Reliance Insurance Co. v. Barron's, 442 F. Supp. 1341 (S.D.N.Y. 1977)

U.S. District Court for the Southern District of New York - 442 F. Supp. 1341 (S.D.N.Y. 1977)
November 18, 1977

442 F. Supp. 1341 (1977)

BARRON'S, sued in the name of Dow Jones & Company, Inc., Dow Jones & Company, Inc., and Abraham J. Briloff, Defendants.

No. 76 Civ. 4094.

United States District Court, S. D. New York.

September 14, 1977.

On Reargument November 18, 1977.

*1342 *1343 Willkie, Farr & Gallagher by Michael Targoff, Robert E. Bartkus, New York City, for plaintiff.

Patterson Belknap, Webb & Tyler by D. Robert Owen, Gene Bauer, Robert D. Sack, New York City, for defendants Barron's and Dow Jones.

Phillips, Nizer, Benjamin, Krim & Ballon, by Paul Martinson, A. Brian Savin, New York City, for defendant Briloff.


BRIEANT, District Judge.

After exhaustive pre-trial discovery, upon a mound of papers submitted by both sides exceeding in volume those usually resulting from a plenary trial, defendants have now moved for summary judgment pursuant to Rule 56, F.R.Civ.P. If it appears clear that an essential element of plaintiff's claim cannot be proved at trial, for want of evidence, it is appropriate to grant the motion. Summary judgment is a remedy which must be applied when the *1344 Court is convinced as a matter of law that the suit can have only one possible outcome. See Epoch Producing Corporation v. Killiam Shows, Inc., 522 F.2d 737, 742-43 (2d Cir. 1975); Applegate v. Top Associates, Inc., 425 F.2d 92, 96 (2d Cir. 1970). Indeed, as the recent cases of Hotchner v. Castillo-Puche, 551 F.2d 910 (2d Cir. 1977), Edwards v. National Audubon Society, Inc., 556 F.2d 113 (2d Cir. 1977) and Meeropol v. Nizer, 560 F.2d 1061 (2d Cir. 1977) all demonstrate, the level of clear and convincing proof required now in this Circuit to show "actual malice" in a defamation case is almost insuperable. It is abundantly clear that this plaintiff cannot surmount the barrier.

Plaintiff, Reliance Insurance Company, filed its complaint on September 14, 1976, requesting compensatory damages of $7,500,000.00, general damages of $10,000,000.00, special damages of $10,000,000.00 and punitive damages of $10,000,000.00, arising out of an article written by the defendant Dr. Abraham J. Briloff and subsequently published by the defendant Barron's in its July 19, 1976 issue entitled "Whose `Deep Pocket'? At Reliance Group, the Slogan is `Dig We Must'."

Reliance charges, in its complaint, that Briloff and Barron's violated § 10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder, and the laws of the State of New York relating to libel and defamation, negligence and intentional tort.


Plaintiff Reliance Insurance Company (hereinafter sometimes "Insurance") is engaged in the property and casualty insurance and life insurance businesses. Of the common stock of Insurance, 96.9% is owned by Reliance Financial Services Corporation ("Financial"), the common stock of which in turn is wholly owned by Reliance Group, Incorporated ("Group") Reliance Group was formerly known as Leasco Data Processing Equipment Corporation. Group acquired control of Insurance in 1968.

On June 11, 1976 Insurance filed an S-1 registration statement pursuant to the Securities Act of 1933 and circulated a preliminary prospectus to the investment community with the intention of offering at public sale, two million shares of its Series A Cumulative Preferred Stock. This sale was scheduled for July 20, 1976.

The corporate defendant (hereinafter "Barron's") is the proprietor of a well known financial magazine published weekly in New York City. Because of the continuing interest in Group on the part of the financial community, editors of Barron's requested and received a copy of this preliminary prospectus sometime between June 11 and June 18, 1976. After studying the prospectus, the editors determined that several interesting financial questions were raised which might warrant treatment in an article in Barron's. The editors therefore asked defendant Dr. Abraham J. Briloff to review the prospectus with a view toward possibly writing an article. Dr. Briloff was sent a copy of the prospectus, as well as Group's 1975 Annual Report and Form 10-K and Financial's Form 10-K. Dr. Briloff holds the Emanuel Saxe Chair of Distinguished Professor of Accountancy at Baruch College of the City University of New York. In addition to teaching and lecturing in the field of accounting, Briloff has also published widely on this subject, writing articles on financial and accounting matters directed to nontechnical readers, including members of the investing public. He may be regarded, for our purposes, as a journalist or reporter, and is the Cassandra of the Accountants.

