Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil No. 84-00714.
Sloviter, Chief Judge,*fn* Mansmann, Circuit Judge, and H. Lee Sarokin, District Judge.*fn**
This appeal requires that we determine whether the district court erred in directing a verdict for the defendants in an action alleging fraud and misrepresentation in connection with the purchase and sale of securities. The plaintiff, John B. Sowell, represents a certified class of plaintiffs who purchased shares of stock in I.G.E., Inc. during the period between August of 1977 and June of 1981. The plaintiff named as defendants Butcher & Singer, a securities broker/dealer having its principal place of business in Philadelphia, Thomas A. Grey, a Butcher & Singer trader and first vice president, and Samuel J. Bennett, a former Butcher & Singer assistant vice president, vice president, and registered representative. The complaint alleged that these defendants committed violations of state and federal securities laws, engaged in conduct in violation of the Racketeer Influenced and Corrupt Organizations Act, and committed acts of fraud, deceit and negligence under Pennsylvania state law.
Several claims were dismissed upon the defendants' motion for summary judgment and, at trial, the only claims remaining were those based on RICO, 18 U.S.C. § 1961-1968, common law fraud, and those section 10(b), 15 U.S.C. § 78j(b), claims involving stock purchases between February 13, 1981 and June, 1981. At the close of the plaintiff's case, the trial court directed a verdict on all claims in favor of the defendants.
The plaintiff now challenges the district court's entry of a directed verdict. The plaintiff also claims that the district court erred in excluding certain evidence at trial and in dismissing a number of claims as time-barred.
While our examination of the issues has been complicated by the district court's failure to articulate the bases for the majority of its rulings, our detailed analysis of the record convinces us that the directed verdict and the evidentiary rulings underlying that verdict can be sustained. We will, therefore, affirm the order of the district court.
While the parties do not agree on every factual detail, we are able to distill from the record those essential historical facts as to which there appears to be consensus. The allegations of wrongdoing in this case center on transactions in the stock of I.G.E., Inc., (IGE), a Massachusetts corporation formed in 1971 as the successor to the business of International Geophysical Explorations, Inc. During the period extending from 1971 through August, 1977, IGE had no revenue and was, in essence, a shell corporation whose principal asset was a 1/64 royalty interest in an off-shore oil and gas concession near Honduras.
In 1977, Samuel J. Bennett, then a registered representative with Butcher & Singer's Cherry Hill, Pennsylvania office, was approached by Craig O. Moon. When Moon expressed interest in acquiring control of a dormant corporation, Bennett suggest IGE as a "clean shell" and introduced Moon to IGE management.
After a period of negotiation, Moon became president of IGE with the intent to involve the corporation in varied business ventures.*fn1 Under the terms of the agreement between Moon and the members of the board of IGE, Moon was required to enlist the services of a listed stock brokerage house for the purpose of "creating and maintaining a strong healthy market for IGE stock." Moon again approached Bennett, who agreed to serve as a consultant to IGE and to enlist the services of Butcher & Singer "to make a market" in IGE stock.*fn2 In return for these services and to compensate him for having brought Moon and the IGE board together, Bennett, or members of his immediate family, were issued 400,000 shares of IGE capital stock. These shares were to be used to create and maintain a "good market situation" in that stock.
At approximately the same time that he was given the 400,000 shares, Bennett is alleged to have misappropriated blank IGE stock certificates on which he forged or caused to have forged necessary signatures, certificate amounts, and dates of issuance.*fn3 None of the stock which Bennett received, either by grant or alleged misappropriation, was registered.
In 1977, Bennett requested that Butcher & Singer make a market in IGE stock. Bennett contacted Thomas A. Grey, an over-the-counter securities trader at Butcher & Singer's Philadelphia office and informed him that he, Bennett, had a "good amount" or an "interest" in IGE stock which he wished to sell. On August 22, 1977, Grey, as the trader designated and authorized to handle stocks such as IGE, began market-making efforts on behalf of Butcher & Singer. Grey did not ask Bennett to disclose the number of IGE shares which he owned, did not inquire into the circumstances surrounding Bennett's acquisition of the certificates, and did not place in the Butcher & Singer file the information required by Section 15 of the 1934 Act.
Between August 23, 1977 and October 31, 1977, Bennett sold 50,560 shares of IGE stock through Butcher & Singer with both Grey and Butcher & Singer earning commissions on the sales. The plaintiff alleges that, at the time of these sales, Bennett was aware that virtually all of IGE's capital stock was outstanding and that, in an effort to raise revenue, IGE was preparing to effect a 1 for 10 reverse split on the stock issued. The impending reverse split, which did, in fact, occur on November 1, 1977, was not disclosed to the purchasers of IGE stock.*fn4
The remaining allegations of misconduct on the part of the defendants focus primarily on circumstances surrounding transactions in IGE stock during April, May and June 1979. Prior to that time, the price of IGE stock fluctuated in a narrow range between $1 and $2 per share. In the spring of 1979, however, the price rose dramatically to more than $8 per share. Transactions in the stock increased during this period, with Bennett transferring more than 40,000 shares for over $200,000 in proceeds. During the same period, Grey and other Butcher & Singer officers and employees also traded IGE stock, at a profit, in their own accounts.
