No. 89-1171

United States Court Of Appeals for The First Circuit


IRVNG A. BACKMAN, et al.,

Plaintiffs-Appellees

v.

POLAROID CORPORATION,

Defendant-Appellant


BRIEF OF DEFENDANT-APPELLANT POLAROID CORPORATION


 

Table Of Contents


Statement of the Issues

Statement of the Case

A. Proceedings Below

B. Statement of Facts

1. Background

2. Polaroid's preliminary earnings estimates for 1978 and the forecasts of securities analysts

3. Polaroid's substantial Polavision expenses

4. The Rowland Foundation sale of Polaroid stock

Summary of Argument

 Argument 

I. THE EVIDENCE WAS INSUFFICIENT AS A MATTER OF LAW TO SUPPORT THE JURY'S FINDING THAT POLAROID HAD A DUTY TO DISCLOSE; IN ANY EVENT, THE CHARGE TO THE JURY FAILED TO SET FORTH THE APPROPRIATE STANDARDS FOR IMPOSING SUCH A DUTY

A. Polaroid Made All Quarterly and Annual Disclosures Required by Statutes and Regulations

B. Polaroid Did Not Make Any Inaccurate or Misleading Statements

C. A Sale of Polaroid Stock by a Charitable Foundation Controlled by Polaroid's Chairman and Chief Executive Officer Did Not Create a Duty of Disclosure on the Part of Polaroid

D. The Charge, in Erroneously Confusing and Combining the Separate Concepts of Duty, Scienter and Materiality, Was Fundamentally Flawed Taken as a Whole

E. Evidence that Two Charitable Foundations Controlled by Two Polaroid Officer-Directors Sold Polaroid Stock Was Irrelevant to the Issue of Duty and Should Not Have Been Admitted Because of Its Propensity Unfairly To Prejudice the Jury 

II. THE EVIDENCE WAS INSUFFICIENT AS A MATTER OF LAW TO SUPPORT THE JURY'S FINDING THAT POLAROID ACTED WITH SCIENTER; IN ANY EVENT, THE CHARGE TO THE JURY FAILED TO SET FORTH THE APPROPRIATE STANDARDS FOR ASSESSING WHETHER POLAROID ACTED WITH SCIENTER 

A. The Undisputed Evidence Foreclosed Any Finding of Scienter

 1. Given Polaroid's remarkable financial successes, the non-profitability of Polavision did not raise any question of misleading investors

 2. Polaroid had adequately disclosed that earnings had been adversely affected by substantial Polavision expenses and the fact that such expenses were affecting earnings was well known

 3. Polaroid's awareness of higher earnings projections by securities analysts also
offers no support for a jury finding of scienter

B. Polaroid's Desire, Conceded by Plaintiffs, Not To Subject Polavision to Extraordinary
Adverse Publicity Regarding Its Commercial Success Established the Good Faith Business Judgment Defense

C. The Scienter Instructions Improperly Denied Polaroid the Defense of Good Faith Business
Judgment To Refrain from Prematurely Reiterating that Polavision Continued To Be a Drain on Earnings
 

D. The Scienter Instructions Erroneously Ruled Out Polaroid's Good Faith as a Defense

III. THE EVIDENCE WAS INSUFFICIENT AS A MATTER OF LAW TO SUPPORT THE JURY'S FINDING THAT THE DISCLOSURES SOUGHT BY PLAINTIFFS WERE MATERIAL; IN ANY EVENT, THE CHARGE TO THE JURY FAILED TO SET FORTH THE APPROPRIATE STANDARD FOR ASSESSING MATERIALITY 

A. Polaroid's January 11, 1979 Estimates of Earnings Constituted Mere Forecasts, which Were Immaterial as a Matter of Law

B. The Charge Erroneously Failed To Instruct the Jury that Materiality Must Be Assessed in Light of the Total Mix of Available Information

C. Errors in the Admission of Evidence Added to the Prejudice on Materiality

IV. THE EVIDENCE WAS INSUFFICIENT AS A MATTER OF LAW TO SUPPORT THE JURY'S FINDING THAT THE PRICE OF POLAROID STOCK WAS INFLATED BY $9.75 EACH DAY OF THE CLASS PERIOD; IN ANY EVENT, THE CHARGE TO THE JURY FAILED TO SET FORTH THE APPROPRIATE STANDARDS FOR MEASURING DAMAGES

A. Plaintiffs' Entire Damage Case Was Based upon a Defective Hypothetical Question

B. Plaintiffs' Expert Testimony on Damages Failed To Account for Intervening Causes of the Decline in Polaroid's Stock Price

C. The Jury Charge Erroneously Omitted Any Requirement that Damages Be Proximately Caused by Polaroid's Culpable Conduct

V. PURCHASERS OF OPTIONS ON POLAROID STOCK LACK STANDING TO SUE
POLAROID FOR ITS SILENCE

Conclusion

Statement of the Issues

This is a class action brought by certain stockholders of Polaroid Corporation ("Polaroid") and holders of call options on Polaroid stock alleging violations of 10(b) of. the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Polaroid appeals from a judgment entered on a jury verdict in favor of the plaintiff classes. The principal issues on Polaroid's appeal are:

1. Where Polaroid timely made all quarterly and annual disclosures required by statutes and regulations, made no inaccurate or misleading statements and did not trade in its own stock, whether the District Court erred in permitting the jury to find that Polaroid had a duty to make an extraordinary interim disclosure of allegedly material adverse facts concerning its anticipated earnings (which later set record highs for Polaroid) and the financial performance of its newly-introduced instant motion picture product, Polavision.

2. Whether the District Court erred in charging the jury that the mere existence of material facts could, without more, trigger a duty to disclose them.

3. Where Polaroid was experiencing record financial successes, had made timely disclosures that substantial Polavision expenses were affecting earnings, and saw little significance in the fact that most securities analysts were forecasting slightly higher earnings than its own internal predictions, whether the District Court erred in permitting the jury to find that Polaroid acted with scienter to deceive investors in not making an extraordinary interim disclosure about its anticipated earnings and Polavision's financial performance.

 4. Whether the District Court erred in charging the jury that no intent to defraud need be shown to establish scienter and in declining to charge the jury that (a) a valid business purpose for deferring disclosure until a regular reporting date and (b) Polaroid's subjective good faith in not making an extraordinary interim disclosure would preclude a finding of scienter.

 5. Where the nondisclosures claimed by plaintiffs had in fact either already been made by Polaroid, concerned information widely known to the public, or constituted preliminary and unaudited earnings forecasts subject to revision, whether the District Court erred in permitting the jury to find such alleged nondisclosures material.

6. Whether the District Court erred in refusing to charge the jury that it must consider the materiality of allegedly undisclosed information in light of the total mix of information already available to investors.

 7. Where plaintiffs' expert on damages erroneously assumed the existence of material facts not previously disclosed, assumed without foundation that the jury had made findings that Polaroid had violated Rule l0b-5 in each of the several respects claimed by plaintiffs, and also ignored intervening causes of the decline in Polaroid's stock price, whether the District Court erred in permitting the jury to accept the full difference in Polaroid's price before and one week after disclosure of the allegedly nondisclosed facts as the amount by which the price of Polaroid stock was unlawfully inflated by Polaroid's silence during the class period.

8. Whether the District Court erred in refusing to charge the jury that damages must be proximately caused by Polaroid's culpable silence, and not by other or intervening causes.

 9. Where plaintiffs offered no basis for holding Polaroid responsible for sales of Polaroid stock by two charitable foundations controlled by two of its officers and directors, whether the District Court erred in admitting evidence of such sales.

10. Where the District Court charged the jury that the culpability of Polaroid's conduct had to be assessed as of January 11, 1979, the first day of the class period, whether the District Court erred in admitting evidence of events allegedly relating to such culpability but occurring after that date.

11. Whether the District Court erred in according purchasers of call options on Polaroid stock standing to sue Polaroid, when such purchasers had no relationship with Polaroid, contractual or otherwise, and Polaroid had no control over their speculation on the future price of its stock.

Statement of the Case

 A. Proceedings Below. Trial of this action was limited to claims asserted in Count II of plaintiffs' Second Amended and Consolidated Complaint, filed May 11, 1981. JA0033-62. Count I was brought against defendants Dr. Edwin H. Land, founder of Polaroid and then its chairman of the board and chief executive officer; Rowland Foundation, Inc., a charitable foundation established by Dr. Land and his wife; Julius Silver, then vice president, director, and outside general counsel to Polaroid; and Jurodin Fund, Inc., a charitable foundation established by Mr. Silver. Count I alleged insider trading in January, 1979, in violation of 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5, 17 C.F.R 240.10b-5, promulgated thereunder. The claims against the Count I defendants were either dismissed (see JA0090-91 (Jurodin Fund)) or settled prior to trial (JA0099-119, JA0246-48 (Land, Rowland Foundation and Silver)).

Count II was brought solely against Polaroid, and alleged that Polaroid violated Rule 10b-5 in January-February, 1979 by failing to disclose to the investing public, in a timely fashion, allegedly "material adverse events in connection with the business of Polaroid". JA0055. On-July 16, 1982, The District Court certified plaintiffs as representatives of two classes of persons who purchased (1) Polaroid common stock or (2) call options on Polaroid common stock between January 11 and February 22, 1979 (inclusive), and who held such securities as of the close of trading on February 22, 1979. JA0081-82; see also JA0089-90.

On August 18, 1982, Polaroid filed a motion for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c), contending that plaintiffs failed to allege any basis for a duty which would require Polaroid to disclose the allegedly material information. JA0083-84. On April 22, 1983, the District Court denied Polaroid's motion without opinion. All; JA0085-86.

 On June 15, 1987, the trial of plaintiffs' claim against Polaroid commenced. At the conclusion of plaintiff s presentation on liability, Polaroid moved for a directed verdict (JA0027 (Docket No. 389)), which request was denied (JA1339-40). On July 2, 1987, the jury returned a general verdict on liability (JA0202), accompanied by answers to special interrogatories, in favor of plaintiffs (JA0203). On July 10, 1987, the jury returned answers to special questions on damages, finding that "the difference between the price paid for each share of Polaroid stock and the true value of the share", was $9.75 for each day of the class period. JA0227.

 On December 30, 1987, the District Court denied plaintiffs' request for prejudgment interest. JA0249-50. On January 20, 1988, the parties stipulated to a method for calculating damages to call option purchasers. A2; JA0030 (Docket No. 446).

