Anixter v. Home-Stake Production Co., HOME-STAKE

CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)
Citation77 F.3d 1215
Docket NumberHOME-STAKE,No. 95-5086,95-5086
PartiesFed. Sec. L. Rep. P 99,056, 33 Fed.R.Serv.3d 1389 Ivan A. ANIXTER; Blanche Dickenson; Dolly K. Yoshida, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v.PRODUCTION COMPANY, an Oklahoma corporation; Home-Stake 1971 Program Operating Corporation; Home-Stake 1970 Program Operating Corporation; Home-Stake 1969 Program Operating Corporation; Home-Stake 1968 Program Operating Corporation; Home-Stake 1967 Program Operating Corporation; Home-Stake 1966 Program Operating Corporation; Home-Stake 1965 Program Operating Corporation; Robert S. Trippet; E.M. Kunkel; Thomas A. Landrith; J.D. Metcalfe; H.B. Gutelius; H.L. Fitzgerald, Defendants, and Wynema Anna Cross, Executrix of the Estate of Norman C. Cross, Jr., Defendant-Appellant. A.M. ANDERSON; Bank of America National Trust and Savings Association, as Trustee for Merl McHenry, Joseph A. Buda, Arthur Bueche, George V.T. and Helen Burgess; Dewey J. Cali; William H. Colquhoun; S.W. Corbin; Robert B. Coburn; Vigil B. Day; William H. Dennler; Mario Dimartino; Stella Dimartino; John M. Evans; Margaret C. Everett; Isador H. Finkelstein; Joseph H. Gauss; H.W. Gouldthorpe; Ralph Hart; James J. Hayes; Earl D. Hilburn; Joseph E. Horak; Gerald A. Hoyt; Richard M. Hurst; Ralph Iannucci; Emily Iannucci; Milton F. Kent; Howard Kicherer; Elizabeth Kicherer; John Kokoszka; Millie B. Lassing; Joseph Levin; Marie F. Levin; John D. Lockton; Dennis G. Lyons; Ferdinand F. McAllister; Russell W. McFall; James Madden; Albert Manganelli; Nicholas A. Marchese; Stanley A. Marks; John G. Martin; C.W. Moeller; Andrew Overby; Carl E. Palermo; Frank A. Palermo; Roy T. Parker, Jr.; Bruce M. Robertson; D.D. Scarff; M.L. Scarff; A.E. Schubert; William R. Smart; E. Starr; Janet G. Stewart; Gerald Toomey; Paul Townsend; Vernon Underwood; H.B. Waldron, Jr.; Ted B. Westfall, Plaintiffs-Appellees, v.PRODUCTION COMPANY, an Oklahoma corporation; Home-Stake 1970 Program Operating Corporation, a Delaware corporation; Robert S. Tripp
Decision Date29 January 1996

B. Hayden Crawford (Robert L. Bainbridge and Kyle B. Haskins with him on the briefs), of Crawford, Crowe, Bainbridge & Haskins, P.A., Tulsa, Oklahoma, for Defendant-Appellant.

Elihu Inselbuch, of Caplin & Drysdale, Chartered, New York City (Peter Van N. Lockwood, of Caplin & Drysdale, Chartered, New York City, William H. Hinkle, of Hinkle, Zeringue & Smith, Tulsa, Oklahoma, and William A. Wineberg and Michael R. Simmonds, of Wineberg, Simmonds & Narita, San Francisco, California with him on the briefs), for Plaintiff-Appellee.

Before BALDOCK, BRORBY and LUCERO, Circuit Judges.

LUCERO, Circuit Judge.

More than thirty years ago, Home-Stake Production Company began offering securities registered with the Securities Exchange Commission ("SEC") in the form of interests in oil and gas drilling programs. The securities represented units of participation in annual oil production subsidiaries Home-Stake established each year between 1964 and 1972, referred to as Program Operating Corporations ("Programs"). These offerings purported to present investors both the promise of return on investment and attractive tax deductions of intangible drilling costs. In fact, we are told, the Home-Stake venture resembled a classic Ponzi swindle. Instead of going to oil development, investments made in later-year Programs were paid to earlier-year investors as "income" from oil production. Inevitably, the scheme collapsed, but only after investors had lost tens of millions of dollars. This securities fraud case, first filed in 1973, already has been the subject of four published opinions by this court. Over the past four years it has been ordered dismissed, reinstated, remanded, and now, appealed once more.

In this appeal we must resolve whether again to dismiss or remand judgments against Home-Stake's outside auditor for violating § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the SEC, 17 C.F.R. § 240.10b-5. Appellant, Wynema Anna Cross, executrix of the estate of Norman C. Cross, Jr., raises several issues on appeal. The question dominating our review is whether we can let stand a general jury verdict returned on a securities fraud claim that included an instruction on aiding and abetting liability, an implied cause of action that has since been found invalid by the Supreme Court in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., --- U.S. ----, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). In the balance is a choice between vacating a jury award plaintiffs won on claims filed more than twenty-two years ago, and maintaining judgments now totalling more than $40 million when the jury may have found liability on an invalid legal theory. We conclude that

the aiding and abetting instruction hopelessly taints the general verdict and that remand for a new trial is necessary

In March 1973, Ivan A. Anixter, along with others, filed a lawsuit in the Northern District of California alleging violations of federal securities laws. Defendants included primary officers and directors of Home-Stake, its outside auditors and attorneys, and certain broker-dealers who marketed its securities. This case, along with other individual actions against Home-Stake, was transferred and consolidated in the Northern District of Oklahoma. In 1977, the district court certified nine separate plaintiff classes, one for investors in each of the annual Programs. 1 The case went to trial in 1988. Plaintiffs from all nine classes and individually consolidated actions won jury verdicts against defendants totalling approximately $130 million. Because of settlements between the parties, only claims from the 1969 and 1970 Programs remain against the appellant, who was substituted for Cross upon his death in 1985. Appellees are the class representatives of the plaintiff investors in Home-Stake Programs.

A. Issues at Trial and the Jury Verdict

Because the primary issue in this appeal involves Cross's direct liability to appellees, we focus on the relevant facts concerning his involvement in the Home-Stake enterprise and allegations made regarding his direct participation in the alleged fraud. Against Cross, plaintiffs alleged primary violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the SEC, aiding and abetting primary violations of Section 10(b) and Rule 10b-5, and liability under Section 11 of the Securities Act of 1933. Our analysis requires some extended recitation of facts.

Home-Stake was an affiliate to the annual Programs and possessed the contractual rights to a percentage of the Programs' revenue in return for developing and recovering oil reserves, the rights to which were owned by the Programs. Investors bought interests in the Programs, not Home-Stake itself. Plaintiffs alleged that the materials used to sell interests in the Programs contained many untrue and misleading statements, as well as omissions of material fact. In particular, plaintiffs alleged that despite rosy reports and projections in materials disseminated to potential investors, very little oil was actually being produced by Home-Stake and its subsidiaries, and that large "royalty" payments paid out to early investors in fact came not from oil production but from other investors. 2

Cross's 10b-5 liability rested on his alleged participation in the preparation and filing of the registration statements, program books, and prospectuses, and especially his certifications and opinion letters verifying Home-Stake's overall health, made with knowledge of the false statements contained therein, or with reckless disregard as to the truth or falsity of the statements. Specifically, plaintiffs alleged that Cross's behavior "constitutes participation in or an aiding and abetting of the...

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