Appendix — Moody v. Meyers

|

82 - a a P UlTiCg-Sunreme Caure HS

2091 Wo FILED

No. : ‘UN 20 1983

———— TEVAS,

a eaad

In THE

Supreme Court of the United States

OctToser TERM, 1982

SHEARN Moopy, JR.,

Petitioner,

v.

Davip C. MEYERS, ET AL.,

Respondents.

APPENDIX TO PETITION

FOR CERTIORARI

Grover Ress III * H. Barrow Farr III

727 East 26th St. Onek, Kien & Farr

Austin, Texas 78705 2550 M. St. N.W.

Washington, D.C. 20037

(202) 775-0184

Joun M. Harmon

Graves, DoucHErty, HEAron

& Moopy

2300 Interfirst Tower

P.O. Box 98

Austin, Texas 78767

(512) 478-6421

* Counsel of Record

Bowne of Houston, Inc. Printed in U.S.A.

TABLE OF CONTENTS

PAGE

. Appendix A (Opinion of the Court of Appeals for the

Fifth Circuit) 1

. Appendix B (Opinion of the District Court for the North-

ern District of Texas) 47

. Appendix C (Judgment of the Court of Appeals for the

Fifth Circuit) 81

. Appendix D (Order of the Court of Appeals for the Fifth

Circuit Denying Rehearing) 83

A-1

APPENDIX A

United States Court of Appeals

Firta Crrcvirt.

No. 80-1145.

Davi C. Meyers, et al.,

Plaintiff s-Appellees,

v.

SHearn Moopy, JR.,

Defendant-Appellant,

Bernarp Haines, et al.,

Plaintiff s-A ppellees,

v.

SHeEaRN Moopy, JR.,

Defendant-Appellant,

THARPE FORRESTER,

Receiver-Appellee,

v.

SHEARN Moopy, JR.,

Defendant-Appellant,

(Dec. 23, 1982)

Appeal from the United States District Court for the

Northern District of Texas.

Before THORNBERRY, REAVLEY and JOHNSON,

Cireuit Judges.

The receiver (“Receiver”) of Empire Life Insurance

Company of America (“Empire”) brought this action

against Empire’s president, board chairman and majority

A-2

shareholder, Shearn Moody, Jr. (“Moody”), alleging that

Moody violated both federal securities law and his fiduciary

duties in the management of Empire’s affairs. The jury

verdict and district court judgment, 475 F.Supp. 232 (D.C.

Ala. 1973), went against Moody on both securities and com-

mon law grounds. Moody appeals and we affirm.

In the summer of 1963 Empire was a fledgling company

licensed in a single state, with no business, one employee,

$256,000 of capital and surplus and no other assets. By

the end of 1968 Empire was licensed in sixteen states, with

approximately $455,000,000 of business in force, 500 full-

time agents, $20,000,000 in reported surplus and $60,000,000

in reported assets. This phenomenal growth was made pos-

sible by Moody’s assignment to Empire of 40 percent of his

life estate in a trust established by his grandmother.! The

life interest was admitted as an asset of Empire at a value

of $5,813,440 in 1964, $14,403,200 in 1965, and $4,250,000 in

1972. When the life interest’s assigned value increased,

Empire prospered; when its value declined, Empire col-

lapsed.

[1] A eritical factual issue has been the designation of

responsibility for the $14,403,200 value placed on the life

interest. Moody claimed that responsibility rested with

national accounting firms, an independent actuary and the

Alabama Superintendent of Insurance. The jury found

that the value increase was done by Moody as part of a

scheme to defraud. As will be seen, that finding is sup-

ported by the evidence. Other facts and legal issues, how-

ever, must be faced to dispose of the appeal.

1. This 40 percent of Moody’s life estate in his grandmother's trust

will hereafter be referred to as “the life interest.”

A-3

I.

FACTUAL BACKGROUND:

THE RISE AND FALL OF EMPIRE?

In 1943 the Libbie Shearn Moody Trust was created for

the benefit of certain heirs, including Shearn Moody, Jr.

The corpus of the trust consisted chiefly of 9,949,585

shares of stock in American National Insurance Company

(“ANICO”), and ANICO dividends produced approxi-

mately 90% of the trust’s income. Moody inherited a one-

eighth life interest in this trust.

On June 27, 1963, Moody incorporated Empire Life

Insurance Company in the State of Alabama. Moody, the

company’s sole shareholder, contributed $256,061 to

Empire. Such meager capital could not support Moody’s

ambitious plan—to amass quickly as many assets as

possible by acquiring other life insurance companies, which

are required by law to have substantial assets in reserve

to pay policyholder claims. To embark upon an acquisition

program Empire needed a substantial surplus.

Empire acquired that surplus in July 1963 when Moody

assigned to it 40 percent of his interest in the Libbie Shearn

Moody Trust in consideration for a $200,000 surplus deben-

ture. Moody and Dale R. Major, Moody’s lawyer and chief

assistant, intended and believed that the instrument assign-

ing the life interest precluded its further transfer; but

Moody never communicated this thought to any insurance

commissioner, Empire director, or Empire shareholder, de-

spite (or because of) the fact that an asset which cannot be

transferred cannot be admitted as an asset of an insurance

company.

2. The following synopsis of facts is stated most favorably to the

jury verdict, and hence the plaintiff. See Quinn v. Southwest

Wood Products, Inc., 597 F.2d 1018, 1019 (5th Cir. 1979).

A-4

Before the life interest could be used to support Empire’s

expansion, it was necessary that the Alabama Superinten-

dent of Insurance “admit” the interest as an asset of

Empire at an approved value. To determine the interest’s

value, Moody employed the actuarial firm of Lloyd K.

Friedman & Associates and the national accounting firm

of Ernst & Ernst. In the spring of 1964 Lloyd Friedman

furnished Henry Hogan, a partner in Ernst & Ernst, with

a suggested method of calculating the life interest’s value.

This method took into consideration an actuarial factor

(Moody’s life expectancy) and three economic factors

(current trust income, future increases in trust income, and

future interest rates), the objective being to arrive at the

present value of predicted income from the trust. Hogan

accepted Friedman’s valuation method, as well as his

assessment of Moody’s life expectancy and current trust

income. Hogan himself selected what he considered the

most reasonable growth rate and discount rate. In deter-

mining the applicable growth rate, Hogan noted that

ANICO’s cash dividends had increased at an average

annual rate of nearly 40 percent over the previous twelve

years. Hogan expressly took this increase into account in

concluding that it would be most reasonable to assume a

5 percent growth rate in trust income. In determining the

applicable discount rate to apply to future income, Hogan

considered but rejected a 4 percent rate in favor of a 5

percent rate.? In a letter dated September 1, 1964, Hogan

informed Moody that, based on the valuation method and

assumptions set forth above, the life interest owned by

Empire should be valued at $5,813,440.

At Moody’s request, Lloyd M. Jard, a partner in the

accounting firm of Peat, Marwick, Mitchell & Co., (“Peat

3. The higher the discount rate, the lower the present value of the

life interest.

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Marwick”) transmitted a copy of Hogan’s letter to Walter

S. Houseal, Superintendent of Insurance for the State of

Alabama. On October 27, 1964, Superintendent Houseal

informed Empire that the Alabama Insurance Depart-

ment accepted the life interest as an admitted asset of

Empire at a value of $5,813,440. Houseal stipulated, how-

ever, that acceptance of the life interest at this or any other

value would continue only so long as the Department

received each year an updated appraisal of the life interest

“prepared by Ernst & Ernst or other competent appraiser.”

Empire listed the life interest as an admitted asset at a

value of $5,813,440 in its December 31, 1964 report to share-

holders.

The $5,813,440 valuation of the life interest provided

Empire with the surplus necessary to consummate a merger

with Consolidated American Life Insurance Company

(“CALICO”), a publicly held corporation. On December 31,

1964, Empire issued 345,103 shares of Class A common

stock for all of CALICO’s outstanding common stock.

Although Empire acquired minority shareholders as a

result of this merger, Moody retained virtually all of the

company’s Class B voting stock, as well as the ability to

elect all but one of its directors.

The CALICO merger so depleted Empire’s surplus

that the rapid expansion program envisioned by Moody

was placed in jeopardy. Thus, within six months of Super-

intendent Houseal’s approval of the life interest at a value

of $5,813,440, Moody undertook a series of actions that

resulted in an increase in excess of $8,000,000 in the life

interest’s admitted value.

In a letter dated March 8, 1965, Dale Major, who was by

now executive vice-president and secretary of Empire,

informed Houseal that ANICO had recently announced a

dividend increase of two cents per share. Major continued:

A-6

Our accountants have been apprised of the [dividend

increase], and have been instructed to prepare imme-

diately a current evaluation based on this increased

dividend. As soon as this appraisal is received it will

be forwarded to you.

About the same time, Moody asked Lloyd Friedman to

recalculate the value of the life interest based on new

economic variables. In a letter dated March 31, 1965,

Friedman responded by setting forth in summary fashion

alternative valuations of Moody’s entire one-eighth life

estate as of December 31, 1964. Friedman’s calculations

assumed current annual income of $400,000, a discount rate

of 4%, and alternative growth rates of 5%, 714% and 10%.

An assumed growth rate of 5% yielded a $19,488,000 valua-

tion of Moody’s entire life estate; a 714% assumed growth

rate yielded a $36,000,000 valuation; and a 10% assumed

growth rate yielded a $73,908,000 valuation. [Friedman

offered no opinion as to which, if any, of these assumed

growth rates were reasonable.

Friedman’s response did nothing more than apply

arithmetic to the obvious fact that the value of the life

interest owned by Empire could be substantially increased

if the three critical economic assumptions on which Ernst

& Ernst had based its appraisal were altered. Specifically,

the life interest’s value would rise from $5,813,440 to

$14,403,200 if the appraiser assumed (a) current annual

income of $400,000, rather than $370,000, (b) a growth rate

of 714% rather than 5%, and (c) a discount rate of 4%

rather than 5%.

Immediately after receiving Friedman’s letter, Moody

provided Empire’s accountant at Peat Marwick with the

new computations. On April 2, 1965, Peat Marwick trans-

mitted to Moody a statement of Empire’s assets and liabili-

ties as of December 31, 1964. In an accompanying letter,

A-7

the accounting firm stipulated that the financial statement

was “prepared without audit or verification by us from data

you made available, .. . [including] a computation by an

independent actuary of the company’s life interests in the

Libbie Shearn Moody Trust.” The statement listed the life

interest as an admitted asset with a value of $14,403,200.

Noting the discrepancy between this valuation and the

$5,813,440 valuation appearing in Empire’s December 31,

1964 report to shareholders, the firm stressed that it had

not inspected any report which might underlie the actuary’s

computations.

At about this time, Moody and Major met with Superin-

tendent Houseal during a convention of the National Asso-

ciation of Insurance Commissioners in Miami. Moody and

Major informed Houseal that they intended to seek a reval-

uation of the life interest, and that studies had been made

which indicated the life interest was worth approximately

$14,000,000.

On April 8, 1965, Lloyd Jard of Peat Marwick trans-

mitted to Superintendent Houseal, at Moody’s request, a

copy of Friedman’s letter setting forth alternative valua-

tions of the life interest. Houseal apparently also received

a copy of Peat Marwick’s unaudited financial statement,

as well as another copy of Friedman’s letter containing

the following addendum: “Two-fifths of the trust valua-

tion at $36,008,000.00 is equivalent to the $14,403,200.00

appearing in the Peat, Marwick & [sic] Mitchell & Co.

financial report dated December 31, 1964.”

Major testified that a formal valuation hearing was held

in the spring of 1965 before Superintendent Houseal and

that Houseal then accepted a $14,403,200 valuation of the

A-8

life interest.4 No written record of either this hearing or

its findings was introduced.

Immediately following Houseal’s approval of the in-

creased valuation of the life interest, Empire embarked

upon an aggressive acquisition program. In the last six

months of 1965 the company’s size more than doubled. In

June, Empire made a stock-for-stock acquisition of the

Empire Life Insurance Company of America (Little Rock,

Arkansas). In November, the company paid cash for a

controlling interest in the National Insurance Company of

America. These developments were noted in Empire’s

December 31, 1965 report to shareholders. The annual

report also listed the life interest as an admitted asset at

a value of $14,403,200 and stated:

Valuation of the trust was calculated by the national

accounting firm of Ernst & Ernst, and actuaries includ-

ing Mr. Lloyd K. Friedman, F.S.A., consulting actuary

of Houston.

Moody now concedes that this statement was inaccurate

and that Ernst & Ernst did not review the 1965 revaluation.

Empire’s expansion program continued in 1966 with the

stock-for-stock acquisition of National Empire Life Insur-

ance Company. Despite this extraordinary growth, no

state undertook to review the company’s financial affairs

until the fall of 1966. At that time insurance examiners

4. Evidence was presented at trial that tended to prove that Hou-

seal might have ‘Seen swayed by considerations of friendship and

obligation in approving the increased valuation of the life

interest. Major and Houseal were friends; indeed, Major recom-

mended Houseal for the position he accepted after stepping down

as Superintendent of Insurance. Moreover, Houseal had visited

Moody’s Texas ranch on several occasions at Empire’s expense.

5. At the time of this merger the words “of America” were added

to Empire’s name.

A-9

for the states of Alabama, Texas and Arkansas reviewed

Empire’s financial condition as of December 31, 1965.

The examiners, apparently non-plussed by the sudden

and substantial increase in the value of the life interest

between 1964 and 1965, consulted Superintendent Houseal

for an opinion. Following a meeting with Houseal in

October of 1966, the examiners drafted a report that

concluded with this curiously limited certification: “The

customary insurance examination procedures... have been

followed in connection with the verification and evaluation

of the liabilities shown in the financial statement of this

report” (emphasis added).

On the surface, 1968 was a banner year for Empire.

The company’s assets increased over 50 percent in that

year alone, and the number of subsidiaries under Empire’s

effective control or under common control with Empire

expanded from nine to thirty-one. Empire acquired con-

trol of Universal American Life Insurance Company in

January, Capital Security Life Insurance Company in

April, Investors Preferred Life Insurance Company in

May, Centennial Reserve Life Insurance Company in

June, and National Investor’s Life Insurance Company (a

complex of twenty-eight companies, including twelve life

insurance companies) in August. In addition, Empire

entered into reinsurance agreements with Reliance Life &

Accident Insurance Company of America in January,

Republic Investors Life Insurance Company in April,

American Trust Life Insurance Company in June, and

Investors Preferred Life Insurance Company in December.

Although Empire touted its rapid expansion program as

a sign of the company’s robust health, the true effect of the

program was to render the company perilously close to

collapse. The aggregate impact of the acquisitions was to

drain Empire of its liquid assets. Cash might be obtained

A-10

so long as the life interest was admitted as a $14,403,200

asset of the company. A significant devaluation of the life

interest, however, would end the ride.

In the following year just such a devaluation was threat-

ened. In December 1968, R. Frank Ussery had replaced

Walter Houseal as Alabama’s Superintendent of Insurance.

By then, the insurance commissioners of several states in

which Empire did business had become sufficiently doubt-

ful of the value assigned the life interest that they com-

missioned the American Appraisal Company to conduct a

formal appraisal. In February 1969, American Appraisal

reported that as of September 30, 1968, the life interest had

a value for continued use of $8,600,000 and orderly liquida-

tion value of $4,250,000. At about the same time, examiners

for the states of Texas, Arkansas and Alabama issued an

unofficial report of examination as of December 31, 1968,

assigning the life interest a value of zero.®

In response to these reports, Superintendent Ussery

ordered Empire to cease writing new insurance policies and

to engage in no further acquisitions and mergers. In June

1969, Ussery accepted a proposal made by Moody whereby

Empire would gradually diminish the life interest’s net

asset value from $14,403,200 to an eventual value of zero.

(Empire did not, however, devalue the life interest as

agreed.) At the same time, a panel composed of Ussery and

four other state insurance commissioners was formed to

attempt to rehabilitate the company. The panel met with

little success: Empire sustained net operating losses of

$1,734,700 in 1969 and in 1970 was temporarily forced to

delay payments of claims due to lack of cash revenues.

8 To quell doubts about the $14,403,200 valuation, Moody hired

Richard P. Johnson, an economics professor at Southern Meth-

odist University, to undertake a valuation of the life interest. In

November 1968, Johnson reported that the life interest’s value as

of December 31, 1968 would be no lower than $16,000,000, and

that a reasonable valuation was $23,000,000.

A-11

in January 1971, John G. Bookout replaced Frank

Ussery as Alabama’s Superintendent of Insurance. Upon

learning that no official report of Empire’s financial con-

dition had been issued in five years, Bookout ordered that

a pending examination be promptly completed. In Decem-

ber 1971, examiners for the states of Alabama, South

Dakota and Texas submitted their report of Empire’s

affairs as of December 31, 1970. The examiners assigned

the life interest a value of $4,250,000, in accordance with

the fair market valuation by American Appraisal, and

found that Empire was statutorily insolvent in excess of

$6,000,000 and impaired in excess of $10,000,000.

