693 F.2d 1196 (5th Cir. 1982), 80-1145, Meyers v. Moody
|Citation:||693 F.2d 1196|
|Party Name:||David C. MEYERS, et al., Plaintiffs-Appellees, v. Shearn MOODY, Jr., Defendant-Appellant. Bernard HAINES, et al., Plaintiffs-Appellees, v. Shearn MOODY, Jr., Defendant-Appellant. Tharpe FORRESTER, Receiver-Appellee, v. Shearn MOODY, Jr., Defendant-Appellant.|
|Case Date:||December 23, 1982|
|Court:||United States Courts of Appeals, Court of Appeals for the Fifth Circuit|
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William E. Junell, Jr., Joe Reynolds, Houston, Tex., John M. Harmon, Austin, Tex., for defendant-appellant.
Will E. Wright, Larry G. Patton, Houston, Tex., Robert L. Blumenthal, Dallas, Tex., James W. Webb, Montgomery, Ala., for Tharpe Forrester.
Appeal from the United States District Court for the Northern District of Texas.
Before THORNBERRY, REAVLEY and JOHNSON, Circuit Judges.
REAVLEY, Circuit Judge:
The receiver ("Receiver") of Empire Life Insurance Company of America ("Empire") brought this action against Empire's president, board chairman and majority shareholder, Shearn Moody, Jr. ("Moody"), alleging that Moody violated both federal securities law and his fiduciary duties in the management of Empire's affairs. The jury verdict and district court judgment, 475 F.Supp. 232 (D.C.Ala.1973), went against Moody on both securities and common law grounds. Moody appeals and we affirm.
In the summer of 1963 Empire was a fledgling company licensed in a single state, with no business, one employee, $256,000 of capital and surplus and no other assets. By the end of 1968 Empire was licensed in sixteen states, with approximately $455,000,000 of business in force, 500 full-time agents, $20,000,000 in reported surplus and $60,000,000 in reported assets. This phenomenal growth was made possible by Moody's assignment to Empire of 40 percent of his life estate in a trust established by his grandmother. 1 The life interest was admitted as an asset of Empire at a value of $5,813,440 in 1964, $14,403,200 in 1965, and $4,250,000 in 1972. When the life interest's assigned value increased, Empire prospered; when its value declined, Empire collapsed.
A critical factual issue has been the designation of responsibility for the $14,403,200 value placed on the life interest. Moody claimed that responsibility rested with national accounting firms, an independent actuary and the Alabama Superintendent of Insurance. The jury found that the value increase was done by Moody as part of a scheme to defraud. As will be seen, that finding is supported by the evidence. Other facts and legal issues, however, must be faced to dispose of the appeal.
I. Factual Background: The Rise and Fall of Empire 2
In 1943 the Libbie Shearn Moody Trust was created for the benefit of certain heirs, including Shearn Moody, Jr. The corpus of the trust consisted chiefly of 9,949,585 shares of stock in American National Insurance Company ("ANICO"), and ANICO dividends produced approximately 90% of the trust's income. Moody inherited a one-eighth life interest in this trust.
On June 27, 1963, Moody incorporated Empire Life Insurance Company in the State of Alabama. Moody, the company's sole shareholder, contributed $256,061 to Empire. Such meager capital could not support Moody's ambitious plan--to amass quickly as many assets as possible by acquiring other life insurance companies, which are required by law to have substantial assets in reserve to pay policyholder claims. To embark upon an acquisition program Empire needed a substantial surplus.
Empire acquired that surplus in July 1963 when Moody assigned to it 40 percent of his interest in the Libbie Shearn Moody Trust in consideration for a $200,000 surplus debenture. Moody and Dale R. Major, Moody's lawyer and chief assistant, intended and believed that the instrument assigning the life interest precluded its further transfer; but Moody never communicated this thought to any insurance commissioner, Empire director, or Empire shareholder, despite (or because of) the fact that an asset which cannot be transferred cannot be admitted as an asset of an insurance company.
