Fed. Sec. L. Rep. P 98,777, 11 Fed. R. Evid. Ser v. 781chemetron Corporation, Plaintiff-appellee Cross-appellant, v. Business Funds, Inc., et al., Defendants-appellants Cross-appellees, 682 F.2d 1149 (5th Cir. 1982)

We review the latest act in the long-running drama of the Western Equities, Inc. ("Westec") stock scandal. The characters include defendants-appellants, cross-appellees Business Funds, Inc. ("BFI"), a small business investment company, John Austin ("Austin"), chairman of BFI, and David Bintliff ("Bintliff"), a businessman and investor. The final character is plaintiff-appellee, cross-appellant Chemetron Corporation ("Chemetron"). The defendants appeal from a judgment of $18,413,160 in actual and exemplary damages for violations of the federal and Texas securities laws entered against them based on jury answers to special interrogatories.¹  Despite an able job in a very complex case by the district court, we discern several errors requiring reversal and remand.II. FACTS AND DISPOSITION BELOW

This court is quite familiar with the Westec stock scandal.²  We sketch only those facts necessary for the disposition of this case.

BFI, a Maryland corporation, was a small business investment company formed prior to 1961 with Houston, Texas, as its principal place of business.³  BFI loaned venture capital to companies in exchange for stock warrants, often providing management expertise and placing representatives on the boards of directors of these companies as well. In order to encourage their growth and enhance its investment, BFI also helped arrange mergers and acquisitions for these companies.

In late 1961, BFI hired James Williams ("Williams") as a vice president to supervise some of its investments. The chairman of BFI at that time was defendant Austin. While he was not a full-time chairman, spending substantial time each week with his principal business, a mortgage-banking firm, he did meet with Williams and discuss his activities several times a week.

Through a series of mergers and acquisitions orchestrated by Williams, Geo-Space, a company in which BFI had invested and for which Williams had responsibility, grew and in 1963 began considering a merger with Westec, a company listed on the American Stock Exchange. A merger with a listed company would substantially enhance the value of BFI's investment in Geo-Space. Williams, assisted by Ernest Hall ("Hall") of Geo-Space, undertook to consummate the merger. They acquired a foothold in Westec with a private nonmarket purchase of Westec stock in August 1963 and elected Williams to the Westec board shortly thereafter. Negotiations on a merger concluded successfully in September 1964. BFI exchanged its Geo-Space stock warrants for stock in Westec, leaving BFI in control of Westec. Williams became chairman of the new company, Hall became president, and Austin was made a director.

From September 1964 until August 1966, Williams and Hall engaged in massive and complex stock operations designed to increase the value of Westec stock. These operations took many forms. For example, Hall repaid a debt to a business associate on the condition that the money be used to purchase Westec stock on the open market during 1964; Williams aided in the financing of this deal, although it is not clear whether BFI was the source of the funds. In another instance, defendant Austin guaranteed a loan in December 1964 from a third party to Hall that Hall used to purchase Westec stock. BFI portfolio companies and Westec subsidiaries also bought Westec shares. In addition, stock was purchased in the name of various relatives and associates of Hall and Williams. In most of these transactions, BFI money appears to have played a role.

In April 1965, Williams resigned from BFI, although his connections with it appear to have continued for a short time thereafter. His departure may have been on unfriendly terms, but this is not altogether clear. About this time, Austin also left the Westec board and BFI distributed its Westec shares to its shareholders. Despite these actions BFI may, however, have continued to influence and control Westec until December 1965.

September 1965 marked the appearance of defendant Bintliff with the acquisition by Westec of Camerina Petroleum Company, partially owned by Bintliff. Bintliff exchanged his Camerina shares for Westec shares. This transaction appears to have been unrelated to the stock price manipulation operation.

Chemetron, a Delaware corporation with its principal place of business in Chicago, began its involvement in 1965, when Williams and Hall sought to acquire a Chemetron subsidiary, Pan Geo Atlas Corporation ("PGAC"), for Westec. Lengthy negotiations led to an October 1965 tentative deal subject to approval by both parties' boards. On January 14, 1966, Chemetron received Westec stock for its PGAC stock and notes. The transaction was nonmarket, and a Chemetron official testified at trial that the market price of Westec shares played no role in Chemetron's evaluation of the deal. Chemetron claims it was never told of the stock manipulation scheme and would not have made the deal had it known.

The manipulative activities of Hall and Williams continued after the Chemetron transaction. They ordered Westec stock in the names of third parties, seeking loans to finance the purchases. One such loan was secured by defendant Bintliff, for which he received Westec stock as a fee. Bintliff also bought Westec stock from a third party in a sale arranged by Williams.

In August 1966, as part of the scheme, Williams and Hall placed a large stock order they could not finance. Bintliff declined to finance it. Chemetron was approached to finance it but declined and informed the Securities and Exchange Commission and the American Stock Exchange, which suspended trading in Westec stock. At that time Chemetron was the largest shareholder of Westec. Shortly after the suspension of trading, Westec went into Chapter X reorganization, emerging as a reorganized company in 1969. Chemetron exchanged its Westec shares with the bankruptcy trustee in 1969, receiving shares and notes in the reorganized company.

The failure of Westec spawned an avalanche of litigation. This suit began in 1967 when Chemetron sued 57 defendants seeking recovery of its losses under many provisions of the federal and Texas securities laws. Chemetron basically alleged a plan, scheme, or conspiracy to manipulate the price of Westec stock through actual or apparent trading, thereby inducing transactions by others, leading to its injury when Westec collapsed. After lengthy discovery and settlement with or voluntary dismissal of 53 of the defendants, the case against four defendants, BFI, Austin, Bintliff, and Brazos Valley Cotton Oil Company ("Brazos Valley"), came to trial in the Southern District of Texas before a jury in 1979. The legal claims had been narrowed to violations of three statutes: (1) section 9 of the Securities Exchange Act of 1934, 15 U.S.C. § 78i (1976); (2) section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) (1976), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (1981), thereunder; and (3) Tex.Rev.Civ.Stat.Ann. art. 4004 (Vernon 1966), the Texas anti-fraud statute.⁴ 

In response to 31 special interrogatories, the jury completely exonerated Brazos Valley and found no section 9 violation. However, the trial judge entered judgment for Chemetron under section 10(b), Rule 10b-5, and article 4004 based on the jury's remaining responses. The three defendants were held jointly and severally liable for actual damages of $4,726,128 under federal and state law, prejudgment interest of $4,817,276, and exemplary damages under art. 4004 of $9,452,256, less settlement of $582,500, for a total liability of $18,413,160. All defendants moved for judgment n. o. v. or a new trial, which were denied. All now appeal to this court. Chemetron lodges a cautionary cross-appeal.

A. Federal Securities Law Claims.

Chemetron alleged that appellants illegally manipulated the national securities exchange market for Westec stock and failed to disclose or made misleading statements about that scheme in violation of two federal securities laws, section 9(a)⁵  of the Securities Exchange Act of 1934, 15 U.S.C. § 78i(a) (1976), and SEC Rule 10b-5,⁶  17 C.F.R. § 240.10b-5 (1981), enacted pursuant to section 10(b)⁷  of the 1934 Act, 15 U.S.C. § 78j(b) (1976). Section 9(e)⁸  of the 1934 Act, 15 U.S.C. § 78i(e) (1976), creates an express private remedy for violations of section 9(a), and an implied private cause of action has long been recognized under section 10(b) and Rule 10b-5, see Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196, 96 S. Ct. 1375, 1382, 47 L. Ed. 2d 668 (1976).

While Chemetron specifically alleged violations of subsections 9(a) (1), (2), (4), and (6), the trial judge submitted to the jury only the subsection 9(a) (2) allegation, directed at the manipulative stock scheme itself. However, all three subsections of Rule 10b-5 were submitted, permitting the jury to hold appellants liable under Rule 10b-5 for either the stock scheme (Rule 10b-5(a) and/or (c)), its misrepresentation/nondisclosure (Rule 10b-5(b)), or both.

In response to Special Interrogatory No. 6, the jury found that Chemetron had not proven that the stock scheme "affected" the price it paid for the Westec stock, a necessary element of a section 9 claim, see section 9(e), 15 U.S.C. § 78i(e). This finding foreclosed any relief under section 9. Nevertheless, the trial court entered judgment for Chemetron on its federal law claim based on Rule 10b-5. The judgment of the trial court does not specify which of Rule 10b-5's subsections or combination of subsections it relies on. However, since the jury found that there was a manipulative stock scheme and that the scheme was not disclosed to Chemetron, the trial court's judgment could have been based on Rule 10b-5(a) or (c) (banning fraudulent schemes in general), on Rule 10b-5(b) (prohibiting misrepresentation/nondisclosure), or on both. Thus the very jury findings that barred section 9 relief permitted, without any inconsistency, relief under Rule 10b-5.

Appellants assail this result, claiming that this overlap in private remedies impermissibly nullifies the express remedy and limitations of section 9. This question of whether an implied private remedy is available under Rule 10b-5 for activities covered by section 9's express private remedy is one of first impression in this circuit.⁹  Our task is to examine both of the possible bases for Rule 10b-5 liability, the existence of a stock scheme and its misrepresentation/nondisclosure, to determine whether they impermissibly nullify the express section 9 remedies. If both nullify section 9, the trial court's judgment based on Rule 10b-5 has no legal support and must be reversed.

For purposes of analysis, we will address two specific questions: (1) is subsection 9(a) (4), which prohibits misrepresentation/nondisclosure, nullified by the similar prohibition in Rule 10b-5(b), and (2) do the general bans on fraudulent schemes and courses of business in Rule 10b-5(a) and (c) nullify the bans on specific stock manipulation schemes found in subsections 9(a) (1), (2), or (6)?¹⁰ 

1. Supreme Court Guidance and Circuit Precedent.

Our analysis of these questions begins with the premise that "it is an elemental canon of statutory construction that where a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it." Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 19, 100 S. Ct. 242, 247, 62 L. Ed. 2d 146 (1979).

Looking first to the Supreme Court for direction, we find that, although it has not yet addressed the question of maintaining an implied cause of action in the face of an express cause of action, see Ernst & Ernst, 425 U.S. at 211 n.31, 96 S. Ct. at 1389 n.31; Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 752 n.15, 95 S. Ct. 1917, 1933 n.15, 44 L. Ed. 2d 539 (1975); infra note 11, its decisions provide some guidance. In Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S. Ct. 2479, 61 L. Ed. 2d 82 (1979), the Court declined to imply a cause of action under section 17(a) of the 1934 Act, 15 U.S.C. § 78q(a) (1976), for customers of securities brokerage firms against accountants who audit section 17(a) reports. The Court found support in the statutory scheme created by Congress:

But we need not decide whether Congress expressly intended § 18(a) to provide the exclusive remedy for misstatements contained in § 17(a) reports. For where the principal express civil remedy for misstatements in reports created by Congress contemporaneously with the passage of § 17(a) is by its terms limited to purchasers and sellers of securities, we are extremely reluctant to imply a cause of action in § 17(a) that is significantly broader than the remedy that Congress chose to provide.

Id. at 574, 99 S. Ct. at 2488 (citations and footnotes omitted, emphasis added). It also noted evidence in legislative history that section 18(a) was intended to be the exclusive remedy, id. at 573 & n.15, 99 S. Ct. at 2487 & n.15 and warned that even the "remedial purposes" of the securities laws "will not justify reading a provision more broadly than its language and the statutory scheme reasonably permit," id. at 578, 99 S. Ct. at 2490.

Under Ernst & Ernst, proof of scienter is required in a private suit under Rule 10b-5. In reaching this conclusion, the Court found it significant that sections of the 1933 Act allowing recovery for mere negligence are subject to restrictions not applicable to section 10(b), 425 U.S. at 209, 96 S. Ct. at 1388, and observed:

We think these procedural limitations indicate that the judicially created private damages remedy under § 10(b)-which has no comparable restrictions-cannot be extended, consistently with the intent of Congress, to actions premised on negligent wrongdoing. Such extension would allow causes of action covered by §§ 11, 12(2), and 15 to be brought instead under § 10(b) and thereby nullify the effectiveness of the carefully drawn procedural restrictions on these express actions. We would be unwilling to bring about this result absent substantial support in the legislative history, and there is none.

Id. at 210-11, 96 S. Ct. at 1388-89 (footnotes and citations omitted, emphasis added).

Finally, in Blue Chip the Supreme Court considered whether stock offering offerees can maintain a Rule 10b-5 cause of action despite the fact that they were neither purchasers nor sellers of the offered shares as required by the express terms of Rule 10b-5 and section 10(b). In holding that such offerees have no Rule 10b-5 cause of action, it reviewed the various express remedies under the 1933 and 1934 Acts, including section 9, and declared that "(i)t would indeed be anomalous to impute to Congress an intention to expand the plaintiff class for a judicially implied cause of action beyond the bounds it delineated for comparable express causes of action." 421 U.S. at 736, 95 S. Ct. at 1925 (footnote omitted).

From these decisions, we conclude that our examination of these questions must focus on whether permitting a Rule 10b-5 action here will impermissibly broaden the section 9 remedy by nullifying its restrictions in defiance of the congressional mandate. In addressing that issue, this court in Huddleston v. Herman & MacLean, 640 F.2d 534 (5th Cir. 1981), modified on denial of rehearing and of rehearing en banc, 5th Cir. 650 F.2d 815, cert. granted, --- U.S. ----, 102 S. Ct. 1766, 72 L. Ed. 2d 173 (1982) (Nos. 81-680, 81-1076),¹¹  agreed with the approach used in the Second and District of Columbia Circuits. See Wachovia Bank & Trust Co. v. National Student Marketing Co., 650 F.2d 342 (D.C. Cir. 1980), cert. denied sub nom. Peat, Marwick, Mitchell & Co. v. Wachovia Bank & Trust Co., White & Case v. Wachovia Bank & Trust Co., and Joy v. Wachovia Bank & Trust Co., 452 U.S. 954, 101 S. Ct. 3098, 69 L. Ed. 2d 965 (1981); Ross v. A. H. Robins Co., 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S. Ct. 2175, 64 L. Ed. 2d 802 (1980). The Huddleston analysis must be applied in this case, since we are bound by it until it is reversed by the Supreme Court or overruled by this circuit en banc. S & H Riggers & Erectors, Inc. v. OSHRC, 659 F.2d 1273, 1278-79 (5th Cir. 1981).¹² 

In Huddleston, plaintiffs sought damages for alleged materially misleading statements in a prospectus. 640 F.2d at 539. There existed a conflict between sections 11 and 12(2) of the 1933 Act, 15 U.S.C. §§ 77k and 77l (2) (1976), each of which creates an express remedy for such misrepresentations, and Rule 10b-5.¹³  The court compared the competing causes of action to determine whether Rule 10b-5 requires proof of facts "not necessary to recovery" under the express causes of action, reasoning that if Rule 10b-5 requires additional facts creating a higher burden of proof, the Rule 10b-5 implied action is available. See 640 F.2d at 542. The court permitted the implied action because Rule 10b-5 requires deceit committed with scienter, elements not found in sections 11 and 12(2). See id.¹⁴ 

With these Supreme Court and Fifth Circuit cases to guide us, we turn now to the specific questions before us.

2. The Misrepresentation and Nondisclosure Remedies.

Our examination of this issue begins with a comparison of the texts of the statute and rule. Subsection 9(a) (4) contains a provision forbidding misrepresentation that is quite similar to that found in Rule 10b-5:

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

....

(4) If a dealer or broker, or other person selling or offering for sale or purchasing or offering to purchase the security, to make, regarding any security registered on a national securities exchange, for the purpose of inducing the purchase or sale of such security, any statement which was at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, and which he knew or had reasonable ground to believe was so false or misleading.

15 U.S.C. § 78i(a) (4) (emphasis added).

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

....

(b) 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 ....

17 C.F.R. § 240.10b-5(b) (emphasis added). The prohibition in subsection 9(a) (4) is certainly intended to apply to misrepresentations made in the course of manipulative schemes banned by section 9. See H.R.Rep.No.1383, 73d Cong., 2d Sess. 10-11 (1934), reprinted in 5 J. S. Ellenberger & E. P. Mahar, Legislative History of the Securities Act of 1933 and Securities Exchange Act of 1934, Item 18 (1973) (hereinafter cited as Ellenberger & Mahar); S.Rep.No.792, 73d Cong., 2d Sess. 12-13 (1934), reprinted in 5 Ellenberger & Mahar, Item 17. Whether Rule 10b-5(b) can also be applied to misrepresentations in the course of a manipulative scheme banned by section 9 turns on the results of the Huddleston analysis.