The parties agree that this increase in the price of and activity in IGE stock resulted from rumors concerning IGE's acquisition of property on which to develop and operate a casino in Atlantic City, New Jersey. Sowell alleges that, by virtue of Bennett's position as a consultant to IGE and his involvement in IGE's casino-related efforts, Bennett knew that the realistic prospects for IGE's acquiring casino property were minimal. Despite this knowledge, Bennett continued to sell IGE stock on the basis of inflated or false rumors.
Sowell also alleges misconduct on the part of Butcher & Singer stemming from the Spring, 1979 events. Prior to April, 1979, no one at Butcher & Singer made any effort to determine the source or extent of Bennett's IGE stock holdings. In April, 1979, however, Louis Iannucci, an assistant to Francis Doyle, Butcher & Singer's compliance director, brought the IGE activity in Bennett's account to Doyle's attention.*fn5 Iannucci had determined that the IGE stock was being sold primarily to other market makers for IGE although some shares had also been sold, on an unsolicited basis, to local customers. Iannucci spoke with Bennett but did not ask him any questions regarding his IGE holdings other than their source. Bennett claimed to have acquired the shares as penny stock during his time as a penny stock trader with another brokerage house during the late 1960's and early 1970's. Doyle asked that the unsolicited nature of IGE sales be confirmed but did not make inquiry or direct that inquiry be made concerning the amount of stock owned by Bennett, previous sales by Bennett, or Bennett's relationship to IGE. No inquiry was made into the registration of IGE stock. Bennett continued to market IGE stock through Butcher & Singer.
In early June, 1979, IGE made a public announcement which stated that its casino project was contingent upon receipt of necessary financing. It then became clear that rumors to the effect that IGE was about to build an Atlantic City casino were unfounded. The price of IGE stock dropped to between $2 and $4 per share by the end of 1979. Thereafter, the price remained steady at between $1 to $2 per share through June, 1981.
During the period extending from August 23, 1977 through June 23, 1981, Bennett sold some 270,550 shares of IGE stock through Butcher & Singer for proceeds totalling some $546,768.41. Butcher & Singer and Grey received commissions on each of these sales.
In 1981, the Securities Exchange Commission, Division of Enforcement, initiated an investigation into trading in IGE stock. At the conclusion of that investigation, a public administrative proceeding was instituted by the Commission's Order for Public Proceedings dated January 13, 1984. Pursuant to this order, a nine-day evidentiary hearing was conducted during April and May, 1984. The administrative law judge found that Butcher & Singer, Bennett, and Grey had willfully violated and willfully aided and abetted violations of Sections 5(a) and 5(c) of the 1933 Act by not inquiring into the source and registration status of Bennett's IGE stock. Butcher & Singer was found to have willfully violated sections 15(c) and 15(b)(4)(E) of the 1934 Act by failing to have certain information in its files prior to publishing quotations and by failing adequately to supervise Bennett and Grey with a view to preventing and detecting their violations. Bennett was also found to have violated the anti-fraud provisions of Section 17(a)(1), 17(a)(2) and 17(a)(3) of the 1933 Act and Section 10(b) and Rule 10b-5 of the 1934 Act.
Butcher & Singer, Grey and Bennett appealed the decision of the administrative law judge to the full Commission which rendered its decision in a January 13, 1987 opinion. The SEC's findings were based on an independent review of the record. With certain exceptions, the Commission's findings of fact and conclusions of law paralleled those found by the administrative law judge.*fn6
In January, 1981, Sowell purchased shares of IGE stock at $2.25 per share through a broker at Prudential Bache. On February 13, 1984, less than one month after the Order for Public Proceedings was issued by the SEC's Enforcement Division, Sowell filed suit against Butcher & Singer, Bennett, Grey and IGE in the United States District Court for the Eastern District of Pennsylvania. In the original complaint, Sowell alleged violations of §§ 5, 10, 12 and 17 of the Securities Act of 1933, 15 U.S.C. §§ 77e, 77j, 77l, and 77q; §§ 10(b), 15 and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78o and 78t; and Rule 10b-5, 17 C.F.R. § 2140.10b-5. Sowell also alleged violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961-1968; the Pennsylvania Securities Act of 1972, 70 Pa. Cons. Stat. Ann. §§ 1-101 to 1-704 (Purdon Supp. 1986), and included allegations based on common law fraud.
