# Petition — First Pennsylvania Bank N. A. v. Monsen

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1978
- **Citation:** 439 U.S. 930

## Text

Se ee
Supreme Court, U, ain
FILED

SEP 8 i978

IN THE MICHAML RODAK, JR. CLERK

Supreme Court of the United States

October Term, 1978

No. 78-68-4094

FIRST PENNSYLVANIA BANK N. A.,
Petitioner,
v.

GEORGE R. MONSEN, et al.,
Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT.

Of Counsel: Mixes H. Snore,

WinsTon J. CHURCHILL,

NorMAN R. BRADLEY,

38th Floor, Centre Square West,

Philadelphia, PA 19102

(215) 972-7759

Attorneys for Petitioner,
First Pennsylvania Bank
N.A.

SAUL, Ew1nc, REMICK
& SAUL.

International Printing Co., 711 So. 50th St., Phila., Pa. 19143 — Tel. (215) 727-8711

TABLE OF CONTENTS.
Page
EY CE sans cine 6s cee wie ea caseew ad eneasheet 1
i ic chkine ash banases si tenvedeentsd ces Hate buss 1
I ca has 6s cebvasiveieseuesuneecagen 2
ATER AIUD CEU EUGENE 2... nc ccnccnscccccecesscess 3
cdc aslns seany gue rnvanae ead soee 4
REASONS FOR GRANTING THE WRIT ..........00seeeeccecees 8
Maa nih budnehdit oe deccctnnne cares ene bpaea en ll
TABLE OF APPENDICES.
Page
A. Opinion of the United States Court of Appeals for the
ME hn ie es Kah tk coh ede db tha deeces Al
B. Memorandum and Order of the United States District
Court for the Eastern District of Pennsylvania ......... A25
a, UN GUE GUY IE oon ci rien dcssncvovesvess A32

TABLE OF CITATIONS.

Cases: Page
Birnbaum v. Newport Steel Corp., 193 F. 2d 461 (2d Cir.),

cert. denied, 343 U. S. 956 (1952) .........ceseeeeeees 9
Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723 (1975) 9
Cost v. Ads, 408-U. &.-G0CIGTS) on bivcicvcnscconscnscccee 9

Ernst & Ernst v. Hochfelder, 425 U. S. 185 (1976) ......... 8, 10
Foremost-McKesson, Inc. v. Provident Securities Co., 423
RB, Be Ge eC iidinsicc Us tacts tnesecagtensan seeds. 10
Gould v. American-Hawaiian Steamship Co., 535 F. 2d 761
(RES, BOD oss dies nl viescnecvdaves cnsvseerried'as 10
TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438 (1976) 9
Statutes:
Securities Act of 1933:
Section 18(1), 15 U. S.C. $771) 2... csccceees 2, 3, 6, 8
Section 12(2), 15 U.S. C. $778) .....cecicccces. 2, 3, 6, 8
es ee ee veya caens cs abagsaeaneks 5
Securities Exchange Act of 1934:
Section 10(b), 15 U. S. C. § 78j(b) ............ 2, 3, 5, 6, 8, 9
Rule 10b-5, 17 C. F. R. § 240.10b-5 .............. 2, 3, 8, 9, 10
Section 14(a), 15 U. S.C. A. 78a(n) ...........eeeeee 10
gee ere errr eee r er tre Teer ere re ye 10
Section 47, 16'U. S.C. OTTO cn ccccccesen wr ekpenees 5
OO. BG en ot kc roma cedenads¢evesneastesthancken 1
Rules:
Federal Rules of Civil Procedure, Rule 50 ................. 5

PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT.

Petitioner, First Pennsylvania Bank N. A. (“Bank”),
respectfully prays that this Court grant a Writ of Certiorari
to review the opinion and judgment of the Court of Ap-
peals for the Third Circuit entered on June 14, 1978. That
decision reversed the district court’s judgment n.o.v. in
favor of the Bank on the securities claim, thereby reinstat-
ing the jury’s verdict against the Bank, and affirmed the
district court’s dismissal of the plaintiffs’ pendent state
claim and its refusal to enter judgment on that claim.

OPINIONS BELOW.

The opinion of the Third Circuit to which this Petition
is addressed is unofficially reported in [Current] Fep. Src.
L. Rep. (CCH) at § 96,479 and has not yet been officially
reported. A copy of the Opinion is reproduced as Ap-
pendix A to this Petition at pages Al through A24. The
Memorandum and Order of the United States District
Court for the Eastern District of Pennsylvania dated April
27, 1977 has not been officially reported; it appears as
/ ppendix B at pages A25 through A31.

JURISDICTION.

The opinion and judgment of the Third Circuit were
filed on June 14, 1978. No Petition for rehearing was filed.
This Petition for a Writ of Certiorari is being filed within
ninety (90) days of that date.

Jurisdiction of this Court is invoked pursuant to 28
U.S.C. § 1254(1).

2

2 Petition for Writ of Certiorari

QUESTIONS PRESENTED.

1. Whether it is proper to impose civil liability on a
commercial bank as an aider-abettor under Section 10(b)
of the Securities Act of 1934 and Rule 10b-5 thereunder
because the bank made secured commercial loans (begin-
ning in 1968) to a customer knowing that the customer
was also borrowing money on an unsecured basis from
employees and others and issuing notes to the lenders with-
out any proof of either knowledge by the Bank that the
issuer was committing securities law violations or intent by
the Bank to defraud.

2. Whether it is proper to impose civil liability on a
commercial Bank as an aider-abettor under Sections 12(1)
and 12(2) of the Securities Act of 1933 because the Bank
made secured commercial loans (beginning in 1968) to a
customer knowing that the customer was also borrowing
money on an unsecured basis from employees and others
and issuing notes to the lenders without proof of either
knowledge by the Bank that the issuer was committing
securities law violations or intent by the Bank to violate
the securities laws.

3. Whether civil liability for aiding and abetting
exists under sections 12(1) and 12(2) of the 1933 Act and
under section 10b of the 1934 Act, or whether liability may
be predicated only on the express provisions of the acts
governing direct liability and liability of controlling
persons.

Petition for Writ of Certiorari 3

STATUTES AND RULE INVOLVED.

The federal statutes involved here are: Sections 12(1)
and 12(2) of the Securities Act of 1933, 15 U. S. C.
U. S. C. §§ 771(1) & (2) and Section 10(b) of the Secu-
rities Exchange Act of 1934, 15 U. S. C. § 78j(b). The
rule involved is Rule 10b-5 promulgated by the Securities
and Exchange Commission, 17 C. F. R. § 240.10b-5.

There are constitutional provisions involved herein.

The text of the Statutes and Rule are set forth as
Appendix C, at pages A32 through A34.

4 Petition for Writ of Certiorari

STATEMENT OF THE CASE.

Consolidated Dressed Beef (“Consolidated”) oper-
ated an abbatoir, slaughtering beef cattle and selling meat
to dealers and food chains and selling meat by-products
in Philadelphia and the surrounding area. Prior to 1965,
certain members of the Silverberg family owned and oper-
ated a meat packing business under the name of Philadel-
phia Dressed Beef Company, a partnership. In 1965 that
partnership purchased all of the stock of Consolidated and
continued to do business under the name of Consolidated.
Beginning at least in 1955 (and possibly as early as the
1930s) Philadelphia Dressed Beef Company began mak-
ing payroll deductions from employees’ salaries and issuing
interest bearing promissory notes to the employees.

Philadelphia Dressed Beef, and later Consolidated,
also borrowed money from non-employees, many of whom
were friends and relatives of the Silverbergs.

First Pennsylvania Bank was first approached by Con-
solidated in August, 1968. The Bank requested, received
and reviewed various financial statements of Consolidated
which included, among other things, information about
Consolidated’s liabilities to noteholders, as well as to other
lending institutions. These notes were explained to the
Bank by Consolidated’s president as representing loans to
Consolidated by employees, friends and relatives of the
Silverbergs evidenced by unsecured promissory notes.
The Bank accepted this explanation, had no reason to
know that notes of this type might be (or might later be
held by some lower courts to be) securities and in any
event had no knowledge of any securities-law violations by
the issuer. The Bank’s concern was the quantity and
quality of the collateral it held as security for its loans to
Consolidated and the adequacy of Consolidated’s sources
of money. (In that latter connection there is evidence

Petition for Writ of Certiorari 5

that the Bank encouraged Consolidated to continue to
borrow money from employees and others, and that the
Bank account officer knew that the Company did not fully
inform all noteholders of the financial condition of Con-
solidated. )

The Bank first lent money to Consolidated in Octo-
ber, 1968. The loans consisted of an accounts receivable
loan, a term loan secured by railroad freight cars, a line of
credit secured by liens on trucks, cars, machinery and
equipment and by first and second mortgages on Consoli-
dated’s real estate. The initial loans totalled more than
$3,750,000. The Bank took security interests in certain
assets of Consolidated and perfected its security interests
under the Pennsylvania Uniform Commercial Code. The
Bank’s loans to Consolidated began to go bad in Septem-
ber, 1969, when a strike closed the plant for nine weeks.
During 1970 and 1971, Consolidated continued to lose
money. In January, 1972 the Bank called its loans and
liquidated all of Consolidated’s assets subject to its security
interests. The Bank lost approximately $1,000,000 on its
loans to Consolidated. The holders of the unsecured
promissory notes lost an additional approximately
$400,000.