As the Huddleston court stated:

The elements necessary to prove a Section 10(b) claim have been so often applied by the lower federal courts that they can be stated in black letter fashion. To make out a claim under Section 10(b), which is based on the common law action of deceit, the plaintiff must establish (1) a misstatement or an omission (2) of material fact (3) made with scienter¹⁵  (4) on which the plaintiff relied (5) that proximately caused his injury.

640 F.2d at 543 (footnote omitted). Subsection 9(a) (4), as privately enforced through subsection 9(e), requires a (1) misstatement or omission¹⁶  (2) of material fact¹⁷  (3) made with scienter¹⁸  (4) for the purpose of inducing a sale or purchase of a security¹⁹  (5) on which the plaintiff relied²⁰  (6) that affected plaintiff's purchase or selling price.²¹ 

We thus perceive that the implied cause of action under Rule 10b-5(b) and the express remedy of subsection 9(a) (4) differ in at least three respects, scienter, intent to induce a purchase or sale, and causation. While Rule 10b-5 permits recklessness to fulfill its scienter requirement, see supra note 15, section 9(a) (4) and (e) and its legislative history do not permit us to loosen its scienter requirement by permitting recklessness to suffice. See S.Rep.No.792, 73d Cong., 2d Sess. 17 (1934), reprinted in 5 Ellenberger & Mahar, Item 17; H.R.Rep.No.1383, 73d Cong., 2d Sess. 20 (1934), reprinted in 5 Ellenberger & Mahar, Item 18. Therefore, section 9's scienter requirement is stricter than Rule 10b-5's.

Furthermore, the "intent to induce" requirement of subsection 9(a) (4) is distinct from the scienter requirement of Rule 10b-5(b). While one may intend to do a fraudulent act thereby fulfilling Rule 10b-5(b)'s scienter requirement, the intent that that act induce a purchase or sale is a distinct and more specific requirement. Thus the "intent to induce" requirement creates a higher burden of proof for the plaintiff under section 9(a) (4) than that borne under Rule 10b-5(b).

Finally, subsection 9(a) (4)'s causation standard is also tougher for a plaintiff-the plaintiff's purchase or sale price must be "affected," while "the causation requirement is satisfied in a Rule 10b-5 case only if the misrepresentation touches upon the reasons for the investment's decline in value." Huddleston, 640 F.2d at 549 (emphasis added). This case presents the classic example of the difference in liability under these causation standards. The jury found that the nondisclosure of the manipulative scheme did not "affect" the price that Chemetron negotiated in its nonmarket purchase of Westec stock-thus no subsection 9(a) (4) remedy. However, the nondisclosure obviously touched upon the reason for the decline in value of Chemetron's Westec stock because the nondisclosure hid the manipulative scheme.

Rule 10b-5(b) therefore requires no additional proof of facts creating a higher burden of proof when compared to subsection 9(a) (4). In fact, Rule 10b-5(b) creates a lower burden of proof than does subsection 9(a) (4)²²  and contains no elements that compensate for this change. Lacking a trade-off for this easing of the burden of proof and concomitant enlargement of the plaintiff class,²³  we hold that permitting a judgment for Chemetron under a Rule 10b-5(b) implied action for misrepresentation or nondisclosure of the stock scheme impermissibly nullifies Congress' deliberate and careful limitations on the express statutory remedy of subsection 9(a) (4).²⁴ 

3. The Stock Manipulation Remedies.

Because there are some differences between subsections 9(a) (1), (2), and (6), we must compare each separately to Rule 10b-5(a) and (c) to fulfill the Huddleston analysis.

a. The Elements of Rule 10b-5(a) and (c).

To violate Rule 10b-5(a) and (c), a person must (1) employ a device, scheme, or artifice to defraud or engage in a course of business that operates as a fraud (2) with scienter²⁵  (3) on which the plaintiff relied²⁶  (4) that proximately caused his/her injury.

b. The Elements of Subsection 9(a) (1).

To make out a violation of subsection 9(a) (1) in a private action under subsection 9(e), a plaintiff must prove the existence of (1) a wash sale or matched orders in a security²⁷  (2) done with scienter²⁸  (3) for the purpose of creating a false or misleading appearance of active trading in that security²⁹  (4) on which the plaintiff relied³⁰  (5) that affected plaintiff's purchase or selling price.³¹ 

c. The Elements of Subsection 9(a) (2).

In order to show a violation of subsection 9(a) (2) in a private suit under subsection 9(e), a plaintiff must plead and prove that (1) a series of transactions in a security creating actual or apparent trading in that security or raising or depressing the price of that security,³²  (2) carried out with scienter³³  (3) for the purpose of inducing the security's sale or purchase by others,³⁴  (4) was relied on by the plaintiff,³⁵  (5) and affected plaintiff's purchase or selling price.³⁶ 

d. The Elements of Subsection 9(a) (6).

To prove a violation of subsection 9(a) (6) in a private suit under subsection 9(e), a plaintiff is required to show (1) a series of transactions in a security³⁷  (2) made for the purpose of pegging, fixing, or stabilizing the price of that security in violation of SEC rules³⁸  (3) done with scienter³⁹  (4) on which the plaintiff relied⁴⁰  (5) that affected plaintiff's purchase or selling price.⁴¹ 

e. A Comparison of Rule 10b-5(a) and (c) and Subsections

9(a) (1), and (2), and (6).

We note several elements that make a violation of subsections 9(a) (1), (2), and (6) more difficult to prove than a violation of Rule 10b-5(a) and (c).

First, causation, as discussed previously, is much easier to prove under Rule 10b-5 than under section 9.⁴²  Second, under Rule 10b-5, recklessness can fulfill the scienter requirement. However, recklessness may not be used to fulfill section 9's scienter requirement, as we noted in our discussion of subsection 9(a) (4).⁴³  Third, while Rule 10b-5(a) and (c) create a presumption of reliance by the plaintiff that can be rebutted by the defendant, section 9 aids the plaintiff with no such presumption.⁴⁴  Fourth, and only as to subsection 9(a) (2), there is an intent to induce requirement not found in Rule 10b-5(a) and (c).

Rule 10b-5(a) and (c) therefore require no additional proof of facts creating a higher burden of proof when compared to subsections 9(a) (1), (2), and (6). In fact, Rule 10b-5(a) and (c) create a lower burden of proof.⁴⁵  Lacking a trade-off for this easing of the burden of proof and accompanying enlargement of the plaintiff class,⁴⁶  we hold that permitting a verdict for Chemetron under a Rule 10b-5(a) and (c) implied action impermissibly nullifies Congress' deliberate and careful limitations on the express statutory remedy of subsections 9(a) (1), (2), and (6).⁴⁷ 

4. Legislative History of the 1933 and 1934 Acts and the Proper Scope of Rule 10b-5.

Any doubts about the results reached under the Huddleston analysis are laid to rest by an analysis not undertaken in Huddleston, Wachovia, or Ross-the intent of Congress as revealed in the legislative history and structure of the 1933 and 1934 Acts. Reviewing that history and structure, we conclude that in the coherent and comprehensive scheme for controlling securities fraud that Congress established,⁴⁸  section 9 is the only remedy for the fraud in this case.

Section 9 is considered "(t)he very heart of the Act." SEC, Report on Proposals for Amendments of the Securities Act of 1933 and the Securities Exchange Act of 1934, H.R. Comm. Print, 77th Cong., 1st Sess. 50 (1941). With its procedural and substantive limitations, it takes aim at several specific types of stock manipulation schemes,⁴⁹  virtually all known and acknowledged to be harmful in 1934. In addition, section 9 gives the SEC rulemaking power to reach types of stock manipulation not known in 1934 or not proven harmful per se at that time. See § 9(a) (6), (b), and (c), 15 U.S.C. § 78i(a) (6), (b), and (c). However, Congress, in its legislative wisdom, laid down the limits on private liability under section 9. Neither private parties, the SEC, nor the courts may go around those limits, no matter how broad the rulemaking power appears, since the Supreme Court has made it clear that the "administration of a federal statute is not the power to make law." Ernst & Ernst, 425 U.S. at 213, 96 S. Ct. at 1391; see Aaron, 446 U.S. at 691, 100 S. Ct. at 1952; Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 41 n.27, 97 S. Ct. 926, 949 n.27, 51 L. Ed. 2d 124 (1977). Equally obvious is that a rule promulgated under section 10(b) cannot be used to evade section 9. See Piper, 430 U.S. at 45-47, 97 S. Ct. at 951-952.

That Congress was very concerned about the scope of section 9 is evidenced by its meticulous drafting, legislative history, and the massive investigation that led to it. See, e.g., S.Rep.No.1455, 73d Cong., 2d Sess. 54-55 (1934), reprinted in 5 Ellenberger & Mahar, Item 21 (known as the Fletcher Report); H.R.Rep.No.1383, 73d Cong., 2d Sess. 10-11 (1934), reprinted in 5 Ellenberger & Mahar, Item 18. To nullify section 9 by implication would violate the "cardinal principle of construction that repeals by implication are not favored." Silver v. New York Stock Exchange, 373 U.S. 341, 357, 83 S. Ct. 1246, 1257, 10 L. Ed. 2d 389 (1963). This principle and Congress' great care from investigation through final passage militates against nullification of section 9 by implication without an express desire by Congress to do so. See Ernst & Ernst, 425 U.S. at 210-11, 96 S. Ct. at 1389; Ruder, Civil Liability Under Rule 10b-5: Judicial Revision of Legislative Intent? 57 Nw.L.Rev. 627, 649 (1963).

Not only is such clear intent of nullification absent from section 10(b)'s legislative history, but that history demonstrates the opposite-that section 10(b) was never intended to supplant or traduce the remedies and limitations of section 9 or the other express remedies of the 1933 and 1934 Acts. From its inception through various amendments and into its final form, section 10(b) was always intended as a "catchall" provision to reach activities not covered or anticipated in other provisions of the Acts.

In House committee hearings, Thomas Corcoran, an official of the Roosevelt administration who assisted in the drafting of the Act, described the provisions of section 9(c), the forerunner of section 10(b), in these terms:

Subsection (c) says, "Thou shalt not devise any other cunning devices" .... Of course subsection (c) is a catch-all clause to prevent manipulative devices. I do not think there is any objection to that kind of a clause. The Commission should have the authority to deal with new manipulative devices.

Stock Exchange Regulation, Hearings Before the House Comm. on Interstate and Foreign Commerce, 73d Cong., 2d Sess. 115 (1934), reprinted in 8 Ellenberger & Mahar, Item 23 (emphasis added). J. M. Landis, FTC Commissioner and one of the Act's draftsmen, substantiated this interpretation of section 10(b): "(I)t gives the general power to the Commission to prescribe rules and regulations governing any other manipulative devices." Id. at 21, reprinted in 8 Ellenberger & Mahar, Item 23 (emphasis added).⁵⁰ 

The report of the Senate committee which studied the proposed bill summarized section 10(b) as follows: "Subsection (b) authorizes the Commission by rules and regulations to prohibit or regulate the use of any other manipulative or deceptive practices which it finds detrimental to the interests of the investor." S.Rep.No.792, 73d Cong., 2d Sess. 18 (1934), reprinted in 5 Ellenberger & Mahar, Item 17 (emphasis added). Finally, Senator Fletcher, the Senate sponsor of the Act, declared in the floor debates that section 10(b) gave the SEC "power to forbid any other devices." 78 Cong.Rec. 2271 (1934) (emphasis added).

In line with the catchall purpose of section 10(b), the conference committee broadened the SEC's rulemaking power to include protection of the public interest, as well as protection of investors. H.R.Conf.Rep.No.1838, 73d Cong., 2d Sess. 32-33 (1934), reprinted in 5 Ellenberger & Mahar, Item 20. The Supreme Court and this circuit have consistently interpreted section 10(b) as a catchall. See, e.g., Aaron, 446 U.S. at 690, 100 S. Ct. at 1952; Ernst & Ernst, 425 U.S. at 203, 96 S. Ct. at 1385; Herpich v. Wallace, 430 F.2d 792, 801 (5th Cir. 1970).

From this power to enact catchall rules under section 10(b) came Rule 10b-5. Judge Ainsworth, in his thorough and scholarly opinion in Herpich, captured the precise origins and original purpose of the Rule:

The SEC adopted Rule 10b-5 in 1942 to close 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." SEC Sec.Exch.Act Rel.No.3230 (May 21, 1942). The purpose of the rule, it seems clear, was to afford sellers of securities the same protections already afforded purchasers by the federal scheme of securities regulation. Previously, fraud on sellers, as distinct from fraud on purchasers, see Securities Act of 1933, § 17(a), 15 U.S.C. § 77q(a), was not covered by the securities acts unless committed by an over-the-counter broker or dealer. 8 SEC Ann.Rep. 10 (1943); see Securities Exchange Act of 1934, § 15(c), 15 U.S.C. § 78o(c). Viewing the rule as an "additional protection to investors," 8 SEC Ann.Rep. 10 (1943), the Commission fashioned it to "make applicable to the purchase of securities, the same broad antifraud provisions which the Congress has imposed in Section 17(a) of the Securities Act of 1933, in connection with the sale of securities." Ward La France Truck Corp., 13 S.E.C. 373, n.8 (1943). To accomplish this end the Commission ... copied the language of section 17(a) of the Securities Act ... and applied it "in connection with the purchase or sale of any security," this being the reach of section 10(b). See also Birnbaum v. Newport Steel Corp., 2 Cir., 1952, 193 F.2d 461, 463; 3 and 6 Loss, Securities Regulation 1424-1427 (2d ed. 1961), 3617 (Supp. 2d ed. 1969).

430 F.2d at 801-02 (emphasis added); accord, Ernst & Ernst, 425 U.S. at 212 n.32, 96 S. Ct. at 1390 n.32.

In 1946, four years after the adoption of Rule 10b-5, came the landmark decision by Judge Kirkpatrick that there existed an implied private right of action under the Rule. Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946). The Supreme Court subsequently acquiesced in this judicial implication. Touche Ross, 442 U.S. at 577 n.19, 99 S. Ct. at 2490 n.19.

Judge Kirkpatrick confronted a novel issue again in 1948, one apposite to our case. In Rosenberg v. Globe Aircraft Corp., 80 F. Supp. 123 (E.D. Pa. 1948), plaintiffs asserted a Rule 10b-5 claim that duplicated the coverage of sections 11 and 12 of the 1933 Act, 15 U.S.C. §§ 77k, 77l. His resolution of this conflict between the express and implied remedies is worth quoting:

It cannot be supposed that Congress intended to abolish (the) regulations and limitations (of §§ 77k and 77l) when it enacted Sec. 10 of the Act of 1934. By any reasonable rule of statutory interpretation, it would require either an express repeal or an implication of repeal so strong as to be inescapable. The two Acts are unquestionably in pari materia and must be construed together to make a consistent whole. Looking at them as one statute it is simply not possible that Congress, having prescribed in elaborate detail procedural requirements which must be fulfilled in order to enforce civil liability attaching to a carefully defined type of violation, would have casually nullified them all in a later section. Nor can an intention to do so be deduced from the general provisions of Sec. 29 of the Act of 1934, 15 U.S.C.A. § 78bb, which is, "The rights and remedies provided by this chapter shall be in addition to any and all other rights and remedies that may exist at law or in equity ...." As a matter of fact "this chapter" does not provide any remedies for the violation of Sec. 10(b). Those remedies arise by the general law of torts, which attaches civil liability to the violation of a criminal statute. The point in Kardon v. National Gypsum Co., D.C., 69 F. Supp. 512, was not that the Act itself provided a civil remedy, but that there was nothing in it to indicate that Congress intended to withhold from injured parties the right to recover damages which normally attends violations of a criminal statute. Undoubtedly "The rights and remedies provided by this chapter" referred to in Sec. 29 were intended to be the rights and remedies which the Act of 1934 did, in Sec. 9, 16 and 18, 15 U.S.C.A. §§ 78i, 78p and 78r, expressly provide for violations of those sections. No other interpretation can avoid making a completely incongruous piece of legislation out of the two statutes in question.

