Stokes v. Lokken

• Decision Date: 07 July 1981
• Docket Number: No. 80-1701,80-1701
• Citation: 644 F.2d 779
• Parties: Fed. Sec. L. Rep. P 98,209 Arthur L. STOKES, et al., Appellants, v. Lawrence LOKKEN and Henson & Tully, a partnership, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 779

644 F.2d 779

Fed. Sec. L. Rep. P 98,209

Arthur L. STOKES, et al., Appellants, v. Lawrence LOKKEN and Henson & Tully, a partnership, Appellees.

No. 80-1701.

United States Court of Appeals,

Eighth Circuit.

Submitted April 16, 1981.

Decided July 7, 1981.

David G. Newhall, James P. McCarthy (argued), Minneapolis, Minn., for Arthur L. Stokes, et al.

James S. Simonson (argued), Susan L. Lentz, Gray, Plant, Mooty, Mooty & Bennett, Minneapolis, Minn., for Lawrence Lokken and Henson & Tully.

Before BRIGHT, HENLEY and ARNOLD, Circuit Judges.

ARNOLD, Circuit Judge.

This is an appeal from the entry of summary judgment by the District Court ¹ in favor of Lawrence Lokken, a lawyer, and his former law firm, Henson & Tully (we will refer to these parties in the singular as "Lokken") on claims of negligent misrepresentation and aiding and abetting violations of federal and state securities laws. We affirm.

This action was brought against Continental Financial Corporation, Continental Coin Exchange, and Numisco Sales Company (referred to collectively as "CFC") on February 11, 1975. A class action against the same defendants had been commenced on January 25, 1975. A partial summary judgment was entered against CFC in the class action, based on a holding that CFC sold unregistered securities in violation of the Securities Act of 1933, 15 U.S.C. §§ 77a et seq. ² Shortly thereafter, Lokken, an attorney for CFC, and Touche, Ross & Co., CFC's accountants, were added as parties to this action and the class action. The plaintiffs in this action alleged that Lokken and Touche, Ross had aided and abetted violations of federal and state securities laws through their dealings with CFC. Some discovery was had, and the deposition of Lokken was filed on May 18, 1977, before further discovery was suspended pending completion of CFC's bankruptcy proceedings. The bankruptcy proceedings were concluded on April 14, 1980, and motions for summary judgment by Lokken and Touche, Ross were filed on June 16, 1980. After a hearing on the motions in which oral arguments were heard, the District Court denied the Touche, Ross motion but granted summary judgment in favor of Lokken on July 3, 1980. So much of the order as dismissed the claim against Lokken was certified under Fed.R.Civ.P. 54(b) for immediate appeal.

Plaintiffs make two separate arguments on appeal. First, they argue that there are genuine issues of material fact, and therefore the entry of summary judgment was improper, as to the claims that Lokken aided and abetted violations 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 (1975), and that Lokken aided and abetted violations of § 5 of the Securities

Act of 1933, 15 U.S.C. § 77e. Second, we are told that summary judgment was improper as to certain claims under the Minnesota Securities Act and allegations based on common-law negligence and misrepresentation. For the reasons set out below, we reject both arguments.

FACTS

CFC was engaged in the marketing of precious metals, including the sale of gold and silver on margin accounts. The specifics of CFC's marketing practices were examined by the District Court in Jenson v. Continental Fin. Corp., supra, and the margin transactions were held to constitute the sale of securities. This holding is not questioned by any of the parties to this appeal, and we accept it for present purposes.

Lokken's involvement with this suit arises out of CFC's request that Touche, Ross undertake an audit of CFC for the fiscal year ending August 31, 1973. In the course of conducting this audit, Touche, Ross sent a standard auditor's letter to Henson & Tully, because the firm had previously done some legal work for CFC. In response to this request Lokken sent a letter dated September 14, 1973, which noted the possibility of securities-law claims relating to the margin transactions, but gave the opinion that the margin transactions did not amount to the sale of securities. The relevant portion of the letter reads as follows:

Continental Coin Exchange Inc. sells coins in bulk in transactions which conceivably could be characterized as sales of securities and hence made in violation of federal and state securities laws. If the sales do constitute sales of a security, substantial liabilities to customers could arise. It is our opinion that the sales in question do not involve the sale of a security.

