Opposition Brief — Ernst & Young v. Reves

{ J gees

| No. 91-877 Re

:

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1991

ERNST & YOUNG,

Petitioner,

BOB REVES, ROBERT H. GIBBS, and FRANCES

| GRAHAM, As Representatives of a Class of

Note Holders,

Respondents.

BRIEF OF THE CLASS IN OPPOSITION

TO ERNST & YOUNG'S PETITION

FOR A WRIT OF CERTIORARI

Robert R. Cloar Gary M. Elden

Court Plaza (Counsel of Record)

Suite 102 John R. McCambridge

51 South 6th St. Jay R. Hoffman

Fort Smith, AR Grippo & Elden

72901 227 West Monroe St.

(501) 783-1186 Chicago, IL 60606

(312) 704-7700

Attorneys for Respondents

-i-

AB OF CONTENTS

TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT OF THE CASE

The Gasohol Plant

Arthur Young's 1981 Audit

The Co-op's 1982 Annual Meeting

Arthur Young's 1982 Audit

The Co-op's 1983 Annual Meeting

Arthur Young And The Class

The Co-op's Bankruptcy

The Proceedings Below

SUMMARY OF ARGUMENT

I.

THE EIGHTH CIRCUIT CORRECTLY |

APPLIED THE RULE OF

AFFILIATED UTE

A. The Eighth Circuit's

Decision .

1 P Nondisclosure

2% Duty To Disclose

: The Effect Of The

Presumption

15

15

17

18

19

The Eighth Circuit Required

The Class To Establish

Reliqnee « <se.. «6 +

The Eighth Circuit

Correctly Interpreted

Affiliated Ute .....

There Is No Conflict Among

The Courts Of Appeals

Summary Of Federal Law

Issue . «es ee is

II. THERE IS NO BASIS FOR THE

EXERCISE OF THIS COURT'S

SUPERVISORY POWERS HERE

A.

CONCLUSION

The Eighth Circuit's

Decision .. Sal

The Eighth Circuit Made

No Factual Findings

This Court Exercises Its

Supervisory Powers Rarely

And In Far Different Cases

21

22

yp.

=?

28

30

a2

35

38

-iii-

TABLE OF AUTHORITIES

Page(s)

Cases

Affiliated Ute Citizens of

Utah v. United States,

moe Geese 226 (3972) «. - © «© « passim

Communist Party of the United

States v. Subversive

Activities Control Board,

Jan US. 115 (1956) og aes -¢ 35, 36

Frazier v. Heebe,

482 U.S. 641 (1987) ....... 36

Gooding v. Wilson,

S65 U.S. $18 (1972) ....... 34

Harris v. Union Electric Co.,

787 F.2d 355 (8th Cir.),

cert. denied, 479 U.S. 823

OS a ae fF

Huddleston v. Dwyer,

322 U.S. 232 (1944) ey a ee ee ee 29

Hurd v. Hodge,

334 U.S. 24 (1948) ee ee 36

Latigo Ventures v. Laventhol

& Horwath, 876 F.2d 1322

ivem war. 2909) «© . « 2 « ee AR a

McNabb v. United States,

wee Wate Sae £26G5) «§ «© «© © © © e 36

Mills v. Electric Auto-Lite Co.,

396 UM. 375 (1970) ....<«-+- 20

ves Vv.

494 U.S.

Salve Regina College v. Russell,

eiye

nst nd,

56 (1990) toe 4

111-S. Ct. 1217 (1991) .

United States v. Thirty-Seven

Photographs, 402 U.S. 363 (1971)

Young v. Un

ited States,

481 U.S.

Ark. Code A

Arnold S. J

and Practice Under Rule 10b-5

(2d Ed.

787 (1987)

Statutes

nn. § 23-42-106(c)

Other Authorities

acobs, Litigation

1991)

12

30

34

a

31

21

-l1-

STATEMENT OF THE CASE

This Statement of the Case will

supplement the Eighth Circuit's detailed

factual analysis (EY Pet. App. at 6a-27a’)

and address the most important aspects of

Arthur Young's fraud. It will explain the

facts that led the jury in this case to

conclude that Arthur Young originated the

securities fraud here by straying far from

its role as auditor and falsely portraying

a farmer's cooperative as_ solvent to

investors.