 On June 28, 1988, the District Court entered a judgment pursuant to Fed. R. Civ. P. 54(b), which certified that the claims of class representatives and Polaroid's liability to the classes had been "fully and finally adjudicate[d]". A7. On July 13, 1988, Polaroid moved for judgment n.o.v. or, alternatively, for a new trial (JA0363-64), which motion was denied on December 5, 1988 without opinion (JA0365).

 On January 3, 1989, Polaroid timely filed a notice of appeal from the judgment of the District Court. JA0366-67 (the present appeal No. 89-1171). On January 10, 1989, plaintiffs filed their appeal from the District Court's denial of their request for prejudgment interest. JA0368-69 (the present appeal No. 89-1172).

B. Statement of Facts. 1. Background. Polaroid is an established manufacturer of instant photographic and light polarizing products based in Cambridge, Massachusetts, with international sales that exceeded $1.3 billion in 1978 (Al4). Polaroid has generated a constant stream of new products and innovations, from the 1930s introduction of the inexpensive sheet polarizing material for which the company was named, to more than 100 products in 1978. JA1348-53 (McCune); see also JA2352 (Dr. Edwin Land, Polaroid's founder awarded 500th patent). Among these products was Polavision, an instant motion picture system that was the result of years of research and development and was nationally introduced in the Spring of 1978 (JA2351-52), receiving universal praise for its innovative technology and universal public skepticism about its financial prospects (e.g., JA 2399; JA2404).

 Polaroid's financial performance for the year ended December 31, 1978, including the fourth quarter, was the best in the company's history. Net earnings, camera and film sales all set new records. A14. In accordance with SEC regulations and its general practice (JA0600 (Bedrosian)), Polaroid had issued financial reports for the first, second and third quarters of 1978, and on February 22, 1979, issued a press release announcing its record financial results for the fourth quarter and year ended December 31, 1978. Plaintiffs do not claim that any of those quarterly statements or the February 22 press release were misleading in any way.

 On February 23, 1979, the day after Polaroid's 1978 results were announced, the market price of Polaroid stock declined from $49.625 to $43 per share (a decline of $6.625), and ultimately fell to $39.875 by March 1, 1979 (a decline of $9.75 from the closing price on February 22). See JA1126 (Torkelson). These cases followed.

 2. Polaroid's preliminary earnings estimates for 1978 and the forecasts of securities analysts. During the last quarter of 1978, various securities analysts had published their projections of the earnings per share Polaroid would report for the fourth quarter of 1978. These projections ranged from $1.22 to $1.57. See JA2386. Polaroid's actual fourth quarter earnings, announced on February 22, 1979, were $1.32, up 15% from the year before and a record high for Polaroid. See A15; JA2314. Polaroid was aware of the analysts' forecasts of its earnings and aware that most analysts had predicted slightly higher earnings than Polaroid's own estimates. JA0588-89 (Bedrosian); JA2386 (sample report). Most of the forecasts were, however, relatively stale; the most recent estimate in evidence predated January 11, 1979 by a month. See JA2386. Polaroid (like many companies) had a policy of not commenting on projections by securities analysts-the "standard practice of Polaroid for years"-and believed (correctly) that it had no duty to do so. JA1409-11 (McCune). It adhered to that policy in this instance.

 Polaroid's own earnings estimates for the fourth quarter and year, as of January 10, 1979-the day before the class period began-were preliminary and unaudited. Numerous accounting and auditing steps remained to be taken to obtain final, audited earnings. See infra pp. 39-40. Polaroid's preliminary fourth quarter earnings estimate as of January 10, 1979, was $1.37 (JA2442), or three percent above the final audited figure of $1.32. As Polaroid's president testified, Polaroid's earnings estimates "in many cases, aren't any more accurate than the analysts," and attempts to correct analysts' reports "could be more confusing and do more harm than good". JA1410 (McCune).

 The drop in Polaroid's stock price after the February 22 earnings announcement "astonished" Polaroid officials, who believed that given the record results -including record results for the fourth quarter-"the price of the stock, if anything, should have escalated". JA1432 (McCune). The evidence also showed that historically there was no predictable relationship among security analysts' estimates of Polaroid earnings, earnings announcements, and Polaroid's stock price. See infra p. 32.

 3. Polaroid's substantial Polavision expenses. Polavision, termed "one of the miracles of photographic science" by Popular Photography (JA2351), was an acknowledged technological success upon its introduction in May, 1978. However, like many newly-introduced products, Polavision's per unit costs exceeded the selling price during 1978. See JA0885 (McCune); JA1009-10 (Thayer). Polaroid's 1978 second quarter report had noted that, as compared with the first half of 1977:

 "The ratio of cost of sales to net sales increased from 52% to 58% due primarily to a shift in the mix of products sold to the SX-70 system and the effect of manufacturing costs associated with Polavision, the Company's new instant motion picture system." JA2383.

Polaroid's 1978 third quarter report similarly had noted that, as compared with 1977:

"'The ratio of cost of sales to net sales increased from 53% to 57% due primarily to an increase in the proportion of sales attributable to SX-70 products and to substantial expenses associated with Polavision." JA2375 (emphasis supplied).

The third quarter report also quoted Polaroid's president as reporting that "earnings continue to reflect substantial expenses associated with Polavision". JA2369 (emphasis supplied).

Polaroid's February 22, 1979 press release announced:

"The Company's 1978 record earnings were achieved notwithstanding manufacturing costs and marketing expenses substantially in excess of revenues from the Polavision program. This program is expected to continue to make significant demands on cash and earnings in 1979." JA2307.

In indicating that Polavision was expected to continue to be unprofitable in 1979, the release simply confirmed the widely-disseminated perception by securities analysts and the national press that it would be some time, if ever, before Polavision proved profitable. See, e.g., JA2399 (Time); JA2404 (Newsweek); see also infra pp. 30-31.

While unit sales of Polavision products rose steadily in the latter part of 1978 (JA2476 (September/October sales); JA2540 (November/December sales)), Polavision did not meet planned sales goals (e.g., JA2445 (planned vs. Dec. 4, 1978 estimated worldwide Polavision unit sales)). Given Polaroid's overall successes, however, the question of whether to make an extraordinary interim disclosure concerning Polavision's financial performance was never raised or considered. Polaroid also did not disclose detailed Polavision sales figures. None of these or other details about Polavision were disclosed in the February 22, 1979 press release, or, indeed, until trial, and plaintiffs do not claim that they were damaged by the nondisclosure of such details concerning Polavision.

4. The Rowland Foundation sale of Polaroid stock. On January 11, 1979, the Rowland Foundation, a charitable foundation controlled by Polaroid's founder and chairman, Dr. Edwin H. Land, and his wife, sold 300,000 shares of Polaroid stock on the open market at a price of approximately $52 per share, receiving approximately $16 million. After the sale, Rowland Foundation continued to hold 411,211 Polaroid shares, and Dr. Land and his wife, who sold no Polaroid shares personally, continued to hold 3,727,539 shares of Polaroid stock. See A12. The Rowland Foundation, as a private charitable endeavor of the Land family, had no connection with Polaroid. JA0789 (deLima); see also JA2727.

Two days prior to the sale, on January 9, 1979, the Rowland Foundation issued a press release announcing the planned sale. A12-13. The release, on Rowland Foundation stationary, reported Dr. Land's statements that: 

"The primary purpose of Rowland's present sale of up to 300,000 shares is substantially to increase the income available to it for charitable contributions by diversifying its investment portfolio.

 "A secondary purpose has to do with my plan for the establishment of a center of scientific endeavor to be located in Cambridge." A12.

The release also announced for the first time the possibility of Dr. Land's gradual, future retirement:

"I intend to continue my active roles as Polaroid's Chairman, Chief Executive Officer and Director of Research. After the next few years, I would like to feel free to devote so much of my time as is not required at Polaroid to the conduct in the planned facility of experiments in pure science or in other new fields that may interest me." A12-13.

Because the reference to Dr. Land's potential retirement might depress Polaroid's stock price, "it was felt important that the release be made sometime in advance of any sale". JA0924 (McCune); see also JA0852 (Land) (possibility of price decline "could not be ignored"); JA1036 (Silver).

Shortly before Rowland's release was issued, Julius Silver, a Polaroid vice president and director, and its outside general counsel, acting in his long-time separate capacity as attorney for Dr. Land and the Rowland Foundation, discussed a draft of the release "as a courtesy" with Richard deLima, Polaroid's chief inside legal officer. JA0765, JA0791 (deLima). Polaroid's Public Relations Department disseminated the release to the news media, telling everyone that "the statement was being issued by Rowland Foundation, not Polaroid". JA2616. Questions to Polaroid about the release were directed to Mr. deLima, who referred the caller to the Rowland Foundation. JA0773-74 (deLima).

 At plaintiffs' instance, the District Court certified the class period to begin January 11, 1979, the date of the Rowland Foundation's sale of stock, as contrasted with January 9, 1979, the date the Rowland Foundation's press release was issued. See JA0075-82.

Summary of Argument

 This is a classic "fraud by hindsight" claim, which ought to have been summarily disposed of by Polaroid's 1982 motion for judgment on the pleadings for failure to allege any facts creating a duty of disclosure. That failing, the District Court should have granted Polaroid's motion for judgment n.o.v., as plaintiffs failed to prove at trial any of the essential elements of securities fraud: (1) that Polaroid owed a duty of disclosure to plaintiffs, (2) that it breached that duty with scienter, (3) that it withheld material facts, or (4) that any wrongful nondisclosure damaged plaintiffs. In addition to the complete failure of proof as a matter of law, the District Court's charge to the jury was fatally defective on each of those four issues.

 1. Duty. In Roeder v. Alpha Industries Inc., 814 F.2d 22 (1st Cir. 1987), this Court declined to create a general affirmative duty on the part of a public corporation to disclose all material developments. Instead, Roeder held that a duty of disclosure would arise only when a corporation failed to make a disclosure required by statute or regulation, made an inaccurate or misleading statement, or engaged in insider trading. None of those circumstances is present here. (Points I(A-C).)

 In any event, the jury was not properly charged under Roeder. Instead, throughout the charge, the District Court repeatedly told the jury, in words, in substance, and by examples, that "it is unlawful to omit to state a material fact". A24. Indeed, the District Court explicitly told the jury that "if those facts were material ... then you may find that there was a duty to disclose." A28. These and other instructions (see infra pp. 20-22) plainly misled the jury into the belief that a duty of disclosure could be based solely on the existence of a material fact. (Point I(D).)