The named plaintiffs filed this class action in April,
1972, representing all holders of unpaid promissory notes
issued by Consolidated. The Complaint was based upon
alleged violations of the Securities Act of 1933 and section
10(b) of the Act of 1934 and common-law constructive
trust. Jurisdiction was invoked under section 22 of the
Securities Act of 1933, 15 U. S. C. § 77v, and section 27
of the 1934 Act, 15 U. S. C. §77aa. At the close of the
plaintiff's case, First Pennsylvania Bank moved for a di-
rected verdict pursuant to Rule 50 of the Federal Rules
of Civil Procedure. After extensive oral argument, the

6 Petition for Writ of Certiorari

District Court denied the motions for a directed verdict,
except as to the common-law constructive trust claim,’
which was dismissed for lack of pendent jurisdiction. The
Court directed a verdict against Consolidated for violating
section 12(1) of the 1933 Act* and the other securities
claims were submitted to the jury, which returned a ver-
dict on liability upon special interrogatories in favor of
plaintiff against Consolidated for violating section 12(2)
of the 1933 Act and section 10(b) of the 1934 Act,
against the individual defendants for violating § 10(b)
of the 1934 Act* and against the Bank for aiding and
abetting violations by Consolidated of both acts.“ The
jury found that the Bank did not directly violate § 10(b)
of the 1934 Act.

The parties agreed to the amount of damages, except
for three claims which were tried by the Court non-jury.
Judgment was entered against First Pennsylvania Bank
and all the individual defendants, jointly and severally, in
the amount of $152,561.44 in favor of those members of
the plaintiff class holding notes issued on or after Novem-
ber 28, 1968, and against Consolidated in the amount of
$421,629.30.

First Pennsylvania Bank filed a Motion for Judgment
Notwithstanding the Verdict; the other defendants filed a
Motion for Judgment N. O. V. or, in the alternative, a New
Trial. Plaintiffs filed a Motion to Reinstate Count III and
enter Judgment thereon in favor of plaintiffs or, in the
alternative, for a new trial on Count III. After oral argu-
ment, the Court, by Memorandum and Order dated April
27, 1977, granted First Pennsylvania Bank’s Motion and

1. Count III of the Complaint.
2. Count I of the Complaint.
3. Count II of the Complaint.
4. Count IV of the Complaint.

Petition for Writ of Certiorari 7

denied the Motion of the other defendants as well as plain-
tiffs Motion. Plaintiffs and the individual defendants ap-
pealed and First Pennsylvania Bank filed a cross-appeal
with respect to the court’s denying pendent jurisdiction of
the common-law claim.

The Court of Appeals, by its Opinion dated June 14,
1978, reversed the district court’s judgment N. O. V. in
favor of the Bank on the securities claims, reinstating the
jury's verdict and affirming the district court’s dismissal
of the plaintiffs pendent state claim and its refusal to grant
judgment on that claim.

8 Petition for Writ of Certiorari

REASONS FOR GRANTING THE WRIT.

Certiorari should be granted to consider whether civil
liability for aiding and abetting is appropriate under sec-
tions 12(1) and 12(2) of the 1933 Act and section 10(b)
of the 1934 Act, which was specifically noted as not con-
sidered or decided in Ernst & Ernst v. Hochfelder, 425
U. S. 185, n. 7 at 192 (1976). Certiorari should be granted
to consider whether the Third Circuit's standard of liability
is inconsistent with Ernst & Ernst v. Hochfelder, since it
imposes liability even though the Bank acted without ac-
tual intent to deceive, manipulate or defraud, as spe-
cifically found by the jury. Certiorari should be granted
to consider whether a commercial bank making secured
loans had a duty (in 1968) to police the manner in which
its customer borrowed money from friends and employees.

The decision of the Third Circuit, if it is to stand as
law, sets standards which apply to all commercial lending
institutions who lend money to issuers and affects many
lenders, many borrowers and huge sums of money. The
effect of this decision therefore far transcends the indi-
vidual litigants here.

The decision below is fundamentally at odds with
Ernst & Ernst v. Hochfelder, where this Court limited the
scope of private actions under section 10(b) and Rule
10b-5 by requiring the plaintiff to prove scienter® on the
part of the defendant. Although the plaintiff in Hoch-
felder sought compensation from Ernst & Ernst on the
ground that the auditor aided and abetted the fraud, this
Court decided the case as one of direct liability, refraining
from considering aiding and abetting liability:

In view of our holding that an intent to deceive, ma-
nipulate, or defraud is required for civil liability under

5. The Court defined scienter as an “intent to deceive, manipu-
late, or defraud.” 425 U. S. at 193.

Petition for Writ of Certiorari 9

§10(b) and Rule 10b-5, we need not consider
whether civil liability for aiding and abetting is ap-
propriate under the section and the Rule, nor the

elements necessary to establish such a cause of action.
425 U. S. 192 n. 7.

The decision of the Court of Appeals raises an im-
portant question of federal law which has not been, but
should be, settled by the Supreme Court. There should be
no liability for aiding and abetting by inaction alone, espe-
cially where the alleged aider-abettor conducts transac-
tions in the ordinary course of its business. This is in
keeping with the recent trend by the Supreme Court to-
ward limiting access to the federal courts by private parties
in securities actions under the 1934 Act. In Blue Chip
Stamps v. Manor Drug Stores, 421 U. S. 723 (1975), this
Court limited the class of private plaintiffs in damage ac-
tions under section 10(b) and Rule 10b-5 by affirming the
Birnbaum * rule, requiring a plaintiff to be either a pur-
chaser or seller of securities. The Court observed that

[While much of the development of the law of de-
ceit has been the elimination of artificial barriers to
recovery on just claims, we are not the first court to
express concern that the inexorable broadening of the
class of plaintiff who may sue in this area of the law
will ultimately result in more harm than good. 421
U. S. at 747-48.

In Cort v. Ash, 422 U. S. 66 (1975), this Court declined to
imply a private cause of action for a shareholder who had
brought suit derivatively on behalf of a corporation. And
in TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438
(1976), this Court unanimously held that an omission

6. Birnbaum v. Newport Stee! Corp., 193 F. 2d 461 (2d Cir.),
cert. denied, 343 U. S. 956 (1952).

10 Petition for Writ of Certiorari

from a proxy solicitation is “materia]” for the purposes of
section 14(a) of the 1934 Act only “if there is a substan-
tial likelihood that a reasonable shareholder would con-
sider it important in deciding how to vote,” 426 U. S. at
449, thereby adopting a standard of materiality requiring
a relatively high threshold of proof to establish liability.
In Foremost-McKesson, Inc. v. Provident Securities Co.,
423 U. S. 232 (1976), section 16(b), which allows a cor-
poration to recover any profits its insiders realize from a
short-term purchase and sale of the company’s securities,
was held to apply only to those stockholders whose se-
curities holdings qualified them as “insiders” before the
initial short-term purchase.

Likewise, in Hochfelder, this Court expressed its con-
cern about the growing class of possible private plaintiffs
in securities cases. 425 U. S. at 191 n. 33. Respondents
in the instant case did not prove, nor did the jury find,
any actual intent to deceive, manipulate or defraud by the
Bank, all of which are now required. Therefore, cer-
tiorari should be granted.

The Third Circuit applied an erroneous standard for
the aider-abettor’s knowledge of a securities violation, cit-
ing Gould v. American-Hawaiian Steamship Co., 535 F. 2d
761 (3d Cir. 1976), which stated in dictum’ that the
knowledge required for aiding and abetting can be actual
or constructive, 535 F. 2d at 780. That standard does not
apply, however, to a 10b-5 case, since Gould involved a
false or misleading proxy statement in violation of section
14(a) of the 1934 Act, 15 U. S. C. A. 78a(n), where the
proper standard of liability is negligence, 535 F. 2d at 777.

