## Facts

- Hyman‑Michaels Company was a closely held scrap iron and steel business controlled by family members, with Joseph Michaels holding about 14% and his uncles Ralph and Everett Michaels controlling most of the remaining voting stock.
- From 1966 to 1976, the Company engaged in repeated, largely unsuccessful discussions with multiple potential buyers regarding a sale of assets or stock.
- In January 1976, Joseph sold his shares back to the Company while Ralph and Everett were insiders with superior access to information about potential sale prospects and financing.
- Joseph alleged Ralph and Everett misstated and withheld material information about ongoing sale discussions and the status of financing, including representing that a key bank loan had been denied when it remained a possibility and not disclosing serious prospective purchasers.
- Several months after Joseph’s sale, the Company was sold for approximately $13.4 million; the transaction included lifetime employment contracts for Ralph and Everett.
- Joseph sued alleging federal securities fraud under Exchange Act § 10(b) and Rule 10b‑5, plus common‑law fraud and breach of fiduciary duty; he also asserted a contract-based warranty theory against the Company.
- After a jury trial, the jury found for Joseph on the Rule 10b‑5, fiduciary duty, and common‑law fraud claims, awarding $750,000 compensatory damages and $200,000 punitive damages, and found for the Company on Joseph’s warranty claim.
- The district court denied post-trial defense motions, awarded prejudgment interest to Joseph, and directed a verdict for Joseph on the Company’s counterclaim.

## Issues

1. Whether alleged nondisclosures and statements about sale negotiations and financing were material for purposes of Rule 10b‑5.
2. Whether Ralph and Everett acted with the scienter required for liability under § 10(b) and Rule 10b‑5.
3. Whether Joseph proved reliance and causation, including whether defendants established that Joseph would have sold even if fully informed.
4. Whether the evidence supported liability for breach of fiduciary duty and common‑law fraud, including punitive damages.
5. Whether the district court erred in evidentiary rulings, denial of a new trial, prejudgment interest, and directing a verdict against the Company on its counterclaim.

## Decision

- The Seventh Circuit affirmed the judgment in all material respects.
- The court upheld the jury’s findings of materiality, scienter, and reliance on the Rule 10b‑5 claim.
- The court affirmed the verdicts for Joseph on breach of fiduciary duty and common‑law fraud and sustained the compensatory and punitive damages awards.
- The court affirmed the award of prejudgment interest.
- The court found no reversible error in evidentiary rulings or denial of a new trial and affirmed the directed verdict for Joseph on the Company’s counterclaim.

## Legal Principles

- Information is material under Rule 10b‑5 if there is a substantial likelihood a reasonable investor would consider it important in deciding whether to buy or sell.
- Materiality, scienter, and reliance are commonly fact questions for the jury when supported by evidence of meaningful negotiations, realistic financing prospects, and credibility-based testimony on decisionmaking.
- Scienter under § 10(b) and Rule 10b‑5 may be shown by knowing or reckless nondisclosure or misstatement by corporate insiders, particularly where they control access to information in a closely held corporation.
- Insiders who purchase a minority shareholder’s shares in a closely held corporation may owe fiduciary duties requiring disclosure of material information affecting share value.
- Common‑law fraud may be established by intentional or reckless deception through misstatements and omissions; punitive damages may be upheld where the record supports such culpability.
- Appellate review of evidentiary rulings and new-trial decisions is deferential; reversal requires a showing of prejudicial error or abuse of discretion.

## Conclusion

The Seventh Circuit affirmed a jury verdict holding corporate insiders liable for securities fraud, fiduciary breach, and common‑law fraud where, during a stock repurchase from a minority shareholder, they withheld and misstated material information about sale negotiations and financing, and the record supported findings of scienter, reliance, compensatory damages, punitive damages, and prejudgment interest.


Michaels v. Michaels, 767 F.2d 1185 (7th Cir. 1985)