majority opinion in this case. I disagree with the conclusion that what transpired here is the sort of conduct that Congress intended to proscribe by the Securities Exchange Act of 1934. I agree with the majority's treatment of the effect of the Zambian decree and the further hearing on remedy ordered by the district court despite the stipulation approved by the court providing for "a single unitary final hearing," but because of the importance of this case and of these issues, I feel constrained to set forth my views on these matters. In addition, the remedy authorized by the majority merits in my view further comment.

The majority opinion states fraud is an essential element of a cause of action under Section 10(b) and Rule 10b-5. It then goes on to assert that the district court found that the "Explanatory Statement and Appendices sent to RST shareholders was deliberately misleading and thereby violated Section 10(b) of the Securities and Exchange Act as well as Rule 10b-5", and that fraud was found because these documents "were designed to create the false impression that the amalgamation, on the basis of the terms specified by the explanatory materials, was an inevitable consequence of Zambian nationalization." Finally, the majority holds that the element of reliance, to the extent it is required, is satisfied by "the finding that the misrepresentation was material."

The crucial basis of this dissent is that the statements were not misrepresentations, that if they deviated from the truth, the misrepresentations were not material, that the plaintiff class did not rely on the misrepresentations, and that the conclusory statements by the district court do not constitute findings of fraud, and to the extent they might, such findings are clearly erroneous in light of the applicable legal standards and the lack of factual support for them in the record. In short, without a finding of culpable conduct supported by the record, there can be no violation of the securities laws and regulations, and the imposition of liability is therefore not legally authorized.

In order to gain the full perspective of this case, it is necessary to explore in some further detail the factual setting, beginning a number of years prior to the events which culminated in this lawsuit.

Rhodesian Selection Trust (RST), a British company, began mining operations in Northern Rhodesia in 1927. It was reincorporated as a Northern Rhodesian company in 1953. Over the years RST became one of the two major producers of refined copper in the area. In 1961, Rhodesia imposed currency exchange control regulations which greatly restricted RST from seeking and exploiting foreign opportunities except in Botswanna, a neighboring country.1

Throughout the 1960's the political situation in Africa became increasingly tumultuous. In 1964, the Rhodesian Federation was dissolved, and Northern Rhodesia became the Republic of Zambia.2 This Government, by the Mulinguishi Declaration of 1968, further circumscribed RST's business mobility by limiting the dividends which could be paid to shareholders outside Zambia to 50% of accrued profits.

RST's largest shareholder was American Metal Climax, Inc. (AMAX), a large American mining company. From 1933 to 1962, AMAX held 51% of RST's stock, but by 1969, its holdings had decreased to 42.3%. Although AMAX held approximately 42% of RST's stock, and was represented on RST's board of directors, RST maintained its business independence. The record in this case demonstrates that despite the substantial ownership of RST by AMAX, control of RST was vested in RST's management, and not in AMAX. RST's management was almost entirely British, and its headquarters was located in Zambia. By 1969, AMAX's investment in RST was worth approximately $1XX-XXX-XXX.

Because of the political ferment in Africa, AMAX decided as a matter of policy to decrease its exposure on that continent. In 1966, AMAX asked RST to file a registration statement with the SEC so that AMAX could sell its RST holdings on the open market. RST declined for two reasons: it was reluctant to incur the risks of registration for the primary benefit of one shareholder, and the necessary disclosures would have jeopardized its position with the Zambian government.3 Thereafter, AMAX began selling its RST stock to the limited extent permissible under the American securities laws.

Still desiring to get out of Africa, AMAX in 1968 and 1969 attempted to sell half of its interest in RST to Megallgesellschaft Aktiengesellschaft, a large German metals company, for $5.38 per share. At the time, RST was selling on the open market for between 5 3/8 and 7 1/8 per share. However, the German company was not willing to pay more than $3.00 per share, and even this offer was conditioned upon insurance by the West German government against the risks of nationalization by Zambia. The sale was never consummated.

