Cooke v. Manufactured Homes, Inc.

• Decision Date: 02 May 1988
• Citation: 998 F.2d 1256
• Parties: Fed. Sec. L. Rep. P 97,652 J. Scott COOKE; Sanford H. Rudolph; William MacKay; Joseph W. Burns, Trustee of the estate in bankruptcy of Manufactured Homes, Incorporated, All on behalf of themselves and all persons who purchased stock of Manufactured Homes, Inc. between
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1256

998 F.2d 1256

Fed. Sec. L. Rep. P 97,652

J. Scott COOKE; Sanford H. Rudolph; William MacKay;

Joseph W. Burns, Trustee of the estate in bankruptcy of

Manufactured Homes, Incorporated, All on behalf of

themselves and all persons who purchased stock of

Manufactured Homes, Inc. between May 2, 1988 and June 27,

1990, excluding Manufactured Homes, Inc. (and its

subsidiaries, affiliates, and divisions) and the individual defendants and their immediate families, Plaintiffs-Appellants, v. MANUFACTURED HOMES, INCORPORATED; Robert M. Sauls; Kenneth

A. Hathaway; Jeffrey J. Brown; Robert A. Brown;

Wayne F. Sloop; Robert L. Berner;

David B. Whelpley, Defendants-Appellees,

and

Harald Bakkebo, Defendant.

No. 93-1005.

United States Court of Appeals, Fourth Circuit.

Argued May 4, 1993.

Decided July 9, 1993.

Amended by Order Filed July 21, 1993.

Norman Barrett Smith, Smith, Follin & James, Greensboro, NC, argued (Margaret Rowlett, on brief), for plaintiffs-appellants.

Peter Joseph Juran, House & Blanco, P.A., Winston-Salem, NC, argued (Reginald F. Combs, on brief), for defendants-appellees.

Before WILKINS, Circuit Judge, SPROUSE, Senior Circuit Judge, and HALLANAN, United States District Judge for the Southern District of West Virginia, sitting by designation.

OPINION

WILKINS, Circuit Judge:

J. Scott Cooke, as representative for a class of investors in Manufactured Homes, Incorporated (MH) stock, appeals the grant of summary judgment in favor of MH. ¹ Appellants brought four claims for violations of federal securities law: (1) violations of § 10(b) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C.A. § 78j(b) (West 1981), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1992) (liability for manipulative or deceptive practices in connection with the purchase or sale of a security); (2) violations of § 18 of the Exchange Act, 15 U.S.C.A. § 78r (West 1981) (liability for misleading statements); (3) violations of § 15 of the Securities Act of 1933 (Securities Act), 15 U.S.C.A. § 77o (West 1981), and § 20 of the Exchange Act, 15 U.S.C.A. § 78t (West 1981 & Supp.1993) (liability of controlling persons); and (4) secondary violations of federal securities laws (aider and abettor claims). The district court ruled that all claims were barred because any alleged misrepresentations or omissions by MH were countered by prolific, contrary information disseminated to the market. Appellants maintain that summary judgment was inappropriate because there are genuine issues of material fact concerning when the market was fully apprised of the finances of MH and that the district court applied the incorrect statute of limitations for the § 10(b) and Rule 10b-5 claims. We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

I.

MH financed the sales of mobile homes and then resold the mortgages to third-party lenders under recourse financing. The financial picture of MH during the relevant time period revealed a company in decline. Precisely when the market was fully apprised of the failing finances of MH is at the crux of this suit. Appellants claim that MH suffered cash flow problems, that the general financial condition of the corporation deteriorated steadily, and that these facts were omitted and/or misrepresented. MH claims that the state of its financial health was readily available to the Appellants through a plethora of information disseminated to the market and the fluctuations in value of MH stock.