The Co-op

The Farmer's Cooperative of

Arkansas and Oklahoma, Inc. (the "Co-op"),

an organization of local farmers, raised

almost all of its operating funds by

+ This response will cite to Ernst

& Young's Petition as "EY Pet." and the

Appendix to that petition as "EY Pet.

AnD.*.

-2-

selling promissory notes to its 23,000

members, all of whom were solicited regu-

larly, and some other local persons. These

notes were uncollateralized, uninsured, and

payable on demand. The Co-op marketed its

notes as an "Investment Program" and told

investors that "YOUR CO-OP has more than

$11,000,000 in assets to stand behind your

investments."

The note program was started in

1959 by Jack White, who served as the

Co-op's general manager for many years.

The Co-op sold many millions of dollars of

demand notes; at the time the Co-op

declared bankruptcy in February 1984, over

1600 persons held notes they had purchased

for nearly $10 million.

The Gasohol Plant

The Co-op's gasohel plant lies at

the center of Arthur Young's fraudulent

scheme. Jack White -- before he was jailed

a

for tax fraud involving self-dealing

transactions with the Co-op -- had owned a

gasohol plant. When it became apparent

that the plant was a white elephant, he

sold it to the Co-op by means of a

"friendly" lawsuit. As a result of White's

self-dealing, the Co-op was’7~ rendered

insolvent.

Arthur Young's 1981 Audit

A partner in the accounting firm

Russell Brown & Co. (which later merged

into Arthur Young) testified on Jack

White's behalf at his criminal trial. In

1981, while White's conviction was on

appeal, White hired Arthur Young to prepare

the Co-op's 1981 audit.

Prior to Arthur Young's

engagement, the gasohol plant had not been

included on the Co-op's financial

statements. Arthur Young soon realized

that properly-prepared financial statements

age

would disclose that the Co-op was insolvent

and that White had taken advantage of the

Co-op. In that event, as Arthur Young also

recognized, there would be a run on the

Co-op: many noteholders would seek to

redeem their notes, no new ones would be

sold, and the Co-op would become bankrupt.

If that happened, Arthur Young would lose

its biggest local account, and Arthur

Young's prior testimony on White's behalf

would appear suspect. |

After consulting with White,

Arthur Young began to construct a series of

fictions (contrary to accepted accounting

standards) that permitted it to create

financial statements concealing the Co-op's

insolvency. The key fiction was that the

Co-op always owned the gasohol plant and

that Jack White never did. As the district

court stated:

-5-

(T]he jury found on substantial

evidence that Arthur Young

originated the fraud, and we may say

that it was rather obvious that

Arthur Young "struggled hard" to

make the Co-op appear’ solvent,

against all available data and any

reasonable characterization of it.

Arthur Young never revealed these fictions

to the Co-op's Board of Directors

("Board"), the Co-op's financial officer,

or to anyone else.

After the Board adopted Arthur

Young's false financial statements for

1981, the Co-op continued to sell demand

notes to its members and others. Arthur

Young knew that the Co-op offered the notes

for sale every month in its’ widely-

circulated newsletter, representing that

the Co-op had sufficient assets to enable

it to redeem the notes on demand.

The Co-op's 1982 Annual Meeting

Prior to the 1982 annual meeting

of its members, the Co-op prepared a

-6-

summary statement of its financial

condition by condensing the false

statements Arthur Young had _ prepared.

Those condensed statements were reviewed

and approved by Arthur Young and then

included in the Co-op's Notice Of Annual

Meeting. Like the full statements, the

condensed ones concealed the Co-op's

insolvency. Arthur Young attended the

annual meeting and used the condensed

statements to report on the Co-op's

financial condition. Arthur Young did not

tell the attendees (who asked many

questions of Arthur Young about the gasohol

plant and the condensed financial

statements) that the Co-op was insolvent.