Three weeks later, sometime around July 4, 1976, Dr. Briloff delivered a first draft of an article to Barron's. According to Dr. Briloff's deposition testimony, he based his article on a review of the preliminary prospectus and other public documents, and research conducted at the Securities and Exchange Commission in New York, American Stock Exchange and New York Stock Exchange. Once received, the article was reviewed and edited at Barron's by Mr. *1345 Steven S. Anreder, one of three News Editors employed by Barron's. Finally, the article was reviewed by Mr. Alan Abelson, Managing Editor of Barron's and Mr. Robert M. Bleiberg, Editor [in Chief] of the publication since 1955.

The Briloff article was published under the author's by-line, in the July 19, 1976 issue of Barron's of which there were more than 225,000 copies, reaching a wide readership in the financial community.

In the article, Dr. Briloff analyzed the proposed public offering of Insurance, and the accounting of Group. He concluded that the purpose of the public offering was to serve the interests and needs of Group rather than Insurance. The article charged that the proceeds of the sale were to flow upstream to Group, the parent, to the detriment of Insurance and its policyholders and minority shareholders. The article also implied, inter alia, that Group was employing certain "creative accounting" concepts, and engaging in improprieties, bad business judgment and breach of fiduciary duties, all of which led to its decision to market the proposed Series A issue.

The article consisted of 38 paragraphs covering approximately four pages of the July 19th issue. A full copy is attached hereto as Appendix A.

The Court regards the subject article as clearly defamatory of plaintiff, and probably also of Reliance Group. It also criticizes practices of Touche Ross & Co., the prestigious accounting firm serving the Reliance companies. For the most part, the article is opinion only. That Dr. Briloff sincerely holds the opinions expressed, and reached the conclusions uttered, after a professional consideration of public documents cannot be disputed. This is not the first time Briloff had publicly criticized the financial and accounting practices of the Reliance Group, and its corporate predecessor, Leasco. His criticisms appear to have brought about substantial revisions in the wording of the final prospectus. That a reasonably prudent investor could purchase the issue, first reading the offending article, and believing it, defies imagination.

Strong public policies exist in favor of the right to publish such critiques as those contained in Dr. Briloff's article. Our federal securities laws are based on the theory that full disclosure will protect the integrity of the market place. The disclosure has tended to become so "full" in some situations, as to bury in legalese, in the interests of total accuracy, facts and possibilities flowing therefrom which should be simply stated in plain English and their possible consequences made known to potential investors. These defendants thought they were exposing to the public in plain language that which was either implicit in the circumstances surrounding the offering, or buried in the prospectus and other public filings of the Reliance companies. To do so is an important function of a free financial press, which should not be inhibited by judgments for damages of the sort sought here.

Plaintiff charges, in answers to defendants' first set of interrogatories that the article contained at least 37 false or misleading statements. Barron's denies that it made any false statements, with the exception of one error at paragraph 4 of the article in which there appeared a misquotation from the preliminary prospectus. This sentence reads as follows:

"Initially, according to the plan, `the $47 million of net proceeds will serve to increase Reliance Insurance's Statutory Policyholders' Surplus, thereby momentarily increasing its underwriting capacity.'" (Emphasis added).

The word "momentarily" did not appear in the preliminary prospectus. When this error was brought to Barron's attention, a correction was made in the following week's edition.

The word "momentarily" adds little to the thrust of the sentence. A moment is an *1346 indefinitely short space of time. "Momentarily" in this context means "at any moment: momentarily liable to occur." See American College Dictionary, Random House, New York 1970 ed. p. 784. Implicit in the preliminary prospectus is the suggestion that the dividend paying ability of Insurance would be improved, and that availability of funds for dividends would in fact occur momentarily, after completion of the offering. But the word did not belong in quotes.

In addition to this single misquotation, plaintiff alleges various false or misleading statements which result in defamation by implying in the broadest terms that Insurance, in its official filings, has falsified the purposes of its public offering.

