Camp v. Dema
| Decision Date | 01 November 1991 |
| Docket Number | No. 90-2690,90-2690 |
| Citation | 948 F.2d 455 |
| Parties | Fed. Sec. L. Rep. P 96,291 Jon A. CAMP, Appellant, v. Robert J. DEMA, James R. Millwee, Alexander Mitchell, and James Kidder, Appellees. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Robert F. Bartle, Lincoln, Neb., argued (Robert F. Bartle and Laurie Smith Camp, on the brief), for appellant.
Douglas F. Staskal, Des Moines, Iowa, for appellee Kidder
Milton A. Katskee, Omaha, Neb., for appellee Mitchell.
Before WOLLMAN and BEAM, Circuit Judges, and LARSON, * Senior District Judge.
Jon A. Camp appeals the district court's order of summary judgment in favor of appellees Alexander Mitchell and James Kidder. Camp alleged that appellees Mitchell and Kidder aided and abetted a violation of securities laws, codified at 15 U.S.C. § 78j (1981) and 17 C.F.R. § 240.10b-5 (1991) (SEC 10b and Rule 10b-5). The district court held that, inter alia: 1) appellees owed no duty to disclose information, 2) appellees lacked knowledge of the securities laws violation, and 3) appellees did not substantially assist the securities laws violation. We affirm.
In 1986 and early 1987, Jon Camp owned forty-nine percent of the stock in CPI Qualified Plan Consultants, Inc. (CPI), a closely held Kansas corporation, and he served as one of its directors, officers, and employees. By March 1987, Camp's ownership in CPI had been diluted to thirty-three percent when 870 shares of treasury stock were issued to Robert J. Dema, 1 the president of CPI, for an $85,000 promissory note.
Concerned about possible self-dealing by Dema, Camp made a formal written request to examine the corporate records of CPI. This request was summarily denied by the executive vice president, James R. Millwee, 2 and, in apparent retaliation for this request, Camp was terminated without explanation. Nevertheless, Camp proceeded to obtain a court order to examine the corporate records, which order was granted on May 14, 1987. Pursuant to this authorization, Camp reviewed the corporate records and discovered what he felt were certain improprieties, none of which are the subject of this appeal.
On June 23, 1987, Camp telephoned Kidder, who at that time was a shareholder and director of CPI, and informed him that Camp had been "frozen out" of CPI and that, as a result, he was under a financial squeeze. Camp also told Kidder about alleged breaches of fiduciary duties by Dema and Millwee, discovered in his examination of the corporate records.
Approximately two weeks after his telephone conversation with Kidder, Camp received a letter from CPI's attorney, appellee Mitchell, reminding him of a noncompete agreement that he had entered into with CPI, which CPI felt was still in force. Mitchell and his law firm had been hired by CPI to seek enforcement of the noncompete agreement, to handle matters related to several lawsuits filed by Camp, and to handle the possible purchase by Dema and Millwee of Camp's stock in the corporation.
On September 2, 1987, a special shareholders meeting was held via telephone. Although Camp was still a director of CPI and an owner of its stock, he was not notified of the meeting. At that meeting, Kidder was informed that Camp had sold all his shares of stock in CPI. The sale, however, had not been finalized. Kidder also received information about recent inquiries concerning the purchase of CPI, and voted to approve a motion giving Dema and Millwee authority to pursue "serious negotiations" with two potential buyers. Some time after this meeting, Kidder signed a waiver of preemptive rights waiving his right to purchase a percentage of Camp's shares.
Meanwhile, Mitchell continued working on the purchase of Camp's stock. On September 12, 1987, Mitchell forwarded copies of the stock purchase agreement executed by Camp to Dema and Millwee. Camp's attorney had made several changes in the proposed agreement which required their approval.
On September 14, Mitchell received a telephone call from Dema advising him that the changes made to the stock purchase agreement were acceptable, and that it had been initialed and would be returned to him. He also advised Mitchell that he and Millwee were considering selling CPI and that some preliminary discussions with a potential buyer had taken place. Dema then asked whether Mitchell and his firm would be available to handle any future sale of CPI, to which Mitchell answered affirmatively. However, at that time, Mitchell did not receive any specifics.