 2. Scienter. Polaroid had no motive to deceive investors and none was suggested. Nor could Polaroid reasonably be considered to have "recklessly" ignored an obvious risk of misleading investors. The year 1978, including the fourth quarter, set records for Polaroid, and 1979 was expected to set new records. Polaroid had already disclosed that "substantial" Polavision expenses were a drag on earnings, and public commentators were universally of the view that Polavision would continue to be a drag on earnings. Polaroid was aware that most securities analysts had slightly higher forecasts of its earnings than it did, but had a standard practice of not commenting on or correcting the forecasts of analysts, believing that it had no duty to do so and that any attempt to do so would be confusing and do more harm than good. Given the insignificant difference between Polaroid's earnings forecasts and those of the analysts, and the lack of any predictable effect on Polaroid's stock price when such differences had previously been resolved by earnings announcements, Polaroid officials had no reason to expect (and indeed were surprised by) the decline, in Polaroid's stock price after the February 22, 1979 earnings announcement. (Point II(A).)

 Even if there had been enough evidence to submit the issue of scienter to the jury, the District Court's failure properly to instruct the jury on scienter egregiously prejudiced Polaroid. For example, the District Court refused to charge the jury that Polaroid could defer disclosure of material information, absent a misleading statement or trading in its own stock, if it had a valid business purpose for doing so. The District Court also refused to charge that Polaroid's subjective good faith would be a complete defense to a claim of scienter. (Points II(B-D).)

 3. Materiality. In light of Polaroid's record performance and prior disclosures about Polavision, as well as the widely-held public view that Polavision would not be profitable at least in the near term, the additional disclosures sought by plaintiffs would not "'have been viewed by the reasonable investor as having significantly altered the "total mix" of information"'. Basic, Inc. v. Levinson, 108 S. Ct. 978, 983 (1988) (quoting TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976)). As for Polaroid's estimates of its earnings as of the January 11, 1979 cutoff date (the date fixed by the District Court for assessing liability), they constituted mere forecasts that as a matter of law lacked the reliability required for materiality. (Point III(A).)

 Even if materiality had been sufficiently shown to create a jury issue, the District Court made evidentiary and charge errors which misled the jury about materiality. The District Court erroneously refused to charge that materiality must be assessed in light of the total mix of information already available to investors. The District Court also admitted facts concerning Polavision's lack of financial success which occurred after the January 11, 1979 cutoff date. It also failed to instruct the jury that plaintiffs were required to prove the materiality of the facts allegedly not disclosed until Polaroid's February 22 release, not the "materiality", of the details underlying such facts. (Points HI(B-C).)

 4. Damages. The damages calculated by plaintiffs’ expert and accepted by the jury were predicated on Polaroid's supposed failure to disclose three specific separate facts. One of these Polaroid had previously disclosed (substantial Polavision expenses), one of these was widely expected (the likely continuance of such expenses), and one of these did not exist as of January 11, 1979 (preliminary estimates of earnings by Polaroid that turned out to be the same as Polaroid's final, audited earnings per share). The expert also assumed, without any basis, that the jury had found Polaroid had fraudulently concealed each of those facts. The expert's opinion was thus without proper foundation, and the jury verdict based thereon cannot stand. (Point IV(A).) The expert's testimony was additionally flawed because he failed to account for intervening causes of the decline in Polaroid's stock price other than Polaroid's culpable conduct. (Point IV(B).) 'These basic flaws in plaintiffs' damages presentation were exacerbated by the District Court's refusal to instruct the jury that plaintiffs could only recover for losses proximately caused by Polaroid's culpable conduct. (Point IV(C).)

 5. Option holder Standing. 'Me District Court additionally erred by according standing to purchasers of call options on Polaroid stock. Such purchasers have no relationship with Polaroid, Polaroid has no say in whether and to what extent its shares are made the subject of option contracts, and Polaroid derives no benefit from options trading. (Point V.)

 In summary, on the issues of duty, scienter, and materiality, "the evidence could lead reasonable [persons] . . . to but one conclusion", a conclusion in Polaroid's favor, and a directed verdict or judgment n.o.v. should therefore have been entered for Polaroid. Calhoun v. Acme Cleveland Corp., 798 F.2d 559, 563 (1st Cir. 1986) (quoting Hubbard v. Faros Fisheries, Inc., 626 F.2d 196, 199 (1st Cir. 1980)). On the issues of duty, scienter, materiality and damages, the jury's conclusions were also against the weight of the evidence and unjust, and even if judgment n.o.v. were not appropriate, a new trial should therefore be ordered. Such relief is appropriate "even though there may be substantial evidence to support the verdict". Hubbard v. Faros Fisheries, Inc., 626 F.2d 196, 200 (1st Cir. 1980).

 In any event, it is palpably clear that the District Court's charge did not set forth the correct legal standards on any of the four basic elements of plaintiffs' claims and was fundamentally flawed. Particularly since the "principal focus in reviewing jury instructions is to determine whether they tended to confuse or mislead the jury on the controlling issues", Service Merchandise Co. v. Boyd Corp., 722 F.2d 945, 950 (1st Cir. 1983), Polaroid deserves a new trial at the very least.

Argument

I. THE EVIDENCE WAS INSUFFICIENT AS A MATTER OF LAW TO SUPPORT THE JURY’S FINDING THAT POLAROID HAD A DUTY TO DISCLOSE; IN ANY EVENT, THE CHARGE TO THE JURY FAILED TO SET FORTH THE APPROPRIATE STANDARDS FOR IMPOSING SUCH A DUTY.

In Roeder, supra, 814 F.2d at 26-28, this Court squarely rejected the contention that 10(b) and Rule 10b-5 created a general "affirmative duty of disclosure" on the part of a public corporation to disclose all material developments. Roeder affirmed dismissal of a Rule 10b-5 claim premised on silence, even though the Court found that the nondisclosed information could clearly be material. Roeder unequivocably held that absent a defendant's (a) failure to make a disclosure required by statute or regulation, or (b) inaccurate or misleading statement, or (c) trading on the basis of confidential information, i.e. insider trading, no disclosure duty would arise. See also Basic v. Levinson, supra 108 S. Ct. at 987 n.17 ("Silence, absent a duty to disclose, is not misleading under Rule 10b-5"); Chiarella v. United States, 445 U.S. 222, 235 (1980) (even where information is unquestionably material, "[w]hen an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak"); Taylor v. First Union Corp., 857 F.2d 240, 243-44 (4th Cir. 1988) (silence about merger discussions not misleading), cert. denied, 109 S. Ct. 1532 (1989); Starkman v. Marathon Oil Co., 772 F.2d 231, 238 (6th Cir. 1985) ("a 'duty to speak' must exist before the disclosure of material facts is required under Rule 10b-5"), cert. denied, 475 U.S. 1015 (1986); Laventhall v. General Dynamics Corp., 704 F.2d 407, 412 (8th Cir.) ("no cause of action arises under section 10(b) or rule 10b-5 simply because an insider has inside information and fails to disclose it"), cert. denied, 464 U.S. 846 (1983); Staffin v. Greenberg, 672 F.2d 1196, 1204 (3d Cir. 1982) (court aware of no case "which imposed any duty of disclosure under the Federal Securities Laws on a corporation which is not trading in its own stock and which has not made a public statement"); In re Gen. Motors Class E Stock Buyout Securities Lit., 694 F. Supp. 1119, 1129 (D. Del. 1988) (following Roeder); Polak v. Continental Hosts, Ltd., 613 F. Supp. 153, 155-56 (S.D.N.Y. 1985) ("Absent a specific duty to disclose, even the most material information imaginable may be withheld from the public").

 Plaintiffs did not suggest a violation of any statute or regulation requiring disclosure. Plaintiffs did not claim or prove that Polaroid had made any inaccurate or misleading statement. Nor did plaintiffs claim or prove that Polaroid traded in its own stock. Thus, under Roeder, Polaroid had the right to remain silent during the class period.

 The jury was never presented with any of the three tests for a duty permitted by Roeder. Instead, the jury was presented with a fourth, and erroneous, theory of duty: if a fact was material, good faith could require Polaroid to disclose it. See infra pp. 20-22. This is directly contrary to this Court's decision in Roeder, the Supreme Court's decision in Basic and the cases from across the country referred to above. The jury's verdict was thus clearly the product of the improper instructions. It follows that even if Polaroid were not entitled to judgment under Roeder, Polaroid would plainly be entitled to a new trial.

A. Polaroid Made All Quarterly and Annual Disclosures Required by Statutes and Regulations. Plaintiffs did not claim or prove that Polaroid failed to make any of the disclosures required by the federal securities laws and the SEC regulations promulgated thereunder. Nor did plaintiffs claim or prove that any of the disclosures made by Polaroid in compliance with those statutes or regulations was inaccurate or misleading in any way.

B. Polaroid Did Not Make Any Inaccurate or Misleading Statements. Polaroid did not make any public disclosures about its earnings or Polavision's financial performance between the announcement in November 1978 of the third quarter results (JA2368-78), and the February 22, 1979 announcement of earnings for the fourth quarter and year ended December 31, 1978 (AI4-21; JA2305-14). See also JA0599-600 (Bedrosian). Polaroid's conduct thus did not trigger any duty to disclose during the class period under Roeder's second theory of duty.

 Contrary to the position they took at trial, plaintiffs argued in opposition to Polaroid's motion for judgment n.o.v. that Polaroid's duty to disclose was triggered by issuance of an affirmatively misleading press release: the Rowland Foundation release of January 9 (Al2-13). This thirteenth hour attempt to support the jury's verdict flatly contradicts the theory plaintiffs sought to present to the jury (see JA-0185 (no reliance on Rule 10b-5(b) in plaintiffs' requested instructions)), the theory the District Court charged to the jury (A22 (That's the string upon which plaintiffs are relying today, a failure or omission to state a material fact. A28-29 Jury questions no. 3-5)), and contradicts the testimony of plaintiffs themselves (JA1091 (Backman) ("the essence of my suit deals with the failure to disclose"); see JA1334 (Anderson) ("not aware of any false facts" stated by Polaroid)).

 In any event, neither the law nor the evidence support such an allegation. First, the Rowland release was not a statement by Polaroid. Every person to whom the Rowland release was read was told: "the statement. was being issued by Rowland Foundation, not Polaroid" and the Rowland release on its face bears the name of the Rowland Foundation (AI2), unlike standard Polaroid press releases (cf, e.g., A14; JA2391; JA2405; JA2408; JA2411; JA2412). The Polaroid department which disseminated the release did so "as a courtesy" to Dr. Land (JAI690 (Yanes)), "because they had the mechanism for putting it on the wire" (see JA0848 (Land)). See also JA0791 (deLima) (Silver represented Land and Rowland, not Polaroid, in connection with the transaction); JA1041-42 (Silver) (Silver billed and was paid by Rowland Foundation for his services). There was absolutely no proof that anyone regarded the Rowland release as attributable to Polaroid and hence a statement by it.