7. The dictum in Gould (that knowledge of th wrongful act
can be constructive) is inconsistent with the decision of the
Supreme Court of the United States in Ernst & Ernst (decided
only ten days earlier than Gould, on March 30, 1976).

Petition for Writ of Certiovari li

The result of the Third Circuit’s extension of securi-
ties law liability to the Bank in this case is particularly
unjust since the Bank has already lost more on its loans
than the class of lenders it is now required to compensate.

CONCLUSION.

For all the reasons set forth above, a Writ of Cer-
tiorari should be granted to review the opinion and judg-
ment of the United States Court of Appeals for the Third
Circuit.

Respectfully submitted,

Of Counsel: , Mixes H. SHore,

WINSTON J. CHURCHILL,

NorMAN R. BRADLEY,
Attorneys for Petitioner,

First Pennsylvania Bank
N. A.

SAUL, Ewi1nc, REMICK
& SAUL.

Dated: September 8, 1978

APPENDIX A.

UNITED STATES COURT OF APPEALS
For THE TuHirpD CIRCUIT

Nos. 77-1935

77-1936

77-1937
GEORGE R. MONSEN; JOSEPH J. OBERMEYER;
JAMES DELGADO; JOSEPH COSGROVE; ROB-
ERT COSGROVE; and JUSTIN ROSENSTOCK and
EVA ROSENSTOCK as Trustees for BENJAMIN
ROSENSTOCK; JUSTIN ROSENSTOCK and EVA
ROSENSTOCK as Trustees for RENEE ROSEN-
STOCK; JUSTIN ROSENSTOCK as Parent and
Natural Guardian of BENJAMIN ROSENSTOCK;
JUSTIN ROSENSTOCK as Parent and Natural
Guardian of ELI ROSENSTOCK; JUSTIN ROSEN-
STOCK as Parent and Natural Guardian of RENEE
ROSENSTOCK; CLAUDIA ROSENSTOCK; and

ELEANOR SCHWARTZ

D

CONSOLIDATED DRESSED BEEF COMPANY, INC.;
SAMUEL SILVERBERG; SIDNEY SILVERBERG;
EDWARD SILVERBERG; MICHAEL SILVER-
BERG; REUBEN SILVERBERG; NATHAN SIL-
VERBERG; ALAN SILVERBERG; and FIRST
PENNSYLVANIA BANKING AND TRUST COM-
PANY

GerorcE R. Monsen, et al.,
Appellants in No. 77-1935
SAMUEL SILVERBERG, et al.,
Appellants in No. 77-1936
? First PENNSYLVANIA BANK, N. A.,
Appellant in No. 77-1937
(Al)

A2 Appendix A

APPEAL FROM THE UNITED STATES District COURT FOR THE
EASTERN DISTRICT OF PENNSYLVANIA

D. C. Civil Action No. 72-799

Argued March 28, 1978

Before ApAMs, VAN DuseEN, and RosEnn, Circuit Judges

M. MELVIN SHRALOW, Esquire

Shralow & Newman

700 Widener Building

1339 Chestnut Street

Philadelphia, Pa. 19107
Attorneys for Appellants in
No. 77-1935

Lester H. Novack, Esquire

Cohen & Novack

226 South 16th St.

Philadelphia, Pa. 19102
Attorneys for Appellants in
No. 77-1936

Mixes H. SHore, Esquire

NorMAN R. BRADLEY, EsQuirE

Saul, Ewing, Remick & Saul

38th Floor, Centre Square West

Philadelphia, Pa. 19102
Attorneys for Appellant in
No. 77-1937

Opinion of the Court
(Filed June 14, 1978)

Appendix A A3

RosEnNn, Circuit Judge

In these appeals we are called upon primarily to de-
termine the propriety of imposing sanctions on a lending
institution as an aider-abettor because of that institution’s
actions in connection with a loan to a borrower who
violated the federal securities laws. We confront the per-
plexing dilemma of ascertaining when the legitimate busi-
ness relationship between a lender and its borrower leaves
the realm of propriety and enters the domain of proscribed
conduct.

This conundrum arises from a class action brought on
behalf of the holders of unregistered securities—promis-
sory notes—issued by the Consolidated Dressed Beef Com-
pany, Inc. (“Consolidated”), a company whose stock was
owned by the Silverberg brothers and Michael and Alan
Silverberg, the sons of one of the brothers, (collectively
“Silverbergs”), which borrowed money from the First
Pennsylvania Bank, N. A. (“Bank”). Plaintiffs, former em-
ployees of Consolidated and their families, who had made
loans on the promissory notes from the company, alleged
direct violations of sections 12(1) and 12(2) of the Secu-
rities Act of 1933 and section 10b of the Act of 1934” by
Consolidated,’ also violations of both acts by the Silver-

1. 15 U. S. C. §§ 771(1) & (2) (1976). Violations of section
1(1), prohibiting the offer or sale of an unregistered security, and
section 1(2), prohibiting the offer or sale of any security containing
untrue or materially misleading omissions of fact by means of inter-
state commerce, subject the seller or offeror to liability to the pur-
chaser of the security.

2. 15 U. S. C. § 78j(b) (1976). This section prohibits the use
of any “manipulative or deceptive device or contrivance” in con-
nection with the purchase or sale of a security and subjects the
fraudulent seller or purchaser to personal liabiltiy.

3. In count I of the complaint, plaintiffs allege that the notes
issued to them as members of the class by Consolidated constituted
a sale of securities, required to be registered under the Securities
Act of 1933, 15 U. S. C. § 77b(1) (1976), but that they were issued

A4 Appendix A

bergs as controlling persons,* and violations of both acts
by the Bank as an aider-abettor to Consolidated and the
Silverbergs.’ Plaintiffs also sought recovery from the
Bank on the basis of a pendent state claim predicated upon
a common law constructive trust theory alleging the Con-
solidated is insolvent and that the Bank has taken control
of all of Consolidated’s assets and applied the proceeds to
its debt.° After completion of the plaintiffs case, the
trial judge dismissed the pendent state claim and the jury
found for plaintiffs against all of the defendants on the
remaining securities claims and awarded damages. On
post-trial motions, the district court denied the Silver-
bergs’ requests for judgment notwithstanding the verdict

“n. o. v.”), denied both plaintiffs’ and the Bank’s request
for judgment on the dismissed state claim, and granted the
Bank’s request for judgment n.o.v. on all counts. We
affirm in part and reverse in part.

3. (Cont'd. )

unregistered and with untrue statements of material fact, in viola-
tion of §§ 771(1) & (2) of 15 U.S.C. In count II of the complaint,
plaintiffs allege that Consolidated had induced them to purchase
securities by means of fraudulent omissions and erroneous state-
ments of fact in violation of section 10b of the Securities Exchange
Act of 1934, 15 U. S. C. eu yy (1976) and rule 10b-5 promul-
gated thereunder, 17 C. F. R. § 240.10b-5 (1977).

4. The Silverbergs were alleged to be derivatively liable for
Consolidated’s securities violations in counts I and II of the com-
plaint, by virtue of their control over a primary violator of the
securities law. See 15 U. S. C. § 770 (1976) (“Every person who
. . . controls any person liable under sections 77k or 771 of this
title shall be liable . . . to the same extent as the controlled per-
son”) (1933 Act); 15 U. S. C. § 78t (1976) (liability for control of
any violator of the 1934 Act).

5. Count IV of the complaint.
6. Count III of the complaint.

Appendix A A5

1.