80 F. Supp. at 124-25; accord, Ernst & Ernst, 425 U.S. at 210-11, 96 S. Ct. at 1389. Judge Kirkpatrick thereupon held that the suit under Rule 10b-5 would be subject to the restrictions of the express remedies that applied. 80 F. Supp. at 124-25. Thus the plaintiffs could not evade the restrictions of the express remedies by pleading Rule 10b-5.⁵¹ 

The reasoning of Judge Kirkpatrick in Rosenberg has been applied by two recent Supreme Court opinions, Blue Chip and Piper. In Blue Chip, the Court held that to acquire standing under Rule 10b-5, private plaintiffs must be either purchasers or sellers of securities, the so-called Birnbaum rule.⁵²  This holding relied in part on the principle that "(i)t would indeed be anomalous to impute to Congress an intention to expand the plaintiff class for a judicially implied cause of action beyond the bounds it delineated for comparable express causes of action." 421 U.S. at 736, 95 S. Ct. at 1925.

In Piper, the Supreme Court was confronted with a claim that the Birnbaum rule applies to plaintiffs pursuing private remedies under Rule 10b-6.⁵³  The Court, however, decided the standing issue on a narrower ground, holding that a frustrated tender offeror has no Rule 10b-6 cause of action against the successful offeror based solely on a failure to gain control. 430 U.S. at 45, 97 S. Ct. at 951. Alternatively, the SEC as amicus curiae argued that a private plaintiff relying on Rule 10b-6 can avail itself of section 9(e)'s standing requirement (the purchase or sale of "any security") since Rule 10b-6 is grounded in part in section 9. If that is true, the Supreme Court reasoned, the plaintiff must also meet the other section 9(e) standing requirements.⁵⁴  Since the plaintiff failed to meet section 9(e)'s "affected price" criterion, there was no section 9 standing. A party may not selectively pick and choose among the requirements, depending on whether they aid his case. See 430 U.S. at 45-46, 97 S. Ct. at 951.

From Piper, we conclude that a private plaintiff pursuing an implied remedy is bound by the congressional limits on the express remedy from which it is derived. From Blue Chip, we derive a similar principle: implied remedies are limited by the provisions of comparable express remedies.

Despite the legislative history of sections 9 and 10(b) that underlies the Rosenberg-Blue Chip-Piper principles limiting implied remedies, courts have permitted private plaintiffs to use rules promulgated under section 10(b) to reach section 9 activity without imposing section 9's restrictions. See, e.g., cases cited supra note 9.

This is such a case. Section 9 encompassed this scheme. Yet relief was granted under Rule 10b-5, defying the intent of Congress as revealed in the legislative history of the Acts. From that history, "we are compelled to conclude that Congress provided precisely the remed(y) it considered appropriate." Middlesex County Sewerage Authority v. National Sea Clammers Association, 453 U.S. 1, 15 (1981). Thus the correct response to attempts such as this to evade section 9 is that pioneered by Rosenberg and endorsed in Blue Chip and Piper : if the action is styled as one under Rule 10b-5, yet addresses section 9 activities, section 9's limitations should apply.⁵⁵  Rule 10b-5 has been extended well beyond its gap-filling purpose as originally envisioned by Congress in section 10(b) and proposed by the SEC. In their eagerness to improve upon the statutory scheme, a practice condemned by the Supreme Court, the courts have created law that does not follow congressional intent, which is the "ultimate question" in these cases. See Touche Ross, 442 U.S. at 578, 99 S. Ct. at 2490; Ruder, supra note 55, at 628. In this case, Rule 10b-5 has been extended until it cuts out the heart of the 1934 Act, section 9, thereby crossing the line between administration of a congressional statute and making new law unauthorized by Congress.

Because we have found that permitting a Rule 10b-5 remedy here would impermissibly nullify the section 9 remedy and is "unnecessary to ensure the fulfillment of Congress' purposes" in enacting the 1934 Act, Santa Fe Industries, 430 U.S. at 477, 97 S. Ct. at 1302, we reverse the trial court's judgment insofar as it was based on Rule 10b-5 and remand for dismissal of the federal claims.⁵⁶ 

B. Texas Securities Law Claims.

Chemetron alleged violations of article 4004, Tex.Rev.Civ.Stat. (Vernon 1966).⁵⁷  On appeal, several claims of error are made against the trial court's judgment based on art. 4004.

1. Errors in the Submission of Special Interrogatories and Instructions.

a. Special Interrogatories.

Appellants assert that the trial court erroneously failed to submit or submitted faulty special interrogatories on three elements of an article 4004 claim: (1) duty to disclose, (2) intent to induce action, and (3) material inducement. Further, appellants claim that it was error not to submit a separate interrogatory requesting exemplary damages as to each appellant. Chemetron initially rejoins that appellants' failure to request or object to the special interrogatories submitted below waives a jury trial on those issues under Fed. R. Civ. P. 49(a),⁵⁸  citing Fredonia Broadcasting Corp. v. RCA Corp., 481 F.2d 781, 796 (5th Cir. 1973); John R. Lewis, Inc. v. Newman, 446 F.2d 800, 804-05 (5th Cir. 1971); and First National Bank, Henrietta v. SBA, 429 F.2d 280, 285 (5th Cir. 1970).

We see no merit in this claim. In this circuit, a party preserves a claim of error either by proposing and being denied a special interrogatory or by objecting to a proposed special interrogatory before the jury has retired. See Huddleston, 640 F.2d at 550. John R. Lewis, Fredonia, and Henrietta are not to the contrary. Either method serves the ultimate purpose of directing the trial court's attention to the issue. The preferred method is to assist the trial court by proposing special interrogatories, but failure to do so is not fatal so long as a timely, comprehensible objection is made before submission to the jury. See id. A final requirement is that each party desiring to preserve the claim of error must object. See L'Urbaine et la Seine v. Rodriguez, 268 F.2d 1, 4 (5th Cir. 1959). Our examination of the record indicates that all appellants preserved their claims of error with timely objections.⁵⁹ 

We turn now to the asserted errors.

Rule 49(a) allows special verdicts at the discretion of the trial court. The trial court also has discretion over the nature and scope of the issues submitted, a discretion reviewable only for abuse. Loffland Brothers Co. v. Roberts, 386 F.2d 540, 546 (5th Cir. 1967), cert. denied, 389 U.S. 1040, 88 S. Ct. 778, 19 L. Ed. 2d 830 (1968). The criteria used in appellate evaluation of the adequacy of special interrogatories are:

(i) whether, when read as a whole and in conjunction with the general charge the interrogatories adequately presented the contested issues to the jury; (ii) whether the submission of the issues to the jury was "fair"; and (iii) whether the "ultimate questions of fact" were clearly submitted to the jury.

Dreiling v. General Electric Co., 511 F.2d 768, 774 (5th Cir. 1975) (citations omitted). We apply these criteria in light of several holdings that clarify their meaning. "(T)he judge must submit all material issues raised by the pleadings and the evidence," Simien v. S. S. Kresge Co., 566 F.2d 551, 555 (5th Cir. 1978),⁶⁰  although none must be submitted twice through redundant special interrogatories, Angelina Casualty Co. v. Bluitt, 235 F.2d 764, 770 (5th Cir. 1956). The limits on the submission requirement were recently outlined:

There is no doubt that a judge must clearly and properly instruct the jury with regard to the resolution of key issues in a given case. However, there is no basis for (appellant's) apparent assumption that because an issue is important to the outcome of a case, the jury must be instructed to supply a specific answer informing the court how they resolved that one issue. No party is entitled to a special verdict on each of the multi-faceted, multitudinous issues essential to the resolution of a given case.

Miley v. Oppenheimer & Co., 637 F.2d 318, 334 (5th Cir. 1981).

Guided by these holdings, we turn to the law of fraud in Texas. Each of the following elements must be established in order to permit recovery: (1) the charged party made a false material representation that consisted of either a positive untrue statement of material fact, concealment of a material fact, or nondisclosure of a material fact that the charged party had a duty to disclose; (2) the charged party knew that the material representation was false or made it recklessly without any knowledge of its truth; (3) the charged party made the false material representation with the intent that it should be acted upon by the charging party; (4) the charging party acted in reliance thereon; and (5) the charging party thereby suffered an injury. See Custom Leasing, Inc. v. Texas Bank & Trust Co., 516 S.W.2d 138, 142-43 (Tex.1974); Roland v. McCullough, 561 S.W.2d 207, 210 (Tex.Civ.App.-San Antonio 1977, writ ref'd n. r. e.); Moore & Moore Drilling Co. v. White, 345 S.W.2d 550, 555 (Tex.Civ.App.-Dallas 1961, writ ref'd n. r. e.).

Appellants first assert that this was only a case of nondisclosure, and hence it was error not to submit a special interrogatory on the duty to disclose.⁶¹  Chemetron responds that this was a case involving only concealment or positive untrue statements, and therefore the duty to disclose does not apply. Our examination of the record indicates that while concealment or positive untrue statements may have been issues in this case, nondisclosure was the only type of misrepresentation under Texas law submitted to the jury.⁶²  Since nondisclosure was the only basis for liability under Texas law, the existence of a duty to disclose was a material issue. However, a duty to disclose arises only in particular circumstances. This court has held that "Texas law is clear that if there is no confidential or fiduciary relation between the parties (creating a duty to disclose), mere silence does not amount to fraud or misrepresentation." Southwest E & T Suppliers, Inc. v. American Enka Corp., 463 F.2d 1165, 1166 (5th Cir. 1972).

Chemetron cites several Texas cases in which nonfiduciary relationships have been held to create a duty to disclose, see, e.g., Campbell v. Booth, 526 S.W.2d 167, 172 (Tex.Civ.App.-Dallas 1975, writ ref'd n. r. e.); Chandler v. Butler, 284 S.W.2d 388, 394 (Tex.Civ.App.-Texarkana 1955, no writ), or where "active" concealment was actionable without there being a duty to disclose, see, e.g., Campbell, 526 S.W.2d at 172; Crofford v. Bowden, 311 S.W.2d 954, 956-57 (Tex.Civ.App.-Fort Worth 1958, writ ref'd). The latter cases are inapposite since concealment was not submitted to the jury here. As to the former cases, Southwest E & T Suppliers held that the Texas law of fraud permitted no exceptions to the above-quoted rule. See 463 F.2d at 1166. "Once a panel of this Court has settled on the state law to be applied in a diversity case, the precedent should be followed by other panels ... absent a subsequent state court decision or statutory amendment which makes this Court's decision clearly wrong." Lee v. Frozen Food Express, Inc., 592 F.2d 271, 272 (5th Cir. 1979) (per curiam). Chemetron has cited to us only one Texas case-Campbell-decided since Southwest E & T Suppliers that broadens the rule it announced. Without more, this single intermediate appellate opinion, which rests on reasoning that the Texas Supreme Court refused to adopt, see Tex.R.Civ.P. 483 (West 1980), is insufficient to persuade us that Southwest E & T Suppliers is "clearly wrong."

Thus, silence alone by the defendants in this case does not create liability. Premising liability on the jury's affirmative answer to Special Interrogatory No. 20 was error without a jury finding that a confidential relationship existed.

The jury instructions on Texas law did not cure the failure to submit a special interrogatory that addressed some factual predicate of a duty to disclose. They simply stated that liability is created for "an omission or concealment of material fact by a person with a duty to disclose." There was no explanation of the duty, when it arises, how it is discharged, and so forth. The jury could not reasonably have made the required threshold finding of a factual basis for a duty to disclose before answering Special Interrogatory No. 20. It was not instructed to do so, nor was Special Interrogatory No. 20 cast in such form as to require one. Therefore, either a special interrogatory concerning the basis of the defendants' duty to disclose to Chemetron should have been submitted to the jury, or Special Interrogatory No. 20 should have addressed it, since it was a material issue. We need not and do not express any opinion on whether the defendants had such a duty here. We hold only that such an issue should have been submitted to the jury. On remand, if liability under Texas law is submitted to the jury based solely or in part on nondisclosure, Chemetron must prove the existence of a confidential relationship under the law of Texas as we interpreted it in Southwest E & T Suppliers.

Appellants also challenge the failure of the trial court to submit a special interrogatory on their intent to induce action by Chemetron. Chemetron argues that this element is established by taking the instructions and interrogatories as a whole. Hence it would have been needlessly redundant to submit a special interrogatory on this issue. In so arguing, Chemetron claims that this element is necessarily part of the alleged manipulative scheme directed at the investing public at large, which included Chemetron.

While Special Interrogatory No. 1 covered the issue of intent to induce action by the public at large,⁶³  Texas law clearly requires an intent to induce action by the plaintiff for article 4004 liability. Oilwell Division, United States Steel Corp. v. Fryer, 493 S.W.2d 487, 491 (Tex.1973). Thus, the trial court failed to submit to the jury a material issue-the defendants' intent to induce action by Chemetron. Appellants' claim of error is well taken.⁶⁴ 

Appellants' third attack on the special interrogatories complains of the burden of proof placed on them in Special Interrogatory No. 25 on material inducement, which stated in full:

DEFENDANTS' BURDEN

SPECIAL INTERROGATORY NO. 25

Do you find from a preponderance of the evidence that Chemetron's decision to purchase Westec securities in January, 1966 would have been the same decision if all transactions comprising the scheme, plan or conspiracy to manipulate had been disclosed to Chemetron prior to the purchase?

The jury answered "no."

Our review of this issue requires some explanation of the instructions and special interrogatories used by the trial court. The jury was correctly instructed that Chemetron had the burden of proving its contentions.⁶⁵  However, since conspiracy was also alleged, the defendants could avail themselves of the defense of withdrawal from any such conspiracy. The jury was correctly instructed that the defendants had the burden of proof on this defense.⁶⁶  As the burden moved back and forth throughout the 31 special interrogatories, the phrases "PLAINTIFF'S BURDEN" (abbreviated "PB" for our discussion here) or "DEFENDANTS' (or DEFENDANT'S) BURDEN" ("DB") were used to tell the jury when there was a change in the burden of proof. Thus, PB is found at the top of the first page of interrogatories. DB precedes Special Interrogatory No. 9 on Austin's withdrawal, but PB reasserts itself before Special Interrogatory No. 10. DB reappears before Special Interrogatory No. 15 on BFI's withdrawal but gives way to PB on Special Interrogatory No. 16. DB's next and final appearance before Special Interrogatory No. 25 is the one attacked here.⁶⁷  PB appears again before Special Interrogatory No. 26.

Under Erie, burden of proof is a substantive issue governed by state law in a diversity case such as this. See 9 C. Wright & A. Miller, Federal Practice & Procedure §§ 2405 and 2409 (1971). Under Texas law the burden of proof for every element in an action for fraud is on the plaintiff. Brooks v. Parr, 507 S.W.2d 818, 819 (Tex.Civ.App.-Amarillo 1974, no writ). Thus, Special Interrogatory No. 25 erroneously placed the burden of proof on the defendant.

This court cannot assume that the jury realized that the burden of proof in Special Interrogatory No. 25 was erroneous and therefore ignored it. The trial court had established a clear written pattern for the jury to follow when deliberating, and it is reasonable to believe that they did so despite what their verbal instructions had been. See Cann v. Ford Motor Co., 658 F.2d 54, 59 (2d Cir. 1981), cert. denied, --- U.S. ----, 102 S. Ct. 2036, 72 L. Ed. 2d 484 (1982). Thus, the jury instructions cannot cure this error.

However, it is clear from the record evidence of a massive manipulative scheme that the jury would have answered a special interrogatory stating the correct burden of proof the same way. Given the scale of this scheme, no reasonable corporate investor would have behaved as Chemetron did if it knew about the scheme, and no reasonable juror could have reached a different conclusion. Therefore, the improper placement of the burden of proof here is not reversible error. See Sheppard Federal Credit Union v. Palmer, 408 F.2d 1369, 1372 (5th Cir. 1969).⁶⁸ 

Appellants' final complaint about the special interrogatories is the failure to submit one that required the jury to apportion exemplary damages among them.⁶⁹  Since there is no Texas jurisprudence squarely on point, we are Erie-bound to make an "educated guess" as to how the Texas Supreme Court would rule. See Nobs Chemical, U.S.A., Inc. v. Koppers Co., 616 F.2d 212, 214-15 (5th Cir. 1980). Before making this "educated guess," we must explain this issue further so that it can be properly analyzed.

The purposes of exemplary damages are the punishment of an intentional act by a defendant and the deterrence of future misbehavior. See Pace v. McEwen, 574 S.W.2d 792, 801 (Tex.Civ.App.-El Paso 1978, writ ref'd n. r. e.); Collins v. Miller, 443 S.W.2d 298, 302 (Tex.Civ.App.-Austin 1969, writ ref'd n. r. e.). Therefore, art. 4004 requires willfulness or knowledge on the part of the defendants before exemplary damages are permitted.⁷⁰ 

In Special Interrogatory No. 26, the jury applied article 4004's willfulness or knowledge requirement to each defendant:

If you have found that a scheme or plan to manipulate the stock of Western Equities existed in answer to Special Interrogatory No. 1, or if you have found that a conspiracy existed in answer to Special Interrogatory No. 7, and if you have found that the existence of that plan, scheme or conspiracy was a material fact which was not disclosed to Chemetron in answer to Special Interrogatories 20 and 22, do you find from a preponderance of the evidence that any of the defendants willfully concealed the existence of such material fact or knowingly took advantage of said activity?

