Wessel v. Buhler

• Decision Date: 22 January 1971
• Docket Number: No. 23854.,23854.
• Citation: 437 F.2d 279
• Parties: Theodore B. WESSEL et al., Appellants, v. L. M. BUHLER and N. A. Jordan, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

437 F.2d 279 (1971)

Theodore B. WESSEL et al., Appellants, v. L. M. BUHLER and N. A. Jordan, Appellees.

No. 23854.

United States Court of Appeals, Ninth Circuit.

January 22, 1971.

Adam M. Duncan (argued), Parker M. Nielson, Salt Lake City, Utah, James Annest, Burley, Idaho, for appellants.

W. F. Merrill (argued), of Merrill & Merrill, Pocatello, Idaho, L. M. Buhler, Pocatello, Idaho, L. M. Buhler, Salt Lake City, Utah, for appellees.

Before ELY, HUFSTEDLER, and TRASK, Circuit Judges.

HUFSTEDLER, Circuit Judge:

Appellants, stockholders of Rocky Mountain Chemical Corporation ("RMC"), appeal from adverse portions of a judgment against L. M. Buhler, president of RMC, and from a judgment in favor of N. A. Jordan, an accountant, in their actions to recover damages for losses allegedly caused by the violations by Buhler and Jordan of Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5.¹

Appellants initiated the action against Buhler, certain other officers and directors of RMC, and Jordan, on their own behalf and for some 4000 other stockholders who had purchased RMC's stock in reliance upon three prospectuses dated February 10, 1960, August 1, 1961, and March 11, 1963. Appellants' class action averments were stricken by the district court on motion of appellees and their codefendants. All of the defendants, other than Buhler and Jordan, settled with the appellants before trial. At the close of appellants' case in chief, the court granted Jordan's motion for a directed verdict. The cause proceeded to judgment against Buhler, who has not appealed. The jury returned separate verdicts as to each appellant, expressly finding liability to each and awarding damages to each, save for three appellants who were awarded zero damages. The court totaled the verdicts ($51,020), totaled the amounts each appellant had received in settlements ($47,000), subtracted the latter from the former, and awarded a lump sum judgment for the difference ($4,020). Prejudgment interest and attorneys' fees were disallowed.

Appellants contend that the court erred in directing the verdict for Jordan, in computing the damages awarded against Buhler, in denying prejudgment interest and attorneys' fees, and in dismissing their class action. We affirm in part and reverse in part.

Buhler and his associates organized RMC in 1959 to produce alcohol from potatoes. Shortly thereafter RMC began selling its common stock to the public. Most of the stock was sold to Idaho residents, but some portions of the later issues were sold to out-of-state purchasers. Appellants variously bought stock under the first, the second, or all of the prospectuses. The financial condition of RMC was precarious from the outset. By 1962 its condition was worse and by 1963 it was desperate. RMC was adjudicated bankrupt in June 1964.

Jordan's Liability

Jordan, an independent certified public accountant, was retained on three separate occasions to prepare financial statements for RMC. In February 1962, Buhler asked him to prepare a financial statement to accompany RMC's application for a surety bond.² Jordan examined the corporate records and found that they were seriously deficient. After he persuaded RMC to hire a bookkeeper, Jordan and the bookkeeper gathered enough financial data to permit Jordan to prepare an unaudited statement for the accounting period ending June 30, 1962. Jordan delivered the statement to RMC's Board, with a transmittal memorandum noting the dubious collectibility of the Spring Kist account receivable listed in the face amount of $272,000 and cautioning that physical assets were carried at the acquisition costs reflected in RMC's books without any independent appraisal or audit. The second statement, also unaudited, was a balance sheet prepared by Jordan in cooperation with RMC's bookkeeper in January 1963. The balance sheet was to accompany RMC's application to the Small Business Administration for a loan. The second statement picked up some of the asset figures from the 1962 statement, with various current adjustments. Cash on hand was shown at $345.72. An operating loss of $267,780.34 also appeared. The third statement was prepared in July 1963. That audited statement disclosed a net loss during the period January through July 1963 of $451,000 and an operating loss of $775,500.