In these appeals from a grant and denial of judgment
n. 0. v., we must view the evidence in the light most favor-
able to the party that secured the verdict, drawing all
reasonable inferences that the jury might have drawn to
support its decision, Thomas v, E, J, Korvette, Inc, 476
F’, 2 471, 474 (3d Cir, 1973), An analysis of the record
reveals the following facts, drawn from the pre-trial fac.
tual stipulations of the parties and a close reading of the
testimony adduced at trial,

Jonsolidated is a now defunct Pennsylvania corpora.
tion which was until January of 1972, in the business of
slaughtering, dressing, selling, and delivering meat and
meat products, Its officers and directors are members of
the Silverberg family, Prior to 1965, certain of the Silver-
bergs owned and operated a meat packing business under
the name of Philadelphia Dressed Beef Company, a part.
nership, and in 1965 that partnership purchased all of the
stock of Consolidated, continuing business under that
name,

The initial payroll borrowing program was com-
menced by Philadelphia Dressed Beef Company by 1955—
possibly as early as the 1930's—and then continued by
Consolidated when it was acquired, Payroll deductions
were made from the company's employees’ salaries and
promissory notes were issued in exchange, This arrange.
ment was voluntary on the part of the employees who
could elect to accept full salary instead of the notes, Any
employee choosing to participate, however, was asked to
sign a company prepared authorization form, Records
were kept by the company of the amount of payroll dedue-
tious authorized by each participating employee,

At the end of three months of these deductions, the
company issued a note in the name of the employee lender

A6 Appendix A

for the face value of the total of the payroll deductions
made for the preceding quarter. These notes called for the
repayment of the principal after five years and provided
for the payment of interest to the employee every three
months until maturity,

At first, the notes bore interest at a rate of seven per-
cent per year, but subsequently the interest rate was raised
to eight percent per annum, Employees participating in
the program had the option of receiving interest quarterly
or having the company accumulate it as consideration for
additional notes, In 1970, after pressure from the note.
holders, Consolidated accelerated the maturity date on the
notes from five years to either one or two years, Em-
ployees enjoyed the option of accepting one-year notes,
bearing an interest rate of one percent less than the two-
year notes, or of accepting two-year notes,

At the same time, Consolidated had also instituted a
parallel note program for non-employees and for those
employees who lent the company supplementary funds
outside of payroll deductions, Interest on these notes was
paid either monthly or yearly and could also, at the elec-
tion of the noteholder, be accumulated in return for addi-
tional notes,

Testimony at trial revealed that none of the note.
holders were given financial information about Consoll-
dated prior to their loans to the company, It is undisputed
that the loans were generated out of employee loyalty to
Consolidated and confidence in the Silverbergs’ ability to
manage the company, The notes were never registered
under either state or federal law,

Consolidated kept detailed records on the progress of
both the employee and non-employee note programs, first
by hand and later by computer, Printouts eventually con-
tained information showing the total deductions from each
employee's paychecks, listed as a “savings” programs, as

Appendix A A7

well as showing data from the non-employee plans. This
information, payment for the notes, and the notes them-
selves, all travelled in interstate commerce or through the
mails,

By August of 1968, the company had continuously
conducted its note program without ever missing a paye
ment to its lenders, although it had accumulated a debt of
several hundred thousand dollars through the program, At
this time, however, the meat industry was beginning to
change substantially, To successfully compete under these
changed circumstances, Consolidated required additional
funds, It therefore communicated with the Bank to are
range for supplementary financing, The Bank requested
and received various financial data from Consolidated, ine
cluding financial reports from 1966, 1967, and 1968 which
contained information about the company's extensive
liabilities incurred through the note programs, These
reports were reviewed and analyzed by officers and em-
ployees of the Bank,

In September of 1968, John C, Wilson, manager of the
Bank's branch office with which Consolidated did business,
was requested by the Bank to pursue the Consolidated
loan request, He spoke with Samuel Silverberg by tele-
phone about conditions at Consolidated’s plant, reviewed
the company’s financial statements, and attended meetings
at and toured Consolidated’s plant,

Further meetings also were held in Wilson's office, At
these meetings, financial statements containing entries de-
scribing the note program were discussed, Wilson asked
for an explanation of these entries, and in response, Con-
solidated furnished the Bank with detailed statements list-
ing each of the employee and non-employee lenders,
Consolidated also furnished the Bank sample copies of the
notes, forms, and sufficient additional information to in-

A8 Appendix A

form the Bank that the noteholders were primarily Con-
solidated’s employees, their families, and friends of the
Silverbergs, all of whom had loaned funds to Consolidated
in reliance on the Silverbergs’ ability to conduct a success-
ful business. On September 18, 1968, following the de-
livery of this detailed information by Consolidated, the
Bank entered into a financing arrangement with the com-
pany, ,

Under the terms of the lending agreement, the Bank
became « secured creditor and the noteholders’ obligations
were effectively subordinated. The Bank was also given
the power to restrict Consolidated from borrowing from
any source other than the Bank. The record, however,
reveals that the Bank not only did not bar additional fi-
nancing elsewhere, but actually encouraged the continua-
tion of financing through the note program. The Bank
had informed Consolidated of its desire to have Consoli-
dated raise funds through unsecured promissory notes,
because it provided needed cash to the company and cre-
ated assets from which the Bank could satisfy its debt.
Consolidated, with the Bank's knowledge, never informed
the noteholders that their increased investments in the
company was subordinated to the Bank's security interest.
Yet, knowing of this lack of disclosure and that the note-
holders did not have adequate financial information about
Consolidated, and that they had invested solely on faith
in the Silverbergs, the Bank permitted—even encouraged
additional utilization of the note program,

Following consummation of the lending agreement
between the Bank and Consolidated, the Bank regularly
received monthly profit and loss figures, quarterly and
semi-annual financial statements, and yearly reports from
Consolidated, The Bank was keenly aware of the detri-
orating condition of the company due to marketing and

Appendix A AQ

supply changes in the industry,’ but it nonetheless refused
to curb Consolidated’s use of the note program.

By January of 1972, Consolidated’s position was so
precarious that the Bank was forced to seize control of the
company’s assets, Consolidated was prevented by ar-
rangement with the Bank from paying any interest on its
notes or honoring them as they matured. The Bank pro-
ceeded to liquidate Consolidated’s assets and to apply the
proceeds to the company’s outstanding debt to the Bank.
Although the Bank’s loan was only partially satisfied none
of the noteholders received any payment whatsoever after
1972 and their debt remains unsatisfied,

At trial the following legal conclusions were also stipu-
lated: (1) the notes on which the plaintiffs brought suit
were securities under the Securities Acts of 1933 and 1934,
(2) the notes were not registered under federal or state
laws; (3) interstate commerce was used in transporting
the notes; and (4) Consolidated was liable for the face
amount of each of the notes. Prior to trial, the district
court ruled as a matter of law that Consolidated had vio-
lated section 12(1) of the Securities Act of 1933, 15
U.S. C, § 771(1) (1976) by its failure to register the notes.

With this factual background, the case was submitted
to the jury on written interrogatories. The jury found

7, Although 1968 had been a profitable year for Consolidated,
in 1969, it began to suffer dramatic losses, In 1969, a strike oc-
curred during the company’s — rofit season, and had the
effect of seriously eroding profits, Similarly, changes in the meat
industry also began to affect the company's financial condition,

In 1970 the Chicago stockyards closed, making it difficult for
Consolidated to purchase live cattle, the mainstay of its business,
As a result, the company was forced to discontinue slaughtering
and to buy dressed carcasses, which both decreased profit margins
- _ Consolidated with a large overhead for the unused portion
of its plant,

In the nine-month period ending July 31, 1971, Consolidated
lost $824,000, The Bank knew of these losses by virtue of financial
statements from Consolidated,

Al0 Appendix A

Consolidated liable under section 12(2) of the 1933 Act,
15 U. S. C. § 771(2) (1976) and section 10b of the 1934
Act, 15 U.S. C. § 78j(b) (1976), because of its misleading
statements and omissions in connection with the note pro-
gram, The jury also found the Silverbergs liable as con-
trolling persons on the securities counts and the Bank liable
as an aider-abettor to Consolidated for its securities viola-
tions, The jury exonerated the Bank of any direct liability
under section LOb of the 1934 Act. The jury returned a
verdict against Consolidated for $421,639.30 and against
the Bank and the Silverbergs for $152,561.44,

The Bank requested judgment n, 0. v. on all counts in-
cluding the dismissed pendent state claim; it stated that it
was entitled to judgment as a matter of law due to the
insufficiency of proof of any securities violation, The Sil-
verbergs also moved for judgment n. 0, v. on all counts of
liability against them. The plaintiffs requested that the
dismissed state claim be reinstated and that judgment be
entered in their favor.

