Petition for Writ of Certiorari — K & S Partnership v. Continental Bank, N. A.
Supreme Court brief1992
Ask Donna
What actually matters in this document.
Text
Supreme Court, U.S.
FiLED
APR 22 1992
91-1 692 0
No
In The
Supreme Court of the Unite OOF PE HE CLERK
October Term, 1991
+
K & S PARTNERSHIP; ROBERT F. SWARTZBAUGH;
RICHARD W. KELLEY; CHARLES C. MYERS; DON
ERFTMIER; CARL L. BOSCHULT; WILLIAM A. LORENZ;
NANCY D. LORENZ; HARLEY D. SCHRAGER; SAMUEL
A. ANCONA; JOSEPH I. ANCONA; CARL ANCONA;
MICHAEL J. ANCONA; BYRON D. STRATTAN; DENNIS
STRAUSS; TONY LAMALFA; KEVIN J. CLOONAN;
STEPHEN H. SIMON; FREDERICK J. SIMON; ALAN
SIMON; GARY GUNDERSON; FRANK WOODS PETERSEN;
THOMAS T. BERNSTEIN; DONALD D. GRAHAM; ALBERT
BLOCH; MARK ANTHONY; EUGENE MCINTYRE;
DOROTHY MCINTYRE; JOHN E. RYAN; PAUL ALPERSON;
GERALD E. PALMER; RONALD K. PARSONAGE;
WILLIAM W. SMITH; O. DOUGLAS OSTERHOLM;
AND BERNARD MAGID,
vs. Petitioners,
CONTINENTAL BANK, N.A.,
Respondent.
+
Petition For Writ Of Certiorari
To The United States Court Of Appeals
For The Eighth Circuit
e
PETITION FOR WRIT OF CERTIORARI
¢
Lrepen, DAHLK, WHITTED,
HOUGHTON, SLOWIACZEK
& JAHN, P.C.
THomas H. Dantk* (15371)
SANDRA L. DouGHERTy (16823)
Davip S. Houcuton (15204)
100 Scoular Building
2027 Dodge Street
Omaha, Nebraska 68102
(402) 344-4000
Attorneys for Petitioners
*Counsel of Record
COCKLE LAW BRIEF PRINTING CO., (800) 225-6964 )
OR CALL COLLECT (402) 342-2831
ho
QUESTIONS PRESENTED
Whether a corporation can be liable under 18 U.S.C.
§ 1962(c) of RICO for the acts of its employees and
agents?
Whether the Seventh Amendment prohibits a court of
appeals from considering and weighing conflicting
evidence in determining the sufficiency of the evi-
dence in support of a jury verdict?
iii ee -
PARTIES TO THE PROCEEDING
The caption of the case in this Court contains the
names of all parties to the proceeding in the United States
Court of Appeals for the Eighth Circuit (Supreme Court
Rule 14.1(b)).
TABLE OF CONTENTS
Page
a
Parties to the Proceeding .......................... ii
ee sens 6b ea cceent esse sda Chas iii
FT OUT TTT ETT TT ETTORE ee Vv
oe oes ie eas oe vcs easy a buss eceses ane 1
ee a a uh dba bank Mako od 6% 2
Provisions of Statute Involved..................... 2
a ree 3
A. Proceedings and Disposition Below.......... 3
EE PRUNE sc eee es ennccscencces 4
Reasons for Granting the Writ..................... 7
A. Respondeat Superior under RICO ............. 8
B. The Proper Standard of Review for Granting
Judgments as a Matter of Law............... 10
I. CERTIORARI SHOULD BE GRANTED
BECAUSE A CONFLICT EXISTS AMONG
THE CIRCUITS CONCERNING THE
APPLICABILITY OF THE DOCTRINE OF
RESPONDEAT SUPERIOR IN RICO
ESN 6 Tis L Eh deuw sesso oes ewdvexs.ce 12
Il. CERTIORARI SHOULD BE GRANTED
BECAUSE A CONFLICT EXISTS CON-
CERNING THE PROPER STANDARD OF
REVIEW FOR DETERMINING THE SUF-
FICIENCY OF THE EVIDENCE TO SUP-
oe Gh aes sy 14
A. There is no Uniform Standard....... 14
i carat i
iv
TABLE OF CONTENTS —- Continued
Page
B. This Court Should Clarify the Stan-
Ne Ge I, oo rvs sc dc Gaceunss sess 16
C. This Case Presents the Court with an
ideal Opportunity to Set Forth a Uni-
Se SL Oop oad ke ceeae ia 18
SS eer ee et oe een ue bee ace ket wes 25
APPENDIX
Eighth Circuit Opinion, December 6, 1991........ A-1
District Court Memorandum and Order, Sep-
SOU WG, RU hc kddepisnbesievcassanusthessess A-24
Eighth Circuit Order Denying Petition for
Rehearing with Suggestion for Rehearing En
NE, FUNUED Dy CHUN vives cos 84 teks es ccwennsnes A-80
TABLE OF AUTHORITIES
Page
Cases
Agency Holding Corp. v. Malley-Duff & Associates,
gmc., SES U.S. 145, BE CGC), oo oscascccccvescicaes 12
American Society of Mechanical Engineers, Inc. v.
Hydrolevel Corp., 456 U.S. 556, 570-73 (1982)....... 12
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255
POON) 5 is 0s de dexcadickeor cea eee 11
Ashland Oil, Inc. v. Arnett, 872 F.2d 1271, 1281 (7th
CME TOP 5 4030.cnsaeeasnen ons eaaoeeee Eee 9, 13
Bernstein v. IDT Corp., 582 F. Supp. 1079, 1083 (D.
OE FOO «oo issecasp ates 14
Caudill v. Farmland Industries, Inc., 919 F.2d 83, 86
Oh Cle Hic ececiG. 15
Chase Manhattan Bank, N.A. v. FDIC, 554 F. Supp.
ee | Pe ey et ee 18
Clements v. General Accident Insurance Co. of Amer-
ica, 821 F.2d 489, 491 (8th Cir. 1987).............. 15
Collective Fed. Sav. v. Creel, 746 F. Supp. 1307,
Sw CLER, EM. ERO + os cncvicresecrneee eee 13
Connors v. Lexington Ins. Co., 666 F. Supp. 434, 453
(8 es PPT eine Opt 13
D & S Auto Parts, Inc. v. Schwartz, 838 F.2d 964,
966-68 (7th Cir.) cert. denied, 486 U.S. 1061 (1988)..... 9
Dace v. ACF Industries, 722 F.2d 374, 376-77 (8th
Cir. 1983), mod. per curiam, 728 F.2d 976 (8th Cir.
BOODs aon ss a ndeawhns te addUA Seen eae 15
Dennis v. Denver R.G.W.R.R., 375 US. 208, 210
SEE kv s.0 bees Mee pares bersaln ae eee 16
vi
TABLE OF AUTHORITIES - Continued
Eyre v. McDonough Power Equip., Inc., 755 F.2d 416,
SEP COR GI, Fee iso snbnekacsesssceeeee 16
Flink v. Carlson, 856 F.2d 44, 46 n. 2 (8th Cir. 1988) .... 23
Gottsch v. Bank of Stapleton, 235 Neb. 816, 826-28,
SSG INN.W.OE GED (PMR. ccc ec ccccavcvedereussrves 23
Grogan v. General Maintenance Serv. Co., 764 F.2d
OGG, GGF GAL. CO FO voc ven evades inecceeccase 16
Harrison v. Dean Witter Reynolds, Inc., 715 F. Supp.
1425, 1429-32 (N.D. Ill. 1989) ................0008. 13
H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S.
SOP CRPOND a5 6 <c-nhceseadns te ee cecr eee 8, 13
Holmes v. Securities Investor Protection Corp., No.
90-727, 1992 WL 52846 (March 24, 1992) .......... 12
In re Citisource, Inc. Sec. Litig., 694 F. Supp. 1069,
S000 GANT. SOUR) 60 cbs cawscnnnacansbeemeees 13
International Terminal Operating Co. v. Nederl, 393
U.S. 74, 75, judgment amended, 393 U.S. 995
(SPER) s:s:0.5s sa 0ke anh ag ae Rea oR ee eee 14
Keiser v. Coliseum Properties, Inc., 764 F.2d 783, 785
(REG CO, Ps vc cee receae eas euee eee eaeeeees tee 16
La Montagne v. American Convenience Products, Inc.,
750 F.2d 1405, 1410 (7th Cir. 1984)................ 15
Landry v. Air Line Pilots Ass’n. Int'l. AFL-CIO, 901
F.2d 404, 425 (5th Cir.), cert. denied, 111 S.Ct. 244
(T90UE ois diskces cede 13
Lavender v. Kurn, 327 U.S. 645, 653 (1946)........... 11
Luthi v. Tonka, 815 F.2d 1229, 1230 (8th Cir. 1987)
SESE Eee eer ee Tee Ty a, 9, 13
Vil
TABLE OF AUTHORITIES - Continued
Page
Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985), cert.
Gemted, 474 U.S. WOS7 (1906)... 2... cece c cc ccce: 21
Morgan v. Arkansas Gazette, 897 F.2d 945, 948 (8th
OE Sei iw Cueek dads s eis Leesan ener ok ik 15
Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322,
et cbigeces th coxcarpig, ELSE EOE OR ISLE iy ae at Ee 17
Petro-Tech, Inc. v. Western Co. of North America, 824
F.2d 1349, 1361-62 (3d Cir. 1987)................ 8, 13
Quaker City Gear Works v. Skil Corp., 747 F.2d 1446,
1454 (Fed. Cir. 1984) cert. denied, 417 U.S. 1136
Soe, AEE CPEs PARE Net nr rir Sn an renin gele re 16
Reves v. Ernst & Young, 91-886....................... 9
Rhea v. Massey-Ferguson, Inc., 767 F.2d 266, 269 (6th
5 GSI at 16
Schofield v. First Commodity Corp. of Boston, 793
Pate 20, SO (ist Cir, 1986). ........ 0.00 cccccescecs, 13
Sedima S.P.R.L. v. Imrex Company, Inc., 473 U.S. 479,
ops cong COE UOTE EEE TE Pe eee ee 8
United States v. Hartley, 678 F.2d 961, 988 (11th Cir.
1982), cert. denied, 459 U.S. 1170, 1183 (1983)....... 9
Utah Pie Co. v. Continental Baking Co., 386 U.S. 685
ot SOP ee Sens Gra ne ee 14
Webb v. Illinois Cent. R.R. Co., 352 U.S. 512, 513-14
Sg Re re eer en ee 16
Western Plains Serv. Corp. v. Ponderosa Dev. Corp.,
769 F.2d 654, 656 (10th Cir. 1985)................. 16
Wilkerson v. McCarthy, 336 U.S. 53, 57 (1949) ........ 16
Viii
TABLE OF AUTHORITIES - Continued
Page
Williams-E1 v. Johnson, 872 F.2d 224, 228 (8th Cir.),
cert. denied, 493 U.S. 824 (1989) ................... 15
Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d |
POP WWE CEPOL BOON iiss cccc ve ctcenceuces 21
Woodward v. Metro Bank of Dallas, 522 F.2d 84, 97
GN EE IE ro a as Whee ne Sev binds kee 21
Yellow Bus Lines, Inc. v. Drivers, Chauffeurs and
Helpers Local Union 639, 839 F.2d 782, 791 (D.C.
Cir. 1988), judgment vacated, 492 U.S. 914 (1989) .... 13
OTHER AUTHORITIES
eG oD ee eceu Checks oluvun wen 10, 17
Re EE anne eevee eee er eee le caer eee 23
Me EE WOE 5 hee sa sees Sede bey oe doen passim
Pe ae he un Case hy deh eea er eae 3
es 60s sd Sies navi aay ese ak ieee 8
Oe er A ears, Speen anu oh ee be 3
Oe Rice ME MMOD 520. 663 v4 os oer ee eae eae ke 2
OF el is ns cis a Fe hades eked oe tke 2
E. Schnapper, Judges Against Juries — Appellate
Review of Federal Civil Jury Verdicts, 237 Wis. L.
es ie deeb verse eas 11, 14, 15
*
In The
Supreme Court of the United States
October Term, 1991
%
K & S PARTNERSHIP; ROBERT F. SWARTZBAUGH:
RICHARD W. KELLEY; CHARLES C. MYERS; DON
ERFTMIER; CARL L. BOSCHULT; WILLIAM A. LORENZ:
NANCY D. LORENZ; HARLEY D. SCHRAGER; SAMUEL
A. ANCONA; JOSEPH I. ANCONA; CARL ANCONA;
MICHAEL J. ANCONA; BYRON D. STRATTAN; DENNIS
STRAUSS; TONY LAMALFA; KEVIN J. CLOONAN:
STEPHEN H. SIMON; FREDERICK J. SIMON; ALAN
SIMON; GARY GUNDERSON; FRANK WOODS PETERSEN:
THOMAS T. BERNSTEIN; DONALD D. GRAHAM; ALBERT
BLOCH; MARK ANTHONY; EUGENE MCINTYRE;
DOROTHY MCINTYRE; JOHN E. RYAN; PAUL ALPERSON:
GERALD E. PALMER; RONALD K. PARSONAGE;
WILLIAM W. SMITH; O. DOUGLAS OSTERHOLM:;
AND BERNARD MAGID,
Petitioners,
vs.
CONTINENTAL BANK, N.A.,
Respondent.
¢
Petition For Writ Of Certiorari
To The United States Court Of Appeals
For The Eighth Circuit
*
PETITION FOR WRIT OF CERTIORARI
*
OPINIONS BELOW
The Eighth Circuit did not deliver a substantive
opinion when it denied petition for rehearing, with a
1
aed |
suggestion for rehearing en banc, on January 23, 1992. The
full opinion, decided December 6, 1991, is officially reported
at 952 F2d 971 (8th Cir. 1991). The opinion of the district
court partially granting Defendant’s Motion for Judgment
Notwithstanding the Verdict, filed September 18, 1989, is
officially reported at 127 F.R.D. 664 (D. Neb. 1989).
The Eighth Circuit opinion filed December 6, 1991, is
contained in the Appendix beginning at A-1. The district
court decision filed September 18, 1989, is contained in the
Appendix at A-24.
JURISDICTION
The jurisdiction of this Court is invoked under 28
U.S.C. § 1254(1) and 28 U.S.C. § 2101(c). The judgment
denying rehearing of the Court of Appeals for the Eighth
Circuit was entered January 23, 1992. This Petition is
timely, having been filed within ninety (90) days of that
date.
«
PROVISIONS OF STATUTE AND
CONSTITUTIONAL AMENDMENT INVOLVED
The statutory provisions of Title 18, United States
Code, added by Title IX (RICO) of P.L. 91-452, in relevant
part, provides:
§ 1962. Prohibited activities. .. .
(c) It shall be unlawful for any person
employed by or associated with any enter-
prise engaged in, or the activities of which
affect, interstate or foreign commerce, to
conduct or participate, directly or indi-
rectly, in the conduct of such enterprise’s
affairs through a pattern of racketeering
activity or collection of unlawful debt.
The Seventh Amendment to the United States Consti-
tution provides:
In Suits at common law, where the value in
controversy shall exceed twenty dollars, the
right of trial by jury shall be preserved, and no
fact tried by jury, shall be otherwise re-exam-
ined in any Court of the United States, than
according to the rules of the common law.
¢
STATEMENT OF THE CASE
A. Proceedings and Disposition Below.
This is an action brought by 35 investors (“Peti-
tioners”) against Continental Bank, N.A. (“Continental”),
for Continental’s participation in a fraudulent scheme.
Petitioners allege that Continental was liable for (1) aid-
ing and abetting securities fraud, (2) conspiracy to violate
the federal securities laws, (3) knowing participation in
breaches of fiduciary duty, and (4) violating RICO. Juris-
diction was based upon 28 U.S.C. § 1331 and 18 U.S.C.
§ 1964.
A three week jury trial was held, and on April 19,
1989, the jury found in favor of the Petitioners on all four
theories of recovery. The district court entered judgment
on May 15, 1989, in the amounts of $1,350,317.32 on each
of the three non-RICO counts, and in the amount of
$4,856,250.52 under RICO.
a
On September 18, 1989, the district court overruled
Continental’s motion for judgment notwithstanding the
verdict on the three non-RICO counts, but granted the
motion j.n.o.v. on the RICO count on the single ground
that as a matter of law, Continental could not be held
liable for the acts of its employees under RICO. Continen-
tal filed a notice of appeal on September 22, 1989. The
Petitioners also appealed from the grant of the motion for
j.n.o.v. with respect to the RICO count.