Answer by naming said defendants, if any.

Business Funds, Inc. Yes ____ No ____ John F. Austin, Jr. Yes ____ No ____ David C. Bintliff Yes ____ No ____ Brazos Valley Cotton Oil Company Yes ____ No ____

(emphasis added). In response, the jury held BFI, Austin, and Bintliff each to have willfully concealed or knowingly taken advantage of the scheme. Chemetron claims that this finding fulfills article 4004's requirement and justifies the joint and several liability for punitive damages imposed in Special Interrogatory No. 31.

We disagree for several reasons and hold that the affirmative answers to Special Interrogatory No. 26 were but a threshold to further consideration of exemplary damages by the jury. First, there is the language of the statute itself. Article 4004 expressly requires joint and several liability for actual damages but has no such express requirement for exemplary damages:

All persons making the false representations or promises and all persons deriving the benefit of said fraud, shall be jointly and severally liable in actual damages, and in addition thereto, all persons wilfully making such false representations or promises or knowingly taking the advantage of said fraud shall be liable in exemplary damages to the person defrauded in such amount as shall be assessed by the jury, not to exceed double the amount of the actual damages suffered.

(emphasis added).⁷¹  The parallel language of the actual and exemplary damage provisions is striking and renders the differences significant, particularly since the statute is penal in nature and must be strictly construed, Westcliff Co. v. Wall, 153 Tex. 271, 267 S.W.2d 544, 546 (1954). The elements of willfulness and knowledge were expressly added to the exemplary damage provision, while the joint and several liability requirement is conspicuously absent. Examination of art. 4004 leads us to conclude that the Texas Legislature chose not to impose joint and several liability for exemplary damages.⁷² 

There is ample support in the case law for this interpretation of the statute. Texas courts have long followed several criteria for the evaluation of exemplary damage awards made by a jury in its discretion. The first, that exemplary damages be reasonably proportional to actual damages, see Southwestern Investment Co. v. Neeley, 452 S.W.2d 705, 707 (Tex.1970), is governed primarily by statute in cases of fraud-art. 4004 permits exemplary damages to be no more than double the actual damages suffered. The remaining criteria are:

the nature of the wrong, the character of the conduct involved, the degree of culpability of the wrongdoer, the situation and sensibilities of the parties concerned, and the extent to which such conduct offends a public sense of justice and propriety.

Schutz v. Morris, 201 S.W.2d 144, 147 (Tex.Civ.App.-Austin 1947, no writ). Texas law imposes additional criteria for evaluating corporate liability for exemplary damages. See Ledisco Financial Services, Inc. v. Viracola, 533 S.W.2d 951, 957 (Tex.Civ.App.-Texarkana 1976, no writ); accord, Wooley v. Southwestern Portland Cement Co., 272 F.2d 906, 907 (5th Cir. 1959). These criteria demand individual consideration of each defendant's conduct, situation, sensibilities, and culpability by the jury, consideration that is denied by failing to apportion exemplary damages.

In a case like this with several conspirators (and many other conspirators not before the court) who may have had varying degrees of intent or knowledge, who participated in the scheme in different ways over a long period of time, and who performed in a variety of capacities (an investor, a corporation, and its chairman), the purposes of exemplary damages are ill served by rendering all defendants jointly and severally liable. Joint and several liability for exemplary damages in these circumstances enables coconspirators to shift the burden of those damages onto their less culpable confederates. This undermines their deterrent and punitive purposes. Cf. Northwestern National Casualty Co. v. McNulty, 307 F.2d 432, 440 (5th Cir. 1962) (insurance for punitive damages blunts punishment and deterrent purposes by shifting burden from wrongdoer to insurance company). Each defendant vigorously contested his own liability at trial and on appeal, and the evidence as to the liability of each varies considerably. The jury should have been permitted to assess exemplary damages against each defendant in accordance with its evaluation of that defendant.

Our conclusion is buttressed by the line of Texas cases that have either upheld separate consideration of exemplary damages for each defendant in a multi-defendant case or supported the principle of separate consideration. In Schutz, the court said:

Where two or more wrongdoers together take part in the wrong, it is entirely possible that one may be prompted by malice, while the other is not. Or it may be that though both be guilty, the culpability of one is much greater than that of the other, thus warranting a greater penalty.

201 S.W.2d at 147 (citations omitted); see Norton Refrigerated Express, Inc. v. Ritter Brothers Co., 552 S.W.2d 910, 913 (Tex.Civ.App.-Texarkana 1977, writ ref'd n. r. e.); Walker v. Kellar, 226 S.W. 796, 798 (Tex.Civ.App.-San Antonio 1920, writ ref'd). Schutz sustained separate consideration; Norton recognized that it may be necessary in some cases but held it unnecessary under the "unusual" facts of that case; and Walker required it for one late-joining conspirator against whom the evidence was weaker.

Chemetron cites Crisp v. Southwest Bancshares Leasing Co., 586 S.W.2d 610, 615 (Tex.Civ.App.-Amarillo 1979, writ ref'd n. r. e.), for the proposition that "(e)ach party to a fraudulent transaction is responsible for the acts of others done in furtherance of the scheme." However, Crisp is inapposite. It involved only joint and several liability for actual damages, since exemplary damages apparently were not awarded at trial. See id. at 612-13. Crisp does not create joint and several liability for punitive damages.

Statutory interpretation, Texas case law, and our evaluation of the facts in this case indicate that separate consideration of the amount of exemplary damages for each defendant is required.⁷³ 

b. Jury Instructions.

The defendants claim that they were prejudiced because the jury was not correctly instructed, in Jury Instruction No. 32,⁷⁴  on the purposes of exemplary damages or how they differ from compensatory damages. The standard of review on this issue was recently summarized:

"(T)he test is not whether the charge was faultless in every particular but whether the jury was misled in any way and whether it had understanding of the issues and its duty to determine those issues." Our jurisprudence mandates that we consider the charge as a whole, viewing it in the light of the allegations of the complaint, the evidence, and the arguments of counsel.

Smith v. Borg-Warner Corp., 626 F.2d 384, 386 (5th Cir. 1980) (citations omitted), quoting Borel v. Fibreboard Paper Products Corp., 493 F.2d 1076, 1100 (5th Cir. 1973), cert. denied, 419 U.S. 869, 95 S. Ct. 127, 42 L. Ed. 2d 107 (1974). While the standards for evaluating jury instructions in a diversity case are federal, the substance of those instructions must adhere to state law. Reyes v. Wyeth Laboratories, 498 F.2d 1264, 1289 (5th Cir.), cert. denied, 419 U.S. 1096, 95 S. Ct. 687, 42 L. Ed. 2d 688 (1974).

Looking at the contested instruction, we see the following: (1) the jury was never informed of the purposes of exemplary damages (deterrence and punishment of extraordinary misconduct); (2) the jury was correctly cautioned several times that an award was discretionary; and (3) it was properly told what criteria article 4004 required (intent or knowledge) for exemplary damages. In the arguments of Chemetron's counsel we find instances where counsel informed the jury of the nature of punitive damages. Next, we have the "entitled to" language of Special Interrogatory No. 31, which may be misleading on the purposes of exemplary damages but is not reversible error in and of itself. See supra note 69. Finally, Chemetron sought punitive damages in its complaint and, we note without intimating any view on the sufficiency of this evidence, did present evidence in support of its claim.

Against this backdrop, the defendants point to Texas and federal standard jury instructions on exemplary damages as proof of the trial court's error.⁷⁵  However, it is scarcely error per se to decline to follow pattern or form book instructions. Nor does Erie compel the use of pattern state instructions, since the manner of giving jury instructions is controlled by federal law, Foster v. Ford Motor Co., 621 F.2d 715, 717 (5th Cir. 1980), and a pattern charge is but one procedure for instructing the jury-other procedures may be used so long as they correctly describe the applicable state law. See Platis v. Stockwell, 630 F.2d 1202, 1207 (7th Cir. 1980); Wright v. Albuquerque Auto-Truck Stop Plaza, 591 F.2d 585, 587 (10th Cir. 1979); Stafford v. Southern Farm Bureau Casualty Insurance Co., 457 F.2d 366, 367 (8th Cir. 1972) (per curiam). Pattern instructions are merely some evidence that an instruction is advisable.

Although it is a close question, we hold that these instructions and the language of Special Interrogatory No. 31 are not erroneous under Smith -they did not mislead the jury or create misunderstanding of the issues. The special interrogatory and the instructions made clear to the jury that an award of exemplary damages was discretionary. The special interrogatory and instructions did not erroneously tell the jury or even imply that exemplary damages were mandatory. Compare nn. 69, 74 with Crowell-Collier Publishing Co. v. Caldwell, 170 F.2d 941, 944-45 & n.9 (5th Cir. 1948). While the preferable course would be for the trial judge to instruct on the purposes of exemplary damages, in this case Chemetron consistently sought exemplary damages and presented its case through evidence and argument in a way that made the purposes of exemplary damages clear to the jury. Given the presentation of Chemetron's case, we hold that the jury was not misled or confused by the "entitled to" language of Special Interrogatory No. 31 or by the jury instructions.

While so holding, we reiterate that the issue is close and that a trial judge must be extremely careful to keep exemplary damages within their proper sphere to prevent a jury from assessing them for invalid or speculative reasons. See Lee v. Southern Home Sites Corp., 429 F.2d 290, 294 (5th Cir. 1970). In future trials and particularly if this cause is retried, the "entitled to" phrase should not be used. In addition, we suggest that an instruction on the purposes of exemplary damages will often be found helpful to the jury, enabling it better to distinguish their proper function from that of compensatory awards.

2. Article 4004 and Texas Common Law of Civil Conspiracy.

The defendants challenge their liability as conspirators for violating article 4004. Since we have already found reversible error in the Texas judgment, it is necessary to discuss only one of these challenges, that of Bintliff. Bintliff claims that even if he joined the alleged conspiracy, he joined it well after Chemetron's purchase of Westec stock, and therefore he cannot as a matter of law be held liable for any fraud in connection with that purchase under article 4004. We address this claim to resolve it and to clarify Texas law should this case be retried on the remand that we order.

The elements necessary for liability under article 4004 have already been outlined. See supra Slip op. p. 4219, p. ----. Bintliff correctly asserts that since he was not involved in the Chemetron transaction, his conduct does not fulfill those elements, particularly the requirement of having fraudulently induced Chemetron, not the public at large, to purchase Westec shares. See supra Slip op. 4221, p. ----; Oilwell Division, United States Steel, 493 S.W.2d at 491. However, the Texas common law of civil conspiracy does provide a legal mechanism that could render Bintliff liable to Chemetron for its purchase of Westec shares. We describe this mechanism but express no opinion on whether the evidence in this case renders Bintliff liable, leaving that to the finder of fact if there is a new trial.

Texas recognizes the ancient common-law doctrine that civil conspiracy consists of " 'a combination by two or more persons to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means.' " Fenslage v. Dawkins, 629 F.2d 1107, 1110 (5th Cir. 1980), quoting Schlumberger Well Surveying Corp. v. Nortex Oil & Gas Corp., 435 S.W.2d 854, 856 (Tex.1968). Unlike criminal conspiracy, civil conspiracy itself does not create liability-the conspirators must pursue an independently unlawful purpose or use an independently unlawful means before they can be held liable. See, e.g., Markman v. Lachman, 602 S.W.2d 350, 352 (Tex.Civ.App.-Texarkana 1980, no writ).

In this case, Chemetron alleged and offered proof that the continuing conspiracy Bintliff joined had both an unlawful purpose-market manipulation-and was pursued via unlawful means, including inducing the public to buy or sell Westec stock in violation of article 4004. None of the conspirators had specific sellers or buyers in mind when the conspiracy began or as it progressed. As each transaction occurred, however, the conspirators could meet the criteria for violating article 4004 by defrauding that particular buyer or seller. This case deals with only one fraudulent act in this broad conspiracy and with only one member of the public defrauded, Chemetron.

This is where Bintliff misunderstands the interaction of article 4004 and Texas civil conspiracy law. He claims that he cannot be liable to Chemetron unless he personally fulfills all of article 4004's criteria. That is true in a nonconspiracy case. But if this court were to accept his argument in this conspiracy case, we would completely abolish civil conspiracy law in Texas. The purpose of civil conspiracy law is to hold conspirators who knowingly and jointly pursue an illegal purpose or use illegal means liable even though all the conspirators do not perform or even know of all the acts done in furtherance of the conspiracy. See, e.g., Bourland v. State, 528 S.W.2d 350, 354 (Tex.Civ.App.-Austin 1975, writ ref'd n. r. e.); Glenn H. McCarthy, Inc. v. Knox, 186 S.W.2d 832, 838 (Tex.Civ.App.-Galveston 1945, writ ref'd w. o. m.).

This principle also covers late-joining conspirators such as Bintliff. See, e.g., State v. Standard Oil Co., 130 Tex. 313, 107 S.W.2d 550, 560 (1937). Standard Oil cited Corpus Juris as authority for this proposition. Turning to Corpus Juris Secondum, we find this rule of law: "Persons having knowledge of a conspiracy who enter into it after its inception and before its consummation are liable for all acts previously or subsequently done in pursuance thereof." 15A C.J.S. Conspiracy § 19, at 659 (1967), citing, e.g., Standard Oil. Accord, 12 Tex.Jur.3d Civil Conspiracy § 4 (1981); 16 Am.Jur.2d, Conspiracy § 56 (1979); 1 Eddy on Combinations § 376 (1901). This immemorial common-law principle has been widely accepted, see, e.g., Industrial Building Materials, Inc. v. Interchemical Corp., 437 F.2d 1336, 1343 (9th Cir. 1970); Ratner v. Scientific Resources Corp., 53 F.R.D. 325, 329 (S.D. Fla. 1971), appeal dism'd for want of juris., 462 F.2d 616 (5th Cir. 1972) (per curiam); Blackstone Industries, Inc. v. Andre, 232 Ga. 715, 208 S.E.2d 815, 816 (1974), and is simply a restatement of another well-settled principle of conspiracy law "that one who knowingly joins a conspiracy even at a later date takes the conspiracy as he finds it," Myzel v. Fields, 386 F.2d 718, 738 n.12 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S. Ct. 1043, 19 L. Ed. 2d 1143 (1968).

Bintliff satisfies the conditions imposed by section 19. He joined the conspiracy after its inception but before its consummation. "A conspiracy, especially one which contemplates a continuity of purpose and a continued performance of acts, is presumed to continue until there has been an affirmative showing that it has terminated ...." United States v. Etheridge, 424 F.2d 951, 964 (6th Cir. 1970). Consummation of the market manipulation scheme had not occurred before Bintliff's membership in the conspiracy because ample record evidence demonstrates that the purpose of the conspiracy, market manipulation, was still pursued by the conspirators well after his entrance. This continuing conspiracy involved many illegal acts, some occurring before and some after Bintliff's entrance. The defrauding of Chemetron was but one illegal act done in furtherance of the conspiracy, not its consummation.

Civil conspiracy principles do not require that Bintliff have intended to defraud a specific party, only that he knowingly have joined the conspiracy intending to defraud its general targets. See, e.g., Schlumberger, 435 S.W.2d at 855-57; Switzer v. Joseph, 442 S.W.2d 845, 849 (Tex.Civ.App.-Austin 1969, no writ). These principles do not render Bintliff liable without regard to his intent-Texas conspiracy law in fact substitutes two intent requirements for the article 4004 intent requirement. Chemetron must prove that (1) one of his coconspirators violated article 4004 and that (2) Bintliff knowingly joined the conspiracy intending to defraud the investing public. We need not repeat the elements of the former requirement, and the Texas Supreme Court has laid out the criteria for the latter:

"A 'conspiracy to defraud' on the part of two or more persons means a common purpose, supported by a concerted action to defraud, that each has the intent to do it, and that it is common to each of them, and that each has the understanding that the other has that purpose."Schlumberger, 435 S.W.2d at 857, quoting Brumley v. Chattanooga Speedway & Motordrome Co., 138 Tenn. 534, 198 S.W. 775, 776 (1917) (emphasis in Texas opinion).