Nor did Arthur Young advise them that it

believed the condensed statements to be

misleading. The press, which reported on

the meeting. to members and to others in the

local community, was unable (due to Arthur

=P

Young's fraud) to accurately report on the

Co-op's financial condition.

Arthur Young's 1982 Audit

After the 1982 annual meeting,

Arthur Young continued its pattern of

deception. It maintained an office at the

Co-op, working there regularly. Arthur

Young observed that the Co-op's financial

condition had grown even weaker.

Nevertheless, in the early 1983, Arthur

Young completed its preparation of a new

set of financial statements. These, too,

assumed that White never owned the gasohol

plant and thus concealed the Co-op's

insolvency.

The Co-op's 1983 Annual Meeting

As in the prior year, Arthur Young

reviewed and approved the Co-op's false

condensed statements, which accompanied the

Notice of Annual Meeting. Arthur Young

appeared at the 1983 annual meeting to

-

report on the Co-op's financial condition.

Arthur Young again failed to disclose to

the members in attendance that both the

full and the condensed statements concealed

the Co-op's insolvency.

Arthur Young And The Class

Throughout this period, the Co-op

continued to sell demand notes as

investments to its members and other local

persons. No purchasers, members, or

directors were informed by Arthur Young

that the Co-op was insolvent. On numerous

occasions, Arthur Young should have told

the truth -- in its full financial

statements, during its meetings with the

Board, in the condensed statements, during

its presentations at the annual meetings --

but it never did. As a result, between the

date oof Arthur Young's first false

financial statement and the date of the

Co-op's voluntary filing for bankruptcy,

eV

=

Co-op members and others in the area

purchased over $6 million of demand notes

from an enterprise that Arthur Young knew

to be insolvent.

These note purchasers are the

members of the Class. The most basic

common sense holds that none of them would

have purchased a demand note had they known

that Arthur Young had concluded that the

Co-op was insolvent. They made their

purchases only because Arthur Young

consistently disseminated financial

information, both directly and through the

Co-op, that concealed the Co-op's

insolvency (as well as numerous other facts

that the courts below found material). Had

Arthur Young ever told the truth, the news

that the Co-op was insolvent would have

spread quickly through the membership.

-10-

The Co-op's Bankruptcy

Arthur Young's fraud began to come

apart after the Arkansas and federal

governments looked into the Co-op's

financial condition and asked Arthur Young

to stand by the financial statements it had

prepared. Arthur Young responded with a

vague letter. When the Arkansas Securities

Department began to press its view that the

notes were securities, Arthur Young

resigned. Within the next few months, as

the Co-op's true financial picture began to

emerge, many notes were redeemed and few

were purchased. When the demand note

balance fell below $9.5 million, Farmland

(the major creditor and supplier of the

Co-op) refused to extend any more trade

credit to it. The Co-op then made a

voluntary filing for bankruptcy. No demand

notes were sold after that filing.

-ll-

The Proceedings Below

In 1987, after a four-week trial,

a jury found that Arthur Young had

intentionally violated the anti-fraud

provisions of both the Arkansas and federal

securities laws by originating the fraud.’

Thus, Arthur Young became liable to the

Class under both federal and state law

judgments (although the damages overlap).

Arthur Young appealed from the

adverse judgments against it. One its many

arguments was that the Co-op's demand notes

were not securities under state or federal

law. The Eighth Circuit accepted Arthur

Young's view and reversed, without deciding

* The Class also asserted a RICO

claim against Arthur Young, predicated on

Arthur Young's acts of securities fraud.

The district court entered summary judgment

against that claim, and the court of

appeals affirmed. The RICO claim is the

subject of the Class' separate petition for

a writ of certiorari. (See infra note 3.)

-12-

any other issue. The Class, supported by

the SEC and the Arkansas Securities

Department, brought the securities issue

before this Court. In Reves v. Ernst &

Young, 494 U.S. 56 (1990), this Court

rejected the Eighth Circuit's test for

notes and held that the Co-op notes are

securities.