Oral arguments were heard before the United States
Court of Appeals for the Eighth Circuit on May 14, 1990.
An initial Opinion was filed September 12, 1990, revers-
ing the district court’s judgment entered on the three
non-RICO counts, and affirming the district court’s grant
of Continental’s motion for judgment notwithstanding
the verdict. Petitioners filed a petition for rehearing with
a suggestion for rehearing en banc, and the Eighth Circuit
withdrew its initial Opinion and Judgment on January 23,
1991.
The Eighth Circuit issued another Opinion on
December 6, 1991, and did not change the result of the
initial Opinion. The second opinion attempted to clarify
the standard of review applied. Petitioners again filed a
petition for rehearing, with a suggestion for rehearing en
banc, which was denied on January 23, 1992. Petitioners
now seek certiorari.
B. Factual Allegations.
Petitioners allege that from 1979 through 1981, Conti-
nental participated in a fraudulent scheme that defrauded
Petitioners in connection with the purchase of securities.
In 1978, Continental entered into an agreement with Penn
Square Bank, N.A., formerly of Oklahoma City, Okla-
homa, to purchase any and all energy loans that Penn
Square could originate regardless cf quality. Under the
agreement, Continental agreed to immediately book the
loans, and review their quality at a later time. If Conti-
nental ultimately chose not to keep a loan, Continental
assisted in the placement of the loan with another large
bank such as Michigan National Bank or Seattle First
National Bank. In essence, the loans were “parked” at
Continental regardless of quality under this agreement.
Petitioners purchased limited partnership interests in
nine different oil and gas drilling partnerships formed by
Eagle Petroleum Corporation (“Eagle”). Petitioners paid
for their securities by paying 25% cash, and causing
letters of credit to be issued in favor of Penn Square Bank
in an amount constituting 75% of the purchase price.
These letters of credit in turn secured drilling loans made
to Eagle by Penn Square Bank pursuant to its agreement
with Continental.
Oil and gas promoters such as Eagle could not raise
significant amounts of money from investors without a
track record. In order for letter of credit programs to
build a track record, they had to obtain “production
loans” secured by oil and gas reserves, and release the
letters of credit securing the drilling loans. Continental,
through its association and agreement with Penn Square
Bank, aided and abetted Eagle in fabricating a false track
record that assisted Eagle to fraudulently sell securities to
Petitioners.
In February 1980, the Continental-Penn Square enter-
prise began converting Eagle letter of credit loans to
production loans for the earliest partnerships despite
insufficient oil and gas reserves. Uncentradicted expert
testimony at trial established that all of Eagle’s produc-
tion loans were under-collateralized by oil and gas
reserves, and that the letters of credit should have been
called in each instance. The evidence also established that
Eagle offering documents touted the fact that Eagle had
never had a letter of credit called. These offering docu-
ments were regularly sent to Penn Square and Continen-
tal before the offerings.
Petitioners contended Continental knew that calls of
letters of credit would be harmful to the marketing of
future oil and gas programs by a promoter, and further
knew that Eagle was touting its track record of “never
having a letter of credit called” in its offering documents.
John Lytle, Executive Vice President at Continental in
charge of the division participating in the energy loans
with Penn Square Bank, and William Patterson, Senior
Vice President at Penn Square Bank in charge of its
energy loans, asserted their Fifth Amendment privilege
against self-incrimination instead of answering any ques-
tions about Continental or Penn Square’s relationship
with Eagle. The evidence was further undisputed that
Lytle received $565,000 in favorable insider loans from
Penn Square, which, when discovered by other Continen-
tal executives, did not cause Continental to fire Lytle, but
instead resulted in an increase in Lytle’s lending author-
ity. Both Lytle and Patterson were convicted of felony
crimes involving dishonesty and were in prison during
the trial.
ee
After hearing three weeks of evidence, the jury found
Continental to be liable for its participation in the pyra-
mid scheme. The district court denied Continental’s
motion for j.n.o.v. for the non-RICO claims, but found
that Continental could not be held vicariously liable
under RICO for the acts of John Lytle and other
employees. In making this ruling, the district court
clearly drew inferences in favor of the verdict loser and
concluded that Petitioners failed to prove that the scheme
was part of Continental’s “policy goals.” (A-37).
The Eighth Circuit went even further on appeal and
reversed the district court’s denial of j.n.o.v. with respect
to the non-RICO claims. The Eighth Circuit ignored any
favorable inferences that should be drawn and were
‘drawn by the jury from the assertion of the Fifth Amend-
ment privilege by both Lytle and Patterson and the
insider loan bribes paid to Lytle. In making its ruling, the
Eighth Circuit not only substituted its judgment for that
of the jury, it expressly considered conflicting evidence
favoring Continental, the verdict loser. The Eighth Circuit
further affirmed the district court’s granting of j.n.o.v.
with respect to RICO on the basis of the district court’s
opinion below.
REASONS FOR GRANTING THE WRIT
This case presents the Court with the ideal oppor-
tunity to resolve confusion in the circuits with respect to
(1) liability of corporate defendants under § 1962(c) of
RICO, and (2) the proper standard for determining the
sufficiency of the evidence to support a jury verdict.
A. Respondeat Superior under RICO.
In order to establish a RICO cause of action under 18
U.S.C. § 1964(c), four elements must be proven. These
elements are (1) conduct (2) of an enterprise (3) through a
pattern (4) of racketeering activity. Sedima S.P.R.L. v. Imrex
Company, Inc., 473 U.S. 479, 496 (1985). In the case at bar,
the district court (affirmed by the Eighth Circuit) grafted
an additional element to a RICO § 1962(c) cause of action
that must be proven before an injured party can prevail.
Under this view, a RICO plaintiff must prove a fifth
element: (5) that the illegal activities represent official
corporate policy.
In Sedima and H.J. Inc. v. Northwestern Bell Telephone
Co., 492 U.S. 229 (1989), this Court instructed the courts of
appeal and the district courts to avoid creating artificial
barriers against RICO liability not found in the express
language of the statute. Yet, in the case at bar, the district
court and the Eighth Circuit once again have departed
from the clear language of the statute and added an
additional element of liability under § 1962(c).
There is a clear conflict in the circuits on this issue.
The Eighth Circuit has taken the most restrictive position.
In Luthi v. Tonka, 815 F.2d 1229, 1230 (8th Cir. 1987), which
was followed in the present case, the Eighth Circuit indi-
cated that corporations can never be liable under the
respondeat superior doctrine in a § 1962(c) case. Other
circuits have recognized, on the other hand, that a corpo-
ration can be held liable under the doctrine of respondeat
superior for a § 1962(c) violation provided it is separate
from the RICO enterprise. Petro-Tech, Inc. v. Western Co. of
a
North America, 824 F.2d 1349, 1361-62 (3d Cir. 1987); Ash-
land Oil, Inc. v. Arnett, 872 F.2d 1271, 1281 (7th Cir. 1989).
At the far end of the spectrum, the Eleventh Circuit has
held in a criminal case that a corporation can violate
§ 1962(c) even if it is the RICO enterprise. United States v.
Hartley, 678 F.2d 961, 988 (11th Cir. 1982), cert. denied, 459
U.S. 1170, 1183 (1983).
In the case at bar, the district court cited Luthi v.
Tonka and D & S Auto Parts, Inc. v. Schwartz, 838 F.2d 964,
966-68 (7th Cir.) cert. denied, 486 U.S. 1061 (1988), and held
“that before RICO liability may be imposed it must be
proven that it was the corporate policy which created the
scheme or senior corporate management implemented
scheme.” (A-33, 35). As D & S Auto Parts was expressly
narrowed by the Seventh Circuit in Ashland Oil, and this
additional requirement is not found in the statute, the
district court’s ruling as affirmed by the Eighth Circuit is
seriously flawed.
The cases simply cannot be reconciled, and confusion
will remain unless this Court settles the conflict by grant-
ing certiorari in the case at bar. Moreover, the Court has
voted to review the question presented in Reves v. Ernst &
Young, 91-886. In Reves, an investor requested review of
the Eighth Circuit’s restrictive interpretation of the
phrase “to conduct, directly or indirectly, in the conduct
of [the] enterprise’s affairs” contained in § 1962(c). By
granting certiorari in the case at bar as well, the Court
can also resolve the confusion that exists concerning the
imposition of vicarious liability under § 1962(c).
10
B. The Proper Standard of Review for Granting Judg-
ments as a Matter of Law.
The instant case also presents this Court the oppor-
tunity to set a uniform standard for reviewing the suffi-
ciency of the evidence supporting a jury verdict. In
reversing the jury verdict on the non-RICO claims, the
Eighth Circuit expressly considered evidence supporting
Continental’s position on appeal, and rejected evidence
favoring the verdict winners. (A-19). There was clearly
probative evidence supporting the jury’s finding that
Penn Square acted as Continental’s agent, but the Eighth
Circuit simply rejected it. The “Certificates of Participa-
tion” executed by Continental and Penn Square with
respect to each loan “parked” at Continental expressly
authorized Penn Square to act on behalf of Continental.
Penn Sq:ere was given the express authority to release
letters of credit and replace them with other collateral.
Yet, the Eighth Circuit rejected this evidence, and
expressly considered conflicting evidence in overturning
the jury’s findings.
Effective December 1, 1991, Fed.R.Civ.P. 50 was
amended, abandoning the terminology “directed verdict”
and “judgment notwithstanding the verdict” in favor of
“judgment as a matter of law.” In adopting this amend-
ment, the Advisory Committee stated that the amend-
ment “effects no change in the existing standard” and “is
not an intrusion on any responsibility for factual deter-
minations conferred on the jury by the Seventh Amend-
ee
The opinion of the Eighth Circuit in the case at bar is
a clear violation of Petitioners’ Seventh Amendment right
1]
to have a jury, not an appellate court, make fact deter-
minations. The opinion violates the holding in Lavender v.
Kurn, 327 U.S. 645, 653 (1946):
Only when there is a complete absence of proba-
tive facts to support the conclusion reached does
a reversible error appear... .
Petitioners are not aware of any case since Lavender,
in which the Supreme Court has taken a jury verdict
away because the Court believed the weight of the evi-
dence to be too slight. E. Schnapper, Judges Against Juries
— Appellate Review of Federal Civil Jury Verdicts, 1989 Wis.
L. Rev. 237, 264. In Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 255 (1986), this Court reaffirmed the role of a jury:
Credibility determinations, the weighing of evi-
dence, and the drawing of legitimate inferences
from the facts are jury functions, not those of a
judge, whether he is ruling on a motion for
summary judgment or for a directed verdict.
The evidence of the nonmovant is to be
believed, and all justifiable inferences are to be
drawn in his favor.
As discussed infra, the circuits have clearly.adopted
very different standards for overturning jury Verdicts.
The present case provides this Court an opportunity to
direct circuit courts and district courts to exercise proper
judicial restraint and adhere to the command of the Sev-
enth Amendment. Petitioners respectfully request this
Court to grant certiorari on this important issue that
arises in virtually every civil jury trial.
12
I.
CERTIORARI SHOULD BE GRANTED BECAUSE A
CONFLICT EXISTS AMONG THE CIRCUITS CON-
CERNING THE APPLICABILITY OF THE DOCTRINE
OF RESPONDEAT SUPERIOR IN RICO CASES.
This Court has previously instructed the circuits and
the district courts to look to the Clayton Act in construing
RICO because both “are designed to remedy economic
injury by providing for the recovery of treble damages,
costs and attorneys’ fees.” Agency Holding Corp. v. Malley-
Duff & Associates, Inc., 483 U.S. 143, 151 (1987). See also
Holmes v. Securities Investor Protection Corp., No. 90-727,
1992 WL 52846 (March 24, 1992) (“We have repeatedly
observed . . . that Congress modeled § 1962(c) on the
civil-action provision of the federal antitrust laws. . . . wi?
Under the federal antitrust laws, this Court has
soundly rejected the argument that a corporation should
not be held liable for the acts of its agents. American
Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456
U.S. 556, 570-73 (1982). In the antitrust context, the
Supreme Court carefully analyzed the pros and cons of
imposing liability vicariously and concluded that corpo-
rations must be held accountable in order to promote the
remedial objectives of the antitrust laws. Id.
In RICO cases, several circuits have refused to follow
the Supreme Court’s directive and reasoning with respect
to respondeat superior liability under the Clayton Act. The
First Circuit has decided that the antitrust analogy should
not apply because “the legislative history [of RICO] tells
us that Congress has a specific target in mind with this
Statute, the individual wrongdoer, in contrast with the
more general purposes behind the antitrust and securities
13
acts.” Schofield v. First Commodity Corp. of Boston, 793 F.2d
28, 33 (1st Cir. 1986).
The Eighth Circuit has interpreted Schofield to mean
that corporations would never be liable under the respon-
deat superior doctrine in a § 1962(c) case. Luthi v. Tonka,
815 F.2d 1229, 1230 (8th Cir. 1987). The Eighth Circuit
affirmed this position in the case at bar by referencing the
district court’s “thorough memorandum opinion.” (A-23).
The Third and the Seventh Circuits have rejected this
narrow view. Petro-Tech, Inc. v. The Western Co. of North
America, 824 F.2d 1349, 1359 (3rd Cir. 1987); Ashland Oil,
Inc. v. Arnett, 872 F.2d 1271, 1281 (7th Cir. 1989). These
circuits recognize that vicarious liability may be imposed
under § 1962(c) provided that the corporate defendant is
not also alleged to be the “enterprise,” but is instead the
person conducting the affairs of a separate enterprise. Id.
Other circuits have refused to hold a corporation
liable under § 1962(c) if it was also the RICO enterprise.
Landry v. Air Line Pilots Ass‘n. Int’l. AFL-CIO, 901 F.2d
404, 425 (Sth Cir.) cert. denied, 111 S.Ct. 244 (1990); Yellow
Bus Lines, Inc. v. Drivers, Chauffeurs and Helpers Local
Union 639, 839 F.2d 782, 791 (D.C. Cir. 1988), judgment
vacated, 492 U.S. 914 (1989) (remanded for further consid-
eration in light of H.J. Inc. v. Northwestern Bell Telephone
Company, 492 U.S. 229 (1989)).
Confusion runs rampant in the district courts. See,
e.g. Collective Fed. Sav. v. Creel, 746 F. Supp. 1307, 1308-09
(M.D. La. 1990); Harrison v. Dean Witter Reynolds, Inc., 715
F. Supp. 1425, 1429-32 (N.D. Ill. 1989); In re Citisource, Inc.
Sec. Litig., 694 F. Supp. 1069, 1080 (S.D.N.Y. 1988); Connors
v. Lexington Ins. Co., 666 F. Supp. 434, 453 (E.D.N.Y. 1987);
14
Bernstein v. IDT Corp., 582 F. Supp. 1079, 1083 (D. Del.
1984).
It is clear that the circuit and district courts need
guidance from this Court on this critical issue. Otherwise,
RICO plaintiffs may prevail in the Third and Seventh
Circuits, but be barred from the courthouses in the First
and Eighth Circuits. Petitioners respectfully submit that
the case at bar presents the Court with an ideal case for
resolving the clear conflict.
Il.
CERTIORARI SHOULD BE GRANTED BECAUSE A
CONFLICT EXISTS CONCERNING THE PROPER
STANDARD OF REVIEW FOR DETERMINING THE
SUFFICIENCY OF THE EVIDENCE TO SUPPORT A
JURY VERDICT.
A. There is no Uniform Standard.
From 1938 to 1968, the Supreme Court regularly
granted certiorari and reversed circuit courts when they
overturned a jury verdict because of a perceived insuffi-
ciency of the evidence. E. Schnapper, Judges Against Juries
~ Appellate Review of Federal Civil Jury Verdicts, 1989 Wis.
L. Rev. 237, 240-41. See, e.g., Utah Pie Co. v. Continental
Baking Co., 386 U.S. 685 (1967) (certiorari granted to reins-
tate verdict in action arising under the Clayton Act);
International Terminal Operating Co. v. Nederl, 393 U.S. 74,
75, judgment amended, 393 U.S. 995 (1968) (“under the
Seventh Amendment, [the disputed factual issue] should
have been left to the jury’s determination.”).
