S.E.C. v. Seaboard Corp.

• Decision Date: 24 May 1982
• Docket Number: Nos. 79-3820,79-3821,s. 79-3820
• Citation: 677 F.2d 1301
• Parties: Fed. Sec. L. Rep. P 98,722 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. The SEABOARD CORPORATION, etc., et al., Defendants. ADMIRALTY FUND and Admiralty Fund Growth Series Litigation Trust, Cross-Claimant/Appellant, v. HUGH JOHNSON & COMPANY, INC., Hugh Johnson, Norman Michael Keiser, and Ernst& Ernst, Cross-Defendants/Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1301

677 F.2d 1301

Fed. Sec. L. Rep. P 98,722

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. The SEABOARD CORPORATION, etc., et al., Defendants.

ADMIRALTY FUND and Admiralty Fund Growth Series Litigation

Trust, Cross-Claimant/Appellant, v. HUGH JOHNSON & COMPANY, INC., Hugh Johnson, Norman Michael

Keiser, and Ernst& Ernst, Cross-Defendants/Appellees.

Nos. 79-3820, 79-3821.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Sept. 8, 1981.

Decided May 24, 1982.

Stephen H. Marcus, Greenberg, Bernhard, Weiss & Karma, Los Angeles, Cal., for plaintiff.

Allen H. Beroza, Hodgson, Russ, Andrews, Woods & Goodyear, Buffalo, N. Y., Joseph J. O'Malley, Paul, Hastings, Janofsky & Walker, Los Angeles, Cal., for cross-defendants/appellees.

Appeal from the United States District Court for the Central District of California.

Before WRIGHT and WALLACE, Circuit Judges, and EAST, ^* Senior District Judge.

EUGENE A. WRIGHT, Circuit Judge:

This is an appeal of summary judgment for cross-defendants Ernst & Ernst, Hugh Johnson & Co., Hugh Johnson, and N. Michael Keiser. Ernst & Ernst and the "Hugh Johnson defendants" (hereinafter HJ) appealed separately. We consolidate them because the claims against them arise from the same facts.

FACTUAL BACKGROUND

This is one of several appeals arising from a 92-page SEC complaint against The Seaboard Corporation, its subsidiaries, and other parties (including officers and directors of Seaboard or its subsidiaries) for securities law violations. Competitive Capital Fund, Inc., Seaboard Leverage Fund, Inc., Admiralty Fund, Inc., and the Income Fund of Boston, Inc., all mutual funds and subsidiaries of Seaboard (hereinafter Funds), cross-claimed against fellow and added defendants involved in the transactions that were the subject matter of the SEC complaint, and which resulted in harm to the Funds.

The transaction that led to this appeal was the purchase by Admiralty Fund (hereinafter AF) of shares of Dukor Modular Systems (hereinafter DMS). AF's purchase of shares of DMS was one of several transactions in which Jerome R. Randolph, then president and director of Seaboard and its subsidiaries, and others looted Fund assets.

The SEC complaint alleged that Randolph, John R. Rawlings, and Harry B. Turner ¹ with the aid of Morgan Olmstead Kennedy & Gardner, Inc. (hereinafter Morgan), used the assets of AF to manipulate the market for DMS shares. This occurred during and after an offering of DMS shares to the public.

On December 22, 1970, DMS floated an offering of 350,000 shares at $10 each. Randolph purchased 50,000 shares for AF. At the same time he directed Turner to buy 7,500 shares. From December 22, 1970 to April 1, 1971 he caused AF to purchase 42,000 more shares of DMS pursuant to an agreement with Morgan, one of the underwriters of the DMS issue.

These purchases allegedly supported the DMS aftermarket and allowed Randolph, Rawlings, and Turner to sell their shares at a profit. AF's DMS holdings, however, were not sold until after Randolph left Seaboard and the Funds in 1972. They were sold at a loss of $1,016,675 on an initial investment of $1,021,825.

On March 11, 1974, the Funds filed cross-claims incorporating the SEC complaint and alleging generally violations of the securities acts that resulted in more than $10 million of damage to the Funds' assets. The cross-claims were amended to add more cross-defendants, among which were the HJ defendants, Hugh Johnson & Co., Hugh Johnson, and Norman Keiser. ² In their second amended cross-claims, the Funds alleged with greater particularity the violations against them and added Ernst & Ernst.