Despite public and private assurances that Zambia had no intention of nationalizing the copper industry, the Government steadily acquired a number of the country's industrial and commercial companies. Then, in 1969, by the Matero Declaration, the President of Zambia announced his Government's desire to acquire control of all the operating copper properties in Zambia for "fair value represented by book value."4 It immediately became clear that the Zambian Government was desirous of having this nationalization appear to be voluntary. Thus, the management of RST was able to negotiate and to extract, in addition to the sale price for 51% of RST's operating assets, two important concessions as the quid pro quo for the appearance of voluntariness: the authorization for RST to externalize its remaining assets so that they would be free from Zambian exchange controls,5 and the right to defer nationalization until its terms were approved by the RST shareholders. This last provision provided time in which RST could arrange to implement the externalization of its assets. Externalization was of vital importance for tax reasons and because the Zambian dividend ceiling and exchange controls meant that large sums would otherwise have to be retained in Zambia and would not therefore be utilized to develop non-Zambian mining enterprises.

After the agreement with Zambia was reached, RST began to formulate its reorganization plan, keeping in mind that it would be imperative to externalize as promptly as possible after nationalization. Concern immediately developed whether a conflict of interest and possible antitrust law violations would result if RST attempted to become an international mining company. These problems might arise because RST would then be competing against AMAX, although AMAX would still hold 42% of RST. The only feasible methods of avoiding this conflict were for AMAX to sell its RST holdings or to buy the remainder of RST after the distribution of RST's other assets.

AMAX had no desire to contravene its policy of disengagement from Africa in view of the political instability there, and yet it had to protect its $1XX-XXX-XXX investment in RST. Although RST wished to transform itself into an international mining company, because of the restrictions of prior years, this course of action was not feasible.6 In order for RST to buy out AMAX's holdings to avoid the conflict of having AMAX in effect compete against itself, RST would have to denude itself of cash. In addition, a "bail-out" by AMAX at this time would have undermined the confidence of investors and personnel in RST's stability, and would have shifted to RST shareholders the full risk of further nationalization. This would also seriously depreciate further the value of the substantial amount of INDECO bonds to be owned by AMAX as a result of Zambia's nationalization.

Accordingly, RST and AMAX began to negotiate the various alternatives for RST's future. The discussions commenced in November, 1969, in London, between RST's and AMAX's banking and legal advisors.7 There is nothing in the record to show that these discussions occurred at other than arm's length. By the middle of February, 1970, the parties were so far from agreement that AMAX proposed a complete pro rata liquidation of all RST assets not necessary for the performance of the contracts with the Zambian government. Under AMAX's recommendation, each shareholder, both AMAX and non-AMAX, would receive a proportionate share of RST's assets. Put another way, RST's liabilities would be discharged and every shareholder would receive his proportion of the remaining assets on the basis of his holdings in the company. RST's management rejected this proposal, because under it, RST would for all practical purposes cease to exist.

During this period, the concept of RST's is becoming an international mining company, domiciled outside of Zambia, was explored further. Counsel quickly realized that such a reorganization would have disastrous tax consequences for the American-public shareholders of RST. The only solution to this problem, other than amalgamation8 with AMAX,9 was to "twin" the corporation. Under the twinning concept, RST would remain a Zambian corporation, holding some assets; a non-Zambian corporation would be formed to hold the externalized assets; and shareholders would receive "twinned" share certificates representing inseparable shareholders in both companies. "Twinning" was rejected as unrealistic for a variety of reasons, including, inter alia, the fear that Zambia would not tolerate the delay that implementation of this arrangement would cause.

By the end of February, 1970, RST's management concluded that the best interests of RST's shareholders lay in an amalgamation with AMAX. Two factors provided the incentives for AMAX's agreement to amalgamate. First, AMAX wanted to obtain liquid assets that RST owned because such assets would be exempt from American foreign investment restrictions. Second, in order to protect its $1XX-XXX-XXX investment in RST, AMAX had to guard against RST's failure to succeed as an independent international mining company, for if RST had difficulties, its assets, and therefore AMAX's holdings, would depreciate in value. Similarly, payment of the INDECO bonds-and AMAX would own in excess of $XX-XXX-XXX of them-depended upon the profitable operation of the mines and refineries in Zambia.

