Anderson v. Morgan Keegan & Co. (In re Infinity Bus. Grp., Inc.)

• Decision Date: 19 April 2022
• Docket Number: 21-1536
• Citation: 31 F.4th 294
• Parties: IN RE: INFINITY BUSINESS GROUP, INCORPORATED, Debtor. Robert F. Anderson, as Chapter 7 Trustee for Infinity Business Group, Inc., Trustee - Appellant, v. Morgan Keegan & Company, Inc.; Keith E. Meyers, Defendants - Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

31 F.4th 294

IN RE: INFINITY BUSINESS GROUP, INCORPORATED, Debtor.Robert F. Anderson, as Chapter 7 Trustee for Infinity Business Group, Inc., Trustee - Appellant,

v.Morgan Keegan & Company, Inc.; Keith E. Meyers, Defendants - Appellees.

No. 21-1536

United States Court of Appeals, Fourth Circuit.

Argued: March 9, 2022

Decided: April 19, 2022

ARGUED: Robert W. Humphrey, II, WILLOUGHBY & HOEFER, P.A., Charleston, South Carolina, for Appellant. Valerie S. Sanders, EVERSHEDS SUTHERLAND (US) LLP, Atlanta, Georgia, for Appellees. ON BRIEF: Mitchell Willoughby, Elizabeth Zeck, WILLOUGHBY & HOEFER, P.A., Columbia, South Carolina; Gerald Malloy, MALLOY LAW FIRM, Hartsville, South Carolina, for Appellant. Robert C. Byrd, A. Smith Podris, PARKER POE ADAMS & BERNSTEIN LLP, Charleston, South Carolina; Olga Greenberg, EVERSHEDS SUTHERLAND (US) LLP, Atlanta, Georgia, for Appellees.

Before RICHARDSON and HEYTENS, Circuit Judges, and KEENAN, Senior Circuit Judge.

Affirmed by published opinion. Judge Heytens wrote the opinion, in which Judge Richardson and Senior Judge Keenan joined.

TOBY HEYTENS, Circuit Judge:

Infinity Business Group used a dodgy accounting practice that artificially inflated its accounts receivable and therefore its revenues. The company's CEO cooked up the practice, and the board of directors and outside auditors blessed it. Many of these wrongdoers have already been held responsible for their conduct through civil lawsuits, criminal charges, or both.

Yet Infinity's bankruptcy trustee remains unsatisfied. He insists the true mastermind was a financial services company Infinity contracted with to (unsuccessfully) solicit investments. But even assuming—contrary to the bankruptcy court's scrupulous factfinding—that the financial services company played some role in creating or perpetuating the flawed accounting technique, the trustee still cannot succeed in holding the financial services company liable. As both the bankruptcy and district courts correctly held, the trustee's claims run headlong into the longstanding principle that one wrongdoer cannot recover from another for joint wrongdoing. We thus affirm.

I.

A.

Infinity was in the business of pursuing collections on bad checks, such as those that initially bounce for insufficient funds. The company was governed by a board of directors and managed by a handful of corporate officers. Infinity's CEO, Byron Sturgill, also acted as the chief financial officer from the company's inception in 2003 until September 2006. Sturgill was in the habit of claiming he was a certified public accountant, but that was a lie. In fact, Sturgill failed every part of the exam six times.

As a young business, Infinity required regular infusions of capital. For help in raising that capital—and potentially plotting an initial public offering—Infinity turned to Morgan Keegan & Company, Inc., and Keith Meyers, one of Morgan Keegan's investment advisers who "focused his work on raising institutional capital" for clients. JA 227. Meyers was a relatively recent business school graduate who had briefly worked as an accountant auditing manufacturing businesses before pursuing his MBA. By the time Infinity retained Morgan Keegan in 2006, however, Meyers’ accounting license had been expired for about five years.

Infinity engaged Morgan Keegan for the limited purpose of assisting with "a private placement of " Infinity stock. JA 1245. The engagement contract required Infinity to "furnish Morgan Keegan with such information ... including financial statements ... as Morgan Keegan may reasonably request" and provided that Morgan Keegan could "rely upon the accuracy and completeness of the [furnished information] without independent verification." JA 1246. Infinity remained "solely responsible for the contents of " all "written or oral communications to any actual or prospective" investor. JA 1246.

Morgan Keegan's first major task was helping prepare a confidential information memorandum for potential investors, which was to include Infinity's financial information from 2003 to 2005. Sturgill (Infinity's CEO) prepared and provided the relevant information for all three years.