The following day, Mitchell received the initialed stock purchase agreement and a copy of a letter of intent from First Actuarial Corporation to CPI along with CPI's response to the letter. Mitchell mailed the initialed documents to Camp's attorney and delivered the First Actuarial letter and response to one of his law partners. Believing that the First Actuarial letter and response were background material for a future transaction, he did not review them. Mitchell performed the remaining acts necessary to consummate the stock sale by Camp.
In mid-October, Mitchell received additional documents concerning the First Actuarial offer and he again delivered these to one of his law partners for review. During the next couple of weeks, documents were sent back and forth among the parties involved in the First Actuarial/CPI purchase and sale. However, it was not until November 6 that an associate of Mitchell's involved in the transaction first learned that Dema, Millwee and First Actuarial had engaged in negotiations prior to the date the Camp stock purchase had been completed. By letter dated November 12, Mitchell advised Camp's attorney of these negotiations and further advised that these negotiations had commenced prior to the conclusion of the stock transaction among Dema, Millwee, and Camp. This appeal is a result of that disclosure. With this background, we turn to the issues on appeal.
We use the same standard as the trial court in reviewing the entry of summary judgment. Stokes v. Lokken, 644 F.2d 779, 782 (8th Cir.1981). Summary judgment may be granted where "no genuine issue as to any material fact [exists] and ... the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Additionally, all facts must be viewed in the light most favorable to the party opposing the motion of summary judgment, and the opposing party must be given the benefit of all reasonable inferences. Vette Co. v. Aetna Cas. & Sur. Co., 612 F.2d 1076, 1077 (8th Cir.1980).
To determine aiding and abetting liability, this circuit has adopted a tripartite test, the elements of which are:
(1) a securities laws violation by the primary party (as opposed to the aiding and abetting party);
(2) "knowledge" of the violation on the part of the aider and abettor; and
(3) "substantial assistance" by the aider and abettor in the achievement of the primary violation.
FDIC v. First Interstate Bank of Des Moines, N.A., 885 F.2d 423, 429 (8th Cir.1989). For the purposes of this appeal, we assume a securities laws violation by the primary party. Therefore, we need only examine the second and third elements of our test.
For aiding and abetting liability, the knowledge element is critical. Although the Supreme Court's holding in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), clearly establishes scienter as a necessary element for a primary violation of 10b and Rule 10b-5, this holding does not mandate the knowledge element needed for aiding and abetting liability. Without the holding in Ernst, knowledge would still be necessary because it is inherent in the terms "aiding and abetting" themselves. If it were otherwise, aiding and abetting would be indistinguishable from simply aiding. This would cast too wide a net, bringing under it parties involved in nothing more than routine business transactions. See David S. Ruder, Multiple Defendants in Securities Law Fraud Cases: Aiding and Abetting, Conspiracy, In Pari Delicto, Indemnification, and Contribution, 120 U.Pa.L.Rev. 597, 632 (1972). For instance, without the knowledge element, a party who, in the normal course of business, transmits documents necessary to consummate a sale may be held liable as an aider and abetter if the transmission somehow aided a securities laws violation. Knowingly engaging in a customary business transaction which incidentally aids the violation of securities laws, without more, will not lead to liability. See id.
The word abetting actually provides the knowledge element required in aiding and abetting. "[T]he word 'abet' includes knowledge of the wrongful purpose of the perpetrator and counsel and encouragement in the crime." People v. Terman, 4 Cal.App.2d 345, 40 P.2d 915, 916 (1935). Therefore, aiding and abetting not only requires assistance, but also knowledge of a wrongful purpose. As we shall see later, this knowledge requirement also permeates the third element of our test.
We do not mean to suggest that an alleged aider and abettor may escape liability by simply claiming he was ignorant of the securities laws; however, "a bare inference that the defendant 'must have had' knowledge" of the primary violation is insufficient. Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 497 (7th Cir.1986). Some knowledge must be shown, but the exact level necessary for liability remains flexible and must be decided on a case-by-case basis. Negligence, however, is never sufficient.
In Metge v. Baehler, 762 F.2d 621 (8th Cir.1985), we stated that the knowledge and substantial assistance elements "should be considered relative to one another ... [and] 'where there is a minimal showing of substantial assistance, a greater showing of scienter is required.' " Id. at 624 (quoting Stokes, 644 F.2d at 784). A party who engages in atypical business transactions or actions which lack...
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