Jenson v. Touche Ross & Co.

• Decision Date: 17 June 1983
• Docket Number: No. C3-81-1170.,C3-81-1170.
• Citation: 335 NW 2d 720
• Court: Minnesota Supreme Court
• Parties: Lawrence JENSON, et al., Appellants, v. TOUCHE ROSS & CO., defendant and third party plaintiff, Respondent, and Lawrence LOKKEN, Defendant, v. CONTINENTAL FINANCIAL CORPORATION, et al., Third Party Defendants.

335 N.W.2d 720 (1983)

Lawrence JENSON, et al., Appellants, v. TOUCHE ROSS & CO., defendant and third party plaintiff, Respondent, and Lawrence LOKKEN, Defendant, v. CONTINENTAL FINANCIAL CORPORATION, et al., Third Party Defendants.

No. C3-81-1170.

Supreme Court of Minnesota.

June 17, 1983.

Charles S. Zimmerman, Minneapolis, Edward W. Glickman, Minneapolis, for appellants.

Oppenheimer, Wolff, Foster, Shepard & Donnelly, Craig W. Gagnon and Michael J. Bleck, Minneapolis, for respondent.

Heard, considered and decided by the court en banc.

SIMONETT, Justice.

This class action arises out of an audit prepared by the defendant accounting firm, and raises issues on evidentiary rulings relating to the claim of negligence against the defendant auditor and whether the defendant violated the state consumer fraud, the state false advertising, or the state securities statutes. Another issue is whether the trial court erred in denying a pretrial motion to disqualify defendant's counsel from representing the defendant because of an alleged conflict of interest. Based on the jury's special verdict answers, the trial court ordered judgment of no liability in favor of the defendant. Plaintiffs appeal from a denial of their motion for judgment notwithstanding the verdict or a new trial. We affirm.

Appellant-plaintiff class members are customers of Continental Coin Exchange, Inc., who claim to have suffered financial loss as a result of their purchases of bulk silver coins on margin from Continental Coin. Plaintiffs were successful in making a partial recovery in a separate federal court action against Continental Coin and its principals, which eventually went bankrupt. Plaintiffs then brought on for trial this state court action against defendant-respondent Touche Ross & Co., which had conducted an audit of Continental Coin.

Continental Coin (the sales division of Continental Financial Corporation) was in the business of selling silver coins in bulk as investments. The customer could pay cash and take physical possession of the coins or could buy on margin, paying down only a portion of the purchase price. If a margin purchase, Continental Coin would loan the customer the purchase price balance and was obliged to deliver the coins to the customer on payment of the margin debt, but not before. A customer could, however, close out the purchase and realize any appreciation in value without taking physical delivery of the coins. In 1973, at the time of the audit, 80 to 90% of Continental Coin's business was margin business.

Rather than purchasing silver coins, Continental Coin secured its obligations to customers primarily by making purchases in the futures market parallel to and offsetting its customers' margin purchases. These purchases would be made daily to reflect aggregate net sales for the day. The futures contracts were themselves purchased on margin and in Continental Coin's name, without identification or connection to any particular customer. The testimony was that Continental Coin was in a complete "hedge" at all times and thereby was protected from any exposure to risk of market fluctuations. At the time of the audit, less than 1% of Continental Coin's customer obligations were secured by physical bags of coins in Continental Coin's possession. A detailed description of Continental Coin's operations is described in Jenson v. Continental Financial Corp., 404 F.Supp. 792 (D.Minn.1975). Compare State, by Spannaus v. Coin Wholesalers, Inc., 311 Minn. 346, 250 N.W.2d 583 (1976) (a functionally similar operation).

In July 1973, Continental Coin retained Touche Ross to audit its balance sheet for the end of the fiscal year, August 31, 1973. (The poor internal company controls at the beginning of the year precluded any audit of a profit and loss statement.) The audit was completed and "signed off" on November 5, 1973. The audit report concluded with the statement by Touche Ross that "in our opinion, the aforementioned consolidated balance sheet presents fairly the financial position of Continental Financial Corporation and subsidiary at August 31, 1973 in conformity with generally accepted accounting principles."

Not long after the audit report was issued in November 1973, Continental Coin ran into problems. Sometime in early 1974 Wisconsin issued a cease and desist order, finding that Continental Coin's contracts were the sale of unregistered securities. Eventually, investigations started in Minnesota, New York, South Dakota, and other states. Plaintiffs here started their federal court class action in January 1975, and at that time Continental Coin stopped selling coins on margin entirely and terminated existing margin accounts.