The district court granted the Bank's motion for judg-
ment n, 0. v. on the securities counts, stating that the evi-
dence was insufficient to provide aiding and abetting, All
of the other motions were denied, Plaintiffs appeal the
grant of judgment n, o. v, in favor of the Bank; the Silver-
bergs appeal the denial of their motion for judgment
n. 0. v.; both the Bank and the plaintiffs appeal the dis-
missal of the pendent state count and the refusal of the
court to grant a judgment on the merits of that cause of
action. We consider each of these claims seriatim,

Il,

Plaintiffs appeal from the grant of judgment n, o. v. in
favor of the Bank on all of the counts of the complaint
alleging aiding and abetting of securities violations by the

Appendix A All

Bank. To sustain a charge of aiding and abetting, the
plaintiffs have the burden of establishing: (1) that there
has been a commission of a wrongful act—an underlying
securities violation; (2) that the alleged aider-abettor had
knowledge of that act; and (3) that the aider-abettor
knowingly and substantially participated in the wrong-
doing. Gould v, American-Hawatian Steamship Co., 535
F, 2d 761, 779 (3d Cir, 1976); Rochez Brothers, Ine. v.
Rhoades, 527 F’, 2d 880, 886 (3d Cir, 1975) (“Rochez II")
(stating the third element alternatively as “substantial as-
sistance in effecting” the wrongful act); Landy v. Federal
Deposit Insurance Corp., 486 F. 2d 139, 162-63 (3d Cir,
1973), cert, denied, 416 U, 8, 960 (1974),"

Knowledge of the underlying violation is a critical
element in proof of aiding-abetting liability, for without
this requirement financial institutions, brokerage houses,
and other such organizations would be virtual insurers of
their customers against security law violations. Culpabil-
ity of some sort is necessary to justify punishment of a
secondary actor and mere unknowing participation in
another's violation is an improper predicate to liability.
See Ruder, Multiple Defendants in Securities Law Fraud
Cases; Aiding and Abetting, In Pari Delicto, Indemnifica-
tion, and Contributions, 120 U, Pa, L, Rev. 597, 638 (1972),

In Landy v, Federal Deposit Insurance Corp., supra,
we indicated that the aider-abettor's knowledge of a se-
curities violation must be actual, However, in Gould v.,
American-Hawatian Steamship Co., supra, we stated that
the “requirement of knowledge may be less strict where
the alleged aider and abettor derives benefits from the
wrongdoing.” 535 F, 2d at 780. Nevertheless, even in
such a situation, “the proof offered must establish con-

== = = Se cee =

8, See Woodward v. Metro Bank of Dallas, 502 F, 2d 84, 95
{oya) Cir, 1975); SEC v. Coffey, 493 F. 2d 1304, 1316 (6th Cir,

Al2 Appendix A

scious involvement in impropriety or constructive notice
of intended impropriety.” Id.° Such involvement may be
demonstrated by proof that the alleged aider-abettor “had
general awareness that his role was part of an overall
activity that is improper.” SEC v. Coffey, 493 F. 2d 1304,
1316 (6th Cir. 1974), accord, Gould v. American-Hawaiian
Steamship Co., supra, 535 F. 2d at 880. In determining
this awareness, “the surrounding circumstances and ex-
pectations of the parties are critical.” Woodward v. Metro
Bank of Dallas, 522 F. 2d 84, 95 (5th Cir. 1975).*°

Equally important as knowledge in establishing an
aider-abettor’s liability, is proof of his substantial assist-
ance or participation in the primary securities violation.
The securities laws comprehend that mere knowledge of a
violation alone, without assistance or a duty to disclose
the violation, is not an actionable wrong. See Ruder,
supra, 120 U. Pa. L. Rev. 644. Nor have courts extended
vicarious liability where the secondary defendant’s conduct
is nothing more than inaction. Such inaction, however,
may provide a predicate for liability where the plaintiff
demonstrates that the aider-abettor consciously intended
to assist in the perpetration of a wrongful act. Gould v.
American-Hawaiian Steamship Co., supra, 535 F. 2d at
780; Rochez II, supra, 527 F. 2d at 889.

9. It has been suggested by the Fifth Circuit that when an
alleged aider-abettor conducts what appears to be no more than a
transaction in the ordinary course of business, the degree of knowl-
edge must be higher than in the typical case. Woodward v. Metro
Bank of Dallas, supra, 522 F. 2d at 95. In the former situation, the
court suggests that no liability may be found unless there is “clear
proof of intent to violate the securities law.” Id. at 97.

10. Analysis of aiding and abetting knowledge unavoidably
“harks back to the nature of the security that is the object of the
transaction.” Woodward v. Metro Bank of Dallas, supra, 522 F. 2d
at 95. In the case of publicly issued stock the alle ed aider-abettor
may be more easily charged with knowledge of the circumstances
> eames the sale of a security than in the privately sold security.

ee i TA

Appendix A A13

It sometimes may be difficult for a court to reach a
decision as to whether an alleged aider-abettor’s conduct
is sufficient to constitute substantial assistance or partici-
pation in a wrongful act. We therefore have pointed to
the Restatement of Torts § 876 (1937) (liability for con-
tributory tortfeasors) * for guidance to district courts for
making that determination. The Restatement instructs the
trier of fact to consider the following factors in determin-
ing whether a defendant’s conduct constitutes substan-
tial assistance: (1) the amount of assistance given by the
defendant, (2) his presence or absence at the time of the
tort, (3) his relation to the other person, and (4) his state
of mind. Landy wv. Federal Deposit Insurance Corp.,
supra, 486 F. 2d at 162.

In applying the above standards to the proof adduced
by plaintiffs at trial, the district court concluded that the
evidence was insufficient to support the jury’s finding of
aiding and abetting by the Bank and that the verdict
should be reversed. The court concluded, first, that the
Bank rendered no assistance to the securities violation,
second, that the Bank never participated in the sales and
was absent at the time they occurred, third, that the Bank
made no representations to the buyers of the notes and
owed them no legal duty of disclosure, and fourth, that
although the Bank gave limited encouragement to Consoli-
dated to continue the note program, the evidence failed to

11. Section 876 of the Restatement provides in pertinent part:
§876 Persons Acting in Concert
For harm resulting to a third person from the tortious con-
duct of another, a person is liable if he
* Ga °
(b) knows that the other’s conduct constitutes a breach of
duty and gives substantial assistance or encourage-

ment to the other so to conduct himself,
oO ° °

Al4 Appendix A

show any intention by the Bank to further a securities
violation.”

Plaintiffs claim that the district court’s review of the
evidence was unduly narrow, that the court incorrectly ap-
plied the standards governing aiding-abetting liability, and
that therefore the verdict must be reinstated. Plaintiffs
assert that this overly restrictive approach to the evidence
caused the court to erroneously avoid the cardinal princi-
pal of review of a jury’ verdict—that judgment n.o.v.
should not be awarded as long as “there is conflicting evi-
dence or there is insufficient evidence to make a ‘one-way’
verdict proper.” Thomas v. E. J. Korvette, Inc., supra,
476 F. 2d at 474. We agree.

There is no question that the record clearly estab-
lishes the first element of proof of aiding-abetting. Con-
solidated committed underlying securities violations of
sections 12(1) & (2) of the 1933 Act and of section 10b of
the 1934 Act. (See pp. A9-A10, supra.) As to the second
and third elements, the district court, in its opinion dis-
posing of the post-trial motions, stated that the evidence
showed: (1) that the note program was instituted on be-
half of friends and employees of the Silverbergs, (2) that
the Bank had knowledge of the promissory note program
and should have known of its illegality, (3) that the Bank
as a secured lender encouraged the note program to con-
tinue, thus improving the Bank’s position at the expense of
the noteholders, and (4) that the Bank had the authority
to require Consolidated to discontinue the note program.
Taking the evidence in the light most favorable to the pre-

12. The district court also indicated its concern that the evi-
dence failed to prove scienter by the Bank in its aid of Consoli-
dated’s securities violations as required by Ernst & Ernst v. Hoch-
felder, 425 U. S. 185 (1976), in a private cause of action for
damages. We consider the sufficiency of the Bank’s scienter at
n. 17, infra.

Appendix A AIS

vailing party, the record sufficiently supports the jury’s
findings that the Bank had knowledge of the underlying
securities violations and substantially assisted or partici-
pated in their accomplishment.

Evidence of Knowledge of the Primary Violation

Olinto R. Serafini, who worked for Philadelphia
Dressed Beef Company and for Consolidated from 1942 to
1972 as its bookkeeper, office manager, and comptroller,
testified that the Bank was advised that funding from the
note program had continuously increased over the years
prior to the Bank’s loan, that Consolidated had begun to
lose substantial amounts of money, that no financial infor-
mation was given to the noteholders, and that the note-
holders never received information of the declining profit
margins of Consolidated.

Wilson, manager of the Bank’s branch dealing with
Consolidated’s loan, substantiated this testimony. He
stated: the Bank had extensive knowledge of the note pro-
gram; the Bank understood that the funds derived from
this program were lent to Consolidated principally on con-
fidence in the Silverbergs and faith in the company; the
transactions were not at arm’s length; the securities were
not registered; '* the Bank, with assistance from its own
securities analyst, had discussed the possibility of Con-
solidated making a public issue of stock; and the Bank
considered the noteholders as investors. Ralph Henry,
Wilson’s superior at the Bank, confirmed that the Bank
knew that the funds produced by the note program were
obtained on faith, without financial information.

