## Facts

- In 1964, Rochez Bros., Inc. owned 50% of MS & R, Inc., and Charles R. Rhoades owned the other 50%.
- Rhoades served as MS & R’s full-time chairman of the board, chief executive officer, and president, running day-to-day operations; Joseph Rochez (Rochez Bros.’ president) was MS & R’s part-time vice president and a director.
- Increasing conflict between Rochez and Rhoades led MS & R’s board to authorize both men to seek a purchaser for the company.
- Rhoades contacted Wingate Royce about locating a buyer for MS & R. After meeting Royce, Rochez declined to retain him.
- Rhoades then personally retained Royce to help find a purchaser, but Rhoades did not tell Rochez that Royce had been hired and did not share Royce’s leads or sales efforts with Rochez.
- When no immediate company sale resulted, Rochez and Rhoades shifted to discussing a buyout in which one would purchase the other’s shares.
- By September 11, 1967, Rochez Bros. set the price at which it would sell its MS & R stock to Rhoades; the written agreement was executed on September 16, 1967.
- The transaction closed on November 13, 1967, with Rhoades purchasing Rochez Bros.’ 50% interest for $650,000.
- After the buyout, Rhoades continued to follow up on Royce-generated leads and entered negotiations with a third party that ultimately purchased MS & R from Rhoades the next year.
- Rochez Bros. sued, alleging violations of Exchange Act § 10(b) and SEC Rule 10b-5 and asserting related Pennsylvania fraud claims, based on Rhoades’s failure to disclose the Royce relationship and acquisition-related information during the buyout.
- The district court found Rhoades liable under Rule 10b-5, awarded damages, and dismissed the federal securities claim against MS & R, Inc.; the parties appealed (including challenges to liability, damages, and the dismissal of the corporate defendant).

## Issues

1. Whether a corporate insider who buys a co-owner’s shares violates § 10(b) and Rule 10b-5 by failing to disclose material, nonpublic information about efforts and opportunities to sell the company to a third party.
2. Whether the proper damages measure should be tied to the value shown by the subsequent third-party sale (the transaction Rhoades pursued using the concealed information), rather than a valuation method that excludes that later sale price.
3. Whether MS & R, Inc. could be held liable for the Rule 10b-5 violation under theories such as agency/participation or § 20(a) controlling-person liability, and whether the district court made adequate findings to support dismissal of the corporate defendant.

## Decision

- The Third Circuit affirmed the district court’s determination that Rhoades violated § 10(b) and Rule 10b-5 by purchasing Rochez Bros.’ stock without disclosing material information about the Royce engagement and the resulting acquisition interest.
- The Third Circuit held the district court used an improper damages measure and remanded for recalculation using the value established by the later third-party purchase price; damages should be the difference between (i) the value of 50% of MS & R based on that later sale price and (ii) what Rochez Bros. received in the buyout.
- The Third Circuit did not simply impose liability on MS & R; it remanded for further proceedings and findings supporting the dismissal of the corporate defendant, including consideration of the plaintiff’s § 20(a) argument.

## Legal Principles

- A corporate insider purchasing stock in a direct transaction with another shareholder may have a duty under Rule 10b-5 to disclose material, nonpublic information known to the insider but not reasonably available to the seller, or else refrain from trading.
- Information about active efforts to sell a closely held company, including serious buyer interest developed through a retained finder, can be material when it bears on the value of the stock being purchased.
- In a nondisclosure case involving an insider’s purchase, the causal link between withheld information and the seller’s decision to sell may be shown where the omitted facts would have mattered to a reasonable seller deciding whether to sell and at what price.
- Rule 10b-5 damages are meant to compensate for the economic harm caused by the deception; where the insider quickly realizes value through a later arm’s-length sale connected to the concealed opportunity, that later sale price can be used as the best evidence of the stock’s value for computing the seller’s loss.
- Corporate liability for an officer’s securities-law violation is not automatic; dismissal of the corporate defendant must rest on adequate findings, and § 20(a) controlling-person liability (when properly raised) requires analysis of control and available defenses.

## Conclusion

Rochez Bros., Inc. v. Rhoades held that a corporate insider who secretly retained a finder and pursued acquisition interest while buying out a co-owner’s shares committed a Rule 10b-5 violation by failing to disclose that information, and the Third Circuit required damages to be recalculated using the value reflected in the subsequent third-party sale, while sending the corporate-dismissal and § 20(a) questions back to the district court for further findings and analysis.


Rochez Bros., Inc. v. Rhoades, 491 F.2d 402 (1973)