Fed. Sec. L. Rep. P 92,203, 19 Fed. R. Evid. Serv. 176 Joseph Michaels, Plaintiff-Counterdefendant-Appellee v. Ralph Michaels, Everett B. Michaels and Hyman-Michaels Company, Defendants- Counterplaintiffs-Appellants

This case involves a family squabble between the plaintiff Joseph Michaels and his uncles, defendants Ralph Michaels and Everett Michaels.1 Joseph claims that when he sold his stock in the family business, the Hyman-Michaels Company ("the Company"), to the Company in January of 1976, his uncles misstated and withheld material information that, if revealed, would have affected his decision to sell. Joseph subsequently brought this action, alleging that his uncles and the Company had violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 and had committed common-law fraud. Joseph's complaint also charged his uncles with a breach of a fiduciary duty and the Company with a breach of the warranty provision of the contract for the sale of stock. The parties tried the case before a jury in November, 1983, and the jury found for Joseph and against his uncles on the 10b-5, fiduciary duty, and common-law fraud claims, but against Joseph and for the Company on the warranty claims. The jury assessed damages at $750,000 and also awarded Joseph $200,000 in punitive damages on the common-law fraud claim. The district court subsequently denied defendants' motion for judgment notwithstanding the verdict or a new trial, awarded Joseph prejudgment interest, and directed a verdict for Joseph on the Company's counterclaim.

This appeal raises a number of issues. The defendants argue that they did not violate section 10(b) or Rule 10b-5 because (1) the withheld information was immaterial as a matter of law, (2) they did not possess the requisite scienter, and (3) the plaintiff did not rely on any misstatement and would have sold his stock even if he had known the withheld information. The defendants also challenge several of the district court's evidentiary rulings, its denial of their motion for a new trial, and the directed verdict for the plaintiff on the Company's counterclaim. We affirm.

The Hyman-Michaels Company was in the business of purchasing, processing, and distributing scrap iron and steel. In mid-1975, Everett owned or controlled approximately fifty percent of the outstanding voting common stock of Hyman-Michaels, Ralph owned or controlled approximately thirty-six percent, and Joseph owned fourteen percent. On January 27, 1976, Joseph agreed to sell his shares to the Hyman-Michaels Company for $300 a share. Three days later, Joseph delivered the stock, resigned from his offices in the Company, and received $981,276.73. In July, 1976, Everett and Ralph sold the assets of the Company for approximately $13.4 million plus lifetime employment contracts. Joseph claims that Everett and Ralph withheld three material facts from him: (1) that the Continental Illinois National Bank ("Continental Bank") had not said "no" to the Company's loan request; (2) that Everett and Ralph decided to retain a professional financial firm to obtain a purchaser for Hyman-Michaels's assets; and (3) that Ralph had met with Angus Littlejohn in London and that Littlejohn had agreed to contact some prospective purchasers.

Between 1966 and 1976, Hyman-Michaels negotiated with approximately ten different companies in unsuccessful attempts to sell either the Company's assets or the stock owned or controlled by Ralph, Everett, and Joseph. In mid-summer 1975, Ralph began discussions with the Commercial Metals Company ("Commercial Metals") designed to effect a sale of the assets of Hyman-Michaels. The two parties discussed prices, based on asset value, of approximately $14 million. On September 5, 1975, while the Commercial Metals negotiations were ongoing, Ralph, Joseph, and Al Moeng (a Hyman-Michaels financial officer) met with Angus Littlejohn, a consultant to International Carbon & Minerals Corporation ("ICM"), and John Samuels, the chairman of ICM, to discuss the possibility of ICM acquiring Hyman-Michaels. A purchase price in the range of $12 to $14 million was mentioned, but Ralph terminated the meeting without further pursuing Samuels's proposal because Ralph felt that the ongoing discussions with another company (Commercial Metals) precluded such a dialogue. Ralph told Littlejohn and Samuels that he would contact them if negotiations with the other company fell through.