The amalgamation agreement reached between AMAX and RST on March 5, 1970, provided for AMAX's acquisition of the public shareholders' interest in RST's liquid assets, worth about $XX-XXX-XXX, and the entire interest in RST's residual properties. In return, the public shareholders of RST would receive $XX-XXX-XXX of 8% subordinated AMAX debentures with warrants attached for the purchase of AMAX common stock. RST's public shareholders would also receive slightly more than their pro rata share of the Zambian bonds, their pro rata share of RST's interest in the Botswana venture, slightly less than their pro rata share of RCM stock,10 and 25cents per share in cash.

On March 5, 1970, the date of the agreement between RST and AMAX, RST traded on the New York Stock Exchange at $6.25 per share. Kuhn, Loeb & Co. valued the package of securities which RST shareholders would receive as a result of the proposed amalgamation at $7.13 per share, AMAX valued it at $6.62 per share and plaintiff's witnesses valued the package at between $6.95 and $12.20 per share.11

The structure of the amalgamation was devised to preserve to the maximum extent possible the tax credit for RST's public shareholders and to permit capital gains tax treatment of the distribution.

It was at this point in the negotiations, specifically on March 10, 1970, that plaintiff, who had purchased 2,000 shares of RST less than two months earlier, on January 14, 1970, instituted his action to block the amalgamation. After an evidentiary hearing, the district court on June 8, 1970, denied a preliminary injunction motion without prejudice.12 Because the hearing by the Zambian court regarding the acquisition by the Government of Zambia of the Zambian assets was scheduled for August, 1970, the time consumed by the injunction proceeding compressed drastically the period for preparation of the necessary, but highly complicated, proxy materials and the Explanatory Statement.13 In late June, plaintiff moved to enjoin the distribution of the proxy materials which presented the nationalization and reorganization plans for shareholder approval, charging that the materials violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j (1964). After a hearing, the district court enjoined the distribution, but this Court held that the district court's action was void for failure to enter an order under Rule 65. On July 8, 1970, the district court again enjoined distribution of the proxy materials unless a letter from plaintiff was also included with them. Plaintiff, one of the nation's most knowledgeable lawyers, drafted a statement explaining the opposition to the transaction. The proxy materials and plaintiff's statement were then distributed, including a copy of the district court's opinion, findings and order of June 8, 1970.

The day before the shareholder vote on the nationalization and reorganization was to be held, August 5, 1970, plaintiff moved to enjoin the vote, charging that the proxy materials were false and misleading. After a telephonic conference call to the trial judge, who was then in Florida, initiated by plaintiff and objected to by defendants,14 this motion was denied, and the resolution adopting the terms of the reorganization and nationalization was approved by 85.5% of the shares present and voting. The non-AMAX shareholders then approved the resolution by an affirmative vote of 66.3%. They had been separately polled by RST's management to ensure that AMAX would not force the amalgamation upon unwilling shareholders.

According to Zambian law, which governs this reorganization because of RST's domicile in Zambia, the next procedure in the reorganization was to obtain the approval of the High Court of Zambia. Nine days prior to the date of the scheduled hearing, RST filed with the High Court all of the details of the plan, including the complete record in the district court. Plaintiff had been specifically informed on prior occasions, and as late as the August 5th conference call, of the date of the hearing, and advised of his right to attend and to object to the plan. He had also been informed that the decree of the Zambian court would be binding on all RST shareholders.

On August 12, 1970, plaintiff moved to enjoin the hearing, and an injunction was granted by the district court via another long-distance conference telephone call. This Court stayed the injunction provided that AMAX post a $XX-XXX-XXX bond and agree not to transfer any property subject to a final adjudication.

After a hearing on August 14, 1970, the High Court of Zambia approved the reorganization, finding it to be "fair to all RST shareholders," and on August 15th, the High Court's order was filed with the Zambian Registrar of Companies. Plaintiff did not attend the Zambian hearing, and no appeal was taken from the order of the High Court of Zambia.

