## Facts

- Boston Electro Steel Casting, Inc. (BESCO) was financially distressed; its directors largely relied on John B. Janigan (president, general manager, and director) for reports on company conditions.
- At a December 27, 1955 directors’ meeting, Janigan was asked whether any material change had occurred that should alter the directors’ view of the company; he responded that nothing had changed and it was “about the same.”
- In early 1956, after making that statement, Janigan purchased virtually all outstanding BESCO shares from the plaintiffs (former shareholders, some also directors) for about $40,000.
- In December 1957, Janigan resold the shares for $700,000.
- The plaintiffs filed suit in October 1958, alleging Janigan’s statement was knowingly and materially false, that they relied on it in selling, and that he concealed information suggesting a likely improvement in value.

## Issues

1. Whether the action was time-barred under the applicable state limitations period, or timely because the period was tolled by fraudulent concealment.
2. Whether, for a Rule 10b-5 fraudulent purchase of stock, damages may include disgorgement of the defendant’s later net resale profits (including windfall appreciation) rather than being limited to out-of-pocket loss at the time of sale.
3. Whether any portion of the defendant’s gains must be excluded from disgorgement when attributable to independent, legitimate rights (e.g., a pre-existing compensation/bonus plan).

## Decision

- The First Circuit affirmed judgment for the plaintiffs.
- The court held the suit was not time-barred because the Massachusetts limitations period was tolled by fraudulent concealment until discovery of the fraud.
- The court upheld liability under Rule 10b-5 based on a knowingly false, material statement made in response to a direct inquiry, on which the sellers relied.
- The court approved awarding Janigan’s net profits from the later resale as damages, including appreciation not shown to have been foreseeable at the time of the fraud.
- The court required excluding from the disgorgement calculation any amounts attributable to Janigan’s legitimate, pre-existing bonus/compensation arrangement.

## Legal Principles

- When federal securities law provides no express limitations period for a Rule 10b-5 claim, the forum state’s limitations period applies, while federal law governs accrual; state fraudulent-concealment tolling may extend the filing period where the fraud prevented earlier discovery.
- Rule 10b-5 does not impose a freestanding duty of disclosure absent a need to make prior affirmative statements non-misleading; however, once an insider elects to answer a direct question, the response must be truthful and not omit material facts that render it misleading.
- In a fraudulent purchase of securities (seller defrauded by buyer), an equitable remedy may award the wrongdoer’s subsequent net profits on resale to the defrauded seller, placing the risk of later gain or loss on the party who obtained the property by fraud.
- Disgorgement may include “windfall” appreciation following the fraudulent acquisition, but must be reduced by gains clearly attributable to independent, legitimate entitlements unrelated to the fraud.

## Conclusion

The court held that fraudulent concealment tolled the limitations period for the sellers’ Rule 10b-5 claim and that, because the buyer acquired the shares through a knowingly false and material statement inducing the sale, the appropriate remedy was disgorgement of the buyer’s later net resale profits, including windfall appreciation, with deductions for gains attributable to legitimate, independent compensation rights.


Janigan v. Taylor, 344 F.2d 781 (1st Cir. 1965)