The Commercial Metals negotiations ended in December, 1975. Worried about Everett's health and the possible problems for Hyman-Michaels if Everett would die and his shares go into probate, Ralph suggested that the Company borrow money and buy back Everett's common stock for $300 per share. This price was less than the stock's book value, but Everett agreed to accept $300 because Ralph said that was all the Company could afford. Ralph and Al Moeng consequently contacted Bruce Simons, a loan officer at Continental Bank, about borrowing the approximately three million dollars needed to buy out Everett. Ralph also advised Joseph that all three shareholders would need to sign a "unanimous stockholders consent" before the Company could borrow money for Everett's shares.

While the Company was negotiating with Continental Bank for a loan, Ralph told Joseph that, after Everett's stock was purchased, Ralph would own or control about seventy-five percent of Hyman-Michaels's voting stock with Joseph owning approximately twenty-five percent of that stock. Ralph also said that he intended to place his wife and his son-in-law on Hyman-Michaels's Board of Directors when Everett left the Company. Joseph consequently became concerned about what would happen to his family if he or Ralph died, given Ralph's wife's apparent ill-will toward Joseph's wife. Joseph therefore sought advice from Harrison Fuerst, a friend who practiced law in Cleveland, Ohio. Fuerst suggested that Joseph ask Ralph to accept one of three proposals: (1) that Hyman-Michaels offer Joseph a buy-sell agreement for his stock; (2) that Ralph and Joseph place their stock in a voting trust so that each would have equal votes; or (3) as a last and least desirable alternative, that Hyman-Michaels purchase Joseph's stock at the same time and for the same price that it purchased Everett's stock.

Joseph and Fuerst presented these proposals to Ralph, Moeng, and Marvin Chapman, the Company's lawyer, on January 4, 1976. Either Ralph or Chapman rejected the first two proposals, but Ralph agreed to ask Continental Bank for an additional one million dollars to buy Joseph's shares along with Everett's. Ralph said, however, that he thought Joseph's request would "kill the deal" and that, as far as Ralph was concerned, Joseph was "out" of Hyman-Michaels no matter what Continental said. After this meeting, Ralph and Chapman went to Everett's house to report what had happened; Everett agreed that the Company should buy out Joseph. When Chapman related Joseph's desire not to be kicked out of the Company and lose his job, Everett responded, "I don't give a damn."

On January 5, 1976, Ralph and Moeng went to Continental Bank and requested the additional financing to buy Joseph's stock. Later that day, Simons told Ralph that the bank would not loan Hyman-Michaels either the three million dollars originally requested or the four million dollars unless the loan were secured with Ralph's personal guarantee. Moments later, Joseph was summoned to Moeng's office, where Ralph told him, "Joe, you're out. The bank has said no." Ralph reiterated that Joseph was relieved of all duties at Hyman-Michaels.

Joseph also claims that Ralph and Everett never told him that they had decided to retain a professional financial firm to locate a purchaser for the Company. On January 5, 1976, Charles Aaron met briefly with James Hemphill and James Gorter of the investment firm of Goldman, Sachs & Co. ("Goldman, Sachs"). Aaron told Gorter only that he represented a company that might be interested in seeking a buyer. On January 24, 1976, Ralph told Littlejohn that Hyman-Michaels was considering retaining Goldman, Sachs. As it turned out, the Company never retained Goldman, Sachs or any other investment firm.

The third alleged misrepresentation concerns Ralph's contact with Angus Littlejohn in London on the 23rd and 24th of January. Prior to his departure for Europe, Ralph told Joseph that he (Ralph) would try to reactivate interest in a purchase of Hyman-Michaels and promised to report any such interest to Joseph. On January 23, 1976, while in London, Ralph telephoned Angus Littlejohn and told him that Hyman-Michaels was no longer negotiating with Commercial Metals. Ralph asked Littlejohn if ICM and John Samuels were still interested in buying Hyman-Michaels. At Littlejohn's request, Ralph agreed to stay in London an extra day and meet Littlejohn for lunch.

After his telephone conversation with Ralph, Littlejohn sent the following telex to John Samuels in New York:

RALPH MICHAELS OF HYMAN MICHAELS COMPANY CHICAGO, WHOM I AM SEEING TOMORROW, JUST TOLD ME THAT THE PROPOSED SALE OF THEIR COMPANY COLLAPSD [sic] RECENTLY AT THE VERY LAST MINUTE.

