Zweig v. Hearst Corp.

• Decision Date: 21 July 1975
• Docket Number: 74-2028,Nos. 74-1979,s. 74-1979
• Parties: , Fed. Sec. L. Rep. P 95,256 Richard L. ZWEIG and Muriel Bruno, Plaintiffs-Appellants, v. The HEARST CORPORATION, a corporation, Defendant-Appellee. Jerry GREENFIELD, Individually and as a representative of a class of allpersons similarly situated, Plaintiff-Appellant, v. The HEARST CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1129

521 F.2d 1129

32 A.L.R.Fed. 703, Fed. Sec. L. Rep. P 95,256

Richard L. ZWEIG and Muriel Bruno, Plaintiffs-Appellants, v. The HEARST CORPORATION, a corporation, Defendant-Appellee.

Jerry GREENFIELD, Individually and as a representative of a class of allpersons similarly situated, Plaintiff-Appellant, v. The HEARST CORPORATION, Defendant-Appellee.

Nos. 74-1979, 74-2028.

United States Court of Appeals, Ninth Circuit.

July 21, 1975.

Philip M. Brown (argued), Beverly Hills, Cal., for plaintiffs-appellants.

Stephen G. Contopulos (argued), Los Angeles, Cal., for defendant-appellee.

OPINION

Before KOELSCH and CHOY, Circuit Judges, and McNICHOLS, ^* District Judge.

McNICHOLS, District Judge:

The above-captioned actions have, by prior order, been consolidated for appeal. The appellee in each case is the same and the controversies arose out of a single transaction. Appellants rely on precisely identical grounds for reversal.

For the purposes of this appeal, jurisdiction in the District Court was founded on 15 U.S.C. § 78j(b) and 17 CFR § 240.10b-5 (the familiar Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission promulgated under authority of the Act). ¹ Jurisdiction here is laid in 28 U.S.C. § 1291.

FACTUAL BACKGROUND

The Hearst Corporation (hereinafter Hearst) publishes the Los Angeles Herald Examiner, a daily newspaper. One Alex A. Campbell, a co-defendant below, not a party to this appeal, is an employee of Hearst and the author of a financial column published five days a week in the Herald Examiner. On June 4, 1969, Campbell wrote, and the paper printed, a column concerning a corporation known as American Systems, Inc. The article tended to be laudatory of American Systems, its management, products, and fiscal condition. Undisclosed in the article was the fact that Campbell had recently invested in American Systems stock.

Subsequent to publication of the June 4 column, the price of American Systems stock rose dramatically. Campbell took advantage of the appreciated market and disposed of some or all of his stock. The value of the stock later fell off.

Plaintiffs alleged various theories of pecuniary damage through the fluctuation of the price of American Systems stock which fluctuation they attribute to the newspaper story. They contend that Campbell's conduct constituted actionable wrongdoing in violation of Section 10(b) and Rule 10b-5. Suit was instituted in each case against Campbell, Hearst and others. Vicarious liability on the part of Hearst is claimed, based on the employment relationship.

Hearst promptly moved for summary judgment as to the claims under Section 10(b), supporting such motions with affidavits. Plaintiffs fully resisted the motions. Hearst prevailed, summary judgment was granted in each case, and this appeal was perfected.

Two issues are concisely delineated for review:

1. Did the District Court err in holding that Hearst had no vicarious liability under the agency theory of Respondeat superior?

2. Did the District Court err in granting summary judgment in favor of Hearst, based on the good-faith defense permitted by 15 U.S.C. § 78t(a) (Section 20(a) of the Act of 1934)?

We deem it unnecessary to set out in Haec verba the well-known proscriptions of Section 10(b) and Rule 10b-5 relative to the employment of any manipulative or deceptive devices in connection with the purchase or sale of any security. For the purposes of this appeal, we accept, without deciding, that plaintiffs have pled a meritorious Section 10(b) action.

The two issues faced on this appeal turn on an interpretation of the effect of Section 20(a) of the 1934 Act, which provides:

"(a) Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action."

The quoted portion of the Act is commonly referred to as the " controlling person" provision. Vicarious liability attaches to a controlling person or entity by operation of law except that a defense of good faith is provided where the controlling person did not directly or indirectly participate in the wrongful acts.

Both courts below concluded, we think correctly, that Hearst qualifies as a controlling person under Section 20(a).