In April 1972, after reviewing the results of the exam-

ination, Superintendent Bookout instituted a receivership

proceeding in Alabama court against Empire. Two months

later, after a three-week hearing largely devoted to the

proper valuation of the life interest, the trial court placed

Empire into receivership. The court appointed Superin-

tendent Bookout as receiver and authorized him to solicit

offers from other insurance companies for the reinsurance

of Empire. At about the same time, the states of Texas,

Arkansas and Montana also placed Empire into receiver-

ship.

In January 1974, the Alabama receiver sought an order

of liquidation of Empire and approval of a bulk reinsur-

ance agreement presented by Protective Life Insurance

Company (“Protective”). After another extensive hearing,

the receivership court found that Empire was statutorily

insolvent in excess of $6,000,000 and impaired in excess of

$10,000,000, and that the company’s financial condition was

“rapidly deteriorating.” On June 14, 1974, the court entered

an order granting the receiver’s petition to liquidate and

reinsure the business of Empire into Protective.

A-12

In June 1974, Receiver filed a complaint against Moody

in United States District Court for the Northern District

of Texas’ alleging that in his management of Empire

Moody had violated his fiduciary duties of care and loyalty

as well as §10(b) of the Securities Exchange Act of 1934.

The case was tried before a jury in December 1976. In

response to special interrogatories, the jury found that

Moody had violated both his common law duties to Empire

and the federal securities laws. On May 29, 1979, the trial

court entered judgment against Moody for actual damages

of $5,319,000 and punitive damages of $1,000,000, together

with accrued interest. Meyers v. Moody, 475 F.Supp. 232

(N.D.Tex. 1979). This is an appeal from that judgment.

Il.

THE LEGAL ISSUES

A. Preliminary Matters

1. Standing

Moody first complains that plaintiff Receiver, appointed

under the laws of Alabama, lacked standing to bring suit

in a court outside the state of his appointment.

[2] The capacity of a receiver to sue in federal court is

governed by the law of the forum state. Fed.R.Civ.P.

17(b); Wright & Miller, Federal Practice and Procedure

§ 1567 (1971). The controlling case in Texas is Carpenter

v. Pink, 133 Tex. 82, 124 S.W.2d 981 (1939). In that case

a New York court placed an insolvent New York corpora-

tion in the hands of the New York Insurance Commissioner.

7. On March 21 and May 5, 1972, Empire shareholders had filed

derivative suits against Moody. These suits were subsequently

consolidated. Receiver joined in the consolidated derivative

action as plaintiff, and the shareholders’ derivative action was

abated and ultimately dismissed, leaving only Receiver’s deriva-

tive action.

A-13

At the Commissioner’s request a Texas ancillary receiver

was appointed to preserve the company’s assets in Texas.

In a subsequent suit brought in Texas court, the Texas

receiver disputed the New York Commissioner’s authority

under Texas law to prosecute an appeal. The Supreme

Court of Texas held that the Commissioner was entitled

to prosecute the appeal because he was lawfully a party

to the suit in the court below. The court stated:

We are aware of the general rule that an administrator

appointed in one state cannot sue in another, and an

ordinary equity receiver appointed by a State court

has no extraterritorial powers, but such rule cannot be

applied here.... [T]he New York receiver... did not

derive his powers, authority, and title from the decrees

of the appointive court, but from the laws of the state

which created or chartered this corporation....

[S]inee the State of New York created this corpora-

tion, it had the lawful right to say, by statute, who

[the corporation’s] agents should be ..., both while

this corporation was a solvent and going concern, and

after it had been declared insolvent.... For us to

refuse to recognize the New York Insurance Commis-

sioner as a party to this suit under the facts of this

record would be to deny full faith and credit to the

statutes and judicial decrees of the State of New York.

Id. 124 S.W.2d at 987 (citations omitted).

[3] Since Empire Life Insurance Company was created

by the laws of Alabama, Alabama had the right to desig-

nate its agent in insolvency. The receiver in this case, like

the receiver in Carpenter, derived his authority not from

the decrees of the appointive court but from the laws of

the appointive state. Alabama Code § 27-32-15 provides in

pertinent part:

As a domicilary receiver, the commissioner shall be

vested by operation of law with the title to all of the

property, contracts and rights of action . . . wherever

A-14

located, as of the date of entry of the order directing

him to rehabilitate or liquidate a domestic insurer ....

The Alabama receiver accordingly had standing to bring

suit in United States District Court for the Northern Dis-

trict of Texas.

[4] Moody also argues that Receiver did not have stand-

ing to sue on behalf of Empire’s shareholders, policyhold-

ers or creditors. The law in Texas is to the contrary. In

Cotten v. Republic National Bank of Dallas, 395 S.W.2d

930 (Tex.Civ.App.—Dallas 1965, writ ref’d n.r.e.), the court

stated:

Certainly a receiver for an insolvent insurance cor-

poration... has a right to maintain a suit which is

necessary to preserve the corporation’s assets and to

recover assets of which the corporation has been

wrongfully deprived through fraud. In such a suit the

receiver may be said to sue as the representative of the

corporation and its creditors, stockholders and policy-

holders. ...

Id. at 941. Moody’s challenges to plaintiff’s standing are

without merit.

2. Statute of Limitations

The events which form the basis of Receiver’s state and

federal claims occurred more than three years before this

suit was commenced. The increased valuation of the life

interest occurred in 1965; the acquisition program which

that valuation made possible was concluded in December

1968; and the present action was brought in March 1972.

Moody argues that Receiver’s suit is accordingly barred

by applicable statutes of limitations.®

[5| State law determines when a state law cause of

action accrues, see Walko Corp. v. Burger Chef Systems,

5 Receiver's state law claims are governed by a two-year limita-

tions period. See Tex.Rev.Civ.Stat.Ann. art. 5526(4) (repealed

A-15

Inc., 554 F.2d 1165, 1171 (D.C. Cir. 1977). Under state law,

a cause of action based on fraud accrues only when the

fraud is discovered or by the exercise of reasonable dili-

gence should have been discovered. Gaddis v. Smith, 417

S.W.2d 577 (Tex. 1967). Whether a plaintiff has exercised

the degree of diligence necessary to toll the statute of

limitations is a question of fact. Cotten v. Republic

National Bank of Dallas, supra, at 946; L.C.L. Theatres v.

Columbia Pictures Industries, Inc., 566 F.2d 494, 497 (5th

Cir. 1978).

Moody argues that all causes of action in the present case

accrued upon the conclusion of Empire’s acquisition pro-

gram in 1968, because by that time Empire’s disinterested

shareholders and directors and the various insurance com-

missioners involved had knowledge of facts from which

they could have inferred the existence of any common law

violations. The jury, however, found in response to special

interrogatories that Moody concealed material facts from

all these persons, and that reasonable diligence would not

have alerted them to Moody's wrongful acts before March

1971.

[6] The jury’s findings are supported by the evidence.

Empire’s shareholders were explicitly informed in Empire’s

1965 annual report that the $14,403,200 valuation of the life

interest was calculated by Ernst & Ernst and by actuaries

including Lloyd Friedman; every subsequent report to

shareholders until 1972 continued to assign the life interest

a $14,403,200 value. Three of Empire’s directors, Hilton

effective August 27, 1979); White v. Bond, 362 S.W.2d 295 (Tex.

1962). In light of our disposition of the 10b-5 issue, see section

(I1)(B)(2), infra, we n not decide the applicable limitations

period for that claim and whether it was tolled.

9. Absent cause to question them, it is reasonable for shareholders

to rely on the knowledge and integrity of the corporate managers

with respect to shareholder reports. De Haas v. Empire Petro-

leum Co., 435 F.2d 1223, 1227 (10th Cir. 1970).

A-16

Painter, Frank Schmidt and Richard Linn, testified at trial

that they were led to believe the increased valuation was

based upon an appraisal by an accounting or actuarial firm.

R. Frank Ussery, Alabama’s Superintendent of Insurance

from December 1968 to January 1971, testified that he,

too, believed the increased valuation was based on assump-

tions provided by an accounting or actuarial firm. The

jury could reasonably have found that the reliance of these

persons on Moody’s representations was justified, and that

their diligence was sufficient to toll the statute of limita-

tions.

3. Equitable Estoppel

In April 1975, three years after the present action

against Moody was initiated, Receiver entered into an

agreement to effectuate a buik reinsurance treaty with

Protective Life Insurance Company of America (“Pro-

tective”). Under this treaty Protective acquired virtually

all of Empire’s assets and liabilities. Receiver retained

Empire’s right of action against Moody, but agreed to

pass along to Protective any recovery obtained from

Moody. Since Empire’s liabilities exceeded its assets,

Protective stipulated that it would reinsure only those

Empire policyholders who accepted a ten-year moratorium

on the right to receive the cash values of their policies.

Protective and Receiver agreed that any recovery against

Moody would inure to the benefit of those policyholders

by reducing the moratorium amount established under the

treaty.

Moody contends that Protective is the real plaintiff in

interest under these facts, and that any recovery against

Moody would unjustly enrich Protective in violation of the

equitable principles enunciated in Bangor Punta Opera-

tions, Inc. v. Bangor & Aroostook Railroad, 417 U.S. 703, 94

A-17

S.Ct. 2578, 41 L.Ed.2d 418 (1974). In Bangor Punta the

Amoskeag Company (“Amoskeag’’) purchased virtually all

the stock of the Bangor & Aroostook Railroad (“BAR”).

BAR subsequently sued its former owner for corporate

waste and mismanagement. The Supreme Court held that

equity precluded BAR from maintaining the action, reason-

ing that although the suit was purportedly brought on

BAR’s behalf, the real party in interest and the principal

beneficiary of any recovery was Amoskeag. Since the

depressed price Amoskeag had paid for BAR’s stock

already reflected the effects of the earlier mismanagement,

any recovery would constitute a “windfall” for Amoskeag.

Bangor Punta is distinguishable from the present case in

several respects.

First, Protective in this case, unlike Amoskeag in Bangor

Punta, cannot fairly be considered the principal beneficiary

of any recovery against the injured corporation’s former

owner. Although Protective might benefit derivatively

from such recovery, the principal beneficiaries under the

express terms of the reinsurance agreement are the policy-

holders of Empire. These policyholders are Empire’s

creditors, and have suffered direct injury as a result of

Moody’s improprieties. By contrast, the Supreme Court in

Bangor Punta stressed that Amoskeag was not suing on

behalf of the injured corporation’s creditors, 417 U.S. at

718 n. 15, 94 S.Ct. at 2587 n. 15, and had not itself suffered

any injury, 417 U.S. at 711-12, 94 S.Ct. at 2583-84.

Second, even if Protective were the principal beneficiary

of any recovery in this case, it still could not fairly be con-

sidered the beneficiary of a “windfall.” The Supreme

Court’s finding in Bangor Punta that any recovery against

BAR’s former owner would constitute a windfall for

Amoskeag turned on the fact that Amoskeag received

all it had bargained for when it acquired BAR’s

A-18

stock. In the present case, however, Protective did not

receive all it had bargained for when it acquired Empire’s

assets since it had sought and obtained an agreement that

any recovery against Moody would be applied to reduce

the policyholder’s moratorium. Far from being an unex-

pected gain, a recovery against Moody was clearly contem-

plated by Protective and provided for in its reinsurance

agreement with Receiver.

[7] Finally, in Bangor Punta there was no lawsuit, and

there could have been no lawsuit, until Amoskeag acquired

BAR’s stock. By contrast, Empire initiated this action

against Moody several years before Protective acquired

Empire’s assets. Moody is thus urging us to extinguish a

cause of action that both existed and was pursued long

before the transfer of Empire’s assets took place. Neither

law nor equity permits us to do so. Empire suffered a

cognizable injury for which a remedy exists. To hold that

the remedy abates because the corporation’s assets were

sold would result in inequity that the Court in Bangor

Punta sought to avoid, and would make Moody himself the

beneficiary of a windfali. See National Union Electric Cor-

poration v. Matsushita Electric Industrial Co., 498 F.Supp.

991, 1003 (E.D.Pa.1980). Receiver is not equitably

estopped from bringing this action under the principies

enunciated in Bangor Punta.?°

[8-10] Moody also argues that Receiver is equitably

estopped from bringing this action because Moody

10 It bears noting as well that Bangor Punta involved a transfer

of stock rather than assets. Moody cites no case, and we have

found none, in which Bangor Punta is applied to preclude

recovery by a plaintiff who has acquired a corporation’s assets

rather than its stock. This is hardly surprising, since the trans-

feree of a corporation’s assets has no right of action against the

corporation’s prior owners for mismanagement unless the transfer

agreement gives it such a right—in which case any recovery

would not constitute a “windfall.”

A-19

increased the value of the life interest and pursued the sub-

sequent acquisition program in reliance on the approval

issued by Empire’s shareholders and board of directors

and the Alabama Department of Insurance. The sole vir-

tue of this contention is audacity. The doctrine of estoppel

is for the protection of innocent persons, and only the

innocent may invoke it. A party may not invoke an estop-

pel for the purpose of shielding himself from the results

of his own fraud, dereliction of duty, or other inequitable

conduct. El Paso National Bank v. Southwest Numismatic

Investment Group, Ltd., 548 S.W.2d 942, 949 (Tex. Civ.

App. — El Paso 1977, no writ). Moreover, a party invoking

estoppel must be ignorant of the facts which the party to

be estopped is alleged to have represented by his conduct or

silence. Investors Realty Trust vy. Carlton Corp., 541

S.W.2d 289, 292 (Tex. Civ. App. — Dallas 1976, no writ) ;

Clifton v. Ogle, 526 S.W.2d 596, 603 (Tex. Civ. App. —

Fort Worth 1975, writ ref’d n.r.e.). Moody is in no position

to invoke an estoppel against Receiver.

B. Liability

1. Common Law

a. Applicable Law

{11] A threshold issue concerns the law to be applied in

determining the nature and extent of Moody’s fiduciary

obligations to Empire. We apply the conflict of law prin-

ciples of Texas (the forum state) in resolving this issue.

Klazon Co. v. Stentor Electric Manufacturing Co., 313 U.S.

487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Specifically, we

look to the Texas Business Corporation Act (the “Act”’),

which was enacted in 1955 and in force at all times rele-

vant to this lawsuit.

[12] Tex.Bus.Corp.Act Ann. art. 9.14(A) (Vernon) pro-

vides that the Act does not apply to foreign corporations

which are granted authority to transact business within

A-20

the state under any special statute, except that, where the

special statute contains no provision regarding matters

provided for in the Act with respect to foreign corpora-

tions, the Act applies to the extent it is not inconsistent

with the special statute. Insurance companies are among

those foreign corporations authorized to transact business

in Texas under a special statute. See Tex.Ins.Code Ann.

art. 3.57, 21.43 (Vernon). The Texas Insurance Code

nowhere specifies the duties or liabilities of officers or direc-

tors of insurance companies. The Texas Business Corpora-

tion Act, on the other hand, provides that officers and direc-

tors of a foreign corporation doing business in the state are

subject to the same duties and liabilities as are imposed

upon officers and directors of domestic corporations. Tex.

Bus.Corp.Act Ann. art. 8.01, 8.02; see Model Business Cor-

poration Act $99 par. 1 2.02(3) (1960). Nothing in the

Texas Insurance Code is inconsistent with this provision.

We conclude that Moody was subject to the same duties

and liabilities that Texas law imposes upon officers and

directors of Texas corporations.

b. Breach of Duty of Care

[13,14] Texas law imposes en corporate officers and

directors a duty to exercise due care in the management

of the corporation’s affairs. If they breach that duty, they

are liable to the corporation for any loss it may suffer as a

result of their neglect. See Sutton v. Reagan & Gee, 405

S.W.2d 828, 834 (Tex.Civ.App.—San Antonio 1966, writ

ref’d n.r.e.) ; Fagan v. La Gloria Oil & Gas Co., 494 S.W.2d

624, 628 (Tex.Civ.App.—Houston [14th Dist.] 1973, no

writ). “Due care” is that degree of care which a person

of ordinary prudence would exercise under the same or

similar circumstances.

The jury found in response to special interrogatories that

Moody negligently managed Empire’s business affairs and

A-21

breached his fiduciary duties to the company. The jury also

found that Moody’s behavior amounted to “intentional mis-

conduct or gross negligence.” The jury thus accepted

Receiver’s contention that Moody was at least grossly negli-

gent in undertaking a massive acquisition program based

on an artificial surplus created by the $14,403,200 revalu-

ation of the life interest.

Moody here asserts that both the revaluation of the life

interest and the subsequent acquisition program involved

legitimate exercises of business judgment. Moody first

contends that his revaluation of the life interest was rea-

sonable since it was based on appraisals made by account-

ants and/or an actuary. The evidence is to the contrary.

