765 F.2d 1004 (11th Cir. 1985), 84-5106, Woods v. Barnett Bank of Ft. Lauderdale
|Citation:||765 F.2d 1004|
|Party Name:||Dean WOODS, et al., Plaintiffs-Appellees, Cross-Appellants, v. BARNETT BANK OF FORT LAUDERDALE, Defendant-Third-Party Plaintiff-Appellant- Cross-Appellee, Alexander and Allen, Inc., et al., Third-Party Defendants.|
|Case Date:||July 15, 1985|
|Court:||United States Courts of Appeals, Court of Appeals for the Eleventh Circuit|
Mahoney, Hadlow & Adams, Earl B. Hadlow, Robert J. Winicki, Olivia Watts Martin, Jacksonville, Fla., Faircloth, Easthorpe & Traver, Earl Faircloth, Ft. Lauderdale, Fla., William H. Adams III, Jacksonville, Fla., for third-party plaintiff defendant-appellant, cross-appellee.
Ritchie & Rediker, J. Michael Rediker, Birmingham, Ala., Shutts & Bowen, Robert E. Venney, Miami, Fla., for plaintiffs-appellees, cross-appellants.
Appeals from the United States District Court for the Southern District of Florida.
Before HILL, KRAVITCH and SMITH [*], Circuit Judges:
KRAVITCH, Circuit Judge:
On cross-appeals from a judgment of the United States District Court, 1 plaintiffs, members of a class of investors who purchased bonds that defaulted before maturity, endorse the district court's holding on liability and compensatory damages, but challenge the court's refusal to award prejudgment interest, punitive damages, and attorneys' fees. Defendant Barnett Bank of Fort Lauderdale attacks the court's theory of liability and measure of damages. The court below imposed aiding and abetting liability on Barnett Bank for its employee's substantial assistance to and participation in a securities fraud that was committed in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5. The perpetrators of the fraud were the subject of a proceeding brought by the Securities Exchange Commission (SEC), SEC v. R.J. Allen & Associates, Inc., 386 F.Supp. 866 (S.D.Fla. 1974), but they are not involved in this appeal. The district court awarded $550,000 in damages to the class, but denied the other forms of relief requested. We affirm.
The Primary Actors
Robert J. Allen and H. William Alexander were the principal actors in this scheme. The two men organized a corporation, Alexander & Allen, Inc., in the state of Florida in August 1972. On February 26, 1974, the corporation changed its name to R.J. Allen & Associates, Inc. From 1972 to October 1974, this entity was in the business of selling securities commonly referred to as municipal bonds. Alexander and Allen also were the sole shareholders in two other entities, A & A Enterprises, and All Enterprises. 2
As part of its business, Alexander & Allen, Inc. engaged in the underwriting of industrial development revenue bonds of numerous issuers. Although these bonds came within the definition of municipal obligations, they were not general bonds issued by a political entity nor were they secured by the taxing power of any political unit. Rather, their strength as investments depended entirely on the ability of a company funded by the bond sales to put the proceeds to use and generate revenue sufficient to meet the principal and interest payments when due. Thus, these bonds were a speculative, high risk investment, includable in the class of municipal securities because interest payments received by bondholders were tax exempt.
In July 1973, C. David Smith, a loan officer at Barnett Bank, was introduced to Alexander and Allen by a friend who related that the two were dissatisfied with their present bank. Smith asked them to move their financial business to Barnett Bank and the two agreed. Shortly thereafter, they opened a checking account at Barnett Bank and applied for and received a $50,000 loan. On the loan application form they stated that the source of repayments would be "income from bond sales." Alexander and Allen, through their several businesses, maintained a substantial banking relationship with Barnett Bank until the SEC's action commenced in the fall of 1974.
The Tuskegee Bond Issue
In early 1973, Alexander and Allen became involved in the planning of a hydroponic tomato farming project in Alabama. To finance their proposal, the two men
approached the Tuskegee, Alabama, Industrial Development Board, which agreed to issue industrial revenue bonds on behalf of the project. In October 1973, Alexander and Allen described their tomato farming project to Smith, hoping to convince Barnett Bank to act as trustee for the accompanying bond issue. Barnett Bank did not have a trust department at that time, so it sought to determine whether its holding company was interested in the project. Brad Middlebrook, then of Del Ray National Bank, refused this offer, stating that many small bond houses were having a great deal of trouble financially at that time.