In July 1977 plaintiffs commenced this state court action against Touche Ross, alleging seven counts, of which three — breach of contract, punitive damages, and sale of unregistered securities — were dismissed prior to or during trial. The remaining counts were: (1) fraudulent sale of securities, (2) common law negligence, (3) statutory consumer fraud, and (4) statutory false advertising. The basis of all these claims was Touche Ross' failure to disclose, either in the accountant's audit opinion letter or otherwise thereafter, that Continental Coin was being investigated by the securities commissions of Wisconsin and Michigan and the Federal Securities and Exchange Commission to determine whether its sale of bulk silver coins on margin constituted the sale of securities.

After a 5-week trial on the issues of liability only (the trial was bifurcated, the damages issues along with perplexing issues of causation to be resolved later), the jury found that (1) defendant Touche Ross did not knowingly make or omit any untrue statement of a material fact, either before or after November 7, 1973; (2) defendant was not negligent, either before or after November 7, 1973; (3) defendant did not knowingly use or knowingly employ a misleading statement or a deceptive practice with intent that others rely upon it; and (4) defendant did cause an advertisement to be published with intent to induce the public to enter into an obligation, but that the advertisement did not contain a statement of fact which defendant knew was untrue, deceptive or misleading.

A.

We first take up the claims of error relating to the jury's finding of no negligence on the part of defendant Touche Ross. Appellant-plaintiffs concede that there is evidence sufficient to sustain the verdict of no negligence. They contend, however, that various evidentiary rulings so prejudiced their negligence claim that a new trial is required.

Before discussing these evidentiary rulings, some further factual background will be helpful. While the audit was being conducted, defendant Touche Ross became aware that the securities commissions of two states were investigating Continental Coin's operation to determine whether its transactions were sales of commodities, as the company maintained, or sales of securities which had to be registered and thus could be rescinded by the customer. In response to Continental's standard "audit inquiry letter" to its corporate counsel, Touche Ross obtained two letters, the first dated September 14, 1973, from Lawrence Lokken, who had earlier served as secretary and corporate counsel for Continental Coin, which concluded, "It is our opinion that the sales in question do not involve the sale of a security."¹ The second letter, dated November 5, 1973, was from Miles Efron, the then current corporate counsel, who specifically noted the Wisconsin and Michigan investigations but stated he knew of "no transactions or business activities which have had or might have a significant effect on the financial position" of the company.² There was also a letter from attorney Lokken to the Minnesota Department of Commerce, Securities Division, written in March 1973, confirming a telephone call in which Lokken had described Continental Coin's operations, and an attorney for the division had indicated agreement with his opinion that these did not constitute the sale of securities. Although Touche Ross was aware of this Lokken letter, it had not received it by the time the audit was signed off. There was also evidence that in September 1973 representatives of the Securities and Exchange Commission visited with Continental Coin. It seems the SEC voiced no objections at the time but neither was a formal "no-action" letter requested or issued.

Touche Ross' opinion letter, issued on November 5, 1973, was unqualified, and neither the opinion nor the audit report made any mention of the securities issues or pending investigations. At trial, plaintiffs' experts testified that disclosure should have been made by the auditor; defendant's experts testified to the contrary. Touche Ross' witnesses testified that the securities issue was primarily a legal question, for which they relied on the letters of corporate counsel and management's representations as to the absence of contingent liabilities. Further, since silver prices were rising, the likelihood of customers affording themselves of rescission was lessened and, in any event, only a relatively few sales had been made in Wisconsin and Michigan.

Appellants claim that they were prejudiced by four evidentiary rulings. We first note that evidentiary rulings on materiality, foundation, remoteness, relevancy, or the cumulative nature of the evidence are committed to the sound discretion of the trial judge and will only be the basis for reversal where that discretion has been clearly abused. See, e.g., Hiedeman v. Hiedeman, 290 Minn. 210, 187 N.W.2d 119 (1971); Colby v. Gibbons, 276 N.W.2d 170, 175 (Minn.1979). Further, as we stated in Poppenhagen v. Sornsin Construction Co., 300 Minn. 73 at 79-80, 220 N.W.2d 281 at 286 (1974), in construing Minn.R.Civ.P. 61, "before an error in the exclusion of evidence may be grounds for a new trial, it must appear that such evidence might reasonably...