13. The district court held that the Bank should have known
that the securities were required to be registered from its inspection
of the notes, the financial statements supplied by Consolidated, and
the Bank's familiarity with the securities laws.

Al6 Appendix A

Samuel Silverberg, the President of Consolidated, tes-
tified that the Bank was told that the noteholders had lent
money to Consolidated solely on the basis of trust and that
such lenders were provided with no financial information
about the company.“ In critical testimony, he revealed
that the Bank had demanded subordination of the note
program and guarantees of its continuation, with full un-
derstanding that the company could not disclose the junior
status of the notes to the noteholders and expect them to
continue to lend funds to the company.”

14. Samuel Silverberg’s testimony concerning the Bank’s knowl-
edge that the noteholders were given no financial advice about
Consolidated prior to their advances was as follows:

Q: In other words, these [the noteholders] were people
who had faith and trust in you, your family, and your family’s
company, isn’t that right?

A: That’s correct.

° fo] s

9: And, this was made known to the bank when they in-
quired about this plan, wasn’t it, that this is the kind of person
who was listed [in the statements sent to the Bank]?

A: That’s correct.

Q: It was also made known that the basis of the invest-
ment was trust and confidence, and not financial, technical in-
formation, isn’t that correct?

A: That’s correct. There was no technical, financial in-
formation given, to the best of my knowledge.

Q: And, this was made known in your discussions con-
cerning [the supporting material for the loan]?

A: That’s correct.

15. Silverberg testified that he notified the Bank of Consoli-
dated’s intention not to fully disclose to the noteholders their junior
a and the terms of the Bank’s loan to the company. He
stated:

They [the Bank] wanted to know what the notes were. I
told them strictly promissory notes. . . . A request was made
that the notes become subordinated to any bank debt. I told
them that could not be done without alienating all the note-
holders and having them disappear off the scene. And, after
that kind of discussion, it was finally agreed we'd just leave the
notes stay as notes.

(Emphasis supplied. )

Appendix A A17

Evidence of “Substantial Assistance”

Bank officers Wilson and Henry testified that the Bank
desired that the note program be subordinated to its posi-
tion and that the Bank encouraged Consolidated to ensure
the program’s continuation. In fact, it may be fairly
stated that the Bank attempted to extract a promise from
Consolidated that the program would continue.” They
also testified that the Bank had the power to prevent
further borrowing by Consolidated from the noteholders,
but that the Bank never exercised it.

16. Mr. Wilson’s testimony concerning the Bank’s insistence
upon the continuation of the note program is as follows:

Q: Isn't it . . . true that it was your concern that the
cash and capital of [Consolidated] not be —_— by a large
outflow of money represented by those notes

A: Yes.

= And, isn’t it true that you told Mr. Silverberg that it
was the bank’s desire that the practice or the past history of
the notes steadily increasing continued to be the case with this
company?

A: Yes.

Q: And, in fact, you encouraged Mr. Silverberg to con-
tinue to receive funds on this basis, because it was a very
economic way for the company to receive funds on an un-
secured basis, isn’t that correct?

A: Yes.

Mr. Henry, Wilson’s superior at the Bank confirmed Wilson’s testi-
mony:

* Did you and Mr. Wilson discuss whether the company
should be encouraged to continue or expand the issuance of
such notes in return for cash?

A: Yes.
Q: What was that discussion?
A: We encouraged the company to do this.

: Were you aware of whether the bank, through Mr.
Wilson or yourself or anyone else, asked for the company’s
assurance that it would continue to [do] so?

A: I assume we did.

A18 Appendix A

Sufficiency of Evidence of Aiding-Abetting

We believe that this evidence, taken in the light most
favorable to the verdict winner, is adequate to support the
jury’s finding of the Bank’s liability as an aider-abettor.
At a minimum, the evidence reveals: the Bank was well
informed about the note program; it knew that the notes
were unregistered; it either knew, or as a major metro-
politan banking institution should have known, of the reg-
istration requirement for the notes; it knew that the
noteholders were receiving no financial information, but
were trading on faith in the Silverbergs; it knew that Con-
solidated would not reveal either its financial difficulties or
the junior status of the promissory notes to the note-
holders; and with this knowledge the Bank demanded
subordination of the notes and actively encouraged Con-
solidated to continue the note program. It is true that
knowledge alone of the note program would have been an
insufficient predicate for aiding and abetting liability
against the Bank. Similarly, had the Bank merely re-
quired the continuation and subordination of the note
program without knowledge of the Silverbergs’ intent not
to disclose the subordination to the noteholders, liability
might not have been established. This combination of
knowledge and action by Bank, however, is sufficient evi-
dence to support the jury’s verdict on the Bank’s liability.

The district court held the proof insufficient to make
out a violation of the securities laws because it contained
no evidence of an intent by the Bank to assist a primary
violation of securities law.’ In determining the Bank’s

17: The court also held that the Bank rendered no assistance
to any securities violation, that it did not participate and was not
present at the sale of the securities, and that it made’no representa-
tions to the buyers and was under no duty to do so. We believe
that these conclusions are erroneous, as the evidence shows the
Bank’s active role in the continuation of the note program. It

Appendix A Al9

intent, however, the district court did not consider the
critical fact that the Bank knew that the company would
not reveal the Bank’s superior position to the noteholders,
and in the face of that position nonetheless insisted upon
the continuation of the note program. With Consolidated
in a deteriorating financial condition, the Bank's require-
ment of assurances of the continuation of an unregistered
security program knowing of Consolidated’s intention not
to disclose the weaknesses of the program, is tantamount
to proof that the Bank’s conduct was a major substantive
factor in aiding the fraud against the noteholders.""

17, (Cont'd, )
monitored the program monthly and made it clear as an initial
matter that the program would have to continue if Consolidated
were to obtain a bank loan, Although the Bank itself was not
present at the sale of the securities, it had full information on each
sale and it required Consolidated to inform it of the specifics of the
expanding note program, Finally, it is true that the Bank had no
direct duty to the purchasers of the notes, but it was not merely an
innocent third party, Rather, it enhanced jis position at the ex-
pense of the noteholders with knowledge of Consolidated’s decep-
tion of the noteholders,

The district court also stated its belief that the record insuffi-
ciently established the Bank's scienter in Consolidated’s violation of
section LOb of the 1934 Act, Scienter is “a mental state embracing
intent to deceive, manipulate or defraud.” Ernst & Ernst v, Hoch-
felder, supra, 425 U, S, at 194 n, 12. Without reaching the issue of
whether the Bank's reckless disregard of Consolidated’s deception
may constitute scienter, we hold that the Bank’s knowledge of the
company’s intention not to disclose the subordinated position of
the noteholders and the Bank’s intention to take advantage of the
noteholders’ junior status is sufficient proof of manipulative intent
to fulfill the scienter requirement and thereby support the Bank's
aiding and abetting liability,

18. This case is thus distinguishable from Woodward v, Bank
of Dallas, supra. In Woodward, plaintiff, an accommodation maker
of a borrower of the bank, sued the bank as an aider-abetter of the
borrower's securities violation—a duty and failure to disclose to the
plaintiff the borrower's hopeless financial condition. The bank had

ressured the borrower to find a guarantor for an additional loan,
cot there was no evidence that the bank had a continuing under-
standing of its borrower's intention to withhold information from

ae ee eee ree ee

A20 Appendix A

Therefore, the Bank cannot be heard to complain that it
did not substantially assist in Consolidated’s violations,
It may be that had we been the triers of fact in this case
we might not have held the Bank liable on this record, but
the evidence does provide adequate support for the jury's
verdict and under our limited role on appeal we cannot
usurp their function.

ITT,

The Silverbergs assert that the district court erred
in denying their motion for judgment n.o.v. on the securi-
ties violations. They request that we separate the evi-
dence of liability as to each of the Silverbergs individually.
We have viewed the evidence separately, but we nonethe-
less find sufficient evidence to support the verdict against
each of them.

It was stipulated at trial that all seven of the Silver-
bergs were officers, directors, and shareholders of Con-
solidated and that they were in fact the only officers, di-
rectors, and shareholders of the company. Furthermore,
Serafini, Consolidated’s comptroller, testified that all of the
Silverbergs constituted the board of directors of the com-
pany and that each was present at the meetings of the
company in which the note program was discussed. He

18, (Cont'd, )

others from which it sought funds, The court concluded on such
facts that no liability would be justified. As is evident, in Wood-
ward the plaintiff did not establish the bank’s knowledge of its
borrower's fraud, That lack of knowledge is the critical difference
between that case and the instant one. e same distinction elimi-
nates the problem of aider-abettor liability for a bank envisioned
by Ruder, Multiple Defendants in Securities Law Fraud Cases:
Aiding and Abetting, Conspiracy, In Pari Delicto, Indemnifaction,
and Contribution, 120 U, Pa. L. Rev. 597, 630-31 (1972) (fear of
extension of liability to bank as aider-abettor when bank has no
knowledge of under ying violation ), cited by the Woodward court.
Woodward v. Metro Bank of Dallas, supra, 522 F. 2d at 96.

