Bush v. Rewald

• Decision Date: 14 January 1986
• Docket Number: Civ. No. 84-0881.
• Citation: 619 F. Supp. 585
• Parties: Conrad Bryson BUSH, on Behalf of himself and all others similarly situated, Plaintiffs, v. Ronald R. REWALD, et al., Defendants.
• Court: U.S. District Court — District of Hawaii

619 F. Supp. 585

Conrad Bryson BUSH, on Behalf of himself and all others similarly situated, Plaintiffs, v. Ronald R. REWALD, et al., Defendants.

Civ. No. 84-0881.

United States District Court, D. Hawaii.

September 25, 1985.

As Amended January 14, 1986.

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Elizabeth Joan Cabraser, Robert L. Lieff, Lieff & Cabraser, Jonathan J. Wilcox, Mills & Wilcox, San Francisco, Cal., Dennis Tonsing, Richard M. Heimann, Tonsing & Heimann, Danville, Cal., Paul E. DiBianco, Honolulu, Hawaii, for plaintiffs.

Donald A. Beck, Robert A. Rowan, Thomas E. Crowley, Rhonda L. Griswold, Cades Schutte Fleming & Wright, Honolulu, Hawaii, for Jason G.F. Wong.

William F. Quinn, William C. McCorriston, Bruce C. Lamon, Goodsill Anderson Quinn & Stifel, Honolulu, Hawaii, for Dana Smith.

Alexander C. Marrack, Wesley H. Ching, Patricia K. Wall, Hoddick, Reinwald, O'Connor & Marrack, Honolulu, Hawaii, for Gerald N.Y.C. Lam.

John R. Dwyer, Jason N. Baba, Carlsmith & Dwyer, Honolulu, Hawaii, for D. Alden Newland.

David W. Proudfoot, David Allan Feller, Case Kay & Lynch, Honolulu, Hawaii, for Ralph D. Black.

Edmund Burke, Gary L. Miller, Burke, Sakai, McPheeters, Bordner & Gilardy, Honolulu, Hawaii, for John Ing.

James F. Ventura, Rodney S. Nishida, Adrian Y. Chang, Libkuman, Ventura, Ayabe & Hughes, and Luman N. Nevels, Honolulu, Hawaii, for William E. Jolly.

Gerald S. Clay, Stanton, Clay & Tom, Honolulu, Hawaii, for Daniel Clement.

Eric A. Seitz, Honolulu, Hawaii, for Karen Koshko Cunningham.

Leslie K.W.C. Fong, Law Offices of Paul A. Tomar, Honolulu, Hawaii, pro se.

DECISION ON DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT

PENCE, District Judge.

In the summer of 1983, the investment house of Bishop, Baldwin, Rewald, Dillingham & Wong (Bishop Baldwin) was revealed as a gigantic fraud, a "Ponzi scheme, upon those who had entrusted their money to it. Bankruptcy immediately followed.

The factual background of the firm, its absolute control by Ronald R. Rewald, its Chairman, and its collapse are reported in some detail in Sovereign Life Ins. Co. v. Rewald, 601 F.Supp. 1489 (D. Hawaii 1985).

The instant case, one of many arising from the collapse of Bishop Baldwin, is a securities fraud suit against many persons employed by the firm. It is proposed as a class action on behalf of investors in the firm.

Before this court are motions to dismiss, or, in the alternative, for summary judgment, brought by ten persons — lawyers, accountants, and a real estate agent — who performed work for Bishop Baldwin. Due to the large number of issues and moving defendants, this court bifurcated its consideration and decision of the motions. Initially, the court heard and decided, under F.R.C.P. 12(b)(6), issues relating to the sufficiency of the pleadings.

Briefing and hearing followed on issues involving matters in the factual record outside the pleadings. These issues are resolved in this decision on the summary judgment aspects of defendants' motions.

The Defendants

Each moving defendant, like virtually all other defendants, was listed on the roster of Bishop Baldwin "consultants" in the company's "Directions" brochure. This brochure was extensively used to solicit investments. Using a nautical theme, illustrated by numerous photographs of a modern vessel's navigation room, the brochure suggested that Bishop Baldwin provided direction to the "international community" as a sea captain provides direction to his ship. It consisted of literally dozens of representations about the company's past achievements and present financial activities — all made up out of thin air, with not a grain of truth in them.

Most of the moving defendants were young attorneys largely unknown in the community. Plaintiff alleged, for himself and potential class members, that reading the long list of "consultants" in the brochure helped induce all to invest by seeming assurance that they were dealing with a reputable company backed by some of the oldest names and largest businesses in Hawaii.

