the oil drilling ventures contemplated by the WMC limited partnership agreements and (d) knew that the actual drilling costs for each limited partnership would be less than $ 140,000. Higgins testified at his deposition that, while under the transaction contemplated by this "paper loan" WMC would not have access to the money it would "borrow" from IBT, that was "not a difference . . . that in my opinion would be that critical from the tax point of view." As it turned out, many of these facts were untrue as a result of WMC's fraud.
Professor Wolfman stated that if the writer had made such a recommendation and was aware of these facts, the October 11 letter contained a number of misstatements: that the driller would receive $ 140,000 in cash, that there would be partnership borrowing and that such borrowing would be from a suitable bank or other lending agency. These misrepresentations, which the jury could have found were intentional or at least reckless, in turn rendered the opinion as to tax consequences a misrepresentation, again at best recklessly made, because it was based on assumptions known to be false.
Third, the plaintiffs established that as of October 11 Higgins had decided to leave defendant's employ and that he had as of October 8 taken a leave of absence and was remaining there only to finish the opinion letter. There was evidence that by October 6 Higgins was working closely with ECI, WMC's selling agent, and on October 16 he got powers of attorney from Raymond to execute and file papers for WMC, of which Raymond was president, and for IBT, of which he was board chairman. Professor Wolfman testified that it was improper for an employee of an accounting firm who was employed by ECI to write a tax opinion letter and that the failure to disclose his relationship with the selling agent would be a material omission which would appear to have been intentional or reckless.
The jury concluded that, while Higgins caused the material misrepresentations and omissions in the October 11 letter recklessly or with an intent to defraud, no partner of the defendant firm caused any misstatements with such scienter. It also found no misrepresentations or omissions in the July 22 letter, so that liability is limited to those relying on the October 11 letter. With respect to the plaintiffs' negligence claim, the jury determined that defendant failed to exercise reasonable care but said that it was not foreseeable to the defendant that plaintiffs would be injured as a result of its negligent misrepresentations. With respect to common law fraud, the jury determined there was clear and convincing proof that the misrepresentations and omissions were made recklessly but not that they were made with knowledge and intent to deceive. Again, liability can arise only from reliance on the October 11 letter. The responses to interrogatories under § 20(a) of the Securities Exchange Act were that the defendant had the power to control Higgins' wrongful activities and that its good-faith defense of reasonably adequate supervision of Higgins had not been made out.
II. COMMON LAW NEGLIGENCE:
After considerable dubitation as to whether the defendant could owe a duty to the plaintiff investors to exercise reasonable care in writing its opinion letters, we charged the jury and included interrogatories as to negligence. The questions we deemed common to the class were the existence of a duty to the plaintiffs and the defendant's standard of care. After the jury found that the defendant was negligent but that the named plaintiff's injury was not foreseeable to it, we entered judgment for the defendant on Count Three on the ground that defendant owed no duty of reasonable care to plaintiffs whose injury was not foreseeable. Plaintiffs have moved for judgment n. o. v. on the foreseeability issue and assert they should be allowed to pursue individual damage claims on a negligence theory.
There looms a threshold question of what common law governs as to this pendent claim. As a federal court exercising pendent jurisdiction, we are bound to invoke the choice of laws rules of the forum state, 1A Moore's Federal Practice P 0.305(3) at 3056 (1977), at least where there is direct authority from the highest court of a state. Cf. Towner v. Commissioner of Internal Revenue, 182 F.2d 903, 907 (2d Cir.), Cert. denied, sub nom. Estate of Farrell, 340 U.S. 912, 71 S. Ct. 293, 95 L. Ed. 659 (1950). The controlling Pennsylvania choice of laws principle in tort cases generally is that enunciated in Griffith v. United Air Lines, Inc., 416 Pa. 1, 203 A.2d 796 (1964), that the law of the state bearing the most significant relationship with the occurrences and parties in a case ought to be applied. Neither party has argued on these motions that the selection of applicable state law is significant or that a particular state law should apply. We believe, to the contrary, that determining whose law applies might be crucial to the liability of the defendant under the negligence claim on the issue of duty.