Trial of the present action began on October 8, 1970, and concluded on November 3, 1970. After a jury was empanelled, at the suggestion of the court the parties agreed to waive jury trial if all issues would be "finally determined by [the district court] in a single unitary final hearing." The district court rendered a final judgment on November 25, 1970. Defendants appealed on December 2, 1970. The next day, plaintiff moved to amend and supplement the judgment. On January 8, 1971, this Court, over the objection of the defendants, remanded to the district court to rule on plaintiff's motion. The district court filed three amendatory orders. One directed that supplementary hearings on the question of additional relief be held. Another was entered without notice to defendants and a discussion regarding its formulation took place between plaintiff and the court without participation by the defendants. On January 16, 1971, plaintiff filed a notice of appeal from the original judgment and the amendatory orders.

With the facts of the controversy in mind, we now turn to a consideration of the applicable securities laws and regulations.

In order properly to evaluate the facts set forth above, it is necessary to consider and then apply the appropriate legal standards. Although much has been written about this area of the law, further exploration might tend to dispel the murkiness surrounding the contours of an action based upon material misrepresentation. To be able intelligently to decide whether defendants here should respond in damages or be subject to injunctive relief, a complete understanding of the section and rule, their legislative and administrative histories, and their interpretation by the courts is essential.

A. The Provisions of the Act and Rule and Their Legislative and Administrative Histories.

Section 10(b) of the Securities Exchange Act of 1934 provides:

"Regulation of the Use of Manipulative and Deceptive Devices

Sec. 10. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange-

******

* * *

(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Pursuant to this statute, the Securities and Exchange Commission promulgated Rule 10b-5, which implements the statute. It states:

"Rule 10b-5. Employment of Manipulative and Deceptive Devices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,

(1) to employ any device, scheme, or artifice to defraud,

(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(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 provisions of Section 10(b) and Rule 10b-5 are written in broad language, and some maintain they are ambiguous regarding the specific conduct that Congress and the Commission intended to prohibit. Therefore, since reference to the statute and rule will not provide the legal measuring rod, it is appropriate to examine the legislative and administrative history to ascertain the intent of Congress and the Commission. In as much as various aspects of this history have been extensively developed in the literature and cases, the present discussion will narrowly focus on aspects of the history relating to this case.

The Securities Exchange Act of 1934 was an outgrowth of the stock market crash of 1929 and the speculative boom of 1933. The present Section 10(b) evolved from Section 9(c) of bills originally introduced by Senator Fletcher and Representative Rayburn.15 The legislative history deals primarily with other aspects of the 1934 act and is not very enlightening as to the intent of Section 10(b).16 The Senate Report17 discusses generally the various abuses which necessitated the legislative action and the inadequacy of self-regulation by the stock exchanges. The Report then analyzes the component provisions of the statute, citing examples of the flagrant conduct utilized by unscrupulous speculators,18 but does not parse Section 10. However, the Report is replete with words and phrases indicating that the act was designed primarily to prohibit fraudulent activities. Nowhere does the Report imply that liability without culpability would attach for material misrepresentations.

Thomas G. Corcoran, one of the draftsmen, explained the purpose of section 9 (c) of the original bills as follows:

"Subsection (c) says, 'Thou shall not devise any other cunning devices. * * * Of course, subsection (c) is a catch-all clause to prevent manipulative devices[.] * * * The Commission should have the authority to deal with new manipulative devices."'19

Thus, while Professor Bromberg is probably accurate in describing Section 10(b) as a "catchall,"20 it seems quite clear that it was intended to be a "catchall" only for "any manipulative or deceptive device[s] or contrivance[s]."21

The administrative history of Rule 10b-5 is even more cryptic than the legislative history of Section 10(b). Although the act had been passed in 1934, it was not until eight years later that the rule was promulgated.22 The new rule was enunciated on May 21, 1942, and the SEC explained:

"The Securities and Exchange Commission today announced the adoption of a rule prohibiting fraud by any person in connection with the purchase of securities. The previously existing rules against fraud in the purchase of securities applied only to brokers and dealers. The new rule closes a loophole in the protections against fraud administered by the Commission by prohibiting individuals or companies from buying securities if they engage in fraud in their purchase." Securities and Exchange Act Rel. No. 3230 (1942) (emphasis added).