Since 1968, however, the Supreme Court has not
granted certiorari to consider whether the Seventh
15
Amendment has been violated when jury verdicts are
overturned on the ground of insufficient evidence. 1989
Wis. L. Rev. at 245. As a result, circuit courts have contin-
ually departed from the doctrine of judicial self-restraint
guaranteed by the Seventh Amendment and have over-
turned jury verdicts at an alarming rate. Id. at 247-48 (in
208 cases decided in a one year period, 49% of the jury
verdicts challenged on the ground of insufficiency of the
evidence were overturned).
The circuit courts and district courts use different
standards to circumvent the express dictates of the Sev-
enth Amendment. The Seventh Circuit has expressly rec-
ognized that it will “weigh the evidence to the extent of
determining whether the evidence to support the verdict
is substantial.” La Montagne v. American Convenience Prod-
ucts, Inc., 750 F.2d 1405, 1410 (7th Cir. 1984) (emphasis in
Original).
The Eighth Circuit has been internally inconsistent.
In the case at bar, the Eight Circuit panel expressly
rejected the verdict winner’s evidence in favor of evi-
dence supporting the verdict loser. (A-19). Yet, in Morgan
v. Arkansas Gazette, 897 F.2d 945, 948 (8th Cir. 1990), the
majority opinion emphasized that the appellate court
must limit its review to evidence supporting the verdict
winner. See also Dace v. ACF Industries, 722 F.2d 374,
376-77 (8th Cir. 1983), mod. per curiam, 728 F.2d 976 (8th
Cir. 1984); Clements v. General Accident Insurance Co. of
America, 821 F.2d 489, 491 (8th Cir. 1987); Williams-E1 v.
Johnson, 872 F.2d 224, 228 (8th Cir.), cert. denied, 493 U.S.
824 (1989). The Eighth Circuit has also indicated that a
middle standard may be appropriate. Caudill v. Farmland
ii
16
Industries, Inc., 919 F.2d 83, 86 (8th Cir. 1990) (“uncon-
troverted evidence” favoring the verdict loser may be
considered in certain circumstances).
This Court has held that an appellate court should
disregard evidence militating against the verdict reached
by the jury. Dennis vp. Denver R.G.W.R.R., 375 U.S. 208, 210
(1963); Webb v. Illinois Cent. R.R. Co., 352 U.S. 512, 513-14
(1957); Wilkerson v. McCarthy, 336 U.S. 53, 57 (1949). Yet,
many of the circuits have expressly considered “all” of
the evidence in determining the sufficiency of the evi-
dence on appeal. See Keiser v. Coliseum Properties, Inc., 764
F.2d 783, 785 (11th Cir. 1985); Eyre v. McDonough Power
Equip., Inc., 755 F.2d 416, 419 (Sth Cir. 1985); Grogan v.
General Maintenance Serv. Co., 764 F.2d 444, 447 (D.C. Cir.
1985); Quaker City Gear Works v. Skil Corp., 747 F.2d 1446,
1454 (Fed. Cir. 1984), cert. denied, 471 U.S. 1136 (1985);
Western Plains Serv. Corp. v. Ponderosa Dev. Corp., 769 F.2d
654, 656 (10th Cir. 1985); Rhea v. Massey-Ferguson, Inc., 767
F.2d 266, 269 (6th Cir. 1985).
B. This Court Should Clarify the Standard of Review.
The case at bar presents this Court with an oppor-
tunity to reaffirm the doctrine of judicial restraint that is
expressly incorporated into the Seventh Amendment. Mr.
Chief Justice Rehnquist has recognized that the Seventh
Amendment represents our founders’ intent to protect
the determinations of juries from the interference by
judges:
The founders of our Nation considered the right
of trial by jury in civil cases an important
bulwark against tyranny . . . a safeguard too
paiement
17
precious to be left to the whim of . . . the
__, judiciary. . . . Trial by a jury of laymen rather
than by the sovereign’s judges was important to
the founders because juries represent the lay-
man’s common sense, . . . and thus keep the
administration of law in accord with the wishes
of the community. . . . Those who favored juries
believed that a jury would reach a result that a
judge either could not or would not reach.
Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 343-44
(1979) (Rehnquist, J., dissenting).
When Fed.R.Civ.P. 50 was amended effective Decem-
ber 1, 1991, the Advisory Committee stated that the aban-
donment of the “directed verdict” and “judgment
notwithstanding the verdict” terminology “effects no
change in the existing standard” and “is not an intrusion
on any factual determinations conferred on the jury by
the Seventh Amendment... . ” As illustrated in the
preceding discussion, there is no uniform “existing stan-
dard.” Thus, it is imperative that this Court provide the
circuits and the district courts with the correct standard.
Rule 50, as amended, allows a trial judge to make
findings as a matter of law at any time during a trial. In
doing so, should the trial judge weigh controverted evi-
dence? On appeal, is it proper for the court of appeals to
consider evidence favoring the verdict loser? The answer
to these questions should not depend upon the particular
jurisdiction in which the case is brought.
18
C. This Case Presents the Court with an Ideal Oppor-
tunity to Set Forth a Uniform Standard.
The Eighth Circuit opinion in the case at bar violated
the Seventh Amendment rights of Petitioners. In deter-
mining there was no evidence to support the jury verdict,
the Eighth Circuit prefaced its account of the facts by
referring to a book, M. Singer, Funny Money (1985), which
was outside the record and never considered by the jury.
(A-4 n.2). The Eighth Circuit rejected uncontradicted
expert testimony and the findings of the Tone Report (an
investigative report covering Continental’s relationship
with Penn Square) in concluding that Continental’s
actions were not “atypical.” Instead of considering record
evidence, the Eighth Circuit relied upon a district court
opinion that was not part of the evidence at trial, Chase
Manhattan Bank, N.A. v. FDIC, 554 F. Supp. 251 (W.D.
Okla. 1983), and concluded that many banks were making
similar loans through Penn Square. (A-5).
The Eighth Circuit improperly considered contro-
verted evidence supporting Continental in determining
three critical factual determinations made by the jury. The
following table summarizes this improper appellate
weighing of evidence:
19
‘gulayos
juaynpnel jo MOUF
jou pip [e}yusUT}UO->)
‘yua3e s [eyUaUT}UO7)
jou sem asenbs uuag
uOoISsn[aIUO7)
SHININD YAS
‘(0Z-V)
jeoidAje you alam
sueo] ‘(6-Y) PaisaAul
S19UOI}I}9g YIM
ur swiesZoid 6 ay}
jo g ut uonedidiysed
ajyeui}jn
§ |eyUaUI}UO>)
‘(6I-V) syuauaai3y
ueoy ut ydesZesed
BUl}II]JUOD
aoUaplAq
$,[e}UaUI}UO7D
‘ynouD YyYsIq ayy Aq MatAal
jO prepueys ayy jo uoyedyddesim ay; Burjesysnyy! jo sasodind 4103 Ajuo pasajjo si ajqe} stu] ‘ajqe}
Siu} Ul paziseWUNs aq Ue UY} Sat}IINdas jo ayes. juajnpnesy ajseq ayy pue diysuoyejas jeyuautjUOD
-aienbs uueg ay} 3uijdedsei padnppe sem aduapiAa as0Ww Yon ‘[e11} 499M 9914) B Suing |
‘SURO] JapIsUl
s apAq 4aoday
QUO] ‘[e}UIUT}JUO-)
pue azenbs
uuag usaMjaq
juswiaeiZe , Zuryied
URO],, ‘S9DUIIIJUI
jusuIpUusuly IS
‘santjdeid Zuryueg
jeaidAje wos
UMBPIP SadUalazU]
‘ZS6L eun{ yYsnosyy
8Z6[ Woy ssauIsnq
Sulop jo Jauueul
‘uotjedininieg
JO Sa}yedy1V197>
jaUaPIAW
SAQUOT}}Ag
‘aUIaUIS
jyua_Npnely jo
MauUy [B}JUBUTJUO>)
‘qua3y
$ JejuaUT}UO7
sem airenbs uuag
uorsnjIUuO0>)>
s, Ain{
20
‘pneiy af3eq
9y} 3sIsse A]]e1yUR}sSqQns
JOU pIp [eJuauTyUO>
uoIsn|IUO>
SAIMITD yg
TARN uestys1py
PUR jsIIjRac
0} Wey} pazjrys
‘[eJUaUTIUO. je Aejs
Ajtaerodwia; 03 sueo]
ay} Sulmoyye sae
‘Peq 213M sueo]
,peyied, mauy
SizauI3Zua WNalosjad
‘(1Z-v) ‘[EJUaUTIUOD
s[eliajew Bursayyjo je sueoy
Ul SJOUTE[ISIQ paysed Ajiesodwiay
aUaPIAg eUaPIAq
$,[2JUaUI}UO> SIBUOT}IAg
‘pnesy
9[3eq ay) pajsisse
Ajjerjuejsqns
[ejUaUT}U0>
uOoIsn|aIU0>
s Ain{
21
Under a proper standard of review, there was suffi-
cient evidence to create a jury question concerning
whether: (1) Continental engaged in atypical banking
transactions, (2) Penn Square acted as Continental’s
agent, (3) Continental knew Eagle was touting the fabri-
cated track record built by the under-collateralized loans,
and (4) Continental rendered substantial assistance by
participation in the under-collaterized loans pursuant to
its loan parking agreement with Penn Square. After a
three week trial, the jury found in favor of the Petitioners
on all of these issues, and the district court agreed that
the evidence was sufficient to support the jury’s conclu-
sions on these issues. (A-10).
As the instructions to the jury (which were
unchallenged on appeal) required the jury to find the
three elements of aiding and abetting, including actual
knowledge by Continental of Eagle’s fraud on the inves-
tors, the foregoing evidence, which must be assumed as
true, is sufficient to withstand a review by an appellate
court under the proper standard. Moreover, the “knowl-
edge” and “substantial assistance” elements of aiding
and abetting can be inferred from “atypical” business
actions. See Woodward v. Metro Bank of Dallas, 522 F.2d 84,
97 (5th Cir. 1975), relied upon in Metge v. Baehler, 762 F.2d
621 (8th Cir. 1985), cert. denied, 474 U.S. 1057 (1986); Woods
v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1012 (11th
Cir. 1985). As the underlying fraud was conceded on
appeal, and there was evidence of “atypical” business
actions from which the jury could reasonably infer
knowledge and substantial assistance, there was suffi-
cient evidence that all three elements of aiding and abet-
ting were satisfied.
22
Petitioners respectfully submit that the Eighth Circuit
in the case at bar ignored record evidence in setting forth
the facts in its opinion. Regarding the issue of Continen-
tal’s atypical banking practices, in addition to the testi-
mony of the only banking expert to testify (Tr. 1864), the
jury heard evidence of substantial atypical practices that
was summarized best in the Tone Report as follows:
In general, there is substantial evidence that
loans were disbursed without the approval of
officers having the requisite lending authority;
that the creditworthiness of borrowers was not
sufficiently checked; that loans secured by
reserves were disbursed without confirmation
by the Bank’s engineers of the value of the
reserves; that loans which could not be justified by
proven reserves were approved through the use of
additional types of collateral which were insufficient;
that in a number of instances security interests
were not perfected; that at periodic intervals, Lytle
caused the Bank to purchase groups of Penn Square
participations without proper credit investigation, to
relieve Penn Square's recurrent “liquidity
crunches”; that Lytle tolerated improper actions
by Bill G. Patterson, Executive Vice-President of
Penn Square, such as filling out the Bank’s CRF
forms for a loan or deceiving a loan officer into
believing that Lytle had approved a loan when
he had not done so; that loans were disbursed
without preparation of notesheets or furnishing
sufficient data to permit them to be rated; that
there were severe problems of lack of loan and
collateral documentation and past due pay-
ments in connection with Penn Square loans;
that the past due notices and exception reports
generated as a result of these deficiencies were
largely ignored and, in any event, never cleared
23
up by Lytle; and that Redding (whose office was
adjacent to Lytle’s) had knowledge of or at least
warning about many of these matters and took
no effective action to correct them. 127 F.R.D. at
671 (emphasis supplied).
Notwithstanding this evidence, the Court concluded
that letter of credit and production loan participations
“were hardly an atypical practice for banks in the late
1970s and early 1980s.” (A-20). Petitioners submit that the
Court misperceived the issue of atypicality when it
ignored the foregoing evidence in the record. Moreover,
the Court completely ignored the expert testimony that
Eagle’s experience and expertise was insufficient to jus-
tify Continental’s decision to open a banking relationship
through Penn Square as early as 1978 (Tr. 1804), and that
other banks in the “oil patch” turned down letter of credit
limited partnerships such as Eagle (Tr. 1807), thus creat-
ing an inference of a questionable relationship from the
outset.
On the critical issue of agency, the jury was told and
shown copies of the Certificates of Participation evidenc-
ing each Continental loan which contained express lan-
guage appointing Penn Square to act for Continental.?
2 The Certificates of Participation supported the jury find-
ing that Penn Square was Continental’s agent, and Penn
Square’s knowledge of the conversions of the letter of credit
loans was reasonably imputed to Continental by the jury. See
Gottsch v. Bank of Stapleton, 235 Neb. 816, 826-28, 458 N.W.2d
443 (1990) (court found agency in similar banking relation-
ship). See also, Flink v. Carlson, 856 F.2d 44, 46 n. 2 (8th Cir.
1988) (“since that question involving the ‘general law’ of con-
tracts and agency, federal courts look to state law in shaping
federal law”.)
24
These documents were signed by both Continental and
Penn Square from 1978 through 1982. Yet, the Court
rejected this evidence, and expressly relied on conflicting
evidence. (A-19).
The record also contains sufficient evidence from
which the jury could reasonably infer Continental’s
knowledge of Eagle’s fabricated track record and its
assistance in building the false track record. Continental
discussed Eagle’s track record with Eagle in 1978. (Tr.
649). Continental knew that a track record was important
in order fora drilling promoter to sell limited partnership
interests. (Tr. 650). Continental knew that calls of letters
of credit would signify an unsuccessful program. (Tr. 650
and 1013). Continental knew that Eagle was touting its
fabricated track record to sell securities. (Tr. 390-91; 1406;
2651-52). A Continental employee testified the Continen-
tal employees “often” reviewed offering materials
“because they were the only source of material that we
had on the loan.” (Tr. 1406). The offering materials touted
the “never had a letter of credit called” track record:
Continental further knew that its own petroleum
engineer called the letter of credit loans “garbage” and
that letter of credit loans were being converted to produc-
tion loans based upon insufficient reserves. (Tr. 1122-24,
Ex. 21; Tr. 1140, Ex. 39; Tr. 1231-32, Ex. 38). Continental
knew that Penn Square loans were being put on Conti-
nental’s books without performing any credit analysis.
(Tr. 1450-55; Kenefick Memo Ex. 93). Additionally, there
was expert testimony that from February 1980 through
July 1982, the Continental-Penn Square enterprise con-
verted Eagle letter of credit loans to production loans
despite insufficient oil and gas reserves. (Tr. 1815-58).
25
Finally, there was the evidence that John Lytle, the
Continental senior vice-president in charge of the Penn
Square relationship, took the Fifth Amendment and
refused to testify as to any matters concerning Eagle. (Tr.
2315). Lytle received $565,000.00 in favorable “insider”
loans from Penn Square during the relevant period. After
the loans were officially discovered by Continental, Lytle
was not fired, but instead received an increase in his
lending authority to $10 million. (Tr. 1017-20). The jury
was properly instructed that it could draw favorable
inferences from this failure to testify, and Petitioners con-
tend that the jury could reasonably conclude that Conti-
nental fully approved of the Penn Square relationship
because of its failure to fire Lytle. The jury was further
informed that in assessing Lytle and William Patterson’s
(senior vice-president of Penn Square) credibility, that
both of them had been convicted on August 30, 1988, of
felony crimes involving dishonesty. (Tr. 2314-15).
¢
CONCLUSION
The Petitioners respectfully request this Court to
grant certiorari to resolve the clear conflict in the circuits
and district courts concerning the applicability of the
doctrine of respondeat superior to actions brought under
§ 1962(c) of RICO and to set a uniform standard of
reviewing the sufficiency of the evidence to support a
26
jury verdict. The case at bar presents the Court with an
ideal opportunity to address these important issues.
Dated: April 22, 1992
Respectfully submitted,
LigBEN, DAHLK, WHITTED,
HOUGHTON, SLOWIACZEK
& JAHN, P.C.