On remand, the Eighth Circuit

decided the many appellate issues in an

opinion so comprehensive that it has a

table of contents. The Court carefully

considered each argument of the parties and

(while remanding for a recalculation of

damages) affirmed both the federal and

state securities law judgments against

Arthur Young.

-13-

SUMMARY OF ARGUMENT

Arthur Young presents no special

or important reason why this Court should

review the securities law rulings of the

Eighth Circuit. There is no conflict among

the circuits here; nor did the Eighth

Circuit fail to follow state or Supreme

Court precedent. Thus, there is no reason

to disturb the securities law decisions of

the jury, the district court, and the

Eighth Circuit.

Moreover, while the factual issues

on the securities claims are complex, the

legal issues are not. First, the Eighth

Circuit applied settled law in affirming

the district court's ruling that the Class'

Rule 10b-5 claim was entitled to a

rebuttable presumption of reliance under

the rule of Affiliated Ute. Arthur Young

contends that the Eighth Circuit (as well

as the district court) "seriously

-14-

misconstrued" the applicable precedent and

thus applied it incorrectly to the

particular facts of this case. (EY Pet. at

12.) This claim -- which in any event is

mistaken -- is not a sufficient reason for

this Court to grant the petition.

Second, Arthur Young asks this

Court to take the extraordinary measure of

reviewing the Eighth Circuit's

interpretation of Arkansas law. Arthur

Young does so because it violated both the

federal and state securities laws, and thus

a victory on the federal securities law

judgment, by itself, would not erase Arthur

Young's liability to the Class. There

Simply is no basis for Arthur Young's

contention that the Eighth Circuit went

awry; indeed, it is apparent from the

opinion below that the Eighth Circuit

carefully analyzed the many arguments

_ -

-15-

presented to it and reached rational and

just decisions.’

I. THE EIGHTH CIRCUIT CORRECTLY

APPLIED THE RULE OF

AFFILIATED UTE.

A. The Eighth Circuit's

Decision

Arthur Young disputes the Eighth

Circuit's ruling on only one element of the

Class' Rule 10b-5 claim -- reliance --

which the appellate court (and Arthur Young

below) called "transaction causation." See

also Harris v. Union Electric Co., 787 F.2d

355, 366 (8th Cir.), cert. denied, 479 U.S.

823 (1986). That element requires proof

> The Class holds the same view even

in the context of its own petition for a

writ of certiorari. While the Eighth

Circuit affirmed the summary judgment

against the Class' RICO claim, it candidly

explained that it was bound to follow the

precedent of the court of appeals en banc

"until the Supreme Court rejects our

standard." (EY Pet. App. at 30a.)

e1Ge<

that "the allegedly fraudulent acts caused

the plaintiff to purchase the securities."

(EY Pet. App. at 39a-40a.)*

The Eighth Circuit held that under

Affiliated Ute and its progeny, the Class

was entitled to a rebuttable presumption

of transaction causation because (a) the

claim was based primarily on Arthur Young's

nondisclosures (rather than affirmative

misrepresentations) and (b) Arthur Young

“

Transaction causation is the more

appropriate term here. In this case and

others in which the fraud _ consists

primarily of omissions and nondisclosures,

it is awkward to say that a plaintiff

"relied" on those omissions and

nondisclosures in buying securities. See

Latigo Ventures v. Laventhol & Horwath, 876

F.2d 1322, 1326 (7th Cir. 1989). It makes

more sense to say that omissions and

nondisclosures "caused" a plaintiff to

enter into an investment transaction, or

put another way, a plaintiff who knew the

omitted or nondisclosed information -- such

as the Coop's insolvency -- would not have

purchased the securities.