Alexander & Allen, Inc. was named to act as underwriter for the bond issue, 3 with Covington County Bank of Andalusia, Alabama ultimately agreeing to serve as trustee. All Enterprises and A & A Enterprises were to put the proceeds of the bond issue to use in constructing and operating the tomato farming project. As underwriter, Alexander & Allen, Inc. obligated itself to purchase the entire bond issue, which totalled $1.5 million, for resale to the public. In its role as trustee, Covington County Bank agreed to deliver the bonds to the underwriter upon payment of the purchase price. The exchange was scheduled to take place on January 23, 1974, the closing date for the bond issue.
Class representative Dean Woods testified that he placed his order for the bonds during the latter part of 1973. He did not receive the bonds at that time because none of the bonds were to be released until all were purchased. When the closing date finally arrived, only a small portion of the bond issue had been ordered by investors. Because the underwriter had not yet sold enough bonds or raised money in another fashion to pay for the entire issue, Covington County Bank did not deliver the bonds at the closing as planned. As an alternative, the underwriter suggested that Covington County Bank allow piecemeal distribution of the bonds. The trustee agreed to this, releasing bonds as Alexander & Allen, Inc. paid for them. 4 Woods testified that he received his bonds in two shipments; one arriving around February 1, 1974, and the other sometime during the spring of that year. According to Covington County Bank's trust agreement, no money could be distributed to A & A Enterprises until all the bonds had been purchased by the underwriter. Hence, this arrangement caused the money received upon sale of the bonds to investors to accumulate in the trust account.
Although it complied with the underwriter's request to allow piecemeal distribution of the bonds, Covington County Bank was not comfortable with this gradual distribution. Eager to dispel the trustee's anxieties, Allen went to Barnett Bank, hoping to obtain a letter of recommendation to assure Covington County Bank of the underwriting firm's trustworthy character. Apparently, Allen initially sought Smith's assistance, but Smith was not present in the office at the time, so Allen turned to R.E. Prentiss, the Bank's vice president. Prentiss drafted a letter in an effort to comport with the request. Not satisfied with Prentiss' letter, however, Allen, accompanied by Alexander, returned to Barnett Bank the next day. They found Smith, explained why Prentiss' letter was not sufficient, and asked Smith to write a stronger letter. Smith addressed the following letter to L.R. Deal, President of Covington County Bank:
I have reviewed the investment banking agreement between Alexander and Allen, Inc., and All Enterprises, Inc. dated November 20, 1973. This agreement
is similar to the corporation's previous investment banking agreements which they have previously fulfilled without any difficulty. There is no reservation, in my mind, that this agreement can and will be met as agreed to.
In fact, Smith had not reviewed the investment banking agreement and was not aware whether the corporation had fulfilled similar agreements. Rather, he wrote the letter, stating essentially what Alexander and Allen wanted him to write, as a favor to them because of the substantial amounts they kept on deposit with Barnett Bank. Shortly after receiving this letter, Covington County Bank began to distribute the proceeds of the bond issue to A & A Enterprises, thereby violating its trust agreement because a portion of the bonds had not been purchased by the underwriter.
Sales and distribution of the bonds continued through the spring and summer of 1974, but the entire bond issue was never exhausted. During this period, Covington County Bank made several disbursements of the proceeds of the bond issue, totalling $550,000, to A & A Enterprises, which was deposited in an account at Barnett Bank. Over the next few months, some of the deposited funds were used for purposes varying from those stated in the prospectus; for example, $6,000 was used to prepay twelve months' rent for H. William Alexander & Associates, a brokerage firm; Alexander received $6,000 in the form of a personal loan; Alexander used $50,000 more to secure a personal loan from Barnett Bank in the form of certificates of deposit; and Alexander took $4,500 to pay for stock in another corporation, Arthritis Clinic International.
Two semiannual interest payments were made to the investors in the Tuskegee bond issue. On October 1, 1974, the SEC brought an action against the underwriter, Alexander, Allen, and several other individuals, alleging securities violations arising out of certain Industrial Development Revenue Bond issues, including the one in Tuskegee. In SEC v. R.J. Allen & Associates, 386 F.Supp. 866...
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