These various statements can be divided into several categories. Plaintiff alleges that the article (a) falsely implied that the amount of the prospective common stock dividends was misstated in the prospectus; (b) falsely stated that the preferred offering was detrimental to Insurance and beneficial only to Group; (c) falsely stated that Insurance's "earnings power" had "sharply diminished" thereby impugning Insurance's ability to service the preferred offering while paying common stock dividends; (d) falsely or at least incorrectly described Provident's interest in Commonwealth, thereby accusing Insurance of accepting a worthless pledge; (e) erroneously implied by the use of the term "artificial respiration" that Insurance was financially "near death"; (f) was written with omissions and innuendo which falsely substantiated the claim that Insurance was financially unstable and that Group's "accounting gimmickry" might force Insurance into an uneconomic stock offering; and (g) contains false and misleading statements as to Group's financial stability which falsely substantiate the theme that the preferred offering was improperly induced by Group to Insurance's detriment.

After publication of the article, Insurance revised its preliminary prospectus and filed a final prospectus with the SEC. On August 17, 1976 the registration statement relating to the offering of the preferred stock became effective. On August 24, 1976, Insurance sold the two million shares of preferred to the public at a dividend rate of 10.72%. Plaintiff charges, and we accept as true for the motion, that this is approximately one percentage point more than the rate would have been had the article not been published. The resulting cost to Insurance over the 25 year life of the preferred issue was approximately $7,500,000.00.

On August 31, 1976, counsel for Group and Insurance wrote to Barron's and Dr. Briloff to demand a retraction of the various allegedly false and misleading statements in the article. No such retraction was published, and on September 14, 1976 this lawsuit was commenced.

The Libel Claim. 
1. Public Figure

It is now well accepted that the plaintiff's status determines the standard of proof that such plaintiff will be required to present in making a defamation claim. If the plaintiff is a public official or public figure, then the plaintiff will have to show that the defendant published false statements against him with "actual malice," a word of art discussed below. New York Times Co. v. Sullivan, 376 U.S. 254, 84 S. Ct. 710, 11 L. Ed. 2d 686 (1964); Gertz v. Robert Welch, Inc., 418 U.S. 323, 94 S. Ct. 2997, 41 L. Ed. 2d 789 (1974); Time, Inc. v. Firestone, 424 U.S. 448, 96 S. Ct. 958, 47 L. Ed. 2d 154 (1976). If, on the other hand, the plaintiff is not a public figure then he need only establish a minimum degree of fault in order to establish liability. Whether one is a public figure presents a mixed question of fact and law as to which defendants have the burden of persuasion. Hotchner v. Castillo-Puche, 404 F. Supp. 1041 (S.D.N.Y.), rev'd. on other grounds, 511 F.2d 910 (2d Cir. 1977). Here, the facts on which that *1347 issue is to be determined are not in dispute. The Court, then, at least in this case, must make the initial determination of whether Insurance is a public figure before reaching the question of whether plaintiff has presented a material and genuine issue of fact with respect to the actual libel alleged.

The standard for determining whether or not a person or corporate entity is a public figure is set forth in Gertz v. Robert Welch, Inc., supra. First, Gertz defines those who are the subject of the New York Times standard:

"Those who, by reason of the notoriety of their achievements or the vigor and success with which they seek the public's attention, are properly classed as public figures . . .." Id., 418 U.S. at 342, 94 S. Ct. at 3008.

The Court then observed that:

"Public officials and public figures usually enjoy significantly greater access to the channels of effective communication . . .." Id. at 344, 94 S. Ct. at 3009.

A public figure is one who has voluntarily invited close public scrutiny by thrusting himself into the public arena. Finally, Gertz sets forth two categories of public figures: public figures for all purposes and those whose lives are only public in limited circumstances.

"For the most part those who attain this status have assumed roles of especial prominence in the affairs of society. Some occupy positions of such persuasive power and influence that they are deemed public figures for all purposes. More commonly, those classed as public figures have thrust themselves to the forefront of particular public controversies in order to influence the resolution of the issues involved. In either event, they invite attention and comment." Id. at 345, 94 S. Ct. at 3009.

In attempting to apply this "public figure" analysis to corporations as opposed to natural persons, courts have differed in their method of analysis. In Martin Marietta Corp. v. Evening Star Newspaper, 417 F. Supp. 947 (D.D.C.1976), the court concluded that the Gertz analysis was inapplicable to corporations since they are all, by definition, not private persons, and therefore do not require the special protection afforded to individuals in protecting their "private lives." A defamation action by a corporation does not involve "the essential dignity and worth of every human being," considerations of concern in a libel action brought by an individual involuntarily thrust into the public eye and reviled. The Court in Martin Marietta therefore applied the test set forth in Rosenbloom v. Metromedia, Inc., 403 U.S. 29, 91 S. Ct. 1811, 29 L. Ed. 2d 296 (1971) (disavowed in Gertz with respect to natural persons), which provides that any person involved voluntarily or involuntarily in a matter of public interest can only be libelled by a false statement made with "actual malice." Using this test the Court found that Martin Marietta was certainly involved in a matter of public interest, i. e. corporate entertainment of government officials at privately funded stag parties. As an alternative ground for this holding the Court also found that Martin Marietta was a public figure under the Gertz definition since it had "thrust" itself into a public controversy thereby becoming a public figure for the purposes of the issues involved.