Hogan of Ernst & Ernst and Jard of Peat Marwick both

testified that they did not revalue the life interest; indeed,

Hogan stated he did not learn of the revaluation until the

time of trial. He testified that the trial was the first occa-

sion that Ernst & Ernst even had knowledge that its name

had been used in Empire’s 1965 annual report with the false

statement that the $14 million valuation of the life interest

had been calculated by his firm. Lloyd Friedman, the

actuary who Moody now claims was chiefly responsible

for the revaluation, testified that he did nothing more than

determine Moody’s life expectancy and make mathematical

calculations based upon economic assumptions provided by

Moody. Moody rebutted none of this testimony, and all of

it is fully corroborated in the record. The conclusion is

inescapable that the $14,403,200 value was placed on the life

interest by Moody himself.

[15] Moody next contends that, whether or not outside

experts were responsible for the revaluation, $14,403,200

was a reasonable value to place on the life interest. In par-

ticular, he argues that it was reasonable to raise the life

interest’s assumed growth rate from 5% to 714% (thereby

A-22

boosting the life interest’s value by millions of dollars)

because ANICO’s dividends, which constituted virtually all

of the life interest’s income, had enjoyed a 19% average

annual growth rate between 1944 and 1964. This argu-

ment is easily met by noting that Ernst & Ernst was

familiar with ANICO’s earnings record when it found an

assumed growth rate of 5% to be most reasonable. More-

over, ANICO’s subsequent earnings history vindicated

Ernst & Ernst’s conservatism: between 1964 and 1974, the

years here at issue, ANICO’s dividends increased at an

annual rate of only 4.62%. Finally, the $14,403,200 valu-

ation was clearly unreasonable in relation to the life

interest’s income; between 1966 and 1970 the highest annual

yield on the life interest at the $14 million valuation was

1.52%. Thus, between 1966 and 1970 the average amount

of income that the life interest actually brought Empire

each year was only about $200,000, an amount grossly dis-

proportionate to its valuation. One expert testified that life

insurance companies during those years generally guaran-

teed their policyholders a return of between 214% and 3%

on ordinary life insurance policies, and that the minimum

yield on an asset required to guarantee such a return pru-

dently was 314%."!

Even if Moody’s $14,403,200 valuation of the life interest

had been reasonable, his subsequent course of conduct was

not. Moody had reason to know that the life interest’s

value was extraordinarily volatile having seen it leap from

$5,813,440 to $14,403,200 within a space of six months.

11. Moody also contends that, even if the $14,403,200 revaluation of

the life interest were unreasonable, he is not responsible for

Empire’s subsequent losses because the Alabama Insurance Com-

misioner approved the revaluation. This contention is spurious.

An insurance company may not delegate responsibility for valua-

tion of its assets to a state agency, and the mere fact that an insur-

ance commissioner accepts a company’s asset valuation does not

immunize the company from liability arising from that valuation.

A-23

Moody also knew, or should have known, that if he

expended Empire’s liquid assets in an acquisition program

any significant decline in the life interest’s value would

instantly render Empire insolvent. Moody nevertheless

embarked upon a massive acquisition program that drained

Empire of its liquid assets and made the company’s

economic survival depend entirely on the stability of the

life interest’s value. The jury could reasonably find that

Moody was grossly negligent in failing to provide for the

contingency that in 1972 became a reality—a sudden and

substantial decline in the life interest’s value.

[16] The jury’s finding that Moody was grossly negligent

in his management of Empire is supported by the testimony

of numerous witnesses at trial. Hilton Painter, who served

Empire for ten months as vice-president and director,

testified that Moody was “totally incapable of operating a

life insurance company,” and ran Empire in an illogical,

irresponsible and dangerous manner.!* Frank Schmidt,

12. The testimony of several witnesses at trial supports the conclu-

sion that Moody often exhibited a blatant, callous disregard for

the interests of Empire’s shareholders and policyholders, espe-

cially when their interests conflicted with his own ambitious plans

for the company. For instance, the following excerpt from

Mr. Painter’s testimony highlights one such incident that occurred

during a meeting of Empire’s executive committee of directors

and officers:

[Mr. Hilton]:

A question arose concerning the expenditure of certain funds

to acquire a oy position in another life insurance com-

pany and, as often happens in a meeting like that, there is

some discussion about where the money comes from.

Q. (By Mr. Wright) Was Mr. Moody there?

A. Mr. Moody was chairing the meeting, yes sir.

Q. All right, what happened?

A. And I made the comment to Mr. Moody that — that such

an expenditure would not be an acceptable expenditure be-

A-24

also an Empire vice-president and director, testified that

Moody’s aggressive acquisition program ran the company

into bankruptcy. Laurence Cottingham, an attorney in

Empire’s legal department, stated that Moody “violated

all rules of good management.” Thomas Pennington, a

vice-president of Protective, testified that Empire’s invest-

ments were poor to atrocious with limited exception, that

policy records were poorly maintained and incomplete,

that documentation on policies assumed from acquisitions

was virtually non-existent, that the administration of the

reinsurance program indicated gross negligence, and that

Empire was “probably the worst managed company” he

cause it constituted the use and, in my opinion, the unauthor-

ized use of policyholder reserves.

Q. What was Mr. Moody’s reply?

A. (No response).

Q. Precisely?

A. Mr. Moody was standing at the end of the table —

THE COURT:

What was his reply?

THE WITNESS:

His reply was, “F(_—)k the policyholders.”

Q. (By Mr. Wright) All right, Mr. Painter, I take it you’ve

heard that word used before in your adult life?

A. Yes.

Q. I want to ask you this: Have you ever heard the use of

that particular profanity in a jocular manner?

A. Yes.

Q. Heard it simply used as an adjective to highlight some-

thing?

THE COURT:

Just ask him.

Q. How do you interpret that that phrase was meant at

that time?

A. He said it without a trace of smile and it was very clear

that he meant it in the crudest and most malicious way.

A-25

had ever seen. The jury’s finding of gross negligence on

the part of Moody is amply supported by the evidence.

[17,18] Moody also argues that the district court erred

in its instructions to the jury regarding the law applicable

to directors’ duty of care. First, he challenges the court’s

instruction that he was to be “held to a higher standard

of care and fair-dealing than would be one not in a fiduciary

position.” This instruction is however, patently correct.

See 15 Tex. Jur.3d, “Corporations,” § 235 (1981); H. Henn,

Law of Corporations §§ 234, 235 (2d. ed. 1970). Second,

Moody complains that the court failed to instruct the

jury regarding the applicability of the business judgment

rule. This complaint, too, is fatuous: the court explicitly

instructed the jury that directors “are not held responsible

for ordinary mistakes of business judgment,” and that

“if Moody exercised reasonable business judgment in the

acquisition program and perpetrated no fraud he is not

liable to the receiver in this case however mistaken his

actions might appear to be in hindsight.” See Conrick v.

Houston Civic Opera Ass’n, 99 S.W.2d 382, 384 (Tex.Civ.

App. — Amarillo 1936, no writ); Henn, Corporations at

§ 242. Finally, Moody asserts that the court erred in

instructing the jury that Moody owed fiduciary duties to

the policyholders of Empire, as well as its stockholders and

the corporate entity itself. We are not certain that this

instruction was erroneous. See, e.g., American Trust Co.

v. California Western States Life Insurance Co., 15 Cal.2d

42, 98 P.2d 497, 510 (1940); 18 J. Appleman, Insurance

Law and Practice § 10012 (1945). Even if this instruction

were erroneous, the error was harmless.

2. Securities Law Claims

The jury in this case found that Moody had engaged in

conduct in violation of Securities Exchange Commission

A-26

Rule 10b-5, 17 C.F.R. § 240.10b-5 (1981), enacted pursuant

to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.

§ 78j(b) (1976). Specifically, the jury found that Moody

(1) failed to disclose his belief that the trust interest was

intended to be non-transferable by Empire, and (2) fraudu-

lently misrepresented the value of the life interest. Moody

raises a variety of arguments in this appeal contesting the

jury’s findings of liability under Rule 10b-5. We need not

decide, however, whether the jury’s findings and the district

court’s holding of liability under this ground were correct,

because the damages awarded may be sustained on the basis

of the common law claims.

At the close of trial, the court submitted 17 special inter-

rogatories to the jury. Question i asked whether Moody

was negligent in his management of Empire; Question 2

asked whether Moody breached his fiduciary duties to

Empire; Question 3 asked whether such negligence or

breach of fiduciary duties constituted intentional miscon-

duct or gross negligence; Question 4 asked whether Moody

breached his fiduciary duties in connection with the guar-

antee of Credit Factoring’s indebtedness to Moody Bank;

Question 5 asked whether such negligent mismanagement

or breach of fiduciary duties proximately caused damage to

Empire stockholders’ capital and surplus or Empire’s

ability to meet its policyholders’ obligations; and Questions

6-9 cumulatively asked whether Moody violated the securi-

ties laws. The jury answered all these questions affirma-

tively. Question 10 then stated:

Find from a preponderance of the evidence, what sum

of money, if any, if paid now in cash would fairly and

reasonably compensate Empire for damages cause

[sic] by the depletion, if any, of its stockholders’ capi-

tal and surplus proximately caused by such negligent

mismanagement, breach of fiduciary duties or securi-

ties violations as you may have found.

A-27

The jury answered: “five million dollars.”

[19] Moody argues that it is impossible to determine

whether the jury based its assessment of $5,000,000 com-

pensatory damages on the allegedly improper securities

law theory or on the common law theory, and that the case

must therefore be remanded for a new trial. This conten-

tion fails for several reasons. First, it is clear from the

jury’s answers to Questions 1-5 that it found Moody liable

under common law independent from and without reference

to his liability under Rule 10b-5. Second, although Ques-

tion 10 is phrased in the disjunctive, the measure of dam-

ages recoverable by Receiver under Texas common law is

the same (as will be demonstrated below) as it is under

Rule 10b-5. Furthermore, there was only one wrong com-

plained of and proved: the manipulation of the life interest

leading to fatal undercapitalized acquisition; and the proof

of damages on the depletion of capital was the same and

not linked only to one theory of liability. Thus, the $5 mil-

lion figure assessed by the jury may stand irrespective of

Rule 10-b liability.'*

C. Damages

1. Measure of Damages

[20] The district court makes the following statement in

its opinion:

What is not clear is how to measure the loss to Empire.

Neither Texas law nor federal securities law provides

13. Moody cites Dougherty v. Continental Oil Co., 579 F.2d 954,

960 n. 2 (5th Cir.1978), vacated, 591 F.2d 1206 (5th Cir.1979) in

support of his argument. That case is inapposite, however, be-

cause the ambiguity there concerned not the theory on which

damages were based but the theory on which liability was based.

Here it is clear that the jury found liability under both theories.

Their answers to Questions 1-5 clearly indicate a finding of lia-

bility under common law and their answers to Questions 6-9

clearly indicates a finding of liability under federal securities laws.

In this case it is irrevelant upon which theory the jury based its

finding of damages in Question 10 because, as discussed in text,

the measure of damages is the same under either theory.

A-28

a clear guideline, so this court must fashion a measure

of damages which comports with the sparse precedent

available and which is just. Seé Spiegel v. Beacon

Participations, 297 Mass. 398, 8 N.E.2d 895, 909 (1937).

There being no indication otherwise, the court pre-

sumes that the measure of damages for Receiver’s

common law and securities law claims does not differ

under state and federal law. Cf. Pappas v. Moss, 303

F.Supp. 1257, 1281 (D.N.J.1969).

475 F.Supp. at 237. We believe that the district court’s

“presumption” on the measure of damages was correct. To

understand this conclusion, it is necessary to examine

briefly the types of damages available under Rule 10b-5

and common law.

First, it is well-settled that Rule 10b-5 allows recovery

of both general and special (or consequential) damages.

5B A. Jacobs, The Impact of Rule 10b-5 § 260.03[b] (rev.

ed. 1980). Special damages are defined as outlays attri-

butable to the defendant’s wrongful conduct. Jd. at

§ 260.03[d]. Two limits exist on the recovery of special

damages: (1) they cannot be awarded if their relationship

to the defendant is too remote; (2) they are unavailable if

they redress the same injury for which the plaintiff is com-

pensated by general damages or prejudgment interest. Id.

It is significant to note, however, that special or conse-

quential damages are recoverable even if the plaintiff can

show no general damages. I/d.

[21, 22] Likewise, Texas common law recognizes and

allows both general and special damages as a recovery for

acts of fraud or deceit. Although we have found no Texas

eases specifically addressing the common law liability of a

director/president/majority stockholder who violates his

fiduciary duties through mismanagement and thereby

forces the corporation into insolvency, we determine that

Texas law allows special damages against Moody under the

A-29

facts here. Examining Texas cases in three factual situa-

tions reported upon by the state courts is instructive.

Specifically, we look to cases involving: (1) directors who

cause the financial condition of the corporation to be mis-

stated, thereby inducing creditors to loan money to the

company; (2) the common law actions of fraud and deceit,

and types of damages recoverable thereunder; and, (3)

negligent corporate mismanagement by directors.

As to the first category, it appears that the Texas courts

have long permitted third-party creditors to recover dam-

ages personally against corporate directors who fraudu-

lently or even negligently misrepresent the financial condi-

tion of the company. Tex Jur.3d summarizes Texas law in

this fashion:

Directors of a corporation are personally liable to

anyone who sustains loss by reason of false financial

statements made by them. For example, directors have

been held personally liable at common law for inducing

deposits in a failing bank by representations of its

solvency. Of course, the officers are liable if the false

statements are shown to have been fraudulently or

designedly made. So, also, where an officer has been

concerned in the publication of false statements, he is

liable for those statements even though he was in fact

ignorant of their truth and falsity; it is his duty to

inform himself of the true financial position of the

corporation.

Directors, in particular, are in a position of special

responsibility, in view of the statutory provision vest-

ing in them the general management of the affairs of

the corporation. Directors are accordingly held liable,

as a matter of law, where it appears that they allowed

false statements to be published and used by employees

in order to obtain credit for the corporation.

15 Tex.Jur.3d, Corporations § 300 at 455-56 (1981) (foot-

notes and case citations omitted).

A-30

The seminal Texas case illustrating this rule is Cameron

v. First National Bank, 194 S.W. 469 (Tex.Civ.App. —

Galveston 1917, writ ref’d), a case in which the plaintiffs

extended a line of credit to a manufacturing corporation

in reliance on false and fraudulent statements of the com-

pany’s financial condition as contained in the annual report.

The court found that the defendant/directors “knew the

method by which the accounts of the mill were kept, and

that it has been the uniform custom in preparing financial

statements to include in such statements as assets accounts

which had proven uncollectable and which by general

commercial custom and usage should not be included in a

financial statement as assets.” Jd. at 476. Concluding that

the directors’ authorization of the issuance of such finan-

cial statements constituted failure to exercise ordinary care,

the court held that “having accepted the position and exer-

cised the duties of directors, and having sanctioned the

long-continued method of borrowing money for the com-

pany on the faith of yearly financial statements, appellants

must be held responsible for the truth of the statements so

sanctioned by them.” Jd. See Durham vy. Wichita Mill &

Elevator Co., 202 S.W. 138 (Tex.Civ.App. — Fort Worth

1918, writ ref’d) (similar facts; holding directors liable

for fraud and negligence even though plaintiff/creditor did

not extend credit wholly in reliance upon false financial

statements of corporation); see also Parsons v. Johnson,

28 App.Div. 1, 5, 50 N.Y.S. 780, 782 (1898) (“[AJn officer

of a corporation making a false statement in the annual

report becomes liable to the damages which naturally flow

from or are caused by the falsehood. The Legislature has

not undertaken to define the precise damage which the

injured party may recover, but has used a broad term which

covers all damages which flow directly from the false

statement.”’).

[23,24] The above cases dealing with the liability of

directors to corporate creditors for false financial state-

A-31

ments are grounded upon common law theories of negli-

gence or fraud, or both.’ Although the common law of

fraud is generally more stringent in its requirements than

the elements of Rule 10b-5, it is clear that the two are

closely related. In Texas in an action for common law

fraud or deceit, a plaintiff must allege and prove: (1) an

untrue representation made by the defendant (2) known by

him to be false (3) concerning a material fact (4) made with

the intent to receive the plaintiff and (5) to induce him

to act in a particular manner, (6) such representation being

one on which the plaintiff relied and (7) which proximately

caused his damages, (8) with issues on proximate cause

having to be submitted to the jury where “special” damages

are sought. See Success Motivation Institute, Inc. v. Law-

lis, 503 S.W.2d 864, 868 (Tex.Civ.App.— Houston [lst

Dist.] 1973, writ ref’d n.r.e.); El Paso Development Co. v.

Ravel, 339 S.W.2d 360, 367 (Tex.Civ.App.— El Paso

1960, writ ref’d n.r.e.). Thus all of the requirements of a

Rule 10b-5 cause of action are included within the elements

of fraud under Texas law, which imposes a few additional

requirements. Cf. Huddleston v. Herman & MacLean, 640

F.2d 534, 543 (5th Cir. 1981), modified, 650 F.2d 815, cert.

granted, — U.S. —, 102 S.Ct. 1766, 72 L.Ed.2d 173 (1982).