THomas H. DanHtk* (15371)
SANDRA L. DoucGHERTY (16823)
Davip S. HoucHton (15204)
100 Scoular Building
2027 Dodge Street
Omaha, Nebraska 68102
(402) 344-4000
Attorneys for Petitioners
“Counsel of Record
A-1
APPENDIX
United States Court of Appeals
FOR THE EIGHTH CIRCUIT
No. 89-2678
K & S Partnership, Robert F. ?
Swartzbaugh; Richard W. Kelley, *
Charles C. Myers, Don Erftmier, *
Carl L. Boschult, William A. '
Lorenz, Nancy D. Lorenz, Harley *
D. Schrager, Samuel A. Ancona, *
Joseph I. Ancona, Carl Ancona, r
Michael J. Ancona, Byron D. F
Strattan, Dennis Strauss, Tony
LaMalfa, Kevin J. Cloonan, °
Stephen H. Simon, Frederick J. .
Simon, Alan Simon, Gary :
Gunderson, Frank Woods Petersen, *
Thomas T. Bernstein, Donald D. :
Graham, Albert Block, Mark :
Anthony, Eugene McIntyre, ¥
Dorothy McIntyre, John E. Ryan, *
Paul Alperson, Gerald E. Palmer, *
Ronald K. Parsonage, William W. *
Smith, O. Douglas Osterholm, and *
Bernard Magid, :
Appellees, ‘
V. +
Continental Bank, N.A., +
Appellant.
A-2
Appeals from the
No. 89-2679 United States
District Court for
the District of
Nebraska.
K & S Partnership, Robert F. i
Swartzbaugh; Richard W. Kelley, *
Charles C. Myers, Don Erftmier, *
Carl L. Boschult, William A. ,
Lorenz, Nancy D. Lorenz, Harley *
D. Schrager, Samuel A. Ancona, *
Joseph I. Ancona, Carl Ancona, ‘*
Michael J. Ancona, Byron D. .
Strattan, Dennis Strauss, Tony i
LaMalfa, Kevin J. Cloonan, .
Stephen H. Simon, Frederick J. .
Simon, Alan Simon, Gary :
Gunderson, Frank Woods Petersen, *
Thomas T. Bernstein, Donald D. 7
Graham, Albert Block, Mark .
Anthony, Eugene McIntyre, ¥
Dorothy McIntyre, John E. Ryan, *
Paul Alperson, Gerald E. Palmer, *
Ronald K. Parsonage, William W.
Smith, O. Douglas Osterholm, and *
Bernard Magid, .
*
Appellants,
V. .
Continental Bank, N.A., “
Appellee.
a
A-3
Submitted: January 23, 1991
Filed: December 6, 1991
Before JOHN R. GIBSON, FAGG, and WOLLMAN, Cir-
cuit Judges.
WOLLMAN, Circuit Judge.
On September 12, 1990, we filed our opinion revers-
ing the jury verdict entered in favor of K & S Partnership
and other plaintiffs (plaintiffs) and affirming the judg-
ment notwithstanding the verdict entered in favor of
Continental Bank, N.A. (Continental). Thereafter, plain-
tiffs filed a petition for rehearing, with a suggestion for
rehearing en banc, alleging that our opinion had applied
a standard of review to the motion for judgment notwith-
standing the verdict that was in conflict with the standard
of review heretofore adopted by this court. After careful
review, we concluded that our opinion employed lan-
guage that might be read by some as being in conflict
with that used in our earlier opinions. Because it was not
our intention to in any way depart from the well-estab-
lished standard of review laid down by our prior opin-
ions, we vacated our September 12, 1990, opinion on
January 23, 1991. We now file this opinion in its place.
Continental Bank appeals from the district court’s!
judgment in favor of plaintiffs entered on a jury verdict
' The Honorable Richard G. Kopf, United States Magis-
trate for the District of Nebraska, presided at trial pursuant to
the parties’ consent.
A-4
that awarded plaintiffs damages under theories of Conti-
nental’s secondary liability to plaintiffs. Plaintiffs cross-
appeal from the district court’s grant of judgment not-
withstanding the verdict on their Racketeer Influenced
and Corrupt Organizations Act (RICO) claim. We reverse
the judgment entered on the jury verdict and affirm the
district court’s judgment notwithstanding the verdict.
I.
We summarize the evidence produced at trial, view-
ing it in the light of the standard of review set forth later
in this opinion. In the late 1970s and early 1980s, Penn
Square Bank (Penn Square) of Oklahoma City, Oklahoma,
loaned money extensively for oil and gas exploration and
production.? Included in this lending were “drilling
loans” made to Eagle Petroleum Company and its two
principals, Wesley Markle and Terry Stanhagen (collec-
tively Eagle), to explore for oil and gas. Eagle secured the
loans with letters of credit that the limited partners in its
oil and gas programs obtained from their own banks in
favor of Penn Square. In most cases the letters of credit,
along with cash paid directly to the partnerships, consti-
tuted the limited partners’ investment in the programs.
Using letters of credit as collateral allowed investors to
take tax deductions for the entire amount of their invest-
ment instead of just the cash portion. The letters of credit
in the Eagle programs generally expired after two years,
2 For a highly readable account of Penn Square’s rise and
fall and of Continental’s participation, along with that of sev-
eral other major banks, in Penn Square’s ultimately ill-fated oil
gas lending policies, see M. Singer, Funny Money (1985).
A-5
and the drilling loans were repayable approximately
three months prior to that time.
Under standard practice, before the drilling loan
came due the partnership would apply for a “production
loan” to produce and sell the oil and gas that had been
discovered. When making a production loan, the bank
would release the limited partners’ letters of credit and
substitute the oil and gas reserves as collateral. If, how-
ever, the bank refused to grant a production loan, the
bank would call the letters of credit and use the proceeds
to satisfy the outstanding drilling loan.
Banking regulations limited Penn Square’s lending to
a percentage of its capital, and further limited the amount
it could lend to any single borrower. Thus, for Penn
Square to make new loans it needed other banks to par-
ticipate in or purchase a share of its loan portfolio.
Because the oil and gas industry was thriving at the time,
there was competition among major banks to purchase
participations from Penn Square and other lenders. Some
fifty other banks across the country bought oil and gas
participations from Penn Square. For example, Chase
Manhattan Bank purchased some $212 million worth of
participations. See Chase Manhattan Bank, N.A. v. FDIC,
554 F. Supp. 251 (W.D. Okl. 1983). Continental's participa-
tions ultimately totaled some $1.075 billion.
Continental began participating in Penn Square loans
in 1978, including loans made to Eagle. Generally, each of
Continental's participations was evidenced by two docu-
ments: a loan participation agreement and a certificate of
participation. The loan participation agreements speci-
fically provided that Penn Square would not, without
A-6
Continental’s prior written approval, release the letters of
credit that secured the drilling loans.
Contrary to the terms of the loan participation agree-
ments with Continental, the certificate of participation
prepared by Penn Square stated that Penn Square could
release collateral and substitute new collateral without
Continental’s consent.
In February 1981, Eagle sent a Continental loan offi-
cer a package of Eagle offering materials, including a
twenty-six page “Investment Brief” prepared by Invest-
ment Search, Inc. Page nine of the report, summarizing
Eagle Drilling Partnership 1981’s “strengths,” stated that
Eagle had returned letters of credit to limited partners
before the expiration date in five of its fourteen private
oil and gas partnerships. According to the report, this
record indicated Eagle’s ability to select prospects that
generated revenues sufficient to obtain production loans.
The record does not indicate that anyone at Continental
read the report or this portion of it.
Later in 1981 there were signs within Continental of
problems with the Penn Square participations. In the
summer of 1981, Kathleen Kenefick, a Continental vice-
president, wrote a memo about her concerns with the
participations, including Continental’s practice of lending
money to Penn Square for 30 to 90 days before doing a
credit analysis. Both John Lytle, who headed Continen-
tal’s Mid-Continent division, which was in charge of
Penn Square participations, and George Baker, a Conti-
nental executive vice-president who headed General
Banking Services, of which Lytle’s Mid-Continent divi-
sion was a part, knew about the memorandum.
al
A-7
Baker became concerned with the level of Penn
Square participations after reading the Kenefick mem-
orandum. Baker told Gerald Bergman, who headed a
special industries unit that included the Mid-Continert
division, to discontinue purchasing participations in dril-
ling fund loans supported by letters of credit and to
convert the participations already purchased into direct
loans. A Report of the Special Litigation Committee of the
Board of Directors of Continental Illinois Corporation
(the Tone Report) later stated that despite these directions,
the “vast bulk of the participations were purchased,
increased, or renewed after Baker’s order was given.”
In November 1981, two oil and gas engineers
employed in the Mid-Continent division informed John
Redding, a senior vice-president at Continental and
Lytle’s direct superior, that lending on Penn Square loans
exceeded what oil and gas reserve evaluations indicated
were justified. Redding apparently took no action with
this information. One Continental engineer who ques-
tioned the wisdom of drilling fund loans was repeatedly
told that letter-of-credit loans were “lucrative.”
In December 1981, an audit revealed that Penn
Square had made a series of personal loans to Lytle in the
amount of $565,000 at preferential interest rates. After
numerous consultations with Lytle’s superiors, Roger
Anderson, Continental’s chairman, imposed monetary
sanctions against Lytle but did not discharge him. About
the same time as this discovery, Continental increased
Lytle’s lending authority to $10 million.
As time went on, several of the Eagle drilling loans
were converted to production loans, replacing limited
A-8
partners’ letters of credit with oil and gas reserves as
security interests. On July 5, 1982, Penn Square was taken
over by the Federal Deposit Insurance Corporation.
Eagle, Markle, and Stanhagen all eventually declared
bankruptcy.
II.
Plaintiffs invested in nine of the seventeen oil and
gas limited partnerships Eagle formed between 1979 and
1981. In general, plaintiffs were told before they invested,
often by Markle or Stanhagen, that Eagle had a good
track record in exploring for and producing oil and gas,
that prior programs had received production loans, and
that no letters of credit had been called.
Before investing, however, plaintiffs received offer-
ing materials that stated a warning on the cover page that
“THESE SECURITIES INVOLVE A HIGH DEGREE OF
RISK.” The circular also warned that Eagle “may not be
able to successfully conduct the activities contemplated,”
and that since “oil and gas exploration . . . is considered
speculative, .. . no assurance can be given that ali or any
part of an investment . . . will be recovered.” The circular
also stated that “[d]ue to the unpredictability of oil and
gas exploration and development, the results of previous
operations can not be construed as indicative of the
results that may be achieved by the Partnership.” Each
investor signed a suitability letter acknowledging the
“speculative nature” and “high degree of risk” of the
investment and verifying that he had “a sufficient net
worth to sustain a loss of his entire investment in the
Partnership in the event such loss should occur.”
:
2
A-9
Continental bought participations in only five of the
nine programs in which plaintiffs invested. Continental
had no contact with the plaintiffs and made no state-
ments to them before they invested in Eagle.
Plaintiffs lost their investments when Eagle and Penn
Square failed. They brought this suit against Continental
in 1984, alleging that Continental had knowingly assisted
Eagle “in fabricating its ‘never had a letter of credit
called’ track record.” Plaintiffs’ Brief at 6. In particular,
plaintiffs allege that Markle and Stanhagen violated secu-
rities law by misrepresenting Eagle track records in two
respects: (1) although Markle and Stanhagen accurately
stated that production loans had been received in the
earlier programs and letters of credit released, those
statements were misleading because of the failure to dis-
close that the oil and gas reserves were in fact insufficient
to warrant the production loans; and (2) while Markle
and Stanhagen accurately told investors that Eagle had
repurchased its first two programs, that statement was
deceptive because it did not reveal that Eagle
repurchased the programs because it had not found ade-
quate reserves.
At trial, plaintiffs’ banking expert, John Bricker, a
professor of finance at Southern Methodist University in
Dallas, Texas, testified that Continental's initial participa-
tions in the Penn Square loans were not prudent because
Stanhagen and Markle did not have the experience and
expertise to discover oil and gas in sufficient quantities to
fully repay the principal and interest they had borrowed
from Penn Square. An internal Continental memorandum
dated December 26, 1978, indicates that Continental
became interested in the Eagle programs only after a
A-10
well-known drilling contractor became connected with
the Eagle programs.
Continental employees testified that Penn Square
released letters of credit and made production loans with-
out consulting with or informing Continental. Plaintiffs
did not controvert this testimony; Bricker testified that he
had seen no evidence of Continental’s consent to Penn
Square’s release of letters of credit or grant of production
loans.
Lytle did not testify about Continental's relationship
with Eagle, invoking his Fifth Amendment privilege
against self-incrimination. The jury was informed that
Lytle, along with a senior vice president of Penn Square,
had been convicted of felony crimes involving dishon-
esty.
Dennis Winget, a former Continental vice-president
and Penn Square employee, testified that it was difficult
to sell limited partnership interests in a drilling fund
without a track record and that calling letters of credit
would make it more difficult to sell such interests. Red-
ding likewise testified that calls of letters of credit in
drilling fund programs like Eagle’s would signal an
unsuccessful venture.
The district court submitted the case to the jury on
four counts: (1) aiding and abetting a violation of Section
10 of the Securities Exchange Act of 1934 (15 U.S.C. § 78))
and Rule 10b-5 of the Securities and Exchange Commis-
sion; (2) conspiring to violate the securities laws; (3)
_ knowingly participating in a breach of fiduciary duty;
and (4) RICO (18 U.S.C. § 1962). The jury returned a
A-11
verdict against Continental on all four counts. On Conti-
nental’s motion for judgment notwithstanding the ver-
dict, the district court set aside the RICO count, finding
that the alleged acts were contrary to Continental’s poli-
cies and that Continental could not be held vicariously
liable under RICO for the acts of its employees. The court
denied the motion on the other counts and entered judg-
ment against Continental, stating:
While some of [Continental’s] arguments [for
setting aside the jury verdict] are particularly
persuasive, such as the claim that plaintiffs did
not prove justifiable reliance on the alleged mis-
representations, given the standard of review I
must apply in this case regarding the motion for
judgment notwithstanding the verdict, I should
not substitute my judgment for that of the jury.
While I would come to different conclusions
than the jury came to, I cannot say as a matter of
law that the conclusions I would reach are the
only reasonable conclusions.
Memorandum Opinion at 48.
In its verdict, the jury awarded damages of approx-
imately $438,000 to plaintiffs on each count. Post-verdict
juror affidavits stated that during deliberations the jury
had “divided the total damage amount by four” and thus
apportioned the damages “equally among the four differ-
ent theories of recovery.” Concluding that the affidavits
rather than the actual verdict reflected the jurors’ true
intentions, the court amended the verdict to multiply the
jury’s award by four.
A-12
lil.
The plaintiffs’ position was summarized by the dis-
trict court:
[P]laintiffs contended that Penn Square and
Continental helped Markle, Stanhagen and
Eagle engage in a “pyramid” scheme. As long as
the banks would make production loans, oil and
&as promoters could sell their securities regard-
less of the sufficiency of the oil and gas used to
collateralize the production loans. The benefit to
the banks would be large interest bearing loans,
and, despite the failure due to lack of oil and gas
reserves of certain production loans, if enough
loans were made the profits to the banks would
exceed any losses which might occasionally
occur. As long as the banks would make produc-
tion loans, Markle, Stanhagen and Eagle had a
good “track record” to point to in order to
induce others to invest.
Memorandum Opinion at 8-9.
Continental challenges the judgment on the grounds
that the district court incorrectly applied the law of sec-
ondary liability and that the evidence was insufficient to
support the jury’s verdict.
We review the district court’s application of the law
de novo. Garionis v. Newton, 827 F.2d 306, 309 (8th Cir.
1987). In deciding whether Continental is entitled to judg-
ment notwithstanding the verdict,
we must consider the evidence in the light most
favorable to [plaintiffs], assume all conflicts in
the evidence were resolved by the jury in [plain-
tiffs’] favor, assume [plaintiffs] proved all facts
A-13
[their] evidence tends to prove, and give [plain-
tiffs] the benefit of all favorable inferences that
may reasonably be drawn from the proven facts.
A judgment notwithstanding the verdict
“should be granted only when all the evidence
points one way and is susceptible of no reason-
able inferences sustaining [plaintiffs’] position.
Frieze v. Boatmen’s Bank of Belton, No. 91-1030, slip op. at 3
(8th Cir. Dec. 2, 1991) (quoting Washburn v. Kansas City
Life Ins. Co., 831 F.2d 1404, 1407 (8th Cir. 1987)) (citation
omitted). See also Caudill v. Farmland Indus., 919 F.2d 83, 86
(8th Cir. 1990). Continental cannot prevail on its motion
“if the evidence so viewed would allow reasonable jurors
to differ as to the conclusion that could be drawn.” Cole v.