In Trans World Accounts, Inc. v. Associated Press, 425 F. Supp. 814 (N.D.Cal.1977), the court rejected the approach of Martin Marietta, preferring to apply the Gertz standard to corporations as well as natural persons. Using the Gertz analysis, the court found that Trans World Accounts was a public figure under the second test of Gertz by having been "drawn into a public controversy."

It appeared preferable on this motion for summary judgment to follow Trans World Accounts, and consider whether Insurance is a public figure in accordance with the terms set forth in Gertz. See also, Time, *1348 Inc. v. Firestone, 424 U.S. 448, 96 S. Ct. 958, 47 L. Ed. 2d 154 (1976); Rinaldi v. Holt, Rinehart & Winston, Inc., 42 N.Y.2d 369, 397 N.Y.S.2d 943, 366 N.E.2d 1299 (1977).

We find that plaintiff is indeed a public figure. It is a large corporation with more than a billion dollars in assets. Nearly all of its common stock is owned (through Financial) by Group, a publicly held company whose shares are traded on the New York Stock Exchange. There has been great public interest in Insurance and its affiliated companies over the past several years, particularly with respect to the circumstances surrounding its acquisition. [See, Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544 (E.D.N.Y. 1971)]. Insurance's business is in a field subject to close state regulation, and the company files periodic reports with the SEC and the New York and Pennsylvania Departments of Insurance. In addition, Insurance was, at the time of the libel, offering to sell its stock to the public, thereby voluntarily thrusting itself into the public arena, at least as to all issues affecting that proposed stock sale.[1] Accordingly, it is clear that Insurance is certainly a public figure with respect to issues involving its offering of securities to the public.

Indeed, plaintiff's role in society is such that it is a figure generally in the public eye. I find that plaintiff is a public figure in the general sense, and also in the specific context of its decision to make a $50 million public stock offering. See Hutchinson v. Proxmire, 431 F. Supp. 1311 (W.D.Wis.1977); Trans World Accounts v. Associated Press, supra; Wolston v. Reader's Digest Ass'n, Inc., 429 F. Supp. 167 (D.D.C.1977); Martin Marietta Corporation v. Evening Star Newspaper, supra; Hotchner v. Castillo-Puche, supra; Meeropol v. Nizer, 560 F.2d 1061 (2d Cir. 1977).

Plaintiff's efforts to avoid the label of a public figure are unavailing. Although Insurance did not have access to the media during the period of registration, because of peculiarities of federal securities law, it does have and has exercised its access to "channels of effective communication." (Gertz, 418 U.S. at 344, 94 S.Ct. 2997).

Reliance argues that it should not be treated as a public figure because it was, at the time of the libel, "in registration" and therefore lacked the media access to counteract the libel which is normally available to a public figure, and one of the theoretical underpinnings for the "actual malice" rule. We find nothing in Gertz or its progeny which would remove "public figure" status from an offeror during the brief time it is in registration. The "access to media" argument is no more than a makeweight. There are many public figures who are so scorned and reviled by the media as to have little or no access for purposes of counteracting a libel. These remain yet public figures.

The suggestion that Reliance could not respond is based on the assertion that after filing its S-1 Registration Statement on June 14, 1976, and until it became final (usually 20 days August 17, 1976 in this case) Reliance was "effectively prohibited from publicly commenting on its Series A Cumulative Preferred Stock, lest such comment be interpreted [by the SEC] as an `offer to sell' the preferred" (Pltfs. br. p. 16).

The Court doubts that the SEC Release cited, No. 5180, 17 C.F.R. § 231.5180, or 15 U.S.C. § 77e upon which it is ostensibly based, intended to prevent an issuer in registration from denying or disputing a defamatory article. It should be possible so to word a denial as not to constitute an offer to sell. To the extent the SEC purports *1349 to deny an issuer this fundamental right, that would appear to be a usurpation of power, and violation of the issuer's First Amendment rights. We need not reach the question here, since, as noted, one who has no practical access to the media to get his denials and justifications before the public, will yet be a public figure if he has thrust himself into a public controversy.

