The opinion of the court was delivered by: GESELL
FINDINGS OF FACT AND CONCLUSIONS OF LAW
I. Description of Parties
1. Plaintiff Langley Federal Credit Union ("LFCU") is a credit union chartered under the Federal Credit Union Act, 12 U.S.C. § 1751, Et seq., with its principal place of business in Hampton, Virginia. LFCU has assets of approximately $ 70 million and a membership numbering about 30,000. Its Board of Directors (the "Board"), is composed of volunteer members who are generally full-time military or governmental employees working at Langley Air Force Base. The daily management of the credit union is performed by a general manager and an assistant general manager, who are full-time employees.
2. LFCU, guided by an Investment Committee consisting of three directors, invests among other things, in certificates of deposit issued by federally insured financial institutions. As a matter of established policy, this committee does not authorize a purchase of a certificate of deposit without first receiving and analyzing a recent financial statement of the proposed issuer to determine the issuer's financial strength and stability. The Investment Committee only approves those investments in which the effective rate of interest of the proposed certificate of deposit is higher than the then current yield on analogous government securities. The unanimous consent of all available committee members is required. In July and August 1976, the period of time pertinent to this action, the Investment Committee was composed of Emanuel Boxer ("Boxer"), the Chairman, Ferdinand W. Schmidt ("Schmidt"), and Jesse W. Hughes ("Hughes"). It is significant to note that, at all times relevant herein, the members of the Investment Committee believed that, by statutory proscription, 12 U.S.C. § 1757 and See 12 C.F.R. § 703.1, LFCU (a) could only purchase certificates of deposit in its name from federally insured financial institutions, and (b) could not lend money to private corporations.
3. American Marine Supply, Inc. ("AMS") is a corporation existing under the laws of and located in the District of Columbia, having been incorporated in late 1975. Claude Geoffrey Hyde ("Hyde") has always been a director, the president and a stockholder of AMS. For a period of time relevant to this action, Bromley Keables Smith ("Smith") was a director, the vice president and a shareholder of AMS. The corporation owned tugboats which it was attempting to sell to the Government of Nigeria. AMS never earned any profits.
4. Shenandoah Management Corporation ("Shenandoah") is a corporation existing under the laws of and located in the District of Columbia, having been incorporated on May 21, 1976. Dennis P. Bixler ("Bixler") president, Irwin Nestler ("Nestler") vice president, Hyde vice president, and Smith vice president, have been at all relevant times the officers, directors and shareholders of Shenandoah. This corporation was organized by the aforementioned individuals primarily to sell coal repossessed from mine wastes. Shenandoah never earned any profits. AMS and Shenandoah were not related companies in any formal sense.
5. Originally, there were four additional defendants, including Linnie Harp ("Harp"), James W. Rice ("Rice"), Riggs National Bank of Washington, D.C. ("Riggs"), and Union First National Bank of Washington ("Union First"). However, cash settlements with each of these defendants were effected immediately before or during the trial of this matter.
II. Jurisdiction, Venue and the Issues in the Case
6. The action was instituted under 15 U.S.C. § 78aa and 28 U.S.C. § 1332, the matter in controversy exceeding the sum of $ 10,000 exclusive of interest and costs.
7. Venue in this district was founded on 15 U.S.C. § 78aa.
8. The Complaint, as modified by a supplemented complaint and the proceedings in this case, alleges five causes of action independently against AMS and Shenandoah: (i) the commission of common law fraud or the conspiring or aiding and abetting thereof, (ii) the violation of Section 10(b) of the Securities and Exchange Act of 1934 (the "1934 Act"), and Rule 10b-5 promulgated thereunder or the conspiring or aiding and abetting thereof, (iii) conversion, (iv) mutual mistake of contract, and (v) default on certain promissory notes. Compensatory and punitive damages are sought.
9. The trial was held on November 6, 8, 9 and 13, 1978.
10. The following individuals appeared as witnesses: Boxer, Jean M. Yokum ("Yokum"), assistant general manager of LFCU; James F. Keating, Jr. ("Keating"), an assistant branch manager at Riggs; Michael C. Finnegan ("Finnegan"), a former assistant vice president with loan responsibilities at Riggs; Nicholas W. Newbold ("Newbold"), a former assistant branch manager of LFCU; and Smith. Hyde did not appear. LFCU submitted portions of Hyde's deposition transcript into evidence. No testimony by deposition or otherwise was presented by Rice, who was served but failed to appear. AMS and Shenandoah submitted into evidence portions of the deposition transcripts of Ruby LaNell Poland ("Poland"), a former investment clerk at LFCU, and of Thomas Amiss, general manager of the Fort Eustis Federal Credit Union.
