Applying the flexible duty factors to Arthur Young and Michael Thomas, we again find that the analysis yields no duty on the part of either third-party defendant to disclose anything to the bondholder plaintiffs. Consequently, Gresov is left without sustainable contribution claims.
As to Arthur Young, their relationship with the plaintiffs was indirect and limited at best. Their role was confined to auditing the start-up balance sheet of NSNJ and to conducting a review and preparing a draft of the "Financial Forecast" of NSNJ, attached as Exhibit II to the POS and the OS. Admittedly, the Financial Forecast forms the basis for one of plaintiff's claims of omission and misrepresentation. However, Arthur Young merely drafted this section based upon data provided it by the Pucketts; it did not formally audit this data. Rand Aff. para. 5; Ex. "A," p. AY 1710. Moreover, Arthur Young's cover letter to the Financial Forecast rather candidly distanced itself from the ultimate veracity of the report, stating, "the forecast reflects management's judgment, based on present circumstances, of the most likely set of conditions and management's most likely course of action . . . . It is usually the case that one or more of the assumptions in a forecast do not materialize because events and circumstances do not occur as expected. Therefore, the actual results during the forecast period will differ from the forecasted results; the differences may be material." Id., (emphasis added). Thus, any "relationship" (indeed any contact) Arthur Young had with the bondholders was through a limited and circumspect statement of review. In a similar situation, the Second Circuit Court of Appeals in Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986), refused to find 10(b) liability to the authors of an offering memorandum, which had "warned prospective investors that 'actual results may vary from the predictions and these variations may be material.'" 802 F.2d at 56. The court, speaking through Judge Winter, stated: "We are not inclined to impose liability on the basis of statements that clearly 'bespeak caution.'" Id., (citations omitted).
Regarding the second flexible duty factor, there is absolutely no evidence that Arthur Young received any "particular benefit" or had "any special stake" in the bond offering. Instead, the company received its normal fee for its accountancy work, a fee "not contingent upon the closing of the transaction, the sale of bonds or the eventual success of NSNJ." Rand Aff. para. 13. As to the third factor, as related above, any reliance plaintiffs placed upon Arthur Young's representations contained in its draft of the Financial Forecast would necessarily have to be tempered by the language of review itself, which clearly counseled caution. Luce, supra, at 56. It is difficult, therefore, to fairly ascribe to Arthur Young any awareness that plaintiffs would rely on their word (as opposed to their professional skill in preparing a financial forecast based on unaudited information and assumptions provided by management) in investing in the industrial revenue bonds.
Finally, defendant Gresov can point to no evidence that Arthur Young in any fashion initiated the bond offering that forms the basis of the primary lawsuit. It appears to be undisputed that Arthur Young's role in this affair was limited to auditing the start-up balance sheet of NSNJ and to drafting the Financial Forecast that became Exhibit II in the POS and OS.
Thus, none of the four flexible duty factors are present here. Arthur Young's motion for summary judgment as to the third-party complaint of Boris Gresov must therefore be granted.
Whether the flexible duty test implicates Michael Thomas presents a somewhat closer question; some of the factors which favor finding a duty to disclose are arguably present. However, we find that the possible presence of these factors do not overcome the absence of other factors and cannot create a triable issue of duty.
Thomas owned a 20% interest and was a general partner in the firm of Standard Ventures Limited Partnership ("SVLP"). SVLP was identified in the OS as one of the "parties associated with the financing," specifically, as "acquisition advisor" to NSNJ. Merely being listed on the OS does not, however, establish a relationship with the bondholder plaintiffs. As the court noted in Bush v. Rewald, 619 F. Supp. 585 (D. Hawaii 1985):
A reasonable investor might consider the identity of those associated with a company to be highly material to a decision whether to invest in that company . . . . However, that each moving defendant was listed as a "consultant" in the "Directions" brochure, with or without their knowledge or consent, does not, by itself, create any duty on the part of anyone so listed to those who read the brochure and become investors in the firm.
619 F. Supp. at 594 (citation omitted). Thomas had no direct communications with plaintiffs. He was described, instead, as a "middleman," a "go-between between Standard Metals and NL." Reuss Dep. 11/3/88 at 31; Rand Dep. 8/30/88 at 31. SVLP further did not draft any portion of the POS or the OS, nor did it issue any opinion letter on the bond offering. Thomas's relationship to the bondholders was thus minimal to the point of non-existence.