In count 4 of the second amended cross-claims, AF realleged the market manipulation by Randolph, Rawlings and Turner. Further, it alleged that its purchases and the DMS distribution as a whole were pursuant to a conspiracy between Randolph, DMS, Morgan, Ernst & Ernst and others. ³

Pursuant to this alleged conspiracy, DMS filed a registration statement and prospectus precedent to the offering, which contained these misrepresentations and omissions: (1) they failed to disclose the scheme for distributing DMS shares; (2) they failed to disclose that DMS was in financial straits; (3) they overstated DMS's net worth by at least $500,000; (4) they failed to disclose anticipated losses on incompleted projects; (5) they stated that DMS had over $12 million in back orders, while in reality the firm back orders amounted to much less; (6) they failed to disclose that backlog customers were unlikely to fulfill their obligations because of limited resources and conditions precedent to their obligations to DMS; (7) they failed to disclose that the primary backlog customer, Arbor Development Co. (hereinafter Arbor), was in such financial difficulty that it could not pay for its back orders and was in fact controlled by DMS.

These misrepresentations and omissions were alleged to be a cause for AF's purchase of DMS shares because Randolph, notwithstanding his personal motivations, relied upon the prospectus in directing the purchases. Ernst & Ernst and HJ were added because of their participation in the preparation of the registration materials and in the offering itself. HJ and Morgan were the underwriters of the offering, and Ernst & Ernst certified the financial statements contained in the prospectus. In response to the second amended cross-claims, Ernst & Ernst and HJ acknowledged their roles in the offering, but denied wrongdoing. Both moved for summary judgment.

In support of its motion, Ernst & Ernst argued that the statutes of limitations barred claims for violation of the securities provisions upon which AF relied. In the alternative, it argued that its work for DMS had complied with generally accepted accounting standards. It presented the affidavit of its auditor, James Maxwell. HJ relied only upon the bar of the statutes of limitations to support its motion.

In response, AF filed memoranda arguing the infirmity of the statute of limitations defense and asserting facts, supported by citations to documents and depositions on file, to show the existence of issues of material fact. Ernst & Ernst and HJ were allowed to file response memoranda. AF then filed a reply and a supplemental memorandum of points and authorities in opposition to all motions for summary judgment. Ernst & Ernst objected to the filing of these unscheduled memoranda and its motion to strike was granted.

The court granted summary judgment for all count 4 defendants. Its judgment was based primarily on the finding that the claims brought by AF were barred by statutes of limitations. Alternatively, it concluded that even if the claims were not so barred, the prospectus was not, as a matter of law, misleading.

In behalf of Ernst & Ernst, the court further found that its defense of compliance with generally accepted accounting principles was good because no evidence to the contrary had been introduced. And the court found no evidence that Ernst & Ernst or HJ has conspired with Randolph to defraud the funds. ⁴

On appeal, AF raises these issues: (1) whether summary judgment for Ernst & Ernst and HJ was improper because the prospectus was not materially misleading as a matter of law; (2) whether it was improper because AF's claims are not barred by the statutes of limitations; (3) whether summary judgment for Ernst & Ernst was improper because its defense of compliance with generally accepted accounting principles is ineffectual; and (4) whether the court erred in striking AF's unscheduled reply memorandum.

DISCUSSION

Summary judgment is proper only when (1) the pleadings, depositions, affidavits, and other material permitted by Rule 56(c), show that there is no disputed issue of material fact, and (2) on the agreed facts, the moving party is entitled to prevail as a matter of law. Fed.R.Civ.P. 56(c); Pegasus Fund, Inc. v. Laraneta, 617 F.2d 1335, 1339 (9th Cir. 1980). A material issue of fact is one that affects the outcome of the litigation and requires a trial to resolve the parties' differing versions of the truth. United States v. First National Bank, 652 F.2d 882, 887 (9th Cir. 1981).

The well known principles controlling summary judgments apply here. Adickes v. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962).

I. The Prospectus

Admiralty Fund's claims against Ernst & Ernst and HJ are based upon §§ 11 and 12(2) of the 1933 Securities Act (15 U.S.C. §§ 77k and 77l (2) ), § 10(b) of the 1934 Exchange Act and its companion Rule 10b-5 (15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5), §§ 25400-25402 of the California Corporations Code, and common law fraud. These claims are predicated upon the allegation that the DMS prospectus was materially misleading. ⁵

Our first inquiry is whether the court could properly grant on this record summary judgment because the prospectus was not misleading as a matter of law.

We have adopted an objective test of materiality described in Northwest Paper Corp. v. Thompson, 421 F.2d 137 (9th Cir. 1969). We continue with it notwithstanding the Supreme Court's articulation of more permissive standards. See Lewelling v. First California Co., 564 F.2d 1277, 1279 n.3 (9th Cir. 1977).

It is whether the existence or nonexistence of the fact in question is a matter to which a reasonable man would attach importance in determining his choice of action in the transaction. Northwest Paper Corp. v. Thompson, 421 F.2d at 138. This is normally a jury question and should not be taken from it unless the court has engaged in meticulous and well articulated analysis of each item of withheld or misrepresented information. Id.

In support of their motions, neither Ernst & Ernst nor HJ argued explicitly that the prospectus was not misleading. Both asserted as their principal defense the statutes of limitations.

Ernst & Ernst...