The 2005 financials reflected a one-year increase in accounts receivable of more than $9 million—from approximately $150,000 to $9.9 million. Meyers questioned the increase on behalf of Morgan Keegan, and Sturgill offered multiple explanations, including a change in reporting practices and an uptick in a new area of business. Sturgill also explained that, starting in 2005, the numbers now reflected anticipated receivables, including fees Infinity would be entitled to if it managed to collect a check, with a certain portion discounted for estimated non-collections.

Everyone now agrees this accounting practice was inconsistent with the generally accepted accounting principles endorsed by the Securities and Exchange Commission. At the time, though, Sturgill "was adamant" that the technique complied with those principles, JA 233, and Infinity's external auditors repeatedly corroborated that position. Meyers—whose limited accounting experience had been in a different sector nearly a decade before—trusted those representations.

Morgan Keegan incorporated the 2005 financial statements Sturgill provided into the memo it prepared for potential investors. The memo's first page stated that it was based on "information furnished" by Infinity and reminded prospective buyers of their "responsibility to perform a thorough due diligence review prior to consummating a transaction." JA 1282.

Bison Capital, a potential investor that received Morgan Keegan's memo, was interested and began due diligence. Because the accounts receivable figure purported to exclude "checks the company feels are not collectable," JA 1335, Bison asked for data about Infinity's historical success rate. A Morgan Keegan employee, Calvin Clark, helped Infinity prepare its responses. In calculating the historical success rate, Clark excluded any checks "older than 60 days," JA 1508, and later described "his methodology" to both Infinity management and "Bison's representative," JA 238. Bison's contemporaneous writeup reflected its understanding that "[t]he sample of 400 checks is small relative to the entire portfolio of checks" and therefore that "no inferences can be considered as genuinely accurate until a larger sample, or ideally the entire population of check data is analyzed." JA 1956.

Bison's diligence review also included a background check on key members of Infinity's management team, which proved the dealbreaker. After learning that Infinity's CEO (Sturgill) had been misrepresenting his experience and credentials, Bison turned tail and the deal collapsed. Another potential investor—Eastside Partners—also bailed after learning of Sturgill's unfavorable background check.

Morgan Keegan attracted no other serious attention from institutional investors under the 2006 engagement, but it did help Infinity and outside counsel adapt material from the memo Morgan Keegan prepared for other purposes, including an application for a line of credit with Regions Bank and other securities offerings to individual investors. During this period, Infinity also worked with its auditors to redo its 2003 and 2004 financial statements, including extending the same dubious accounting technique to the 2004 financial statements, which Infinity's external auditors again approved. Nothing suggests Morgan Keegan played any significant role in the reworking of the older financials or that it generated any significant new material in connection with those other projects. Rather, Morgan Keegan's involvement was largely limited to adapting the material from its earlier memo and providing relatively minimal line edits on documents prepared by others.

After the Bison and Eastside deals fell through, Meyers decided to terminate Morgan Keegan's relationship with Infinity on October 31, 2006. Meyers participated in an "exit interview" with Infinity management, where he provided recommendations for improving the company's prospects. JA 247. Meyers offered three main pieces of advice: (1) Infinity's leadership should share their background reports with one another; (2) Infinity should hire a "bigger" and "more credible" accounting firm "that understands" the debt-collection "space" to conduct its external audits; and (3) Infinity should abandon its existing accounting policy for receivables and adopt more "conservative accounting," writing off the current receivables so Infinity "won't have to continue to explain the accounting." JA 247, 946–47.

Meyers was not the only one questioning the propriety of Infinity's accounting practices at the time. Ernst & Young also cast doubt on the policy in an email to Infinity's CEO and outside securities counsel (but not to Meyers or anyone else at Morgan Keegan).

Things came to a head at Infinity's January 2007 board meeting, where the board discussed whether to stick with "the way the revenues of the company are booked, i.e., checks in the system waiting for collection." JA 2849. The minutes reflect the board's unanimous judgment that it was in the company's "best interests to maintain the status quo and not to change the reporting method." JA 2849.

"There is no evidence that Morgan Keegan, Meyers or Clark attended or participated in" the January 2007 board meeting. JA 250. In fact, Morgan Keegan "had little involvement with [Infinity] in 2007 beyond occasional phone calls and emails checking in." JA 252. Meyers also occasionally spoke with potential individual investors (including colleagues at Morgan Keegan) and personally invested $50,000 in Infinity.

In December 2007, Infinity asked Meyers whether he knew of any new potential investors and sent Meyers some updated financial information. Meyers was surprised to learn that the accounts receivable had not been written off as he had recommended. When Meyers asked about it, Infinity's president responded, "[i]n an apparent...