Our difficulty with making a choice of law analysis at this point is that we do not yet know in the case of each individual plaintiff which state has the most significant relationship with the occurrences and the parties. Normally, in a tort case this will be the state in which the injury occurred. However, individual cases may contain individual factors which could cause us, under Pennsylvania's choice of law rules, to look to a state other than the state of injury.
But even if we were to reach the usual result in tort cases and apply the law of the state of injury, we still do not know which law to apply since on this record we do not know the state in which each of the individual plaintiffs was injured. That the interests of more than one state are involved is inevitable. The problem is that we do not know on this record how many or which states are involved with respect to each plaintiff's claim. Therefore, any discussion of the law of any given state at this time would be both premature and futile. Since the pendent common law claims involve several state law questions, such as the duty of accountants to third persons, reliance, statute of limitations defenses and damages, it is manifestly impossible for us to decide those questions as to each individual state until we first determine which state law to apply.
The plaintiffs have moved for judgment n. o. v. with respect to the jury's finding that the defendant could not foresee that the named plaintiff would be likely to be injured by its negligence. Whatever its merits, we are unable to consider this motion because the plaintiffs did not move for a directed verdict under F.R.Civ.P. 50(a) as to foreseeability or as to Count Three generally. A motion for judgment n. o. v. based on a ground not raised in a party's motion for a directed verdict cannot be granted. C. Albert Sauter Co., Inc. v. Richard S. Sauter Co., Inc., 368 F. Supp. 501, 509 (E.D.Pa.1973); 5A Moore's Federal Practice P 50.08, at 50-86 & n.3 (1977). The Third Circuit has interpreted strictly the requirement of F.R.Civ.P. 50(b) that a motion for a directed verdict after the presentation of all evidence is a prerequisite to a motion for judgment n. o. v. DeMarines v. KLM Royal Dutch Airlines, 580 F.2d 1193 at 1195 n.4 (3d Cir. 1978); Lowenstein v. Pepsi-Cola Bottling Co. of Pennsauken, 536 F.2d 9 (3d Cir.), Cert. denied, 429 U.S. 966, 97 S. Ct. 396, 50 L. Ed. 2d 334 (1976); Beebe v. Highland Tank and Manufacturing Co., 373 F.2d 886 (3d Cir.), Cert. denied sub nom. National Molasses Co. v. Beebe, 388 U.S. 911, 87 S. Ct. 2115, 18 L. Ed. 2d 1350 (1967). See also 9 C. Wright & A. Miller, Federal Practice & Procedure § 2537, at 596-98 (1971). Indeed, to entertain the plaintiffs' motion might deprive defendant of its Seventh Amendment rights to a trial by jury on Count Three as to foreseeability. Lowenstein v. Pepsi-Cola Bottling Co. of Pennsauken, 536 F.2d at 11; Sulmeyer v. Coca Cola Co., 515 F.2d 835, 846 n.17 (5th Cir. 1975), Cert. denied, 424 U.S. 934, 96 S. Ct. 1148, 47 L. Ed. 2d 341 (1976), Citing Slocum v. New York Life Insurance Co., 228 U.S. 364, 33 S. Ct. 523, 57 L. Ed. 879 (1913). The importance of the policies served by the Rules and the Seventh Amendment forbids us under the law of this circuit to consider plaintiffs' arguments in chambers that plaintiffs' injuries were as a matter of law foreseeable as curing the failure to move for a directed verdict as to that interrogatory on that basis. Lowenstein v. Pepsi-Cola Bottling Co. of Pennsauken 536 F.2d at 12 & n.7. The plaintiffs' motion for judgment n. o. v. therefore will be denied.