Control Data Corp., No. 90-2685, slip op. at 3 (8th Cir. Oct.
16, 1991). For similar formulations of the standard of
review to be applied to motions for judgment notwith-
standing the verdict, see, e.g., Nelson v. Production Credit
Ass'n, 930 F.2d 599 (8th Cir.), cert. denied, _S. Ct. ___
(1991); Morgan v. Arkansas Gazette, 897 F.2d 945 (8th Cir.
1990); Gilkerson v. Toastmaster, Inc., 770 F.2d 133 (8th Cir.
1985); Dace v. ACF Indus., Inc., 722 F.2d 374 (8th Cir. 1983).
A. Aiding and Abetting Liability
The three theories of secondary liability under which
the district court submitted the case to the jury have
similar elements under federal common law. Because the
elements of aiding and abetting liability are also the core
elements of the other theories, we will examine that the-
ory first.
We evaluate a claim for aiding and abetting a viola-
tion of the securities laws under a three-part test:
|
A-14
(1) the existence of a securities law violation
by the primary party (as opposed to the
aiding and abetting party);
(2) “knowledge” of the violation on the part of
the aider and abettor; and
(3) “substantial assistance” by the aider and
abettor in the achievement of the primary
violation.
FDIC v. First Interstate Bank of Des Moines, N.A., 885 F.2d
423, 429 (8th Cir. 1989). Continental’s arguments on
appeal assume that Eagle’s actions defrauded plaintiffs.
Therefore, we examine Continental’s liability for aiding
and abetting under the assumption that Eagle is primarily
liable to plaintiffs for securities law violations.
As for the second element, that of whether or not
Continental had “knowledge” of Eagle’s primary viola-
tion, Continental asserts that because it had no duty to
disclose knowledge of a primary violation to the plaintiff
investors, plaintiffs were required to but failed to prove
that Continental had actual knowledge of the primary
violation, here Eagle’s fraud.3 In FDIC v. First Interstate
Bank, a case in which a bank also sought to defend itself
against claims for aiding and abetting a primary viola-
tor’s fraud, we held that a defendant’s general awareness
of its overall role in the primary violator’s illegal scheme
3 The district court’s Instruction No. 27 required the plain-
tiffs to “prove by a preponderance of the evidence that Conti-
nental Bank or its agent had actual knowledge that the track
record of early programs was being falsely portrayed and that
Eagle Petroleum Corporation, Wesley Markle or Terry Stan-
hagen were doing so knowingly and with intent to defraud.”
A-15
is sufficient knowledge for aiding and abetting liability.
Id. 885 F.2d at 429-31. Such knowledge may be proved by
and inferred from circumstantial evidence, including
facts available to the defendant’s employees. Id. at 431;
Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004,
1009 (11th Cir. 1985) “Knowledge may be shown by cir-
cumstantial evidence, or by reckless conduct, but the
proof must demonstrate actual awareness of the party’s
role in the fraudulent scheme.” Woodward v. Metro Bank of
Dallas, 522 F.2d 84, 96 (5th Cir. 1975). If an illegal scheme
exists and a bank’s loan assists in that scheme, the bank’s
knowledge of the scheme is the crucial element that pre-
vents it from suffering automatic liability for the conduct
of insiders to whom it loaned the money. Id. at 96 (citing
Ruder, Multiple Defendants in Securities Law Fraud Cases:
Aiding and Abetting, Conspiracy, In Pari Delicto, Indemni-
fication, and Contribution, 120 U. Pa. L. Rev. 597, 630-31
(1972). “A plaintiff’s case against an aider, abetter, or
conspirator may not rest on a bare inference that the
defendant ‘must have had’ knowledge of the facts.”
Schlifke v. SeaFirst Corp., 866 F.2d 935, 948 (7th Cir. 1989)
(quoting Barker v. Henderson, Franklin, Starnes & Holt, 797
F.2d 490, 496-97 (7th Cir. 1986)).
In First Interstate, we held that the bank had reck-
lessly ignored signs of its depositor’s misappropriation of
funds in favor of seeking potential profits from its
involvement with the depositor. 885 F.2d at 432. Severe
recklessness can satisfy the scienter requirement, at least
where the alleged aider and abettor owes a duty to the
defrauded party. Woods, 765 F.2d at 1010.
Severe recklessness is limited to those highly
unreasonable omissions or misrepresentations
A-16
that involve not merely simple or even inexcus-
able negligence, but an extreme departure from
the standards of ordinary care, and that present
a danger of misleading buyers or sellers which
is either known to the defendant or is so
obvious that the defendant must have been
aware of it.
Id. at 1010 (quoting Broad v. Rockwell Int'l Corp., 642 F.2d
929, 961-62 (5th Cir.) (en banc), cert. denied, 454 U.S. 965
(1981)). In Woods, the court affirmed the imposition of
aiding and abetting liability based upon a bank officer’s
letter of recommendation written solely for the purpose
of currying favor with the bank’s clients. The letter con-
tained statements that the officer had no knowledge of,
even though he was aware that the recipient would rely
on the letter.
In First Interstate, the defendant bank had a statutory
duty to disclose information to regulatory authorities
when it knew or suspected that a depositor was using the
bank to carry on an illegal scheme. Id. at 433. In Metge v.
Baehler, 762 F.2d 621 (8th Cir. 1985), cert. denied, 474 U.S.
1057 (1986), we quoted Woodward, 522 F.2d at 97, for the
proposition that “[w]hen it is impossible to find any duty
of disclosure, an alleged aider-abettor should be found
liable only if scienter of the high ‘conscious intent’ vari-
ety can be proved. Where some special duty of disclosure
exists, then liability should be possible with a lesser
degree of scienter.” Id. at 625.
Whether or not the existence of a duty to disclose
affects the level of knowledge required to establish aiding
and abetting, the record does not establish that Continen-
tal had any duty of disclosure here. There is no evidence
A-17
that Continental, in its dealings with Eagle or Penn
Square, undertook to communicate or disseminate infor-
mation to the plaintiffs with an intent or awareness that
plaintiffs would use it in the purchase or sale of a secu-
rity.
Moreover, the record is deficient of probative evi-
dence that Continental had even a general awareness of
an Eagle or Penn Square illegal scheme. Plaintiffs place
significance on the testimony of former Continental
employees who were aware that calling letters of credit in
oil and gas programs such as Eagle’s was important for
attracting investors to future programs. This is no indica-
tion, however, that Continental knew that Eagle was pro-
moting a false track record. Continental’s bare receipt of
the Investment Search Report summarizing Eagle’s pro-
grams does not establish that Continental knew that
Eagle was misrepresenting its track record, especially
because there is no evidence that Continental knew any-
thing about the reserve levels of the production loans
referred to in the report.
In addition, the record contains no evidence from
which reasonable jurors could find that Continental had
an interest in assisting Eagle or Penn Square in producing
a false track record. In Metge, we reversed the district
court’s summary judgment, finding that “although the
record is not very illuminating on the question of [the
defendant’s] benefit from IEI’s delayed bankruptcy, we
find sufficient evidence at least to give rise to an infer-
ence that [the defendant] may have benefitted at the
expense of the certificate holders from IEI’s renewed
lease on life.” 762 F.2d at 629. Thus, we found that the
A-18
facts presented a jury question on aiding-and-abetting
liability. Id. at 630.
Here, however, the plaintiffs did not produce evi-
dence at trial establishing that the interest Continental
received on letter-of-credit loans would outweigh Eagle’s
occasional production loan default, or that anyone at
Continental thought this would be possible. The testi-
mony of Continental’s employees that letter-of-credit
loans were “lucrative” explains Continental’s willingness
to participate in Penn Square’s loans, but it is not enough
to support an inference that Continental knew of a
scheme by Eagle to defraud.
What the record does show is that Continental’s man-
agement at the time of the Penn Square participations
was plagued with problems that permitted the poor judg-
ment of some employees to prevent it from perceiving the
risk of its involvement with Penn Square. As the district
court stated, “[T]here is no question but that certain
employees of Continental were negligent,” a statement
fully supported by the testimony at trial and by the
findings included in the Tone Report.
The record shows that Lytle pursued an aggressive
end risky lending policy that his superiors failed to ade-
quately supervise. Baker’s directions in late 1981 to dis-
continue letter-of-credit loans participations were not
carried out, due to lack of supervision, and, perhaps,
according to the record, misunderstanding. Lytle’s per-
sonal debt to Penn Square bank constituted an unethical
conflict of interest that may well have clouded his judg-
ment, but it is an insufficient basis for a finding that
A-19
Continental agreed to assist Penn Square and Eagle in
creating a false track record to attract investors.
Furthermore, whether the production loans Conti-
nental participated in were insufficiently supported by oil
and gas reserves is not a matter of mathematical preci-
sion. Plaintiffs’ banking expert testified that determining
the prudent loan value of a given reserve is a matter of
judgment without a fixed standard in the banking indus-
try. Moreover, the record does not disclose that plaintiffs
were aware of guidelines that Continental and Penn
Square used in making loans. Thus, plaintiffs could not
have known what reserves the banks considered ade-
quate for granting a production loan.
The district court permitted the jury to find that Penn
Square acted as Continental’s agent, thus allowing the
jury to attribute Penn Square’s knowledge and actions
concerning the Eagle loans. The record lacks evidence
that would enable a reasonable jury to make such a
finding. Although the certificates of participation allowed
Penn Square to substitute collateral and thus grant pro-
duction loans without Continental’s consent, they were in
conflict with the loan participation agreements on that
point. There was no other evidence that Continental
authorized Penn Square to act for it, that Penn Square
accepted such an undertaking, or that Continental had
any control over Penn Square or its actions concerning
Eagle.
A bank may be willing to take a chance on a new and
potentially valuable customer who does not meet its nor-
mal credit requirements. Although it is true that “if the
A-20
method or transaction is atypical or lacks business justi-
fication, it may be possible to infer the knowledge neces-
sary for aiding and abetting liability,” Woodward, 522 F.2d
at 97, the evidence here made plain that letters-of-credit
and production loan participations were hardly an atypi-
cal practice for banks in the late 1970s and early 1980s.
Indeed, the profitability of such loans, by itself, is an
obvious and legitimate business justification.
In Metge, we noted that otherwise unremarkable
events viewed together may suggest an unusual pattern
of events intimating an illegal scheme. 762 F.2d at 626.
Speculative investments, however, are not enough to hold
a private enterprise liable to others. Accordingly, we con-
clude that plaintiffs failed to produce evidence from
which it could reasonably be found that Continental
knew of any scheme to aid Eagle in falsely portraying its
track record to investors.
The third element of aiding and abetting liability is
substantial assistance in the achievement of the primary
violation. Establishing this element also requires the
plaintiff to show that the secondary party proximately
caused the violation, or, in other words, that the encour-
agement or assistance was a substantial factor in causing
the tort. Metge, 762 F.2d at 624.
Continental asserts that its business dealings with
Penn Square were nothing more than routine business
transactions and thus could not have constituted substan-
tial assistance. In Metge and First Interstate we held that a
party’s involvement in only routine business transactions
will not necessarily protect it from aiding and abetting
liability. We need not decide whether there were more
— iahas
A-21
than routine business transactions involved here, how-
ever, because we conclude that there is no evidence that
Continental’s actions proximately caused plaintiffs’ loss.
The thrust of plaintiffs’ claim is that had they known the
facts concerning Eagle’s fabricated track record, they
would not have invested in the Eagle partnerships. Plain-
tiffs’ bare allegations, however, are not sufficient to sup-
port a finding that they were entitled to rely on
Continental’s participation in production loans as repre-
sentations on which to base their investment decisions in
the light of the knowledge plaintiffs had at the time they
made their investments. When plaintiffs chose to invest
in Eagle partnerships, they chose to subject themselves to
the risks made explicit by the warnings and disclaimers
contained in the Eagle offering materials. When Conti-
nental chose to participate in Penn Square loans, it evalu-
ated other entities to determine its own course of conduct
and did not guarantee its conclusions to the world at
large. “Mindful of the potentially devastating impact aid-
ing and abetting liability might have on commercial rela-
tionships,” Woods, 765 F.2d at 1009 (citations omitted), we
will not uphold aiding and abetting liability in a relation-
ship between investor and lending bank as attenuated as
that between plaintiffs and Continental without more
evidence than we have here.
B. Other Secondary Liability Theories
The jury also returned verdicts in favor of plaintiffs
for conspiracy to violate the securities laws and knowing
participation in a breach of fiduciary duty. Knowing par-
ticipation in a breach of fiduciary duty “is analogous to a
cause of action . . . for aiding and abetting a securities
A-22
fraud,” where the primary violation involves a breach of
fiduciary duty. Whitney v. Citibank, N.A., 782 F.2d 1106,
1115 (2d Cir. 1986). Likewise, liability for civil conspiracy
is in substance the same thing as aiding and abetting
liability. Civil conspiracy requires an agreement to partic-
ipate in an unlawful activity and an overt act that causes
injury, so it “do[es] not set forth an independent cause of
action” but rather is “sustainable only after an underly-
ing tort claim has been established.” McCarthy v. Klein-
dienst, 741 F.2d 1406, 1413 n.7 (D.C. Cir. 1984); accord
Mizokami Bros. v. Mobay Chem. Corp., 660 F.2d 712, 718 n.8
(8th Cir. 1981); Rotermund v. United States Steel Corp., 474
F.2d 1139, 1145 (8th Cir. 1973).
Thus, al! three theories of secondary liability here
rise or fall together. Because Continental is not liable for
aiding and abetting securities fraud, it did not assist in
breaching any fiduciary duty Eagle or Penn Square owed
to plaintiffs. Likewise, Continental may not be held liable
on the civil conspiracy claim because plaintiffs did not
prove a substantive violation, much less an agreement to
participate in one of the substantive offenses. Therefore,
we find that Continental is not secondarily liable to plain-
tiffs under any of these theories.
D. [sic] Conclusion
We reverse that part of the judgment imposing sec-
ondary liability on Continental. As a result, we need not
examine the damages issue. We affirm the judgment not-
withstanding the verdict on plaintiffs’ RICO claim on the
A-23
basis of the district court’s thorough memorandum opin-
ion.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS,
EIGHTH CIRCUIT.
A-24
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
K & S PARTNERSHIP, et al., _) CV 84-0-626
a )
shame ) MEMORANDUM
vs. ) AND ORDER
CONTINENTAL BANK, N.A., etc. )
°"“) (Filed Sep. 18, 1989)
Defendant. )
Continental Bank, N.A. (“Continemtal”) moves for
judgment notwithstanding the jury verdict (filing 298).
The plaintiffs move for attorneys’ fees (filing 297) on the
basis that they recovered pursuant to a jury verdict ona
civil RICO claim, and thus are entitled to attorneys’ fees.
Since I will grant, in part, the motion for judgment not-
withstanding the verdict as that motion regards plaintiffs’
recovery on the RICO claim, I will deny the plaintiffs’
motion for attorneys’ fees as moot.
This case involved an alleged securities fraud. Plain-
tiffs contended that Continental assisted certain promo-
ters in oil and gas limited partnerships in creating a false
track record, thereby luring the plaintiff investors into
investing with the promoters of the oil and gas limited
partnerships. The jury returned a verdict in favor of all
plaintiffs against Continental on all counts of the com-
plaint, including a RICO count.
A-25
I. J.N.O.V.
A. Introduction
Continental claims the jury verdict should be over-
turned because:
(1) Plaintiffs failed to prove their damages;
(2) Continental cannot be held vicariously liable for
alleged acts of its employees under RICO;
(3) Plaintiffs failed to demonstrate a multiple
scheme necessary to support a RICO claim;
(4) Plaintiffs failed to establish transaction causa-
tion or proximate cause;
(5) Plaintiffs did not justifiably rely on the alleged
misrepresentations.
Continental’s motion will be granted in part regard-
ing the RICO claim, because on the trial record as a
matter of law Continental did not directly violate the law,
and the acts of its employees or agents cannot be imputed
to Continental since it was not the corporate policy of
Continental to seek “loan growth at any price.” Other-
wise, the motion for judgment notwithstanding the ver-
dict should be denied.