I PRESUME THAT WE [ICM] WOULD NOT BE INTERESTED AT THIS STAGE BUT WOULD APPRECIATE YOUR OPINION AS TO WHETHER IT MIGHT APPEAL TO DAVID.

IF THIS IS TO BE PURSUED PLEASE GIVE ME TIME TO FIRST ESTABLISH A POSITION AS BROKER WITH RALPH.

"David" referred to David Lloyd-Jacob, the executive director of Consolidated Gold Fields in North America ("Consolidated") and the president of Azcon Corporation ("Azcon"), who had toured Hyman-Michaels's Hegewisch yard with Ralph in 1974. By telex dated January 24, 1976, but not received by Littlejohn until January 26, 1976, Samuels responded, stating that Lloyd-Jacob "would definitely be interested" but that Samuels first wanted the chance for ICM to buy Hyman-Michaels.

On January 24, 1976, Ralph had lunch with Littlejohn. Ralph repeated what he had told Littlejohn the day before and identified Goldman, Sachs as the investment banker Hyman-Michaels intended to retain. Littlejohn mentioned a number of companies that he thought might be interested in acquiring Hyman-Michaels, including Consolidated. Littlejohn then asked Ralph to exclude those companies--including Consolidated--from any agreement Ralph might reach with Goldman, Sachs so that Littlejohn could obtain a brokerage fee if he were able to effect the purchase of Hyman-Michaels by one of those companies. Ralph told Littlejohn: "Get your ducks lined up."

On January 26, 1976, Ralph had a luncheon meeting with Everett and Hyman-Michaels's lawyers, Aaron and Chapman. Ralph told the others about his meeting with Littlejohn and described the companies, including Consolidated, that Littlejohn had indicated were potential purchasers of Hyman-Michaels. Joseph--still a stockholder, officer, and director of Hyman-Michaels--was not invited. Ralph told those gathered that Littlejohn was going to contact certain companies, including Consolidated, on behalf of Hyman-Michaels. The next day, still without telling Joseph of Ralph's conversations with Littlejohn, Ralph and Everett signed the agreement to buy Joseph's stock. In July, 1976, Ralph and Everett sold the Company's name and assets to Azcon for $13.4 million and lifetime employment contracts.

Section 10(b) and Rule 10b-5 make it unlawful to misrepresent or fail to disclose material information in connection with the purchase or sale of securities. See 15 U.S.C. Sec. 78j(b) (1982); 17 C.F.R. 240.10b-5 (1984); Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 150-54, 92 S.Ct. 1456, 1470-72, 31 L.Ed.2d 741 (1972). The defendants argue that the jury verdict on the section 10(b) and Rule 10b-5 claim must be overturned because the information withheld from Joseph was immaterial as a matter of law, because there was no evidence of scienter, and because Joseph did not rely on Ralph's alleged misstatement about the bank. The standard for determining whether the district court should have granted a judgment notwithstanding the verdict ("j.n.o.v.") is "whether the evidence presented, combined with all reasonable inferences permissibly drawn therefrom, is insufficient to support the verdict when viewed in the light most favorable to the party against whom the motion is directed." Syvock v. Milwaukee Boiler Manufacturing Co., 665 F.2d 149, 153 (7th Cir.1981).

For purposes of section 10(b) and Rule 10b-5, an omission or misstatement is material if there is a "substantial likelihood that, under all the circumstances, the omitted [or misstated] fact would have assumed actual significance in the deliberations of the reasonable shareholder." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976); see Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1040 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 225, 54 L.Ed.2d 155 (1977). The materiality of the information misstated or withheld is determined in light of what the defendants knew at the time the plaintiff committed himself to sell the stock, in this case by signing the agreement to sell on January 27, 1976. See Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir.1972) (commitment to sell occurs when "the parties obligated themselves to perform what they agreed to perform even if the formal performance of their agreement is to be after a lapse of time"); see also Goodman v. Epstein, 582 F.2d 388, 411-12 (7th Cir.1978) (quoting Radiation Dynamics with approval but distinguishing it on the facts), cert. denied, 440 U.S. 939, 99 S.Ct. 1289, 59 L.Ed.2d 499 (1979). Thus activities occurring after January 27, 1976 are relevant to the materiality issue only to the extent that they reflect what Ralph or Everett knew at the time they signed the stock purchase agreement.2