 Second, even if the Rowland release could somehow be construed as a Polaroid statement, it had nothing to do with Polavision or Polaroid's financial prospects, and therefore could create no duty to disclose facts about those subjects. Rule 10b-5 may proscribe dealing in half-truths, but the two halves must be halves of one whole. The truths in the Rowland release concerned Dr. Land's future plans and the Rowland Foundation's sale of stock. Those truths were not half the truth about problems with Polavision sales or even half the truth about Polaroid's financial prospects.

 Where undisclosed facts are not sufficiently related to the disclosures, courts have consistently denied Rule 10b-5 liability. E.g., In re Union Carbide Class Action Securities Lit., 648 F. Supp. 1322, 1327-28 (S.D.N.Y. 1986) ("corporation's statement that it is qualified to meet environmental and safety standards" not misleading by failure to disclose financial implications of possible accident or even by failure to disclose known safety defects); see also Starlanan, supra, 772 F.2d at 238 ("a further limitation on the duty to disclose is imposed by the requirement that only misstatements of material facts and omissions of material facts necessary to make other statements not misleading are prohibited by Rule 10b-5"); cf. Turner v. Johnson & Johnson, 809 F.2d 90, 100 (1st Cir. 1986) ("Johnson & Johnson made no reference [in its negotiations with plaintiffs] to the status of either Meditemp or Survalent's patents. Thus, even if patent information would have been material to plaintiffs, Johnson & Johnson was under no obligation to reveal it"). 'This requirement of relatedness is embedded in the literal terms of Rule 10b-5(b), which forbids the omission of "a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading". 17 C.F.R. 240.10b-5(b) (emphasis supplied). 

For the purposes of Rule 10b-5, the Rowland release was complete and not misleading, even assuming arguendo that Polaroid was responsible for it.

C. A Sale of Polaroid Stock by a Charitable Foundation Controlled by Polaroid's Chairman and Chief Executive Officer Did Not Create a Duty of Disclosure on the Part of Polaroid. Had Polaroid sold stock to plaintiffs, Polaroid would have been under a duty to disclose facts material to purchasers’ investment decisions. We are unaware of any court, however, that has held that the sale of stock by corporate insiders triggers such a duty for the corporation, much less sales by charitable entities controlled by insiders. To the contrary, in Abelson v. Strong, 644 F. Supp. 524, 530 (D. Mass. 1986), the complaint against a company based upon the insider trading and misrepresentations of its chairman was dismissed:

 . . . this conclusion . . . places primary liability upon those who perpetrate a fraud and restricts corporate liability to situations where the corporation benefits from the fraud".

 See also O'Connor & Assoc. v. Dean Witter Reynolds, Inc., 529 F. Supp. 1179, 1193 (S.D.N.Y. 1981) (dismissing claim against corporation where "there is no allegation that the corporation (as opposed to corporate insiders) engaged in insider trading or tipping . . . . This Court recently reaffirmed the importance of identifying the trading parties for purposes of imposing a duty of disclosure in Jackvony v. RIHT Financial Corp., [Current] Fed. Sec. L. Rep. (CCH) 1 94,361 (1st Cir. Mar. 30,1989). In Jackvony, plaintiff sold his shares by allowing a subsidiary of defendant Hospital Trust to liquidate collateral on an outstanding loan to plaintiff. Citing Roeder and noting that plaintiff "did not se[ll] to, or buy from, an 'insider"', this Court held that, "Hospital Trust had no 'duty to disclose' the 'pre-merger' information at issue". Id. at 9Z382.

 A contrary rule would expose Polaroid to grossly inequitable damages. The maximum recovery the Rowland defendants would have had to pay class members, even under plaintiffs' flawed theory of damages, would be $2,925,000-disgorgement of unlawful profits of $9.75 per share on 300,000 shares. See SEC v. MacDonald, 699 F.2d 47,54 (1st Cir. 1983) (en banc) (limiting disgorgement remedy in SEC injunctive action to profits accrued during "the reasonable period for the general dissemination, and then, digestion, of the December 24 press release . . ."). If plaintiffs had elected to pursue a theory of aiding and abetting liability for the Rowland Foundation's sale of stock, which, revealingly, they chose not to do, Polaroid's maximum exposure would also have been $2.9 million. Yet plaintiffs here sought damages in excess of $38 million for the class of stock purchasers alone. See JA2079 (Torkelson); JA2568 (study asserting class members collectively held 3,923,227 shares purchased during the six-week class period). The District Court took no express action on Polaroid's motion to limit plaintiffs' recovery to the disgorgement amount (JA0028 (Docket No. 399)).

 The verdict also operates unjustifiably to enrich class members not even arguably injured by the Rowland sale. See Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 94-95 (2d Cir. 1981) ("Any duty of disclosure is owed only to those investors trading contemporaneously with the insider; non-contemporaneous traders do not require the protection of the 'disclose or abstain' rule because they do not suffer the disadvantage of trading with someone who has superior access to information"); see also JA0093 (District Court sets one-day class period for Rowland defendants).

 As in Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 170-72 (2d Cir. 1980), this judgment would ultimately come out of the pockets of "innocent corporate stockholders", and courts must be careful not to accept theories that "allow for the imposition of Draconian damages, out of all proportion to the wrong committed". To hold the defendant liable "for the losses suffered by every open market buyer of the stock as a result of the later decline in value of the stock after the news became public would be grossly unfair". Id. at 170.

D. The Charge, in Erroneously Confusing and Combining the Separate Concepts of Duty, Scienter and Materiality, Was Fundamentally Flawed Taken as a Whole. In Roeder, supra, 814 F.2d at 26, this Court ruled that:

"The materiality of information claimed not to have been disclosed, however, is not enough to make out a sustainable claim of securities fraud. Even if information is material, there is no liability under Rule 10b-5 unless there was a duty to disclose it."

After trial, the distinction between the issues of materiality and duty was reaffirmed by the Supreme Court in Basic, supra, 108 S. Ct. at 986. There the Supreme Court emphasized that courts must not be "insensitive" to the "distinction between materiality and the other elements of an action under 10b-5", and warned that it is improper to "effectively collapse the materiality requirement into the analysis of defendant's disclosure duties". Id. at 988 n.18; see also supra pp. 14-15.

Polaroid consistently maintained that the question of duty was not one for the jury (JA1858), as the issue of duty is "typically a question of law, not of fact", Canier v. Riddell, Inc., 721 F.2d 867, 868 (1st Cir. 1983). Thus the District Court's second question to the jury, "Did Polaroid have a duty to disclose these facts to the public prior to January 11, 1979?" (JA0203), was improper. But if this question was to be submitted to the jury, the jury should have been properly instructed on duty-by charging the three tests established by Roeder. Instead, the charge all but compelled the jury to find a duty of disclosure if it found Polaroid possessed material facts. This direction is repeated again and again in the instructions, both explicitly and implicitly:

(1) The instructions twice repeat that "it's unlawful to omit to state a material fact" (A24), emphasizing that "those words . . . [a]re important for you [the jury] to understand" (A24).

(2) The only, and decisive, factor given to the jury to determine whether Polaroid had a disclosure duty was materiality of the information not disclosed. The instructions repeatedly give examples, some correct and some incorrect, which tell the jury to find a disclosure duty if they find the information material. See, e.g., A24 ("if a company is selling or buying its own stock, obviously that fact has to be disclosed; there is a duty to disclose such a thing"); A24 ("If a company should play a role in a deal involving its own stock with the knowledge that that deal and the information concerning it would affect the value of its stock, there is also a duty to disclose"); A25 ("ordinarily if you are dealing with a pure forecast, something that is going to happen in the future, there's no duty to disclose"); A25 ("Ordinarily there is no duty on the part of a company to disclose preliminary financial results"); A26 ("[But] if that preliminary result would be of importance to a decision on the part of persons contemplating the purchase or sale of a stock, then good faith may require a disclosure . . .").

 (3) A summary following these examples made it quite clear that materiality was the only, and decisive, factor to be considered in determining whether or not the jury should find a duty:

"You have to determine whether there were facts which were known by Polaroid which Polaroid should have recognized would affect the risk of persons about to purchase stock or options to buy stock. You have to decide whether that knowledge would affect the risk to the extent that good faith then called upon Polaroid to make a disclosure.

"So for the plaintiffs to recover, you have to be persuaded that . . . [Polaroid] failed to disclose a material fact . . ." . A26.

(4) Finally, following all the instructions, the Court presented the questions to the jury. Immediately following the second question, "did Polaroid have a duty to disclose those facts?" (A28), the Court commented:

 "And I've said to you-and one of these questions is a tiny bit redundant -that if those facts were material, if they were of importance to investors in determining whether to buy or to sell, then you may find that there was a duty to disclose". A28; see also A29 ("material facts are the ones that have to be disclosed").

In stating that Questions 1 and 2 were "a tiny bit redundant", the Court confirmed that it erroneously regarded the questions of duty and materiality as essentially the same: the mere possession of material facts implied a duty to disclose them. See also JA1825.

In addition to improperly collapsing the elements of duty and materiality, the charge also improperly entangled scienter in the duty analysis by instructing the jury that if a fact were material, "good faith" required Polaroid to disclose it:

"if there is a financial result which, even though it's preliminary, is well settled, well known to the mind of the company, if that preliminary result would be of importance to a decision on the part of persons contemplating the purchase or sale of stock, then good faith may require a disclosure . . . ". A26.

 "You have to determine whether there were facts which were known by Polaroid which Polaroid should have recognized would affect the risk of persons about to purchase stock or options to buy stock. You have to decide whether that knowledge would affect the risk to the extent that good faith then called upon Polaroid to make a disclosure."

Ultimately, the charge unfairly collapsed and intertwined the three key but separate elements of liability-duty, scienter, and materiality. Such an error alone would require a new trial. Cf Ayoub v. Spencer, 550 F.2d 164, 169 (3d Cir.) ("The trial court charged on the law of contributory negligence only in the most general and inadequate terms, entangled with the law of proximate causation. . . . This constituted fundamental error requiring reversal"), cert. denied, 432 U.S. 907 (1977).

 Polaroid objected to these instructions. JA1946-47. Polaroid also requested a charge that there is no general duty to disclose material information and that "'the materiality of the information claimed not to have been disclosed . . . is not enough to make out a sustainable claim of securities fraud"' (JA0150, quoting Roeder, supra, 814 F.2d at 26), and objected to the District Court's refusal to give this instruction (JA1948). There was no curative instruction.

