In re Equity Funding Corp. of Amer. Sec. Litigation
| Decision Date | 23 January 1976 |
| Docket Number | M.D.L. No. 142. |
| Citation | 416 F. Supp. 161 |
| Court | U.S. District Court — Central District of California |
| Parties | In re EQUITY FUNDING CORPORATION OF AMERICA SECURITIES LITIGATION. |
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Mitchell, Silberberg & Knupp, Los Angeles, Cal., defendants' Liaison Counsel and for Seidman and Seidman, and Robert L. Spencer.
Harold A. Abeles, Beverly Hills, Cal., for Julian S. H. Weiner.
Wyman, Bautzer, Rothman & Kuchel, Beverly Hills, Cal., for Daniel J. Disipio, Burton Borman, Stanley Beyer, Joe D. Bain, and G. Phillip Streatfield.
A. Tod Hindin, Hindin, McKay, Levine & Glick, Beverly Hills, Cal., for Dov Amir.
John A. Sturgeon, Sheppard, Mullin, Richter & Hampton, Los Angeles, Cal., for Wells Fargo Bank.
Gibson, Dunn & Crutcher, Los Angeles, Cal., for United California Bank, Peat, Marwick, Mitchell & Co., Pennsylvania Life Co., Pennsylvania Life Insurance Co., and Penn General Agencies, Inc.
Nelson, Liker & Merrifield, Los Angeles, Cal., for Wolfson, Weiner & Co., and Wolfson, Weiner, Ratoff & Lapin.
Stephens, Jones, La Fever & Smith, Los Angeles, Cal., for Arthur Young & Co.
Arthur C. DeGoede, Deputy Atty. Gen. for State of California and State of California Insurance Commissioner.
Nathan Markowitz, Los Angeles, Cal., for Solomon Block.
Howard P. Miller, Elihu M. Berle, Buchalter, Nemer, Fields & Savitch, Los Angeles, Cal., for Equity Funding Corp. of America.
William H. Levit, Jr., Hughes, Hubbard & Reed, Los Angeles, Cal., for Coopers & Lybrand, Philip L. Defliese, Joseph Froggatt & Co., and Joseph Froggatt & Co., Inc.
Simon & Sheridan, Los Angeles, Cal., for Marlene Goldblum.
Alfred I. Rothman, Albert F. Smith, Loeb & Loeb, Los Angeles, Cal., for Haskins & Sells and Lorin H. Wilson.
James L. Nolan, Adams, Duque & Hazeltine, Los Angeles, Cal., for Robert T. Jackson and Phoenix Mut. Life Ins. Co.
Richard A. DeSantis, Los Angeles, Cal., for Marvin A. Lichtig and Esther Lichtig.
Dryden, Harrington & Swartz, Los Angeles, Cal., for John S. Pennish.
Kadison, Pfaelzer, Woodard, Quinn & Rossi, Los Angeles, Cal., for Director of Insurance, Dept. of Insurance, State of Ill.
Fischmann & Wallerstein, Los Angeles, Cal., for Phillip J. Wolfson.
Donnelly, Clark, Chase & Johnson, Los Angeles, Cal., for American Stock Exchange.
David K. Robinson, Leonard M. Marangi, Hahn & Hahn, Pasadena, Cal., for Milliman & Robertson, Inc.
Burton Y. Weitzenfeld, John F. McClure, Arnstein, Gluck, Weitzenfeld & Minow, Chicago, Ill., for The Savings and Profit Sharing Fund of Sears Employees (and Trustees).
William Scott, Atty. Gen. of Ill., Robert J. O'Rourke, Chicago, Ill., for State of Ill.
Leonard Joseph, Dewey, Ballantine, Bushby, Palmer & Wood, George D. Reycraft, Peter M. Brown, Cadwalader, Wickersham & Taft, Donald I. Strauber, Chadbourne, Parke, Whiteside & Wolff, White & Case, Jerome Londin, Carro, Spandock, Londin, Rodman & Fass, Samuel E. Gates, Debevoise, Plimpton, Lyons & Gates, Peter Fleming Jr., Curtis, Mallet-Prevost, Colt & Mosle, Robert A. Meister, Milgrim Thomajan & Jacobs, P. C., New York City, for certain "trading" defendants.
Robert E. Kushner, Cole & Deitz, New York City, for National Bank of North America.
John J. Loflin, Lord, Day & Lord, New York City, for American Stock Exchange, Inc.
Jeffrey M. Epstein, Kaye, Scholer, Fierman, Hays & Handler, New York City, for Franklin Nat. Bank.
Bud G. Holman, Kelley, Drye & Warren, New York City, for Delafield Childs, Inc.
Sherman & Sterling, New York City, for First Nat. City Bank.
Milbank, Tweed, Hadley & McCloy, New York City, for New York Stock Exchange, Inc.
Marvin Schwartz, Sullivan & Cromwell, New York City, for L. Jay Tenenbaum, Bache & Co., Inc., Goldman, Sachs & Co., and New York Securities Co., Inc.
Allen W. Williams, Jr., Foley & Lardner, Milwaukee, Wis., for Estate of Lynford Lardner, Jr.
Raoul Y. Roth, Sherman Oaks, Cal., for William Mercado.
Edwin S. Kahn, Alan E. Boles, Holland & Hart, Denver, Colo., for Dean J. Boosalis, and Frank M. Zaveral, Jr.
