20, 1978, June 8, 1979, and November 12, 1980. (Ex. A, B, and C.) These letters stated Arvey Hodes's opinion of the tax consequences of the cancellation of forward contracts. The letters clearly stated the factual premises about the First Western trading program on which they relied. Arvey was of the opinion that, based on these facts and then current tax law, the cancellation of a forward contract would result in ordinary loss (or gain). There were disclaimers in the opinion letters, regarding both the underlying facts and the legal conclusions.
Plaintiffs Kline and Knops invested in forward contracts with First Western. They had read the June 1979 and November 1980 tax opinion letters before entering into their forward contracts. (Req. for Admis. 26-28, attached as Ex. D.) Cancellation of the loss side of forward contracts was part of their income tax strategy from the beginning, and they canceled forward contracts that incurred losses. (Req. for Admis. 58, attached as Ex. D.) They took deductions for these losses and the IRS disallowed the deductions. Their dispute with the IRS has now been settled. (Req. for Admis. 88, attached as Ex. D.)
On March 3, 1983, plaintiffs Wojdak, Kline, and Knops filed their complaint.
On September 20, 1983, plaintiffs moved for certification of a plaintiff class. On July 30, 1984, Arvey Hodes filed its motion for summary judgment. In the meantime, several investors in the First Western program were pursuing litigation with the IRS regarding the deductibility of the losses incurred by the cancellation of forward contracts. The parties agreed that the outcome of that litigation would have a substantial effect on the suit in this court. Consequently, by agreement of all parties, the case was placed in suspense pending final determination of the IRS litigation.
The IRS litigation proceeded to the United States Supreme Court, and was finally resolved on June 27, 1991. The trial judge concluded that "the transactions between First Western and its customers were illusory and fictitious and not bona fide transactions. . . . Even if the transactions were bona fide transactions, the transactions were entered into primarily, if not solely, for tax-avoidance purposes." Therefore, he held that the investors were liable for additional taxes. Freytag v. Commissioner of Internal Revenue, 89 T.C. 849, 875-76 (1987), aff'd, 904 F.2d 1011 (5th Cir. 1990), aff'd, 111 S. Ct. 2631, 115 L. Ed. 2d 764 (1991).
Upon completion of the IRS litigation, this case was removed from civil suspense. The plaintiffs responded to Arvey Hodes's motion for summary judgment. Arvey Hodes filed a reply, and plaintiffs filed a "sur reply." I have considered all pleadings and exhibits filed with respect to this motion.
Further briefing on the class certification motion has been postponed until after disposition of this summary judgment motion. However, for the purposes of this motion, it is useful to consider the proposed class. Plaintiffs seek to have a class certified of "all investors purchasing forward contracts in government securities through First Western during the period from January 1978 through the date of the filing of this Complaint." (Proposed Order attached to Mot. for Class Certification.)
SUMMARY JUDGMENT STANDARD
A motion for summary judgment is appropriate only when there is no genuine issue of material fact, and one party is entitled to judgment as a matter of law. Williams v. West Chester, 891 F.2d 458, 463-64 (3d Cir. 1989). In a motion for summary judgment, the court may examine evidence beyond the pleadings. The court must always consider the evidence, and the inferences from it, in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962); Tigg Corp. v. Dow Corning Corp., 822 F.2d 358, 361 (3d Cir. 1987); Baker v. Lukens Steel Co., 793 F.2d 509, 511 (3d Cir. 1986). If a conflict arises between the evidence presented by both sides, the court must accept as true the allegations of the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).
SECTION 10b-5 PRIMARY LIABILITY
In order to establish 10b-5 liability,
plaintiffs must prove that Arvey Hodes (1) made a misstatement or omission of material facts; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that the reliance proximately caused plaintiffs' injuries. In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1244 (3d Cir. 1989). Defendant Arvey Hodes contends that summary judgment should be granted in its favor because plaintiffs cannot prove any element except (3). Arvey Hodes claims that there were no misrepresentations in its opinion letters, that there was no knowledge or recklessness on its part, and that plaintiffs did not justifiably rely on any misstatements to their detriment.
Arvey Hodes contends that there was no misrepresentation in its opinion letters because they correctly stated the risks involved in the cancellation of forward contracts. Plaintiffs respond that it is not Arvey Hodes's opinion of the tax consequences which they are challenging, but instead the factual description of First Western's trading program which appears in the opinion letters.
A. Correctly Stated Risks
Arvey Hodes's opinion letters contained explicit disclaimers that while it was Arvey Hodes's opinion that the losses would be deductible as ordinary loss, both the IRS and the courts could take a contrary position. (Ex. A at 6, Ex. B at 6, Ex. C at 3.) The warnings were more explicit. For example, Arvey Hodes stated that "if a court should feel that tax deferral or conversion is the primary purposes [sic] of such transactions, it may be inclined to hold in favor of the Service. . . . " (Ex. C at 16.) Arvey Hodes argues that since it explicitly warned of the risks which actually did manifest, it cannot be held liable.
Plaintiffs argue that
Arvey has completely misconstrued plaintiffs' claim for fraud and misdirects the Court's attention. Plaintiffs do not hold Arvey liable because the law firm misrepresented the tax implications involved in the recognition of gains or losses. These risks are not what was misrepresented. Rather the opinions were false and/or misleading and Arvey knew they were false and/or misleading because they were based on misrepresented and omitted facts.