14. We emphasize that we do not here decide the liability of a

director for false financial statements when such director is

ignorant of the facts underlying the misrepresentation. In Sugar-

land Industries v. Parker, 293 S.W. 609, 612 (Tex.Civ.App. —

Texarkana 1927, writ dismissed), the court noted that “if in the

transaction which is in suit it is affirmatively shown that an

individual director did not have actual participation or knowl-

edge, a claim of fraudulent or false representation cannot be pre-

dicated against him. A director is liable only for his own acts or

omissions. He is not merely by virtue of his position liable.” In

the instant case, Moody’s fraudulent and/or negligent misrepre-

sentation of the financial state of Empire is established by the

evidence, and he is the only director/defendant before us. As to

the liability of a director ignorant of the facts, we are not now

called upon to decide that question, but note in passing that we

agree generally with the court’s position in Sugarland.

A-32

[25, 26] Moreover, in Texas a defrauded plaintiff may

recover both general and special damages, with these terms

having approximately the same meaning as they do when

one is talking about Rule 10b-5. The difference between

general and special damages under Texas law is that

general damages are the necessary and usual result of the

wrong complained of, while special damages need not be

the necessary and usual result of the wrong, but must be

the proximate result thereof. El Paso Development, 339

S.W.2d at 363. “Special damages, predicated upon a wrong,

which are not necessarily the usual result of the wrong,

but are directly traceable to the wrongful act complained

of and result therefrom, may be recovered in a common

law action based on fraud and deceit; but all other dam-

ages will be held to be too remote.” Jd. at 363-64. Thus,

Texas law limits special damages to those which are not

too remote, uncertain, conjectural, speculative or contin-

gent. Jd. at 364.

The third and final category of Texas cases that is rele-

vant is that addressing the liability of directors or officers

for negligent (i.e., nonfraudulent) mismanagement of a

corporation. For example, in Sutton v. Reagan & Gee,

405 S.W.2d 828 (Tex.Civ.App.— San Antonio 1966, writ

ref’d n.r.e.), the court entertained a mismanagement action

filed by a creditor of a bankrupt corporation against its

officers. Although the court held that such a suit was not

maintainable by an individual creditor of the corporation,

it acknowledged such a cause of action is enforceable by

the receiver or trustee in bankruptcy of the corporation.

Id. at 834. With regard to the measure of liability, the

court stated that a director owes a duty to the corporation

to exercise due care in the management of the corporation’s

affairs, and for breach of this duty, the director is “clearly

liable to the corporation for any loss it may suffer as a

result of his neglect.” The words “any loss” suggest that

A-33

special or consequential damages are recoverable in an

action brought for negligent corporate mismanagement

against the director of a corporation; accord, Fagan v. La

Gloria Oil & Gas Company, 494 S.W.2d 624, 628 (Tex.Civ.

App. — Houston [14th Dist.] 1973, no writ).

[27, 28] From the preceding discussion it is clear that

Texas common law:

(1) holds directors liable to third-party creditors who

act in partial reliance upon false financial state-

ments that appear in the annual report of a cor-

poration by the authorization of the directors.

(2) on fraud includes all of the elements of a Rule

10b-5 cause of action, and permits general and

special damages to be recovered.

(3) holds directors who negligently mismanage a cor-

poration liable for “any loss it may suffer as a

result.”

Finally, it is also clear that both federal and state courts,

in awarding damages for violation of Rule 10b-5, have not

insisted that the amount of damages be proven with mathe-

matical certainty. Courts have routinely placed upon the

defendant the risk of imprecise calculations of damages:

Although the plaintiff must present as much proof as

he can, the defendant has no ground to complain if the

plaintiff cannot prove the extent of his injury (as

distinguished from the fact he was harmed) with

mathematical certainty. In effect, the defendant bears

the uncertainty as to the amount of damages.

Jacobs, § 260.02 (footnotes and case citations omitted).

Thus, given the obvious parallels betwen the Texas com-

mon law action for fraud and Rule 10b-5’s elements, and

the fact that both recognize and similarly define general and

special damages, we conclude that the district court was

correct in presuming that the measure of damages for

A-34

Receiver’s common law and securities law claims does not

differ under state and federal law.

2. Proof of Damages

[29] Once we accept the premise that the measure of

damages are the same under federal or state law, the sole

remaining question is whether Receiver adequately proved

the amount of damages, i.e., whether the evidence at trial

supported the jury’s verdict.!5 As we examine the evidence,

we keep in mind the principle, already stated, that Moody

should bear any uncertainty as to proof of the amount

of damages and that Receiver need not demonstrate the

amount with mathematical certainty.

As recounted earlier, the jury in response to special

interrogatories found that $5 million would “fairly and

reasonably compensate Empire for damages caus[ed] by

the depletion ... of its stockholders’ capital and surplus

proximately caused by [Moody’s] negligent mismanage-

ment, breach of fiduciary duties [and federal] securities

violations....” The jury also awarded $1 million in puni-

tive damages against Moody. This verdict was rendered

in 1976; thereafter, Moody's lawyers filed an avalanche of

post-trial motions raising over 80 alleged grounds of error

that delayed the district court’s entry of final judgment

until 1979.

[30-33] Moody’s attack on damages denounces what he

characterizes as the numerous and “outrageous” errors of

the district court. From his many briefs and supplemental

briefs and letters filed in this appeal, we perceive his attack

on the damages to be five-fold. First, he contends that Jim

15. The damages here are, if anything, “special” or consequential

damages because they are not the “necessary and usual result” of

Moody’s fraudulent valuation of the life interest, but rather are,

as George's testimony (recounted in the text) shows, the prox-

imate result thereof.

A-35

George used an improper method of accounting in calculat-

ing the value of Empire’s assets. Second, he argues that

Receiver was relieved of the burden of proving Empire’s

insolvency by being allowed to rely upon a prior adjudica-

tion of this matter in the Alabama courts. Third, Moody

attacks the jury’s award of $1 million in punitive damages.'*

We find no merit to his contentions. Before we discuss

them, however, we summarize the damages evidence.

Moody raises two other arguments which relate more closely to

damages recoverable for a Rule 10-b violation.

First, he argues that George’s testimony did nothing more than

demonstrate a dilution of Empire’s shareholders’ equity, which

Moody claims is not a compensable loss under existing precedent

in this circuit. As support for this proposition, Moody cites a

progression of Fifth Circuit cases, including Herpich v. Wallace,

430 F.2d 792 (5th Cir.1970); Wolf v. Frank, 477 F.2d 467 (5th

Cir.), cert. denied, 414 U.S. 975, 94 S.Ct. 287, 38 L.Ed.2d 218

(1973); and Sargent v. Genesco, Inc., 492 F.2d 750, 765 (5th Cir.

1974). In essence, Moody’s argument is a back-handed attempt

to attack Receiver’s standing to maintain the Rule 10b-5 cause of

action. He points particularly to Wolf v. Frank, a case in which

the district court Seabed the plaintiffs individual 10b-5 claim

because they “were unable to show any actual damages inasmuch

as the dilution of their equity interest was not a cognizable

element of damages for a violation of Rule 10b-5.” 477 F.2d at

478. We affirmed the district court’s action on the basis of our

earlier opinion in Herpich v. Wallace, stating that the plaintiffs

“(did] not have standing to seek individual damages for the dilu-

tion of equity interest caused by the [stock exchange in question]

because plaintiffs were neither purchasers or sellers in connection

with that transaction.” Id.

Moody’s argument misperceives our previous holdings in these

cases. All three of these cases very plainly held that shareholders

could assert a 10b-5 derivative action on behalf of a corporation

although they were neither actual purchasers nor sellers. 430

F.2d at 809-10; 447 F.2d at 478-79; 492 F.2d at 762-66; see

Imperial Supply Co. v. Northern Ohio Bank, 430 F.Supp. 339,

348 n. 6 (N.D.Ohio 1976). The present case is just such a deriva-

tive suit brought by Receiver, and so, even if we were to reach

the issue of 10b-5 liability, it is clear that Receiver would have

standing to assert such a claim. Moreover, the cases cited by

Moody do not hold that dilution of stockholders’ equity is never

a compensable loss in 10b-5 actions, whether derivative or direct.

They merely hold that dilution of shareholders’ equity does not

A-36

At trial the chief damages witness for Receiver was Jim

George, a manager in the Insurance Department of Alexan-

der Grant & Co., a national accounting firm, and a former

life insurance specialist with the international accounting

firm of Peat, Marwick, Mitchell & Co. George testified that

Alexander Grant & Co. had been retained by Receiver “to

put together a complete accounting picture absent perform-

ing an audit of the entities involved in the birth, growth

and demise of Empire... .” As a result, George and the

confer “purchaser” or “seller” status on a plaintiff seeking to

overcome the standing hurdle in a direct 10b-5 suit. Perhaps

this distinction is best expressed by the court in Sargent: “Thus,

although dilution of equity may be an appropriate measure of

damages, such dilution does not confer standing.” 492 F.2d at

765 (emphasis added).

Moody also argues that the district court should have awarded

damages, if at all, under the “out-of-pocket” theory which, as he

points out, is the usual measure of damages applied in Rule 10b-5

cases. Our declining to reach the issue of 10b-5 liability does not

necessarily answer this argument because, as we have pointed

out before, the “out-of-pocket” theory may also be applied at

common law. Huddleston v. Herman & McLean, 640 F.2d at

555 & n. 34. We reject it as the proper measure of damages here,

though, for the following reason. Under the out-of-pocket rule,

a pe le wll buyer is entitled to recover the difference between

the price paid for securities and the real value when bought. Id.

at 555-56. Under the unusual facts here, it is questionable

whether this measure of damages could properly be applied to

ascertain Empire’s losses through its mergers and outright pur-

chases of shares in other corporations for no allegation has ever

been made that Empire did not receive “full value” when acquir-

ing these securities, yet the evidence overwhelmingly demon-

strates, as we have discussed in the text, that Empire suffered

huge, tangible damages in the millions of dollars because of these

aquisitions. Moreover, the acquisition program also involved the

purchase of blocks of life insurance policies through bulk reinsur-

ance agreements; such purchases did not involve securities, see

475 F.Supp. at 245. Thus, application of the out-of-pocket rule

makes no sense in assessing } ace suffered by Empire as a

result of this aspect of its acquisition program. Yet these reinsur-

ance agreements no less than the mergers and purchases of

securities caused injury to Empire and were clearly compensable

under the state law mismanagement action.

A-37

Insurance Department of Alexander Grant spent over one

year examining the records and books of Empire for the

period from 1963 to 1972. Scrutinized in the process were

minutes of meetings of the board of directors, executive

committee, and shareholders, proxy statements to share-

holders, bulk reinsurance agreements and consents of insur-

ance commissioners, mortgage loan files, annual financial

statements, reports of state insurance examining depart-

ments, memoranda of officers and directors of Empire and

its subsidiaries and controlled affiliates, and documents

related to Empire’s interest in the Libbie Shearn Moody

Trust, including Ernst & Ernst’s valuation of the trust.

George presented the results of this exhaustive analysis

in his testimony at trial; the transcription of his testimony

on direct examination alone covers 94 typewritten pages in

the record before us. Basically, George described to the

jury his method of measuring the damages suffered by

Empire:

All I did was take the years ’64 through ’72 as reported

by the company, shoved them together and said fine,

now summarize what caused the change in stockholders

equity to be in the beginning three hundred ninety-four

thousand and at the end, ’72, be a $7,000,000 deficit, or

a swing, if you please, of $7,400,000.

George concluded, based on his analysis of the change in

stockholders’ equity from Empire’s inception to its ultimate

receivership, that the cause of Empire’s downfall was the

aggressive acquisition program it had pursued; he also

explained that the acquisition program would not have been

possible without the artificial inflation of the trust value

from $5,813,440 to 14,403,200:

Q. [Counsel for Receiver] :

Out of that study, we’ll go back and analyze the

segments, give us the ultimate conclusions.

A-38

Was there any particular cause of the company’s

collapse or were there hundreds of causes that are

reflected by your studies of the financial history of

Empire life?

A. [George]:

To point to one thing and say this caused, this

transaction caused the demise, you couldn’t do. You

have to look at the entire program.

It was the total impact of the merger acquisition

program creating huge drains on surplus of the

insurance company that triggered or caused its

insolvency.

Q. Did you come to any conclusion as to how Empire

Life was able to embark and effectuate this acquisi-

tion program that you spoke of?

A. Yes, this is what I was trying to get across [a]

while ago.

The contribution of the Trust Interest created

equity, if you please, of $14,000,000. Had that equity

not been there, it’s my opinion that a merger acquisi-

tion program of the magnitude executed by the com-

pany could not have been done, could not have been

attempted. The $14,000,000 increase in equity pro-

vided a right or a license, if you please, to use assets

of the company to go on a merger acquisition

program.

George also explained that the acquisition program had

resulted in Empire’s obtaining assets that, when valued

under statutory accounting principles as required by state

insurance law, were nonincome producing and had to be

valued below their cost. In short, his testimony explained

how Moody’s acquisition scheme caused Empire to exchange

liquid assets deemed “admitted” under state law, e.g., cash

and marketable securities, for noliquid assets statuorily

valued at significantly less than cost. This left Empire with

inadequate liquid assets, 7.e., cash reserves, with which to

A-39

pay its routine obligations such as policyholders’ claims.!”

George testified that the difference between cost and

statutory value of the property acquired by Empire was

$9,207,242, i.e., Empire’s liquid and admitted assets were

reduced by this amount as a result of the acquisitions. The

low statutory value of the acquired property and its non-

liquidity, when coupled with the sudden reduction in value

of the trust interest by the Alabama Insurance Commis-

sioner, rendered Empire statutorily insolvent. George

reiterated that such insolvency was caused by the acquisi-

tion program:

Q. [Counsel]:

Was there any other cause reflected by the — your

study of the financial statements that could have

made — placed Empire Life Insurance Company

into receivership, in an insolvent posture?

A. [George]:

I keep coming back to the same answer, the acquisi-

tion program.

George then stated that, in his view, Empire had suffered

damages of somewhere between $7 and $10 million dollars.

The $7 million or bottom figure was his calculation of the

deficit and drain on shareholder equity caused by the

acquisition and merger program; the top or $10 million

figure represented the $14 million excess of Empire’s liabili-

17. In fact, the exchange of Empire’s liquid, admitted assets for

non-liquid, nonadmitted ones at times left Empire with little more

than the income produced by the life interest to back up its

routine obligations. Yet as noted earlier, although the life interest

was valued at over $14 million, it only brought in about $200,000

yearly in actual income, an amount clearly inadequate to cover

payments to policyholders and other business operating expenses.

At trial an insurance examiner/expert for the State of Oklahoma,

Ben Larson (who had studied Empire’s financial condition in

detail), testified that Empire’s liquid capitalization was seriously

inadequate to cover routine obligations even before the value of

the life interest was inflated from $5 to $14 million.

A-40

ties over assets at the time it entered its bulk reinsurance

agreement with Protective Life Insurance Co., less the $4

million value of the Moody trust interest at the time Empire

entered receivership. George’s extensive analysis and con-

clusions were borne out by the testimony of three other

experts at trial (including former directors and officers of

Empire) as was set forth in the opinion of the district

court. 475 F.Supp. at 240.

a. Asset Valuation

Moody’s most vehement attack on the damages evidence

is directed toward George’s method of calculating the value

of Empire’s assets. Moody raised this same contention in

district court, whose characterization of it adequately sum-

marizes his argument now:

Moody attacks George’s testimony on the ground that,

if he had employed generally accepted accounting prin-

ciples rather than statutory accounting principles, he

would have valued the “downstream” assets that

Empire acquired through its acquisition program much

higher, and may have determined that Empire was in

fact solvent at the time it entered receivership. Moody

alleges that George relied solely upon statutory

accounting principles in forming his opinion as to the

damage caused by the acquisition program to Empire

and therefore his testimony does not sufficiently prove

that Empire suffered actual damages.

475 F.Supp. at 240.

Statutory accounting principles (“SAP”) are rules that

state insurance departments have developed to regulate life

insurance companies; SAP mandate that conservative

methods be employed in valuing the assets of such com-

panies to guarantee their continuing solvency. D. Gregg &

V. Lucas, Life and Health Insurance Handbook 1048 (3d

ed. 1973) ; D. McGill, Life Insurance 860-61 (rev. ed. 1967).

A-41

This routine conservatism as reflected through use of SAP

requires only that certain types of assets be considered in

calculating a company’s financial condition, and that the

value of such “admitted” assets be determined according

to quite restrictive rules. McGill, Life Insurance at 863-64.

In short, it is clear that the standard practice in the life

insurance industry is to determine the solvency of insur-

ance companies by reference to SAP, even though, under

generally accepted accounting principles (“GAAP”),'®

assets may be shown to have substantially greater value

and might show a net equity of the company. 19 A.J.

Appleman, Insurance Law and Practice § 10641 at 42

(1982); MeGill, Life Insurance at 860-64; R. Strain, Life

Insurance Accounting 353-54 (Merritt Co. ed. 1977); In re

American Investors Assurance Co., 521 P.2d 560, 562

(Utah 1974). George explained all of this at trial when

he testified that life insurance companies are “‘run and

managed’” and “‘bought and sold’” according to SAP.