 

The fundamental errors in the charge on duty clearly prejudiced Polaroid. In the closing argument, counsel for plaintiffs had downplayed traditional notions of scienter (e.g., JA1890 ("Whether Polaroid is a fraudulent corporation or not a fraudulent corporation is not the issue")), stressing a simplistic and erroneous view of securities law that required "full disclosure" (JA1890), so that "people have the same information" (JA1890-91). Again and again counsel for plaintiffs put forth the same, erroneous view of the law: "You've got to disclose". JA1895; see also JA1894, JA1902, JA1920. Misled by the charge and plaintiffs' counsel, the jury could not help but return a verdict against Polaroid.

The District Court's charge is "inconsistent with the careful plan that Congress has enacted for regulation of the securities markets". Chiarella, supra, 445 U.S. at 235. It substitutes a scheme requiring Polaroid -and all other public corporations to hazard guesses as to the indeterminate materiality of undisclosed information, and choose whether or not (and when) to make extraordinary disclosures, with wrong guesses to create Draconian liability for securities fraud to all buying and selling shareholders (and even holders of options). As Justice Cardozo aptly concluded in analogous circumstances: "'The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences." Ultramares Corp. v. Touche, Niven & Co., 255 N.Y. 170,179-80,174 N.E. 441,444 (1931).

E. Evidence that Two Charitable Foundations Controlled by Two Polaroid Officer-Directors Sold Polaroid Stock Was Irrelevant to the Issue of Duty and Should Not Have Been Admitted Because of Its Propensity Unfairly To Prejudice the Jury. Over Polaroid's objections, the District Court admitted evidence of the sale by the Rowland Foundation of 300,000 shares of Polaroid stock on January 11, 1979. JA0025 (Docket No. 352) (motion in limine); see also JA0425-28. Plaintiffs presented no legal basis for holding Polaroid responsible for that sale. Evidence of the sale was thus irrelevant and unfairly prejudicial in that it was calculated improperly to associate Polaroid with alleged insider trading. Fed. R. Evid. 40Z 403.

 Also over Polaroid's objection (JA0025; see also JA0415-19; JA0025 (Docket No. 343) (motion in limine)), plaintiffs were allowed to present evidence that on January 18, 1979, the Jurodin Fund, a charitable foundation controlled by Julius Silver, a Polaroid officer and director, sold 19,600 shares of Polaroid stock. JA1043 (Silver). Here plaintiffs did not show that anyone connected with Polaroid, other than Mr. Silver, had ever heard of the Jurodin sale until well after it took place; indeed, Polaroid's chief legal officer was not aware of the sale during January 1979. JA0759 (deLima). The evidence lacked any relevance and its admission as well could only improperly and unfairly prejudice the jury. Fed. R. Evid. 402 403.

 The Rowland sale was specifically exploited by plaintiffs counsel, who stated in his closing argument that the sole issue for the jury was whether:

"following the sale of $16 million worth of stock by the chairman of the board of Polaroid, with Polaroid's knowledge in advance and Polaroid's approval and Polaroid's blessing,, [Polaroid] violated the securities laws which require full disclosure so that people who purchase and sell securities do so on a fair playing field, that people have the same information . . ."'. JA1890-91.

Because it cannot be said "'with fair assurance ... that the judgment was not substantially swayed by the error . . ."', a new trial would be required on this ground without more. Latadle v. Ponte,, 754 F.2d 33, 37 (1st Cir. 1985) (quoting Kotteakos v. United States, 320 U.S. 750, 765 (1946)) (granting new trial for erroneous admission of evidence).

II. THE EVIDENCE WAS INSUFFICIENT AS A MATTER OF LAW TO SUPPORT THE JURY’S FINDING THAT POLAROID ACTED WITH SCIENTER; IN ANY EVENT, THE CHARGE TO THE JURY FAILED TO SET FORTH THE APPROPRIATE STANDARDS FOR ASSESSING WHETHER POLAROID ACTED WITH SCIENTER.

In Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), the Supreme Court held that, given the aim of 10(b)-to prevent fraud and manipulation-there could be no liability under Rule 10b-5 unless the defendant were shown to have acted with "scienter". Id. at 193. This was understood by the Court to be "a mental state embracing an intent to deceive, manipulate, or defraud". Id. at 194 n.12 (emphasis supplied); see also Dirks v. SEC, 463 U.S. 646,663 n.23 (1983) (same); Herman & MacLean v. Huddleston, 459 U.S. 375 (1983) (issue whether lesser standard would suffice was "open question"). Although some courts have decided, at least in some circumstances, that "recklessness" is sufficient, this Court has never held that standard sufficient. See Hoffman v. Estabrook & Co., 587 F.2d 509, 517 (1st Cir. 1978) ("assuming without deciding" that recklessness is sufficient); Cook v. Avien, Inc., 573 F.2d 685, 692 (1st Cir. 1978) (same).

 But even if a "recklessness" standard were proper, "reckless" conduct must be truly extraordinary. "'In view of the Supreme Court's analysis in [Ernst & Ernst]"', this Court (while still not embracing the recklessness standard) has said,

 "'the definition of "reckless behavior" should not be a liberal one lest any discernible distinction between "scienter" and "negligence" be obliterated for these purposes. We believe "reckless" in these circumstances comes closer to being a lesser form of intent than merely a greater degree of ordinary negligence. We perceive it to be not just a difference in degree, but also in kind."' Hoffman, supra, 587 F.2d at 516 (quoting Sanders v. John Nuveen & Co., Inc., 554 F.2d 790, 793 (7th Cir. 1977)).

More specifically, in order to be considered reckless for Rule 10b-5 purposes, the acts must be:

"so highly unreasonable and such an extreme departure from the standards of ordinary care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it."' Id. at 517.

The evidence in this case does not even approach that level of misconduct, and judgment n.o.v. should also have been entered for Polaroid for lack of scienter.

 Even had there been sufficient evidence to put the scienter question to the jury, the District Court's adoption of too loose a scienter standard for silence, and its failure to instruct the jury on business judgment and good faith defenses plainly raised by the evidence, would require a new trial.

A. The Undisputed Evidence Foreclosed Any Finding of Scienter. There was no evidence that anyone at Polaroid had an intent to deceive, manipulate. or defraud investors. No motive to do so was even suggested. Polaroid sold no stock during the class period, and derived no benefit from sales by others. Cf Dirks, supra, 463 U.S. at 663-64 (stressing importance of "personal benefit" in scienter determination). Polaroid witnesses uniformly denied an intent to defraud investors, (JA1410 (McCune); JA1504 (Young); JA1573 (Wensberg)), and plaintiffs did not even attempt to cross-examine on this point. To the contrary, plaintiffs' counsel told the jury that "it did not have to be [Polaroid's] purpose or their motive to defraud anyone". JA1919; see also JA1890, JA1917-18, JA1920.

 Nor did plaintiffs present any evidence that Polaroid by its mere silence recklessly disregarded an obvious risk of misleading plaintiffs. The question of whether to make special disclosures in January 1979 appeared to be so inconsequential that it did not even surface for consideration. Polaroid timely filed all reports required by the SEC in accord with its usual practice. Plaintiffs do not claim that any of those reports are misleading in any way. Finally, as detailed below, given Polaroid's record-setting financial performance, prior Polavision disclosures, and the minor differences between the earnings projections of securities analysts and Polaroid, no reasonable juror could conclude-without the benefit of hindsight-that Polaroid disregarded an obvious danger that its silence would mislead investors.

 1. Given Polaroid's remarkable financial successes, the non-profitability of Polavision did not raise any question of misleading investors. For 1978 as a whole, and for the fourth quarter specifically, Polaroid achieved record earnings. As compared with the preceding year, they represented substantial gains, as shown by the following table (derived from JAM14):

Full Year 1977 1978 % Increase

Net Sales $1,062M $1,377 M 30
Profit from
Operations $149M $180 M 21
Net Earnings $92M $118M 28
EPS $2.81 $3.60 28

Fourth Quarter
Net Sales $367 M $475 M 29
Profit from
Operations $56M $70 M 25
Net Earnings $38M $43 M 15

EPS $1.15 $1.32 15 

Every one of these dollar figures was a new record for Polaroid.

 In addition, Polaroid sold "by far the largest total of cameras" in its history, and set records for its sale of instant film (with sales of-film for its most important new product, the SX-70, up more than 75%). A14-16; JA1403-04 (McCune). Both its domestic and international business set records. See A16.

 The objective facts were that Polaroid had done exceptionally well, especially considering "the problems of dealing with Eastman Kodak, who had come into the instant business through infringing [Polaroid's] patents". JA1359 (McCune). Moreover, Polaroid thought it had done exceptionally well. Polaroid's Board was told on December 1Z 1978 (its last 1978 meeting before the January 11, 1979 start of the class period), that, in domestic marketing, it had been the "'best year ever"' (JA1392 (McCune, ‘quoting Wensberg)) and "my favorite year so far because it was a spectacular year" (JA1558 (Wensberg)). As Polaroid's president testified, Polaroid's management came out of the year "very much elated because we had been so successful in maintaining our business in the face of th[e] threat from the Eastman Kodak Company". JA1359 (McCune).

 Further indicative of Polaroid's generally bullish state of mind was its plan for 1979, which showed profits from operations and earnings per share as increasing still further-by about 44% and 28% respectively-as compared to the predicted (and actual) records in 1978. JA2676; JA1421 (McCune). As the president of the international division testified:

"Our expectations were to have a very, very good year. We had the historical fourth quarter in the international division. Once we received the audited figures, it was a very big fourth quarter, and we were expecting very substantial growth to continue in 1979, both in sales and profit". JA1503 (Young).

In sum, precisely when plaintiffs claim Polaroid knew it should have been making bearish noises, the unrebutted evidence is that Polaroid was bullish, and understandably so, about the recent past, present and future. Without benefit of hindsight, any danger that Polaroid's failure to disclose its preliminary earnings estimates would somehow mislead investors was, at the least, far from obvious.

2. Polaroid had adequately disclosed that earnings had been adversely affected by substantial Polavision expenses and the fact that such expenses were affecting earnings was well known. As early as its report for the second quarter of 1978, Polaroid had disclosed that Polavision manufacturing costs were adversely affecting profitability. See JA2383.

 Polaroid's third quarter 1978 report and the October 18, 1978 press release announcing that report publicly again disclosed Polaroid's "earnings continue to reflect substantial expenses associated with Polavision". JA2369; JA2392. Moreover, as Polaroid's president and treasurer both explained in unrebutted testimony, it was "common" and "quite normal" for Polaroid (and for other companies) to have manufacturing costs exceed sales revenues for new products just beginning to make their way in the marketplace. JA0885 (McCune); JA1009 (Thayer). This was conceded by plaintiffs:

 -Backman: "would not be surprised" "that manufacturing costs would exceed sales in the initial stages of bringing a product to market" (JA1082);

-Seiden: would not have thought Polavision would be profitable in its first year; would hope for profits, but not until a "year or two" after introduction (JA1783).

