Ballay v. Legg Mason Wood Walker, Inc.
| Decision Date | 21 March 1991 |
| Docket Number | 90-1427,Nos. 90-1412,s. 90-1412 |
| Citation | 925 F.2d 682 |
| Parties | , Fed. Sec. L. Rep. P 95,783 BALLAY, Stephen J., Bandosz, Albert J., Beebee, Susan, Beebee, Peter C., Behmer, L. Nelson, Behmer, Robert L., Bell, Elizabeth W., Broccolini, Agnes M., Burke, Jr., John J., Zappitelli, Sophie Chelyk and John A., Deal, Richard A., Deal, Jr., William W., Dudugjian, Carl, as Trustee, Espinoza (Schimmel), Bobbi S., Flamm, George S., Flansburg, Frank M., Gallagher, David G. and Jacqueline, Goldman, Arthur S., Gould, Herbert E., Hoover, Robert A., Jacobs, Richard W., Merriken, Charles J. and Phylliss A., Munger, Edith L., Persons, Jr., Oren M., Resnick, Albert, Richter, Ronald and Lynn, Robinson, Edmund H., Smedley, L., as Trustee, Smith, Allen and Christine, Uhrman, Gary H., Weyforth, Philip A., Williamson, Dennis, Zappitelli, Michael J. and Anna O., Zook, Dunwoody, for Zook, Melissa D., and Zook, II, William H.D., and Zook, Suzanne C., Goldfine, Sanford D., Staniskis, Peter v. LEGG MASON WOOD WALKER, INC., Appellant in 90-1412. BALLAY, Stephen J., Bandosz, Albert J., Beebee, Susan, Beebee, Peter C., Behmer, L. Nelson, Behmer, Robert L., Bell, Elizabeth W., Broccolini, Agnes M., Burke, Jr., John J., Zappitelli, Sophie Chelyk and John A., Deal, Richard A., Deal, Jr., William W., Dudugjian, Carl, as Trustee, Espinoza (Schimmel), Bobbi S., Flamm, George S., Flansburg, Frank M., Gallaher, David G. and Jacqueline, Goldman, Arthur S., Gould, Herbert E., Hoover, Robert A., Jacobs, Richard W., Merriken, Charles J. and Phylliss A., Munger, Edith L., Persons, Jr., Oren M., Resnick, Albert, Richter, Ronald and Lynn, Robinson, Edmund H., Smedley, L., as Trustee, Smith, Allen and Christine, Uhrman, Gary H., Weyforth, Philip A., Williamson, Dennis, Zappitelli, Michael J. and Anna O., Zook Dunwoody, for Zook, Melissa D., and Zook, II, William H.D., and Zook, Suzanne C., Goldfine, Sanford D., Staniskis, Peter v. LEGG MASON WOOD WALKER, INC. Appeal of Stephen J. BALLAY, Albert J. Bandosz, Susan Beebee, Peter C. Beebee, Nelson L. Behmer, Robert L. Behmer, Eli |
| Court | U.S. Court of Appeals — Third Circuit |
William A. DeStefano, Christopher Warren (argued), Conrad, O'Brien, Gellman, DeStefano & Rohn, Stephen M. Feldman, Philadelphia, Pa., for appellees.
C. Clark Hodgson, Jr. (argued), David C. Franceski, Jr., Keith R. Dutill, Stradley, Ronon, Stevens & Young, Philadelphia, Pa., for appellant.
William J. Fitzpatrick, Securities Industry Ass'n, New York City, for amicus-appellant.
Before SLOVITER, Chief Judge, * MANSMANN, Circuit Judge, and SAROKIN, District Judge. **
In this lawsuit brought by the named investors against their brokerage firm, Legg Mason Wood Walker, Inc. ("Legg Mason"), for alleged oral misrepresentations made concerning the book value calculation of securities, two issues require resolution in this appeal following a jury trial. The first presents an issue not yet ruled upon by any federal appellate court: whether section 12(2) of the Securities Act of 1933 affords a remedy to a buyer of securities in the secondary market. 1 This question is purely one of statutory construction which implicates our plenary standard of review. Chrysler Credit Corp. v. First Nat'l Bank and Trust Co., 746 F.2d 200, 202 (3d Cir.1984); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir.1981). We believe that the language and the legislative history of section 12(2) demonstrate that Congress did not there intend to protect buyers in the aftermarket, and we hold that section 12(2) provides a remedy to buyers of securities only in the initial distributions. The district court thus erred as a matter of law in sending this count of the complaint to the jury. We will reverse the judgment of the district court on this count and remand for the entry of judgment in favor of Legg Mason.