Insurance next argues that it is not a "household word" and that a majority of jurors would not recognize its name. The "household word" standard is not determinative in any event. See Meeropol v. Nizer, supra. Probably plaintiff is well known among Barron's readership, and a well recognized name in the financial and business community.

Finally, Insurance argues that it is not a public figure since it did not "thrust" itself into the media. This is simply untrue. By its very nature as a large publicly held, government-regulated corporation, and additionally because of its voluntary decision to make a public stock offering, Insurance has, in fact, thrust itself into the public eye.

We must acknowledge that the public interest is well served by encouraging the free press to investigate and comment on business and corporate affairs in the same manner as it would report on other public issues. As we observed in Reliance Insurance Co. v. Barron's, 428 F. Supp. 200, 205 (S.D.N.Y.1977):

"Investigative reporting is not limited to the impeachment of presidents or the exposure of licentious congressmen. The public interest is served equally when reporters find a `Deep Throat' in the executive suite, and when an accounting professor spotlights for the financial press, in common language, business dealings he regards as improper, improvident or unfair to investors. Whether his conclusions are right is to be resolved generally in the free market place of ideas."

When such reporting concerns the financial transactions of a large public corporation, the public interest in maintaining the free marketplace of ideas must outweigh plaintiff's claim to the sanctity of private status. As stated in Edwards v. National Audubon Society, Inc., 556 F.2d 113, at 122 (2d Cir. 1977):

"[W]e believe that the interest of a public figure in the purity of his reputation cannot be allowed to obstruct that vital pulse of ideas and intelligence on which an informed and self-governing people depend. It is unfortunate that the exercise of liberties so precious as freedom of speech and of the press may sometimes do harm that the state is powerless to recompense: but this is the price that must be paid for the blessings of a democratic way of life."
2. Actual Malice

In New York Times, supra, the Supreme Court defined "actual malice" as publication "with [the] knowledge that it was false or with reckless disregard of whether it was false or not." Id., 376 U.S. at 279-80, 84 S. Ct. at 726. The Court required that "actual malice" be proved with "convincing clarity." Id. at 285-86, 84 S. Ct. 710. In St. Amant v. Thompson, 390 U.S. 727, 88 S. Ct. 1323, 20 L. Ed. 2d 262 (1968) the Court further refined its definition by explaining the term "recklessness."

"[R]eckless conduct is not measured by whether a reasonably prudent man would have published, or would have investigated before publishing. There must be sufficient evidence to permit the conclusion that the defendant in fact entertained serious doubts as to the truth of his publication." Id. at 731-32, 88 S. Ct. at 1325. (Underlining added)

Although these definitions distort common English, they must be taken at face value. In the context of a libel suit "actual malice" simply does not mean ill-will or spite. Rather, "malice" must be taken to mean fraudulent, knowing, publication of a falsehood, or reckless disregard of falsity. And we also note that reckless *1350 does not mean grossly negligent, its common use, but rather intentional disregard. When the Supreme Court uses a word, it means what the Court wants it to mean. "Actual malice" is now a term of art having nothing to do with actual malice. The question, then, is whether the plaintiff on this motion has established the existence of a genuine issue of material fact with respect to whether the article was written and published with "actual malice," as above defined.

Plaintiff argues that it has raised a factual issue on the question of actual malice by demonstrating errors or inaccuracies in the article, by the timing of the article, by the failure of Barron's properly to edit and verify the article, by Barron's purposely and selectively omitting material, and by the "snide" tone of the article taken as a whole. We shall discuss each of these issues in turn.

(a) Errors: Plaintiff argues that the insertion of the word "momentarily" into a quotation from the prospectus is proof of actual malice. In support of this contention plaintiff argues, correctly, that "actual malice" can be proved by inference from circumstantial evidence such as misquotation, citing Goldwater v. Ginzburg, 414 F.2d 324 (2d Cir. 1969) in support of this position. Here, plaintiff has been able to show only this one case of actual misquotation. No matter how misleading this misquotation might be, it is not sufficient evidence in and of itself to establish actual malice. In Goldwater, misquotation was only one of several methods used purposely to distort the truth. As stated in Goldwater:

"As can be seen, appellee and the district judge did not rely on a few isolated instances of derogatory statements which could be charitably thought of as being nonactionable negligent or good faith misstatements of fact, but rather upon the totality of appellants' conduct, as evidenced by the proffered materials, from which a jury might reasonably find a predetermined and preconceived plan to malign the Senator's character." Id. at 337.

