Financial Corp. of America Shareholder Litigation, In re, No. 85-6376

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Writing for the CourtBefore WALLACE, FARRIS, and CANBY; FARRIS
Citation796 F.2d 1126
PartiesIn re FINANCIAL CORPORATION OF AMERICA SHAREHOLDER LITIGATION. Sam ELIAS, C.M. Glassman, Edwin Margolius, Ruth Stepak, and Irving Fishman, Plaintiffs/Appellants, v. ARTHUR ANDERSEN & CO., Defendant/Appellee.
Docket NumberNo. 85-6376
Decision Date11 August 1986

Page 1126

796 F.2d 1126
In re FINANCIAL CORPORATION OF AMERICA SHAREHOLDER LITIGATION.
Sam ELIAS, C.M. Glassman, Edwin Margolius, Ruth Stepak, and
Irving Fishman, Plaintiffs/Appellants,
v.
ARTHUR ANDERSEN & CO., Defendant/Appellee.
No. 85-6376.
United States Court of Appeals,
Ninth Circuit.
Argued and Submitted June 5, 1986.
Decided Aug. 11, 1986.

Page 1127

Carole Broderick, Haverford, Pa., for plaintiffs-appellants.

Stuart L. Kadison, Lee L. Blackman, Sandra J. Bergmann, Kadison, Pfaelzer, Woodard, Quinn & Rossi, Los Angeles, Cal., for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before WALLACE, FARRIS, and CANBY, Circuit Judges.

FARRIS, Circuit Judge:

Shareholders of Financial Corporation of America appeal the district court's dismissal of this derivative suit against the corporation's auditor, Arthur Andersen & Co., to recover damages for an alleged violation of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78j(b)) and the SEC's Rule 10b-5 (17 C.F.R. Sec. 740.10b-5). The shareholders allege that "but for" Andersen's advice, the corporation would not have purchased certain securities, the purchase of which necessitated reporting certain losses, which allegedly caused massive withdrawals of capital by investors resulting in substantial loss to the shareholders.

The district court dismissed the complaint for lack of subject matter jurisdiction after determining that Andersen's alleged misrepresentations were not "in connection with" the purchase of securities within the meaning of Section 10(b). Because we find the advice given by Andersen did not "touch" the purchase or sale of securities, we affirm the district court's dismissal for failure to state a claim. Section 10(b) and Rule 10b-5 were not designed to reach the factual situation in issue.

STANDARD OF REVIEW

We review a dismissal for failure to state a claim de novo. Guillory v. County of Orange, 731 F.2d 1379, 1381 (9th Cir.1984). Our review is limited, however, to the contents of the complaint. North Star International v. Arizona Corporation Commission,

Page 1128

20 F.2d 578, 581 (9th Cir.1983). To uphold a dismissal of this type, it must appear to a certainty that the plaintiff would not be entitled to relief under any set of facts that could be proved. Halet v. Wend Investment Co., 672 F.2d 1305, 1309 (9th Cir.1982). All allegations of material fact are taken as true and construed in the light most favorable to the non-moving party. North Star, 720 F.2d at 580. Applying these principles, we review the following facts:

The corporation is a financial services holding company. Andersen had been the corporation's independent auditor until it was replaced after the Federal Home Loan Bank Board assumed control of the corporation in 1984. In early 1984, with Andersen's assistance, the corporation's management undertook to generate substantial profits by speculating in interest rate fluctuations. Andersen made representations to the corporation "in connection with" the purchase of Government National Mortgage certificates. The corporation purchased Ginny Maes, and immediately resold them to the original holders subject to fixed coupon dollar reverse repurchase agreements. It engaged in these transactions with the hope that interest rates would fall and the value of the Ginny Maes would increase resulting in the desired profits at the repurchase date. 1 Gains or losses were recognized only after termination of the pertinent transaction and after the securities had been sold without an obligation to repurchase them. As a result, the interim changes in the value of Ginny Maes were not reported as gains or losses. Andersen advised and counseled the corporation to treat the transactions as financing transactions and to record the repurchase liability without recognizing any gain or loss resulting from the transfer. Because of Andersen's advice, the corporation purchased, sold, and agreed to repurchase in excess of $2 billion of Ginny Maes.

In mid-1984 the Securities and Exchange Commission announced that this accounting treatment was inappropriate. The corporation was required to account for the repurchase transactions as forward commitments, and to recognize profits or losses after they accrued on each transaction. The corporation was obliged to report a net loss of $107 million for the quarter ended June 30, 1984. A massive withdrawal of capital followed attributable to a decline in investor confidence because of the reported net loss.

Andersen knew or recklessly disregarded the fact that accounting for these transactions as financing transactions was wholly inappropriate, and was not based on any adopted accounting principles. But for Andersen's advice the corporation would neither have entered the transactions, nor have suffered the significant losses. Andersen is charged with responsibility for the corporation's losses in disposing of the Ginny Maes, and also for damages suffered because of the subsequent outflow of capital.