Appendix A A2l

specifically recollected his presence at meetings in which
the programs were described and discussed in full detail
among all of the Silverbergs, He stated that so far as he
knew, there were no parts of the program unknown to any
of them,

Such knowledge placed each of the Silverbergs on no-
tice as to Consolidated’s violations of the securities acts
and therefore subjected them to liability, as controlling
persons, for the company’s violations “to the same extent”
as the company. 15 U, S. C. §§ 770, 78t (1976), Under
Rochez II, supra, 527 F. 2d at 890, a director may not be
found liable unless he has culpably participated in the con-
trolled person’s unlawful activity. The knowledge of each
of the Silverbergs of the dynamics of the rote program
and their presence at board meetings at which the program
was considered is sufficient proof of their culpability to
support the jury’s verdict. We affirm the district court's
denial of the Silverbergs’ motions for judgment n.o.v.

Both the plaintiffs and the Bank contend that the
pendent state claim was erroneously dismissed by the trial
court. Each suggests that judgment be entered in its favor
as a matter of law. Our review of the district court's dis-
missal of this claim is confined to determining whether the
court abused its discretion. Under that standard we find
no reversible error.

The district court dismissed plaintiffs’ pendent state
claim asking for declaration of a constructive trust in its
favor of Consolidated’s assets seized by the Bank because
the court perceived a possibility of jury confusion between
that issue and the federal securities claims. In United
Mine Workers v, Gibbs, 383 U. 8. 715 (1966), the Supreme
Court indicated that “there may be reasons . . . such as the
likelihood of jury confusion . . . that would justify” dis-
missal of pendent state claims. Id. at 726-27; see Robinson

A22 Appendix A

v. Penn Central Co., 484 F, 2d 553, 556 (3d Cir. 1973)
(court has discretion to dismiss pendent state claim be-
cause of judicial economy and fairness to litigants even
after trial has begun). Following that principle, we find
no abuse of discretion by the trial court in its dismissal of
the plaintiffs’ state claim and express no view on the merits
of their cause of action.

IV.
To recapitulate, we conclude:

(1) The district court's judgment n.o.v. in favor of
the Bank on the securities claim will be reversed and the
jury's verdict reinstated.

(2) The denial of the Silverbergs’ motions for judg-
ment n.o.v. will be affirmed.

(3) The district court's dismissal of the plaintiffs’
pendent state claim and its refusal to grant judgment on
that claim to the plaintiffs or the Bank will be affirmed,

Appendix A A23

UNITED STATES COURT OF APPEALS
For THe Tap Cracuir

Nos. 77-1935

77-1936

77-1937
GEORGE R. MONSEN; JOSEPH J. OBERMEYER;
JAMES DELGADO; JOSEPH COSGROVE; ROB-
ERT COSGROVE; and JUSTIN ROSENSTOCK and
EVA ROSENSTOCK as Trustees for BENJAMIN
ROSENSTOCK; JUSTIN ROSENSTOCK and EVA
ROSENSTOCK as Trustees for RENEE ROSEN-
STOCK; JUSTIN ROSENSTOCK as Parent and Nat-
ural Guardian of BENJAMIN ROSENSTOCK;
JUSTIN ROSENSTOCK as Parent and Natural
Guardian of ELI ROSENSTOCK; JUSTIN ROSEN-
STOCK as Parent and Natural Guardian of RENEE
ROSENSTOCK; CLAUDIA ROSENSTOCK; and

ELEANOR SCHWARTZ

v.

CONSOLIDATED DRESSED BEEF COMPANY, INC.;
SAMUEL SILVERBERG; SIDNEY SILVERBERG;
EDWARD SILVERBERG; MICHAEL SILVER-
BERG; REUBEN SILVERBERG; NATHAN SIL-
VERBERG; ALAN SILVERBERG; and FIRST
PENNSYLVANIA BANKING AND TRUST COM-
PANY

Gronce R. Monsen, et al.,
Appellants in No. 77-1935

SAMUEL SILVERBERG, et al,
Appellants in No. 77-1936

Finst PENNSYLVANIA BANK, N, A.,
Appellant in No. 77-1937

A24 Appendix A

AppEAL From THE UNtrep States Districr Count FOR THE
EASTERN District OF PENNSYLVANIA

D. C, Civil Action No, 72-799

Present: ApAMs, VAN Dusen and Rosenn, Circuit Judges.

Judgment.

This cause on to be heard on the record from the
United States District Court for the Eastern District of
Pennsylvania and was argued by counsel on March 28,
1978.

On consideration whereof, it is now here ordered and
adjudged by this Court that the judgment of the said Dis-
trict Court, filed April 28, 1977, be, and the same is hereby
reversed insofar as it granted judgment n.o.v. in favor of
the Bank on the securities claim, and the verdict of the
jury on the said securities claim be, and the same is hereby
reinstated. With respect to the denial of the Silverbergs’
motions for judgment n.o.v. and the dismissal of the
plaintiff pendent state claim and its refusal to grant judg-
ment on that claim to the plaintiffs or the Bank, the said
judgment be, and the same is hereby affirmed.

ATTEST:

Tuomas F, Quinn
Thomas F’, Quinn
Clerk

June 14, 1978

Appendix B A25
APPENDIX B.

IN THE
UNITED STATES DISTRICT COURT
For THE Eastern District or PENNSYLVANIA

Civil Action No, 72-799

GEORGE R. MONSEN, et al.
v,

CONSOLIDATED DRESSED BEEF COMPANY,
INC,, et al.

Memorandum and Order.
Cann, J. April 27, )977

Presently before this court are post trial motions aris-
ing out of a jury trial in which the defendants, Consoli-
dated Dressed Beef Company (“Consolidated”) and the
Silverbergs' were found to have violated §§ 12(1) and
12(2) of the Securities Act of 1933" and § 10(b) of the
Securities Exchange Act of 1934" and rule 10b-5 * promul-
gated by the Securities Exchange Commission. The jury

1, The Silverbergs: Samuel, Sidney, Edward, Michael, Reuben
Nathan and Alan, “a were the principal officers, directors and
shareholders of Consolidated Dressed Beef Company, Inc.

2. 15 U.S. C, § 771.
3. 15 U.S, C, § 78).
4, 17 C. F. R. § 240,10b-5,

A26 Appendix B

also found that defendant, First Pennsylvania Bank
(“Bank”), aided and abetted those violations. The amount
of the judgment in favor of the plaintiff against Consoli-
dated is $421,629.30. The remaining defendants were
found to be jointly and severally liable in the amount of
$152,561.44. The Silverberg defendants move this court
for a judgment notwithstanding the verdict. The plaintiff
moves this court to reinstate Count III of his complaint,
which involves constructive trust violations, or in the al-
ternative for a new trial on that count.

The motions for judgment n.o.v. must.be decided by
applying the following legal principle.

[T]he motion for judgment n.o.v. may be granted only
when, without weighing the credibility of the evi-
dence, there can be but one reasonable conclusion as
to the proper judgment. Where there is conflicting
evidence, or there is insufficient evidence to make a
‘one-way verdict proper, judgment n.o.v. should not
be awarded. In considering the motion, the court
must view the evidence in the light most favorable to
the party who secured the jury verdict.

5A Moore's FepERAL Practice {§ 50.07[2] (2d Ed. 1975).
In viewing the evidence in the light most favorable to the
party who secured the jury verdict, I must deny the motion
for judgment n.o.v. asked for by the Silverbergs. The mo-
tion for judgment n.o.v. sought by the Bank is a much
closer question and will be discussed in detail below.

The evidence introduced at trial showed a course of
conduct on the part of Consolidated and the Silverbergs
in which they engaged in the sale of unregistered securities
in the form of promissory notes. These notes were sold to
employees of Consolidated and friends of the Silverbergs.
The evidence also showed that the Bank made loans to

Appendix B A27

Consolidated on a secured basis. In addition, the Bank.
had knowledge of the promissory note program and should
have known of its illegality. The Bank enccuraged the
note program to continue which in turn improved the
Bank’s position as a secured creditor. Under the negative
covenants of the loan agreement, the Bank had the author-
ity to require Consolidated to discontinue the note pro-
gram.

