Molecular Technology Corp. v. Valentine, s. 89-1758

• Citation: 925 F.2d 910
• Decision Date: 11 February 1991
• Docket Number: 89-1842 and 89-1843,Nos. 89-1758,s. 89-1758
• Parties: Fed. Sec. L. Rep. P 95,860, 32 Fed. R. Evid. Serv. 374 MOLECULAR TECHNOLOGY CORPORATION, an Ohio corporation; Jafar Behbehani and Michael May, Plaintiffs-Appellants (89-1842), Plaintiffs-Appellees (89-1758), v. Al VALENTINE, Defendant-Appellant (89-1758), Defendant-Appellee (89-1842), Donovan C. Snyder; Moss and Wilkins, Defendants-Appellants (89-1843), Defendants-Appellees (89-1842), Jack Hunter; Jim Fors, Defendants-Appellees, First National Monetary Group, Inc.; First National Securities Corporation, Defendants.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 910

925 F.2d 910

Fed. Sec. L. Rep. P 95,860, 32 Fed. R. Evid. Serv. 374

MOLECULAR TECHNOLOGY CORPORATION, an Ohio corporation Jafar Behbehani and Michael May Plaintiffs-Appellants (89-1842) Plaintiffs-Appellees (89-1758), v. Al VALENTINE, Defendant-Appellant (89-1758) Defendant-Appellee (89-1842), Donovan C. Snyder; Moss and Wilkins, Defendants-Appellants (89-1843), Defendants-Appellees (89-1842), Jack Hunter; Jim Fors, Defendants-Appellees, First National Monetary Group, Inc.; First National Securities Corporation, Defendants.

Nos. 89-1758, 89-1842 and 89-1843.

United States Court of Appeals, Sixth Circuit.

Argued Aug. 7, 1990.

Decided Feb. 11, 1991.

Ernest R. Bazzana, Michael J. Barton, Mark L. McGowan (argued), Plunkett, Cooney, Rutt, Watters, Stanczyk & Pedersen, Detroit, Mich., for plaintiffs-appellees.

Walter L. Baumgardner, Jr. (argued), Musilli & Baumgardner, St. Clair Shores, Mich., for Al Valentine.

John L. Hopkins, Jr. (argued), Judith A. Friday, Denenberg, Tuffley, Bocan, Jamieson, Black, Hopkins & Ewald, Southfield, Mich., for Donovan C. Synder and Moss and Wilkins.

Jack Hunter, Southfield, Mich., pro se.

Jim Fors, Bradenton, Fla., pro se.

Before SUHRHEINRICH, Circuit Judge; WELLFORD ^*, Senior Circuit Judge; BELL ^**, District Judge.

SUHRHEINRICH, Circuit Judge.

This appeal arises out of a securities litigation case brought by purchasers of convertible debentures issued by SDE Robotics and Automation Company ("SDE") in 1983 for losses suffered as a result of SDE's April 1984 bankruptcy. The purchasers, Molecular Technology Corporation ("MoTech"), Michael May, and Jafar Behbehani, alleged, inter alia, violations of federal securities laws, 15 U.S.C. Sec. 78j(b) and 17 C.F.R. Sec. 240.10b-5 ("section 10(b)/rule 10b-5"), Michigan securities laws, Mich.Comp.Laws Secs. 451.501-818 (Michigan's "Blue Sky" law), and state common law claims of negligent misrepresentation. Defendants included Al Valentine, Jim Fors, Keith Crawford and Vincent Swig (officers and directors of SDE), DeWorth Williams, David Williams and David Girkis (directors of SDE), Jack Hunter (a broker and salesman for the debenture offering), Donovan C. Snyder and his Utah law firm, Snyder, Moss & Wilkins, hereinafter collectively referred to as "the Snyder defendants" (attorneys for defendants DeWorth Williams, David Williams, and Al Valentine) and third party defendant Robert Currie, through his law firm Currie, Streper, Haddrill & Segferth, P.C. (SDE's corporate counsel in Michigan). ¹

As of 1982, State Die and Engineering, Inc. ("State Die") was a private Michigan corporation co-owned by Al Valentine and Chester Wentzal. For the nine months prior to December 31, 1983, State Die's financial statements showed $2.4 million dollars in sales of tool and die products and $250,000 in sales of robotics products. At the end of the 1982, co-owner Chester Wentzal left State Die and took most of the tool and die business with him, causing significant financial problems for State Die by the corporate fiscal year ending August 31, 1983.

On August 11, 1983, Valentine, who became sole owner of State Die after Chester Wentzal left the company, and DeWorth Williams, chief stockholder in Extra Production, Inc. ("Extra Production"), employed Utah attorney Donovan Snyder to effect a shell transaction, ² a merger of the privately owned State Die with the defunct public "shell" corporation Extra Production. After terms of the proposed merger were discussed, Valentine and Williams signed an agreement drawn up by Snyder which merged State Die with Extra Production, resulting in the formation of SDE.