The issue is whether these alleged facts amount to a fraudulent scheme to defraud the corporation "in connection with" its purchases and sales of Ginny Maes.

DISCUSSION

Section 10(b) provides:

It shall be unlawful for any person ...

To use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as...

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37 practice notes
  • Miller v. C.H. Robinson Worldwide, Inc., No. 19-15981
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • September 28, 2020
    ...133 S. Ct. 1769, 1778, 185 L. Ed. 2d 909 (2013) ; cf. Elias v. Arthur Andersen & Co. (In re Fin. Corp. of Am. Shareholder Litig.) , 796 F.2d 1126, 1130–31 (9th Cir. 1986) ; Palsgraf v. Long Island R.R. Co. , 248 N.Y. 339, 162 N.E. 99, 103 (1928) (Andrews, J., dissenting). Miller's claim is ......
  • Fed. Home Loan Bank of Seattle v. Credit Suisse Sec. (Usa) LLC, No. 95420-8 (consol. 95436-4)
    • United States
    • United States State Supreme Court of Washington
    • October 3, 2019
    ...between the fraud and the securities transaction in question" (emphasis added) (citing In re Fin. Corp. of Am. S’holder Litig., 796 F.2d 1126, 1130 (9th Cir. 1986) )); Barbara Black, Commentary, The Second Circuit’s Approach to the ‘in Connection with’ Requirement of Rule 10b-5, 53 BROOK. L......
  • Fed. Home Loan Bank of Seattle v. Credit Suisse Sec. (Usa) LLC, No. 95420-8
    • United States
    • United States State Supreme Court of Washington
    • October 3, 2019
    ...between the fraud and the securities transaction in question" (emphasis added) (citing In re Fin. Corp. of Am. S'holder Litig., 796 F.2d 1126, 1130 (9th Cir. 1986))); Barbara Black, Commentary, The Second Circuit's Approach to the 'in Connection with' Requirement of Rule 10b-5, 53 BROOK. L.......
  • In re American Continental/Lincoln S&L Sec. Lit., MDL No. 834.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Arizona
    • June 18, 1992
    ...and the plaintiff's injury. Jett v. Sunderman, 840 F.2d 1487, 1494 (9th Cir.1988); In re Fin. Corp. of America Shareholder Litigation, 796 F.2d 1126, 1130 (9th Cir.1986) ("In re FCA"); Levine, 950 F.2d at 1485 (causal connection between defendant's misrepresentations and plaintiff's injury ......
  • Request a trial to view additional results
37 cases
  • Miller v. C.H. Robinson Worldwide, Inc., No. 19-15981
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • September 28, 2020
    ...133 S. Ct. 1769, 1778, 185 L. Ed. 2d 909 (2013) ; cf. Elias v. Arthur Andersen & Co. (In re Fin. Corp. of Am. Shareholder Litig.) , 796 F.2d 1126, 1130–31 (9th Cir. 1986) ; Palsgraf v. Long Island R.R. Co. , 248 N.Y. 339, 162 N.E. 99, 103 (1928) (Andrews, J., dissenting). Miller's claim is ......
  • Fed. Home Loan Bank of Seattle v. Credit Suisse Sec. (Usa) LLC, No. 95420-8 (consol. 95436-4)
    • United States
    • United States State Supreme Court of Washington
    • October 3, 2019
    ...between the fraud and the securities transaction in question" (emphasis added) (citing In re Fin. Corp. of Am. S’holder Litig., 796 F.2d 1126, 1130 (9th Cir. 1986) )); Barbara Black, Commentary, The Second Circuit’s Approach to the ‘in Connection with’ Requirement of Rule 10b-5, 53 BROOK. L......
  • Fed. Home Loan Bank of Seattle v. Credit Suisse Sec. (Usa) LLC, No. 95420-8
    • United States
    • United States State Supreme Court of Washington
    • October 3, 2019
    ...between the fraud and the securities transaction in question" (emphasis added) (citing In re Fin. Corp. of Am. S'holder Litig., 796 F.2d 1126, 1130 (9th Cir. 1986))); Barbara Black, Commentary, The Second Circuit's Approach to the 'in Connection with' Requirement of Rule 10b-5, 53 BROOK. L.......
  • In re American Continental/Lincoln S&L Sec. Lit., MDL No. 834.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Arizona
    • June 18, 1992
    ...and the plaintiff's injury. Jett v. Sunderman, 840 F.2d 1487, 1494 (9th Cir.1988); In re Fin. Corp. of America Shareholder Litigation, 796 F.2d 1126, 1130 (9th Cir.1986) ("In re FCA"); Levine, 950 F.2d at 1485 (causal connection between defendant's misrepresentations and plaintiff's injury ......
  • Request a trial to view additional results

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