-17-

owed the Class a duty to tell the truth

about the Co-op's financial health.

ie Nondisclosure

The Eighth Circuit, affirming the

decision of the district court, ruled that

the "facts and pleadings" demonstrated that

the Class' claim was principally one of

nondisclosure. The Eighth Circuit recog-

nized that Arthur Young knew early on in

this case that the Class intended to rely

on a nondisclosure-based rebuttable

presumption, and that it nevertheless made

no effort to rebut that presumption (even

though it had deposed numerous Class

members). The Eighth Circuit concluded

that "[(fjor Arthur Young to argue now that

it was entitled to judgment as a matter of

law because the Class did not_~ show

transaction causation is a bold move

indeed." (EY Pet. App. at 43a (footnote

omitted). )

-18-

2 Duty To Disclose

As for the Arthur Young's duty to

disclose, the court of appeals stated that

whether this duty exists depends on the

particular facts and circumstances of each

case. The court then applied a

seven-factor test to the facts here and

concluded that Arthur Young owed the Class

a duty to tell them about the fraud it

originated and perpetuated.

The Eighth Circuit also dismissed

Arthur Young's claim that it had no means

to satisfy that duty as "preposterous":

At the annual meetings Arthur Young

could have said something, but

Simply chose not to. .. . Given

the importance of the [many

nondisclosures], the nature of the

Co-op and the people who invested in

it, the Co-op's location in a

relatively rural area, and the

interests of local news

organizations in the Co-op's

affairs, it seems sure that the

Class would have heard what it now

dearly wishes it had heard. fThus,

Arthur Young could have satisfied

its duty with perhaps two of the ten

-19-

minutes it used to address’ the

annual meetings in 1982 and 1983.

(Ey Pet. App. at 48a (footnote omitted and

emphasis added).)

ae The Effect Of The

Presumption

The decisions of both courts below

on this issue are well-supported by the

facts and law. The jury was able to

presume that those who bought the Co-op's

demand notes would not have invested had

they known about Arthur Young's fraud,

including the concealed insolvency of the

Co-op. Thus, there was no basis in fact,

law, or common sense for requiring over

1600 Class members to pour though a

courtroom to say "had I Known that the

Co-op was insolvent, that there was

something suspicious about the Co-op's

acquisition of the gasohol plant, that the

Co-op's auditors failed to follow proper

accounting procedures, that the auditors

-20-

falsely treated the gasohol plant as if the

Co-op always had owned it, and that without

this fiction the Co-op would have a

negative net worth, I would not have

invested all or part of my life savings in

demand notes." See, e.gq., Mills vv.

Electric Auto-Lite Co., 396 U.S. 375, 382

n.5 (1970) ("proof of actual reliance by

thousands of individuals would .. . not

be feasible").

At trial, Arthur Young was given

the opportunity to prove that even if it

had told the truth at the annual meetings,

followed proper accounting procedures, and

the like, the Class members would have

purchased demand notes anyway. Arthur

Young deliberately chose not to rebut the

presumption of transaction causation,

apparently because there were no facts to

support its position.

-21-

B. The Eighth Circuit Required

The Class To Establish

Reliance.

Arthur Young's assertions

notwithstanding (EY Pet. at 11), the Eighth

Circuit did not ignore the element of

transaction causation/reliance.”® The court

merely held that under these particular

facts, the Class has established that it

was entitled to rely on a presumption of

transaction causation, and Arthur Young had

to present positive proof to rebut that

presumption.

’ The commentator that Arthur Young

relies on for the proposition that

Affiliated Ute and other courts did away

with reliance (Ey Pet. at 13 n.6), actually

does not support this view. Rather, he

asserts that Affiliated Ute replaced a

"subjective reliance" test with a

"constructive reliance" test. Arnold S.

Jacobs, Litigation and Practice Under Rule

10b-5 § 62 n.27, at 3-254 (footnote omitted

from EY quotation) and § 64.01[{b][{i], at 3-

314-18 (2d Ed. 1991) ("Ute broadened

constructive reliance so it covers all

concealment cases").

-22-

Arthur Young states that Congress,

in enacting section 10(b) of the 1934 Act,

intended reliance to be an element of all

securities fraud claims. (EY Pet. at

11-12.) But -- as Affiliated Ute itself

demonstrates -- Congress never suggested

that reliance could not, in certain cases,

be presumed to exist subject to the

introduction of contrary evidence.

Cc. The Eighth Circuit

Correctly Interpreted

Affiliated Ute.

