Huddleston v. Herman & MacLean

• Citation: 640 F.2d 534
• Decision Date: 09 March 1981
• Docket Number: No. 79-3712,79-3712
• Parties: Blue Sky L. Rep. P 71,642, Fed. Sec. L. Rep. P 97,919, 8 Fed. R. Evid. Serv. 61 Ralph E. HUDDLESTON and Chester E. Bradley, Jr., Individually and as designated Class Representatives, Plaintiffs-Appellees, v. HERMAN & MacLEAN, etc., et al., Defendants, Herman & MacLean, Certified Public Accountants, a partnership, and Lawrence A. LoPatin, Leslie Share, Defendants-Appellants. . Unit A
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 534

640 F.2d 534

Blue Sky L. Rep. P 71,642, Fed. Sec. L. Rep. P 97,919,

8 Fed. R. Evid. Serv. 61

Ralph E. HUDDLESTON and Chester E. Bradley, Jr.,

Individually and as designated Class

Representatives, Plaintiffs-Appellees, v. HERMAN & MacLEAN, etc., et al., Defendants, Herman & MacLean, Certified Public Accountants, a

partnership, and Lawrence A. LoPatin, Leslie

Share, Defendants-Appellants.

No. 79-3712.

United States Court of Appeals, Fifth Circuit.

Unit A

March 9, 1981.

As Corrected on Denial of Rehearing and Rehearing En Banc

July 13, 1981.

Jackson, Walker, Winstead, Cantwell & Miller, James L. Truitt, Jack Pew, Jr., Dallas, Tex., for defendants-appellants.

Stephen Wasinger, Detroit, Mich., for Lawrence A. LoPatin and Leslie Share.

Robert H. Jaffe, Springfield, N. J., David S. Komiss, Houston, Tex., for plaintiffs-appellees.

Appeals from the United States District Court for the Northern District of Texas.

Before WISDOM, RUBIN, and SAM D. JOHNSON, Circuit Judges.

ALVIN B. RUBIN, Circuit Judge:

This eight-year securities litigation traverses the gamut of Rule 10b-5 issues. After lengthy discovery and a three-week trial to a jury, a judgment was entered on the basis of the jury's special verdict in answer to specific factual interrogatories. Despite this carnage, the battle must again be joined because the district court failed to submit crucial issues on reliance and causation to the jury. Although the judgment must be reversed, we nevertheless affirm the ruling that there is an implied cause of action under Section 10(b) of the Securities Exchange Act of 1934 even when an express cause of action is created by other sections of the federal securities laws. We reverse the judgment holding that corporate officers and accountants who prepare the corporate issuer's prospectus in connection with a securities offering are sellers of those securities under the Texas Securities

Act. Finally, we consider other issues likely to recur at the unfortunately necessary new trial.

I. FACTS

Texas International Speedway, Inc. (TIS) filed a registration statement and prospectus with the Securities and Exchange Commission (SEC) and the Texas State Securities Board offering a total of $4,398,900 in securities, the proceeds of which were to be used to construct an automobile racetrack called the Texas International Speedway. The entire issue was sold on the offering date, October 30, 1969. The corporation was nonetheless short-lived, for on November 30, 1970, TIS filed a petition for bankruptcy under Chapter X of the Bankruptcy Act.

In 1972, the plaintiffs on behalf of themselves and other purchasers of TIS securities filed this class action alleging claims under Section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act) and Rule 10b-5 promulgated pursuant to that statute. While the class action complaint alleged a panoply of federal and state law violations, only two remain material: conspiracy to violate Section 10(b) of the 1934 Act and Rule 10b-5 and conspiracy to violate the Texas Securities Act (TSA), a pendent claim. The complaint sought damages from LoPatin, the former President, Treasurer and Director of TIS; Share, the former Executive Vice-President and Director of TIS; Herman and MacLean (H&M), the accountants who had participated in preparation of the prospectus, and others. ¹

With court approval, the class compromised its claims against the underwriters for $275,000 and those against the speedway contractor for $50,000. The court order stated that "the release of any of the settling defendants is not to be treated as the release of a joint tort-feasor under common law." The amounts received in settlement were credited against the judgment eventually obtained by the plaintiffs but the nonsettling defendants' cross-claims for contribution were disallowed.

The issues that now concern us focus on statements made in the TIS prospectus. It contained an audited balance sheet dated May 31, 1969, and an unaudited balance sheet dated August 31, 1969. It related that the speedway was under construction and the proceeds of the securities issue would be used to pay the costs of that construction. It also contained a pro forma balance sheet dated May 31, 1969, showing that, upon completion of the public offering of the securities and the application of the proceeds to the construction costs of the speedway, TIS would on the speedway's opening date have $93,870 in cash on hand after allocation of $295,771 for general administrative expenses.