Quite apart from what Polaroid itself had disclosed and what plaintiffs themselves inferred, the public press had predicted from the first day of its introduction that Polavision would continue to lose money for a substantial period of time:

-Time: opined, in the week of the introduction of Polaroid's latest "miracle", that Polavision has "much more scientific and esthetic appeal than commercial significance" (JA2399 (quoting analyst));

-Newsweek-. commented on, Land’s "latest wonder". observed that it would be an error to "bet" on Polavision's commercial success, and quoted an analyst as predicting Polavision will be a drain on earnings for the next two years, and not in the black until 1980 (JA2404).

Reports of securities analysts issued throughout 1978 similarly confirmed that no one expected quick profits from Polavision:

-"Polavision and any other new products will not operate profitably probably for two years or so". JA1234 (quoting Adams, Harkness & Hill report); see also JA2746-47 (report)).

-"As for Polavision, we are not at all sanguine about its sales prospects, and we thereby do expect it to be a drain in 1978 and 1979". JA1236 (quoting Drexel Burnham Lambert report); see also JA2752-60 (report).

-Polaroid's margins have been impacted by "very heavy" expenses with Polavision, "which we believe has rather limited chances for long-term commercial success". JA1239 (quoting Smith Barney Harris Upham report); see also JA2761-62 (report).

-Our earnings estimate for fourth quarter 1978 "assumes a continued drag from Polavision . . .". JA1241 (quoting First Boston report); see also JA2763-66 (report).

-"The fourth quarter will have some heavy pressures, one of which will be continued heavy Polavision costs." JA1245 (quoting G.S. Grumman/Cowen Institutional Services report); see also JA2767-72 (report).

-". . . we don't believe that the Polavision movie system is doing well . . . [and] Polavision is likely to remain a drag on earnings, a weak spot in a generally buoyant picture." JA1246 (quoting Brean Murray, Foster report); see also JA2773-76 (report).

In short, the public and the investment community knew that Polavision was losing money. 'They knew it would likely continue to lose money for a significant period in the future. Even plaintiffs' expert witness Torkelsen ultimately conceded that the securities analysts were "well aware" that Polavision had been, and would be, a drag on earnings. JA1242-43.

Given its own disclosures about Polavision's non-profitability, coupled with the pessimistic views expressed by analysts and other public commentators about Polavision's commercial prospects, it is simply not reasonable to conclude that Polaroid must have realized that it would dangerously mislead investors if it did not make an extraordinary interim disclosure to the same effect.

3. Polaroid's awareness of higher earnings projections by securities analysts also offers no support for a jury finding of scienter. That Polaroid did not disclose its own preliminary earnings estimates as of January 11, 1979 in response to the earlier, somewhat higher estimates of most (but not all) analysts cannot reasonably be viewed as willful disregard of a danger of misleading investors. First, there was no proof that Polaroid thought the price of its stock would fall after release of the information contained in the February 22 press release. Indeed, when asked whether he expected the stock to fall, Polaroid's president said "absolutely not", that Polaroid was "astonished" and that "we believed that the price of the stock, if anything, should have escalated". JA1431-32 (McCune).

Second, the effect on Polaroid's stock price of a disparity between its actual results and security analysts’ predictions had historically not been determinable. Polaroid's announcement of its third quarter earnings for 1978-up about 70% from the prior year, and "a lot higher" than the securities analysts' predictions (JA1666 (Rosenbloom))- was seen as "good news" by the investment community, and indeed plaintiffs' expert Torkelson so opined (JA1274). Nonetheless, the stock in fact dropped. JA1278 (Torkelson); see also JA1666 (Rosenbloom). Torkelson was unwilling or unable to explain this phenomenon. See JA1280-83.

 On another occasion, in 1974, the announced earnings were 9.5% lower than the securities analysts had been predicting. Nevertheless, the stock went up the day after the earnings announcement. JA1634 (Rosenbloom). More generally, a study showed there was "absolutely no relationship" (or indeed a "kind of negative relationship") between (a) the analysts' forecasts, (b) Polaroid's actual announced results, and (c) the stock price movement after the announcement of those results. JAI633-34 (Rosenbloom).

Third, the insignificance of differences between the earnings forecasts of Polaroid and those of the analysts forecloses any finding that Polaroid by remaining silent disregarded an "obvious danger" of disappointing securities analysts, much less a risk of misleading investors. A chart (JA2386) shows estimates made by thirteen securities analysts of full year and fourth quarter 1978 earnings per share at various times during the latter part of 1978. This compared as follows with the figures being predicted by Polaroid as of January 11, 1979 (from JA2441, JA2447):

Polaroid Predictions Range of Security Analysts' Predictions

Full Year $3.65 $3.50-$3.85

4th Quarter $1.37 $1.22-$1.57

 One analyst was predicting less than Polaroid for both the full year and the fourth quarter. See JA2386. Most estimates were higher, but not by much, and they were also relatively stale. See id. The most recent estimate was issued December 11, 1978. See id. Compared to Polaroid's predictions as of January 11, 1979, the analysts' average was only 3.4% higher for the year and 8.8% higher for the fourth quarter. See id.; JA2441, JA2447. And, of course, the analysts joined Polaroid in predicting record earnings.

 Fourth, this is not a case where Polaroid customarily made affirmative efforts to correct or influence the forecasts of securities analysts. Indeed, it was Polaroid's policy not to comment on the earnings projections of securities analysts at all. JA1410 (McCune); cf. Elkind, supra, 635 F.2d at 163 (no duty to disclose different forecasts even though company "examine[d] and comment[ed] on a number of [analysts'] reports"). Polaroid had sound business reasons for not commenting on the analysts’ forecasts: (i) "it's our responsibility not to inform the analysts in any way other than when we inform the public in general", (ii) not commenting had always been the company's policy; (iii) if corrections were started "we will be constantly at it", (iv) the analysts' projections themselves are "all over the lot", and (v) because "our forecasts are forecasts just as well as the analysts and, in many cases, aren't any more accurate than the analysts", to comment "could be more confusing and do more harm than good". JA1410 (McCune).

 Finally, the absence of any duty on Polaroid's part to correct analysts’ projections underscores the unreasonableness of charging Polaroid with "misleading" the public by not making such corrections. Elkind, supra, 635 F.2d at 158 (no duty to correct analysts even where financial figures showed "substantial downturn" in earnings compared to prior year); see also State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843, 850 (2d Cir. 1981) ("a company has no duty to correct or verify rumors in the marketplace unless those rumors can be attributed to the company"); Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937,949 (2d Cir. 1969) ("While a company may choose to correct a misstatement in the press not attributable to it . . . we find nothing in the securities legislation requiring it to do so").

B. Polaroid's Desire, Conceded by Plaintiffs, Not To Subject Polavision to Extraordinary Adverse Publicity Reporting Its Commercial Success Established the Good Faith Business Judgment Defense. Courts have long recognized that delay in disclosure of business information is perfectly proper where "a valuable corporate purpose was served by delaying the publication". SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 850 n. 12 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969). In addition, a "company is entitled to keep . . . cost and product sales data confidential for valid competitive reasons". Dolgow v. Anderson, 438 F.2d 825, 829 (2d Cir. 1971), op. after remand, 464 F.2d 437 -(2d Cir. 1972).

 Enhancing the profits of the corporation is of course a legitimate purpose; in Texas Gulf Sulphur (TGS):

"TGS found the world's largest lode of nickel. To capitalize, it had to line up the mineral rights for the whole area. If TGS had released the assays immediately, other firms (or the owners of the surface interests) could have captured the rewards of TGS's search. TGS had to keep its find secret for a while, and investors who sold their stock while TGS was silent had no complaint." Flamm v. Eberstadt, 814 F.2d 1169, 1176 (7th Cir.), cert. denied, 108 S. Ct. 157 (1987).

Such a rule is in the shareholders' interest and does not damage potential investors as a whole. That is because there is always a class of potential investors who can claim that a disclosure should have been made sooner. But if the disclosure were made sooner, another class would suffer. See Flamm, supra, 814 F.2d at 1177 ("Over the long run, then, the prospect of selling for too little and buying a bargain are a wash . . .").

 Although Polaroid never considered whether to make an extraordinary disclosure of Polavision's (already-disclosed) substantial expenses, Polaroid had solid, and unquestioned, reasons for not making interim disclosures of such information in general; as Polaroid's president testified:

 "In releasing information about a new product to the world at large, it is terribly important to protect the potential sales of that product. And management has to be very careful in its releases to not say anything that will damage the possible future of a new program, particularly one which has been in progress for many years and represents millions of dollars of investment for the company and on the part of its employees. So we have a real responsibility to be careful to protect the long-term interests and that kind of investment as well as to be honest with the public about how the company is doing". JA1388 (McCune).

Having already made disclosure in its most recent regular quarterly report of the "substantial" negative effect of Polavision on earnings, and aware of the pessimistic projections of analysts and other public commentators as to Polavision's commercial success, Polaroid understandably would not want to injure its stockholders' long-term interests by an unprecedented special announcement-had it even considered the question. It was perfectly reasonable to make further disclosures about Polavision at the next regular reporting period. "Rule 10b-5 is about fraud, after all, and it is not fraudulent to conduct business in a way that makes investors better off . . .". Flamm, supra, 814 F.2d at 1177.

C. The Scienter Instructions Improperly Denied Polaroid the Defense of Good Faith Business Judgment To Refrain from Prematurely Reiterating that Polavision Continued To Be a Drain on Earnings. Polaroid requested an instruction that "the timing of disclosure of a fact about a corporation is a matter which to a reasonable extent is within the good faith business judgment of the officers and directors of a corporation". JA0155. The District Court's refusal to give the instruction was erroneous, as indicated in the preceding section, and highly prejudicial.

 The prejudice was enhanced by plaintiffs’ closing argument, where counsel had emphasized Polaroid's business reasons for not disclosing specially problems with Polavision as the foremost evidence of scienter. Counsel read testimony by McCune that "we would always like to have as carefully thought-out information reaching the public so as to have as little negative impact as possible on the sales of the products". JA1918,- see also JA1919. Building on this, counsel stated:

 "[T]his is a case where Polaroid acted like what it was; it acted like a business. It protected its own business interests in not disclosing this information". JA1920.

But if the jury had been told, as it should have been, that Polaroid was entitled as a matter of business judgment to protect its business information from premature disclosure, the verdict would likely have been quite different.