Our resolving this initial issue in favor of Legg Mason requires that we determine whether the investors are entitled to a new trial on their count under section 10(b) of the 1934 Securities Exchange Act. We must address whether the district court erred in refusing to charge the jury that the investors' reliance upon their broker John Burke, as their agent, could establish their section 10(b) claim. We find that, at most, this omission constituted harmless error. For this reason we will affirm the judgment of the district court on this second count.
It is well settled that, on appeal, the verdict winner is entitled to have all the facts and inferences therefrom, as reflected by the jury's verdict, construed in its favor. We state the facts here in light of that standard.
The investors include 41 Legg Mason clients, their stockbroker John Burke, an investor himself, and an additional Legg Mason client, Sanford Goldfine, a client of a different Legg Mason broker. The investors purchased securities of Wickes Company, Inc. through Legg Mason during the period from June 1986 through August 1987. The parties have stipulated that Legg Mason earned commissions for those sales.
According to Burke, who served as Legg Mason's Bryn Mawr, Pennsylvania branch manager, Legg Mason is a full service brokerage house 2 which subscribes to a value philosophy of investing. Employing this value philosophy, Legg Mason promotes investment in the undervalued stock of companies that show potential for future growth. Legg Mason's Anthony Pearce-Batten, a securities analyst in Legg Mason's Baltimore, Maryland research department, articulated this philosophy as "look[ing] for out of favor situations which possess characteristics in one form or another that gives one the basis for believing that there is limited risk involved with investing in those stocks." Typically, "out of favor situations" would involve purchasing securities from companies that have recently emerged from bankruptcy or reorganization, as had Wickes. Investing in these companies is attractive because, according to Legg Mason's theory, these companies present little "downside" risk.
At trial Legg Mason produced evidence that numerous factors weighed in the calculation of value, of which goodwill was only one. The investors, however, argued that because the value investment philosophy is predicated on the approximate equivalence between the purchase price of aggregate shares and liquidation value, intangible assets, such as goodwill, 3 which are not readily sold in a liquidation, should not be included in a company's tangible assets for purposes of estimating the downside risk.
Wickes emerged from bankruptcy in January 1985 and its president subsequently engaged in restructuring maneuvers to strengthen the company's financial health. In addition, Wickes acquired holdings in wallcoverings and furnishings and sold others in apparel and hosiery. According to Legg Mason research reports, this restructuring boded well for Wickes' future. Nevertheless, some of the reports suggested that only those investors more willing to tolerate risk invest in Wickes securities.
Batten recommended investment in Wickes from June of 1986 through November of 1987. These recommendations, according to John Burke, were made orally by means of an interoffice "squawk box" to the Bryn Mawr branch office and also in various written communications circulated to Legg Mason's brokers and clients. Burke testified that in 1986 he heard Batten report over the "squawk box" that Wickes had a book value 4 of $5.00 per share excluding goodwill.
An August 10, 1987, Legg Mason research report concerning Wickes suggested that "positives outweigh the negatives--buy," and listed Wickes' book value per share at $23.70. 5 The report also stated: "It is worth observing that current assets comprise almost two thirds of Wickes' $3.5 billion asset base net of goodwill ..." (emphasis added). Another Legg Mason report, dated August 25, 1987, included a computation of Wickes' book value per share of stock at $25.00 with the notation "(excludes goodwill)." A third and undated Legg Mason document also recommended the purchase of Wickes securities and included the statement that "... with the stock presently selling at less than 40 percent of stated book value (excluding goodwill ), any share repurchases would generate substantial equity growth" (emphasis added). A Legg Mason vice president, David Nelson, admitted that all of these references to goodwill were erroneous.
In its defense, Legg Mason contended that these references were "merely typographical errors" made "after the vast majority of the investors had already purchased their shares of Wickes." Further, Legg Mason corrected these misstatements in both the November 27, 1987, and the December 17, 1987, reports which clarified that much of the stated book value consisted of goodwill. Moreover, David Nelson, who supervised the research department during this period, testified that these written misrepresentations had not even been discovered until after the investors initiated their lawsuit.
In their Amended Complaint, the investors pled causes of action under section 12(2) of the 1933 Securities Act, 15...
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