B. Standard of Review
In deciding whether to grant the motion for judg-
ment notwithstanding the verdict, the court, sensitive to
the constitutional right to trial by jury, may grant the
motion only when, without weighing the credibility of
the evidence, there can be but one reasonable conclusion
A-26
as to the proper judgment. 5A J. Moore & J. Lucas,
Moore's Federal Practice { 50.07[{2] (2nd ed. 1989). In con-
sidering the motion, the court must view the evidence in
the light and with all reasonable inferences most favor-
able to the party who secured the verdict. Id. I have
followed these principles in this case.
C. Failure to Move for Directed Verdict
Federal Rule of Civil Procedure 50(b) has been con-
strued to require that a party who moves for judgment
notwithstanding the verdict must have also moved for a
directed verdict at the close of all of the evidence. This
means that normally when a defendant, after moving for
a directed verdict at the conclusion of plaintiffs’ case,
fails to renew the motion at the close of all of the evi-
dence, defendant is deemed to have waived the defen-
dant’s right to judgment notwithstanding the verdict.
Meyers v. Norfolk Livestock Market, Inc., 696 F.2d 555, 558
(8th Cir. 1982). However, in some circumstances, the
courts have excused noncompliance with this require-
ment. Id. (citing, among other cases, Ohio-Sealy Mattress
Mfg. Co. v. Sealy, Inc., 585 F.2d 821, 825 (7th Cir. 1978),
cert. denied, 440 U.S. 930 (1979)). This is a case where
noncompliance with the normal requirement should be
excused.
Immediately before counsel argued the case to the
jury, certain “housekeeping” matters were taken up out-
side the presence of the jury. Plaintiff had rested, but
defendant had not done so formally.
The defendant offered certain exhibits, the court
dealt with the offer, and defendant, although still not
A-27
formally resting, renewed a previous motion for directed
verdict saying: “The only thing further is that we would —
prior to the jury coming back in, would renew our motion
for directed verdict.” Plaintiffs then offered a chart so the
chart could be used by plaintiffs in their counsels’ argu-
ment before the jury. The chart was received. At that
point the jury was brought back into the courtroom.
Counsel for the defendant then read a summary of
tax deductions taken by individual plaintiffs arising out
of their investments in the securities at issue. Essentially,
what took place in front of the jury was the publication of
a summary of previously admitted evidence. Defendant
rested. Defendant did not renew the motion for directed
verdict in front of the jury. Plaintiff offered no rebuttal.
Closing argument began.
Essentially, what took place after defendant renewed
its motion for directed verdict was (1) outside of the
presence of the jury plaintiffs offered a chart so it could
be used in argument by plaintiffs in front of the jury, and
(2) defendant read into the record without objection and
before the jury a summary of certain tax deductions taken
by the plaintiffs and with which the parties had spent a
considerable period of time dealing during the trial as
each plaintiff testified.
I firmly understood, and I believe that all counsel did
also, that the procedure used by defendant to summarize
the tax return information was intended only to publish
in the most expedient and least time consuming manner
complex evidence essentially already in the record. I had
ruled that the tax returns themselves would not go to the
A-28
jury. Although I did not explicitly tell counsel for defen-
dant that he need not renew the motion after his sum-
mary of the tax return information, that was certainly my
understanding and apparently defense counsel’s as well.
I was not in any way misled by the actions taken by the
defendant, and plaintiffs likewise make no claim that
they were misled.
There are two purposes for the requirement that one
must move for a directed verdict at the close of all of the
evidence in order later to be permitted to move for judg-
ment notwithstanding the verdict. 5A J. Moore & J. Lucas,
supra, { 50.08. The first purpose is to ensure that the court
examines the sufficiency of all of the evidence as a matter
of law before the jury renders its judgment on the facts,
so that the constitutional right to a jury trial on the facts
is preserved. Id. In other words, the right to a jury trial
should not be denied until the court knows all of the
evidence and can state as a matter of law that the evi-
dence is insufficient. The less esoteric, and more practical,
reason for the rule is to avoid trapping the unwary; that
is, at the time the motion for directed verdict is made the
party against whom the motion is made can still cure the
alleged deficiency. Id. Thus, the rule seeks to promote
justice and the avoidance of tactical victories at the
expense of justice.
In this case, since no one was misled or prejudiced,
the court tacitly condoned the procedure, no new evi-
dence was presented, and the evidence presented was
brief, the failure to renew the motion for directed verdict
is not fatal. Halsell v. Kimberly-Clark, 683 F.2d 285, 294 (8th
Cir. 1982), cert. denied, 459 U.S. 1205 (1983); Ohio-Sealy
Mattress Mfg. Co., 585 F.2d at 824-26; Pittsburg-Des Moines
A-29
Steel v. Brookhaven Manor Water Co., 532 F.2d 572, 576 (7th
Cir. 1976); 5A J. Moore & J. Lucas, supra, { 50.08.
D. Vicarious Liability Under RICO
Continental argues that the evidence as a matter of
law failed to establish any reasonable inference that the
alleged wrongful acts of its employees, or those acting in
union with those employees, became the policy of Conti-
nental. If it was not the corporate policy of Continental to
further the alleged wrongful acts of its employees, and
those acting in concert with its employees, then Conti-
nental argues that as a matter of law it cannot be held
vicariously liable under RICO. I agree.
This case was at its core a securities fraud case.
Among other things, the plaintiffs contended that Eagle
Petroleum Corporation (“Eagle”), Wesley Markle and
Terry Stanhagen created a false track record of success
with regard to limited partnerships, which had been
formed to explore for oil and gas, by two means: (1)
Eagle, Markle and Stanhagen created a false track record
of success by representing that drilling loans obtained in
earlier programs had been replaced by production loans
when at the same time those production loans were based
upon insufficient oil and gas reserves to justify the loans;
and (2) Eagle, Markle and Stanhagen misrepresented
their track record by concealing the fact that two of its
earlier programs, Kingfisher and Equity, had not found
sufficient quantities of oil and gas to be successful and
those programs were “repurchased” from the investors
without disclosure of those facts to later investors (Filing
276, Instruction 24).
A-30
At the heart of this case were a series of banking
transactions spanning a number of years between Conti-
nental and Penn Square Bank (“Penn Square”). Plaintiffs
sought"to prove a conspiracy whereby Continental and
Penn Square entered into an unlawful agreement to
defraud plaintiffs and other investors in syndicated oil
and gas programs by facilitating the sale of Eagle securi-
ties, or other securities of other syndicated deals, by
creating a false track record respecting the past perfor-
mance of the oil and gas syndicator (Filing 276, Instruc-
tion 32). Plaintiffs sought also to prove that Continental
substantially assisted Eagle, Markle and Stanhagen in the
saie of securities by participating in the making of pro-
duction loans (Filing 276, Instruction 28).
First, it was claimed that Penn Square would make a
“drilling” loan to the Eagle partnerships, and other oil
and gas promoters (secured by letters of credit furnished
at the request of, and on behalf of, the investors by their
personal bank (Filing 276, Instruction 32).! After Penn
Square made the drilling fund loan, plaintiffs contended
1 A drilling loan was a loan made to finance the finding of
oil and gas. If oil or gas was found in sufficient quantities, the
drilling fund loan was replaced with a longer term loan,
known as a production loan, which production loan was collat-
eralized by the oil and gas reserves. Letters of credit would
pay the drilling fund loan if the drilling fund loan was called
by Penn Square in the event that no long term loan could be
made to the oil and gas promoter because no oil and gas were
found. If oil and gas were found, the letters of credit were
normally released in favor of the long term production loan. In
this way investors could make highly leveraged investments in
oil and gas syndicated investments with little or no “up front”
cash.
A-31
that Penn Square would then make a production loan to
Eagle (or other oil and gas promoters) thereby causing
the release of letters of credit, with Penn Square either:
knowing that the petroleum reserves were insufficient to
repay the production loan or recklessly disregarding the
need to ascertain whether the petroleum reserves were
sufficient to repay the production loan (Filing 276,
Instruction 32).2
Continental’s part in these transactions was said to
be that of a “participant,” meaning, under normal circum-
stances, that a large bank, like Continental, would pur-
chase all or a portion of the production loan from Penn
Square, which was a much smaller bank. However, plain-
tiffs contended that the circumstances were not normal.
Plaintiffs contended that the “participation” of Continen-
tal was with knowledge that the oil and gas reserves were
insufficient to pay the production loans, or that Continen-
tal recklessly disregarded the need to ascertain whether
the reserves were sufficient.
In essence, plaintiffs contended that Penn Square and
Continental helped Markle, Stanhagen and Eagle engage
in a “pyramid” scheme. As long as the banks would make
production loans, oil and gas promoters could sell their
securities regardless of the sufficiency of the oil and gas
used to collateralize the production loans. The benefit to
? Once the production loans were made they were ostensi-
bly collateralized by the oil and gas reserves. When a produc-
tion loan was made the letter of credit would normally be
returned and the investor was no longer at risk to have to pay
the drilling fund loan which was refinanced by the production
loan.
A-32
the banks would be large interest bearing loans, and,
despite the failure due to lack of oil and gas reserves of
certain production loans, if enough loans were made the
profits to the banks would exceed any losses which might
occasionally occur. As long as the banks would make
production loans, Markle, Stanhagen and Eagle had a
good “track record” to point to in order to induce others
to invest. As long as investors had no cash in the limited
partnership, as where letters of credit were used to
finance the investment, if production loans were made,
causing the release of the letters of credit, investors had
nothing to lose and could make an investment sometimes
without paying any money. Ultimately, Penn Square was
closed by federal regulators, outstanding letters of credit
were called because no one would make production
loans, and these plaintiffs, along with others, sued.
Plaintiffs contended that Continental violated sec-
tions 1962(c) and (d) of RICO for essentially the same
reasons that Continental was guilty of being an aider and
abettor of the securities fraud of Markle, Stanhagen, and
Eagle, and for essentially the same reason that Continen-
tal was a co-conspirator of Penn Square (Filing 276,
Instructions 39 and 49). It is at this juncture that Conti-
nental makes a compelling argument — there was never
any evidence from which a jury could reasonably infer
that Continental adopted as a matter of policy the acts of
its employees in dealing with Penn Square. Accordingly,
Continental argues that the RICO judgment must be over-
turned.
3 At oral argument Continental agreed that plaintiffs could
prove a civil securities fraud conspiracy or a civil aiding and
(Continued on following page)
A-33
(1) Theory
The cases make clear that before RICO liability may
be imposed it must be proven that it was the corporate
policy which created the scheme or senior corporate man-
agement which implemented the scheme. See, e.g., D & S
Auto Parts, Inc. v. Schwartz, 838 F.2d 964, 966-68 (7th Cir.),
cert. denied, 108 S. Ct. 2833 (1988); Schofield v. First Com-
modity Corp., 793 F.2d 28, 32-33 (1st Cir. 1986); Gruber v.
Prudential-Bache Sec., Inc., 679 F. Supp. 165, 181 (D. Conn.
1987); O’Brien v. Dean Witter Reynolds, Inc., Fed. Sec. L.
Rep. (CCH) { 91,509, at __ (D. Ariz. Mar. 26, 1984)
(LEXIS, Fedsec library, Courts file); Dakis v. Chapman, 574
F. Supp. 757, 759-60 (N.D. Cal. 1983). It is important to
understand that the policies behind vicarious liability
and RICO are different. In the normal civil context, vicar-
ious liability is used to shift the economic costs of the
(Continued from previous page)
abetting a primary securities fraud violation on the part of a
corporation without establishing that the corporate policy of
the defendant was to commit the fraud. In other words, Conti-
nental argued that there was a level of “knowledge” or “scien-
ter” required in proof of a RICO claim which was not required
in proof of the other claims. Continental contends that proof of
a RICO claim requires evidence of a “knowing and intentional
participation in the criminal scheme at a level at which it can
be said that the criminal activity constitutes corporate policy.”
Memorandum of Law in Support of Defendant’s Motion for
Judgment Notwithstanding the Verdict at 19 (footnote omit-
ted). Accordingly, Continental conceded at oral argument that
a finding for it on the motion for judgment notwithstanding
the verdict regarding the RICO claim would not as a conse-
quence require a finding for it on the motion for judgment
notwithstanding the verdict on the other claims.
~—
A-34
damage from the innocent third party to the producer of
the product in order that the producer internalizes the
costs, passes those costs along to the consumer, and
thereby is placed in a competetive [sic] disadvantage
when competing against others who produce better qual-
ity goods at lower costs. In such a situation a corporation
has an incentive to lower its costs by dealing more effec-
tively with its employees. The intent of RICO, however, is
to force the corrupt business from the marketplace alto-
gether. Thus, it makes little sense to impose RICO treble
damage liability upon an otherwise legitimate entity
unless it is shown that the corporate policy was to violate
RICO in the first case. Thus it has been said that:
Imposition of liability following direct cor-
porate responsibility for the predicate acts and
the RICO violation is also consistent with the
policies behind the RICO statute. The corpora-
tion with direct responsibility can be penalized
for its predicate violations and forced to com-
pensate the injured parties for the harms it
caused. Under the RICO statute, the corporation
can be undercut financially through forfeitures
and treble damages or directly enjoined from
further business practice. Such penalties are
appropriate to a corporation conducting a busi-
ness enterprise through a pattern of racketeer-
ing activity.
Holding a corporation vicariously liable for
the commission of predicate acts by its
employees advances the policies behind vicar-
ious liability, but is inconsistent with the goals
of civil RICO. Under vicarious liability, the cor-
poration, although not directly responsible for
A-35
the harmful acts, is forced to compensate inno-
cent third parties. It internalizes the costs of its
employees’ misdeeds as a cost of doing business
and passes the expense along to the public in
the price of its product or service. The corpora-
tion is encouraged to deter future violations and
to reduce these costs, thereby reducing the cost
of its product and gaining a market advantage.
In contrast, civil RICO was designed to wage
economic war on organized crime. Its remedies,
notably forfeiture and treble damages, were
intended to force the corrupt business from the mar-
ketplace. Even its civil remedies were designed not
merely to compensate, but to enlist private aid in the
attack on organized crime.
Note, Judicial Efforts to Redirect an Errant Statute: Civil
RICO and the Misapplication of Vicarious Corporate Liability,
65 B.U.L. Rev. 561, 602 (1985) (footnotes omitted)
(emphasis added).
The United States Court of Appeals for the Eighth
Circuit has recognized in the RICO context that some-
thing more than evidence sufficient to prove vicarious
liability is required to prove a RICO claim. Luthi v. Tonka
Corp., 815 F.2d 1229, 1230 (8th Cir. 1987). In Luthi, plain-
tiffs’ contended that Tonka should be held liable because
its chief financial officer caused plaintiffs’ financial loss
by fraudulent acts relating to a purchase of various cor-
porations owned by plaintiffs. Liability was asserted
under 18 U.S.C. § 1962(c) of RICO. Id. at 1229.
Mr. and Mrs. Luthi owned the stock of two corpora-
tions, which I shall call A and B. They sold their stock in
A and B to a corporation I shall call C. The sale was for a
relatively small amount of cash up front, with a note for
A-36
the balance. Prior to the purchase of the stock, Tonka had
invested in a corporation which I shall call Corporation
D. That investment was made at the direction of the chief
financial officer of Tonka. Corporation D controlled Cor-
poration C and both those corporations were in turn
controlled by Tonka and its chief financial officer. Corpo-
ration C had been established solely for the purpose of
acquiring the stock of Corporations A and B. Id.
Mr. and Mrs. Luthi brought suit after Corporation C
defaulted. They asserted a claim against Tonka exclu-
sively under RICO. After a pretrial dispositive motion
had been granted, Judge Bright wrote the panel opinion
which concluded that RICO did not apply because the
doctrine of respondeat superior — one who is not at fault
may be held vicariously liable for the wrongdoings of
another — is contrary to the purposes of RICO. Id. at 1229.
Accordingly, the court concluded that the trial court
properly dismissed the complaint of Mr. and Mrs. Luthi.
Id. at 1230.