At the end of the year, in its Annual Report, the Commission again commented that the purpose of the rule was to protect investors against fraud.23

Thus, the administrative history of Rule 10b-5 clearly points to one inescapable conclusion: that it was designed as a safeguard against fraud or other culpable conduct, and not as a general regulation of business affairs.

B. Elements of a Private Action Involving Money Damages or Injunctive Relief Under Section 10(b) and Rule 10(b)-5

The next inquiry in determining whether defendants' conduct should give rise to equitable or pecuniary relief under the Act and Rule 10b-5 is into the nature of the right of action and the elements which must be alleged and proved to sustain the action.

At the time Rule 10b-5 was promulgated the SEC had not considered its application to private litigation, but rather contemplated enforcement only by the Commission.24 Nevertheless, within a few years, courts had decided that the rule and statute implied a right of enforcement by private individuals.

The first case to so hold was Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D.Pa. 1946). In that case, where fraud was specifically alleged, Judge Kirkpatrick analyzed the statute and rule, and concluded that they created a statutory tort. He then applied tort principles to determine whether the plaintiff was a member of the class of persons the statute was designed to protect, whether the damage suffered was of the nature the statute was enacted to prevent, and whether the harm inflicted resulted from a hazard the statute was intended to obviate.25 Other courts followed the lead of Kardon, and assumed or held that a private right of action was implied either by the language of the section or by construction of the entire statutory scheme.26 One court approached the problem by beginning with the proposition that Section 10(b) is criminal in nature, and that a private right of action was inferrable therefrom.27 Whatever the rationale, the Supreme Court has now determined that a private right of action could be inferred from the 1934 Act and the rules promulgated thereunder.28

But it is obvious that Congress did not intend that every false, misleading or omitted fact would give rise to a cause of action. For example, it would be unrealistic to allow recovery for the omission of a trivial point. Accordingly, it must be assumed that the misrepresentation be of a matter material to the purchase or sale of the security. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed. 593 (1970).

The Second Circuit defined materiality for Section 10(b) purposes29 in SEC v. Texas Gulf Sulphur Co.

"As we stated in List v. Fashion Park, Inc., 340 F.2d 457, 462, 'The basic test of materiality * * * is whether a reasonable man would attach importance [to the fact misrepresented] * * * in determining his choice of action in the transaction in question. * * *"' 401 F.2d 833, 849 (2d Cir. 1968), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969).

And in the context of a misleading proxy statement, the Supreme Court defined materiality as that which "might have been considered important by a reasonable shareholder who was in the process of deciding how to vote." Mills v. Electric Auto-Lite Co., supra, at 384, 90 S.Ct. at 621 (1970). These two tests from Texas Gulf and Mills are almost identical, the difference arising primarily from their particular applications. They will be the benchmarks for determining materiality here.

1. Element of Fraud or Culpability in Private Action Under Section 10(b) and Rule 10b-5.

Reference to the legislative history makes clear the intent of Congress to provide a private action so long as it is within certain parameters, including specifically, the elements of fraud and reliance.

In the general analysis of the Securities Act of 1934, the Senate Report states:

"In addition to the discretionary and elastic powers conferred on the administrative authority, effective regulation must include several clear statutory provisions reinforced by penal and civil sanctions, aimed at those manipulative and deceptive practices which have been demonstrated to fulfill no useful function. These sanctions are found in sections 9, 10, and 16." S.Rep. 792, 73d Cong., 2d Sess. 6 (1934) (emphasis added).