The defendants-appellants argue that under this objective test of materiality the discussions with Goldman, Sachs and Angus Littlejohn were immaterial as a matter of law. They base their argument on several cases that held that preliminary merger negotiations are immaterial as a matter of law. For example, in Greenfield v. Heublein, Inc., 742 F.2d 751, 757 (3d Cir.1984), cert. denied, --- U.S. ----, 105 S.Ct. 1189, 84 L.Ed.2d 336 (1985), the Third Circuit held that merger negotiations do not become material until the merging companies agree on both price and the post-merger structure. See also Reiss v. Pan American World Airways, Inc., 711 F.2d 11, 14 (2d Cir.1983). We note, however, that a number of cases do not apply a "bright line" rule of materiality for merger negotiations. See SEC v. Geon Industries, Inc., 531 F.2d 39, 47-48 (2d Cir.1976) (balancing the probability that an event will occur and the magnitude of the event); SEC v. Shapiro, 494 F.2d 1301, 1305-07 (2d Cir. 1974) (balancing approach); see also Schlanger v. Four-Phase Systems, Inc., 582 F.Supp. 128, 131-34 (S.D.N.Y.1984); SEC v. Gaspar, [Current] Fed.Sec.L.Rep. (CCH) p 92,004 (S.D.N.Y.1985) (mere existence of merger negotiations is material when company founder had never previously considered selling his shares); In re Carnation Co., Exch.Act.Rel. No. 22214 (July 8, 1985), reprinted in [Current] Fed.Sec.L.Rep. (CCH) p 83,801, at 87,595-97 (public denial of takeover rumors was material even though parties had had only one meeting and several telephone conversations).

We need not decide whether to adopt the Third Circuit's "price and structure" standard of materiality because the policy underlying that standard is not applicable on the facts of this case. The Third Circuit based the Greenfield holding on the theory that disclosing preliminary merger negotiations would cause speculative investment in the target company's stock, thus raising the price. If the merger negotiations subsequently fail--as they frequently do--the price of the target company's stock falls; investors who bought shares at inflated, post-disclosure prices suffer a loss and shareholders who would have otherwise sold may find that they can no longer obtain even the pre-disclosure price. See Greenfield v. Heublein, Inc., 575 F.Supp. 1325, 1336 (E.D.Pa.1983), aff'd, 742 F.2d 751 (3d Cir.1984), cert. denied, --- U.S. ----, 105 S.Ct. 1189, 84 L.Ed.2d 336 (1985). Therefore, to avoid any misleading caused by disclosing that a company is discussing merger possibilities, both the Third Circuit and a panel of the Second Circuit have held that the existence of preliminary merger negotiations is immaterial as a matter of law. See Reiss, 711 F.2d at 14; Staffin v. Greenberg, 672 F.2d 1196, 1205-07 (3d Cir.1982). The need to protect shareholders from potentially misleading disclosure of preliminary merger negotiations, the courts reason, outweighs the right of shareholders to have notice of corporate developments important to their investment decisions. Greenfield, 742 F.2d at 756. As the Second Circuit noted, "[w]e have no doubt that had [the company] disclosed the existence of negotiations ... and had those negotiations failed, we would have been asked to decide a section 10b-5 action challenging that disclosure." Reiss, 711 F.2d at 14.

The reasons for "price and structure" standard of materiality disappear when there is no public market for a shareholder's stock. Both parties agree that in 1975 Joseph, Ralph, or Everett could dispose of his stock only if Hyman-Michaels bought it back or some outside entity bought the entire Company. Since there was no public market where one of the three could sell the minority interest that he owned or controlled, there was no possibility that disclosing the contacts with Goldman, Sachs and with Littlejohn would result in speculative investment in Hyman-Michaels's stock. Furthermore, Ralph and Everett did not need to make a public announcement in order to inform all the stockholders; they merely had to tell Joseph, who was there with them on January 27, 1976 and about to sell them his stock. There was also no danger that disclosure would mislead Joseph. If Joseph had a question about what Littlejohn or Goldman, Sachs said, he could simply ask Ralph and Everett and they could clarify any possibly misleading statement. Thus Joseph had a right as a shareholder to know about corporate developments, but there was no offsetting need to protect other shareholders and investors from potentially misleading disclosure. Cf. Staffin, 672 F.2d at 1205-07. We therefore decline to apply the "price and structure" rule of Greenfield in this case.