D. The Scienter Instructions Erroneously Ruled Out Polaroid's Good Faith as a Defense. In concluding an "intent to deceive, manipulate or defraud", Ernst & Ernst, supra, 425 U.S. at 194 n.7, was required for 10(b) liability, the Supreme Court referred to Congress' decision to make good faith a defense to, for example, any misleading statements in filings required pursuant to the Act, id. at 206. The Court also relied upon the original Senate Report on 10(b), which stated that: 

"The defendant may escape liability by showing that the [false or misleading] statement was made in good faith." Id. (Court's emphasis) (quoting S. Rep. No. 79Z 73d Cong., 2d Sess. 12-13 (1934)).

The Court then concluded that:

"There is no indication that Congress intended anyone to be made liable for such practices unless he acted in other than good faith. The catchall provision of section 10(b) should be interpreted no more broadly." Id.

Applying Ernst & Ernst, this Court has stated emphatically that for a court to rule out good faith as a defense would be "manifestly incorrect". Hoffman, supra, 587 F.2d at 513 n.7. See also Bryson v. Royal Business Group, 763 F.2d 491, 494 (1st Cir. 1985) (summary judgment on issue of scienter granted to defendant who filed affidavit that challenged statements were made in good faith); Financial Industrial Fund, Inc. v. McDonnell Douglas Corp., 474 F.2d 514, 518-21 (10th Cir.) (reversing denial of judgment n.o.v.: where "silence is at issue", good faith and business judgment are particularly important as defenses), cert. denied, 414 U.S. 874 (1973).

Polaroid requested an instruction that:

"Good faith on the part of Polaroid is a complete defense to a charge of securities fraud. If you find that Polaroid acted in good faith during the class period, you cannot, as a matter of law, find that Polaroid acted with fraudulent intent." JA0163.

Under Polaroid's proposed instruction, if Polaroid was, in good faith,, "unaware of the[ ] significance" of a fact the jury also could not find intent. JA0163. Polaroid objected to the absence Of a good faith defense in the charge (JA1947), but no curative instruction was given.

This error was especially prejudicial because of the extensive evidence showing Polaroid's good faith. It was all the more prejudicial because plaintiffs' counsel, in closing, had stressed that evidence of Polaroid's state of mind was essentially irrelevant-"it did not have to be their purpose or their motive to defraud anyone". JA1919; see also JA1890, JA1917-18, JA1919-20.

III. THE EVIDENCE WAS INSUFFICIENT AS A MATTER OF LAW TO SUPPORT THE JURY’S FINDING THAT THE DISCLOSURES SOUGHT BY PLAINTIFFS WERE MATERIAL', IN ANY EVENT, THE CHARGE TO THE JURY FAILED TO SET FORTH THE APPROPRIATE STANDARD FOR ASSESSING MATERIALITY.

 For omitted information to be judged legally material, plaintiffs had to prove "‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available’". Basic, supra, 108 S. Ct. at 983 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).

 As set forth supra pp. 27-29, Polaroid's problems with Polavision paled beside its remarkable financial success during 1978, rendering Polavision's financial performance and its effect on Polaroid's earnings insignificant in the "total mix" of available information. Moreover, Polaroid had also already disclosed that Polavision expenses constituted a "substantial" drag on earnings, and analysts and other business observers had expressed the consistent view that Polavision would not become profitable for some time, if ever. Given all the available information, additional disclosures that Polavision expenses were adversely affecting earnings and were expected to continue to do so cannot reasonably be seen as "significantly alter[ing] the 'total mix' of information" previously disclosed. In addition, the preliminary and unaudited earnings estimates Polaroid had as of January 11, 1979 constituted mere projections and forecasts, and were thus immaterial as a matter of law.

 In these circumstances, the additional disclosures sought by plaintiffs were immaterial, and judgment n.o.v. should have been granted for Polaroid. But even if there were enough evidence as to materiality to justify submission of that issue to the jury, the charge simply allowed the jury to sift and choose among the mass of facts presented without regard to their significance in the total mix of information, and without regard to whether they were even alleged to have damaged plaintiffs. This error was compounded by the Court's erroneous admission of irrelevant and prejudicial information. These errors unfairly prejudiced Polaroid, requiring a new trial.

A. Polaroid's January 11, 1979 Estimates of Earnings Constituted Mere Forecasts which Were Immaterial as a Matter of Law. The evidence established that as of the January 11 cutoff date, Polaroid's preliminary and unaudited earning estimates could be found in Forecast 11 (JA2439-54), which was being updated to form Forecast 12, dated January 15, 1979 (JA2493-507). See JA1437-38 (McCune); see also JA0992 (Thayer). As Polaroid's president explained, "these figures are estimates that are made to help us run the business, and they are forecasts of the future, not results of what has already happened". JA1387 (McCune); see also JA0991 (Thayer).

 A substantial amount of corporate effort remained to be expended between January 11 and February 22, 1979 further to assemble accounting data and then complete the audit of Polaroid's earnings, including:

 (1) incorporation of the "international flash of January 11" (JA1438; JA2493) (international sales constituted over 40% of Polaroid's net sales in 1978 (JA1459-60 (McCune));

(2) closing of the books of foreign subsidiaries and calculations of their tax liabilities (JA1395-96 (McCune));

(3) meetings among "the financial members of management, the general members of management, the Internal Audit Department and the external auditors, Peat Marwick, in order to decide what various entries needed to be made or what adjustments needed to be made or what information needed to be shared in order to determine the actual earnings for the year" (JA0999 (Mayer));

(4) a meeting with Polaroid's auditors on February 1, at which it was agreed to take a $6.8 million reserve for Polavision in 1978 (JA2489);

(5) presentation of the proposed financial statements to the Audit Committee of the Polaroid Board of Directors (JAl008 (Thayer)); and

(6) presentation of the proposed financial statements to the full Board of Directors (id.).

Moreover, Polaroid's outside accountants' field work for the audit of Polaroid's 1978 financial statements was not completed until the "second to third week in February", and "then we continue working on the text, the written text for the financial statements and the filings with the SEC". JAI753-54 (McDermott).

The fact that information gathered just ten days after the close of the quarter was subject to such further assembly, development and revision demonstrates that Polaroid's preliminary and tentative earnings information as of January 11 should not be regarded as material. See James v. Gerber Products Co., 587 F.2d 324, 327 (6th Cir. 1978) (preliminary earnings figures not material; "[t]he uncontradicted testimony of all the Gerber employees indicated that earnings figures of the company are not finalized until a month or so after the end of a business quarter"); Data Controls North, Inc. v. Financial Corp. of America, 688 F. Supp. 1047, 1051 (D. Md. 1988) (no duty to disclose financial figures which "were 'trial' in nature"), affd, No. 88-2866 (4th Cir. May 3, 1989) (per curiam).

This is not a case where Polaroid's Board considered and rejected disclosure of preliminary forecasts; Polaroid's Board did not even meet in January 1979 because the financial statements had not yet been assembled and audited. JAI569-70 (Wensberg); see also JA1396 (McCune) (Audit Committee had "nothing to talk about"). Polaroid's own perception thus militates against any finding of materiality. See Jackvony, supra, Fed. Sec. L. Rep. 1 94, 36 1, at 92381 ("Hospital Trust placed no special significance upon the general and occasional expressions of interest in acquisition that it received from time to time").

In the last analysis, plaintiffs' argument on materiality boils down to the claim that Polaroid's earnings estimates turned out to be close to the final numbers. The Forecast 11 estimate of fourth quarter 1978 earnings per share was $1.37 (JA2441), while the final audited earnings announced in the February 22 press release were $1.32 per share (Al5). But this disparity simply supplies further proof of the fact, shown by other evidence, that Polaroid's estimate lacked the "substantial certainty" required for materiality. Cf. James, supra, 587 F.2d at 327. And if Polaroid had made an extraordinary disclosure of the higher preliminary estimate, another class of plaintiffs might be in court with a charge of undue optimism. See Panter v. Marshall Field & Co., 646 F.2d 271, 293 (7th Cir.) (corporation need not disclose earnings estimates "prepared for the enlightenment of management with no intention that they be made public"; "in light of the degree by which they failed to project the [25% actual] decline in earnings, release of the seven percent [decline] estimate might have subjected the defendants to securities law liability"), cert. denied, 454 U.S. l092 (1981).

B. The Charge Erroneously Failed To Instruct the Jury that Materiality Must Be Assessed in Light of the Total Mix of Available Information. As set forth above, the jury instructions repeatedly confused the issues of materiality and duty, and only at one point did the instructions provide a definition of materiality that, albeit incomplete, was unconnected to the concept of duty:

 "A fact is material if it is one that an investor would consider to be of importance in deciding whether or not to purchase stock." A24.

Over Polaroid's objection (JA1946), the District Court refused to amplify this instruction to inform the jury of the context in which materiality must be considered-the "total mix of information"-and to point out the additional requirement that the undisclosed information "significantly alter" the total mix of information.

In his closing argument, counsel for Polaroid stressed at length that 1978 was a successful and record breaking year for Polaroid (JA1868-73), an undisputed fact (JA1899), that muted the significance of a fourth quarter which, although record-setting, proved disappointing to the analysts. But the District Court refused to tell the jury that they could consider this background of achievement in judging materiality (and, indeed, disparaged it (JA1493-94; JA1383-85)). Cf. duPont Glore Forgan, Inc. v. Arnold Bernard & Co., [19781 Fed. Sec. L. Rep. (CCH) 1 96,346, at 93,176-77 (S.D.N.Y. Feb. 27,1978) (quarterly earnings report not material in light of known downward trend of earnings and other circumstances). Nor would the District Court agree to tell the jury that they could consider, as counsel for Polaroid had stressed, that Polaroid had already disclosed that Polavision was losing money. JA1875 ("They told them in the second quarter report, and they told them in the third quarter report").

C. Errors in the Admission of Evidence Added to the Prejudice on Materiality. The only alleged cause of plaintiffs' damages was the alleged concealment during the class period of certain categories of information in existence on January 11, 1979, but not revealed until Polaroid's February 22 press release. A14-21; JA2305-14. These were that earnings per share would be lower than the analysts projected, that Polavision expenses had been a drain on earnings, and that Polavision expenses would likely continue as a drain on earnings in 1979. See JA1181-82 (Torkelson). It was thus plaintiffs' burden to prove the materiality of that information in light of the circumstances that existed on January 11, 1979.

