Eichen v. EF Hutton & Co., Inc.

• Decision Date: 02 September 1975
• Docket Number: Civ. No. 72-510-GT.
• Court: U.S. District Court — Southern District of California
• Parties: Myron S. EICHEN, Plaintiff, v. E. F. HUTTON & CO., INC., et al., Defendants.

402 F. Supp. 823

Myron S. EICHEN, Plaintiff, v. E. F. HUTTON & CO., INC., et al., Defendants.

Civ. No. 72-510-GT.

United States District Court, S. D. California.

September 2, 1975.

Jenkins & Perry, by Rex Heeseman, San Diego, Cal., for plaintiff.

Luce, Forward, Hamilton & Scripps, by Michael L. Kirby and Lee R. Rydalch, San Diego, Cal., for defendants.

AMENDED MEMORANDUM OPINION AND JUDGMENT

GORDON THOMPSON, Jr., District Judge.

This action, commenced by plaintiff Myron S. Eichen on December 19, 1972, arises under the Securities Act of 1933, 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and specifically Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. After lengthy discovery the parties filed a pretrial conference order on January 10, 1975. That document is particularly relevant to this discussion in that it incorporates 240 admissions of fact that required no proof at trial. Many of those admissions were of critical importance in reaching the conclusions of law found in this opinion. Other documentary evidence and oral testimony was offered during the course of the court trial. The testimony elicited at trial was often inconsistent and has caused this court to discount a number of plaintiff's contentions.

When considered in its entirety, the evidence indicates that plaintiff's causes of action are founded upon alleged misrepresentations which are said to have been material in inducing plaintiff to invest in a tax shelter program, defendant Texas International Drilling Fund-Series A (the "Fund"), offered by defendant Texas International Drilling Funds, Inc. ("Texas International"), a corporation and the general partner of the Fund.

Based upon the admissions of fact and proof at trial this court must conclude that plaintiff has failed to establish by a preponderance of the evidence that he is entitled to judgment in this case.

Initially, even a brief review of the facts of this case leads to the inescapable conclusion that plaintiff is a very astute and sophisticated investor. It is acknowledged by all of the parties before the court that plaintiff's investment experience is substantial and that most of his profits in the securities markets have been made in high risk, speculative investments. By his own testimony, Mr. Eichen understood the term "risk" to mean the probability of losing all or some fraction of his investment. Further, he believed that every investment involved some risk and never believed any representations that he could not lose money on a particular investment.

While Mr. Eichen is most willing to admit that he is an experienced investor, he denies any knowledge of the operation of tax shelters. However, the evidence shows that Mr. Eichen formerly was an advisor to a mutual fund that specialized in tax shelter programs. This in itself suggests something more than complete unfamiliarity with sheltered investments.

Mr. Eichen's investments, despite frequent losses, often led to significant profits. His income, by 1967, was substantial enough to allow him to devote essentially all of his working hours to the management of his own investments. He presently lists his occupation as that of a venture capitalist.

In November of 1971, Mr. Eichen was advised by his personal accountant that his taxable income for that year could be between $500,000.00 and $1,000,000.00. Mr. Eichen, recognizing that he only had a few weeks within which to act, immediately began to investigate various types of sheltered investments. He talked to a number of accountants, attorneys, and personal friends and requested their suggestions. Generally, all of the individuals with whom he discussed shelters advised him of their potential for loss and warned him that at best all he could do was defer tax consequences for a limited period of time.

Ignoring the pessimism of his advisors, his research led him to the conclusion that he would invest in at least three shelters; his goal being to defer approximately two hundred thousand dollars of his 1971 income. These investments were to be made on a spectrum of risk with at least one of the three to be a very speculative tax shelter.

During the first week of December, 1971, plaintiff became aware of and invested in a real estate tax shelter program known as Century Properties Fund sponsored by Fox & Carskadon. His investment partner, John Stevens, had money in the program and strongly suggested that it was in conformance with Mr. Eichen's goals. Based primarily on the advice of his close friend and associate he invested $48,000.00 on December 6, 1971.