Arthur Young's primary contention

on the federal law issue is that the Eighth

Circuit and the district court

misunderstood Affiliated Ute and therefore

misapplied it to these facts. (EY Pet. at

12.) That is not a sufficient reason for

the Court to hear this case, and in any

event, Arthur Young's argument is

unfounded. Arthur Young's interpretation

eT

at}q

of Affiliated Ute reads limitations into

that decision that no court ever has found.

In Affiliated Ute, this Court held

that under the circumstances’ presented

there -- where the case primarily was based

on nondisclosures and where the defendants

had an obligation to disclose -- "positive

proof of reliance is not a prerequisite to

recovery." 406 U.S. at 153-54. This is

exactly the test that the Eighth Circuit

applied below: was this primarily a

nondisclosure case, and did Arthur Young

owe the Class a duty to disclose material

facts. Answering both questions in the

affirmative, the Eighth Circuit did not

require the Class to present "positive

proof" of reliance.

Contrary to Arthur Young's clain,

nowhere in Affiliated Ute does the Court

restrict the presumption to "reliance on

omissions of particular facts" to the

«ti«

exclusion of "reliance on the conduct of

defendants." (See EY Pet. at 14.) Arthur

Young asserts this limitation is implicit

in "the immediately preceding nine pages of

the Court's opinion" before the statement

of the holding in Affiliated Ute. (Id. at

13-14.) This argument really is a

complaint that the presumption of reliance

was justified under the facts of Affiliated

Ute but not under the facts here. The

district court and the court of appeals

below both disagreed with Arthur Young.

Arthur Young also claims that the

Eighth Circuit relied on a particular

passage from Affiliated Ute that it took

out of context. (RY Pet. at i3.) This

argument is plainly wrong. The Eighth

Circuit's decision does not rely on any

passage from Affiliated Ute or even cite to

that case in its transaction causation

analysis. Rather, the court relied on

EN

-25-

several Eighth Circuit cases that follow

Affiliated Ute and hold that "where the

defendant's alleged conduct involves

primarily a failure to disclose, the

plaintiff need not prove’ transaction

causation will be inferred [subject to

rebuttal] if the withheld information is

material." (EY Pet. App. at 41a.)

Thus, the Eighth Circuit correctly

interpreted the rule in Affiliated Ute and

decided, as in Affiliated Ute, the Co-op's

auditors could not "stand mute while they

facilitate" the fraudulent sale of

securities to the Class members. See 406

U.S. at 153.

D. There Is No Conflict Among

The Courts Of Appeals.

Arthur Young incorrectly states

that there is a conflict among the courts

of appeals as to what Affiliates Ute's

=— =

presumption of reliance means or when it

may be applied. Arthur Young has not c.ited

to any court or commentator that has

perceived this alleged conflict. The cases

Arthur Young relies on merely demonstrate

that the courts of appeals have found that

some cases met the Affiliated Ute test

while other cases did not.

Arthur Young claims that’ the

Eighth Circuit's decision, along with

decisions of the Second, Ninth, and Tenth

Circuits from 1975 and 1980, conflict with

the Seventh Circuit's interpretation of

Affiliated Ute in Latigo Ventures _v.

Laventhol & Horwath, 876 F.2d 1322 (7th

Cir... 30601. (EY Pet. at 17-18.) Yet in

Latigo Ventures, the Seventh Circuit did

not discuss or attempt to explain

Affiliated Ute, and did not disagree with

or even cite to the supposedly conflicting

-27-

cases. See Latigo Ventures, 876 F.2d at

1326.

Nor did the Eighth Circuit detect

any conflict among the circuits over the

interpretation of Affiliated Ute. Indeed,

the court expressly distinguished Latigo

Ventures (and two other cases) because they

posed a distinct legal issue and involved

dissimilar factual settings:

[The cases} all involve claims for

aiding and abetting Rule 10b-5

violations against accounting firms

that did not blow the whistle on

their claims, as opposed to the

primary Rule 10b-5 liability

asserted here. Moreover, those

cases feature vastly different

factual circumstances and procedural

postures.

