In re American Continental/Lincoln S&L Sec. Lit.

• Decision Date: 18 June 1992
• Docket Number: MDL No. 834.
• Citation: In re American Continental/Lincoln S&L Sec. Lit., 794 F. Supp. 1424 (D. Ariz. 1992)
• Parties: In re AMERICAN CONTINENTAL CORPORATION/LINCOLN SAVINGS AND LOAN SECURITIES LITIGATION.
• Court: U.S. District Court — District of Arizona

794 F. Supp. 1424

In re AMERICAN CONTINENTAL CORPORATION/LINCOLN SAVINGS AND LOAN SECURITIES LITIGATION.

MDL No. 834.

United States District Court, D. Arizona.

June 18, 1992.

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William S. Lerach, Leonard B. Simon, John J. Stoia, Jr., Milberg Weiss Bershad Specthrie & Lerach, Kirk B. Hulett, Barrack, Rodos & Bacine, San Diego, Cal., for Shields CIV 90-566 PHX-RMB.

Joseph W. Cotchett, Susan Illston, Allan Steyer, Michael Liberty, Cotchett, Illston & Pitre, Burlingame, Cal., Ronald Rus, Randall A. Smith, Alvarado, Rus & Worcester, Orange, Cal., for First Baptist CIV 90-570 PHX-RMB.

P. John Owen, Michael C. Manning, Kristin L. Farnen, Morrison & Hecker, Phoenix, Ariz., for plaintiff Resolution Trust Corp. CIV 89-1509 PHX-RMB and defendant Lincoln Sav. and Loan Ass'n.

Andrew S. Friedman, Bonnett, Fairbourn & Friedman, Phoenix, Ariz., for Shields and Sidney Kaufman CIV 90-574 PHX-RMB.

Patrick J. Grannan, Greenfield & Chimicles, Los Angeles, Cal., for Shields, Mary Doran CIV 90-569 PHX-RMB and Ronald Fischman CIV 90-567 PHX-RMB.

Richard D. Greenfield, R. Bruce McNew, Greenfield & Chimicles, Haverford, Pa., for Shields and Ronald Fischman.

Kevin P. Roddy, Milberg, Weiss, Bershad, Specthrie & Lerach, Los Angeles, Cal., Richard S. Wayne, Strauss & Troy, Cincinnati, Ohio, Robert S. Schachter, Zwerling, Schachter & Zwerling, New York City, for Shields.

Thomas L. Taylor, III, Barry Mallen, Cooper, Epstein & Hurewitz, Beverly Hills, Cal., for Alan H. Yahr, CIV 90-571 PHX-RMB.

Thomas R. Schuck, Taft, Stettinius & Hollister, Cincinnati, Ohio, Richard C. Field, Cadwalader, Wickersham & Taft, Los Angeles, Cal., for Star Bank, N.A., Cincinnati.

Wayne W. Smith, Gail E. Lees, Gibson, Dunn & Crutcher, Los Angeles, Cal., John T. Behrendt, Gregory Barton, Gibson, Dunn & Crutcher, New York City, for Touche Ross & Co.

Dan K. Webb, Thomas J. Frederick, Winston & Strawn, Chicago, Ill., for Lexecon, Inc.

Max Gillam, Nancy Scheurwater, Latham & Watkins, Los Angeles, Cal., for Jones, Day, Reavis & Pogue and William J. Schilling, Ronald Fein and Robert.

James R. Condo, Snell & Wilmer, Phoenix, Ariz., for Troutman, Sanders, Lockerman & Ashmore.

Edward M. Glennon, Terrence J. Fleming, Steven M. Pincus, Lindquist & Vennum, Minneapolis, Minn., for First Bank Nat. Ass'n (formerly First Bank of Minneapolis).

Timothy A. Meltzer, David J. Brown, Brobeck, Phleger & Harrison, San Francisco, Cal., for Indus. Indem. Corp. CIV 90-1843 PHX-RMB.

Frank Taylor, Popham, Haik, Schnobrich & Kaufman, Ltd., Minneapolis, Minn., for Offerman & Co., Joseph Offerman and Scott Offerman.

Robert Ted Parker, Jeffrey B. Kirschenbaum, Titchell, Maltzman, Mark, Bass, Ohleyer & Mishell, A Professional Corp., San Francisco, Cal., for Societe D'Analyses et D'Etudes Bretonneau (f/k/a Societe de Banque Privee and Saudi European Bank).

Stuart L. Kadison, James Goldman, Sidley & Austin, Los Angeles, Cal., for Arthur Andersen & Co.

Miles N. Ruthberg, Meryl Macklin, Heller, Ehrman, White & McAuliffe, Los Angeles, Cal., for Arthur Young & Co., Ernst & Young and Jack Atchison.

Charles W. Cunningham, Michael A. Piazza, McKool Smith, Dallas, Tex., for Gene E. Phillips.

Terrence B. Adamson, Lynn Fisher Hill, Jack D. Worland, Jr., Donovan, Leisure, Rogovin, Huge & Schiller, Washington, D.C., for Saudi European Inv. Corp. N.V. (SEIC), Alef Inv. Corp., Alef Bank, S.A. and Jamal Radwan.

H. Garrett Frey, pro se.

Stephen C. Neal, Kirkland & Ellis, Chicago, Ill., for Charles H. Keating, Jr., Charles H. Keating, III, Robert M. Wurzelbacher.

MEMORANDUM OPINION

BILBY, District Judge.