The claim against the Bank is based on allegations of
aiding and abetting the other defendants in certain securi-
ties violations. In order “[t]o impose liability as an aider-
abettor under this section, it is necessary to find three
distinct elements: (1) The existence of an independent
wrongful act; (2) knowledge by the aider and abettor of
that wrongful act; and (3) substantial assistance in effect-
ing that wrongful act.” Rochez Brothers, Inc. v. Rhoads,
527 F. 2d 880, 886 (3d Cir. 1975); Landy v. Federal De-
posit Insurance Corporation, 486 F. 2d 139 (3d Cir. 1973);
Saltzman v. Zern, 407 F. Supp. 49 (E. P. Pa. 1976). The
requirements of showing substantial assistance presents the
plaintiff with serious problems in this case.’ In this cir-
cuit, in determining whether the assistance is sufficiently
substantial to make a party liable for aiding and abetting
the wrongful act of another, the courts have looked to the
RESTATEMENT OF Torts § 876 for guidance.® According
to this section of the REsTATEMENT the relevant considera-
tions are: (1) the amount of assistance given by the de-
fendant; (2) his presence or absence at the time of the
tort; (3) his relation to the other person; (4) his state of

5. Although it is not necessary for this court to consider the
question of scienter, the absence of proof on that issue raises an-
other problem for the plaintiff. See Ernst & Ernst v. Hochfelder,
425 U. S. 185 (1976).

6. Landy v. Federal Deposit Insurance Corporation, 486 F. 2d
139 ( 3d Cir. 1973); Saltzman v. Zern, 407 F. Supp. 49 (E. D. Pa.
1976).

A28 Appendix B

mind. RESTATEMENT OF Torts §876, Comment on
Clause (b).

When the evidence is viewed in the light most favor-
able to the party who secured the verdict, it is clear that
the evidence is insufficient for a jury finding of aiding and
abetting against the Bank and a judgment n.o.v. should be
entered. First, the Bank rendered no assistance to the
Silverbergs in regard to the securities violations. Second,
the Bank never participated in the offending sales and was
absent at the time they occurred. Third, the Bank made
no representations to the buyers of the notes nor did it
owe those buyers any legal duty of disclosure. Fourth,
while it is true that the Bank informally and to a limited
extent encouraged the Silverbergs to continue their note
program, the evidence failed to establish that the Bank’s
actions in that regard were intended to further any securi-
ties violations. Thus, each of the four considerations tends
to absolve the Bank of aiding and abetting liability.

The plaintiff urges, however, that even if the forego-
ing tests for substantial assistance are not met, the Bank
may be liable as an aider and abettor for mere inaction if
“the inaction was consciously intended to assist in the per-
petration of the wrongful act.” Gould v. American-
Hawaiian S.S. Co., 535 F. 2d 761, 780 (3d Cir. 1976).
See Rochez Brothers, Inc. v. Rhoads, supra. This argu-
ment of the plaintiff must be rejected.

Courts have generally been reluctant to extend aiding
and abetting liability when the secondary defendant’s ac-
tivity is limited to inaction. As a result of this reluctance
courts have required a stricter standard of proof in in-
action cases." Therefore, I conclude that even if the plain-

7. Rochez Brothers, Inc. v. Rhoads, 527 F. 2d 800 (3d Cir.
1975); Woodward v. Metro Bank of Dallas, 552 F. 2d 84 (5th Cir.
Ag 8 ~ aaa v. Midwest Stock Exchange, 503 F. 2d 364 (7th

ir. .

Appendix B A29

tiff had been able to prove that the Bank consciously
intended to assist in a wrongful act, the plaintiff must also
show that the consciously intended aid was substantial aid.
As was mentioned above, the plaintiff was unable to prove
substantial assistance, and therefore, there is a gap in the
proof of an element essential to plaintiff's cause of action
which necessitates the entry of judgment n.o.v.

If this court were to find otherwise, it would place
a burden on all banks making loans to police the actions of
their customers. Such a result might foreclose avenues of
financing for those who need them the most. The federal
securities laws do not, as the plaintiff suggests, place a
duty on persons who know of possible infractions to take
steps to safeguard possible victims.

The court also denies plaintiff's motion to reinstate
Count III or in the alternative for a new trial on that count.
At the close of the plaintiff's introduction of evidence at
trial, this court declined to accept pendent jurisdiction of
plaintiffs Count III which was based on a constructive
trust theory under Pennsylvania law.* It is settled law
that the denial or acceptance of pendent jurisdiction is
within the sound discretion of the trial judge. In the case
of Robinson v. Penn Central Co., 484 F. 2d 553 (3d Cir.
1973), the court stated that the trial court “remains free
throughout the proceedings to dismiss such a claim if that
seems the fairer course.” One of the major criteria to be
considered by the court in determining whether to accept
or deny pendent jurisdiction is the question of whether
the pendent claim will cause jury confusion. See Saltzman
v. Zern, supra.

In declining to accept pendent jurisdiction over
Count III, this court determined that, inter alia, further

8. It should be noted diversity of citizenship jurisdiction is
lacking.

A30 Appendix B

introduction of evidence on the constructive trust theory,
albeit by the defendant, would unduly confuse the jury
which had the burden of deciding the federal securities
issues. This confusion outweighed the judicial economy
and convenience of trying the issues together.

Epwarp N. Caun,
Edward N. Cahn, J.

Appendix B A31

IN THE
UNITED STATES DISTRICT COURT
For THE EASTERN DisTRICT OF PENNSYLVANIA

Civil Action No. 72-799

GEORGE R. MONSEN, et al.
v.

CONSOLIDATED DRESSED BEEF COMPANY,
INC., et al.

Order.

Anp Now this 27 day of April, 1977, Ir Is OrpEREp
that:

1. The motion of First Pennsylvania Bank for a judg-
ment notwithstanding the verdict is GRANTED.

2. The motion of the other defendants for a judgment -
notwithstanding the verdict is DENtEp.

3. The motion of the plaintiff to reinstate Count III
of its complaint or in the alternative for a new trial on that
count is DENIED.

By THE COURT:

Epwarp N. CAHN
Edward N. Cahn, J.

A32 Appendix C

APPENDIX C.

Securities Act of 1933.

Civil Liabilities Arising in Connection With
Prospectuses & Communications.

Sec. 12. Any person who—

(1) offers or sells a security in violation of section
5, or

(2) offers or sells a security (whether or not ex-
empted by the provisions of section 3, other than
paragraph (2) of subsection (a) thereof), by the use
of any means or instruments of transportation or com-
munication in interstate commerce or of the mails, by
means of a prospectus or oral communication, which
includes an untrue statement of a material fact or
omits to state a material fact necessary in order to
make the statements, in the light of the circumstances
under which they were made, not misleading (the
purchaser not knowing of such untruth or omission),
and who shall not sustain the burden of proof that he
did not know, and in the exercise of reasonable care
could not have known, of such untruth or omission,

shall be liable to the person purchasing such security from
him, who may sue either at law or in equity in any court
of competent jurisdiction, to recover the consideration paid
for such security with interest thereon, less the amount of
any income received thereon, upon the tender of such
security, or for damages if he no longer owns the security.

[15 U.S. C. 77(1)].

Appendix C A33
Securities Exchange Act of 1934.

Regulation of the Use of Manipulative and
Deceptive Devices.

Section 10. It shall be unlawful for any person,
directly or indirectly, by the use of any means or instru-
mentality of interstate commerce or of the mails, or of any
facility of any national securities exchange—

(b) To use or employ, in connection with the
purchase or sale of any security registered on a
national securities exchange or any security not so
registered, any manipulative or deceptive device or
contrivance in contravention of such rules and regula-
tions as the Commission may prescribe as necessary
or appropriate in the public interest or for the protec-
tion of investors. [15 U. S. C. 78(j)].

Rule 10b-5. Employment of Manipulative
Deceptive Devices.

It shall be unlawful for any person, directly or in-
directly, by the use of any means or instrumentality of
interstate commerce or of the mails, or of any facility of

_any national securities exchange,

(1) to employ any device, scheme, or artifice to

defraud,

(2) to make any untrue statement of a material
fact or to omit to state a material fact necessary in
order to make the statements made, in the light of the
circinstances under which they were made, not mis-
leading, cr

A34 Appendix C

(3) to engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any person,

in connection with the purchase or sale of any security.
[17 C. F. R. 240.10b-5].

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1677%3A1. Public record. Not legal advice.