The relevant facts as to the individual moving defendants may be summarized as follows:

Dana Smith

According to his affidavit, Smith was an outside counsel and director of Bishop Baldwin. Most of his work for the firm involved negotiating workouts with creditors of various sporting goods companies and a printing operation in which Rewald, personally, held interests. He avers that he never drafted the "Directions" promotional brochure or any other document or did anything else that he had any reason to believe aided in soliciting any investor.

Smith states in an affidavit that when retained to incorporate the firm, he was assured that the firm name referred to real people who would be involved in the corporation.

In answer to the allegation in paragraph 10 of the complaint that he participated directly in soliciting the investment of Cecelia McCormick, Smith states that "the only conceivable connection between her investment and me" was that Rewald asked him to obtain Pittsburgh counsel to seek termination of a Mellon Bank trust in her favor.

Also, in Exhibit A to Smith's joinder in the instant motion, which consists of plaintiff's answers to his interrogatories, question 13 asks the basis of the suit against him and the facts alleged in support thereof. Plaintiff's answer is that merely by virtue of his position as a consultant and/or attorney, Smith had a duty to disclose all material facts to the investors.

Clearly, performing corporate legal work does not, by itself, create such a duty to investors in the corporation. Nor does director status, per se.

The inquiry then becomes: Did Smith perform any act, or was he involved in the company in any way which would create a duty on his part to the investors to conduct a reasonable investigation into the company's affairs to determine how their money was being "invested", and disclose to them whatever he found? Further, is there any genuine dispute as to his role which would require resolution by the factfinder at a trial, or may the court appropriately grant summary judgment?

As discussed infra, the magistrate stayed substantive discovery pending class certification of this action. Plaintiff's counsel did, however, review the documents in the hands of the Bishop Baldwin bankruptcy trustee in an effort to produce evidence creating a reasonable inference of liability, in order to make out issues of fact to oppose the instant motions for summary judgment.

From their search, plaintiff's counsel have submitted numerous corporate forms and minutes, such as the annual corporation exhibit filed with the state Department of Regulatory Agencies. There is a bill to the firm reflecting that Smith performed work relating to the issuance of stock certificates and refiling subchapter S. There is a letter to the president of the International Market Place in Waikiki regarding Bishop Baldwin's application for tenancy in the treehouse in a banyan tree there. In the letter, Smith states that to the best of his knowledge, the company "operates its business in conformance with all applicable laws and regulation." There is Smith's letter to Rewald stating that he is "reviewing your records to ascertain if you have completed all necessary registrations and filings which may be required by governmental agencies for the corporate activity in which you are engaged."

Smith was responsible for filing registrations and other forms with various regulatory agencies. He seemed to believe that the company was not selling securities. It is unclear whether his duties included registering with the SEC.

Jason G.F. Wong

This defendant is not related to defendant Sunlin L.S. "Sunny" Wong, nominal President of the firm, who pled guilty to criminal charges of fraud arising from the instant facts and has not entered an appearance herein.

Jason Wong's affidavits show that Rewald hired him to establish an office in Taiwan. He "viewed this as an exciting and exceptional career opportunity." Like several of the other outside contractor attorney defendants, he was paid a retainer which began at $1000 monthly and eventually reached $4,000 monthly.

Wong spent most of the period from his retention through the failure of the firm on assignment in Asia, opening the Taiwan, Singapore, Hong Kong, and Jakarta offices and doing research for what was to be the "infamous" Capital Flight from Hong Kong "report". The company published this lengthy, vacuous volume, elegantly bound with gold lettering but containing virtually no substantive economic or financial analysis, ostensibly as a project commissioned by the lieutenant governor of Hawaii, to attract capital from Hong Kong to the State of Hawaii. There is no evidence that it was ever used to solicit Bishop Baldwin investors, having apparently been issued the week the company collapsed.

When Rewald visited Taiwan, he and Wong discussed possible uses of the office and possible company projects in Taiwan.

Wong's other work for the firm consisted of writing memoranda on legal problems unrelated to investments, and analyzing tax or other legal consequences of what he was led to believe were potential firm investments, investments that were never made.

Wong turned down the title of vice president of "Far East Operations" because he knew so little about the company.

Like many of the other moving defendants, he himself invested in the firm.

He and defendant Newland questioned defendant Lam's tax opinion, discussed below, and Rewald advised him that the investment accounts covered by the opinion would be closed.

Wong did no securities work and never participated in soliciting investments.

Ralph D. Black

Black, an outside attorney contractor for Bishop Baldwin, has submitted a factually uncontradicted affidavit which establishes that he neither participated in any offers or sales of securities, nor in any underlying event leading thereto. There is no...