If a jury accepts Chemetron's proof that Bintliff knowingly agreed to participate in the alleged conspiracy to defraud the public and the jury also finds that one of his coconspirators violated article 4004 by defrauding Chemetron, Bintliff must be held liable to Chemetron under a long-established rule in Texas: "(A person) having once entered the conspiracy, however late, becomes in law a party to every act previous or subsequently done by any of the others in pursuance of it." Standard Oil Co., 107 S.W.2d at 560 (cited in, e.g., Logan v. Barge, 568 S.W.2d 863, 868 (Tex.Civ.App.-Beaumont 1978, writ ref'd n. r. e.); Mims v. Bohn, 536 S.W.2d 568, 570 (Tex.Civ.App.-Dallas 1976, no writ)). Thus, Bintliff can be held jointly and severally liable for the actual damages resulting from the previous act of his fellow conspirators, the defrauding of Chemetron.⁷⁶ 

Bintliff raises a final argument on this issue that we must address. He claims that while he may be liable for actual damages under article 4004 and Texas conspiracy law based on the acts of his coconspirators, he cannot be held liable for exemplary damages based on their acts.

Earlier in this opinion, we held that the wording of article 4004 and Texas case law require individual assessment of exemplary damages under article 4004. See supra Slip op. p. 4226, at ----. While civil conspiracy law can be used to render Bintliff liable for actual damages under article 4004, we agree with him that punitive damages can only be assessed against him based on his conduct. The purpose of punishment and deterrence would not be served by imposing exemplary damages without regard to Bintliff's individual conduct.⁷⁷  No Texas case of which we are aware has ever ignored individual culpability and awarded exemplary damages against civil conspirators on a joint and several basis. See, e.g., Fenslage, 629 F.2d at 1109, 1111 (Texas diversity case apportioning exemplary damages among civil conspirators).

This is not to say that, as a matter of law, Bintliff cannot be liable for punitive damages here since he joined the conspiracy late. Article 4004 permits exemplary damages against persons who "knowingly tak(e) ... advantage" of fraud. Thus, if Chemetron can prove that Bintliff knowingly took advantage of the defrauding of Chemetron, he can be held liable for exemplary damages.

C. Other Issues on Appeal.

We address three other allegations in order to guide the trial court if there is a new trial on remand.

1. The In Pari Delicto Instruction.

Appellants claim that it was error to deny them an in pari delicto instruction as to Chemetron. The grant of this defense is within the discretion of the district court, Wolfson v. Baker, 623 F.2d 1074, 1082-83 (5th Cir. 1980), cert. denied, 450 U.S. 966, 101 S. Ct. 1483, 67 L. Ed. 2d 615 (1981), and review of this discretion is limited to its abuse. Prior cases limit this discretion and hold that this defense is only available to defendants under the circumstances outlined in Woolf v. S. D. Cohn & Co., 515 F.2d 591, 601-05 (5th Cir.), on petition for rehearing, 521 F.2d 225, 226-28 (1975) (per curiam), vacated and remanded on other grounds, 426 U.S. 944, 96 S. Ct. 3161, 49 L. Ed. 2d 1181 (1976).

One important circumstance is the effect of the dispute on the investing public. If the fraud is worked only between the parties to the lawsuit, the public is not affected. If, however, as here, the fraud affected the public, use of in pari delicto is disfavored because it will hinder bringing of securities fraud cases. See id. at 602-03; 521 F.2d at 227-28. This circumstance must be given "substantial weight" in determining whether to permit this defense. 515 F.2d at 604.

(E)ven in a case where the fault of plaintiff and defendant were relatively equal, simultaneous and mutual, the court might still reject the defense if it appeared that the defendant's unlawful activities were of a sort likely to have a substantial impact on the investing public, and the primary legal responsibility for and ability to control that impact is with defendant.

Id. In the Woolf opinion on petition for rehearing, the court likened this equal-simultaneous criterion to the "vital" cooperation of coconspirators required to accomplish the conspiratorial scheme. 521 F.2d at 228.

Given these standards, the evidence does not persuade us that, even if Chemetron was a party to the conspiracy, it was a "vital" party. The trial court could well have concluded that the "primary legal responsibility" for the conspiracy lay with the defendants. Therefore, he did not abuse his discretion in denying this defense.

2. Use of the Zero-Value Theory in Measuring Damages.

In Special Interrogatory Nos. 27 and 30, addressing federal and Texas law, respectively, the jury found that had there been disclosure of the manipulative scheme prior to Chemetron's receipt of Westec stock on January 14, 1966, "the real and actual value" of that stock would have been zero. Defendants appeal the use of the zero-value theory in Chemetron's presentation of its case, the theory upon which the answers to Special Interrogatory Nos. 27 and 30 are based. They also appeal other points on the measure of damages.

The briefs are directed almost exclusively to the validity of the zero-value theory and related points under federal law. We need not decide any federal law questions since we have held that Chemetron has no federal cause of action for this fraud. Therefore our analysis of this theory and the other points on appeal is performed according to Texas law to guide a trial on remand.

We first consider an issue other than the theory itself. Defendants allege that Chemetron's expert who advanced the zero-value theory improperly incorporated post-purchase events in his damage assessment. The text of article 4004 expressly describes what evidence is relevant to a damage calculation:

All persons guilty of such fraud shall be liable to the person defrauded for all actual damages suffered, the rule of damages being the difference between the value of the property as represented or as it would have been worth had the promise been fulfilled, and the actual value of the property in the condition it is delivered at the time of the contract.

(emphasis added).

It is clear from article 4004 that any events occurring after January 14, 1966, may not be considered in assessing actual damages. Thus, the experts on damages and the jury may not consider, for instance, manipulative transactions after that date, the revelation of the scheme to the SEC, the cessation of trading in Westec stock, or the bankruptcy of Westec. Other considerations, such as an assumption that prepurchase transactions were illegal, may be used if they meet the standard tests for the admission of evidence, adequate foundation and the like. We leave these issues to the discretion of the trial judge on remand.

As to the zero-value theory, Chemetron contends that "actual value" in article 4004 refers only to the market value of the Westec stock, and the market value of Westec stock would have been zero had the scheme been disclosed. Appellants argue that even if the Westec stock had no market value, it had an intrinsic value representing the assets, tangible and intangible, of Westec, and that article 4004 includes this intrinsic value in the term "actual value."

The resolution of this debate requires an initial inquiry into the nature of damages under article 4004. The seminal case on common law damages for fraud in Texas, George v. Hesse, 100 Tex. 44, 93 S.W. 107 (1906), clearly distinguished between the two remedies available to defrauded purchasers. The first is an action for cancellation and rescission of the contract induced by the fraud, one which restores both parties to the status quo. The second, a tort action for deceit, compensates the defrauded purchaser for the difference between the actual value of the property received and the amount paid for that property. This second cause of action, sounding in tort and using an out-of-pocket measure of damages, was expanded by article 4004 into a benefit-of-the-bargain measure of damages in stock and real estate fraud cases. See El Paso Development Co. v. Ravel, 339 S.W.2d 360, 363 (Tex.Civ.App.-El Paso 1960, writ ref'd n. r. e.), cited with approval in Stanfield v. O'Boyle, 462 S.W.2d at 272 (Tex.1971).

In assessing damages in stock fraud cases under either article 4004 or the common law, Texas courts have employed the standard of value used by the damaged party. Thus, if a damaged party used the market value in striking its bargain, that became the standard. See, e.g., Chandler v. Butler, 284 S.W.2d 388 (Tex.Civ.App.-Texarkana 1955, no writ); cf. Patterson v. Wizowaty, 505 S.W.2d 425 (Tex.Civ.App.-Houston 1974, no writ) (measure of damages in stock conversion suit based on market value of stock at time of conversion). However, where there is no market for the stock or where it is allegedly worthless, the intrinsic value of the assets, tangible and intangible, represented by the stock is used. See, e.g., K. W. S. Manufacturing Co. v. McMahon, 565 S.W.2d 368 (Tex.Civ.App.-Waco 1978, writ ref'd n. r. e.); Beckwith v. Powers, 157 S.W. 177, 180 (Tex.Civ.App.-El Paso 1913, no writ). And in those cases where a damaged party valued stock by reference to the value of underlying assets, damages are calculated by reference to the value of those assets. See, e.g., Reed v. Holloway, 127 S.W. 1189 (Tex.Civ.App.1910, no writ). Using the damaged party's standard of value is eminently sensible, since it awards that party its anticipated benefit of the bargain while avoiding speculative and conjectural damages based on unanticipated benefits of the bargain. Such speculative and conjectural damages are forbidden under both article 4004 and the Texas common law of fraud. George, 93 S.W. at 108; El Paso, 339 S.W.2d at 363-64.

Based on these principles of Texas law, the use of the zero-value theory here was erroneous. The parties established a trading value different from and below the market value of Westec stock on the date of the transaction. There is no evidence that Chemetron contemplated the higher market price as a benefit of its bargain. Chemetron was making an investment in Westec, which is why it used the company's assets in establishing a price for the transaction. Unless Chemetron expected to benefit from the market price, it is speculative and conjectural to award damages based on it.

Even if Chemetron did anticipate the market price as a benefit of the bargain, the damages here would still be speculative or conjectural. The zero-value theory posits that during the panic after the disclosure of a scheme the stock will have no value. Such a panic period is an unpredictable phenomenon-its duration, effect on stock prices, and so forth are highly speculative and conjectural. See Beecher v. Able, 435 F. Supp. 397, 402-06 (S.D.N.Y. 1977). Aggravating these characteristics is the fact that Chemetron would be selling an unusually large amount of stock-ten percent of all Westec stock. Selecting a measure of damages based on such an unreliable and volatile market risks awarding the plaintiff a windfall rather than damages. We find that Texas law cannot countenance a zero-value theory of damages.

Therefore, on remand, the zero-value market theory may not be used. Indeed, no theory that uses market value to set damages can be used, since market value played no role in the striking of the bargain. Chemetron must prove that the value it placed on the Westec stock (which ignored market value) was reduced by the fraud. The difference between the amount Chemetron paid (representing the value it placed on the Westec stock) and this reduced value, if any, represents the damages "actually suffered" and recoverable by Chemetron.

3. The Admission of Williams' Securities Fraud Conviction.

Defendants argue that the probative value of admitting Williams' securities fraud conviction into evidence was outweighed by its prejudicial effect. The conviction came into evidence in a short, two-question colloquy at the conclusion of Williams' lengthy, complicated testimony on the scheme and was also mentioned in closing argument.

In assessing the relevance and prejudice of this evidence in a civil case under Fed.R.Evid. 403,⁷⁸  the trial judge has broad discretion, reviewable only for abuse. Rozier v. Ford Motor Co., 573 F.2d 1332, 1347 (5th Cir. 1978). The threshold issue here is the relevance of the conviction. If it is irrelevant, we need not reach the question of whether its probative value is substantially outweighed by its prejudicial effect. We believe that the conviction is certainly relevant. Two crucial elements of Chemetron's case were (1) that the plan to manipulate the market was illegal and (2) that Williams' conduct was illegal. Williams' conviction is relevant to both elements. While Chemetron did explore at length with the jury the scope of the manipulation, its purposes, and its ultimate results, the defendants hotly contested the existence and the illegality of the scheme and the illegality of Williams' conduct. The probative value of his conviction rose when these issues were vigorously contested. See United States v. Beechum, 582 F.2d 898, 914-15 (5th Cir. 1978) (en banc), cert. denied, 440 U.S. 920, 99 S. Ct. 1244, 59 L. Ed. 2d 472 (1979).

Having passed the relevancy threshold, we must now consider whether the trial judge abused his discretion when he decided that the "danger of unfair prejudice" posed by the conviction did not "substantially outweigh" its probative value. "The task for the court in its ascertainment of probative value and unfair prejudice under rule 403 calls for a commonsense assessment of all the circumstances surrounding the extrinsic offense." Id. at 914. We find this advice on the meaning of "unfair prejudice" in the Notes of the Advisory Committee on the federal evidence rules:

"Unfair prejudice" within its context means an undue tendency to suggest decision on an improper basis, commonly, though not necessarily, an emotional one.... In reaching a decision whether to exclude on grounds of unfair prejudice, consideration should be given to the probable effectiveness or lack of effectiveness of a limiting instruction. See Rule 106 (now 105) and Advisory Committee's Note thereunder. The availability of other means of proof may also be an appropriate factor.

28 U.S.C.A. Fed. Rule of Evidence 403 at 102-03 (1975).

The defendants could have requested, but apparently did not, a limiting instruction that is their right under Rule 105.⁷⁹  Once evidence admissible for one purpose but inadmissible for another is admitted, the trial court cannot refuse a requested limiting instruction. Lubbock Feed Lots, Inc. v. Iowa Beef Processors, 630 F.2d 250, 266 (5th Cir. 1980). In all likelihood, a limiting instruction would have effectively alleviated the appellants' concerns in this case. We also note that defendants began, but abandoned, cross-examination of Williams on the issue of his conviction, another method they could have used to minimize any prejudicial effect.

The Notes also mention consideration of other means of proof. One aspect of such consideration must be whether Williams' conviction is redundant of other less prejudicial evidence. Rozier is instructive on this issue. In Rozier the issue was defendants' negligence in manufacturing the car in which plaintiff's decedent was killed when it ignited after being hit from behind by another car. The trial court admitted into evidence the guilty plea on charges of manslaughter of the driver of the other car. On appeal, this court held this to be an abuse of discretion. The court noted that the criminal conviction had limited probative value since it duplicated already ample evidence of the obvious cause of the auto accident in that case. See 573 F.2d at 1348. The court also held its relevance as evidence of legal cause "attenuated at best," since it had nothing to do with the issue in the case: the legal liability of the allegedly negligent defendant auto manufacturer for injuries in a car accident. Id. This limited relevance was held to outweigh the confusion it could cause the jury as it assessed the legal causes of the tort. Id. Therefore, the auto company's introduction of the conviction was barred.

This case is quite different from Rozier. While the cause of the accident was obvious in Rozier, here the legality of the alleged scheme was strongly disputed between the parties. The relevance of this conviction is not at all attenuated. In Rozier there was a danger that the two forms of causation, the obvious cause of the accident and the disputed proximate (legal) cause of the death, would be confused. The conviction was not at all relevant to the dispute over proximate cause. Here, however, Williams' activities were pivotal in proving the crucial issue in this case: proximate cause and legal liability. Unless he had done something illegal, his alleged superiors and coconspirators could not be held liable. Finally, there was little chance of jury confusion sufficient to outweigh the evidence's relevance. The jury was clearly and repeatedly told that defendants' liability was a separate issue from Williams' liability.

Undue prejudice could also have resulted had the conviction been repeatedly emphasized to the jury or had Chemetron introduced the conviction of other conspirators. See United States v. Fleetwood, 528 F.2d 528, 535 (5th Cir. 1976). However, neither of these events occurred. We therefore hold that the trial judge did not abuse his discretion in admitting evidence of Williams' securities fraud conviction.

Chemetron lodges a cautionary cross-appeal on several issues. This appeal is triggered since we have reversed the judgment under section 10(b) and Rule 10b-5.

A. Denial of Directed Verdict and J. N. O. V. on Special Interrogatory No. 6.

In Special Interrogatory No. 6 the jury found that the price paid by Chemetron for its Westec stock was not "affected by" the fraudulent scheme. Therefore, the defendants could not be liable under section 9. See § 9(e), 15 U.S.C. § 78i(e). Chemetron appeals the denial of a directed verdict or judgment withstanding the verdict on this issue and advances an interpretation of "affected by" in support.

The gist of Chemetron's interpretation is that every price of a stock being manipulated is a false price until the manipulation is revealed and the market reacts. Therefore, all transactions, whether on or off the market, during a manipulation and before its relevation are at false prices, and all are "affected by" the manipulation as a matter of law. In support of this far-reaching interpretation, Chemetron cites no case law, only general passages from the legislative history of the 1934 Act on the importance of open and honest securities markets.

