564 F.2d 1277 (9th Cir. 1977), 75-2759, Lewelling v. First California Co.

Docket Nº:75-2759.
Citation:564 F.2d 1277
Party Name:Asa L. LEWELLING, Plaintiff-Appellee, v. FIRST CALIFORNIA COMPANY, a California Corporation (Appellant), Harold F. Smither and M. J. Coen (Appellant), Defendants-Appellants.
Case Date:November 21, 1977
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 1277

564 F.2d 1277 (9th Cir. 1977)

Asa L. LEWELLING, Plaintiff-Appellee,


FIRST CALIFORNIA COMPANY, a California Corporation

(Appellant), Harold F. Smither and M. J. Coen

(Appellant), Defendants-Appellants.

No. 75-2759.

United States Court of Appeals, Ninth Circuit

November 21, 1977

Page 1278

John R. Faust, Jr. (argued), Portland, Or., for defendants-appellants.

Clifford N. Carlsen, Jr. (argued), Miller, Anderson, Nash, Yerke & Wiener, Portland, Or., for plaintiff-appellee.

Appeal from the United States District Court for the District of Oregon.

Before DUNIWAY, ELY and CHOY, Circuit Judges.

CHOY, Circuit Judge:

This controversy arises out of a scheme to enable insiders to bail out of various corporations which were failing. Plaintiff, Asa L. Lewelling, brought a private suit for fraud under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); SEC Rule 10b-5, 17 C.F.R. § 240.10b-5; and the Oregon securities act and common law. 1 From the adverse judgment of the district court, defendants First California Company (FCC), a brokerage firm, and its principal owner, M. J. Coen, appeal. We affirm.

Lewelling, a private investor, dealt with FCC through an employee, Harold F. Smither. 2 In the last two years of their relationship, Smither handled Lewelling's account by purchasing securities without his knowledge, then forwarding confirmation slips regarding the transactions. When Lewelling received a confirmation slip, he would immediately telephone Smither for

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an explanation. Smither would then present justifications for his unilateral decision to purchase. Lewelling never tried to overturn a purchase. There was no written agreement between Lewelling and Smither.

The securities in question had been owned by Coen or C. Arnholdt Smith, or sources related to them, and were passed through a series of brokerage houses controlled by them before coming to FCC and then to Lewelling. The trial court found that the several transfers were all part of a scheme to "launder" the securities in order to conceal the underlying "bail outs" by the insiders. The gravamen of Lewelling's complaint was that, in selling him the securities, defendants failed to disclose the insider source of the securities or the sellers' reasons for disposing of them.


The materiality of omissions is measured by an objective standard: whether " 'a fact's existence or nonexistence is a matter to which a reasonable man would attach importance in determining his choice of action in the transaction in question.' " Northwest Paper Corp. v. Thompson, 421 F.2d 137, 138 (9th Cir. 1970), quoting Restatement of Torts § 538(2)(a) (1938) (emphasis supplied). 3 Because of the trial court's finding that the sales were part of a larger plot to unload "bad" stock, its conclusion that the omissions were material is certainly not clearly erroneous. Fed.R.Civ.P. 52(a). See Ryan v. Foster & Marshall, Inc., 556 F.2d 460, 463 (9th Cir. 1977); Butler v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 528 F.2d 1390, 1391 (9th Cir. 1975).

Defendants argue, however, that there was insufficient evidence to warrant the trial court's findings that insiders were in fact bailing out of failing corporations. We need not reach their contentions, however, for the district court apparently felt that the routing of the securities through the various brokerage firms in which Coen had an interest was itself a material fact which should have been disclosed. The reason for this "laundering" attempt may not be as significant to an investor as the fact that the investment house with which he was dealing was engaging in the practice.

"In Connection With"

Defendants next contend that the purported omissions did not occur "in connection with" the purchase or sale of a security as required by Rule 10b-5 because Lewelling and Smither communicated only after the confirmation slips had been sent. They argue that Rule 10b-5 requires both that the fraud occur in connection with the transaction, see Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), and that the plaintiff be a purchaser or seller, see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). If the purchases were consummated before the fraudulent nondisclosures, they reason, Lewelling is merely an "aborted seller" who was induced to retain the securities through the defendants' fraud, rather than to purchase them in the first instance, and is therefore barred from recovery under the teachings of...

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