While Luthi may be read by plaintiffs and defendant
in this case in slightly different ways, what is absolutely
clear about Luthi is that something more than vicarious
liability must exist to charge a corporation with the acts of its
employees under 18 U.S.C. § 1962(c) of RICO.4
4 Plaintiffs also sued under a RICO conspiracy theory
alleging a conspiracy to violate 18 U.S.C. § 1962(d). There
seems no doubt that if something more than a vicarious lia-
bility doctrine is necessary to charge a corporation under
(Continued on following page)
A-37
Plaintiffs in their brief essentially concede the point
that something more than vicarious liability is required to
impose RICO iiability. Plaintiffs argue in their brief:
Unlike Luthi, the Plaintiffs in this case did not
seek damages solely on the basis of vicarious
liability. The Plaintiffs sought and introduced
evidence from which the jury could reasonably
conclude that Lytle and other Continental
employees served the corporate policies of Con-
tinental in transacting business with Penn
- Square Bank. The evidence introduced at trial over-
whelmingly supported the conclusion that John
Lytle'’s conduct furthered the corporate policy goals
of Continental.
Plaintiffs’ Memorandum of Law In Opposition to Defen-
dant’s Motion For Judgment Notwithstanding the Verdict
at 14 (emphasis added).
It is precisely because the evidence at trial establishes
as a matter of law that the activities of Continental’s
employees did not further the corporate policy goals of
Continental that judgment notwithstanding the verdict
must be granted on the RICO claim.
(Continued from previous page)
§ 1962(c), then the same standard applies to § 1962(d). Plain-
tiffs do not contend otherwise. This is not necessarily true
under § 1962(a). Cf. Liquid Air Corp. v. Rogers, 834 F.2d 1297,
1306-07 (7th Cir. 1987). Among other things, § 1962(a) prohibits
a person from investing monies received from a pattern of
racketeering activity in an “enterprise” engaged in interstate
commerce. This is not a § 1962(a) case.
A-38
(2) The “Tone Report”
The failure of Penn Square touched off one of the
most significant banking failures in the history of this
country. In effect, Penn Square, a relatively small Okla-
homa bank, caused, or substantially contributed to, the
failure of Continental, a large international money center
bank.
As a result of the collapse of Penn Square and the
impact upon Continental of Penn Square’s failure, various
stockholder suits were filed against Continental. As a conse-
quence of these suits, the board of directors of Continental
created what became known as the “Tone committee.” This
committee prepared what became known as the “Tone
report” officially known as the Report of the Special Litiga-
tion Committee of the Board of Directors of Continental
Illinois Corporation (Exhibit 90).
The “Tone report,” prepared with the assistance of a
former federal judge, sought to set forth the advice of a
special litigation committee of the board of directors as to
the position the board should take in the exercise of its
fiduciary duty to stockholders regarding the pending
derivative law suits. Over vigorous objection in this case
by Continental, the “Tone report” was received in evi-
dénce in a redacted form. The “Tone report” is an objec-
tive, highly critical, analysis of the policies of Continental
as well as the actions taken by employees of Continental
when dealing with oil and gas credits.°
5 Plaintiffs described the Tone report as having “inherent
trustworthiness.” Memorandum in Opposition to Defendant’s
(Continued on following page)
A-39
The “Tone report” (Exhibit 90), as well as the deposi-
tion testimony of former employees of Continental and
Penn Square (Exhibits B through J) failed to establish as a
matter of law that Continental or its senior management
implemented a policy to increase the dollar volume of its
loan portfolio even if that required a reduction in the
quality of its loan portfolio. It was the contention of
plaintiffs in this case that Continental engaged in a “loan
growth at any price” policy. The evidence failed as a
matter of law to establish that contention.
(3) The “Black Hats”
So as not to be misunderstood, there is no question
- but that certain employees of Continental were negligent.
Indeed, in ringing terms, the special litigation committee
of Continental deplored what happened at Penn Square,
and found negligent the actions of three individuals who
dealt with, or were otherwise responsible for loans
regarding, Penn Square.
For example, the “Tone report” concluded that the
relationship between Continental and Penn Square was
negligently mishandled by Messrs. Lytle, Redding, and
Bergman, who were employees of Continental. (Exhibit
90, 28-29). The Tone committee found:
In general, there is substantial evidence that
loans were disbursed without the approval of
(Continued from previous page)
Motion in Limine at 17. Indeed, outside directors were dis-
missed as defendants as a result of the report. In re Continental
Ill. Sec. Litig., 732 F.2d 1302, 1304-06 (7th Cir. 1983).
A-40
officers having the requisite lending authority;
that the creditworthiness of borrowers was not
sufficiently checked; that loans secured by
reserves were disbursed without confirmation
by the Bank’s engineers of the value of the
reserves; that loans which could not be justified
by proven reserves were approved through the
use of additional types of collateral which were
insufficient; that in a number of instances secu-
rity interests were not perfected; that at periodic
intervals, Lytle caused the Bank to purchase
groups of Penn Square participations without
proper credit investigation, to relieve Penn
Square’s recurrent “liquidity crunches”; that
Lytle tolerated improper actions by Bill G. Pat-
terson, Executive Vice President of Penn Square,
such as filling out the Bank’s CRF forms for a
loan or deceiving a loan officer into believing
that Lytle had approved a loan when he had not
done so; that loans were disbursed without
preparation of notesheets or furnishing of suffi-
cient data to permit them to be rated; that there
were severe problems of lack of loan and collat-
eral documentation and past due payments in
connection with Penn Square loans; that the past
due notices and exception reports generated as a
result of these deficiencies were largely ignored
and, in any event, never cleared up by Lytle;
and that Redding (whose office was adjacent to
Lytle’s) had knowledge of or at least warning
about many of these matters and took no effec-
tive action to correct them.
(Exhibit 90, 28-29).
A-41
Specifically with regard to Mr. Lytle, the Tone com-
mittee report found:
Mr. Lytle was the Vice President in charge
of Mid-Continent Division during the period in
which the Penn Square participations increased
from $200 million to over $1 billion and person-
ally was involved in the making and renewal of
all or virtually all of these loans. He personally
was responsible for what occurred in his Divi-
sion with respect to Penn Square transactions.
There is substantial evidence that would sup-
port a finding that the improper credit Practices
and failures to follow Bank procedures
described in Section III, A, at pp. 27-29, supra,
occurred and that Lytle was responsible for
those practices and failures.
The evidence in support of the claim of
negligence against Mr. Lytle is Clearly sufficient
to go to the jury, and the Corporation’s interest
would be served by continued prosecution of
that claim.
(Exhibit 90, 108-09).
With regard to Mr. Redding, the Tone committee
specifically found:
Mr. Redding, as Senior Vice President in
charge of the Oil & Gas Group, was Mr. Lytle’s
immediate superior, located in an adjoining
office throughout the Penn Square period. There
is substantial evidence that would support the
following findings:
Mr. Redding apparently did not control Mr.
Lytle’s improper practices, despite his knowl-
edge of many of them. He saw the large volume
A-42
of Five Day Rule exception reports and knew
that Mr. Lytle was processing loans for which he
needed but had not obtained Redding’s
approval. Nevertheless, Mr. Redding never took
action to stop this practice of Mr. Lytle’s.
Instead, he contented himself with sending back
notesheets he did not approve for further work
and declining to place his initials on certain
loans, even though he often found that “the
money was already out the door.” Although he
told Mr. Lytle that he was too close to Penn
Square, Mr. Redding took no action to correct
the situation when Mr. Lytle ignored his warn-
ings.
In addition to failing to supervise Mr. Lytle,
Mr. Redding failed in his own credit approval
duties. His signature and approval were neces-
sary for the larger of the Penn Square loans, and
he was familiar with the details of many of
them. A number of these loans proved, upon
examination in early July and subsequently, to
have been of very poor quality. Mr. Redding did
not protect the Bank from those loans of poor
quality. Also, he failed to take action after the
warnings by Ms. Kenefick and by the engineers.
In addition, he failed to take action to see that
the Bank’s procedures as to loan documentation,
collateral, and past dues were followed despite
seeing a large volume of Penn Square Loans
continually on exception reports.
Redding did not carry out the instructions
Mr. Bergman says he gave Mr. Redding to
switch the Penn Square participations to a direct
loan basis. He did not even effectively accom-
plish the limited switch-over he admits to have
undertaken.
A-43
Redding says that he took comfort from the
“relatively clean” reports of the internal audi-
tors in the reports on the October and December
1981 audits of Penn Square. It is at least open to
serious question whether these reports could
reasonably be interpreted as “clean”; the audi-
tors did not think so.
Finally, when Mr. Lytle’s personal loans
were under investigation, Mr. Redding at first
favored termination but later altered his recom-
mendation and his memorandum on the subject
at the request of his superiors. He never
informed the group investigating the Lytle loans
about and of the Penn Square problems. Instead,
he joined with Mr. Bergman in assuring every-
one that the Penn Square participations were of
good credit quality.
The evidence that Mr. Redding was negli-
gent is clearly sufficient to go to the jury, and
the claim against him should not be dismissed.
(Exhibit 90, 109-111).
And with regard to Mr. Bergman, the Tone committee
found:
Mr. Bergman was the Executive Vice Presi-
dent in charge of the Special Industries Depart-
ment, which included the Oil & Gas Group. He
was Mr. Redding’s direct supervisor. Through-
out the Penn Square period, however, his
responsibilities included a number of groups
and divisions in addition to the Oil & Gas
Group. He was not as intimately acquainted
with the operations of the Mid-Continent Divi-
sion as Mr. Redding.
A-44
There is substantial evidence that would
support a finding that Mr. Bergman was negli-
gent in his supervisory role and in reporting to
his superiors. Mr. Bergman received the Five
Day exception reports and other exceptions
reports relating to the Mid-Continent Division.
It appears that he did not take any effective
action to investigate the cause of Mid-Conti-
nent’s large number of exceptions or to clear
them up. Nevertheless, he repeatedly assured
Messrs. Coriaci, Melick, Baker, and others pre-
sent at weekly GBS management meetings that
substantive problems with exceptions and past
dues did not really exist and that the complaints
were the result of inaccurate reporting by the
GBS Operations department. On one occasion
(in November, 1981), he also informed the Cor-
porate Office that this was the fact. When Baker
told Bergman that Ms. Kenefick criticized the
way in which Lytle ran the Mid-Continent Divi-
sion, Bergman simply dismissed the matter as a
“personality conflict” between Mr. Lytle and
Ms. Kenefick without asking for the details of
the complaints or making any other investiga-
tion.
In September or October of 1981, Mr. Baker
became concerned when both Mr. Bergman and
Mr. Redding demonstrated their lack of famil-
iarity with Penn Square commitments by esti-
mating the level of participations at approxi-
mately 50% of the actual number. Mr. Bergman
then reassured Mr. Baker that the Penn Square
loans were checked as carefully as if they were
direct loans. It does not appear that he had a
basis for this assurance. Although Mr. Berg-
man’s accounts vary, he admits to receiving
orders from Mr. Baker (or agreeing with him)
A-45
that either all or at least the larger Penn Square
loans should be changed to a direct basis. Yet,
Mr. Bergman failed to see that this change was
accomplished.
After the American Banker article on Penn
Square appeared in April, 1982, Mr. Bergman
gave further assurances to Mr. Baker concerning
the conversion of Penn Square participations to
direct loans and concerning the quality of all the
transactions with Penn Square. Yet Mr. Bergman
admits that in the interval between September
and May, he neither asked for nor received any
detailed reports from Mr. Redding concerning
the conversation [sic] to direct loans. At most,
he asked Mr. Redding how the matter was com-
ing and received general assurances that it was
progressing satisfactorily. In any event, it is not
clear that almost none of the Penn Square loans
were converted to direct loans by the Bank.
Mr. Bergman relied upon the Bank’s internal
audit reports on Penn Square, which he viewed
as “relatively clean,” as a basis for some of his
later assurances. His view of these audit reports,
however, is contrary to that of the auditors, and,
in any event, he concedes that the reports did
not purport to evaluate the creditworthiness of
the Penn Square loans. Furthermore, although
Mr. Bergman states that these audits were “rou-
tine” in nature, the auditors state that it is
unusual for them to audit another bank in this
fashion. The auditors also recall Mr. Bergman
displaying a sense of urgency and suspicion
about Penn Square operations at the time he
sent them down to Penn Square.
Mr. Bergman went to Mr. Lytle’s defense
after Mr. Lytle’s personal loans from Penn
A-46
Square were disclosed. During the course of the
deliberations regarding sanctions for Mr. Lytle,
Mr. Bergman made no investigation of the Penn
Square loans and said nothing about the prob-
lems with Penn Square; instead, he joined the
other line officers in assuring the Chairman and
others that the Penn Square loans were of good
credit quality.
It should be noted, in considering the claims
against Mr. Bergman, that he was seriously ill
from approximately December, 1981, until
March, 1982. To his credit, at no time during the
interviews did he assert his illness as an excuse.
Also, he sent the auditors to Penn Square and
gave orders for at least a limited switchover of
Penn Square loans to a direct basis. Neverthe-
less, Mr. Bergman’s apparent failure to super-
vise Mr. Redding and Mr. Lytle, and his
repeated assurances that “all is well” when he
, had made little or no investigation, lead the
Committee to conclude that there is sufficient
evidence to support a finding of negligence
against him and that the claim against him
should not be dismissed.
(Exhibit 90, 111-14).
Based essentially on the foregoing, the plaintiffs con-
tended that there was enough evidence for the jury to
conclude that corporate employees were carrying out
Continental policy because: The head of Continental's
Mid-Continent division, John Lytle, was inadequately
supervised, because Lytle was encouraged to buy partici-
pations from Penn Square, and because Continental did
not fire Lytle when it found out that Lytle had borrowed
more than one-half million dollars from Penn Square
A-47
while Lytle was doing business on behalf of Continental
with Penn Square. Plaintiffs’ Memorandum of Law in
Opposition to Defendant’s Motion For Judgment Not-
withstanding the Verdict at 14-15. Recognizing the negli-
gence of Lytle, Redding and Bergman, the evidence, in
contrast, reveals that what went on at Continental with
Mr. Lytle, Mr. Redding and Mr. Bergman was not in
furtherance of corporate policy, but in direct counterven-
tion of it. The following represents an objective analysis
of the evidence presented to the jury which forces me to
conclude that Lytle, Redding and Bergman were not fol-
lowing corporate policy and that senior management of
Continental and Continental’s board of directors cannot
be charged with knowledge such that Continental can be
charged with RICO liability.
(4) Personnel and Lending Hierarchy
General Banking Services (“GBS”) was a division of
Continental which engaged in wholesale domestic lend-
ing, except real estate (Exhibit 90, 14). GBS was headed
by George R. Baker, who was an executive vice president
and who reported directly to the chairman of the board,
Roger E. Anderson. (Exhibit 90, 14-15). GBS was, in turn,
divided into several lending departments (Exhibit 90, 15).
One such unit was the special industries unit headed by
Gerald K. Bergman, who reported to Baker. (Exhibit 90,
15). The special industries group was in turn divided into
units, one of which was called the oil and gas group,
headed by John A. Redding, who reported to Bergman.
(Exhibit 90, 15). The oil and gas group was further subdi-
vided into groups, one of which was the Mid-Continent
A-48
division headed by John Lytle, who reported to Redding.
(Exhibit 90, 15).
To put the Mid-Continent division of which Lytle was
responsible in perspective with GBS, of which Lytle’s
department was only a small part, it is helpful to under-
stand that the Mid-Continent division’s loans as a per-
centage of total GBS loans never exceeded, on an average
basis, 15% of the average loans made by GBS. (Exhibit 90,
83). On an average basis, Mid-Continent’s loans were 14%
of GBS loans as of June 1982, up from 6.3% as of Decem-
ber of 1980. (Exhibit 90, 83). Although the dollar volume
of Mid-Continent’s loans were quite significant, Mid-
Continent’s loans were only a small part of the huge
dollar volume of loans made by all of the operating units
of Continental.
It is also helpful to understand that.senior manage-
ment and the board of directors of Continental were
insulated from Lytle not only by the personnel hierarchy
described above, but by the loan origination and review
process. (Exhibit 90, 18-27). The senior management of
Continental was known as the “corporate office.” The
loan origination and review process worked as follows.
When a loan, or a participation, was made by a
lending officer supervised by Lytle, the officer was sup-
posed to create two documents. One document was called
an “approval notesheet” (“notesheet”), and the other doc-
ument was called a “credit reporting form” (“CRF”).
(Exhibit 90, 18-19). The notesheet described the lending
officer’s analysis of the credit, and the CRF provided the
data necessary for Continental to open the credit facility
for the borrower. (Exhibit 90, 18-19). Each loan officer had
A-49
a Credit limit above which the officer could not approve a
loan unless a person having adequate lending authority
had given written approval for the credit. (Exhibit 90, 19).