(EY Pet. App. at 48a n.28.)

E. Summary Of Federal Law

Issue

The Eighth Circuit's decision is

entirely consistent with congressional

intent, Affiliated Ute, and decisions of

-28-

other courts of appeals. Arthur Young's

only complaint is that the Eighth Circuit

reached the wrong result -- in spite of the

overwhelming evidence that Arthur Young

originated and perpetuated a fraud and, by

its deceptions, caused over 1600 investors

to purchase worthless securities. This

Court should deny Arthur Young's writ on

the federal securities law issue.

II. THERE IS NO BASIS FOR THE

EXERCISE OF THIS COURT'S

SUPERVISORY POWERS HERE.

Arthur Young's liability to the

Class is founded on violations of both Rule

10b-5 and the Arkansas Securities Act, and

thus, Arthur Young needs both judgments

reversed in order to erase its liability.

As for Arkansas law, the obstacle Arthur

Young faces is that this Court is not the

appropriate forum for review of lower

federal courts' interpretations of state

-29-

statutes. See, e.g., Huddleston v. Dwyer,

322 U.S. 232, 237 (1944) ("[W]e accept and

do not review, save in exceptional cases,

the considered determination of questions

of state law by the intermediate appellate

courts." (citation omitted)).

Arthur Young therefore struggles

to formulate a procedural issue in order to

invoke this Court's supervisory powers.

Arthur Young claims that it was unfairly

surprised by the Eighth Circuit's allegedly

incorrect interpretation of the Arkansas

Securities Act. Arthur Young, however,

misconstrues the court's decision and

merely offers a different interpretation of

Arkansas law.

In any event, this Court exercises

its supervisory powers only rarely and

cases involving serious problems with the

administration of justice. Those types of

circumstances-~ are not present here.

-30-

Indeed, the Eighth Circuit's decision is

remarkable for the thorough attention paid

to the each of the many issues that were

raised on appeal.

A. The Eighth Circuit's

Decision

Mindful of this Court's decision

in Salve Regina College v. Russell, 111 S.

ct. 1217 (1991), the Eighth Circuit

reviewed de novo the district court's

decision on the state securities law issue.

The court also recognized -- as Arthur

Young does not -- that it had to consider

the evidence in the light most favorable to

the Class, assume that the jury resolved

all conflicts of evidence in favor of the

Class, assume as true all facts which the

Class' evidence tended to prove, and grant

the Co-op the benefit of all favorable

aJi@-

inferences that reasonably may be drawn

from the facts. (EY Pet. App. at 31la-32a.)

The Eighth Circuit, as the

district court had, held that based on all

the facts and reasonable inferences, Arthur

Young properly was found liable under Ark.

Code Ann. § 23-42-106(c), formerly codified

as § 67-1256(b) ("Section 106(c)").

The court of appeals explained

that secticn 106(c) creates two kinds of

secondary liability for securities fraud:

control person liability and aiding and

abetting liability. The court determined

that aiding and abetting liability was more

appropriate in light of the facts adduced

at trial. (EY Pet. App. at 33a-34a.)

The Eighth Circuit then analyzed

the jury instruction on_~ the state

securities law claim and concluded that it

"fulfilled the requirements of section

106(c)":

-32-

(T)he jury could only hold Arthur

Young liable if it concluded that

Arthur Young originated the untrue

statements or omissions, knew that

the statements were communicated to

the Class, and knew that the Class

would rely on them to purchase the

demand notes; in other words, that

Arthur Young "materially aided" in

the sale of demand notes.

(EY Pet. App. at 36a.)

In fact, the court of appeals held

that the district court's instruction set

too high a threshold, in that it required

the jury to find -- which it did -- that

Arthur Young actually originated the

securities fraud (and not just materially

aided it). The court further held that

"the trial evidence provides ample support"

for the jury's decision that Arthur Young

violated state law. (Id. at 36a-37a.)

-33-

B. The Eighth Circuit Made

No Factual Findings.