Since plaintiff has been unable to point out any other example of misquotation or falsification of a hard fact (as distinguished from an opinion), evidence of error(s) alone is insufficient to raise a factual question on the issue of actual malice in the context of this case. We must affirm the longstanding principle that inaccuracy itself will not demonstrate "actual malice" in a libel case. Even if there were a dozen errors in this article, mistakes or bad judgment will not substitute for knowing falsehood or reckless disregard as to falsity, when the uncontradicted testimony reveals that the author and publisher held the good faith belief that the article was correct and truthful.

Stating good faith is not enough to exonerate a defendant. But when the defendant has asserted his good faith under oath, and no evidence whatever exists to counteract that assertion, then it must be credited.

It is at this point that we consider the status and reputation of the author. Dr. Briloff is an acknowledged expert in the field of accounting as evidenced by his full-time profession as a Professor of Accounting and by his many publications and lectures in the field. The source of this article was therefore of known quality. Compare, Curtis Publishing Co. v. Butts, 388 U.S. 130, 87 S. Ct. 1975, 18 L. Ed. 2d 1094 (1967) with Martin Marietta Corp. v. Evening Star Newspaper, 417 F. Supp. 947 (D.D.C.1976). Unlike pornographer Ginzburg in the Goldwater case, supra, Dr. Briloff is an expert in accounting, the relevant discipline, who gathered much material concerning Insurance, reviewed that material, and then published his own opinion of Insurance's stock offering. This is not the case of an unreliable informant (Butts) or of a conceded nonprofessional giving a psychiatric opinion (Ginzburg) who publish their opinions as *1351 fact without any basis in fact. Although Dr. Briloff's opinions may have been erroneous they cannot be said to have been uttered with actual malice as above defined.

(b) Timing of the Article: Insurance argues that the publication of the article in the July 19th issue, approximately one week prior to the date the stock was to be sold, is circumstantial evidence of the defendants actual malice. Insurance contends that defendants desire to publish the critique prior to the offering demonstrates their awareness of the impact of the article on the investing public and the harm it would cause Reliance. We reject this evidence as proof of "actual malice." Dr. Briloff and Barron's are both in the business of educating or informing the public. It is beyond dispute that the article would have its greatest impact on the public if it appeared prior to the sale. This desire to publish prior to the sale is praiseworthy rather than blameworthy. Prior to its sale, the offering was "hot news" in the financial community. If the function of the financial press is to inform and educate the investing public with hot news, which we believe it is, then the editors have an actual duty to publish at the time of greatest benefit. After the issue had been sold, news bearing on its investment quality would have been of no use to the readers. Even if the timing of the article could be construed to demonstrate a hidden or subconscious desire by Dr. Briloff and Barron's to harm Insurance, this still is not evidence that the defendants knew the article was false, or published the article with a reckless disregard as to truth or falsity.

(c) Barron's Editing Process: Insurance argues that Barron's editing was so lax and slipshod and so removed from its normal procedures as to constitute evidence of actual malice on its part. Plaintiff specifically charges that Barron's failed to investigate and verify much of the material provided by Dr. Briloff. Once again the Court cannot agree that Barron's editorial conduct was so slipshod as to provide evidence on which to base a finding of actual malice.

A mere failure to investigate does not constitute "actual malice." St. Amant v. Thompson, 390 U.S. 727, 731, 733, 88 S. Ct. 1323, 20 L. Ed. 2d 262 (1968). Furthermore, there may be no requirement to investigate an article which is primarily a critique (an opinion) of a publicly filed document. It is true that if there is a complete departure from the standards of investigation and reporting ordinarily adhered to by responsible publishers, that may be some evidence of actual malice. See, Curtis Publishing Co. v. Butts, supra. In Butts a news article was published concerning the head football coach of the University of Georgia, accusing him of disclosing game strategy to the opposing team. The information on which the report was based was provided by a convicted felon. No efforts were made by the publishers to verify the report although there was a live witness to the supposed conversation disclosing game strategy. The author of the article was not a football expert, and did not even view the game films to ascertain whether or not the opposing team acted as if it was aware of the strategy.

In stark contrast are the facts of this case. Here, the article was authored by a reputable member of the accounting community, who holds strong and genuine views about Reliance, and about what he regards as some of the current failings of the accountants. In addition, the article was primarily no more than a critique or a personally held opinion concerning matters of public record. Finally, the editors of Barron's have testified that they did in fact apply their usual editing procedures to the article, including discussions with the author, stylistic and copy editing, spot checking of some of the sources cited by the author, and reviewing drafts and redrafts in consultation with the author and other editors. There is simply no evidence offered here that Barron's knowingly departed *1352 from its usual procedures so as to publish an article recklessly without regard to its truth or falsity.