The trial judge submitted the case to the jury on special issues concerning whether the prospectus was materially misleading and, if so, whether this was done with scienter of various defendants. Despite the defendants' requests, he refused to submit special issues relating to reliance and causation.

The jury found that the prospectus was materially misleading as to the cost of constructing the speedway and that the defendants had "failed to disclose" the true facts with reckless disregard for the truth. ²

The trial judge then himself determined the amount of damages and entered judgment for the plaintiffs and against LoPatin, Share and H&M.

II.

THE IMPLICATION OF A PRIVATE CAUSE OF ACTION UNDER SECTION

10(b) AND RULE 10b-5 DESPITE THE APPLICABILITY OF

EXPRESS CIVIL LIABILITY PROVISIONS

The Securities Act of 1933, 15 U.S.C. § 77a et seq., (the 1933 Act) and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., (the 1934 Act) each authorizes specific private civil actions for damages arising out of statutory violation. ³ Together they "constitute interrelated components of the federal regulatory scheme governing transactions in securities." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206, 96 S.Ct. 1375, 1387, 47 L.Ed. 668, 684 (1976).

Each of the Acts contains general prohibitory sections that neither specifically authorize nor forbid a private cause of action. In a series of separate decisions, spanning four decades, courts have found that many of these provisions, including Section 10(b) and SEC Rule 10b-5, imply a private judicial remedy. ⁴

The plaintiffs alleged violations of Section 17(a) of the 1933 Act, 15 U.S.C. § 77q(a), Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, all of which have been held to imply a private action. However, the alleged misrepresentations in the prospectus would also warrant a suit under Sections 11 and 12(2) of the 1933 Act, 15 U.S.C. §§ 77k and 77l (2). The apparent overlap in the applicability of the express liability provisions of the 1933 Act and the implied remedies raises the issue whether an implied cause of action is available when an express cause of action has been created, a question reserved by the Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 752 n.15, 95 S.Ct. 1917, 1933 n.15, 44 L.Ed.2d 539, 559 n.15 (1975), and again left open in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 211 n.31, 96 S.Ct. 1375, 1389 n.31, 47 L.Ed.2d 668, 687 n.31 (1976), in considering the relationship of Section 10(b) and Section 18 of the 1934 Act, 15 U.S.C. § 78r.

The classic reconciliation of the apparent overlap of the express civil liability provisions of the 1933 Act and the cause of action implied in Rule 10b-5 is, according to 4 A. Bromberg, Securities Law: Fraud SEC Rule 10b-5 § 2.4, at 384.6 (Supp.1977), provided by Fischman v. Raytheon MFG. Co., 188 F.2d 783 (2d Cir. 1951). In Fischman, the common stockholders who were the plaintiffs contended that they were injured by the misstatements in a registration statement pursuant to which preferred stock was issued. Because they had not purchased the registered securities, they had no claim under Section 11 of the 1933 Act. The trial court held that these common stockholders were not entitled to relief under Rule 10b-5 because to allow such a claim would circumvent the restrictions imposed in an action under Section 11. The Second Circuit, reversing the district court, noted that proof of fraud is required under Rule 10b-5 but not required in a Section 11 action. "We think that when, to conduct actionable under § 11 of the 1933 Act, there is added the ingredient of fraud, then that conduct becomes actionable under § 10(b) of the 1934 Act and the Rule...." 188 F.2d at 786-87. ⁵

Moreover, in SEC v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), the Supreme Court considered the contention that Rule 10b-5 does not cover misrepresentations in connection with proxy solicitations in the light of Section 14 of the 1934 Act, 15 U.S.C. § 78n, which provides a complex regulatory scheme covering such solicitations. "(T)he existence or nonexistence of regulation under § 14," the Court said, "would not affect the scope of § 10(b) and Rule 10b-5. The two sections of the (1934) Act apply to different sets of situations. Section 10(b) applies to all proscribed conduct in connection with a purchase or sale of any security; § 14 applies to all proxy solicitations, whether or not in connection with a purchase or sale. The fact that there may well be some overlap is neither unusual nor unfortunate." 393 U.S. at 468, 89 S.Ct. at 573, 21 L.Ed.2d at 680 (emphasis added).

However, recent Supreme Court decisions curtailing the broader sweep given the Securities Acts by lower federal courts ⁶ together with the footnote observations in Ernst & Ernst and Blue Chip Stamps recognizing, without deciding, the overlap issue, give substance to the argument that no remedy should be implied for actions covered Two circuit courts have recently addressed the question. ⁸ The Second Circuit adopted the Fischman rationale in Ross v. A. H. Robins Co., 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980), holding that a cause of action may be implied in Section 10(b) and Rule 10b-5 for conduct that might also permit suit under Section 18 of the 1934 Act, 15 U.S.C. § 78r. While ...