The threshold issue to be dealt with concerns the effect of the adoption of Section 20(a) by the Congress on the long-established agency doctrine of Respondeat superior. Appellants contend that Section 20(a) was not intended to supplant the vicarious liability of an employer under agency theories, but provided an enlargement of liability to reach persons having responsibility but not easily fitted into any specific agency classification. Appellee, pointing to our holding in Kamen & Co. v. Paul H. Aschkar & Company,382 F.2d 689 (9th Cir. 1967), Cert. granted, 390 U.S. 942, 88 S.Ct. 1021, 19 L.Ed.2d 1129, Cert. dismissed, 393 U.S. 801, 89 S.Ct. 40, 21 L.Ed.2d 85, urges that in this Circuit the issue is foreclosed contra to appellants' position.

Kamen appears to be the forerunner of a series of cases in the various circuits treating with the liability of an employer where an employee violates Section 10(b). It was there held that Section 20(a), the controlling person provision, is to be applied to determine such liability. The contention that the more stringent doctrine of Respondeat superior remained effective to establish vicarious liability was rejected. This holding has far-reaching implications because of the exculpatory defense of good faith available under Section 20(a).

The Kamen decision has been much discussed, sometimes followed, on occasion distinguished, and other times rejected out of hand. As a result the circuits are not in full accord. The Supreme Court has not spoken on the issue, though the occasion has been afforded.

The Kamen rule is well established in this circuit. Hecht v. Harris, Upham & Co., 430 F.2d 1202 (9th Cir. 1970); Douglass v. Glenn E. Hinton Investments, Inc., 440 F.2d 912 (9th Cir. 1971); Jackson v. Bache & Co., Inc., 381 F.Supp. 71 (D.C.1974).

The Second Circuit is in accord. Lanza v. Drexel & Co., 479 F.2d 1277 (2nd Cir. 1973); Securities & Exchange Commission v. Lum's Inc., 365 F.Supp. 1046 (D.C.1973); Gordon v. Burr, 366 F.Supp. 156 (D.C.1973), Partially modified on other grounds, 506 F.2d 1080 (2nd Cir. 1974); Barthe v. Rizzo, 384 F.Supp. 1063 (D.C.1974).

The Fourth, Sixth and Seventh Circuits take a contra position. Johns Hopkins University v. Hutton, 422 F.2d 1124 (4th Cir. 1970), (affirming the strongly presented arguments of Judge Frank Kaufman at D.C., 297 F.Supp. 1165); Armstrong, Jones & Co. v. Securities & Exchange Commission, 421 F.2d 359 (6th Cir. 1970); Fey v. Walston & Co., Inc., 493 F.2d 1036 (7th Cir. 1974).

Leading cases in the Eighth and Tenth Circuits, where Section 20(a) has been held to support liability in Section 10(b) cases, do not specifically deal with the agency remedy question. Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967); Richardson v. MacArthur et al., 451 F.2d 35 (10th Cir. 1971).

Kamen provides the controlling authority on this appeal. We hold that the trial court correctly held that Hearst was not vicariously liable under the doctrine of Respondeat superior and that, as to Hearst, liability, if any, was as a controlling person under Section 20(a).

We turn to the second specification of error, that of the propriety of the summary judgment entered on the issue of the defense of good faith made available by the terms of Section 20(a).

It is to be noted that there is no contention made that Hearst directly or indirectly induced the act or acts of Campbell which form the basis of plaintiffs' claim of Section 10(b) and Rule 10b-5 violations. We therefore face the narrow question of whether, under Rule 56, Federal Rules of Civil Procedure, the record discloses that there is no genuine issue as to any material fact to the end that Hearst would be entitled as a matter of law to summary judgment on the question of having "acted in good faith".

We are most cognizant of the strictures controlling the granting of summary judgment under Rule 56.

"Summary judgment of course is proper only where there is no genuine issue of any material fact or where viewing the evidence and the inferences which may be drawn therefrom in the light most favorable to the adverse party, the movant is clearly entitled to prevail as matter of law." Stansifer v. Chrysler Motors Corporation, 487 F.2d 59, 63 (9th Cir. 1973).

An examination of the facts developed by interrogatories and affidavits offered for and against appellants' motion for summary judgment is required. The source of those facts are to be found in affidavits of Donald Goodenow, Managing Editor of the Herald Examiner, and of George R. Hearst, Jr., Publisher of the paper, and in answers to separate interrogatories propounded to and answered by Campbell and by Hearst.

The affidavits and the interrogatory answers do not raise any specific conflict and, indeed, the parties agree as to the basic facts. We therefore paraphrase the affidavits and interrogatory answers.

Mr. Goodenow, as Managing Editor, avers in essence that his duties required him to supervise the reporters; that Campbell had been employed for a number of years; ² that Campbell chose his own subject without suggestion from the newspaper; that at the time the article in question was published the employer was unaware of any financial interest Campbell may have had in American Systems, Inc.; that the newspaper never investigates the financial affairs of its employees, unless for cause; prior to publication of the...