(d) Selective Omissions: Plaintiff argues that the article omitted information which was pertinent to the offering. Had this information been included, plaintiff contends, the article would not have been false and misleading. Plaintiff submits that the selective omission of relevant data provides circumstantial evidence of defendants' actual malice.

We do not accept plaintiff's contention. Obviously the author of an article will have to choose which facts to include and which to omit. It is impossible to print all of the facts on which an opinion or belief is based, especially when an article comprises a critical analysis of a company's accounting practices. Were the courts or criticized corporations to be allowed to dictate the contents of such articles, censorship would have won out over free speech and the right to dissent. See Time, Inc. v. Pape, 401 U.S. 279, 91 S. Ct. 633, 28 L. Ed. 2d 45 (1971); Hutchinson v. Proxmire, 431 F. Supp. 1311 (W.D.Wis.1977).

(e) "Snide" Tone of the Article: Plaintiff finally argues that the tone of the article was generally snide, full of innuendo and hidden uncomplimentary swipes and cheap shots, and highlighted by the jabbing headlines. Plaintiff contends that this tone is circumstantial evidence of defendants' actual malice in writing and publishing this article.

The Court has read the article, the depositions, the answers to interrogatories and the exhibits submitted in connection with this motion. The Court has found no factual support for the contention that defendants published the article with "actual malice." The Court did, of course, notice the uncomplimentary tone of the article. But this does not in any way tend to prove that the author knew that statements in his article were false or that he had a reckless disregard, that is, entertained a serious doubt, as to the truth or falsity of his article. The fact that the publishers allowed the "snide" tone to permeate the article similarly is no evidence that the article was published with actual malice. We recall once again that "actual malice" does not mean hatred or contempt. Journalists are entitled to have and to express such views; that is no more than robust First Amendment expression.

The Court is aware that any article replete with snide innuendos can be hurtful to a subject, and indeed may damage him in his business or reputation. But if he is a public figure, then he must bear the risk of such publicity as the price he pays for conducting activities or business in the public arena. If the financial press, or the press at large, had to fear libel suits when expressing dislike of certain persons or firms, or of business or other practices, the self-censorship that would inevitably occur would have a stifling if not smothering effect on the functioning of a free press. Public figures are exposed to public comment. Such comment will not be libelous unless the commentator wrote with "actual malice," as defined by the Supreme Court, and as contrasted with actual malice, or mere aversion or scorn.


Since the Court has found that plaintiff is and will be unable on a trial to demonstrate the required "actual malice," defendants' motion for summary judgment on the libel claims is granted.

The claims for intentional tort and negligence pleaded under state law add nothing to the libel or defamation claim and summary judgment is also granted as to them.

The Rule 10b-5 Claim

Because of our conclusions above we probably need not reach a tantalizing question sought to be posed by this complaint, *1353 namely: Could there ever be a case where a newspaper which has no financial interest in a securities transaction could be found liable for a violation of Rule 10b-5 because of a false report published bearing on securities offered for sale? In re Republic National Life Insurance Company, 387 F. Supp. 902 (S.D.N.Y.1975); Milberg v. Western Pacific Railroad Company, 51 F.R.D. 280 (S.D.N.Y.1970), appeal dismissed sub nom. Korn v. Franchard Corp., 443 F.2d 1301 (2d Cir. 1971). Here, the Rule 10b-5 claim must fail if only because plaintiff has been unable to establish that there is a genuine issue of material fact as to the required element of scienter. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976). Hochfelder requires that a plaintiff seeking damages for a violation of Rule 10b-5 must allege and prove injury resulting from an "intent to deceive, manipulate or defraud." 425 U.S. at 194, n. 12, 96 S. Ct. at 1381. No such intent can be proved on the facts of this case. Even if recklessness were sufficient to prove the required scienter, recklessness has been defined in this Circuit as "a willful, deliberate, or reckless disregard for the truth that is the equivalent of knowledge." Lanza v. Drexel & Co., 479 F.2d 1277, 1305 (2d Cir. 1973). We have already found that neither Dr. Briloff nor Barron's acted with such reckless disregard for the truth. Therefore, for that reason alone, plaintiff is unable to sustain a cause of action based on Rule 10b-5.