 However, much of the evidence introduced by plaintiffs to show materiality came into existence only after the January 11, 1979 cutoff date, and its admission unfairly prejudiced Polaroid. In particular, evidence concerning a $6.8 million Polavision charge for 1978 taken February 1, 1979 (JA2489), a $22 million Polavision reserve for 1979 dated January 23, 1979 (JA2490), and a summary of retail sales dated January 22 1979 (JA2523-40), was wrongly admitted over Polaroid's timely objections and motion in limine. JA0894-95; JA1022-26; JA0025 (Docket No. 348).

 Other evidence as to nondisclosed facts that existed prior to January 11, such as evidence of layoffs at the plant manufacturing Polavision cameras (JA2461-62- JA2463-64), was offered by plaintiffs as evidence of scienter. JA0446. Since Polaroid had disclosed that earnings were being adversely affected by lagging Polavision sales (JA2369), the admission of such colorful details as to its knowledge was unfairly prejudicial under Fed. R. Evid. 403. As Polaroid's counsel explained, "the jury is going to be completely unable to distinguish between the bad acts for which no damages are claimed and the bad acts, the nondisclosures, for which damages are claimed". JA0447-48. The District Court nevertheless admitted such evidence and gave no limiting instruction as to its use.

IV. THE EVIDENCE WAS INSUFFICIENT AS A MATTER OF LAW TO SUPPORT THE JURY’S FINDING THAT THE PRICE OF POLAROID STOCK WAS INFLATED BY $9.75 EACH DAY OF THE CLASS PERIOD; IN ANY EVENT, THE CHARGE TO THE JURY FAILED TO SET FORTH THE APPROPRIATE STANDARDS FOR MEASURING DAMAGES.

Plaintiffs' purported expert Torkelson testified that the price of Polaroid stock during the entire class period was artificially inflated by $9.75, the full amount of the price decline from February 23 through March 1, 1979. JA1181-82- JA2058. In reaching this conclusion, Torkelson was asked to assume Polaroid had a duty to disclose its earnings estimates, Polavision's nonprofitability in 1978, and the likely continuance of such nonprofitability in 1979. Because those assumptions lacked foundation, and because the jury made no finding that all of those facts had been wrongfully concealed by Polaroid, there was no foundation for Torkelson's opinion. Nor did Torkelson account for intervening causes of the price decline, the effect of which must be removed in assessing damages. See Blackie v. Barrack, 524 F.2d 891, 909 n.25 (9th Cir. 1975) ("the drop after a collective disclosure will not be conclusive of the amount of original inflation"), cert. denied, 429 U.S. 816 (1976). The judgment should therefore be reversed for this additional reason.

In any event, the charge failed to require any causal link between any culpable conduct by Polaroid and the post-February 22 price decline. A new trial at least is thus required.

A. Plaintiffs' Entire Damage Case Was Based upon a Defective Hypothetical Question. The assumption underlying Torkelson's testimony that Polaroid's stock was artificially inflated by $9.75 on January 11 each day of the class period thereafter was that the information disclosed in Polaroid's February 22 press release actually existed on January 11 and had not been previously disclosed. Specifically, plaintiffs' counsel asked Torkelsen to assume that Polaroid had a duty to disclose:

 "[1] That Polaroid had manufacturing costs and marketing expenses substantially in excess of revenues from the Polavision program; [2] that the Polavision program is expected to continue to make significant demands on cash and earnings in 1979; and [3] that the preliminary unaudited results of the fourth quarter of 1978 would be approximately $1.32 a share and for all of 1978 approximately $3.60 per share." JA1181.

But the first omission had been disclosed, the second was known to the public and the third "omission" did not exist as of January 11. As set forth supra pp. 29-31, both Polavision losses and their likely continuance were widely known. As of January 11, the "'preliminary unaudited results" for the fourth quarter of 1978 showed fourth quarter earnings of $1.37 and $3.65 for all of 1978, not the $1.32 and $3.60 eventually reported. Moreover, the jury made no findings as to which, if any, of these three matters had been concealed by Polaroid with scienter.

The damage verdict cannot stand if even one of the three does not qualify as a fraudulent omission, because there was no evidence offered to show what proportion of the $9.75 was attributable to each claimed omission. Cf. Turner, supra, 809 F.2d at 95 (new trial ordered where "only Johnson & Johnson's statements and omissions involving the Survalent thermometer could possibly meet the requirements for fraud", and "the jury's finding of fraud may have been based on others of the alleged misstatements or omissions"); Zant v. Stephens, 462 U.S. 86Z 881 (1983) ("a general verdict must be set aside if the jury was instructed that it could rely on any of two or more independent grounds, and one of those grounds is insufficient, because the verdict may have rested exclusively on the insufficient ground").

B. Plaintiffs' Expert Testimony on Damages Failed To Account for Intervening Causes of the Decline in Polaroid's Stock Price. Both experts agreed that the analysts' reaction caused a decline in Polaroid's stock price, amplifying the effect of the information in the February 22 press release. JA1178, JA1255 (Torkelson); JA1657 (Rosenbloom). In so testifying, Torkelson admitted at one point that the market price could be affected by analysts' reactions even if they were wrong. JA 1214.

 Because he claimed the full amount of the market decline, $9.75, was damages, Torkelson obviously could not have taken into account any intervening causes of the decline in Polaroid's stock price. At least one court has discarded Torkelson's testimony on similar grounds. In re Fortune Systems Securities Lit., 680 F. Supp. 1360, 1367-68 (N.D. Cal. 1987) ("plaintiffs' expert is not an expert in causation, only in damages").

C. The Jury Charge Erroneously Omitted Any Requirement that Damages Be Proximately Caused by Polaroid's Culpable Conduct. At the very least, the speculative nature of plaintiffs' expert testimony mandated Polaroid's requested instruction (JA0215) that plaintiffs could not recover any damage that the jury found was caused by factors other than Polaroid's alleged fraud. The Court failed to charge the jury on this basic principle of proximate causation. This allowed the jury to infer that the impact of intervening causes or nonfraudulent conduct was unimportant. See Sharp v. Coopers & Lybrand, 649 F.2d 175, 190 (3d Cir. 1981) ("Our goal in formulating a damage instruction must be to compensate appellees precisely for the damage directly resulting from appellant's wrongful acts"), cert. denied, 455 U.S. 938 (1982). Polaroid objected to the charge (JA2280), but no curative instruction issued.

Instead, the Court charged:

 ". . . one crucial question for you to answer is, How much was the difference in each day of the class period between the amount that these people paid for a share of stock and the amount that they should have paid? That is the measure of the damages with respect to Question No. 1, and that's why I posed it to you. What was the difference between the price paid for each share of Polaroid stock and the true value of the share for each business day from January 11 through February 22, 1979?" JA2268-69.

The jury was thus instructed to determine "true value" without reference to what material information had not been disclosed by Polaroid on January 11, and without reference to what of such information Polaroid had been found to have fraudulently concealed. The charge on damages, therefore, improperly eliminated from the jury's consideration the element of proximate cause.

 This plainly prejudiced Polaroid, particularly since plaintiffs’ counsel ignored any questions of causality in his closing, declaring that the jury had to determine

"a very simple proposition. What, in fact, happened to Polaroid stock when the news was disclosed? . . . . Let's don't look at a theory. Let's don't look at a mathematical calculation." JA2255.

The absence of any instruction limiting damages to those proximately caused by the allegedly fraudulent omissions later disclosed-more than simply "[w]hat, in fact, happened"-allowed the jury to award damages purportedly measured by the effect of the February 22 disclosure, rather than by the effect of wrongful conduct by Polaroid.

V. PURCHASERS OF OPTIONS ON POLAROID STOCK LACK STANDING TO SUE POLAROID FOR ITS SILENCE

The District Court also erroneously rejected Polaroid's contention that the call option purchaser class lacks standing to recover damages from Polaroid under Rule 10b-5. Call options on common stock are contracts between two parties that give the purchaser of the option the right to buy from the seller a specified amount of common stock at a fixed price (the "exercise price") at any time prior to the expiration date of the option. Because a call option on the common stock of Polaroid is not a security issued by Polaroid, and because the mere purchase of a can option on Polaroid stock does not establish any relationship between the purchaser and Polaroid, such purchasers lack standing to sue Polaroid under 10(b) and Rule 10b-5. See Laventhall, supra, 704 F.2d at 412-13; Data Controls, supra, 688 F. Supp. at 1049; Starlanan v. Warner Communications, Inc., 671 F. Supp. 297, 304 (S.D.N.Y. 1987); Bianco v. Texas Instruments, Inc., 627 F. Supp. 154, 161 (N.D. Ill. 1985). In re McDonnell Douglas Securities Lit., 567 F. Supp. 126, 127 (E.D. Mo. 1983); but see Tolan v. Computervision Corp., 696 F. Supp. 771, 772 (D. Mass. 1988); In re Digital Equipment Corp. Securities Lit., 601 F. Supp. 311, 315 (D. Mass. 1984)

 Section 10(b) and Rule 10b-5 also both require that actionable conduct be "in connection with the purchase or sale of any security". There is no sense in which Polaroid's silence may be construed as undertaken in connection with the market for options on Polaroid stock. See Bianco, supra, 627 F. Supp. at 161 ("transactions in options contracts are simply too remote to satisfy the 'in connection with' requirement when the alleged deceptive acts are merely corporate misstatements not directed in any way to the options market").

Finally, the rule denying option holders standing to sue protects corporations and their shareholders from potentially limitless liability to an unbounded class of speculators over which the corporation has no control and from which the corporation derives no benefit. Data Controls, supra, 688 F. Supp. at 1050 (court declines to extend standing to "those who engage in risky speculation such as that found in the options trading game"); Bianco, supra, 627 F. Supp. at 161. Ultimately, "whatever deterrent purpose is served by 10(b) and Rule 10b-5 will be amply fulfilled by restricting liability for misrepresentations and omissions to persons trading in the common stock of a corporation." Bianco, supra, 627 F. Supp. at 161.

Conclusion

 For all of the foregoing reasons, Polaroid respectfully requests that this Court reverse the District Court's judgment and order dismissal of the action, or, in the alternative, order a new trial, together with such other relief as this Court may deem appropriate.

 May 26, 1989

 

Respectfully submitted,

 

CRAVATH, SWAINE & MOORE
One Chase Manhattan Plaza,
New York, NY 10005
(212) 428-1000

John R. Hupper
Frederick A. O. Schwarz, Jr.
James L. Buchal

 

OLWINE, CONNELLY, CHASE, O'DONNELL & WEYHER
299 Park Avenue
New York, NY 10171
(212) 207-1800

James E. Tolan
William K Dodds
Rodney M. Zerbe

 Attorneys for Defendant
Polaroid Corporation

 

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