Although we cannot grant plaintiffs' motion, we conclude nevertheless in light of the uncertainty as to what state law applies that judgment should not have been entered as to any plaintiff on Count Three. For at least some plaintiffs, the lack of privity with defendant might not foreclose the existence of a duty. Similarly the non-foreseeability found by the jury might not foreclose all plaintiffs. It is possible that under the law of some states, foreseeability is not required to impose a duty on accountants to exercise reasonable care. More likely, some states may impose liability on accountants for negligence to all persons whom the accountants foresaw or should have foreseen would have Used or would have Relied on the opinion letter rather than those whose injury was foreseeable. See Restatement (Second) of Torts § 552 (1965) (limiting liability for negligently supplied false information without direct reference to foreseeability) and Illustrations 5, 6. Because there is no legal or factual finding which forecloses all plaintiffs from recovery on Count Three, we will vacate our judgment for defendant on that count.
III. COMMON LAW FRAUD AND FORESEEABILITY:
Defendant contends both that the jury's finding of non-foreseeability of injury compels judgment in its favor on Count Two, alleging fraudulent misrepresentation, and that it is entitled to judgment n. o. v. because there was no evidence of its scienter. We are again thrust into a situation in which we cannot decide what state law to apply without knowing with regard to each plaintiff all the states, laws and interests involved, and we are therefore unable to grant the defendant's motions at this time.
IV. HIGGINS' RULE 10b-5 VIOLATIONS:
A. Foreseeability and Rule 10b-5.
The jury determined that Herman Higgins made material misrepresentations and omissions in the October 11 opinion letter either recklessly or with intent to defraud. The defendant advances several grounds why it is entitled nonetheless either to a verdict in its favor on Count One, alleging violation of Rule 10b-5 under § 10(b) of the Securities Exchange Act, or to a new trial on that count. Among these is the contention that the jury's finding of non-foreseeability of injury compels such a judgment in order to make the verdict on all counts consistent with the jury's answers to interrogatories, and that we must take the view of the case that renders these answers consistent, Atlantic & Gulf Stevedores, Inc. v. Ellerman Lines, Ltd., 369 U.S. 355, 82 S. Ct. 780, 7 L. Ed. 2d 798 (1962).
Underpinning this argument is a failure to ask the crucial question, "foreseeability of What ?" and to make distinctions among the various possible answers. The foreseeability which is required under Rule 10b-5 is not foreseeability that a plaintiff might be injured, but merely that the defendant knew or should have known the opinion letter would be promulgated to investors.
The defendant is correct, however, in stating that the Third Circuit requires foreseeability as an element of a 10b-5 claim. In Landy v. Federal Deposit Insurance Corp., 486 F.2d 139, 168 (3d Cir. 1973), Cert. denied, 416 U.S. 960, 94 S. Ct. 1979, 40 L. Ed. 2d 312 (1974), the court held that an accountant's alleged misstatements in reports could not be the basis of a 10b-5 action because
"None of the directors' reports was made in a manner reasonably calculated to influence the investing public (and there) is no proof that any were disseminated to the public or that any investor saw them except for Landy, a director and counsel for the bank."
See also Wessel v. Buhler, 437 F.2d 279, 282 (9th Cir. 1971); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860-62 (2d Cir. 1968) (en banc), Cert. denied sub nom. Coates v. SEC, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1976). As we concluded in SEC v. Penn Central Co., 450 F. Supp. 908, 912-13 (E.D.Pa.1978), the "in connection with" requirement of Rule 10b-5
imposes in these cases the limitation that defendants can be liable for misrepresentations and omissions only if the defendants reasonably could foresee that these misstatements would be used in connection with the purchase or sale of a security I. e., would go to a class of persons (including the plaintiff or plaintiffs in a private damage action) for their consideration in deciding whether to purchase or whether to sell securities. Accord, Competitive Associates, Inc. v. Laventhol, Krekstein, Horwath & Horwath, 516 F.2d 811, 815 (2d Cir. 1975). Defendant points to no evidence, nor could it, suggesting non-foreseeability in this sense. We hold as a matter of law that the defendant foresaw and reasonably could foresee that the October 11 opinion letter would be shown to potential investors in WMC limited partnerships, and we therefore conclude that this letter was used in connection with the purchase of those partnership interests.