Shoob & Zalut, Phoenix, Ariz., for Bernard D. Duskin.
John S. Martin, Martin, Obermaier & Morvillo, New York City, for Frank Flaum, Thomas F. Egan, George Mandel, Melvin Bund, Samuel B. Ratoff, Benjamin H. Lapin, Arthur M. Hartzband, and Saul Bruh.
Tom Watson Brown, Huie, Brown & Ide, Atlanta, Ga., for Leonard Bagen, J. Rodgers, Robert Gorin, and Pete Fishman.
Marshall B. Grossman, Schwartz, Alschuler & Grossman, Jack Corinblit, Corinblit & Shapero, Los Angeles, Cal., Herbert M. Wachtell, Wachtell, Lipton, Rosen & Katz, New York City, Wayne M. Thomas, Harold E. Kohn, Philadelphia, Pa., Stanley A. Furman, Feinerman, Furman & Klein, Beverly Hills, Cal., Allen D. Black, Fine, Kaplan & Black, Philadelphia, Pa., David B. Gold, San Francisco, Cal., John E. Martindale, Arter & Hadden, Cleveland, Ohio, Edmond H. Kerr, Cleary, Gottlieb, Steen & Hamilton, New York City, James F. Pascal, Everett G. Allen, Jr., Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., James J. Wilson, Diamond, Tilem, Colden & Emery, Los Angeles, Cal., for plaintiffs.
The occasion for this opinion is resolution of many defendants' motions directed to the sufficiency of the pleadings in this litigation. The litigation arises out of an alleged securities fraud perpetrated through Equity Funding Corporation of America (hereinafter "EFCA") and its subsidiaries.1 After more than eight years of public trading in EFCA securities, the S.E.C. suspended trading in the company's securities on March 27, 1973. On April 2, 1973, reports describing the alleged fraud at EFCA were published in the press, and numerous investor suits were filed throughout the country.2 Most of the actions were transferred to the Central District of California for coordinated or consolidated pretrial proceedings before this Court, pursuant to the transfer and pretrial provisions of 28 U.S.C. ž 1407. In Re Equity Funding Corporation of America Securities Litigation, 375 F.Supp. 1378 (J.P.M.L., 1974).
After transfer of the actions, this Court held a first preliminary pretrial conference to organize the conduct of discovery and other pretrial matters. Subsequently, the Court issued its General Management Order No. 1, which established the structure of these pretrial proceedings, set up certain discovery schedules, and required the plaintiffs to file a Unified and Consolidated Complaint.3 The Court required that this pleading be served on all the defendants or their counsel authorized to accept service.
The organized representatives of plaintiffs' counsel thereupon filed the First Amended Unified and Consolidated Complaint (hereinafter the "Complaint"), the pleading to which the present motions are directed. The Complaint invokes subject matter jurisdiction of this Court pursuant to ž 22 of the Securities Act of 1933,4 ž 27 of the Securities Exchange Act of 19345 and various other jurisdictional statutes. The Complaint also purports to state claims for relief under state and common laws, and the doctrine of pendent jurisdiction is invoked with regard to these claims. Paragraph 5 of the Complaint catalogues the federal securities laws and other theories under which claims are asserted.6
In paragraphs 10-48, the Complaint sets out the alleged fraudulent activities related to EFCA and the acts of each defendant for which liability is claimed.7 The scheme described by the Complaint was carried out by certain officers and directors of EFCA, designated in the Complaint as "primary defendants." The conduct of these defendants caused the records and financial statements of EFCA to show continued false and inflated rates of growth in the stated assets, incomes, and earnings of the company and its subsidiaries. This was done to influence the price of EFCA securities traded on the national securities exchanges, to induce purchase of those securities by others, and to influence stockholders in other companies acquired by EFCA to exchange their stock in those companies for EFCA securities. From 1964 through April 2, 1973, the price of EFCA securities was inflated on account of the fraudulent activities at EFCA.
The misstatements about EFCA's growth and financial condition were achieved, and EFCA's true financial condition concealed through a number of fraudulent devices. These included false entries in the books, records, and financial reports of EFCA and its subsidiaries, use of foreign corporations to create fictitious and inflated assets for EFCA, and a method by which bogus life insurance policies were created for the files of Equity Funding Life Insurance Company (hereinafter "EFLIC"), a subsidiary of EFCA, then reinsured by unknowing companies or carried as assets by EFLIC. Loans were made to customers of EFCA and secured by mutual funds purchased by these same customers. These "premium funded loans" were listed as assets by EFCA, although by 1972, the amount of fictitious loans entered in the "premium funded loan" account reached a rate of $2,000,000 per month. Many filings were made with public agencies, all of which included false statements or misleading omissions necessary to conceal the scheme and inflate the value of EFCA securities. Other aspects of the scheme are also alleged in the Complaint.
The fraud at EFCA was continued for eight years with the aid, complicity, and neglect of many persons or business entities outside the EFCA structure that knew or should have known about the fraud. These persons or entities are named as "aider and abettor" defendants in the Complaint. They include the accountants for EFCA and its subsidiaries, underwriters for EFCA debenture issues, a firm that did actuarial work for EFLIC from 1966 on, a group of defendants that sold EFCA securities between March 6, 1973 and March 27,...
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