And in discussing civil liabilities, the Report explains:

"Experience with State laws designed to prevent the exploitation of the investor by supervision of the sale of securities has demonstrated the inadequacy of criminal penalties as the sole sanction. Customers are ordinarily reluctant to resort to criminal proceedings, and in the absence of complaints by them, the discovery of violations is often impossible. Furthermore, if an investor has suffered loss by reason of illicit practices, it is equitable that he should be allowed to recover damages from the guilty party. With these considerations in view, the bill provides that any person who unlawfully manipulates the price of a security, or who induces transaction in a security by means of false or misleading statements, or who makes a false or misleading statement in the report of a corporation, shall be liable in damages to those who have bought or sold the security at prices affected by such violation or statement. In such case the burden is on the plaintiff to show the violation or the fact that the statement was false or misleading, and that he relied thereon to his damage. The defendant may escape liability by showing that the statement was made in good faith." Id. at 12-13 (emphasis added).

Thus, it appears that Congress intended to grant a private action for damages suffered as a result of "illicit practices," consisting of "manipulative and deceptive practices which have been demonstrated to fulfill no usful function." Essential to the elements intended by Congress are the requirements that the defendant has acted in other than "good faith" and that the plaintiff has "relied" on the misleading statement. Nowhere in the Senate Report is there a manifestation of an intent by Congress to provide a cause of action based on either mere negligence or liability without fault. There is no evidence that Congress intended that under Section 10(b) anyone should be an insurer against false or misleading statements made non-negligently or in good faith.

It seems clear from the discussion of the legislative history of Section 10(b) and the administrative history of Rule 10b-5 that Congress and the SEC both intended, before any liability for misrepresentation might attach, that the element of culpability be present. This intent was manifested by the constant usage of words such as "cunning," "manipulative," "deceptive," "fraudulent," "illicit," "fraud," and lack of "good faith," and the absence of language indicating liability for negligent or non-negligent conduct. The inquiry then becomes whether courts have construed the language of the statute and rule so as to obviate the requirement of culpability that Congress and the SEC apparently contemplated.

The issue of scienter, or the intent to defraud, in 10b-5 matters has been widely discussed in the literature and, as might be expected, a divergence of opinion exists. One commentator urges that mere negligence should ordinarily be sufficient to give rise to a cause of action, but recommends the adoption of a flexible, transactional approach.30 Other articles insist that 10b-5 liability should not attach to mere negligence, but rather the test ought to be whether the defendant actually knew the statement in question was false or misleading, and that in any event good faith sufficient to negative the intent to mislead would be an adequate defense.31

The cases collected and summarized in the Appendix to this opinion indicate that the vast majority hold, on analysis, but without specifically so stating, that for a private party to recover damages the element of fraud or culpability must be present. A number of courts assert that some form of intent to defraud must be pleaded or proved before recovery may be had, but a number have eliminated intent to defraud as a necessary element.

The requirement of intent to defraud was first incorporated into securities case law in criminal prosecutions for mail fraud and for fraud in violation of Section 17 of the Securities Act of 1933. See Rice v. United States, 149 F.2d 601 (10th Cir. 1945); Troutman v. United States, 100 F.2d 628 (10th Cir. 1938). See also, United States v. Benjamin, 328 F.2d 854 (2d Cir.), cert. denied, 377 U.S. 953, 84 S.Ct. 1631, 12 L.Ed.2d 497 (1964). Since Rule 10b-5 was drafted on the basis of the language of Section 17, it follows logically that intent to defraud would also be an element of a criminal prosecution for violation of Section 10(b) and Rule 10b-5. Cf. Trussell v. United Underwriters, Ltd., 228 F.Supp. 757 (D.Colo. 1964).

Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951), one of the earliest decisions holding that a private action existed under 10b-5, is the seminal case establishing scienter, or the intent to defraud, as an essential requirement for the maintenance of such an action. Fischman involved a suit for damages arising from a purchase of stock where untrue representations had been made in a prospectus and registration statement. The Second Circuit laid down the rule that "[p]roof of fraud is required in suits under Sec. 10(b) * * *." The court explained: "[W]hen, to conduct actionable under Sec. 11 of the 1933 Act, there is added the ingredient of fraud, then that conduct becomes actionable under Sec. 10(b) * * *." Most cases decided subsequent to Fischman have not deviated from this position.