This interpretation of section 9(e) would obviate its causation requirement. Given Congress' numerous careful substantive and procedural restrictions on a section 9(e) private cause of action, we cannot countenance an interpretation of 9(e) that works at cross-purposes to Congress' intent by effectively reading section 9(e)'s causation requirement out of the statute. At a minimum, "affected by" plainly must mean that the manipulated price influenced or was responsible for the purchaser's or seller's price.⁸⁰  See Crane Co. v. American Standard, Inc., 603 F.2d 244, 251-53 (2d Cir. 1979) (transaction before manipulation not actionable; transaction after manipulation not actionable absent allegation and proof of effect on sale price); Rosenberg v. Hano, 121 F.2d 818, 821 (3d Cir. 1941) (price of stock purchased before alleged manipulation occurred not "affected" under section 9); Kerrigan v. Merrill Lynch, Pierce, Fenner & Smith, 450 F. Supp. 639, 647 (S.D.N.Y. 1978) (sale at predetermined net book value price cannot be "affected by" alleged manipulation under section 9(e)). The Supreme Court has characterized section 9 as designed to recover an "improper premium exacted for ... stock." Piper, 430 U.S. at 46, 97 S. Ct. at 951.

Under this minimum definition, the jury verdict was amply supported by the evidence. W. W. Whitnell, an officer of Chemetron, testified at trial that he was "the person primarily in charge of determining what would be a fair price for the (Westec) stock." He served as the "leading negotiator for Chemetron in connection with the Chemetron/Westec deal." In deposition testimony that he reaffirmed at trial, Whitnell said that the negotiators struck a bargain for the nonmarket transaction in October 1964. This bargain was approved by the parties and led to the January 1966 exchange of stock. For purposes of the bargain, Westec shares were to be valued at $14 per share, a price below its market trading price in both October and January. When asked how the $14 figure was arrived at, he responded: "(W)e felt that $14 was a fair price based on the fundamental value of the company. We were not influenced by the market. I have long ago learned that market prices have nothing to do with fundamental values."

Thus, just as in Crane, Rosenberg, and Kerrigan, it is clear that the allegedly manipulated market price of the Westec shares in no way influenced or was responsible for the nonmarket price Chemetron paid for its Westec stock. Chemetron did not base its price on the market price or even use it as a factor. Therefore, it paid no "improper premium" for the Westec stock it purchased. While Chemetron was apparently aware of the market price, it was completely ignored or totally discounted in its Westec negotiations. Mere awareness of the allegedly manipulated market price will not suffice under section 9(e).

B. Collateral Estoppel.

Chemetron argued in its proposed pretrial order that Bintliff be collaterally estopped from relitigating certain factual issues adjudicated adversely to him in Cosmos Bank v. Bintliff, Civ. Action No. 67-H-590 (S.D. Tex. 1975). The trial court denied Chemetron's proposal, and it appeals.

It is necessary to detail the facts at some length in order to analyze this question correctly. Cosmos Bank was one of the many cases arising out of the Westec collapse. The instant case, Cosmos Bank, and many others were consolidated for the purposes of pretrial proceedings in 1970. Cosmos Bank came to trial before Judge Hannay without a jury from December 17, 1974, until February 12, 1975. On May 1, 1975, the trial judge filed and entered a lengthy "Memorandum and Order" detailing his findings of fact and conclusion of law. Based on those findings and conclusion, judgment for over $700,000 in damages and interest was to be awarded to the plaintiff. Plaintiff filed a motion for judgment on May 9, and on May 16 Bintliff filed his motion in opposition to entry of judgment.

On May 29, Bintliff's counsel wrote the United States District Clerk, saying that Bintliff and Cosmos Bank would settle only if the trial judge would sign an order preventing use as offensive collateral estoppel of the findings and conclusions.⁸¹  On May 30, Cosmos Bank and Bintliff filed their joint motion and proposed order. However, the trial judge refused to sign the order because it ordered a new trial for which, the trial judge said in a letter to counsel, "(t)here is, in my opinion, no basis." The trial judge proposed a different order and threatened to act on plaintiff's pending motion for judgment unless his proposed order was promptly agreed to.⁸²  The parties accepted that order, and the judge signed and entered it on June 17, 1975, dismissing the case with prejudice and withdrawing and setting aside the findings of fact and conclusion of law.⁸³  Chemetron's proposed pretrial order contained 158 findings of fact taken verbatim from the 221 findings of fact made by the court and then set aside in Cosmos Bank. However, the trial judge refused to estop Bintliff from relitigating those facts, a refusal Chemetron appeals.

As a preliminary issue we must decide which offensive collateral estoppel rules, Texas or federal, to apply. Because this case was brought in federal court based on federal question and pendent jurisdiction and the estoppel claim is based on a prior case in federal court, we will apply federal rules. See Stovall v. Price Waterhouse Co., 652 F.2d 537, 540 (5th Cir. 1981).

The Supreme Court's landmark case of Parklane Hosiery Co. v. Shore, 439 U.S. 322, 99 S. Ct. 645, 58 L. Ed. 2d 552 (1979), established the criteria for the use of offensive collateral estoppel. In Parklane the precise question was "whether a party who has had issues of fact adjudicated adversely to it in an equitable action may be collaterally estopped from relitigating the same issues before a jury in a subsequent legal action brought against it by a new party." 439 U.S. at 324, 99 S. Ct. at 648. The question in this case is nearly identical. The Court initially expressed its approval of the offensive use of the doctrine if it can be used to prevent relitigation of issues and to promote judicial economy. See id. at 326-31, 99 S. Ct. at 649-651. However, in order to avoid problems with the doctrine's use, the Court adopted a general rule to guide the lower courts:

The general rule should be that in cases where a plaintiff could easily have joined in the earlier action or where ... the application of offensive estoppel would be unfair to a defendant, a trial judge should not allow the use of offensive collateral estoppel.

Id. at 331, 99 S. Ct. at 651.

The first step in the application of this rule is to determine whether Chemetron could have joined the Cosmos Bank suit. We find that that was not possible. As the Westec cases were filed in Houston or transferred from New York, nearly all of them were placed on Judge Hannay's docket. See Wyndham Associates v. Bintliff, 398 F.2d 614, 619-20 (2d Cir.), cert. denied, 393 U.S. 977, 89 S. Ct. 444, 21 L. Ed. 2d 438 (1968). He entertained motions to consolidate for various purposes. Some cases were consolidated for all purposes, including trial, but Judge Hannay expressly consolidated Cosmos Bank and Chemetron "for purposes of pretrial proceedings and none other." (emphasis added). This order, supported by the court's thorough familiarity with these cases, see id., demonstrates to us that consolidation was carefully considered and rejected. The reasons for rejection are obvious, since Chemetron began with far more defendants (57) than Cosmos Bank (4), involved far more transactions, and was in general much more complex. Basically, only Bintliff's participation was common to both cases. Thus, deference to the expertise of the trial court and our own analysis of the two cases convinces us that Chemetron could not have joined Cosmos Bank.

The second step in our analysis is possible unfairness to defendant Bintliff. The Court in Parklane gave several examples of possible unfairness to the defendant that should block the use of offensive collateral estoppel. The first was that if the defendant was sued in the first action "for small or nominal damages, he may have little incentive to defend vigorously, particularly if future suits are not foreseeable." 439 U.S. at 330, 99 S. Ct. at 651 (citations omitted). That is not true in this case. The damages in Cosmos Bank were over $400,000, plus interest, eventually totalling over $700,000, hardly "small or nominal damages" in absolute terms. In this case on remand, Bintliff does face the possibility of damages greater than those he faced in Cosmos Bank.⁸⁴  However, he knew other cases such as this one bearing on the same issues and requesting larger damages were pending, as evidenced by the common discovery procedure and his eagerness to settle and avoid offensive collateral estoppel. He had every incentive to defend vigorously in Cosmos Bank.

Another unfair situation is where "the judgment relied upon as the basis for estoppel is itself inconsistent with one or more previous judgments in favor of the defendant." Id. (footnote omitted). There is no such inconsistency here because there are no previous judgments.

"Still another situation where it might be unfair to apply offensive collateral estoppel is where the second action affords the defendant procedural opportunities unavailable in the first action that could readily cause a different result." Id. at 630-31 (footnote omitted). The Court suggested that such procedural obstacles could be an inconvenient forum inhibiting full discovery or the availability of witnesses. Id. at 631 n.15. There are no such procedural problems here. Indeed, Cosmos Bank was originally filed in New York, and Bintliff had it transferred to Houston, where he lives, for convenience. See Wyndham Associates, 398 F.2d at 616-17; In re Westec Corp., 307 F. Supp. 559, 563 Sch. B. (J.P.M.D.L.1969) (per curiam). We perceive Bintliff to be at no disadvantage due to the Cosmos Bank procedures. If anything, in these cases Chemetron has been inconvenienced by the forum as an out-of-state corporation.

The Parklane Court did not consider its list of considerations exhaustive. See 439 U.S. at 331, 99 S. Ct. at 651. To seek others, we turn to our circuit's precedent. Even before Parklane, the circuit "had stressed the importance of fairness in the particular circumstances of a given case when a litigant sought to invoke offensive collateral estoppel." Hicks v. Quaker Oats Co., 662 F.2d 1158, 1171 (5th Cir. 1981). Canvassing our precedent, we discover these criteria, many repeated in Parklane : (1) party against whom estoppel is asserted must have had a "full and fair" opportunity to litigate the issue in the prior case; (2) application of the doctrine must not create "injustice"; (3) application of the doctrine must not contravene any "overriding public policy"; (4) parties who are defendants in both actions must be closely scrutinized to avoid unfairness; (5) the issue to be concluded must be identical to that involved in the prior action; (6) in the prior action the issue must have been "actually litigated"; and (7) the determination made of the issue in the prior action must have been necessary and essential to the resulting judgment. See Johnson v. United States, 576 F.2d 606, 614-15 (5th Cir. 1978).

Criteria 1, 2, 4, and 6 have been covered already. Criterion 3 requires us to consider our view that settlements are "highly favored in the law." Pearson v. Ecological Science Corp., 522 F.2d 171, 176 (5th Cir. 1975), cert. denied, 425 U.S. 912, 96 S. Ct. 1508, 47 L. Ed. 2d 762 (1976). But the reason that settlements are favored is that they avoid litigation. Id. Here Bintliff settled only to avoid offensive collateral estoppel, not litigation, since the entire trial had run its course, and only the judicial act of signing a final, known adverse, judgment was left.⁸⁵ 

As to criterion 5, there is no question that the factual issues are the same. Criterion 7, because it appears to require a "judgment," leads us to an evaluation of whether we should require the final ministerial act of entering final judgment before giving collateral estoppel effect to the findings of fact of the trial court.⁸⁶ 

The general rule in this circuit is that there must be "judicial finality" before collateral estoppel can be invoked. Since judicial finality has been assumed without analysis to require entry of final judgment, a settlement with no final judgment on the merits has been said to bar collateral estoppel. See, e.g., Kaspar Wire Works, Inc. v. Leco Engineering & Machine, Inc., 575 F.2d 530, 538 (5th Cir. 1978); Associates Capital Services Corp. v. Loftin's Transfer & Storage Co., 554 F.2d 188, 189 (5th Cir. 1977) (summary calendar) (per curiam). However, none of our cases have fully considered the "judicial finality" requirement in an offensive collateral estoppel case such as this one. Loftin's summarily denied the defensive use of collateral estoppel on a jurisdictional issue by the defendant in that case. In Kaspar the issue was the res judicata or collateral estoppel effect of a prior consent judgment dismissing a suit between the same two parties. Particularly relevant to our case, the court expressly acknowledged that the "final judgment" requirement is relaxed in the case of collateral estoppel. See 575 F.2d at 538 n.11. Most important, Kaspar and Loftin's predated the watershed case on offensive collateral estoppel, Parklane, which, as we stated recently, created a "need to redefine the doctrine of collateral estoppel," Migues v. Fibreboard Corp., 662 F.2d 1182, 1187 (5th Cir. 1981). Given Kaspar 's reservation of the question of finality in the collateral estoppel context and the guidance of Parklane, the definition of "judicial finality" for purposes of offensive collateral estoppel is an open question in this circuit.

As the Second Circuit pointed out in Kurlan v. C. I. R., 343 F.2d 625, 628 n.1 (2d Cir. 1965), "general expressions that only final judgments can ever have collateral estoppel effect are considerably overstated." In Kurlan the court upheld giving collateral estoppel effect to the opinion of an appellate court even though the case had been settled on remand. The Kurlan court was acting based on sound precedent.

In Zdanok v. Glidden Co., Durkee Famous Food Division, 327 F.2d 944, 955 (2d Cir.) (Friendly, J.), cert. denied, 377 U.S. 934, 84 S. Ct. 1338, 12 L. Ed. 2d 298 (1964), cited with approval in Johnson, 576 F.2d at 614, the court held:

Dealing with this very question of the kind of finality of judgment necessary to create an estoppel, we pointed out, quite recently, that collateral estoppel does not require a judgment "which ends the litigation ... and leaves nothing for the court to do but execute the judgment," Catlin v. United States, 324 U.S. 229, 233, 65 S. Ct. 631 (633), 89 L. Ed. 911 (1945), but includes many dispositions which, though not final in that sense, have nevertheless been fully litigated. Lummus Co. v. Commonwealth Oil Refining Co., 297 F.2d 80, 89 (2d Cir. 1961), cert. denied, 368 U.S. 986, 82 S. Ct. 601, 7 L. Ed. 2d 524 (1962), and cases cited. As we there said, " 'Finality' in the context here relevant may mean little more than that the litigation of a particular issue has reached such a stage that a court sees no really good reason for permitting it to be litigated again.

The Second Circuit has reaffirmed these principles several times. See, e.g., United States ex rel. DiGiangiemo v. Regan, 528 F.2d 1262, 1265 (2d Cir. 1975), cert. denied, 426 U.S. 950, 96 S. Ct. 3172, 49 L. Ed. 2d 1187 (1976). Other circuits agree with these principles as well. " 'Finality' in the sense of 28 U.S.C. § 1291 is not required" for collateral estoppel. Miller Brewing Co. v. Joseph Schlitz Brewing Co., 605 F.2d 990, 996 (7th Cir. 1979), cert. denied, 444 U.S. 1102, 100 S. Ct. 1067, 62 L. Ed. 2d 787 (1980).

Thus, the finality requirement does not necessarily demand the ministerial act of executing a judgment. It does not elevate form over substance in that fashion-the accurate definition of "finality" in the offensive collateral estoppel context is "fully litigated." In this instance, the facts of Bintliff's activities found in Cosmos Bank have been found again by the jury in Chemetron. Thus, they have been twice fully litigated. That Judge Hannay felt he had rendered a fully litigated, fair, and correct adjudication on the merits in Cosmos Bank is evidenced by his refusal to sign an order granting a new trial because such an order had "no basis" and by his threat to enter judgment.

A recent opinion in the Ninth Circuit reinforces our conclusion here. In Aetna Casualty & Surety Co. v. Jeppesen & Co., 440 F. Supp. 394 (D. Nev. 1977) (ruling on motion for summary judgment), 463 F. Supp. 94 (1978) (judgment), vacated on other grounds and remanded, 642 F.2d 339 (9th Cir. 1981), the district court confronted an issue very similar to the one we face: can a plaintiff not a party to a prior case invoke offensive collateral estoppel against the defendant when that case had been fully litigated as to liability but settled before trial on the issue of damages and entry of final judgment? In its ruling on the motion for summary judgment, the trial court carefully and thoroughly reviewed the need for "finality," discussing the concepts and cases we have cited, see 440 F. Supp. at 401-06, and held that both case law and equity compelled an affirmative answer to the question, id. at 405-06.⁸⁷ 

In conclusion, we have held that "although the decision to apply offensive collateral estoppel rests in the discretion of the trial judge, ... this discretion is not unbounded and must be channeled through the considerations of fairness listed in Parklane, along with any other considerations of fairness which the trial judge deems appropriate." Hicks, 662 F.2d at 1172-73 (citation and footnote omitted). We have analyzed the Parklane considerations and this circuit's considerations, and Bintliff neither points out nor do we see any others that would render the use of offensive collateral estoppel against Bintliff in any way unfair "in the particular circumstances" of this case.⁸⁸  Tactically he chose to litigate fully Cosmos Bank, risking an adverse decision. He lost on that risk, and only when he lost did he decide to settle, fearing offensive collateral estoppel. Yet now he seeks to avoid the consequences of that loss by elevating form over substance. He cannot have it both ways. The findings of fact against Bintliff in Cosmos Bank are sufficiently final to permit their use in this case. On remand, Bintliff should be collaterally estopped from relitigating those facts.

C. Federal Securities Law Claims Against Bintliff Based on Chemetron's Alleged 1969 "Forced Sale" of its Westec Shares to the Bankruptcy Trustee.

Chemetron claims that it should have been permitted to submit to the jury claims against Bintliff under sections 10(b) and 9, and Rule 10b-5, arising out of an alleged "forced sale" of its Westec stock to the Westec bankruptcy trustee in June 1969.