In so holding, we conclude that an accounting firm's rendering of opinions to a client as to the tax consequences of purchases and sales of the client's securities, where the firm is or should be aware the opinion will be disseminated to potential purchasers and sellers of those securities, is analogous for Rule 10b-5 purposes to preparing or certifying financial statements which it actually or constructively knows will be used in the same way. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 n.33, 96 S. Ct. 1375, 1391, 47 L. Ed. 2d 668 (1976) ("experts who perform services or express opinions with respect to matters under the (Securities Exchange) Acts"); Gold v. DCL Inc., 399 F. Supp. 1123, 1127 (S.D.N.Y.1973).
The other cases from this circuit cited by defendant for the proposition that foreseeability of loss is necessary in a 10b-5 case are not relevant to this motion. The court in Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 194 (3d Cir. 1976), discussed the requisite of a causal connection between fraudulent conduct and a purchase or sale of securities and concluded that the defendants' fraudulent refusal to sell stock had an insufficient causal nexus with plaintiffs' stock purchases. Similarly, Judge Adams held in Ketchum v. Green, 557 F.2d 1022, 1027 (3d Cir.), Cert. denied, 434 U.S. 940, 98 S. Ct. 431, 54 L. Ed. 2d 300 (1977), that the fraud-sale of securities relationship was too attenuated in a case involving an intra-corporate struggle for control. In our case the causal nexus takes a classic form, between an accountant's misrepresentation and purchases of securities, and causation follows from objective materiality, which has been proven, and subjective reliance, which has not been at issue in the trial thus far.
The other main line of authority invoked by the defendant involves the limitation of damages recoverable in a Rule 10b-5 action to those proximately caused by defendants' fraud. Courts have mentioned foreseeability of injury in that context, E.g., Garnatz v. Stifel, Nicolaus & Co., Inc., 559 F.2d 1357, 1361 (8th Cir. 1977), Cert. denied, 435 U.S. 951, 98 S. Ct. 1578, 55 L. Ed. 2d 801 (1978); See also Miller v. Schweickart, 413 F. Supp. 1062, 1067-68 (S.D.N.Y.1976); 2 A. Bromberg, Securities Law: Fraud, SEC Rule 10b-5 § 8.7(2), at 218 (1973) ("Foreseeability has a role to play in determining the measure of damages . . ."). To the extent that the jury's finding of non-foreseeability would be relevant to that issue, it cannot be deemed competent because the damages issue has not yet been tried and hence the plaintiffs were not required at the trial of common issues to prove proximately caused damages. What role, if any, foreseeability will play in that determination cannot be ascertained until a later date.
Defendant also relies heavily on Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976), to impose a foreseeability requirement, mainly on the bases of (1) the Securities and Exchange Commission's proposed standard for recovery for negligent violations of Rule 10b-5, which the Court rejected in holding scienter is required, Id. at 198 n.18, 96 S. Ct. 1375, and (2) the Court's citation of Ultramares v. Touche, Niven & Co., 255 N.Y. 170, 174 N.E. 441 (1931), Id. at 215 n.33. The SEC proposed that a defendant's liability for negligence be limited to those persons whose Reliance could be foreseen by the defendant, which requirement has been met here in any case. Moreover, there is no reason to expect that the Court, in rejecting the sufficiency of negligence for 10b-5 liability, in any sense adopted this limitation.
Nor should the citation of Ultramares v. Touche, Niven & Co., in Ernst & Ernst and in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 747-48, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975), suggest endorsement of a foreseeability rule. In both cases the Court echoed Chief Judge Cardozo's concern about the overbreadth of the class of plaintiffs to whom persons doing business might be liable, but neither opinion suggests limiting an accountant's liability to purchasers and sellers for Fraudulent, as opposed to negligent conduct. Thus once there is a breach of a duty extending to persons beyond those in privity with an accountant, I. e., once there is fraud and not mere failure to exercise reasonable care,
"If the certified financial statements (or opinions) are intended to be used and are used, to the knowledge of the accountants, in the sale of securities by the company or someone else to the public, there would seem to be little question that the purchasers are persons entitled to complaint of that breach of duty, even under Cardozo's opinion in the Ultramares case which is discussed in Ernst & Ernst."