Although we agree with the appellee that preliminary merger negotiations may be material when there is no public market for the company's stock, we disagree with his suggestion that a more subjective standard of materiality applies when the corporation is closely-held.3 TSC Industries teaches that the test of materiality is always an objective one. 426 U.S. at 445, 96 S.Ct. at 2130; see also Kohler v. Kohler Co., 319 F.2d 634, 642 (7th Cir.1963). Even with the objective test, however, the fact that the corporation is small and closely-held may affect the materiality of an omitted fact in two respects. First, an event of a given magnitude probably has a larger potential impact on the fortunes of a small company than on the fortunes of a large one. See SEC v. Geon Industries, Inc., 531 F.2d at 47-48. In addition, what the reasonable shareholder considers important is necessarily a function of his options. The "total mix" of information available to the reasonable shareholder includes the probability of being locked into a minority interest of an unprofitable, closely-held corporation. See, e.g., Thomas v. Duralite Co., 524 F.2d 577, 581, 584-85 (3d Cir.1975) (defendant gave plaintiff the impression that the company faced imminent disaster). Thus, although we apply the objective standard of materiality, the significance the reasonable shareholder would give a particular omitted fact depends on the circumstances confronting him. See TSC Industries, 426 U.S. at 449, 96 S.Ct. at 2132 ("a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder") (emphasis added); see also 5A A. JACOBS, LITIGATION AND PRACTICE UNDER RULE 10b-5 Sec. 61.02[b][ii], at 3-131 (2d ed. revised December, 1984) ("the hypothetical reasonable man should be presumed to be standing in the plaintiff's shoes").

On January 27, 1976, Joseph had only two options--he could sell his stock to the Company for $300 per share or he could hope that some outside entity would buy Hyman-Michaels at a higher price. If Joseph had decided not to sell and no other company acquired Hyman-Michaels, Joseph would have been the unemployed owner of a minority interest for which there was no market and that paid no dividends. See Hillman, The Dissatisfied Participant in the Solvent Business Venture: A Consideration of the Relative Permanence of Partnerships and Close Corporations, 67 Minn.L.Rev. 1, 37-38 n. 118 (1982) (discussing the "essentially unmarketable character of minority interests in close corporations"). We therefore must consider whether the withheld information about Littlejohn and Goldman, Sachs would have assumed actual significance in the deliberations of the reasonable shareholder owning such a minority interest.

The defendants argue that no jury reasonably could find that Hyman-Michaels's contacts with Goldman, Sachs and Ralph's conversations with Angus Littlejohn were material facts for purposes of Rule 10b-5. We agree that the contact with Goldman, Sachs was not a material fact. Viewing the evidence in the light most favorable to Joseph, as we must, the evidence supports a finding that Ralph and Everett sent Charles Aaron to Goldman, Sachs to discuss (without revealing Hyman-Michaels's identity) whether Goldman, Sachs would be interested in finding a buyer for a small, closely-held company. In addition, Ralph told Angus Littlejohn that Ralph and Everett were considering retaining Goldman, Sachs to find a buyer for Hyman-Michaels. Nonetheless, on January 27, Aaron had not revealed Hyman-Michaels's identity to Goldman, Sachs and Goldman, Sachs had no way to assess the Company's salability. We therefore hold that the withheld information about the contact with Goldman, Sachs was immaterial as a matter of law.