Although Lokken had previously performed some services of a limited nature for CFC, only the conduct associated with the September 14, 1973, letter is alleged to be in violation of the securities laws. Lokken had no further involvement with any CFC concerns.

Some time after the Touche, Ross audit was completed, CFC compiled an advertising brochure, entitled "The Silver Book." The Silver Book extolled the virtues of investing in silver through CFC and presented information about CFC's financial condition, including a reference to a favorable Touche, Ross audit opinion. The Silver Book made no mention of Lokken, nor is there any specific indication in the record that Lokken had reason to know that the Touche, Ross audit would be reproduced in advertising literature.

ANALYSIS

When reviewing the entry of a summary judgment, the appellate court applies the same standard as the trial court. Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment may be granted

if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

In addition, all facts must be viewed in the light most favorable to the parties opposing the motion, in this case appellants, and they must be given the benefit of all reasonable inferences. Vette Co. v. Aetna Cas. & Sur. Co., 612 F.2d 1076, 1077 (8th Cir. 1980).

Alleged Aiding and Abetting of Violations of § 10(b) and Rule 10b-5.

The courts of appeals have formulated a three-part test that must be met before aiding and abetting liability is imposed. If proof of any part is lacking, there can be no liability. The three prerequisites are:

(1) the existence of a securities law violation by the primary party (as opposed to the aiding and abetting party);

(2) "knowledge" of the violation on the part of the aider and abettor; and (3) "substantial assistance" by the aider and abettor in the achievement of the primary violation.

See IIT, An International Investment Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980); Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 799 (3d Cir.) cert. denied, 439 U.S. 930, 99 S.Ct. 318, 58 L.Ed.2d 323 (1978); Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94-97 (5th Cir. 1975). As was said in Cornfeld, supra, 619 F.2d at 922, the three-part test has become commonplace, but the exact content of the three parts "is still being delineated by the courts." Nor should the three parts "be considered in isolation from one another." Ibid.

(1) The Primary Violation. There is no dispute that the first element has been satisfied. The court in Jenson found that CFC violated the federal securities laws, and that finding is not in controversy on this appeal.

(2) Knowledge of the Violation. The Supreme Court in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 1381, 47 L.Ed.2d 668 (1976), held that a finding of scienter intent to deceive, manipulate, or defraud is a prerequisite to § 10(b) liability. Hochfelder clearly eliminates negligence as a possible basis for a finding of liability, but leaves open the question whether recklessness could be sufficient under certain circumstances. Id. at 193-94 n.12, 96 S.Ct. at 1381 n.12.

Since Hochfelder, the courts of appeals have generally concluded that recklessness, in some form, can satisfy the scienter requirement. Edward J. Mawod & Co. v. SEC, 591 F.2d 588, 596 (10th Cir. 1979); Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 44 (2d Cir.), cert. denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978); Nelson v. Serwold, 576 F.2d 1332, 1338 (9th Cir.), cert. denied, 439 U.S. 970, 99 S.Ct. 464, 58 L.Ed.2d 431 (1978); Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 224, 54 L.Ed.2d 155 (1977). This Court has not yet decided what degree of knowledge will satisfy the scienter requirement. In the analogous case of Berdahl v. Securities and Exchange Commission, 572 F.2d 643 (8th Cir. 1978), however, we affirmed action taken in a disciplinary proceeding based on conduct we considered to be "at the very least ... grossly reckless." Id. at 647 n.6. We do not believe it necessary in this opinion to canvass the matter fully and announce a comprehensive standard adequate to govern all cases. For here the actor's conduct falls short of any reasonable formulation of the requisite legal standard.

A brief review of the allegations and evidence submitted to the District Court makes clear that Lokken did not act with the quality of intent required to sustain civil liability. As corporate counsel Lokken incorporated CFC, drafted some agreements, and advised CFC, in a limited way, on its corporate activities. Then, after receiving a standard auditor's request, Lokken responded with an opinion letter that was based on facts concerning CFC's manner of operations supplied by CFC's President, Richard V. Marteson, and limited legal research conducted in August of 1972 on whether the sale of bags of coins constituted the sale of securities. ³ Appellants allege that Lokken relied on advice he solicited over the phone from a Mr. Sedgwick of the Minnesota Securities Division to the effect that the margin transactions were not securities. Such reliance is said to be improper, especially in light of the availability of a statutory procedure for the issuance of interpretive opinions by the...