Before the life interest could be used to support Empire's expansion, it was necessary that the Alabama Superintendent of Insurance "admit" the interest as an asset of Empire at an approved value. To determine the interest's value, Moody employed the actuarial firm of Lloyd K. Friedman & Associates and the national accounting firm of Ernst & Ernst. In the spring of 1964 Lloyd Friedman furnished Henry Hogan, a partner in Ernst & Ernst, with a suggested method of calculating the life interest's value. This method took into consideration an actuarial factor (Moody's life expectancy) and three economic factors (current trust income, future increases in trust income, and future interest rates), the objective being to arrive at the present value of predicted income from the trust. Hogan accepted Friedman's valuation method, as well as his assessment of Moody's life expectancy and current trust income. Hogan himself selected what he considered the most reasonable growth rate and discount rate. In determining
the applicable growth rate, Hogan noted that ANICO's cash dividends had increased at an average annual rate of nearly 40 percent over the previous twelve years. Hogan expressly took this increase into account in concluding that it would be most reasonable to assume a 5 percent growth rate in trust income. In determining the applicable discount rate to apply to future income, Hogan considered but rejected a 4 percent rate in favor of a 5 percent rate. 3 In a letter dated September 1, 1964, Hogan informed Moody that, based on the valuation method and assumptions set forth above, the life interest owned by Empire should be valued at $5,813,440.
At Moody's request, Lloyd M. Jard, a partner in the accounting firm of Peat, Marwick, Mitchell & Co., ("Peat Marwick") transmitted a copy of Hogan's letter to Walter S. Houseal, Superintendent of Insurance for the State of Alabama. On October 27, 1964, Superintendent Houseal informed Empire that the Alabama Insurance Department accepted the life interest as an admitted asset of Empire at a value of $5,813,440. Houseal stipulated, however, that acceptance of the life interest at this or any other value would continue only so long as the Department received each year an updated appraisal of the life interest "prepared by Ernst & Ernst or other competent appraiser." Empire listed the life interest as an admitted asset at a value of $5,813,440 in its December 31, 1964 report to shareholders.
The $5,813,440 valuation of the life interest provided Empire with the surplus necessary to consummate a merger with Consolidated American Life Insurance Company ("CALICO"), a publicly held corporation. On December 31, 1964, Empire issued 345,103 shares of Class A common stock for all of CALICO's outstanding common stock. Although Empire acquired minority shareholders as a result of this merger, Moody retained virtually all of the company's Class B voting stock, as well as the ability to elect all but one of its directors.
The CALICO merger so depleted Empire's surplus that the rapid expansion program envisioned by Moody was placed in jeopardy. Thus, within six months of Superintendent Houseal's approval of the life interest at a value of $5,813,440, Moody undertook a series of actions that resulted in an increase in excess of $8,000,000 in the life interest's admitted value.
In a letter dated March 8, 1965, Dale Major, who was by now executive vice-president and secretary of Empire, informed Houseal that ANICO had recently announced a dividend increase of two cents per share. Major continued:
Our accountants have been apprised of the [dividend increase], and have been instructed to prepare immediately a current evaluation based on this increased dividend. As soon as this appraisal is received it will be forwarded to you.
About the same time, Moody asked Lloyd Friedman to recalculate the value of the life interest based on new economic variables. In a letter dated March 31, 1965, Friedman responded by setting forth in summary fashion alternative valuations of Moody's entire one-eighth life estate as of December 31, 1964. Friedman's calculations assumed current annual income of $400,000, a discount rate of 4%, and alternative growth rates of 5%, 7 1/2% and 10%. An assumed growth rate of 5% yielded a $19,488,000 valuation of Moody's entire life estate; a 7 1/2% assumed growth rate yielded a $36,000,000 valuation; and a 10% assumed growth rate yielded a $73,908,000 valuation. Friedman offered no opinion as to which, if any, of these assumed growth rates were reasonable.
Friedman's response did nothing more than apply arithmetic to the obvious fact that the value of the life interest owned by Empire could be substantially increased if the three critical economic assumptions on which Ernst & Ernst had based its appraisal were altered. Specifically, the life interest's value would rise from $5,813,440 to $14,403,200 if the appraiser assumed (a) current annual income of $400,000 rather than
$370,000, (b) a growth rate of 7 1/2% rather than 5%, and (c) a discount rate of 4% rather than 5%.
Immediately after receiving Friedman's letter, Moody provided Empire's accountant at Peat Marwick with the new computations. On April 2, 1965, Peat Marwick transmitted to Moody a statement of Empire's assets and liabilities as of December 31, 1964. In an accompanying letter, the accounting firm stipulated that the financial statement was "prepared without audit or verification by us from data you made available, ... [including] a computation by an independent actuary of the company's...
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