In August, 1983, SDE's corporate counsel in Michigan, Robert Currie, prepared a convertible debenture private placement offering circular for SDE which set forth: the purpose and terms of the debenture offering; a proposed use of the proceeds of the offering; a summary of business conducted by SDE; a list of the directors and officers of SDE with each person's resume; and State Die's financial balance sheets for the years 1982-85. This original offering circular was prepared utilizing information provided by various people, including SDE director Jim Fors and SDE officer David Birkis. Currie later sent the offering circular to Snyder and requested that he review the statements concerning the August 11, 1983 merger. Snyder reviewed the original offering circular, edited several paragraphs, made handwritten insertions and, on September 20, 1983, returned the edited circular to Currie. An amended private placement offering circular was ultimately prepared, incorporating some of the changes suggested by Snyder, and was made available to investors.

After the shell transaction was completed, DeWorth Williams asked Snyder to review an information statement prepared for the purpose of marketing SDE's stock in the OTC market. ³ Using information provided in part by DeWorth Williams, Snyder updated the information statement to insert the corporation's new name and current officers, the number of shares outstanding, the history of the corporation, the nature of the products and services performed by SDE, and the description of SDE's facilities. No evidence was introduced at trial indicating that the information statement partially prepared by Snyder was ever transmitted to a broker or made available to the public.

In September, 1983, Snyder reviewed the corporate and transfer agent's records and prepared an opinion letter to SDE concerning the tradeability of SDE's stock in the OTC market. Snyder's only other involvement was a response to a telephone inquiry in which he advised Fors that sales to non-United States citizens were not subject to the $500,000 limitation under federal securities laws.

On September 2, 1983, plaintiff Michael May, acting individually and as the president of MoTech, purchased $8,000 worth of SDE debentures for himself and $25,000 worth of debentures for MoTech. May testified that he received the original offering circular before making this investment for himself and MoTech. In October, 1983, and on December 9, 1988, May purchased for himself an additional $12,000 and $5,000 worth of debentures, respectively. May testified that he received and relied on the amended offering circular prior to his third purchase on December 9, 1988.

May suggested an investment in SDE to his friend and MoTech business associate, Behbehani, in November 1983. On December 12, 1983, Behbehani purchased $500,000 worth of SDE debentures. Behbehani testified that he had a copy of the amended offering circular at the time he made his investment and that he relied on the circular and the advice of May in making his investment decision.

In April 1984, SDE went bankrupt, resulting in the entire loss of MoTech's, May's and Behbehani's debenture investments. Thereafter, plaintiffs brought suit against defendants under various federal and state laws for losses incurred as a result of their investments in SDE. On March 27, 1989, after a three week trial, the jury returned a verdict in favor of plaintiffs. As to liability, the jurors found, inter alia, that: 1) Fors had violated section 10(b)/rule 10b-5 as to all plaintiffs while the Snyder defendants had violated section 10(b)/rule 10b-5 as to Behbehani and MoTech only; 2) Fors, Valentine and the Snyder defendants were liable for negligent misrepresentation to Behbehani and MoTech, but Behbehani and MoTech had been seventy percent (70%) comparatively negligent as to these defendants; and 3) Fors and Valentine had violated Michigan's securities laws, for which Fors was liable to all plaintiffs, and for which Valentine was liable to Behbehani and MoTech.

Without the knowledge or consent of the court or the attorneys, the jurors modified the verdict form and supplemented it with a chart purporting to allocate plaintiffs' damages among the various defendants on the various claims. (The verdict form and supplemental chart are attached as Appendix A). The altered verdict form awarded Behbehani $308,000 ($244,000 from Fors and $64,000 from the Snyder defendants) and MoTech $24,000 ($18,000 from Fors and $6,000 from the Snyder defendants) for violation of section 10(b)/rule 10b-5. Regarding the negligent misrepresentation claims, Behbehani was awarded $281,000 ($116,000 from Fors, $67,000 from the Snyder defendants, and $98,000 from Valentine) and MoTech was awarded $29,000 ($10,000 from Fors, $9,000 from the Snyder defendants, and $10,000 from Valentine). The verdict also indicated that plaintiffs MoTech and Behbehani were seventy percent (70%) comparatively negligent. After the parties post trial motions were decided by the district court, the Snyder defendants, Valentine and plaintiffs Michael May, MoTech and Jafar Behbehani appealed. These appeals have been consolidated for consideration by this Court.

We hold that it was reversible error for the district court to accept a verdict with inconsistent findings and misapplications of the jury instructions, and which awarded excessive damages. We further hold that a judgment notwithstanding the verdict ("JNOV") should have been granted in favor of the Snyder defendants on MoTech's negligent misrepresentation claim since there was no showing that MoTech received or relied on the amended offering circular in making its investment decision. Thus, we reverse and remand this case for new trial on the remaining claims, consistent with this opinion.

A. Snyder Defendants' Motions for a Directed Verdict and JNOV

The Snyder defendants appeal from a denial of their directed verdict and JNOV motions as to the negligent misrepresentation and section 10(b)/rule 10b-5 claims. The Snyder defendants also argue that plaintiffs' expert witness testimony concerning the requirements of federal securities laws was improper and resulted in juror confusion during deliberations.

1. Negligent Misrepresentation

The Snyder defendants contend that the district court's denial of...