Arthur Young's contention that the

Eighth Circuit held it liahle under section

106(c) by making an implicit factual

finding that it was an "employee" of the

Co-op is incorrect. Arthur Young concedes

that "the court of appeals did not make an

explicit finding" (EY Pet. at 28), and the

opinion is bereft of any even an implied

decision to that effect.

Arthur Young suggests that it is

entitled to a remand to present additional

evidence on its liability under Arkansas

Ee ee

—

law.® Yet Arthur Young does not explain

what that evidence might be. It was

apparent to the courts below that in the

course of a four-week trial, the jury was

presented with virtually every conceivable

detail of Arthur Young's involvement with

the Co-op and the demand note program.

There are no new facts for Arthur Young to

present.

Arthur Young already used the

appropriate avenue for relief in this case:

a petition for rehearing in the Eighth

. Though Arthur Young also asks this

Court for an outright reversal on this

issue (EY Pet. at 30), there is no basis

for this request. In order to reverse the

Eighth Circuit's decision on the state law

Claim, this Court would have to reinterpret

Arkansas securities law. But this Court

"lack[s] jurisdiction authoritatively to

construe state legislation." United States

v. Thirty-Seven Photographs, 402 U.S. 363,

369 (1971) (citation omitted); accord

Gooding v.: Wilson, 405 U.S. 518, 520

(1972).

-35-

Circuit to convince the court to reconsider

its interpretation of Arkansas law. The

court of appeals denied that petition

without dissent.

Se. This Court Exercises Its

Supervisory Powers Rarely

And In Far Different Cases.

Because this Court rarely

exercises its supervisory powers over the

federal courts, the contours of those

powers are not well defined. From the

instances in which the Court has used these

powers, though, it is plain that there is

not a serious problem in the administration

of justice that has implications beyond

fates of the parties to each case.

For example, in Communist Party of

the United States v. Subversive Activities

Control Board, 351 U.S. 115 (1956), the

Court used its supervisory powers to

reverse the circuit court's decision

-36-

barring the introduction of additional

evidence to show that witnesses. had

committed perjury at trial: "[F]jastidious

regard for the honor of the administration

of justice requires the Court to make

certain that the doing of justice be made

so manifest that only irrational or

perverse claims of its disregard can be

asserted." Id. at 124 (emphasis added).

Other circumstances requiring

supervisory action include striking down

race-based restrictive covenants, Hurd v.

Hodge, 334 U.S. 24, 34 (1948), excluding

the introduction of confessions obtained

through "flagrant disregard" of criminal

justice procedures, McNabb v. United

States, 318 U.S. 332, 340-47 (1943),

ensuring that district court's attorney

residency requirements are consistent with

"principles of right and justice," Frazier

v. Heebe, 482 U.S. 641, 645-46 (1987), and

er ¢ ae

Ce ee ee ee ee ee

-37-

preventing a lower court from appointing an

interested party as prosecutor in a

criminal contempt proceeding, Young v.

United States, 481 U.S. 787, 802-09 (1987).

These cases all presented serious

and fundamental problems in the

administration of justice, with

implications reaching far beyond the fates

of the parties to each case. These

circumstances are not present here. Put in

the very best light for Arthur Young, the

Eighth Circuit below affirmed a jury

verdict and district court decision by

interpreting a contested state statute

incorrectly and in a manner that Arthur

Young had not anticipated. Even if Arthur

Young is correct -- and it is not -- the

result below does not cause the "honor of

the administration of justice" to be

questioned. There is no basis for the

-38-

exercise of this Court's extraordinary

powers of supervision here.

CONCLUSION

For all the reasons stated above,

Arthur Young has not presented an issue

that merits this Court's consideration, and

Ernst & Young's petition for a writ of

certiorari should be denied in its

entirety.

Respectfully submitted,

Robert R. Cloar Gary M. Elden

Court Plaza (Counsel of Record)

Suite 102 John R. McCambridge

51 South 6th St. Jay R. Hoffman

Fort Smith, AR Grippo & Elden

72901 Suite 3600

(501) 783-1186 227 W. Monroe St.

Chicago, IL

60606

(312) 704-7700