475 F.2d at 242.9

18. On the differences between SAP and GAAP, see D. Gregg &

V. Lucas, Life and Health Insurance Handbook 1048-49 (3d ed.

i978) S. Huebner & K. Black, Life Insurance 528-80 (9th ed.

1976); D. McGill, Life Insurance 860-65 (rev. ed. 1967); R. Mehr,

Life Insurance 658-60, 673-75 (rev. ed. 1977); R. Strain, Life

Insurance Accounting 353-84 (Merritt Co. ed. 1977).

19 We are not at all certain from our reading of the record that

George himself did not employ GAAP when calculating the

dollar amount of Empire’s insolvency. At trial George presented

a summary of his calculations in a graph or chart entitled

“Analysis of Changes in Stockholders’ Equity” for Empire cover-

ing the years 1964-72. This chart, admitted into evidence during

his testimony as an exhibit (PX # 19), specifically utilizes a dollar

amount representing the value of Empire’s nonadmitted assets in

the calculation of = ony Fee e og note that Moody’s

In addition, we believe that valuation of Empire’s assets under

GAAP would not help Moody's position. The record reveals a

A-42

[34] The simple answer to Moody’s argument about

asset values is that Empire was insolvent under the law”

and that the damages were determined after the assets

had been transferred. If Moody had any support for the

contention that the capital accounts would show a different

balance if the assets were valued differently, he should

have come forward with it.

b. Prior Adjudication of Empire’s Insolvency

[35,36] Moody also attacks the damages award by

arguing that Receiver was relieved of the burden of proving

letter from Peat, Marwick, Mitchell & Co. to Moody dated

April 2, 1965, in which Peat Marwick transmitted the unaudited

financial statement it prepared for Empire for the year ending

December 31, 1964. This letter is significant because it repre-

sents the first time the value of the life interest was stated at the

inflated value of $14,403,200. After noting the increased valu-

ation placed on the life interest, Peat Marwick offered this caveat

to Moody:

You have informed us that this interest was acquired at no

cost to the company. In accordance with generally accepted

accounting principles, the life interests in the Libbie Shearn

Moody Trust should be valued at cost rather than the com-

puted value as determined by the actuary [$14,403,200] or

the admitted value as shown by the annual statements

[$5,813,440].

(emphasis added). Thus, if Moody followed GAAP in determin-

ing the value of the life interest, he should have listed its value

in Empire’s annual report as either $0.00, its “no cost” value, or

$200,000, the amount of the surplus debenture that Empire trans-

ferred to Moody in consideration for his original assignment of

40% of his interest in the trust to Empire. Yet Moody ignored

GAAP and the advice of Peat Marwick and caused the value

of the life interest to be reported to shareholders as $14,403,200!

20. Alabama law expressly employs the use of SAP in calculating

the solvency of life insurance companies. The Alabama Insurance

Code very plainly spells out what kinds of insurance company

assets are to be admitted or rejected. Ala.Code i 27-37-1,

27-37-2 (1975). These or similar statutory provisions have been

in effect in Alabama since Empire began its acquisition program

in the 1960's and were in force in 1972 at the time of its insol-

vency.

A-43

Empire’s insolvency by being permitted to stand on a prior

judicial adjudication of the issue. This contention is

spurious. As recounted earlier, in 1974 Receiver sought an

order to liquidate Empire and approve its bulk reinsurance

by Protective Life. An Alabama receivership court granted

such an order in a judicial proceeding in which Empire was

adjudged to be statutorily insolvent in excess of $6 million

and impaired in excess of $10 million. At the close of the

trial in the instant case, the district court instructed the

jury that Empire had been declared insolvent in the earlier

Alabama proceeding and that such finding of insolvency

was “binding on the parties at this time.’”* Moody contends

that this instruction relieved Receiver of the burden of

proving insolvency and the amount of damages suffered

by Empire. We disagree.

First, the jury had already been informed of this adjudi-

cation of insolvency during testimony at trial (to which,

we might point out, no objection was made). Second, at

no time was the jury ever informed of the dollar amounts

by which the Alabama court found Empire to be insolvent

and impaired; indeed, the district court repeatedly stressed

that the amount by which Empire was found to be insolvent

in the Alabama proceeding could not be used as proof of

damages in the instant case. Thus, it is impossible that the

jury could have relied on the adjudication of the Ala-

bama court in calculating the $5 million damage award it

returned. Moreover, Receiver obviously did not purport

to rely upon the Alabama adjudication as proof of the

amount of damages that Empire suffered, but instead ten-

dered the exhaustive testimony of George and other experts

which we have already discussed.

21. We note that Moody, in his reply brief, admits that he inter-

vened as a codefendant with Empire in the Alabama proceeding

brought by Receiver; as a result, he is bound by the adjudication

there of the fact of Empire’s insolvency.

A-44

ce. Moody’s Day of Judgment

[37-39] Punitive damages are not recoverable in a Rule

10b-5 action, but may be recovered under pendent state

claims.2 Petrites v. J.C. Bradford & Co., 646 F.2d 1033,

1036 (5th Cir.1981). Moody argues that the district court

erred in failing to instruct the jury that it could not

consider any securities law violations in assessing

punitive damages. Moody did not object at trial to the

court’s failure to give this cautionary instruction, how-

ever, and such failure may not now be assailed on appeal.

Fed.R.Civ.P. 51. It is true that even absent objection we

may consider errors in jury instructions that seriously

affect the fairness and integrity of the proceedings.

Delancey v. Motichek Towing Service, Inc., 427 F.2d 897,

901 (5th Cir.1970); Dunn v. Sears, Roebuck & Co., 639

F.2d 1171, 1176 (5th Cir.1981). However, Moody’s wrong-

ful conduct was the same whatever the basis of legal liabil-

ity, and the court’s failure to include a cautionary instruc-

tion relative to the legal basis for punitive damages could

not result in a miscarriage of justice.

D. Motion for Mistrial

Moody raises one final argument for our consideration.

He claims that the district court erred in failing to grant

his motion for a mistrial based upon the allegedly pre-

judicial comments made by counsel for Receiver during

closing jury argument. First, Moody claims that he was

compared to Adolph Hitler. This claim is not entirely

accurate. At one point during the examination of Richard

E. Linn (an accountant with Empire and witness at trial)

the parties were discussing a memorandum from Moody

in which he issued directions to Empire’s “field units.” In

22. Texas law permits punitive damages to be recovered under the

facts of this case. See Collins v. Miller, 443 S.W.2d 298

iieker tap — Seale 1969, writ refd n.r.e.); Wililiams B.

oberts, Inc. v. McDrilling Co., 579 S.W.2d 335, 340 (Tex.Civ.

App. — Corpus Christi 1979, no writ).

A-45

trying to ascertain what Moody meant by the term “field

units,” counsel for Receiver commented that the term

originated with Adolph Hitler in World War II. Counsel

for Moody objected and the district judge sustained the

objection.

Moody also claims that he was unfairly likened to crimi-

nals widely known by the public. This also occurred during

closing jury argument of counsel for Receiver:

The Court will instruct you that the insolvency of

Empire Life Insurance Company of America has been

determined by a court which Mr. Moody was a part of

and he’s further going to instruct you that the motives

of the people that put it into insolvency are not rele-

vant, are not material to any issue in this case. But,

having heard the argument, let me remind you that

everybody from Ben Jack Cage to Billy Sol Estes to

Shearn Moody that’s been in a suit like this has claimed

polities and, indeed, Richard Nixon and Mr. Agnew

have the same claim and they all, whenever there’s no

other defense, attack the attacker.

In many ways, this case has been tried a little bit like

a rape case. You don’t defend yourself against the

crime, you attack the integrity of the people who were

had, who were injured. You attack the witnesses.

Moody did not object to these allegedly prejudicial com-

ments at the time they were made, although he did object

to them and moved for a mistrial upon a completion of

Receiver’s closing argument. The district court denied

the motion for mistrial.

[40, 41] It is well-established that a motion for new trial

based upon inflammatory remarks is addressed to the sound

discretion of the trial judge, and his ruling thereon will

not be disturbed absent an abuse of that discretion. /nter-

national City Bank & Trust Co. v. Morgan Walton Proper-

ties, Inc., 675 F.2d 666, 669 (5th Cir. 1982); Crown Colony

A-46

Distributors, Inc. v. United States Fire Insurance Co., 510

F.2d 544, 545 (5th Cir. 1975). In the instant case, although

the comments by Receiver’s counsel may have been unneces-

sary and even unfortunate, we cannot say that the district

judge abused his discretion in denying a motion for a

mistrial. These comments occurred in two isolated and

brief instances during the course of an extremely long and

otherwise fairly litigated trial. From our review of the

record, we cannot say that the “ ‘conduct of [Receiver’s]

counsel was such to impair gravely the calm and dispas-

sionate consideration of the case by the jury....’” Crown

Colony, 510 F.2d at 545. We are convinced that the verdict

in this case is rationally based on the convincing evidence

at trial and is not the product of an impassioned jury

swayed by a few passing references made by Receiver’s

counsel.

AFFIRMED.

A-47

APPENDIX B

In THE

United States District Court

For Tue NortHern District or Texas

DALLAS Division

Davin C. Meyers, Ft al.,

Plaintiffs

v.

Crviz Action No. CA-3-5678-D

Suearn Moopy, Jr., Et al.,

Defendants

AND

Bernarp Haines, Et al.,

Plaintiff s

Vv. \Crvit Action No. CA-3-7625-D

SHEARN Moopy, Jr., Et al.,

Defendants

AND

CuHar.es H. Payne,

Receiver | CONSOLIDATED

Vv.

SHEARN Moopy, Jr.

MEMORANDUM OPINION AND ORDER

The Defendant’s Motion for Judgment on the Verdict; in

the Alternative, for Judgment N.O.V.; and in the Further

Alternative, for a Partial New Trial and for Dismissal for

Failure to State a Claim Upon Which Relief Can Be

Granted came on for consideration before the court, the

Honorable Robert M. Hill, United States District Judge.

The court has considered the motion and is of the opinion

that the motion should be denied.

A-48

I. DAMAGES

Defendant Shearn Moody, Jr.’s (Moody) primary attack

upon the jury’s verdict in this case, camouflaged among

some 82 alleged grounds of error, centers on its findings of

damages. The jury found that five million dollars would

compensate Empire Life Insurance Company of America

(Empire) for damages caused by the depletion of its stock-

holders’ capital and surplus proximately caused by Moody’s

negligent mismanagement, breach of fiduciary duty and

violations of federal securities law. Court’s Charge to the

Jury (Charge), Question No. 10. It further found that

Moody should pay one million dollars in punitive damages

as a result of his intentional misconduct and gross negli-

gence in managing Empire. Charge, Question No. 12. The

court instructed the jury that, in determining Empire’s

damages, it should only consider “the amount of impair-

ment at the time of Receivership, if any, to the corporation

consisting of the loss of capital and paid in surplus.”

Charge at 21. Moody essentially contends that the court

did not instruct the jury as to the correct measure of

damages, and that the plaintiff, Empire’s receiver (Re-

ceiver), did not present sufficient evidence to support an

award of damages.

Waiver

At the outset, the court must determine whether Moody

has waived his objections to the jury’s verdict on damages

for purposes of his motions for judgment no.v. and for a

partial new trial. F.R.Civ.P. 50(a) requires that a motion

for a directed verdict state the specific grounds therefor.

Further, a party may not assert a ground in a motion for

judgment notwithstanding the verdict that was not included

in the motion for a directed verdict. 9 Wright & Miller,

Federal Practice and Procedure, § 2537 at 598; Sulmeyer

v. Coca Cola Co., 515 F.2d 835, 846 (5th Cir. 1975). Moody

A-49

did assert in his motion for a directed verdict that Empire’s

insolvency is not th: proper measure of its damages.

(T. 1416). He did not, however, specifically contend that

measurement of Empire’s damages as of the time of the

Alabama receivership adjudication was incorrect. Further-

more, he did not specifically contend as the ground for

Receiver’s failure to introduce sufficient evidence of dam-

ages the reliance of its experts witness upon an incorrect

accounting method. (T. 1414-16). Therefore, he may not

allege these grounds in a motion for judgment notwith-

standing the verdict.

Federal Rules of Civil Procedure 46 and 51 govern

whether Moody may present in a motion for new trial his

objections to the jury’s verdict on damages. These rules

require that a party specifically and timely object to the

introduction of evidence or to an instruction to the jury,

and give specific grounds therefor, in order to preserve

such objection for a motion for new trial. See Patton v.

Archer, No. 77-1381 (5th Cir. Mar. 7, 1979); Jamison Co.

v. Westvaco Corp., 526 F.2d 922, (5th Cir. 1976); 9 Wright

& Miller, Federal Practice and Procedure, § 2472. Since

Moody did not object at trial to Receiver’s expert testimony

on damages on the specific ground that it was based upon

improper accounting principles, he has waived any objec-

tion to the admission of such testimony. Moody did object

to the submission to the jury of question 10 concerning

damages on the ground that insufficient evidence supported

its submission. (T. 2399). He also objected to the measure

of damages set forth in question 10 on the ground that

damages should be measured as of the time of each wrong-

ful act alleged. (T. 2403). Accordingly, Moody may assert

as grounds for new trial that plaintiff did not present evi-

dence of sufficient weight to support the jury’s finding of

damages and that question 10 stated an improper measure

of damages.

A-50

Measure of Damages

Receiver is entitled to recover on behalf of Empire com-

pensation for losses proximately caused to the company by

Moody’s negligence and breach of fiduciary duty. See

Home Telephone Co. v. Darley, 355 F.Supp. 992 (N.D. Miss.

1973), aff’d per curiam, 489 F.2d 1403 (5th Cir. 1974);

Hux v. Butler, 339 F.2d 696, 701 (6th Cir. 1964); 19 C.J.S.

Corporations § 833(d). Receiver may also recover on behalf

of Empire damages proximately caused to it by Moody’s

violations of Rule 10b-5. Moody v. Bache & Co., Inc., 570

F.2d 523, 527 (5th Cir. 1978) ; Herpich v. Wallace, 430 F.2d

792, 810 (5th Cir. 1970). This much is clear. What is not

clear is how to measure the loss to Empire. Neither Texas

law nor federal securities law provides a clear guideline,

so this court must fashion a measure of damages which

comports with the sparce precedent available and which is

just. See Spiegel v. Beacon Participations, 297 Mass. 398,

8 N.E.2d 895, 909 (1937). There being no indication other-

wise, the court presumes that the measure of damages for

Receiver’s common law and securities law claims does not

differ under state and federal law. Cf. Pappas v. Moss.

303 F.Supp. 1257, 1281 (D. N.J. 1969).

In Commonwealth of Massachusetts v. Davis, 168 S.W.2d

216, 233 (Tex. 1942), the Texas Supreme Court indicated

that corporate loss may be measured in terms of loss of

value or physical damage to corporate assets, restraints

upon the marketability of corporate assets, and inter-

ference with the development of corporate properties. The

Supreme Judicial Court of Massachusetts in Spiegel v.

Beacon Participations 297 Mass. 398, 8 N.E.2d 895, 909-911

(1937) assessed the damage caused to a corporation by an

improper series of transactions according to loss in value

of corporate assets. In Spiegel, certain directors of

defendant Beacon Participations, an investment company,

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authorized the investment of corporate funds in a joint

venture with an investment company owned by two

directors of Beacon Participations. The trial court found

the responsible directors of Beacon Participations “grossly

negligent” and in breach of their fiduciary duty to the com-

pany in authorizing this transaction because they did not

require a capital investment or other security from the

company’s joint venturer and thus put Beacon Participa-

tions’ capital at risk for the benefit of the joint venturer

and not for the benefit of the company. The venture

suffered losses in excess of $60,000. Since the responsible

directors’ wrongdoing consisted in the very entering of the

joint venture and not in the particular transactions con-

ducted by the venture, the court approved a rule of damages

assessing the responsible directors for one-half the losses

sustained by the joint venture as a result of transactions

entered into while they remained directors. The court ruled

that damages should be measured “according to general

principles of gain and loss” as of the date of the final

hearing to determine damages. Spiegel, supra, 8 N.E.2d at

911. Thus, the value of the stock remaining in the hands of

the joint venture, sums realized from the sale of such stock,

and contributions by the joint venturer were to be taken

into account in calculating losses.

In Insuranshares Corp. v. Northern Fiscal Corp., 42

F.Supp. 126 (KE. D. Pa. 1941), a federal district court also

analyzed damages caused to a corporation by a wrongful

series of transactions according to loss in value of cor-

porate assets. In that case the controlling shareholders

of an investment corporation were found liable for turning

over control of the corporation to persons who looted the

assets of the company through a series of fraudulent trans-

actions and who, in turn, transferred control of the cor-

poration to another person, who looted the corporation

further. The /nsuranshares court interpreted the “ortho-

A-52

dox rule” of damages formulated in Spiegel to be the

“difference in dollars between the assets of the plaintiff

before the acts complained of and those found remaining

at the time of suit” and applied a variant of that rule.

