## Facts

- Herbert and Ann Rowe (and a trustee) owned a large block of unregistered Pemcor, Inc. shares (216,965 shares) and negotiated a private, face-to-face sale of that block to Maremont Corporation in July 1977.
- Maremont, seeking acquisition targets, agreed to buy the Rowes’ Pemcor shares for $13 per share.
- During negotiations, the Rowes’ representative asked whether Maremont intended to make a tender offer for Pemcor; Maremont’s counsel denied such plans.
- The Rowes alleged Maremont also failed to disclose an existing Federal Trade Commission order that created legal complications relevant to Maremont’s acquisition strategy.
- Soon after closing, Maremont publicly announced a tender offer for additional Pemcor shares at $16.75 per share.
- The Rowes learned of the tender offer shortly after its announcement and sent a rescission letter alleging fraud.
- After later corporate events involving a merger with a third party, Maremont exchanged the Pemcor shares and later sold the resulting stock at a large profit.
- After a bench trial, the district court found Maremont liable under § 10(b) and Rule 10b-5 and awarded $745,423.80 plus interest; Maremont appealed and the Rowes cross-appealed on damages.

## Issues

1. Whether Maremont’s denial of near-term tender offer plans and nondisclosure of the FTC order were material misrepresentations/omissions made with scienter and relied upon in a negotiated sale, establishing liability under § 10(b) and Rule 10b-5.
2. Whether the district court applied a proper damages measure for “fraud on the seller,” including whether damages could be reduced to zero or increased to approximate disgorgement of Maremont’s later profits.

## Decision

- The Seventh Circuit affirmed the judgment for the Rowes and rejected Maremont’s challenge to liability.
- The court upheld the district court’s findings that the tender-offer plans and the FTC order were material to a reasonable seller and that Maremont acted with the requisite scienter.
- The court upheld reliance/transaction causation and loss causation findings based on the Rowes’ acceptance of $13 per share in the bargaining context created by the misstatements/omissions.
- The Seventh Circuit affirmed the damages award ($745,423.80 plus interest), rejecting Maremont’s argument for no damages and the Rowes’ request for a larger award tied to Maremont’s later gains.

## Legal Principles

- Section 10(b) and Rule 10b-5 apply to negotiated, face-to-face stock transactions between sophisticated parties when one side makes material misstatements or omits material information.
- Materiality may include reasonably definite, near-term corporate plans (such as an imminent tender offer) and significant regulatory constraints (such as an FTC order) when they would affect a reasonable investor’s pricing or decision to sell.
- Appellate review of factual findings after a bench trial is deferential; credibility determinations and findings supported by the record are not reversed absent clear error.
- In fraud-on-the-seller cases, damages are generally limited to out-of-pocket loss (the difference between the price received and the value absent the fraud), rather than transferring to the plaintiff the defendant’s later profits attributable to intervening events and market developments.

## Conclusion

The Seventh Circuit held Maremont liable under § 10(b) and Rule 10b-5 for materially misleading statements and omissions made to induce a discounted sale of a control-relevant stock block and affirmed an out-of-pocket damages award, rejecting both a zero-damages theory and a profit-disgorgement expansion.


Rowe v. Maremont Corp., 850 F.2d 1226 (7th Cir. 1988)