According to Gresov, Thomas "assisted in the sale of the plant on behalf of Standard Ventures Ltd. by introducing NL and the Pucketts to Hereth, Orr and Jones, Inc., for which services he was paid a commission." Gresov's Answers to Plaintiff's First Set of Interrogatories at 8. This is the only allegation of "benefit" received by SVLP and Thomas; it is unclear whether this commission was anything more than ordinary payment for services, or whether it was in some way contingent upon the successful consummation of the sale. Assuming it was, an inference could be made that Thomas had a stake in the plant sale. However, it is somewhat of a logical leap to derive from this inference an assumption that defendant derived a benefit from his relationship to the plaintiffs, as the second factor of the flexible duty test requires.
In view of the virtual lack of any relationship between Thomas and the plaintiffs, and Thomas's complete non-involvement in the preparation of the POS or the OS, there is no conceivable way Thomas could have any awareness of reliance on his representations by plaintiffs for the simple reason that this defendant made no representations upon which reliance could be placed. Thus, the third factor of the flexible duty analysis, like the first, is wholly absent here.
Finally, this defendant argues that "the plaintiffs have not come forward with any proof that Thomas initiated the bond offering or did more than act as a go-between in the sale of the plant." Thomas's Brief at 13. Technically, this is correct; the submissions of the bondholder plaintiffs and, more importantly, third-party plaintiff Gresov, are completely barren on this issue. However, evidence of Thomas's possible role in the bond issue has surfaced in the moving papers submitted on the motion by Conroy and Windels for summary judgment (discussed below). This evidence includes a letter by Thomas to NJEDA bond counsel, drafted in the winter of 1982, in which Thomas discussed particulars of the bond offering. This evidence shows awareness, but not necessarily initiation. See Letter Op. 12/14/87 at 26 (evidence adduced to show Reuss was aware of interlocking transactions not sufficient to establish duty). In a similar vein, Edward Puckett testified in deposition of an early plan devised by Thomas and James Conroy to purchase the Pedricktown facility for $ 1 million, describing it as "one of a series of acquisition scenarios that were developed by Mike Thomas and Jim Conroy." E. Puckett Dep. 9/14-15/88, at 62; Hooke Cert., Ex. "D." While this partakes of initiation, it is not necessarily initiation of the bond offering. In sum, while there is some evidence of Thomas's involvement in the transaction, it is not compelling enough to overcome the fact that Thomas was a virtual stranger to the plaintiff bondholders. Consequently, we find no duty to disclose on the part of Thomas. His motion for summary judgment as to Gresov's third-party complaint is granted.
Remaining before us is third-party defendants Conroy and Windels's motion for summary judgment on the third-party complaint of Aaron Holman. As these entities were also not corporate insiders,
it is appropriate to apply the flexible duty test to them as well.
At the time of the transactions at issue, Conroy and Windels had been legal counsel to SMC for at least five years.
It is also alleged that Conroy and Windels acted as counsel to NSR and NSNJ at the time of the project. R. Puckett Dep. 9/15/88 at 38; Hooke Ans. Cert. para. 3. However, Conroy and Windels's relationship to the plaintiffs (which is the relevant relationship to assess under the flexible duty test) appears extremely attenuated. Neither Conroy nor Windels are listed in or are in any way referred to in the OS. Holman alleges that a relationship between these defendants and the plaintiffs arises by virtue of the fact that Windels drafted one paragraph of the Risk Factors section of the OS and, more importantly, because Windels issued an opinion letter which was addressed to, among other people, the trustee for the bondholders.
The fact that Windels authored a portion of the Risk Factors section is of no moment because the plaintiff class has not contended that this section misrepresented or omitted material information, or that they in any fashion relied on this section. Conroy Aff. at para. 13. Similarly, in our December 14, 1987 opinion, we held that the work performed by the Reuss law firm on the POS and OS was not relevant in divining their relationship with plaintiffs because the sections they worked on were not in issue in this litigation. Letter Op. 12/14/87 at 25.