In Weber v. C. M. P. Corp., 242 F.Supp. 321 (S.D.N.Y. 1965), the court reasoned that to predicate relief on innocent or negligent misrepresentations would add a remedy not contemplated by Congress, as Section 10(b) would then render other sections of the securities acts meaningless. Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540 (2d Cir. 1967), held that an allegation of "[d]eceitful manipulation of the market price" by withholding dividends is sufficient to state a cause of action for injunctive relief.

In SEC v. Frank, 388 F.2d 486 (2d Cir. 1968), the Government sought to restrain an attorney from drafting documents which falsely or misleadingly described the properties of a new chemical product. In reversing the injunction on other grounds, the court indicated that an attorney would be liable for assisting in circulating a statement "he knows to be false," and that he cannot "escape liability for fraud by closing his eyes to what he saw and could readily understand." The case strongly suggests that the attorney would not be liable for errors resulting from mere negligence in translating technical reports into ordinary English, but that recklessness would be tantamount to wilful fraud, from which intent could be inferred.

Apparently the Fifth Circuit also requires the element of fraud. In Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970), the court held that allegations of a "broad scheme to defraud" are sufficient to sustain a cause of action, as are allegations of facts amounting to "causal deceit." See also, Shell v. Hensley, 430 F.2d 819, 824 (5th Cir. 1970) (allegations of fraudulent activity).

This Circuit, too, has adopted the view that fraud or deception is required to establish a violation of Rule 10b-5. In Pappas v. Moss, 393 F.2d 865 (3d Cir. 1968), we concluded that the threshold requirement of a 10b-5 action was met because "a fraud in the act of selling a security" had been asserted.

There is nothing in SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963), indicating that proof of fraud is an obsolete requirement. The Government there sought an injunction under the Investment Advisors Act of 1940, which contains language similar to that found in Section 10(b), to compel a registered investment advisor to disclose to its customers its practice of purchasing securities, recommending purchases of those securities by the subscribers to the service, and then selling the securities at a profit when the clients' subsequent purchases caused an increase in the price. The Supreme Court based its holding on the fiduciary relationship existing between an advisor and his client. In relying on modern common law formulations of fraud, the Court stated that it would defeat the intent of the Act "to require proof of intent to injure and actual injury to clients" in an injunction action.32 Thus, Capital Gains Research Bureau can be read as expanding the scope of Section 10(b) by including in the requirement of fraud the concept of constructive fraud, but it in no way eliminates the requirement altogether.

There have been cases, however, which seem to indicate that intent to defraud need not be alleged or proved to prosecute successfully a private action under Section 10(b) and Rule 10b-5. In analyzing these cases which purport to dispense with intent, the admonishment of the Supreme Court that 10(b) actions constitute an "area where glib generalizations and unthinking abstractions are major occupational hazards"33 must be kept firmly in mind.

The first case which some commentators cite for the proposition that intent to defraud, scienter or culpability is not essential to a cause of action based on material misrepresentations is Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961). That case was a private action for damages resulting from defendant's misrepresentation that if plaintiff, as a participant in a joint venture to acquire control of a corporation, would purchase shares of the corporation at a price in excess of the market price, he would thereby obtain a voice in the corporate management. The Ninth Circuit held that a dismissal of a complaint may not be granted where the affidavits presented a disputed issue of fact as to the fraudulent nature of the conduct.34

The court stated that Congress intended liability if there existed "any manipulative or deceptive device or contrivance in contravention of rules and regulations." Quite significantly, there is no citation in Ellis to support the suggestion that fraud is not necessary in a 10b-5 action. Ellis relies primarily on Matheson v. Armbrust, 284 F.2d 670 (9th Cir. 1960), but Matheson does not say that fraud is unnecessary, and indeed there is in it a square finding of intentional fraud.

Royal Air Properties, Inc. v. Smith, 312 F.2d 210 (9th Cir. 1