On the other hand, a jury could reasonably find that Littlejohn's agreement to contact prospective buyers on behalf of Hyman-Michaels was material. Viewing the evidence in the light most favorable to the plaintiff, Ralph and Everett knew that Angus Littlejohn, who had visited the Company with John Samuels in September, 1975 when Samuels discussed the possibility of ICM buying Hyman-Michaels for $12 to $14 million, had agreed to contact some prospective buyers on behalf of Hyman-Michaels. Ralph's comment that Littlejohn should "get [his] ducks lined up," together with Littlejohn's actions after the January 24 meeting,4 support a finding that Ralph retained Littlejohn as a broker on January 24, 1976. Furthermore, although Ralph thought his conversations with Littlejohn were important enough to report to Everett and the other Company officers and advisors who met on January 26, 1976, neither Ralph nor Everett told Joseph, the only other major stockholder, about these developments.5 See SEC v. Texas Gulf Sulfur Co., 401 F.2d 833, 851 (2d Cir.1968) ("[A] major factor in determining whether the [information] was a material fact is the importance attached to the [information] by those who knew about it."), cert. denied sub nom. Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). Finally, Ralph and Everett refused Joseph's request that the stock purchase agreement be signed on January 27 but the closing be delayed six weeks so that Joseph might be able to complete his negotiations with the Harris Bank and buy the Company from Ralph and Everett. They did not, Ralph testified, want to give Joseph an extension that "might interfere with any future plans [they] may have for the sale of Hyman-Michaels." In short, a jury could reasonably find that on January 27 Ralph and Everett knew--but did not disclose to Joseph--that the prospects for selling Hyman-Michaels were the brightest since the Commercial Metals negotiations had collapsed. To the reasonable shareholder standing in Joseph's shoes, this would clearly be a material fact.

The defendants also argue that the withheld information was immaterial as a matter of law because Joseph knew that Hyman-Michaels was for sale and he knew that Ralph had gone to Europe to "stir up" interest in Hyman-Michaels. Ralph had promised, however, to tell Joseph of any developments in Europe. In light of this promise, we think a reasonable shareholder would interpret Ralph's failure to mention any developments--especially since Al Moeng told Joseph that "nothing" happened in Europe--as a sign that Ralph had no success. This fact distinguishes the present case from Hassig v. Pearson, 565 F.2d 644, 649-50 (10th Cir.1977). In Hassig, the Tenth Circuit held that the majority shareholder of a bank need not disclose general inquiries about purchasing the bank since he told the minority shareholder that he (the majority shareholder) was thinking about retiring and selling his majority interest. Id. at 649. Thus in Hassig the majority shareholder disclosed that he intended to end his many years as majority owner and officer of the bank and sell his interest. Here Ralph and Everett disclosed neither their proposed change in approach (using Littlejohn as a broker) nor the prospects that Littlejohn would contact on behalf of Hyman-Michaels. Knowledge that Hyman-Michaels was for sale would not aid the reasonable shareholder's deliberations if the shareholder did not know about the change in approach or the brightened prospects.

The defendants' reliance on James Blackstone Memorial Library Association v. Gulf, Mobile and Ohio Railroad, 264 F.2d 445 (7th Cir.), cert. denied, 361 U.S. 815, 80 S.Ct. 56, 4 L.Ed.2d 62 (1959) is also misplaced. In that case, minority shareholders complained that the majority shareholder failed to disclose its intent to sell some of the company's assets at a favorable price. Blackstone was unique, however, in that the company had leased all its assets to another company in perpetuity. In exchange, the lessee promised to pay an annual dividend of $7 dollars per share on the lessor's stock. The special master found, and this court agreed, that even if the minority shareholders had not sold their stock, they would still receive only the $7 annual dividend and would not have enjoyed any increase in the value of their stock. Id. at 452-53. Since the sale of assets would have no effect on the value of the stock, knowledge of the prospective sale would not alter the "total mix" of information considered by the reasonable shareholder. In contrast, the shareholders of Hyman-Michaels would--and did--enjoy the profits of selling the Company's assets for more than their book value.

For these reasons, a reasonable jury could find that, under all the circumstances, there was a substantial likelihood that the withheld information about Littlejohn would have assumed actual significance in the deliberations of the reasonable shareholder. TSC Industries, 426 U.S. at 449, 96 S.Ct. at 2132. The defendants were therefore not entitled to a judgment notwithstanding the verdict on the ground that no reasonable jury could find the omission material. Selle v. Gibb, 741 F.2d 896, 900 (7th Cir.1984).B.