The court varied from the Spiegel measure of damages in

assessing damages as of the time of suit according to the

loss in value of corporate assets caused by the defendant’s

wrongdoing less the increase in value of corporate assets

also attributable to defendant’s wrongdoing.

The measure of damages instructed to the jury in this

ease logically follows the formulations in Spiegel and

Insuranshares. “The amount of impairment at the time of

Receivership, if any, to the corporation consisting of the

loss of capital and paid in surplus” proximately caused

by the acquisition program negligently and fraudulently

engineered by Moody takes into consideration the losses

and gains in value of Empire’s assets caused by Moody’s

wrongdoing and the increases and decreases in corporate

liabilities caused by his wrongdoing. It measures loss

according to general principles of gain and loss.

The measure of damages instructed to the jury differs

from that employed in Spiegel and Insuranshares in that

gains and losses are valued as of the time of the receiver-

ship adjudication. Spiegel applied a true rescissory

measure of damages in determining loss as of the time of

the hearing to determine loss. See Note, The Assessment

of Damages in Rule 10b-5 Cases, 26 Stan. L.Rev. 371 (1974).

As did this court, the Jnsuranshares court applied a rescis-

sory measure of damages, but chose a post transaction

date earlier than the date of the hearing to determine

damages on which to measure damages. It measured

damages as of the date of suit.

Moody contends that damages should be measured as of

the time of each transaction constituting the acquisition

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program. He thus argues for an out-of-pocket measure of

damages. See Note, 26 Stan. L.Rev. 371 (1974). The Fifth

Circuit recently applied an out-of-pocket measure of dam-

ages in a shareholder’s derivative suit brought under

Florida law to challenge a corporation’s purchase of its

own shares at an inflated price. Schilling v. Belcher, 582

F.2d 995, 1005 (5th Cir. 1978). But see Dupuy v. Dupuy, 551

F.2d 1005, 1024-25 (5th Cir. 1977); Bird v. Ferry, 497 F.2d

112 (5th Cir. 1974); Colvin v. Dempsey-Tegeler & Co.

477 F.2d 1283, 1288 n. 7 (5th Cir. 1973) (out-of-pocket

measure of damages not applied). Although an out-of-

pocket measure of damages may be proper in a suit chal-

lenging a market transaction entered into by a defendant

with numerous sellers or buyers, plaintiffs in Receiver’s

position would be deterred from bringing suit if required

to go to the expense of segregating a series of transactions

over a number of years for purposes of calculating losses.

Cf. Daniels Towing Services, Inc. v. Nat Harrison Asso-

ciates, Inc., 432 F.2d 103, 106 (5th Cir. 1970); Hunter v.

Shell Oil Co., 198 F.2d 485, 490 (5th Cir. 1952). Further-

more, an expert witness, James Lewis George (George),

testified that Empire’s loss was caused by the cumulative

impact of the transactions constituting the acquisition pro-

gram, (T. 597). A measure of Empire’s loss which aggre-

gated the separate impace of each transaction would there-

fore not be consistent with the cause of Empire’s loss.

A commentator has suggested that courts sometimes

measure damages as of a post transaction date other than

the date of the hearing to determine damages because such

a date is the earliest on which a precise valuation of loss

can be made. Note, 26 Stanford L. Rev. 371, 375 (1974)

Citing Niles v. New York Central, 68 N.E. 142 (N.Y. 1903),

Moody contends in his memorandum of law (p. 24) — in

the alternative, it appears, to his argument for an out-of-

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pocket measure of damages — that the best date for valuing

Empire’s loss, if any, is some future date when Empire’s

assets are liquidated. Clearly, Receiver need not await

Empire’s liquidation to receive compensation for the loss

incurred by Empire as a result of Moody’s wrongdoing.

See Spiegel, supra, 8 N.F.2d at 911. The date instructed

to the jury on which to measure Empire’s loss — the date

of Receivership — is a proper date on which to assess dam-

ages in this case for two reasons. One, George testified

that Empire’s damages became measurable “at such time as

the Insurance Commissioner stepped in and said the valua-

tion of the Trust Interest is not an amount any where near

the amount you are carrying it,” (T. 598) and receivership

adjudication shortly followed the devaluation of Moody’s

trust interest. Two, valuation of Empire as of the date of

Receivership permitted the jury to take into account the

impact of an adjudication of insolvency on Empire’s value.

See discussion at p. 11, infra.

In addition to being proper, the date instructed to the

jury on which to measure Empire’s damages is fair to

Moody. One criticism of the rescissory measure of dam-

ages is that it permits market forces for which the defen-

dant is not responsible to affect the amount of damages

awarded. See Note supra. The Second Circuit justified

a recissory measure of damages — the difference between

the purchase price of certain securities and the sale price

of the securities — on the ground that the buyer would not

have purchased the securities at any price but for the mis-

representations of the defendant, his stockbroker. Chasins

v. Smith, Barney & Co., 438 F.2d 1167, 1173 (2d Cir. 1970) ;

see Dupuy, supra, 551 F.2d at 1025; cf. Colvin, supra, 477

F.2d at 1288 n.7. Since the evidence in this case shows

that Empire could not have embarked upon the acquisition

program but for the inflated trust interest (e.g., T. 542-43),

A-55

the court is justified on the ground adduced in Chasins in

applying a rescissory measure of damages.

Under the circumstances of this case, furthermore,

measurement of the loss caused to Empire by the acquisi-

tion program at a date later than the acquisitions them-

selves probably benefits Moody. Measurement of Empire’s

value following the acquisition program gives the “down-

stream investments” acquired by Empire during its acquisi-

tion program, see discussion at p. 8, infra, a chance to pro-

duce income and thereby mitigate Empire’s loss. On the

other hand, since it would become difficult to assess the

damages attributable to Moody’s actions after Empire had

fallen into the hands of the Receiver, cf. Insuranshares,

supra, 42 F. Supp. at 131, measurement of damages as of

the date of Receivership avoids the possibility that Moody

will pay for any losses caused by the Receiver. The court

notes, finally, that Moody has not offered any evidence

which would show that measurement of Empire’s damages

as of a given date would result in significantly lower dam-

ages than that achieved by measuring Empire’s damages as

of the date of Receivership. For the reasons set forth

above, the court is of the opinion that it instructed a fair

and proper measure of damages to the jury.

Proof of Injury and Damages

Receiver chiefly relies upon George’s expert testimony

to support the jury’s award of damages. George testified

that the increase in valuation of the Moody trust interest

from approximately $5,800,000 to approximately $14,000,000

enabled Empire to embark upon an aggressive program of

mergers with insurance companies, purchases of controlling

interests in insurance companies, and purchases of blocks

of insurance in force all of which “created huge drains on

surplus” (T. 542) and ultimately caused damages to Empire

measurable in 1972 in a range between $7,000,000 and

A-56

$10,000,000. (T 601-603). George explained that the acqui-

sition program created drains on surplus because the assets

acquired generated income “downstream.” Hence, they were

valued according to statutory accounting principles at an

amount significantly below their costs. George labelled this

difference between cost and statutory value as “unrealized

ivestment losses” and calculated these to be $9,207,242 in

his chart analyzing changes in stockholder’s equity in

Empire between 1964 and 1972 (Px. 19). The capital struc-

ture of Empire could withstand this drain or surplus only

so long as the trust interest remained valued at $14,000,000.

When it was devalued by the Alabama Commissioner of

Insurance, Empire instantly became insolvent. Another

expert, Hilton Painter, described the effect of the acquisi-

tion policy as “looting” the “good hard assets” of Empire

(T. 137) because the acquisitions ultimately were supported

by Empire’s liquid assets rather than by the trust interest.

Two other experts, Frank I. Schmidt and Ben Larson, con-

curred that the acquisition program caused Empire to

become insolvent. (T. 319, 1279). Larson also opined that

Empire made “bad acquisitions.” (T. 1278-79). George’s

calculation that Empire incurred realized investment losses

of $2,964,591 between 1964 and 1972 (Px. 19) supports this

assessment.

George arrived at his range of damages by taking the

stockholders’ deficit of $7,000,000 generated by his analysis

of changes in stockholders’ equity from 1964-1972 as the

low point of the range and by taking the $14,000,000 deficit

“reflected in Best Reports concerning the ultimate bulk

reinsurance” by Protective Life Insurance Company of

Aiabama (Protective) of Empire (T. 602), less a $4,000,000

value for the trust interest, as the high point. Protective,

the highest bidder for Empire’s assets and liabilities’ after

1. The assets for which Protective bid did not include a fund of

$2,000,000 retained by Receiver to pay creditors other than policy

holders (T. 1177).

A-57

Empire entered receivership, required that a $13,000,000

moratorium be imposed for ten years on the cash values of

insurance policies issued by Empire (T. 1180-82, 1244), evi-

dence that, in real business terms as well as according to

statutory accounting principles, Empire’s liabilities signi-

ficantly exceeded its assets in 1972.

Moody attacks George’s testimony on the ground that,

if he had employed generally accepted accounting prin-

ciples rather than statutory accounting principles, he would

have valued the “downstream” assets that Empire acquired

through its acquisition program much higher, and may have

determined that Empire was in fact solvent at the time it

entered receivership. Moody alleges that George relied

solely upon statutory accounting principles in forming his

opinion as to the damage caused by the acquisition program

to Empire and therefore his testimony does not sufficiently

prove that Empire suffered actual damages.

George testified that statutory accounting principles are

the rules that each state has evolved in regulating insur-

ance companies, whereas generally accepted accounting

principles have been established for stock life insurance

companies by the accounting profession (T. 531). He also

testified that there are material differences between the

two methods of accounting (T. 531). Some evidence in the

record, in addition to cases cited by Moody, specify cer-

tain of these material differences, DX 42 n.l.; see, e.g.,

Norte ¢ Co. Huffines, 504 F.Supp. 1096, 1103 (S.D. N.Y.

1968), aff’d in part, rev’d in part and remanded, 416 F.2d

1189 (2d Cir. 1969); Franklin Life Insurance Co. v. U.S.,

399 F.2d 757 (7th Cir. 1968), but Moody nowhere has pre-

sented evidence cognizable by this court of a comprehensive

valuation of Empire’s assets and liabilities at the time

Empire entered receivership according to generally

accepted accounting principles. Rather, it has pointed to

—_——

A-58

the values of Empire’s “non-admitted assets” as of Decem-

ber 31, 1970, included in Empire’s Annual Statement and

the NAIC Zone Examination Report of Empire (PX 80,

Ex.B, p. 54; DX 37, p.14). Moody also relies upon testi-

mony that a block of whole life insurance has a rule of

thumb value for business purposes of one-and-one-half

times the annual premium income of the block of insurance

and no value according to statutory accounting principles

(T. 989-990, 1339-1340). He then calculates the rule of

thumb value of Empire’s insurance in force in 1970 (DX

37, p.4) to underscore the inadequacy of George’s determi-

nation of damages.

Moody’s assorted examples of assets undervalued and

non-valued under various theories do not persuade the

court that Receiver’s proof of damages is inadequate to

support the jury’s award. In determining whether proof

of damages is “speculative,” a court must first decide

whether defendant’s wrongdoing proximately caused injury

in fact to the plaintiff. Aldon Industries, Inc. v. Don Myers

é Associates, Inc., 517 F.2d 188, 191 (5th Cir. 1975). If so,

plaintiff need not prove the extent of damages with mathe-

matical precision. Where the wrong is of such a nature as

to preclude exact ascertainment of the amount of damages,

the court need only determine, second, whether the jury

could have made a just and reasonable inference of the

extent of damages from the evidence. Kestenbaum v.

Falstaff Brewing Corp., 514 F.2d 690, 698 (5th Cir. 1975) ;

Daniels Towing Service, swpra, 432 F.2d at 106.

In accordance with this framework, the court makes the

primary determination that the evidence supports a finding

that Moody’s common law and federal securities law viola-

tions proximately caused economic injury in fact to Empire.

The expert testimony by George and others cited above

sufficiently establishes a causal link between the fraudulent

A-59

valuation of the trust interest, the acquisition program,

and injury in fact to Empire. Moody’s contention that

Receiver did not adequately prove injury in fact fails for

several reasons.

First, Moody misreads George’s testimony. George did

not rely entirely upon statutory accounting principles to

show that Empire suffered economic loss. Rather, he relied

upon those principles to measure the extent of Empire’s

economic loss as of a particular date. The import of

George’s testimony was that Empire’s rapid acquisition of

downstream assets based upon a fraudulently created sur-

plus destined its financial ruin, measured by any accounting

method, upon discovery of the fraud and the proper valua-

tion of its surplus. Thus, he testified that the acquisition

program “ultimately put Empire Life Insurance Company

into a category that would classify it as insolvent, both

statutorily and otherwise.” (T. 544).

Second, Moody does not consider the impact of receiver-

ship upon the value of Empire’s assets. The evidence

amply supports a jury finding that Moody should have

foreseen at the outset of the acquisition program that

Empire’s statutory insolvency and entry into receivership

would ensue upon the devaluation of its fraudulently

inflated trust interest. Therefore, the jury could properly

have measured Empire’s assets as of the date it entered

receivership according to their value under the circum-

stances of receivership and not according to their value on

the open market. Protective’s requirement of a moratorium

shows that the value of Empire’s assets under the circum-

stances of receivership were much less than the amount of

its liabilities and that Empire had suffered actual economic

loss.

Third, even ignoring the impact of receivership, Moody’s

alternative valuations of Empire’s assets do not persuade

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the court that Receiver has not sufficiently proven injury

in fact. This court will not order a new trial on the highly

speculative basis that, if required to value Empire’s assets

and liabilities according to methods other than statutory

accounting principles, Receiver may be unable to prove

injury in fact. The record does not indicate that the alter-

native methods of valuation proposed by Moody are

superior to statutory accounting principles and does not

contain a comprehensive valuation of Empire’s assets and

liabilities according to such alternative method.

Having determined that Receiver sufficiently proved

injury in fact to Empire, the court turns now to the question

of whether he adequately proved the extent of Empire’s

damages. CGeorge’s testimony reveals that the injury to

Empire caused by the acquisition program is not suscep-

tible of exact determination. George testified to the over-

all detrimental impact of the acquisition program on

Empire which became “measurable” only when the

trust interest was devalued. (T. 596-98). Since Empire’s

damages may not be precisely determined, evidence

supporting a reasonable approximation will suffice. See

Kestenbaum, supra, )14 F.2d at 698. Furthermore, since

Moody had the opportunity to present to the jury alterna-

tive methods of valuing Empire’s assets, it cannot now

complain that the measure of Empire’s damages was not

more precise. See Fattore Co. v. Metronolitan Sewerage

Comm’n., 505 F.2d 1, 6 (7+h Cir. 1974).

The court is of the opinion that the Receiver presented

evidence from which the jury could draw a just and reason-

able inference of the extent of damages suffered by

Empire. George testified that insurance companies are “run

and managed” and “bought and sold” according to sta-

tutory accounting principles. (T. 531-32). In estimating a

range of damages ($7,000,000 — $10,000,000) caused to

A-61

Empire by Moody’s wrongdoing premised upon statutory

accounting principles, George presented highly probative

evidence to the jury of the extent of damages suffered by

Empire. The $13,000,000 ten year moratorium imposed on

the cash values of insurance policies issued by Empire

was additional data on which the jury could base its

damage award. The jury discounted George’s estimate by

$2,000,000, thus compensating for inaccuracies in his

method of assessment which may have inflated the extent

of Empire’s damages. See Locklin v. Day-Glo Color Corp.,

429 F.2d 873, 884 (7th Cir. 1970). The Seventh Circuit, in

Fattore, supra, permitted an award of damages to stand,

even though premised upon a clearly incorrect method of

computing damage, because the method employed was

probative of the extent of damages and the trial judge

rendered a “jury type verdict” by reducing the damage

figure generated by the incorrect method. It by no

means being settled that statutory accounting principles

incorrectly measure the damages suffered by an insurance

company, this court’s decision to let the jury’s verdict stand

is less difficult than the Fattore court’s decision.

Since Receiver proved that Moody’s wrongdoing proxi-

mately caused injury in fact to Empire and adduced

evidence upon which the jury could reasonably base its

award of $5,000,000 compensatory damages, the court will

not set aside the jury’s finding of damages.

II. 10b-5 CLAIM

Moody makes a blunderbuss attack on the jury’s finding

that he violated Rule 10b-5. The jury found that “the

increase in the value of the trust interest from 5.8 million

to 14.2 million dollars together with the acquisition

program was a devise, scheme or artifice to defraud by

Moody in connection with the purchase and sale of securi-

A-62

ties,” Charge, Question No. 6, and “an act, practice or

course of conduct by Moody which operated as a fraud or

deceit upon any person in connection with the purchase or

sale of securities.” Charge, Question No. 7. The jury also

found that “Moody’s failure to state that the trust interest

was intended by Moody to be non-transferable by Kmpire

was an omission to state a material fact necessary to make

his representations about the value and admissibility of the

trust interest not misleading and was omitted with the

intent to deceive or defraud in connection with the purchase

or sale of securities.” Charge, Question No. 8. It found,

in response to Question No. 9, that these violations of Rule

10b-5(1), (2), and (3) were a proximate cause of damages

to Empire’s stockholders “capital and surplus”, and, in

response to Question 16, that such damages amounted to

$5,000,000. Moody contends that these findings, in light of

the instructions given to the jury, do not state a violation

of Rule 10b-5. The court will examine seriatim the elements

of a 10b-5 action to determine whether the jury’s findings

in light of the court’s instructions support the entry of

judgment on Receiver’s 10b-5 claim.