The scope of this issue on appeal can be quickly narrowed. Since we have held that the fraud at issue here gives rise only to a section 9 cause of action, the "forced seller" doctrine of Rule 10b-5 cannot be applied. That leaves the issue of whether the 1969 claim is cognizable under section 9. However, we need not reach the merits of this claim, since it is quite evident from the proceedings below that Chemetron has been less than diligent in pursuing this claim and gave the trial judge ample cause to deny its submission to the jury.

Chemetron's 1967 complaint asserted many causes of action and described the alleged manipulative scheme as well. However, that complaint could allege nothing about a 1969 transaction with the bankruptcy trustee. Its only reference to the bankruptcy was to say that "(Westec) is currently undergoing reorganization in a proceeding under Chapter X of the Bankruptcy Act" caused by the manipulative scheme. This was enough, Chemetron claims, to put the defendants on notice of a possible claim arising out of a possible bankruptcy "sale." Chemetron argues that further notice, if necessary, was provided by discovery in August 1974, when defendants were informed of the terms of the "sale."

As a result of the complaint and discovery, Chemetron asserts that there was adequate notice of this claim under Fed. R. Civ. P. 8's liberal pleading doctrine. However, Chemetron neglects the strictures of Fed. R. Civ. P. 9:

(b) Fraud, Mistake, Condition of the Mind. In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

While Rules 8 and 9 must be read in conjunction, see Powell, Inc. v. Abney, 83 F.R.D. 482, 487 (S.D. Tex. 1979), Rule 9(b) still requires that defendants be fairly apprised of the claims against them, including the "consequence(s) of the fraud," Gross v. Diversified Mortgage Investors, 431 F. Supp. 1080, 1088 (S.D.N.Y. 1977), aff'd mem., 636 F.2d 1201, 1203, 1206 (2d Cir. 1980), and particularly of "the purchase or sale transactions ... effectuated by reason of the misrepresentations," Rich v. Touche Ross & Co., 68 F.R.D. 243, 247 (S.D.N.Y. 1975). Therefore, the 1967 complaint in and of itself did not satisfy Rule 9(b) because it did not even mention the 1969 sale. Rules 8 and 9(b) required that Chemetron amend or supplement its complaint with a short, concise statement stating a claim based on the 1969 transaction.

Nor do we think discovery here afforded adequate notice of this claim to the defendants in the absence of a sufficient complaint. In 1974, the defendants apparently learned of the 1969 transaction through interrogatories. But merely learning of the "sale," without more, did not give them notice of a specific claim arising out of it for at least two reasons. First, the traditional use of evidence of such a transaction would be to prove damages arising out of Chemetron's original purchase of Westec stock, not to create another cause of action. In fact, that is precisely the use to which the trial judge put evidence of the 1969 transaction. In the judgment, he also set off the value Chemetron received in that transaction against the damages awarded, a setoff that Chemetron accepted.

Second, while the federal rules do not require statement of a legal theory in order to obtain relief, see Hostrop v. Board of Junior College District No. 15, 523 F.2d 569, 581 (7th Cir. 1975), cert. denied, 425 U.S. 963, 96 S. Ct. 1748, 48 L. Ed. 2d 208 (1976), a section 9 "forced sale" claim is so novel that defendants' counsel would have had to be most prescient to be on notice of it from simply the original complaint and discovery. While the doctrine of "forced sale" appears to be well entrenched under Rule 10b-5, see Alley v. Miramon, 614 F.2d 1372 (5th Cir. 1980), its origin was in a Rule 10b-5 case, Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.), cert. denied, 389 U.S. 970, 88 S. Ct. 463, 19 L. Ed. 2d 460 (1967), and Chemetron neither cites nor are we aware of the use of the doctrine outside of Rule 10b-5 cases. Chemetron thus makes the unprecedented argument that there is an analogous doctrine under section 9 and that an exchange of shares in a bankruptcy proceeding is such a "forced sale." Our initial reaction is that the differences between section 9 and Rule 10b-5, particularly Congress' strict limits on section 9, may preclude the development of such a doctrine.⁸⁹  We need not decide this question in order to illustrate our point: even after discovery, defendants could not possibly have had any semblance of "fair notice" that Chemetron planned to present such an unusual section 9 theory to the jury.

Overall, then, we hold that defendants never had sufficient notice of this claim until the pretrial conference held shortly before trial in August and September of 1979, more than ten years after the 1969 "sale." When Chemetron submitted its proposed pretrial order containing this claim at the conference, defendants were naturally surprised and objected. In response to a subsequent motion by Chemetron, the trial judge, in October 1979, barred a claim based on the 1969 transaction and limited the use of evidence about the 1969 "sale" to one issue:

ORDERED that Chemetron Corporation will not be barred from submitting evidence regarding its sale of Westec stock on June 24, 1969, as that sale relates to establishing the measure of damages as an element of its cause of action for violations of § 9(e) asserted against Defendant Bintliff in Plaintiff's Complaint.

Chemetron never objected to this order and never pursued its fall 1979 motion for leave to file supplemental pleadings pursuant to Fed. R. Civ. P. 15(d), specifically alleging and seeking relief based on the 1969 "sale." Only now does Chemetron complain of the trial court's failure to grant the motion to supplement.

Granting such a motion is within the discretion of the trial court. Aladdin's Castle, Inc. v. City of Mesquite, 630 F.2d 1029, 1037 (5th Cir. 1980), rev'd in part and remanded on other grounds, --- U.S. ----, 102 S. Ct. 1070, 71 L. Ed. 2d 152 (1982). Since there is virtually no precedent in our circuit on Rule 15(d), we rely on Rule 15(a) cases, since the two are treated alike in evaluating a trial judge's exercise of discretion, 6 C. Wright & A. Miller, § 1504 at 541 (1971). Those cases list several factors that justify denial of leave to amend: (1) undue delay, (2) bad faith or dilatory motive by the movant, (3) repeated failure to cure deficiencies by previous amendments, (4) undue prejudice to the opposing party, or (5) futility of amendment. See Dussouy v. Gulf Coast Investment Corp., 660 F.2d 594, 598 (5th Cir. 1981); Gregory v. Mitchell, 634 F.2d 199, 203 (5th Cir. 1981).

Given these factors, we hold that there were the "substantial reason(s)" required under Rule 15 to deny the motion to supplement. See Dussouy, 660 F.2d at 598. In Dunn v. Koehring Co., 546 F.2d 1193, 1198-99, clarified on reh'g and denial of reh'g en banc, 551 F.2d 73 (5th Cir. 1977), we upheld the court's discretion to deny an amendment offered on the morning of trial, five years after the filing of the case, and after over four years of "extensive pretrial preparation." Here, on the eve of trial, over twelve years after the complaint was filed, over ten years after the 1969 "sale," and after ten years of very extensive pretrial work, Chemetron moved to supplement. Given this undue delay and lack of diligence in moving to supplement, Chemetron had the burden of showing that the delay was due to oversight, inadvertence, or excusable neglect. Gregory, 634 F.2d at 203. It has not advanced, nor do we comprehend, any reasons meeting this burden. We detect undue prejudice as well. That Chemetron would add this claim immediately before trial may suggest a complaint in search of a wrong. See Rich, 68 F.R.D. at 247.

Balanced against these "substantial reasons" to deny is the possible prejudice to Chemetron of denial of leave to supplement. That prejudice is preclusion of a section 9 claim based on the 1969 transaction. Given the weakness of that legal theory and the fact that Chemetron's primary cause of action arose out of its original purchase of the Westec securities, this prejudice is slight. Finally, judicial economy gave the trial court further cause to bring this case to trial without additional delay twelve years after its filing. For these reasons, we deny Chemetron's cross-appeal on this issue.

To summarize, we hold and order the following: (1) Chemetron has no section 10(b) or Rule 10b-5 action in this case, and the judgment, insofar as it is based on them, is reversed; (2) the judgment for actual and exemplary damages based on Texas law is reversed due to the errors found; on remand the parties may retry the Texas claims in accordance with the rulings on Texas law and other issues found in this opinion; and (3) we find merit in only one of Chemetron's cross-appeal claims; in a new trial on remand, Bintliff may be collaterally estopped from relitigating facts found in Cosmos Bank.

REVERSED AND REMANDED.

JERRE S. WILLIAMS, Circuit Judge, concurring in part and dissenting in part.

I concur in all parts of Judge Gee's opinion except Part III, A, the Federal Securities Law claims. I particularly note my concurrence in those portions of the majority opinion to which Judge Reavley directs his dissenting views.

Judge Gee's opinion rules out any liability under federal law for the stock manipulations of James Williams and those who participated in or who are responsible for his activities. The opinion is meticulously reasoned. The difficulty I have with it is that it leads to a result which borders on the absurd. In spite of the reasoning, I cannot conclude that Congress intended any such result.

The defendants before the Court, Business Funds, Inc. (BFI) and David Bintliff are responsible for the manipulations of Williams and John Austin, Chairman of BFI, upon which this lawsuit is based. Williams was found to have engaged in a (1) scheme relating to the purchase or sale of stock, which included (2) misstatements or omissions (3) of material facts, (4) made with scienter, (5) upon which Chemetron relied, (6) causing Chemetron's injury, and (7) touching upon the loss in value of the stock. We have held that these are the elements required by Section 10(b) of the statute and Rule 10b-5. See, Huddleston v. Herman & MacLean, 640 F.2d 534, 543 (5th Cir. 1981). But because Williams' activities failed to "affect" the purchase or selling price of the stock, according to the finding of the jury, Williams and those responsible for his actions are found by this Court to have committed no federal securities offense at all.

In evaluating this case it is of significant aid to speculate what the result would have been if Chemetron had brought its suit only under Section 10(b) and not referred to Section 9(a) at all. I should think the result is clear. An offense was committed by the defendants under Section 10(b) and Rule 10b-5. All of the requisites were met. It is only because an additional element of an offense under Section 9(a) was not proven that the defendants are freed of all responsibility for having violated federal securities law. This is an overtly unrealistic view of the law, and I cannot conceive that Congress would contemplate such a result.

If it were true that this was some unusual kind of stock manipulation which could only be cognizable under Section 9(a), then the majority opinion's analysis would be correct. But such is not this case. The defendants through Williams engaged in a number of different kinds of manipulations and deceits designed to enhance the value of the stock. These manipulations and deceits were not unique nor unusual for such offenses. At least some of them were "manipulative or deceptive" devices or contrivances clearly at the core of a Section 10(b) violation as well as a Section 9(a) violation. The Section 9(a) violations charged in this case require a series of transactions. Section 10(b) requires only one. But surely it cannot be argued that someone who commits one violation under Section 10(b) must go free if he commits more than one unless additional and more stringent proofs are met. This would be an open invitation to commit more than one offense to make responsibility more difficult to prove.

It is quite true, as the opinion for the Court points out, that Section 10(b) was created as a "catch-all." It was intended to cover transgressions other than those covered by the specific requirements of Section 9(a) and a number of other sections of the statute. But I cannot see what is wrong with the use of a catch-all. As the jury found, Williams did not violate Section 9(a). But he was in complete and literal violation of Section 10(b). Hence the application of a "catch-all."

The opinion for the Court concedes that "Rule 10b-5 has been extended well beyond its gap-filling purpose as originally envisioned by Congress in Section 10(b) and proposed by the SEC." The major alteration of the scope of Section 10(b), of course, was the finding of an implied private right of action under Rule 10b-5 in Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946). The private remedy is now well established, see Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196, 96 S. Ct. 1375, 1382, 47 L. Ed. 2d 668 (1976). The earlier pattern of the statute was found in the specific provision in Section 9(e) for a civil remedy for those damaged by stock manipulation schemes under Section 9, but with no comparable civil remedy provision in Section 10(b), thus leaving 10(b) violations to governmental enforcement. But the subsequent creation by judicial interpretation of a civil remedy under Section 10(b) must not be taken as narrowing the scope of Section 10(b). It was a broadening of Section 10(b), not a narrowing.

It is asserted, however, that we are bound by the analysis of this Court in Huddleston v. Herman & MacLean, 640 F.2d 534 (5th Cir. 1981), modified on denial of rehearing and of rehearing en banc, 5th Cir., 640 F.2d 815, cert. granted, --- U.S. ----, 102 S. Ct. 1766, 72 L. Ed. 2d 173 (1982) (Nos. 81-680, 81-1076). In my view, the Court in the instant case is not bound by the Huddleston case for two reasons. In the first place, in that case the Court upheld as proper, private remedies, even with admitted overlap, under both Section 17(a) and the Section 10(b) "catch-all." The substantive provisions of Section 17(a) of the statute were found to be different from the substantive provisions of Section 10(b). The Court found that the Section 10(b) offense charged required different, and in some circumstances stronger, proof than that required by Section 17(a). Therefore, the analysis in Huddleston which the majority opinion urges is that if Section 10(b) does not make some additional requirements over offenses charged in the other section it cannot be used. But this analysis was not a part of the holding in that case because the Court upheld the overlapping remedy, nor was it necessary to the holding.

But the second, and more compelling reason, is that the Huddleston analysis did not focus at all upon or evaluate in detail a situation where, as in this case, a person engaged in deceitful stock manipulations would clearly be in violation of Section 10(b) while another person who did the same thing but was charged with his actions having a serious and harmful additional impact would go free.

Huddleston points out clearly in its footnote 7, 640 F.2d 542, that the authority in existence is overwhelmingly in favor of recognizing that conduct covered by the express liability provisions of the 1933 and 1934 acts may also be covered by Section 10(b). This view is confirmed in footnote 9 of the majority opinion. Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 788 (2d Cir. 1951) established this rule. It was stated as the rule of law in 1 A. Bromberg, Securities Law: Fraud-SEC Rule 10b-5 § 2.4(1), at 27-28 (1967). Particularly noted should be the case of Schaeffer v. First National Bank of Lincolnwood, 509 F.2d 1287 (2d Cir. 1975), cert. denied, 425 U.S. 943, 96 S. Ct. 1682, 48 L. Ed. 2d 186 (1976) holding that a plaintiff can file claims under both Section 9 and Rule 10b-5, the same situation as in the instant case.

But Huddleston argued that these cases and these authorities are now somewhat in doubt as a result of recent Supreme Court decisions "curtailing the broader sweep given the Securities Acts by lower federal courts....," 640 F.2d 534, 541. The majority opinion discusses these cases beginning at MSP 10 and also MSP 29. But these cases are not at all controlling in Chemetron's situation. Blue Chip Stamps, supra, held only that a person who was neither a purchaser nor a seller could not claim the benefits of Section 10(b). This had already been the law under the Birnbaum rule since 1952. Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L. Ed. 1386 (1952). Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976) held only that Section 10(b) requires scienter, that a mere claim of negligence is not cognizable. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977) held that where the minority stockholders' option to purchase in a merger situation was fairly presented there was no 10(b) violation. Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 97 S. Ct. 926, 51 L. Ed. 2d 124 (1977) held that there was no private cause of action under Section 14(e) relating to fraudulent practices in a tender offer situation. The Court held also that Section 10(b) did not apply to the specific tender offer situation because the only allegation was that the opportunity to gain control of the target company had been defeated. The Court interpreted Section 10(b) as being aimed only at maintaining an orderly market for the distribution of securities free from manipulative influences and was not aimed at tender offers as such.

Moving to claimed further restrictive interpretations, Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S. Ct. 2479, 61 L. Ed. 2d 82 (1979) held only that the record keeping requirements of Section 17(a) do not create a private cause of action under that provision. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S. Ct. 242, 62 L. Ed. 2d 146 (1979) held only that the Investor Advisor's Act of 1940, 15 U.S. § 80b-1, did not create a private cause of action. Middlesex County Sewerage Authority v. National Sea Clammers Assn., 453 U.S. 1, 101 S. Ct. 2615, 69 L. Ed. 2d 435 (1981) held only that neither the Federal Water Pollution Control Act, 33 U.S.C. § 1251 nor the Marine Protection, Research and Sanctuaries Act of 1977, 33 U.S.C. § 1401 created a private cause of action for damages. It should be noted that these three cases in refusing to recognize private causes of action under the statutes have no relevance at all to Chemetron's situation because it is well established that there is a private cause of action under Section 10(b), and the majority opinion concedes this.

Finally, Chiarella v. United States, 445 U.S. 222, 100 S. Ct. 1108, 63 L. Ed. 2d 348 (1980) held that the employee of a company printing materials related to takeover bids who on his own used the confidential information gained from such printing to buy stock and then sell it at a profit when the takeover bids became public did not violate Section 10(b) because he was under no duty to the purchasers of the stock which he sold since there was no relationship of trust and confidence.

