Roberts v. Peat, Marwick, Mitchell & Co.

• Decision Date: 19 September 1988
• Docket Number: Nos. 87-2106,87-2128 and 87-2278,s. 87-2106
• Parties: Fed. Sec. L. Rep. P 94,028, 12 Fed.R.Serv.3d 810 Phillip D. ROBERTS; Lynn Roberts; Denny Delk; Karen Delk; William J. Freschi, on behalf of themselves and all others similarly situated, Plaintiffs/Appellants/Cross-Appellees, v. PEAT, MARWICK, MITCHELL & CO., Defendant/Appellee/Cross-Appellant, and Houston Harbaugh, P.C., Defendant/Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 646

857 F.2d 646

Fed. Sec. L. Rep. P 94,028, 12 Fed.R.Serv.3d 810

Phillip D. ROBERTS; Lynn Roberts; Denny Delk; Karen Delk;

William J. Freschi, on behalf of themselves and all others similarly situated, Plaintiffs/Appellants/Cross-Appellees, v. PEAT, MARWICK, MITCHELL & CO., Defendant/Appellee/Cross-Appellant, and Houston Harbaugh, P.C., Defendant/Appellee.

Nos. 87-2106, 87-2128 and 87-2278.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 15, 1988.

Decided Sept. 19, 1988.

Solomon B. Cera, David B. Gold, P.C., San Francisco, Cal., for plaintiffs/appellants/cross-appellees.

Richard N. Patterson, McCutchen, Doyle, Brown & Enersen, San Francisco, Cal., for defendant/appellee/cross-appellant.

James J. Corbelli, Lillick, McHose & Charles, San Francisco, Cal., for defendant/appellee.

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

Before SCHROEDER ^* and BOOCHEVER, Circuit Judges, and STEPHENS, ^** District Judge.

PER CURIAM:

OVERVIEW

Plaintiffs are a class of investors who purchased interests in limited partnerships offered by an array of individuals and corporate

entities. Defendants are accountants and attorneys who provided professional services to the partnerships. When the value of the partnerships failed to materialize, the investors brought suit under federal and state securities laws. The district court granted summary judgment and dismissal for the defendants on the federal securities claims, dismissed the investors' remaining state claims, and denied cross motions for sanctions. 670 F.Supp. 1466. The investors appeal the summary judgment and dismissal of the federal claims, and both parties appeal denial of their respective motions for sanctions. We affirm in part, reverse in part, and remand.

FACTS AND PROCEEDINGS BELOW

Between 1980 and 1982 the investors purchased numerous shares in limited partnerships. The partnerships were organized to produce oil and gas through oil recovery technology which increased production of otherwise nonproductive oil-bearing property and were also to serve as tax shelters. The partnerships were organized and sold by a number of corporate entities and individuals, including Werner Heim as an individual. Some of these entities served as general partners in the partnerships. The defendants include the accounting firm of Peat, Marwick, Mitchell & Co. ("Peat, Marwick") and the law firm of Houston Harbaugh, P.C., ("Houston Harbaugh"), each of which rendered professional services to the partnerships. ¹ Peat, Marwick provided accounting services to the partnerships and issued audit reports. Houston Harbaugh prepared title opinions on real properties purchased by the partnerships.

The total price of a partnership unit was $150,000. This commitment consisted of $12,500 paid in cash upon initial subscription, two $12,500 payments on short-term promissory notes for each year of the two immediately subsequent years, and $112,500 payable in three installments due in the subsequent tenth, eleventh and twelfth years. Within three years of buying into the partnership, the oil technologies failed to materialize and the investors brought suit under the Securities Exchange Act of 1934, section 10(b) and Rule 10b-5, alleging fraud in the sale of the partnerships as securities.

The complaint against Peat, Marwick alleged: (a) the oil recovery technologies were unproven and, as a result, the partnerships never had the value represented, (b) the limited partnerships purchased mineral properties from Werner Heim and his corporate alter egos at over-inflated prices, and (c) the partnerships amounted to a scheme to defraud which Peat, Marwick knew of or should have been aware of. An additional claim alleged Peat, Marwick aided and abetted a section 10(b) violation by participating in partnership offering memoranda which contained false and misleading statements. With respect to Houston Harbaugh, the investors alleged: (a) it prepared false and misleading title opinions to some of the partnership properties, and (b) it knew and failed to disclose or recklessly disregarded the fact that the properties were transferred between various entities to conceal Heim's previous ownership, and that the properties were not acquired in arms-length transactions. Finally, the investors asked for Fed.R.Civ.P. 11 sanctions in response to Peat, Marwick's own motion for Rule 11 sanctions.