The basic elements of a 10b-5 action are: (1) conduct by

the defendant proscribed by the rule; (2) a purchase or

sale of securities by the plaintiff in connection with such

proscribed conduct, and (3) resultant damages to the plain-

tiff. Woodward v. Metro Bank of Dallas, 522 F.2d 84, 93

(5th Cir. 1975).

Proscribed Conduct

Recent Supreme Court decisions have refined the sort of

conduct proscribed by Rule 10b-5. Only conduct which

ean be fairly viewed as manipulative or deceptive is

covered by Rule 10b-5. Santa Fe Industries, Inc. v. Green,

430 U.S. 462, 473-74 (1977). A person who engages in

A-63

deception in connection with the purchase or sale of a

security does not violate Rule 10b-5 unless he intends to

deceive the buyer or seller of the security. Ernst € Ernst v.

Hochfelder, 425 U.S. 185 (1976). Thus, a person who

imparts false information to a buyer or seller of a security

violates Rule 10b-5 if he knows of the falsity of the infor-

mation or acts in reckless disregard of its falsity. Furst

Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th

Cir. 1977).

Although Questions 6 and 7 to the jury differ in wording

in accordance with the differing language of subsection (1)

and (3) of Rule 10b-5, they essentially inquire whether

Moody has engaged in deceptive conduct. See Santa Fe,

supra, 430 U.S. at 473-74; 1 A. Bromberg, Securities Law:

Fraud, §2.6(1) at 49 (1977). The evidence more than

adequately demonstrates that Moody employed deceit to

increase the value of the trust interest from 5.8 million

dollars to 14.2 million dollars. Empire’s Annual Report

of 1965, DX 7, first announced to Empire’s shareholders

a valuation of $14,213,440 for Moody’s trust interest.

Empire’s annual report for the previous year had stated

a valuation of $5,813,440 for the trust interest. DX 9.

The 1965 annual report stated that “[vjaluation of the

trust was calculated by the national auditing firm of Ernst

& Ernst and actuaries including Mr. Lloyd K. Friedman,

F.S.A., consulting actuary of Houston.” DX 7, at p. 7.

Ernst and Ernst, however, had not “calculated” the

$14,213,440 value for the trust interest. Rather, it had

approved the method employed by Lloyd K. Friedman

(Friedman) to calculate the value of the two-fifth’s of

Moody’s trust interest assigned to Empire at $5,813,440.

DX 16, PX 35. The data underlying the trust valuation

came from Moody and Friedman, not from Ernst & Ernst,

in contradiction to the clear import of the statement that

A-64

Ernst & Ernst calculated the value of the trust interest.

Furthermore Friedman employed a different method to

calculate the value of Moody’s trust interest at $36,084,000.

DX 74. Under all the cireumstances the jury could readily

conclude that Moody deceived Empire’s shareholders into

believing that the increased value of the trust interest

formed a solid foundation to suppor’ the acquisition pro-

gram, when in reality the $14,213,440 value and shaky

underpinnings.

The wording of Questions 6 and 7 implies an inquiry into

Moody’s intent to defraud Empire’s shareholders. See

Ernst & Ernst, swpra. In connection with Question No. 6,

the court defined “a device, scheme or artifice to defraud”

as embracing an intent to deceive. Charge at 20. Since the

evidence supports a finding that Moody intended to deceive

Empire’s shareholders as to the basis for the trust valua-

tion, the jury’s answers to Question No. 6 and 7 establish

the element of “scienter” in Receiver’s 10b-5 claim.

The court correctly defined “materiality” for .

of Question No.-8, Charge at 20. TSC Indusirw.

Northway, Inc., 462 U.S. 438, 449 (1976); Smallwovuw v.

Pearl Brewing Co., 489 F.2d 579, 603-04 (5th Cir. 1974).

Under the evidence, the jury could reasonably find that

Moody’s omission to state that the trust interest was non-

transferable was material and made with intent to deceive

Empire’s shareholders as to the value of the trust interest.

Moody contends that even if he deceived Empire’s share-

holders when he increased the trust valuation, he did not

deceive Empire, for whom Receiver seeks recovery. The

jury’s finding that Moody dominated the business policy of

Empire until at least March 21, 1970, by virtue of his power

to nominate and elect a majority of the Board of Directors

of Empire forecloses a finding that Moody deceived the

Board of Directors in order to effectuate the acquisition

A-65

program. Charge, Question 15; See Superintendent of

Insurance v. Banker’s Life and Casualty Co., 404 US. 6,

7 n. 1(1971). Since a majority of the board of directors

carries on the business of a corporation and its knowledge

is imputed to the corporation adherence to corporate

formalism requires the conclusion that if a majority of

board of directors of a corporation is not deceived the

corporation is not deceived. The Fifth Circuit, however,

has rejected this position as incompatible with the remedial

purposes of Rule 10b-5. Shell v. Hensley, 430 F.2d 819,

826-27 (5th Cir. 1970) ; Rekant v. Desser, 425 F.2d 872, 878

n. 14 (1970). Shell did not articulate the “deception”

involved when a majority of the board of directors of a

plaintiff corporation authorizes a securities transaction

with knowledge of the fraud connected with the transaction.

The court perhaps relied instead upon the “new fraud”

approach rejected by the Supreme Court in Santa Fe. See

Schoenbaum v. Firstbrook. 405 F.2d 215 (2d Cir. 1968),

cert. denied, 395 U.S. 906 (1969) ; Note, Suits for Breach of

Fiduciary Duty Under Rule 10b-5 After Santa Fe Indus-

tries, Inc. v. Green, 91 Harv. L. Rev. 1874, 1882 n. 49 (1978).

Although Santa Fe does not overrule Shell, it at least calls

for an articulation of the deception suffered by a corpora-

tion when a majority of its directors participate in the

deception. See Goldberg v. Meridor, 567 F.2d 209, 217-18

(2d Cir. 1977), cert. denied, 435 U.S. 956 (1978). The Third

Circuit, prior to Santa Fe, theorized that when a majority

of the board of directors participates in a deception pros-

cribed by Rule 10b-5, the shareholders become the corporate

entity for purposes of being deceived. Pappas v. Moss, 393

F.2d 865, 869 (3d Cir. 1968) ; see Goldberg, 567 F.2d at 217

(reaffirming theory of constructive deception); Note, 91

Harv. L. Rev. 1874, 1883, (1978) (principles of agency law

and nature of a shareholders derivative suit are theoretical

bases for “constructive deception” of a corporation through

A-66

minority shareholders. The Fifth Circuit appears to have

adopted this theory of “constructive deception.” In Miller

v. San Sebastian Gold Mines, Inc., 540 F.2d 807 (5th Cir.

1976), it held that a corporation could bring a 10b-5 action

even though all the directors and shareholders of the cor-

poration participated in the fraud. The persons deceived,

according to the court, were the future shareholders of the

corporation, who were the intended victims of the fraud.

This court instructed the jury that Empire’s shareholders

were among the persons whom Moody may have deceived in

inflating the trust interest, Charge at 20-21, and related to

the jury Receiver’s contention that Moody deceived

Empire’s shareholders. Charge at 18. The jury’s answers

to Question 6, 7, and 8, therefore, can reasonably be con-

strued as findings that Moody deceived Empire’s minority

shareholders. Under the theory of constructive deception,

the jury’s findings that Moody deceived minority share-

holders of Empire* constituted findings that Moody so

deceived Empire.

Purchase or Sale of Securities in Connection

With Proscribed Conduct

The second basic element of a 10b-5 action seeks to estab-

lish a causal link between the conduct prescribed by rule

10b-5 — the intentional deception— and the purchase or

sale of a security. In this case that causal link is between

Moody’s deceptive practices concerning the value of the

trust interest and the acquisition program. The acquisition

program involved three types of transactions: mergers;

outright purchases of shares in other corporations; and

purchases of blocks of life insurance policies through bulk

2. Although Moody originally owned 100% of Empire’s stock (T.

579, DX 43), various mergers created minority shareholders in

Empire prior to the deceptions practiced in the 1965 annual report

in connection with the increase in value of Moody’s trust interest.

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reinsurance agreements. (T. 575, 578, 785-88). Each time

Empire merged with a corporation it purchased and sold

securities. See Smallwood vy. Pearl Brewing Co., 489 F.2d

579, 590 (Sth Cir. 1974). Empire’s outright purchases of

shares in other corporations were clearly the purchases of

securities. Empire’s purchases of blocks of life insurance

were not, however, the purchases of securities. The signi-

ficance of this fact will be explored later. For purposes of

this discussion, it need only be stated that the acquisition

program involved purchases and sales of securities.

The Fifth Circuit has broken down the proof of a causal

link between the proscribed conduct and the purchase or

sale of a security into the proof of two separate but over-

lapping elements: (1) actual reliance by the plaintiff upon

the defendant’s deceptive practices in deciding whether to

purchase of sell a security; and (2) deceptive practices by

defendant “in connection with” plaintiff’s purchase or sale

of securities. See Rifkin v. Crow, 574 F.2d 256 (5th Cir.

1978) ; Moody, supra; First Virginia Bankshares v. Benson,

559 F.2d 1307 (Sth Cir. 1977); Dupuy v. Dupuy, 551 F.2d

1005 (5th Cir. 1977). The existence of a separate reliance

element raises a question whether Receiver may recover

judgment on his 10b-5 claim if the jury did not expressly

find that Empire’s shareholders relied upon Moody’s decep-

tions concerning the value of the trust interest in assessing

the propriety of the acquisition program. It is presumed

that Empire’s shareholders relied upon Moody’s omission

concerning the transferability of the trust interest. See

Rifkin, swpra, 574 F.2d at 262. Since the court instructed

the jury that it should find “a device, scheme, or artifice to

defraud” only if the device, scheme or artifice to defraud

operated to deceive “persons who would predictably rely

thereon,” the jury’s answer to Question No. 6 conceivably

encompasses a finding of actual reliance upon Moody’s

affirmative misrepresentation concerning the value of the

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trust interest. Even assuming the jury’s answers to Ques-

tions No. 6, 7, and 8 do not include a finding of actual

reliance, however, its answer to Question No. 9 necessarily

involves a finding of actual reliance on Moody’s misrepre-

sentation. The jury could not have found that Moody’s

securities violations proximately caused damages to Empire

without finding that Empire’s shareholders actually relied

upon those violations. See Rifkin, supra, 574 F.2d at 262

(reliance requirement “simply requires there to be a causal

link between defendant’s violation and plaintiff’s harm in

order for plaintiff to recover”). Whereas a finding of

reliance does not necessitate a finding of causation, see

Moody, supra, the converse is not true. If there is evidence

to support the jury’s finding of proximate cause, the element

of reliance has been satisfied.

The jury’s proximate cause finding also obviates the need

for a separate finding that Moody’s securities violations

were “in connection with” the purchase or sale of a security.

The Fifth Cireuit may give “in connection with” a loose

causal interpretation. In First Virginia Bankshares, supra,

the court quoted the following formulation of the “in con-

nection with” requirement from List v. Fashion Park, Inc.,

340 F.2d 457 (2d Cir. 1964): “whether the plaintiff would

have been influenced to act differently than he did act if

the defendant had disclosed to him the undisclosed fact.”

559 F.2d at 1315. See Wilson v. First Houston Investment

Corp., 566 F.2d 1235, 1243 (5th Cir. 1978) (any purchase

and sale of security “too remote” to satisfy “in connection

with” requirement). But see Superintendent of Insurance,

supra, 407 U.S. at 12-13 (corporation which suffers an

injury as a result of deceptive practices “touching” its sale

of securities entitled to recover under Rule 10b-5). See

generally Note, The Pendulum Swings Farther: The “In

Connection With” Requirement and Pretrial Dismissals of

Rule 10b-5 Private Claims for Damages, 56 Texas L. Rev.

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62 (1977). One commentator construes Santa Fe, supra 430

U.S. at 474 n. 14, as requiring, in the context of 10b-5 suits

premised on “constructive deception” of shareholders, a

causal link between the deception and the challenged securi-

ties transactions. Note, 91 Harv. L. Rev. 1874 (1978). This

link is satisfied, the commentator argues, if the deception

practiced by corporate directors upon shareholders pre-

cludes a shareholder’s derivative suit to enjoin the securi-

ties transactions, regardless of whether such a suit would

succeed. See Goldberg, supra. Although the definition of

“in connection with” is in flux, one can safely assume that

it does not entail a degree of causation more rigorous than

proximate causation. Cf. First Virginia Bankshares, 559

F.2d at 1314 n.4. A priori, the “in connection with” require-

ment is met if there is evidence to support the jury’s answer

to Question No. 9.

The court is of the opinion that the jury had before it

adequate evidence upon which to base its finding of proxi-

mate causation. The jury could readily find that the decep-

tive description of the Moody trust interest in Empire’s

Annual Report of 1965 had considerable impact upon

Empire’s minority shareholders. See Rifkin, supra, 574

F.2d at 261 n. 1. It could conclude that, had shareholders

known of the shaky foundation upon which the increase in

the value of the trust interest rested, they would have taken

steps to halt the acquisition program. (T. 542-43). Since

Moody could not have implemented the acquisition program

but for the increase in value of the trust interest, share-

holders could have halted the program by publicizing the

facts surrounding the increase in value. The jury could

reasonably conclude that dessimination of these facts to

companies targeted by Empire for merger and to persons

approached for non-cash sales of controlling shares in cor-

porations would foil such transactions and lead to the

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abandonment of the whole acquisition program. The jury

could also have found that shareholders could have halted

the acquisition program through a court injunction based

on the same mismanagement and breach of fiduciary duty

claims brought by the Receiver and decided by the jury that

very day. See Goldberg, supra. There being adequate evi-

dence to support the jury’s finding that Moody’s securities

law violations proximately caused the acquisition program,

the second basic element of Receiver’s Rule 10b-5 action

has been established.

Due Diligence

The Fifth Circuit requires that a plaintiff seeking recov-

ery under Rule 10b-5 prove his “due diligence” as an ele-

ment distinct from the actual reliance requirement. Dupuy,

supra; Clement A. Evan & Co. vy. McAlpine, 434 F.2d 100

(Sth Cir. 1970). Under McAlpine, a plaintiff established his

due diligence by proving that his reliance upon defendant’s

deceptive practices was reasonable under all the circum-

stances existing at the time of the deceptive practices. 434

F.2d at 103-04. Dupuy, a decision handed down after this

case was submitted to the jury, announced a less stringent

due diligence requirement responsive to the Supreme

Court’s holding in Ernst d Ernst, supra. Under Dupuy a

plaintiff did not exercise due diligence if he intentionally

refused to investigate in disregard of a risk known to him

or so obvious that he must be taken to have been aware of it,

and so great as to make it highly probable that harm would

follow. 551 F.2d at 1020.

Moody contends in his Memorandum of Law at p. 47

that Receiver may not recover on his 10b-5 claim because

the jury did not make a finding of due diligence. The jury’s

finding in response to Question No. 14, although in the con-

text of Moody’s statute of limitations defense, would seem

to establish Empire’s due diligence under Dupwy. The jury

A-71

found that Empire’s shareholders other than Moody did not

have knowledge of facts that would have caused a reason-

ably prudent person to make inquiry which would have led

to a discovery before March 21, 1969, of the material cir-

cumstances surrounding the increase in carrying value of

the trust interest and the acquisition program. To make

this finding, the jury must have concluded that Empire’s

minority shareholders did not intentionally refuse to inves-

tigate a known or obvious risk concerning the value of the

trust interest so great as to make it highly probable that

harm would follow. Since, however, Moody had the burden

of proving the shareholders’ unreasonable delay in dis-

covering Receivers’ claims in Question No. 14, and Receiver

would have the burden of proving due diligence, the jury’s

answer to Question No. 14 may not discharge Receiver’s

duty to establish due diligence.

The jury’s failure to make a finding of due diligence,

however, does not necessitate a new trial. Moody did not

request an interrogatory or instruction to the jury con-

cerning Empire’s shareholders’ due diligence in assessing

the value of the trust interest and did not object to the

omission from the charge of the issue of due diligence.®

Under these circumstances F.R.Civ.P. 49(a) authorizes

the court to make a finding on the issue of due diligence.

Accordingly, the court finds that Empire’s minority share-

holders did not intentionally refuse to investigate a known

or obvious risk concerning the value of the trust interest

so great as to make it highly probable that harm would

follow.

3. At the time of this case, McAlpine had clearly established a due

diligence requirement. That Dupuy altered the content of the

requirement did not relieve Moody of the duty to object to the

omission of the issue from the Charge if it wished to preserve its

right to a jury determination.