To prevail on a section 10(b) or Rule 10b-5 claim, a plaintiff must also prove scienter--an intent to deceive. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 212-14, 96 S.Ct. 1375, 1390-91, 47 L.Ed.2d 668 (1976). Since defendants argue that there was no evidence of scienter, we examine the record to determine whether a jury could reasonably find that Ralph and Everett knowingly or recklessly withheld (or misstated) material information. See Sanders v. John Nuveen & Co., 554 F.2d 790, 792-93 (7th Cir.1977).

The defendants argue there was no evidence of scienter because Ralph thought the bank said "no" and because Ralph and Everett did not think the withheld information about Littlejohn was important. We quickly dismiss the first argument because Ralph testified at trial that Simons (the Continental Bank loan officer) told him the bank would not loan the $3 million or the $4 million unless Ralph gave a personal guarantee. Ralph also testified that he told Everett the bank wanted Ralph's personal guarantee but only told Joseph that the bank said "no" and that Joseph was "out" of Hyman-Michaels. Since the evidence clearly supported a finding that Ralph knowingly misstated the bank's answer, a jury could reasonably infer that Ralph intended to deceive Joseph with the falsehood. Cf. Sanders, 554 F.2d at 792.

The plaintiff also offered sufficient evidence for a jury to find that the defendants possessed scienter with respect to the omissions. Ralph thought his discussions with Littlejohn were important enough to report to Everett and the Company's lawyers at their January 26 meeting. Nonetheless, neither Ralph nor Everett mentioned Littlejohn when they met with Joseph to buy his stock on January 27.

A finding of scienter is also supported by Ralph and Everett's January 27 refusal to extend the closing date beyond January 30. True, it is the date the parties sign the agreement, not the closing date, that is relevant for determining materiality and scienter. See Radiation Dynamics, 464 F.2d at 891. But their refusal to extend the closing date and the subsequent explanations of that refusal are relevant to prove their intent on January 27, 1976. Ralph and Everett knew that Joseph and Fuerst had met with the Harris Bank and were trying to obtain a loan so Joseph could buy Hyman-Michaels. They refused to extend the closing date because, as Ralph testified, allowing Joseph a six-to-eight week extension for the purpose of allowing Joseph to obtain financing "might interfere with any future plans" for the sale of Hyman-Michaels. Therefore, viewing the facts in the light most favorable to the plaintiff, we think a jury could reasonably find that Ralph and Everett possessed the requisite scienter when they purchased Joseph's stock on behalf of the Company. See Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n. 30, 103 S.Ct. 683, 692, 74 L.Ed.2d 548 (1983) (scienter can be inferred from circumstantial evidence).

Finally, appellants assert that the judgment for the plaintiff must be reversed because Joseph's claim cannot satisfy the reliance element of a section 10(b) claim. The defendants contend that Joseph failed to prove he had relied on Ralph's misstatement about the bank and that they proved that Joseph would have sold his stock for $300 a share even if he had known about Littlejohn.

When a plaintiff bases a section 10(b) or a Rule 10b-5 claim on a misrepresentation, he must prove that he was induced to act by the defendant's misstatement. See Huddleston v. Herman & MacLean, 640 F.2d 534, 547-48 (5th Cir.), modified, 650 F.2d 815 (5th Cir.1981), aff'd in part and rev'd in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). The defendants in this case claim that Joseph's theory of reliance is premised on a fact that was contradicted by the proof. They argue that Joseph offered no credible evidence of reliance and that he therefore cannot succeed on the misrepresentation claim. We disagree. Joseph testified at trial that he would not have agreed to sell his stock for $300 per share if he had known that Continental Bank did not say "no" to the request for a loan to buy both Everett's and Joseph's stock. In addition, Joseph's attempt to obtain financing from the Harris Bank so he could buy Hyman-Michaels--an attempt that continued until he sold his stock--suggests that Joseph believed Ralph's statement and, consequently, looked for alternative methods of protecting his minority interest in the Company. From this evidence, a jury could reasonably find that Ralph's statement that the bank said "no" was relied upon by Joseph in his decision to forego his request that his stock be bought with Everett's and instead to sell only his stock to the Company.

Turning to the withheld information about Littlejohn, we note that reliance is presumed when the plaintiff proves that the withheld information was material. See Affiliated Ute Citizens, 406 U.S. at 153-54, 92 S.Ct. at 1472<