The district court granted summary judgment in favor of Peat, Marwick on the section 10(b) claim, finding it did not become involved with the transaction until after the investors made their initial partnership contributions, and that the installment payments on the short-term promissory notes were not separate investment decisions for which liability could attach for fraud in the sale of a security. On the aiding and abetting allegation, the district court dismissed with prejudice for failure to state a claim. The district court also The investors appeal summary judgment on the main claims and the dismissals of their section 10(b) and aiding and abetting claims. Both Peat, Marwick and the investors appeal denial of their respective motions for sanctions.

dismissed with prejudice the separate section 10(b) claim against Houston Harbaugh, finding the title opinions were correct as a matter of law because they accurately identified the entity holding title to the property. Finally, both Peat, Marwick's motion and the investors' cross-motion for Rule 11 sanctions were denied. ²

ANALYSIS

1. Separate Purchases

The investors allege they read and relied on audit reports and Form K-1 tax returns prepared by Peat, Marwick prior to making payments on their short-term promissory notes. The reports were alleged to be materially false and misleading in violation of section 10(b) of the Exchange Act because they failed to disclose that the represented tax benefits would not be available in light of: (1) the dependent relationship between the technology licensor and the partnership, (2) the partnerships' lack of profit motive, (3) the long-term obligations' failure to qualify for tax deductions, (4) the unproven and hence overvalued technology, and (5) the commingling of partnership funds and assets. In their depositions, the investors stated that they relied on the documents prepared by Peat, Marwick before making payments to the partnerships under the short-term promissory notes. They also stated that had they known of the alleged section 10(b) violations, they would not have made the subsequent payments on their note obligations. However, the investors acknowledged that the reports by Peat, Marwick alleged to have been false and misleading were not prepared and read by them until after they made their initial subscription payments and after they executed the subscription, promissory note and partnership agreements.

The investors argue that each payment on the short-term notes constituted a separate purchase of securities. This argument is essential to the investors' case because by acknowledging that Peat, Marwick's reports and tax returns were not involved in the partnerships when they initially agreed to invest, they cannot establish fraud "in the purchase." Securities Investor Protection Corp. v. Vigman, 803 F.2d 1513, 1516-17 (9th Cir.1986). Without fraud in the purchase, there can be no liability on the part of Peat, Marwick for preparation of the documents because it could not assist fraud which occurred before its involvement.

We review summary judgments de novo, viewing the affidavits in the light most favorable to the nonmoving party. Jett v. Sunderman, 840 F.2d 1487, 1491 (9th Cir.1988). We review the district court's rulings on discovery for an abuse of discretion. Id.

To prevail on a cause of action for violation of section 10(b) of the Securities Exchange Act of 1934 ³ and Rule 10b-5 of the Exchange Commission, ⁴ the investors must Section 3(a) of the 1934 Act defines "purchase" and "sale." Unless the context otherwise indicates, "purchase" includes "any contract to buy, purchase, or otherwise acquire," and "sale" includes "any contract to sell or otherwise dispose of." 15 U.S.C. Sec. 78c(a)(13) and (14). However, these definitions are of limited utility in ascertaining the scope of section 10(b) and Rule 10b-5. Precisely when a transaction is finalized, thereby creating an obligation to buy or sell securities, is a "question of intent for the finder of fact." Lewelling v. First California Co., 564 F.2d 1277, 1280 (9th Cir.1977). Thus, it is necessary to evaluate the factual situations in other cases to determine whether the purchase or sale requirement was met in this case.

                establish fraud "in connection with the purchase or sale of any security."    This requirement actually contains two separate elements:  "in connection with" and a "purchase or sale."    The former requires a causal relationship between the fraud and the resulting injury.   See Basic Inc. v. Levinson, --- U.S. ----, 108 S.Ct. 978, 989, 99 L.Ed.2d 194 (1988);  In re Financial Corp. of America Shareholder Litigation, 796 F.2d 1126, 1130 (9th Cir.1986) ("This 'transactional nexus requirement is a species of causation [in fact]' ") (quoting Hudson v. Capitol Mgmt. Intern., Inc., 565 F.Supp. 615, 622 (N.D.Cal.1983)).   Cf. Ohashi v. Verit Indus., 536 F.2d 849, 853 (9th Cir.), cert. denied, 429 U.S. 1004, 97 S.Ct. 538, 50 L.Ed.2d 616 (1976) (the fraud alleged "was not in connection with the inducement nor concurrently with the exchange").  The latter, a "purchase or sale," requires an "actual purchase or sale of securities, or a contract to purchase or sell...." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 735, 95 S.Ct. 1917, 1925, 44 L.Ed.2d 539 (1975).  It is the purchase and sale element which is at issue here, and we view the Blue Chip Stamps contract requirement as controlling
                

The investors contend the sale requirement is met under the following three cases: ...