In addition, the Court concludes that the allegation of a violation of Rule 10b-5 is being pleaded here as a method of circumventing the higher evidentiary threshold developed by the Supreme Court to limit state actions for libel. This is a misuse of the securities laws. Plaintiff's case, if it has one, is a libel action pure and simple. The securities laws, and particularly Rule 10b-5, were not developed with the intention of overlapping or reinforcing the law of libel, nor to inhibit the exercise of freedom of the press.

As we have seen recently, the heyday of the unfettered extension of the federal securities laws to recompense all those damaged, has ended. See, Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975).

There is no evidence that Dr. Briloff, or the Barron's editors who acted with respect to his article, purchased or sold any Reliance securities at or about the time of the offending article, or that they were acting in collusion with persons who did so. Nor is there any evidence that defendants published with intent to manipulate stock prices, or to defraud potential investors or aid and abet those so engaged. Indeed, implicit in the article itself, defendants' intention was to the contrary: to alert potential purchasers to the likelihood that investment in paper sold by any business controlled by Group was fraught with peril. Thus, defendants "simply do not fall into any of the categories of non-privity parties who have been held liable to defrauded purchasers and sellers under Rule 10b-5." In Re Republic National Life Insurance Co., 387 F. Supp. 902, 905 (S.D.N.Y.1975).

Without such a financial interest, direct or through others, the intent to defraud or manipulate required by Hochfelder, supra, is unlikely to exist. Distinguishable are situations where a publisher uses his First Amendment rights intentionally to effect a fraud or manipulation for his own financial gain, as was found in SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 84 S. Ct. 275, 11 L. Ed. 2d 237 (1963); Courtland v. Walston & Co., 340 F. Supp. 1076 (S.D.N. Y.1972).

Defendants' motions for summary judgment are granted and the Clerk is directed to enter Judgment pursuant to Rule 58, F.R.Civ.P. that all relief be denied on all claims pleaded.

So Ordered.

Exhibit A to follow. 






This Court has heard reargument, as requested by plaintiff, of its Memorandum and Order dated September 14, 1977, granting summary judgment to defendants in this defamation action.

Since reargument, the Court of Appeals of this Circuit has decided Herbert v. Lando, 568 F.2d 974 (2d Cir. 1977). From that opinion, which analyzes in some detail most of the prior decisions relied on by this Court in its September 14, 1977 determination, it appears very clear that, as this Court previously concluded, this plaintiff will be unable at trial to prove actual malice by clear and convincing evidence. Indeed, since Herbert, defendants in defamation actions may not even be examined under oath before trial as to how they "formulated [their] judgments" (Slip op. at 232). If not before trial, then not at trial, since the same reasoning used in Herbert with respect to pre-trial testimony must in logic apply to testimony at trial.

Accordingly, the conceded subjective intentions comprised in use of the word "momentarily" (referred to by plaintiff as "the acknowledged meaning," Br. p. 2) in this litigation, yield to its objective meaning, found by this Court in its prior decision herein, and now said to have been misapprehended.

The Herbert decision is also noteworthy for the suggestion, found in Judge Oakes' concurring opinion, and, we think expressed for the first time in a reported Second Circuit case, that the standards for granting summary judgment are "somewhat more relaxed in constitutional libel cases" (568 F.2d fn. 24 p. 991).

In light of Herbert, and in view of the recent denial by the Supreme Court of certiorari in Hotchner v. Castillo-Puche, 551 F.2d 910 (2d Cir.), cert. denied ___ U.S. ___, 98 S. Ct. 120, 54 L. Ed. 95 (1977), practical litigants may well conclude that any remedy for libel against a journalist by a public figure is now illusory.

A judicial remedy for defamation was regarded, since the earliest days of the common law, as necessary because of the "supposed tendency [of libel] to arouse angry passion, provoke revenge and thus endanger the public peace." Regina v. Holbrook, 4 Q.B.D. 42, 46 (1878). Are men and women of honor who happen to be public figures to right vicious slanders hereafter by resort to fisticuffs or duelling? Naturam expellas furca, usque tamen recurret. Horace, Epistles I, 10.

Probably the policy implications of this apparent trend are not of immediate concern. The Court believes that summary judgment was properly granted in this case.

On reargument, the prior determination is adhered to.

So Ordered.


[1] Filing a preliminary or red herring prospectus, a matter of public record, is theoretically not an offer to sell securities, which can be made only when the registration becomes final. But by doing so, an issuer thrusts itself into the public eye, indicating by its action that it intends to have the registration become complete and that the preliminary prospectus will mature into a final one, with resultant distribution of securities to the public.

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