The defendants moved for summary judgment and, on May 13, 1987, those claims based upon sections 5 and 17 of the Securities Act and section 15 of the Exchange Act were dismissed for lack of a private right of action. Most of Sowell's claims based on section 12 of the Securities Act were dismissed as time-barred or on privity grounds. The only viable section 12 claims were those section 12(2) claims asserted by class members who purchased directly from the defendant after February 13, 1981. Summary judgment was not granted as to Sowell's RICO and common law claims, although the plaintiff was required to file an amended complaint as to the RICO issues, pleading the allegations of fraud with greater particularly, and eliminating IGE as a defendant, given that IGE was also alleged to have been an enterprise for purposes of RICO.
On October 16, 1987, defendants Butcher & Singer and Grey filed a second motion for summary judgment on the remaining section 10(b) and Rule 10b-5 claims. The district court granted this motion, ruling that all claims involving IGE stock purchases prior to February 13, 1981, were time-barred under our decision in In re Data Access Securities Litigation, 843 F.2d 1537 (3d Cir. 1988), cert. denied sub. nom, Vitiello v. I. Kahlowsky and Co., 488 U.S. 849, 102 L. Ed. 2d 103, 109 S. Ct. 131 (1988). The parties thus prepared to litigate the RICO and common law fraud claims as well as those section 10(b) claims arising from stock purchases made between February 13, 1981 and June, 1981.*fn7
At the same time that the district court granted the defendants' summary judgment motion based upon the statute of limitations, it granted a motion for partial summary judgment filed by the plaintiff on the issue of liability under section 10(b) and Rule 10b-5. By this motion, Sowell sought to invoke the principle of collateral estoppel with respect to the findings of fact and conclusions of law set forth in the SEC opinions filed by the administrative law judge and the full Commission. In response to Sowell's motion, the district court, without specifically referring to the SEC, ruled in an order dated May 26, 1989, that the following facts were conclusively established for purposes of this litigation:
a. That all defendants violated Sections 5(a) and 5(c) of the Securities Act by selling defendant Bennett's forged and unregistered stock.
b. That defendant [Butcher & Singer] willfully violated Section 15(c)(2) of the Exchange Act and Rule 15c2-11 by publishing quotations for IGE without having the required information about the company in its possession.
c. That defendant Bennett violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 by selling forged stock certificates, by making fraudulent representations to a customer identified as "Mr. C." and by trading in IGE stock without disclosing material inside information.
On October 23, 1989, Sowell moved for an order in limine precluding the defendants from introducing evidence to controvert the facts found by the SEC in the prior administrative action. This motion was denied. The defendants also filed a motion in limine seeking to preclude any reference to the prior regulatory proceedings. The district court ruled that while Sowell could refer to the factual findings made by the SEC, he could not make reference to the SEC itself or to the fact that certain actions taken by the defendants were found to have violated provisions of the securities laws. Sowell then presented his case to the jury and, at the conclusion of Sowell's case, the district court directed a verdict in favor of the defendants.
On appeal, Sowell contends that he adduced at trial evidence sufficient to have each of his claims submitted to the jury. To the extent that his proof on any one of these claims may have been deficient, Sowell argues that the deficiency resulted from erroneous evidentiary rulings made by the court. Specifically, Sowell challenges the district court's failure to accord full collateral estoppel effect to the findings of fact and conclusions of law made at each level of the SEC proceedings, the district court's ruling preventing any reference to violations of specific sections of the securities laws held established for purposes of this litigation in the court's May 26, 1989 order, the exclusion of Sowell's testimony as to class damages, the exclusion of expert testimony on damages, and the district court's failure to admit a statement made by Bennett in answers to interrogatories served in other litigation to the effect that the IGE stock which he received was "worthless." Sowell also challenges the district court's conclusion that certain of his section 12(2) and 10b-5 claims were time-barred and asserts that the court committed error in refusing to permit discovery surrounding the transfer of Butcher and Singer assets to Wheat First Securities.*fn8
We have thoroughly examined the record in this case and are satisfied that we need not devote detailed consideration to each of the issues raised on appeal. Because we are convinced that Sowell failed to present evidence on the issue of damages sufficient to withstand a directed verdict under any theory of liability and are convinced as well that this failure was not the result of erroneous evidentiary rulings, we are able to sustain the district court's entry of a directed verdict.
Before we turn to the substance of this appeal, we feel compelled to note that our review of this matter has been complicated by the district court's failure to articulate the bases for many of its rulings. This failure occurs in the context of evidentiary rulings and in the grant of the directed verdict itself.
The district court's failure to discuss the reasoning underlying the entry of the directed verdict is particularly troubling. Each of the plaintiffs' theories of recovery required proof of multiple elements and even a close reading of the record does not reveal upon which of these elements the district court focused in directing the verdict. In moving for a directed verdict, the defendants claimed that Sowell had failed to meet his burden of proof on the issues of causation, damages, the RICO statute of limitations, the degree of fraud required under RICO, and the element of reliance. Granting the motion for directed verdict, the district court stated, "Based upon the ...