Through several press releases issued during 1988, MH disclosed its declining financial status. Also, the annual reports of MH reveal the picture of a corporation experiencing financial hardship: net earnings and earnings per share decreased in each subsequent year, while operating costs increased. Apart from the financial reports issued by MH, the press also reported the financial condition of the corporation. For instance, on May 2, 1988, an article in the Winston-Salem Journal (Journal ), reported that the entire manufactured home industry was in a slump and specifically cited MH as suffering financial setbacks because of industry wide losses. Again, on May 7, 1988, the Journal reported that the earnings and revenues of MH were down for the first quarter of 1988 compared to the first quarter of 1987. Subsequently, on September 19, 1988, Barron's, a national financial journal, published an article criticizing the practices of MH of front-loading profits by using possibly false assumptions and of issuing misleading press releases and possibly inaccurate disclosures to the Securities Exchange Commission (SEC). The article also criticized MH as having problems with its accountants, attributing these problems to questionable accounting practices by MH. The day that Barron's released this article, MH responded by issuing a press release disclaiming any impropriety and stating that all of its disclosures complied with SEC rules and regulations.

On November 23, 1988, the Journal reported that the stock of MH had dropped 35 percent in the previous 15 trading days and that MH was experiencing substantial financial losses. Then, on December 17, 1988, the Journal announced not only that MH stock had lost 9.8 percent of its value the preceding day and 47 percent of its value since October 31, 1988, but that MH was suffering from general financial failure.

Despite this troubled financial picture, MH issued press releases during 1988 stating that it was enjoying a degree of financial prosperity. For example, on April 12, 1988, MH reported that it was negotiating a profitable contract with an insurer. On May 26, Robert Sauls, Chief Executive Officer of MH, stated in a press release that he was "looking for record earnings for 1988." On June 27, 1988, MH announced that it was planning to repurchase 400,000 shares of its common stock, stating that the shares were an "attractive investment in light of the Company's strong earnings prospects for the future." The release further reported that sales were "good" in April and May of 1988 and that this trend would likely continue in June. Also, even though the annual reports revealed fiscal decline, they also reported promising financial prospects. This hopeful financial picture never materialized. In June of 1990, trading of the stock of MH was suspended, and the stock was ultimately delisted.

On June 29, 1990, Appellants filed suit, averring that MH omitted or misrepresented material information about its declining financial status. The district court, adopting the recommendation of the magistrate judge, certified a class and defined its parameters as those who purchased MH stock between May 2, 1988 and June 27, 1990, excluding MH and its subsidiaries. It also concluded as a matter of law that on December 17, 1988 the market was fully apprised of the financial failure of MH. The district court then granted summary judgment in favor of MH with respect to all claims.

Appellants raise two contentions on appeal. First, they claim that because the information available to the market included misrepresentations and/or omissions by MH, whether the market justifiably relied on this conflicting information gives rise to a genuine issue of material fact, and thus the district court erred in granting summary judgment in favor of MH. They contend that this information was still sufficiently conflicting on December 17, 1988 to preclude the court from granting summary judgment on or after this date. Appellants also assert that even if December 17, 1988 is the date on which the market was apprised of the instability of the finances of MH, the district court improperly granted summary judgment with respect to the claims of investors who purchased their stock prior to this date. Second, Appellants contend that the limitations period for the § 10(b) and Rule 10b-5 claims is two years under the dictates of § 27A of the Exchange Act, 15 U.S.C.A. § 78aa-1(a) (West Supp.1993). Thus, since this action was filed June 29, 1990, Appellants assert that it is timely.

Conversely, MH asserts that summary judgment was properly granted because the market was apprised of the financial health of the corporation at all relevant times. Moreover, MH contends that this action is time-barred because the proper limitations period is one year under Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991).

We first address whether summary judgment was properly granted with respect to all claims, and then the proper date that Appellants were deemed to be on notice for purposes of commencement of the statute of limitations on the § 10(b) and Rule 10b-5 claims. After addressing the limitations issue, we turn to the claims brought under § 15 of the Securities Act, §§ 18 and 20 of the Exchange Act, and the aider and abettor claims.

II.

Summary judgment is proper if, viewed in the light most favorable to the nonmoving party, "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Ross v. Communications Satellite Corp., 759 F.2d 355, 364 (4th Cir.1985). Federal Rule of Civil Procedure 56(c) requires that the court enter judgment against a party who, "after adequate time for discovery ... fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). The nonmoving party is entitled to the most favorable inferences that may reasonably be drawn from the forecasted evidence, Ross, 759 F.2d at 364, but it "cannot create a genuine issue of material fact through mere speculation or the building of...