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Resultant Damages to the Plaintiff

The third basic element of a 10b-5 action concerns the

causal link between the securities transactions caused by

the defendant’s proscribed conduct and the loss suffered by

the plaintiff. But see Moody, supra (under one interpreta-

tion causal link between deceptive practice and loss is

required; even though defendant’s misrepresentation

induced plaintiff to purchase a security —a discretionary

account in commodities futures contracts — defendant not

liable for losses incurred in trading of particular futures

because plaintiff consented to such trading). The jury’s

answers to Question No. 9 and 10, adequately supported by

the evidence, establish a causal link between Moody’s decep-

tive practices and Empire’s loss. In meeting the more

stringent causation requirement that is one interpretation

of Moody,* this jury finding establishes a causal link

between the acquisition program and Empire’s loss, thus

satisfying the third basic element of a 10b-5 claim.

In the previous section the court upheld the jury’s

finding of $5,000,000 compensatory damages based upon

evidence that the acquisition program caused damages

amounting to at least that much. Having found that Moody

breached common law duties owed to the corporation by

implementing the acquisition program, the jury reasonably

4. Moody, 570 F.2d at 572 n. 7 expressly denies that it is requirin

a ee more than proof of “transaction causation”: a cau

ink between the defendant’s deceptive practices and plaintiff's

securities transactions. One possible interpretation of the court’s

decision which conforms with this denial] is that, since the plaintiff

consented to the trading of those futures which resulted in his

loss, he would have entered into those transactions regardless of

whether he had “purchased” the discretionary commodities

account from the defendant. A third interpretation of Moody is

that at the time of the futures trading which caused plaintiffs’

losses defendant’s misrepresentation was no longer material. 570

F.2d at 528.

A-73

considered the loss attributable to the acquisition program

in calculating the damages recoverable on Receiver’s com-

mon law claims. It is more problematic, however, to permit

the jury’s finding of damages recoverable on Receiver’s

securities law claims to stand if premised also on the loss

to Empire caused by the acquisition program. Moody

violated the securities laws only in connection with trans-

actions in the acquisition program which were purchases

or sales of securities. He did not violate the securities laws

when Empire purchased blocks of life insurance from other

companies. If the jury considered the whole acquisition

program in determining the damages caused by Moody’s

securities law violations, it took into account losses caused

by transactions other than purchases or sales of securities.

The court must determine, first, whether the jury did con-

sider the purchases of blocks of life insurance in assessing

damages for Moody’s securities law violations and, if so,

second, whether the jury erred in considering those trans-

actions.

The court instructed the jury that the bulk insurance

transactions were not securities transactions. Charge at

20. It did not, however, instruct the jury that it was not to

take the bulk insurance transactions into account in assess-

ing damages for Moody’s securities law violations. Rather,

the court stated the Receiver’s contention in connection

with his 10b-5 claim that the acquisition program embarked

upon by Moody was the proximate cause of the ultimate

damage to Empire Charge at 18. It is doubtful that the

jury found identical damages for Moody’s breach of com-

mon law duties and for his securities law violations and

omitted consideration of the bulk insurance transactions in

assessing damages on the securities law claims. As no

evidence was introduced to show the loss to Empire caused

by the acquisition program less the bulk insurance trans-

A-74

actions, it is even more unlikely that the jury made such a

finding in response to Question No. 10.

The court is of the opinion that the jury did not err in

taking into account the bulk insurance transactions in

assessing damages for Moody’s securities law violations.

The jury could reasonably have determined that Moody

would not have engaged in the acquisition program at all

if he had been unable to enter into the securities trans-

actions forming the basis for Receiver’s 10b-5 claims. Thus

it could have found that Moody’s securities law violations

caused the entire acquisition program which caused a loss

to Empire of $5,000,000. Even if the securities law viola-

tions did not cause the bulk insurance transactions, the

jury was entitled to consider those transactions in deter-

mining damages on Receiver’s 10b-5 claims. As discussed

above, the transactions constituting the acquisition program

are inextricably bound with reference to Empire’s loss. No

one kind of transaction caused Empire’s loss. To require

proof that the securities transactions alone caused Empire’s

loss and proof of the extent of that loss would foreclose

Receiver’s 10b-5 claims. It should be Moody’s burden to

prove what amount of Empire’s loss, if any, is not attribu-

table to his violations of Rule 10b-5. See Daniels Towing

Service, supra. Since Moody presented no such evidence

in mitigation of Empire’s loss, the jury was entitled to

charge him with the loss attributable to the entire acquisi-

tion program.

For the reasons set forth above, the court is of the

opinion that the jury’s findings support the entry of judg-

ment on Receiver’s 10b-5 claims in the amount of $5,000,000.

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Ill. ESTOPPEL

Citing Bangor Punta Operations, Inc. v. Bangor and

Aroostock R.R., 417 U.S. 307 (1974), Moody contends that

Receiver is equitably estopped from bringing this suit on

behalf of Empire because the proceeds of the suit will go

to Protective under the Fourth Amendment to Treaty of

Assumption and Bulk Reinsurance (Treaty), PX 73. The

decision in Bangor Punta turned on the equitable principle

that a purchaser of all, or nearly all, of a corporation’s

shares may not sue his seller for corporate mismanage-

ment. 417 U.S. at 425. If permitted to recover from his

seller, the purchaser would obtain a windfall, assuming he

paid the fair market value of the shares, and would, in

effect, recover his purchase price from the seller. 417 U.S.

at 425-26. Finally, recovery would permit the seller to

profit from the wrongs done to others and thus would

encourage further such speculation. Jd.

Bangor Punta does not compel dismissal of this suit on

its facts or on its principles. Protective did not purchase

any shares of Empire. Rather, it acquired most of Empire’s

its assets and liabilities under a bulk reinsurance agree-

ment after Empire had been adjudicated involvent and

placed in receivership. The assets transferred to Protective

expressly did not include the causes of action sued upon in

this case. Since Protective acquired an insolvent company,

it required a moratorium on the cash values of insurance

policies issued by Empire. The proceeds of this suit will »e

received by Protective and applied to reduce the Mora-

torium Amount established in the bulk reinsurance agree-

ment. Treaty at 2. They will not be a windfall for

Protective. Protective will not thereby recover the “pur-

chase price” of Empire. Finally, it will not profit from

wrongs done to others. It flies in the face of equity for

Moody to argue that he may avuid compensating Empire

A-76

for the loss he caused it because the Receiver has chosen

to benefit the creditors of Empire with the proceeds of this

suit.

IV. McCARRAN-FERGUSON ACT

Moody contends that the McCarran-Ferguson Act, 15

U.S.C. §1012(b) forbids Receiver’s 10b-5 claims because

they involve the construction of an Act of Congress that

would “invalidate, impair or supercede” Alabama law

regulating the accounting of insurance companies and hence

the “business of insurance.” Even assuming that the

Alabama law which regulates the accounting of insurance

companies concerns the “business of insurance”’ because it

is designed to protect the security of policyholders, see

SEC vy. National Securities, Inc., 393 U.S. 453, 461-62

(1969), Receiver’s suit under the Securities Exchange Act

of 1934 does not “invalidate, impair, or supercede” such

law. In National Securities, supra, the Supreme Court held

that the state law under which an insurance commissioner

approved a merger between two insurance companies was

not impaired by a SEC action to enjoin the merger.

According to the Court, the insurance commissioner viewed

the merger from the standpoint of its impact on policy-

holders and the SEC sought to protect the shareholders of

the companies from misrepresentations made in connection

with the merger. Since the Court had determined that

shareholder protection did not involve the business of

insurance, it concluded that the SEC’s suit would not impair

the law under which the insurance commissioner approved

the merger, even though, if successful, it would undo the

merger.

In this case, the Receiver’s suit seeks recovery for losses

caused by securities transactions entered into as a result

of Moody’s deceptive practices in connection with the valua-

tion of the trust interest. Empire’s purchases of securities

A-77

were not the “business of insurance” because they did not

directly involve the relationship between the insurance com-

pany and its policyholders. See Group Life & Health

Insurance Co. v. Royal Drug Co., 47 U.S.L.W. 4203

(February 27, 1979) ; National Securities, supra. Unlike the

facts of National Securities, recovery by Receiver on his

10b-5 claim would not even have required that the Alabama

Insurance Commissioner revise the value at which Empire

holds Moody’s trust interest. Federal securities law merely

required full disclosure of the facts surrounding the valua-

tion of the trust interest for the benefit of the corporation’s

investment decisions. It did not impair the Alabama

Insurance Commissioner’s valuation of Empire’s assets in

accordance with statutory accounting principles for the

benefit of Empire’s policyholders. As in National Securt-

ties, supra, 393 U.S. at 463, there was no conflict.

V. OTHER GROUNDS OF ERROR

Several grounds of error asserted by Moody have

already been considered by the court and do not require

reconsideration. The remaining grounds can be quickly

disposed of.

The court is of the opinion that sufficient evidence

supports the jury’s findings in response to Questions No.

14-17. The evidence also adequately demonstrates Moody’s

responsibility for the liability producing acts found by the

jury. The forms of the interrogatories submitted to the

jury are not confusing or misleading. The jury did not

award punitive damages for Moody’s securities law viola-

tions. Rather, its award of $1,000,000 punitive damages in

response to Question No. 12 is tied to its finding of Moody’s

breach of common law duties in Question No. 3. The court

did not submit a damage issue to the jury with respect to

Question No. 4 because the damages surfered by Empire

A-78

as a result of Moody’s self-dealing did not present an issue

of fact. The evidence shows that, as a result of Moody’s

self-dealing, Empire transferred on July 1, 1971, over

$319,000 to W. C. Moody Bankers (PX 70) and received

nothing in return. All other grounds of error raised by

Moody are overruled.

VI. CONCLUSION

In accordance with the jury’s verdict the court shall

enter judgment on Receiver’s self-dealing claim in the

amount of $319,000. It shall also enter judgment on his

mismanagement and breach of fiduciary duty claims and on

his 10b-5 claims in the amount of $5,000,000. Further, the

court shall enter judgment for punitive damages on

Receiver’s mismanagement and breach of fiduciary duty

claims in the amount of $1,000,000. Under Texas law, the

court is required to award pre-judgment interest as dam-

ages on Receiver’s common law claims if the principal dam-

ages are determinable and established at a definite time

either by rules of evidence or known standards of value.

McDaniel v. Tucker, 520 S.W.2d 543, 549 (Tex. Civ. App. —

Corpus Christi 1975, no writ) ; Colonial Refrigerated Trans-

portation, Inc. v. Mitchell, 403 F.2d 541, 554 (5th Cir. 1968).

But see Phillips Petroleum Co. v. Adams, 513 F.2d 355, 366

(5th Cir.) cert. denied, 423 U.S. 930 (1975). The damage to

Empire caused by Moody’s self-dealing became definite and

ascertainable on July 15, 1971, when Empire funds were

transferred to W. L. Moody Bankers. The damages suffered

by Empire as a result of Moody’s mismanagement and

breach of fiduciary duty became definite and ascertainable

as of the date of Receivership, July 1, 1972. Accordingly,

the court shall award pre-judgment interest on Receiver’s

common law claims from these dates. One question remains:

at what rate of interest shall prejudgment interest be

awarded?

A-79

Unfortunately, the Texas law is not clear. Watkins v.

Junker, 90 Tex. 584, 40 S.W. 11 (1897) stated that “the

courts have, by analogy, adopted the legal rate of interest

fixed by statute as the standard by which to be governed in

assessing damages for the detention of money.” Texas law

provides for two legal rates of interest. Tex. Rev. Civ. Stat.

Ann., art. 5069-1.03 allows pre-judgment interest on “‘writ-

ten contracts ascertaining the sum payable” and on open

accounts at the rate of six percent. Since September 1, 1975,

Tex. Rev. Civ. Stat. Ann., art. 5069-1.05 has provided for

post-judgment interest at the rate of nine percent. In a

Memorandum Opinion and Order entered November 29,

1978, in Hadra v. Herman Blum Consulting Engineers,

CA-3-75-1041-D, this court determined that pre-judgment

interest as damages should be awarded at a rate of six

per cent. A review of the case law revealed no discussion of

the issue of which rate to apply, but uncovered applications

of both the nine per cent and the six percent rates. See Earl

Hayes Rents Cars ¢ Trucks vy. City of Houston, 557 S.W.2d

316, 322 (Tex. Civ. App. — Houston [1st Dist.] 1977, writ

ref’d n.r.e.); City of Ingleside v. Stewart, 554 S.W.2d 939,

946-47 (Tex. Civ. App. — Corpus Christi, 1977, no writ).

Resorting to the language of Watkins, this court concluded

that art. 5069-1.03 provided the more appropriate analogy

for prejudgment interest as damages because it provides

specifically for prejudgment interest. Furthermore, to

award pre-judgment interest as damages at a rate of nine

per cent would emasculate art. 5069-1.03. As stated in

Hadra, supra, the court feels bound to apply a six percent

rate to pre-judgment interest awarded as damages until the

Texas legislature remedies the disparity in legal rates of

interest or the Texas courts resolve the issue of which rate

to apply.

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The court is not bound by state law in determining

whether to award pre-judgment interest on Receiver’s

securities law claims. Whether to award pre-judgment

interest is a question of fairness resting within the district

court’s sound discretion, Wolf v. Frank, 477 F.2d 467, 479

(5th Cir. 1973). Under the circumstances of this case, the

court is of the opinion that Receiver should be awarded pre-

judgment interest at the rate of six per cent from the date

of Receivership, July 1, 1972. Moody’s personal wrong-

doing was established by the jury’s findings. See Norte ¢&

Co. v. Huffines, 416 F.2d 1189, 1191-92 (2d Cir. 1969).

Further, Empire was deprived of the opportunity to invest

the $5,000,000 awarded by the jury as damages. /d. at 1192.

Finally, Moody is at least as responsible as Receiver for the

time elapsed in bringing this suit to judgment. Jd. Moody’s

voluminous post trial briefs attest to that.

Defendant’s motions are denied; it is so ORDERED.

Dated this 29th day of May, 1979.

United States District Judge

A-81

APPENDIX C

United States Court of Appeals

For THE

Firtx Circuit

No. 80 - 1145

D.C. Docket Nos. CA-3-5678-D anp CA-3-7625-D

Davin C. Meyers, Et al.

Plaintiff s-A ppellees

v.

SHEaRN Moony, Jr.

Defendant-A ppellant

BernakbD Harness, Et al.

Plaintiff s-A ppellees

v.

SHEARN Moopy, JR.

Defendant-Appellant

THoRPE FoRRESTER,

Receiver-A ppellee

v.

SHEaRN Moopy, JR.

Defendant-A ppellant

APPEAL FROM THE UNITED States District Court

FOR THE

NorTHERN District oF TEXAS

BEFORE THORNBERRY, REAVLEY and JOHNSON,

Circuit Judges.

A-82

JUDGMENT

This cause came on to be heard on the record on appeal

and was argued by Counsel;

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court that the judgment of

the said District Court in this cause be, and the same is

hereby affirmed;

It is further ordered that defendant-appellee pay to

plaintiffs-appellees, the costs on appeal to be taxed by the

Clerk of this Court.

December 23, 1982

Issued as mandate: March 28, 1983

A-83

APPENDIX D

In THE

United States Court of Appeals

For Tue Frrrx Circuit

No. 80-1145

Davi C. Meyers, et al.,

Plaintiff s-A ppellees,

v.

SHeEaRN Moopy, JR.,

Defendant-Appellant,

Bernarb Haines, et al.,

Plaintiff s-A ppellees,

v.

SHearn Moopy, JR.,

Defendant-Appellant,

THARPE FORRESTER,

Receiver-Appellee,

v.

SHeEaRN Moopy, JR.,

Defendant-A ppellant,

APPEAL FROM THE UNITED STATES

DISTRICT COURT FOR THE

NORTHERN DISTRICT OF TEXAS

ON SUGGESTION FOR REHEARING EN BANC

(Opinion 12/23/82, 5 Cir., 198 ., ae |

(March 1, 1983)

A-84

Before THORNBERRY, REAVLEY and JOHNSON,

Circuit Judges.

PER CURIAM:

(Y ) Treating the suggestion for rehearing en banc as

a petition for panel rehearing, it is ordered that the peti-

tion for panel rehearing is DENIED. No member of the

panel nor Judge in regular active service of this Court

having requested that the Court be polled on rehearing

en banc (Rule 35, Federal Rules of Appellate Procedure;

Local Fifth Circuit Rule 16), the suggestion for Rehearing

En Banc is DENIED.

( ) Treating the suggestion for rehearing en banc as

a petition for panel rehearing, the petition for panel

rehearing is DENIED. The judges in regular active ser-

vice of this Court having been polled at the request of one

of said judges and a majority of said judges not having

voted in favor of it (Rule 35, Federal Rules of Appellate

Procedure; Local Fifth Circuit Rule 16), the suggestion

for Rehearing En Banc is DENIED.

Entered For The Cowrt:

/s/ Tomas M. REAvVLEY

United States Circuit Judge