None of the cases summarized above has any measurable impact upon the well established law as exemplified both by commentators and the lower federal courts that Section 10(b) violations can stand along side Section 9(a) violations and violations of other sections of the law. This conclusion is also confirmed by recent holdings of both the Second and the D.C. Circuits. In Ross v. A. H. Robins Co., 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S. Ct. 2175, 64 L. Ed. 2d 802 (1980), the Court held that a Section 10(b) cause of action would lie for conduct which would also justify a private remedy suit under Section 18 of the 1934 act. In Wachovia Bank & Trust Co. v. National Student Marketing Corp., 650 F.2d 342 (D.C. Cir. 1980), cert. denied, 452 U.S. 954, 101 S. Ct. 3098, 3099, 69 L. Ed. 2d 965 (1981) the Court thoroughly considered the overlapping remedies problem. It held that the Section 10(b) remedy was available although Section 17(a) was an express remedy also applicable. Admittedly, in this case the Court again reiterated the differences between Section 10(b) and Section 17(a) as the Court had done in Huddleston, supra.

It is suggested that if we allow the Section 10(b) remedy in this case we have eliminated the provisions of Section 9(a). The same argument can be turned around the other way. If we do not allow the remedy under Section 10(b), we have eliminated Section 10(b) as it relates to manipulative and deceptive schemes in the purchase and sale of securities. And this is contrary to the exact and precise wording of the Section. There is no denying the expansion of Section 10(b) has weakened the impact of Section 9(a). But that expansion took place long before this case. This earlier expansion, of course, lessened the significance of legislative history of the 1930's relied upon so heavily in the majority opinion. It is not necessary in this case to decide what other kinds of improper and fraudulent stock transactions are forbidden in Section 9(a) which may not be covered by Section 10(b). Section 9(a) is a long and complicated section, and it cannot be concluded that to hold as I here suggest wipes out the entire Section 9(a).

The compelling irony in this case is that the majority view results in freeing the more serious offender but holding the lesser offender liable for engaging in exactly the same activities, manipulative and fraudulent devices in securities transactions. Such an interpretation does not ring true.

Defendants are responsible for the actions of Williams in his manipulative and deceitful wrongdoing under Section 10(b) of the statute but which fell short of violation of Section 9(a). This liability is not because of any particular activities or techniques which are any different under Section 9(a) or Section 10(b), but solely because the jury found the activities did not "affect" the value of the stock (Section 9(a)), although it is obvious, and the majority of the Court agrees, that the activities did "touch upon the reasons for the investment's decline in value" (Section 10(b)). By the same analysis a person engaged in these stock manipulations who was charged with acting intentionally (scienter under Section 9(a)) and also recklessly (scienter under Section 10(b)) but who is found to have acted not intentionally but recklessly would be free of guilt while the person charged only with reckless disregard of the rights of others and proved to have been in such a state of mind would be in violation of the law.

Posed as the issue is in the stark facts of this case, I cannot accept the cases which indicate that the Section 10(b) catch-all must be interpreted in such a way as to free from federal wrong-doing individuals who commit offenses which fall literally, specifically, and precisely within the scope of Section 10(b) when those same activities fall short of the offenses set out in Section 9(a). I therefore respectfully dissent from that portion of the majority opinion which rules out any liability on the part of defendants under the federal securities laws for these obviously forbidden securities manipulations.

REAVLEY, Circuit Judge, dissenting in part:

I join most of Judge Gee's fine opinion. I dissent, however, from the holdings (1) that Bintliff may be held liable to Chemetron as a civil conspirator and (2) that Bintliff is collaterally estopped by the findings in a case that was settled and dismissed by agreement of the parties.

There is no allegation or proof in this case to justify the court's holding that Bintliff may be liable to Chemetron as a conspirator under Tex.Rev.Civ.Stat. § 4004. The evidence shows that Hall and Williams were engaged in a manipulative scheme to enhance the price of Westec stock from September 1964 until August 1966. The sale to Chemetron took place in January 1966. The only evidence against Bintliff is that he took part in three transactions-two in May 1966 and one in July 1966-none of which concerned Chemetron. There is no evidence that Bintliff benefitted in any way from the Chemetron sale.

The majority's holding confuses concepts of criminal and civil conspiracy. The gist of criminal conspiracy is the agreement itself: the defendant is guilty of the crime of conspiracy if he agrees to commit a substantive crime, regardless of whether he personally participates in or even knows of all the acts taken in furtherance of the conspiracy. That the defendant is guilty of conspiracy, however, does not make him guilty of the substantive crimes that his co-conspirators have committed as part of the conspiracy.

To hold a defendant liable in damages to a particular plaintiff as a civil conspirator, it is not enough to prove that, at some point, he became a member of the conspiracy. "(T)he gist of a civil conspiracy is the damage resulting from commission of a wrong which injures another, and not the conspiracy itself." Schlumberger Well Surveying Corp. v. Nortex Oil & Gas Corp., 435 S.W.2d 854, 856 (Tex.1969). To be liable in damages as a civil conspirator, the conspirator must agree "to injure another by the commission of a particular wrong." Id. at 857.

The majority concedes that Bintliff could not have agreed to the "particular wrong" to Chemetron. Nevertheless, the majority holds that Bintliff may be liable by invoking the principle that a late-joining conspirator "becomes in law a party to every act previously or subsequently done by any of the others in the pursuance of it." State v. Standard Oil Co., 130 Tex. 313, 107 S.W.2d 550, 560 (1937). While this broad principle is sound for many purposes, it is clearly too broad even for the law of criminal conspiracy where guilt as a conspirator does not itself make the defendant guilty of substantive offenses his co-conspirators have committed as part of the conspiracy.

I agree with the majority that a co-conspirator need not have directly participated in or even have known of all the details of the Chemetron transaction to be liable. But Schlumberger requires that, at a minimum, he must have agreed to injure Chemetron by the commission of a particular wrong. Such agreement could be proved by showing that the co-conspirator joined in the scheme to sell stock specifically to Chemetron, or that, prior to the sale to Chemetron, he joined in a fraudulent scheme to sell Westec stock to all comers. But Bintliff cannot, consistently with Schlumberger, be held liable in damages for a particular wrong that he could not have agreed, either directly or indirectly, to commit.

We hear of no Texas authority for the proposition that a conspirator may be held liable in damages for particular wrongs committed long before his involvement in the conspiracy.¹ 

Furthermore, the evidence in this record is insufficient as a matter of law to prove that Bintliff joined in a scheme to create actual or apparent active trading in, or to raise the price of, Westec stock for the unlawful purpose of fraudulently inducing the purchase of Westec stock by the general public.

The evidence shows that Hall and Williams were engaged in a manipulative scheme to enhance the price of Westec stock from September 1964 until August 1966. As representatives of both Westec and Business Funds, which controlled Westec, they had many reasons to desire the long-term enhancement of the market price of Westec stock. The only evidence against Bintliff is that he took part in three transactions which occurred months after the January 1966 sale of stock to Chemetron. These three transactions are not sufficient circumstantial evidence to prove that Bintliff ever joined in the conspirators' broad purpose to induce the general public to buy Westec stock.

The first two Bintliff transactions took place in May 1966. Williams offered to sell Bintliff 60,000 shares of Westec stock at $40 a share when the market price was $50 a share. Bintliff made the deal and re-sold half the shares immediately. He expressed his intent to re-sell the remainder immediately, but then agreed not to sell it until November 1966.

Later in May, Williams and Hall were in need of funds to continue financing the conspiratorial scheme. Bintliff agreed to guarantee a $3,000,000 loan for 30 days. His fee was 3,000 shares of Westec, worth $150,000 on the market.

Finally, in July 1966 Bintliff guaranteed a 3 day, $3,000,000 loan for Hall. He received a guarantee fee of $216,000 and permission to sell immediately half of his remaining shares from the first transaction.

When Bintliff discovered in August 1966 that Williams and Hall could no longer get financing for their Westec purchases, he realized that the Westec market was about to crash, and he sold his remaining shares.

This evidence does not tend to prove that Bintliff ever joined in the conspirators' purpose to induce the purchase of Westec stock by the general public through manipulation of the market. Rather, the evidence shows that Bintliff engaged in three arm's-length transactions with the conspirators in which he exacted a high price for his services. It was irrelevant to him whether the conspirators' long-range manipulation scheme was successful-if, indeed, he was even aware of its scope. Bintliff was acting for his own purposes, not to advance the conspirators' purpose. In purchasing the Westec stock, he was attempting to make a quick profit on the difference between the sale price and the market price; in guaranteeing the loan, he was taking advantage of the conspirators' desperate need for financing.

It is not enough to show that Bintliff knew of the conspiracy, concealed it, and profited from it. See Schlumberger, supra. To hold Bintliff liable in damages as a civil conspirator, the evidence must show that Bintliff intended "to injure another by the commission of a particular wrong." Schlumberger, 435 S.W.2d at 857. The evidence does not show that Bintliff ever shared the unlawful purpose that caused the conspirators to sell Westec stock to Chemetron.

The majority holds that Bintliff is collaterally estopped by withdrawn findings in a prior case that was settled and dismissed by agreement of the parties. This holding ignores settled principles of preclusion, overrules Fifth Circuit precedent, and undermines the strong public interest in the settlement of law suits. Its application to this case is especially unfortunate, for it deprives Bintliff of the primary benefit of his agreement to settle while resulting in almost no saving in time or resources to the litigants or the courts.

The most basic prerequisite to the use of preclusion is "a judgment that is valid, final, and on the merits." 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4427, at 269 (1981) (hereinafter Wright & Miller). An issue is precluded (or subject to collateral estoppel) only when it is "determined by a valid and final judgment, and the determination is essential to the judgment." Restatement (Second) of Judgments § 27 (1982); accord, Ashe v. Swenson, 397 U.S. 436, 443, 90 S. Ct. 1189, 1194, 25 L. Ed. 2d 469 (1970); Hicks v. Quaker Oats Co., 662 F.2d 1158, 1166 (5th Cir. 1981); Kaspar Wire Works, Inc. v. Leco Eng'r & Mach., Inc., 575 F.2d 530, 535-36 (5th Cir. 1978).

The "judgment" on which the majority bases its holding was neither final nor on the merits. Nothing was determined by the order of dismissal in the Cosmos Bank case but that the court approved the parties' settlement and withdrew the findings of fact that the majority today finds preclusive.

The majority reasons that the findings of fact in Cosmos Bank meet the requirement of a final judgment because "only the judicial act of signing a final, known adverse, judgment was left." But findings of fact in themselves have no operative effect, and certainly these withdrawn findings cannot be considered "essential to the judgment" that was in fact rendered: a judgment of dismissal.

The disposition of Cosmos Bank the majority uses was not "final." It is the general rule that a decision is not "final" for collateral estoppel purposes if it cannot be tested by appellate review. 18 Wright & Miller, supra, § 4433, at 315-21.²  Bintliff could not appeal a judgment that was never entered.³  If he had allowed the entry of judgment and then appealed, and this court had reversed and remanded for further proceedings-as it does in this case today-then the findings in the Cosmos Bank case could have no preclusive effect. Id. § 4432, at 303. And even if this court had affirmed, no finding would be entitled to preclusive effect unless that finding was necessary to the specific grounds on which the court's affirmance was based. Hicks, 662 F.2d at 1168 & n.6 (collecting cases); 18 Wright & Miller, supra, § 4421, at 205, § 4432, at 302. Thus, if the Cosmos Bank plaintiff prevailed in the district court on many legal theories but this court found it necessary to pass on only one, all of the findings that were not essential to the ground of affirmance would have no collateral estoppel effect.

Nor was the disposition of Cosmos Bank "on the merits." It is well-settled that when litigation is terminated by a consent decree, the judgment may only preclude "the issues actually intended to be precluded by the parties." Kaspar Wire Works, 575 F.2d at 539; accord, 18 Wright & Miller, supra, § 4443, at 382. In this case, both the parties and the trial court made express their intent that the settlement and dismissal have no collateral estoppel effect.

Recognizing these basic principles of the law of preclusion, this court held in Associates Capital Servs. Corp. v. Loftin's Transfer & Storage Co., 554 F.2d 188, 189 (5th Cir. 1977), that the findings in a case that is dismissed pursuant to a settlement can have no collateral estoppel effect, even after judgment has been entered and the case is pending on appeal. Today the majority not only overrules Loftin's but goes further to give preclusive effect to findings on which a court has never entered judgment. The majority "distinguishes" Loftin's on the ground that Loftin's involved "defensive" collateral estoppel, but it fails to explain how this distinction has anything to do with the requirement of a final judgment. The majority then attempts to prop up this distinction by terming Parklane Hosiery Co. v. Shore, 439 U.S. 322, 99 S. Ct. 645, 58 L. Ed. 2d 552 (1979), a "watershed case on offensive collateral estoppel" which "create(s) a 'need to redefine the doctrine of collateral estoppel.' " But the Parklane decision has absolutely nothing to do with the requirement of a final judgment.⁴  Parklane is a landmark only because it abandons the requirement of mutuality; offensive collateral estoppel is itself nothing new. See, e.g., Mason Lumber Co. v. Buchtel, 101 U.S. 638, 25 L. Ed. 1073 (1880); 18 Wright & Miller, supra, § 4416, at 138 n.13. The majority fails to point to one word in Parklane that justifies its departure from the firm rule of this circuit that a panel cannot overrule a decision of another panel.

Apparently, the majority believes that it need not adhere to our precedent because Bintliff voluntarily chose to avoid judgment and forgo appeal. In essence, what the majority holds today is that once a trial court is prepared to enter judgment against a litigant, that litigant may not settle his case for the purpose of avoiding the collateral estoppel effect of the district court's findings. I think that is bad law and bad policy. Society maintains a strong interest in settlements at every stage of litigation. The majority claims that this interest is not served here because "the reason that settlements are favored is that they avoid litigation," and that "the savings of legal resources by settling after a full trial (a)re nominal." Even assuming, without agreeing, that "the" only reason settlements are favored is that they conserve legal resources,⁵  I do not agree with the majority's estimation of the potential savings.

Certainly the majority is wrong in its estimation of the savings in this case.⁶  But more importantly, today's decision will deter post-trial settlements and force all defendants facing multi-plaintiff litigation to appeal every adverse finding of fact made by every trial court. Even if the defendant believes that his appeal is unmeritorious-because, for example, the particular plaintiff is entitled to prevail on one of many legal theories-the defendant will be forced to challenge all of the findings and alternative bases of recovery on which he believes the trial court erroneously relied. "(F)orcing a losing litigant to take an appeal he knows he will lose on the basis of one alternative ground is a waste of the resources of both litigants and courts, and is contrary to the principles of judicial economy which motivated the doctrine of collateral estoppel in the first place." Hicks, 662 F.2d at 1169. And while these unnecessary appeals are pending, the preclusive effects of the trial courts' findings will remain uncertain, since a reversal or an affirmance on an alternative ground will prevent the application of collateral estoppel. See generally 18 Wright & Miller, supra, § 4433, at 311-13.

The sole authority the majority finds for its decision today is Aetna Cas. & Surety Co. v. Jeppesen & Co., 440 F. Supp. 394 (D. Nev. 1977), vacated on other grounds, 642 F.2d 339 (9th Cir. 1981). That district court decision has not met with favor elsewhere.

(T)he result (in Aetna) is questionable at best. The terms of settlement and dismissal would make it impossible to apply issue preclusion between the parties to the original action. The prospect of applying preclusion in favor of a non-party is little more attractive. Not only did the settlement sacrifice the possibility of appeal from the findings of liability, but the subsequent use of preclusion may make it more difficult to settle cases in this posture.

18 Wright & Miller, supra, § 4433, at 318 (footnote omitted).

Finally, the majority's holding is unfair to Bintliff. As the majority acknowledges, the primary reason that Bintliff settled Cosmos Bank was to avoid the application of collateral estoppel. He relied on well-settled rules of law in deciding to settle. He gave up his right to appeal, the exercise of which would either have delayed the trial in this case or prevented, for all practical purposes, the use of collateral estoppel in this case. He saved the judicial system a certain appeal and a possible retrial and second appeal, and saved his adversary additional time and expense in collecting damages. Nevertheless, today the majority disregards his justifiable reliance interests and deprives him of the primary benefit of his bargain. The majority says that the rules of collateral estoppel are based on "fairness," but I see nothing fair about the majority's decision.