During this period of time, Stevens advised Mr. Thomas Carney, a registered account executive employed by E. F. Hutton & Co., that Mr. Eichen was interested in tax shelter investments. Mr. Carney had originally attempted to sell the defendants' program to Stevens but had not been successful. Carney contacted Eichen by telephone and discussed various investments. During their initial personal meeting Mr. Carney provided plaintiff with a prospectus and other documents for the defendants' tax shelter.

Defendant Texas International is a Delaware corporation engaged in the business of exploring and drilling for oil and gas. Defendant Fund is a limited partnership organized under the laws of Oklahoma, and is also engaged in the business of exploring for oil and gas. In January, 1970, the Fund established a six year program with the goal of raising $25,000,000.00 through the sale of registered public securities. Texas International, acting as general partner of the Fund, formed various limited partnerships and utilized the combined money to engage in a diversified oil and gas drilling program.

The initial limited partnership interests in the Fund were sold in 1970 pursuant to a registration statement filed with the Securities and Exchange Commission. Four individual partnerships were formed in 1970. The available percentage of deductions for those partnerships varied between 94.99% and 100.89%. The redemption value of those four programs, based on a $10,000.00 investment, fluctuated between $10,100.00 and $10,900.00.

Mr. Carney advised Mr. Eichen that, while this investment had attendant risks, he felt it was conservative in relation to other tax shelters; Carney testified that his conclusion was primarily based on the representations of Mr. Norman Stein, an employee of Texas International. He told Mr. Eichen that the past performance of the Fund was commendable and that the individuals employed by Texas International were of excellent quality. He stated that one of the prime safety factors utilized by the Fund was its diversification of capital over a broad range and number of drilling projects. He suggested that the maximum downside risk was 10 to 20%, that there would be 30 to 40 wells drilled with the partnership money, and that most of the money would be spent on semi-developed wells that drilled into "known pools of oil" in conjunction with major oil producers.

The supplemental prospectus which was provided to Mr. Eichen contains the following language in bold faced type on the cover page thereof:

THESE SECURITIES ARE SPECULATIVE IN THAT OIL AND GAS EXPLORATION INVOLVES A HIGH DEGREE OF RISK.

That document provides a detailed description of the high risk factors involved in the program and explains the nature of diversified drilling.

Mr. Eichen admits that he did not do anything more than casually review the prospectus. His primary interest was the deductibility of the investment and he discussed this question with his accountant, Mr. Peterson, and with a tax attorney. Mr. Eichen remembers that Mr. Peterson was favorably impressed with the program in general. Mr. Peterson's recollection differs. Peterson recalls that he first advised Mr. Eichen that he lacked the expertise to make any recommendations. He added that he felt oil and gas programs involved high risks due to their technical nature which rendered them very difficult to evaluate. The tax attorney also refused to express an opinion on the merits of the program.

Following Mr. Carney's suggestion, Eichen contacted the regional director for E. F. Hutton & Co., Mr. Allan Crowne. Crowne confirmed the comments made by Carney and suggested that Eichen call Mr. Stein.

Mr. Stein was a vice president of Texas International specializing in marketing. He maintained offices in San Francisco to promote sales of partnership interests. The plaintiff and Mr. Stein discussed the Fund over the telephone and certain representations were allegedly made.

The evidence adduced at trial and in the admissions varies materially as to the nature of Mr. Stein's comments. Mr. Eichen testified that Stein not only represented that his maximum risk of loss or "downside exposure" would be ten to twenty percent but further suggested that he would personally guarantee the safety of the investment. At trial Mr. Stein testified that he never guaranteed anything and that his representations were based solely upon and confined to the content of the prospectus and the past earnings of the Fund.

In either case, shortly after talking to Stein, and three days prior to the deadline for investment in the program, on December 17, 1971, Mr. Eichen purchased $75,000.00 worth of partnership interests in the Fund's 1971 year-end drilling partnership.

As a condition to the purchase of the partnership interest Mr. Eichen was required to sign a suitability letter which again warned of the risks of the investment. In California, the Commissioner of Corporations imposes the highest suitability standards for oil and gas programs and pursuant to those requirements the letter made specific reference to the uncertainty and speculative nature of the Fund.

Three days later Mr. Eichen invested in another real estate tax shelter, the Cascadian Apartments. This decision was motivated by the recommendation of another close friend, Dr. Ben Ichinosi.

Between...