Appellants have two theories to sustain their claims against Jordan: (1) Jordan's financial statements were in and of themselves misleading statements "in connection with the purchase or sale of any security," within the meaning of Rule 10b-5. (2) The misleading financial statements, as Jordan knew, or should have known, were used in preparing the prospectuses that, in turn, were used "in connection with the purchase or sale of any security."

For the purpose of discussing the first point we assume that all three financial statements were misleading. Despite that assumption, no liability under Rule 10b-5 could have been based on those statements because there was no proof that the statements alone were statements "in connection with the purchase or sale of any security."

The quoted phrase has been broadly construed to effectuate Congress' intent to prevent corporate practices that are reasonably likely to mislead investors to their detriment. (E. g., Heit v. Weitzen (2d Cir. 1968) 402 F.2d 909, cert. denied (1969) 395 U.S. 903, 89 S.Ct. 1740, 23 L.Ed.2d 217; SEC v. Texas Gulf Sulphur Co. (2d Cir. 1968) 401 F.2d 833, cert. denied sub nom. Kline v. SEC (1969) 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756). But its reach is not boundless. As Judge Waterman explained in Texas Gulf Sulphur Co., supra, 401 F.2d at 862, "Rule 10b-5 is violated whenever assertions are made * * * in a manner reasonably calculated to influence the investing public, e. g., by means of the financial media, * * * if such assertions are false or misleading or are so incomplete as to mislead irrespective of whether the issuance of the release was motivated by corporate officials for ulterior purposes."

None of the three financial statements was made "in a manner reasonably calculated to influence the investing public." None was publicly disseminated in any way. There was no evidence that any investor ever saw the statements until after the litigation began. The evidence was that Jordan delivered them to the Board for uses unconnected with stock issuance, and, as far as the evidence discloses, no one before suit ever saw them, except the officers and directors of RMC and the agencies to which they were directed. We decline to stretch Rule 10b-5 to cover Jordan's financial statements. (See Fischer v. Kletz (S.D.N.Y.1967) 266 F.Supp. 180, 194-196; cf. Rusch Factors, Inc. v. Levin (D.R.I.1968) 284 F.Supp. 85, 90-93.)

We turn to appellants' alternative theory. It is evident that Jordan had nothing to do with the first two prospectuses because they were issued before he reached the RMC scene. It is also evident that his third financial statement had nothing to do with the third prospectus because the third prospectus was issued before he prepared the third statement. Appellants' efforts to fasten responsibility upon Jordan rest upon connecting his first two statements with the production of the third prospectus.

Appellants attempted to show that Jordan participated in the creation of the prospectus by pointing to the use in the prospectus of some of the figures that appeared in Jordan's financial statements and by asking that an inference be drawn therefrom that Jordan was responsible for their appearance in the prospectus. Of course, we can infer from the presence of those figures in both instruments that whoever drew the prospectus took those figures from the earlier financial statements. But the further inference does not follow that the person who copied parts of the financial statements was Jordan. That inference is particularly untenable because other key features of the prospectus had no counterpart in the financial statements. Thus, RMC's operating loss of $267,000, shown on the 1963 balance sheet, was completely omitted from the prospectus. Cash on hand was listed as $345.72 on the balance sheet, but on the prospectus the sum was raised to $10,345.72. The evidence demonstrated that whoever wrote the prospectus picked out the figures he found attractive in the balance sheet, discarded those he did not like, and simply made up the rest. The result was fiction, but there was no proof that Jordan created it.

The direct evidence from both Jordan and Buhler was that Jordan had nothing to do with the production of the third prospectus. Of course, the jury could have disbelieved the denials, but disbelief does not become a substitute for affirmative evidence. As Judge L. Hand said in Dyer v. MacDougall (2d Cir. 1952) 201 F.2d 265, 269:

"Although * * * a party having the affirmative might succeed in convincing a jury of the truth of his allegations in spite of the fact that all the witnesses denied them, we think it plain that a verdict would

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