There was, however, a five-day rule which permitted the
credit to be extended without written approval of the
next higher authority Provided that written approval was
obtained in five days. (Exhibit 90, 19). It was then implicit
that oral approval had been obtained. (Exhibit 90, 19).
The loan operations department of GBS was to collect
the material Supporting the loan and to maintain the
documentation flow so that the lending officers could
obtain missing approvals and documents. (Exhibit 90, 20).
GBS loan operations Prepared exception reports. One of
the exception reports dealt with violations of the so-
called five-day rule. (Exhibit 90, 20). These reports went
to officers with the requisite lending authority (normally
Redding for the Mid-Continent division) and to the head
of the department (Bergman) and to Lytle. (Exhibit 90,
20-21). Even with an exception report, the borrower could
still draw down on the credit. (Exhibit 90, 20). With
respect to many Penn Square loans, Lytle never obtained
the necessary approvals despite the exceptions. (Exhibit
90, 21). The Tone report found that Penn Square participa-
tions appeared on various exception reports prepared by
GBS operations, but typically were not cleared up for
extended periods of time, if ever (Exhibit 90, 22).
After the loan was made, GBS loan review, which is
separate from GBS loan operations, prepared data needed
to “rate” loan quality. (Exhibit 90, 22). GBS loan review
prepared a backup sheet for a separate entity known as
loan administration. (Exhibit 90, 22). Loan administration
rated loans. (Exhibit 90, 22-25).
A-50
Loan administration, separate from GBS altogether,
but not part of the corporate office, would rate loans of
$500,000 or more. (Exhibit 90, 23). The following scale
was used: A = Prime; B = Satisfactory; C = More than
normal risk; and D = Poor quality. (Exhibit 90, 23). Loans
were to be rated or rerated annually. (Exhibit 90, 24).
However, loan administration could not rate or rerate
many credit files related to Penn Square, because GBS
loan review could not prepare the necessary backup
sheets because the necessary data was lacking. (Exhibit
90, 24).
Once again, back in GBS, there was a credit policy
committee (“CPC”) which included many heads of the
departments within GBS, and which met weekly to moni-
tor “C” and “D” rated loans to ensure that good lending
practices were followed in GBS. (Exhibit 90, 25).
Loan administration, which once again is indepen-
dent of GBS, collected information on problem loans and
“C” and “D” rated loans- and accordingly published a
“watch list” for reporting to the corporate office and the
~ board of directors. (Exhibit 90, 26). Essentially the “watch
list” was to pull together the collective opinions of the
lending officers, CPC and loan administration on prob-
lem loans so that the corporate office and the board could
be advised. Significantly, no Penn Square loans were
reported on the “watch list” until June of 1982 (Exhibit
90, 26-27). Penn Square failed on July 5, 1982. (Filing 276,
Instruction 5).
A-51
(5) Corporate Office in the Dark
It is also clear that Continental, obviously not per-
fectly, followed a policy of critically evaluating its rela-
tionship with Penn Square. There is no evidence that the
serious problems of Penn Square were ever communi-
cated to the corporate office or the board of directors of
Continental in such a manner that senior management or
the board could be charged with having furthered or
created a corporate policy to increase the dollar volume
of its portfolio at the expense of portfolio quality. Clearly,
there were “red flags” raised about what was happening
at Penn Square, but no evidence suggests a fair inference
that the corporate office or the board of directors pro-
moted the “loan growth at any price” policy that plain-
tiffs say Lytle sought to advance. Some specific instances
will serve to illustrate the point.
Beginning in 1981, the volume of Mid-Continent’s
“exceptions and past dues” was frequently discussed by
GBS loan operations staff. (Exhibit 90, 29). Lytle claimed
that the exception reports were riddled with errors.
(Exhibit 90, 29-30). Apparently Lytle’s view was not inac-
curate, since the bank’s management generally recog-
nized that loan operations was troubled by an out-moded
computer system. (Exhibit 90, 30). The part of the system
that related to loan operations was not revamped until
October 1, 1982. (Exhibit 90, 29-30). The persistent loan
operation problems, according to the Tone committee,
were in part the cause of the Penn Square-generated
exceptions and “past dues” being dismissed at the meet-
ings as “paperwork” problems. (Exhibit 90, 30).
—
A-52
The operations and lending side of GBS both under-
went internal audits regarding their treatment of loan
exception reports as of July 15, 1981. (Exhibit 90, 31). The
audits concluded in January of 1982 that while the loan
operations side was accurately reporting documentation
exceptions, many of the lending divisions lacked formal
procedures to ensure that exceptions were being cleared
up properly. (Exhibit 90, 31). The auditors asked Baker to
respond to the administrative office by February of 1982,
but as of the date Penn Square failed no response had
been submitted. (Exhibit 90, 31).
Nevertheless, loan operations at GBS were engaged
in “audits” of Penn Square. (Exhibit 90, 31). The first visit
was in December of 1981 and the second visit was in
February of 1982. (Exhibit 90, 31).
The audit team issued a report that suggested further
“work” was required at Penn Square and Continental
including the implementation of an electronic mail termi-
nal, new procedures for the processing of Penn Square
related loans which mandated that funds could not be
disbursed absent a properly approved CRF and note-
sheet, participation agreements and supporting docu-
ments were to be required before disbursement, and title
opinions and mortgage filings for secured loans were to
be required prior to disbursement. (Exhibit 90, 32). While
these procedures were required, Mid-Continent appar-
ently largely ignored these suggested procedures.
(Exhibit 90, 32).
The head of the “audit team,” while identifying var-
ious problems at Penn Square, wrote a report which was
“optimistic, suggesting that progress had been made and
A-53
that the problems could be solved with additional effort.”
(Exhibit 90, 32).
Another “red flag” was a memorandum written by a
young vice president named Kathleen Kenefick. (Exhibit
90, 33). Sometime in the summer of 1981 she prepared a
memorandum. She essentially complained of a lack of
control with regard to the loans being originated at Penn
Square Bank. (Exhibit 90, 33). Kenefick discussed her
concerns with Lytle and in fact showed him a draft of the
memorandum. (Exhibit 90, 33). Baker obtained a copy of
the Kenefick memorandum and kept it on his desk to
remind himself of the problems raised in the memoran-
dum. (Exhibit 90, 33-34). Baker had a discussion with
Bergman about the Kenefick memorandum and criticisms
of Lytle and the Mid-Continent division. (Exhibit 90,
33-34). Bergman dismissed the matter as a “personality
conflict” without making any investigation. (Exhibit 90,
34). When Kenefick left Continental she did not mention
the memorandum or any problems at Mid-Continent at
the time. (Exhibit 90, 34). Kenefick left Mid-Continent for
another job which was due in part to being offered excel-
lent opportunities at a corporation and because she was
frustrated with her experience working with Lytle.
(Exhibit 90, 34).
Sometime in September of 1981, Baker, after he had
read the Kenefick memorandum, became concerned
about the level of Penn Square participations and asked
both Bergman and Redding for current dollar totals.
(Exhibit 90, 35). Each provided an estimate that was
approximately half of what Baker later discovered to be
the actual total of $519 million. (Exhibit 90, 35). Baker
indicated that he was concerned, not only about Bergman
A-54
and Redding’s ignorance of the amounts of loans
involved, but about the “ ‘unreasonable concentration
of loans coming through a smail Oklahoma bank. (Exhibit
-90, 35). Baker expressed these concerns to Bergman.
(Exhibit 90, 35).
sn
Although there was some dispute between Baker,
Bergman, Redding and Lytle as to the definition of cer-
tain procedures, Baker did tell Bergman that “participa-
tion purchases from Penn Square (except for previous
commitments) should be halted, and that those participa-
tions already purchased should be expeditiously con-
verted to direct loans.” (Exhibit 90, 35). Lytle indicated
that he was never directed to stop purchasing participa-
tions, but rather was “encouraged” by Redding to place
large loans on a direct basis. (Exhibit 90, 36). Lytle and
Bergman defined large loans as those over $5 million, and
Redding termed as large loans only those over $10 mil-
lion. (Exhibit 90, 36).
Notwithstanding Baker’s order, the vast bulk of par-
ticipations were purchased, increased or renewed after
Baker’s order was given. (Exhibit 90, 37). Essentially,
Baker’s order was either not followed or misunderstood.
In November of 1981 another warning was raised.
Two oil and gas engineers employed in the Mid-Conti-
nent division told Redding that they were concerned
about Penn Square loans, particularly because reserve
evaluations were in effect ignored because other collat-
eral was used to justify lending more than the loan value
of the reserves. (Exhibit 90, 37). Redding seemed sympa-
thetic, told the engineers not to yield to pressure in
making their evaluations, and Redding said that he
A-55
would speak to Lytle. (Exhibit 90, 37). Redding did not
speak with Lytle. (Exhibit 90, 37).
Every quarter the corporate office conducted a quar-
terly review with each of the major operating units of the
bank. (Exhibit 90, 37). The third quarter review for GBS
was held in November of 1981. (Exhibit 90, 38). This
meeting included Anderson, Baker, Bergman and various
others. (Exhibit 90, 38). Penn Square problems were dis-
cussed. Baker introduced the topic and asked Bergman to
discuss the problems. (Exhibit 90, 38). Bergman stated
that there were Penn Square related “housekeeping prob-
lems” and they all related to documentation. (Exhibit 90,
38). There was no discussion at this meeting of any possi-
ble problems with the creditworthiness of these loans.
(Exhibit 90, 38).
In August of 1981 Bergman asked Redding to send
auditors to Penn Square, but Redding did not act
promptly on this request and subsequently Baker and
Bergman agreed that the bank’s internal auditors should
be sent to Penn Square to review Penn Square’s records.
(Exhibit 90, 38). The auditors made two trips and pre-
pared two reports. (Exhibit 90, 38-42).
The first report according to the auditors was ” ‘a
fairly negative report.’” (Exhibit 90, 40). According to
Redding and Bergman, however, they believed the audit
was “ ‘relatively clean.’ ” (Exhibit 90, 40). Bergman told
Baker, who did not see the report, that the report was
relatively clean. (Exhibit 90, 40).
In the second audit the auditors once again expressed
concern and the auditors discussed with Bergman and
Redding the contents of the report, including providing
A-56
them with copies, which suggested serious problems at
Penn Square. (Exhibit 90, 41). Although an auditor may
have told Baker during a brief conversation, perhaps in a
washroom, that Penn Square “ ‘was pretty frail,’ ” Baker
never saw the audit reports and was not specifically
informed of their contents. (Exhibit 90, 41-42).
Perhaps one of the most significant “red flags” was
the discovery in the audits of a series of personal loans at
preferential interest rates being made by Penn Square to
John Lytle. (Exhibit 90, 42-43). This discovery was made
on December 7, 1981 and was immediately reported to
Mr. Hlavka, who was a senior auditor. (Exhibit 90, 42).
Hlavka initiated an investigation of Lytle’s account at
Continental. (Exhibit 90, 42). The investigation, both at
Penn Square and Continental, revealed that Lytle’s per-
sonal loans from Penn Square were in the amount of
$565,000. (Exhibit 90, 42). Hlavka also concluded from his
investigation that Lytle was living beyond his means.
(Exhibit 90, 42).
Hlavka informed Redding, Lytle’s immediate super-
visor, of these loans in mid-December. (Exhibit 90, 43).
Redding informed his direct superior, Bergman. (Exhibit
90, 42). According to Baker, he learned of these loans
from Hlavka. (Exhibit 90, 42). Baker informed Roger
Anderson at their next Friday morning meeting, which
was late in December or early in January. (Exhibit 90, 42).
Anderson was only told that a division manager had
received a loan from a correspondent bank, and that the
matter was being investigated. (Exhibit 90, 42-43). The
information did not identify the division or Lytle.
(Exhibit 90, 43).
A-57
On December 21, 1981, Hlavka and others met with
Lytle to confront Lytle with the loans. (Exhibit 90, 43).
Lytle expressed great surprise that the loans might create
a conflict of interest, and stated that this was how Okla-
homa bankers treated their friends and special customers.
(Exhibit 90, 43). Hlavka was impressed by Lytle’s open
attitude toward the loans. According to Hlavka, he did
not think that Lytle thought that he had done anything
wrong. (Exhibit 90, 43). Hlavka advised Lytle to take his
loans out of Penn Square Bank, which Lytle did. (Exhibit
90, 43). Jennings and Patterson at the Penn Square Bank
helped Lytle relocate his loans at one of Penn Square’s
correspondent banks in Oklahoma and guaranteed those
loans so the bank would take them. (Exhibit 90, 43). No
one at Continental was informed that Penn Square
employees had helped Lytle place his loans, and no one
at Continental was informed that Penn Square employees
had guaranteed Lytle’s loans. (Exhibit 90, 43).
Thereafter there were various meetings that took
place with various people at Continental. (Exhibit 90,
43-48). It is clear that neither Redding or Bergman ever
suggested to senior management that Lytle should be
terminated. (See e.g., Exhibit 90 at 43). Indeed, Hlavka, the
accountant in charge, was of the opinion that while Lytle
had made a mistake, he should not be terminated.
(Exhibit 90, 42-43). Furthermore, Bergman told Baker in
late March or early April of 1982 that ” ‘two relatively
clean audits had been performed at Penn Square.’ ”
(Exhibit 90, 46). Baker did not only rely upon Bergman,
but also contacted Hlavka around this time, and Hlavka’s
view that Lytle should not be terminated carried consid-
erable weight with Baker. (Exhibit 90, 46).
A-58
In April of 1982 Roger Anderson met with Baker,
Bergman, Redding, Hlavka and others to discuss the situ-
ation. (Exhibit 90, 46). At that meeting Baker and Berg-
man advocated keeping Lytle and imposing sanctions
short of termination. (Exhibit 90, 46). Bergman, and per-
haps Baker and Redding stated that the participations
with Penn Square were of good quality. (Exhibit 90, 46).
Mr. Hallagan of the legal department stated that Lytle
should be terminated, pointing out that Lytle’s action
constituted a violation of the bank’s code of ethics and
that Lytle may have violated the law, although Hallagan
did not have sufficient facts to prove Lytle’s criminal
intent. (Exhibit 90, 47). A representative from personnel
agreed with Hallagan. (Exhibit 90, 47). This April meeting
ended without any final decision by Anderson. (Exhibit
90, 47).
Between April 13, 1982 and May 12, 1982, Eugene
Croisant, an executive vice president responsible for per-
sonnel, met with Roger Anderson, and they covered sev-
eral topics. (Exhibit 90, 47). Included within the topics
they covered was the question of whether Lytle should be
terminated. (Exhibit 90, 47). Croisant advised Anderson
to listen to his staff people, such as legal and personnel,
rather than people from the line office who had personal
involvement in the matter. (Exhibit 90, 47). Anderson
responded that Hlavka, who had been silent earlier when
Hlavka had been in a meeting with Anderson, had
approached Anderson afterwards and expressed the
opinion that Lytle had used bad judgment, but was not
culpable and should not be terminated. (Exhibit 90, 47).
A-59
Thereafter, on May 12, 1982, Anderson once again
met with Baker, Bergman, Redding, Hlavka, the bank’s
general counsel, and others. (Exhibit 90, 48). No one
changed position regarding termination. (Exhibit 90, 48).
As with the previous advice, there was no discussion of
potential problems with the quality of Penn Square par-
ticipations. (Exhibit 90, 48). Once again, Anderson con-
cluded the meeting by saying that he wished to give the
matter further consideration. (Exhibit 90, 48).
Finally, Baker and Roger Anderson had one final
meeting on May 17, 1982. (Exhibit 90, 48). In a memoran-
dum from Baker to Anderson dated May 17, 1982, Baker
referred to a conversation that had occurred earlier in the
day in which they had apparently decided to retain Lytle,
but move him from oil and gas and give him no salary
increases or incentive compensation for two years. The
others were notified of this decision by circulation of a
memorandum bearing the handwritten notation “Agree
REA.” (Exhibit 90, 48).
It is also clear, that while senior management was
aware that some of its credits were “stale” in terms of
rating, senior management did not encourage this prac-
tice. (Exhibit 90, 50-58). As of June 30, 1982, approx-
imately $143.5 million or 13.4% of the approximate $1.073
billion of Penn Square-related loans and participations
were unrated, and $186.7 million, or approximately
17.4%, were stale-rated. (Exhibit 90, 50). Of the $146.4
million identified by Continental as charge-offs in the
second and third quarter of 1982; 50.2 million, 34.3%,
were unrated, and $18.6 million, 12.7%, were stale-rated.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.