III. The Challenged Transactions
A. The AMS-Riggs Transaction
11. In early July 1976, AMS, represented by its president, Hyde, entered into an agreement with Rice, a self-employed money broker, whereby Rice would undertake to (i) sell one or more tugboats purportedly owned by AMS and docked in Liberia, or (ii) secure a loan for AMS in excess of $ 200,000. Upon consummation of either undertaking, Hyde agreed that AMS would pay a commission to Rice.
12. At the time of this agreement and thereafter, the ownership of these tugboats, effectively the sole assets of AMS, was an unsettled question. In early 1976, the tugboats had been attached by a Liberian court because of ownership claims asserted by the Nigerian government as well as for certain unpaid docking fees. By July 1976, the Liberian litigation concerning the tugboats was stalled without any foreseeable resolution. Additionally, by agreement dated April 10, 1976 (PX-2), AMS had sold the tugboats to Terra Marine Liberia, Inc. ("TML"), a company which had been incorporated under the laws of Liberia around April 8, 1976.
13. In early July 1976, Rice telephoned another money broker, Harp. Rice knew from other sources that Harp had connections with federal credit unions, potential sources of funds.
14. During this telephone call, Rice told Harp that his client, AMS, required substantial funds for its business. Harp responded that her experience was limited to the placement of certificates of deposit issued by federally insured financial institutions.
15. During this or a follow-up conversation between Rice and Harp, Rice falsely stated that Riggs was prepared to make a $ 300,000 loan to AMS in the event that AMS could cause an investor to purchase a Riggs certificate of deposit in the amount of $ 300,000. Rice then proposed that Harp obtain a credit union to invest in the Riggs certificate of deposit in the credit union's name. He then conveyed the terms of the suggested Riggs certificate of deposit to Harp $ 300,000 principal, 71/2% Interest per annum and a one-year maturity period. Harp agreed to locate a credit union investor. Rice was aware that Harp would transmit these misrepresentations back to her credit union clientele. Rice and Harp decided to split the commission.
16. Around this time, according to Hyde, Rice explained to Hyde that Harp's credit union client would loan $ 300,000 to AMS subject to the condition that AMS use the funds to purchase a Riggs certificate of deposit in the name of AMS and then, in turn, use the certificate of deposit to collateralize a loan by Riggs to AMS.
17. Significantly, the strange nature of this proposed transaction using supposed loan proceeds to buy a certificate of deposit and then effectively reborrowing on the same money, paying additional interest should have caused Hyde, an experienced businessman, immediately to question Rice's description of the arrangement.
18. In early July 1976, Harp telephoned Boxer, Chairman of LFCU's Investment Committee, and represented that Riggs was offering a $ 300,000 certificate of deposit at 71/2% Interest per annum with a one-year maturity period (the "Riggs CD"). Boxer relied on these representations as accurate, partly because LFCU had previously made six successful investments in certificates of deposit, approximating $ 3,500,000, at the initiation of Harp. Boxer decided that the proposal was a potentially favorable investment according to the Investment Committee's policies. Because the investor typically does not pay a commission to the broker, Harp and Boxer did not discuss a commission.
19. On the same day, Boxer then contacted Schmidt, a member of the Investment Committee, who confirmed the attractiveness of the Harp proposal by the Investment Committee standards as well as the availability of $ 300,000 for investment.
21. Within several days, Boxer received a financial statement of a private corporation in a Riggs envelope without cover letter or other explanatory note. Believing it to be of no moment, Boxer discarded the financial report. This document was a financial statement of AMS dated as of May 14, 1976 (the "AMS Statement").
22. Rice had earlier requested of AMS that the AMS Statement be made available for dispatch to LFCU. Hyde had obtained a copy of the AMS Statement and given it to Rice, who had then mailed the document to LFCU. The AMS Statement, essentially a balance sheet, did not fairly represent the financial condition of AMS in several respects.
23. In early July 1976, Harp again called Boxer inquiring about the status of LFCU's investment decision on the Riggs CD. Boxer responded that he still had not received the financial statement of Riggs. Further, he added that a financial statement did come to him, apparently from Riggs, but that the company was unknown to him. Harp stated that the Riggs mail room must have dispatched the wrong financial statement and that she would undertake to remedy the situation. Harp then telephoned Rice and urged that a Riggs financial statement be sent to Boxer. Rice complied with Harp's request. At this time, Boxer's request for the Riggs financial statement was mentioned by Rice to Hyde.
24. In light of Hyde's alleged understanding of the financial arrangements between AMS and LFCU, Boxer's request for a Riggs financial statement surprised Hyde, but Hyde did not ...