This Opinion describes the basis of this court's rulings by Order of February 14, 1992, on motions for summary judgment filed by parties to these consolidated actions.

I. PROCEDURAL HISTORY

Five separate actions are consolidated before this court. Sarah B. Shields v. Charles H. Keating, Jr. ("Shields"), a class action on behalf "all persons who purchased securities, stock or debentures, of American Continental Corporation ("ACC") between January 1, 1986 and April 14, 1989," Shields v. Keating, No. CV 89-2052 SVW (C.D.Cal.1989) (Order re Class Certification), was transferred to this court by the Judicial Panel on Multidistrict Litigation. The Shields Plaintiffs fall into two categories. The majority purchased unsecured subordinated debentures through branch offices of Lincoln Savings & Loan Association ("Lincoln" or "Lincoln Savings"), a wholly owned subsidiary of ACC. Others purchased stock or debentures through broker/dealers. Shields alleges the following violations: Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5, 15 U.S.C. § 78j(b), 17 C.F.R. 240.10b-5; Section 18 of the Exchange Act, 15 U.S.C. § 78r; the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.; the Arizona Racketeering Act ("AZRAC"), 13 A.R.S. § 13-2301 et seq., and; Sections 11 and 12 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77k, 77l.

Charles Roble v. Arthur Young & Co. ("Roble"), a state action on behalf of the same class of securities purchasers, states claims for fraud, negligent misrepresentation, breach of fiduciary duty, and violations of California Corporations Code Sections 1507 and 25401.

Also before the court are federal and state actions on behalf of approximately 100 individual ACC securities purchasers. Alan H. Yahr v. Lincoln Sav. & Loan Ass'n ("Yahr"). The Yahr plaintiffs allege violations of Section 10(b), RICO, negligent misrepresentation, breach of fiduciary duty, conspiracy to breach fiduciary duty, California Corporations Code Section 25401, Sections 11 and 12(2) of the Securities Act, professional negligence, and negligent infliction of emotional distress.

In Resolution Trust Corp. v. Charles H. Keating, Jr. ("RTC v. Keating"), the Resolution Trust Corporation ("RTC"), as receiver for Lincoln, brings claims under RICO, AZRAC, and various state and common law theories of liability.

Finally, this opinion addresses claims made in Frey v. Hotel Pontchartrain Ltd. Partnership ("Frey"), in which investors in an ACC-related limited partnership brought claims for securities fraud, RICO, unjust enrichment, and negligent misrepresentation.

These actions originate from the business dealings of Charles H. Keating, Jr. ("Keating"), former chairman of ACC. The claims at issue here were brought principally against professionals who provided services to ACC and/or Lincoln Savings. These include: Star Bank, an indenture trustee for ACC subordinated debt; Lexecon Inc. ("Lexecon"), an economic consulting firm; Offerman & Company, Joseph Offerman, and Scott Offerman ("Offerman"), an underwriting firm and its principals; Arthur Andersen & Co. ("Arthur Andersen"), Arthur Young & Co. ("Arthur Young"), and Touche Ross & Co. ("Touche"), accounting firms; Jones, Day, Reavis & Pogue ("Jones Day"), a Cleveland-based law firm and two of its individual partners; Troutman, Sanders, Lockerman and Ashmore ("Troutman"), an Atlanta based law firm; Societe D'Analyses et D'Etudes Bretonneau ("Bretonneau"), a French bank; First Bank National of Minneapolis ("First Bank"), former trustee of the ACC employee stock ownership plan ("ESOP"); Gene E. Phillips, former chairman of Southmark Corporation; and Industrial Indemnity Corporation ("Industrial Indemnity" or "Indemnity"), a surety.

On February 14, 1992, following lengthy discovery, extensive briefing and oral argument, and after a review of voluminous pleadings, depositions, exhibits, and other papers, this court ruled on numerous motions for summary judgment. See In re ACC/Lincoln Savings Securities Litigation, MDL 834 (D.Ariz. February 14, 1992) (Order Granting and Denying Summary Judgment). At that time, the court stated that it would in due course issue this Memorandum Opinion, setting forth its analysis supporting the decision to grant or deny, in whole or in part, the various motions for summary judgment.

In addition, on January 7, 1992, this court issued a Memorandum Opinion and Order setting forth the basis for its rulings on Defendants' Motions for Class Decertification, and describing the legal basis for its decision that the plaintiff class is entitled to a presumption of reliance on the fraud-based claims discussed herein. See In re ACC/Lincoln Savings Securities Litigation, 140 F.R.D. 425 (D.Ariz.1992) (Memorandum Opinion and Order Denying Motions for Class Decertification). That Opinion is incorporated by reference herein, and forms the basis for this court's denial of summary judgment on reliance-based grounds.

II. LAW OF GENERAL APPLICATION Section 10(b) of the Exchange Act

Rule 10b-5, implementing Section 10(b) of the Exchange Act,¹ provides:

It shall be unlawful for any person ...

1. to employ any device, scheme, or artifice to defraud,

2. to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or

3. to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. Therefore, a primary violation of Section 10(b) and Rule 10b-5 entails: (1) a scheme or artifice to defraud; (2) an affirmative misrepresentation or omission of a fact necessary to make other statements not misleading; or (3) a course of business which operates as a fraud or deceit. In addition, the act or omission must be made or conducted "in connection with" the purchase or sale of securities, with resultant damage to plaintiffs. Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1485 (9th Cir.1991).

Proof of scienter is a requisite to any 10b-5 action. The United...