The opinion letter signed by the Windels' firm does bear on the relationship, because it did at least get forwarded to the trustee for the plaintiff bondholders. However, the record indicates that the letter was requested by Alston & Bird, not for inclusion in the OS (which had already been drafted), and indeed not primarily for dissemination to the bondholders at all, but merely to assuage NL's concerns regarding the financial stability of SMC, which had caused NL to pull back from the first scheduled closing of the plant sale. Conroy Reply Aff. paras. 3-6. Indeed, examination of Windels's opinion letter demonstrates that it is confined, in the main, to an opinion of the stability of the SMC stock due to be issued to NSNJ as part of the transaction, and a recitation of the solvency of SMC generally. " While it is certainly true that an indirect relationship with the plaintiff may be sufficient to impose a duty of disclosure on the defendant, the very tenuous nature of the link between plaintiffs and defendants here must be taken into account in applying the flexible duty test." Mirotznick, supra, 658 F. Supp. at 938.
Turning to the second factor -- the benefit derived by the defendant from the relationship with the plaintiff -- it appears that Windels received fees customary for their services rendered in the transaction. Conroy, however, soon after the bond closing, was elected interim director on the Boards of NSR and NSNJ. Holman makes much of this development, despite his inability to advance any evidence to indicate that Conroy's ascendancy was contingent upon the success of the bond offering. Still, the fact of Conroy's election raises, as in the case of Thomas's "commission," at least an inference of a benefit conferred by the transaction beyond normal compensation for services.
The third factor, awareness of reliance, can be disposed of with reference to the first factor discussed above. Again, the sole evidence relevant to this inquiry is the Windels's opinion letter. As stated above, the evidence indicates that this letter was issued to pacify the seller, N.L. Industries, rather than to induce investment by the bondholder. We find this factor, like the first one, to be largely missing from the calculus.
The final factor, defendant's initiation of the transaction, does appear to attract a substantial amount of evidence. Holman has, to use defendant's characterization, "bombarded" the court with citations to record evidence in an effort to convince us that Conroy and Windels's role in the plant sale and bond offering was seminal and decisive. We accept defendant's further description of much of this evidence as "immaterial" or "fanciful." Conroy & Windels's Reply Brief at 2. However, there are bits of evidence specifically related to the bond offering that are not as easily dismissed.
For example, in addition to Edward Puckett's assertion that Thomas and Conroy were responsible for developing "a series of acquisition scenarios" for the purchase of the Pedricktown plant, E. Puckett Dep. 9/14-15/88 at 62, there is Holman's statement in his certification that "as far as the Pedricktown transaction and the bond financing were concerned, Mr. Conroy was in charge of coordinating everything." Holman Op. Cert. para. 2. Holman further testified at deposition "that Windels recommended that a bond issue be floated." Holman Dep. 8/9/88 at 29, 54. Holman also alleges that Conroy gave a review of the transactions associated with the purchase and finance of the Pedricktown plant to the Board of Directors of SMC and recommended their approval of the deal. Holman Dep. 8/9/88 at 76. Edward Puckett similarly states that "to the best of [his] recollection," Conroy recommended ratification of these transactions at the meeting. Puckett Dep. 9/14-15/88 at 253. And, the minutes of the Board meeting, dated January 5, 1983, indicate that "the Chairman . . . requested Mr. Conroy to summarize and review in general the terms and provisions of the various agreements and documents relating to the Pedricktown matter, and Mr. Conroy did so." See Hooke Ans. Cert. Ex. "Z," p. 2.
Conroy, in affidavits submitted in support of this motion, denies such detailed involvement by him or his firm in bringing the "Pedricktown matter" to fruition. Conroy Aff. paras. 5, 10. Holman, however, in his certification, declares: "I have read Mr. Conroy's affidavit submitted in support of his motion. Mr. Conroy's description of his involvement in the Pedricktown transaction as being limited is simply not true." Holman Op. Cert. para. 2. Holman relates that Paul Windels complained to him at the time the bond transaction was being put together that the Windels's firm was "really running Standard." Id. at para. 6. Holman also "distinctly remember[s]" a Conroy pitch to the NSR and NSNJ Boards to approve the transactions. Id. at 7.
In short, there is enough evidence of Conroy and Windels's influence and involvement in the Pedricktown purchase and financing to indicate the presence of the fourth factor in the flexible duty analysis. However, we believe that the virtually complete absence of any definable relationship between these defendants and the bondholder plaintiffs, as indicated by the weakness of factors one and three, indicates the lack of a triable issue as to whether Conroy and Windels had a duty to disclose. Therefore, we will grant summary judgment as to Holman's claim that Conroy and Windels are liable to him in contribution because they are liable to the plaintiff class for a primary violation of the federal securities laws.
Our inquiry does not end here, however, because Holman, unlike Gresov, has also alleged that the impleaded defendants Conroy and Windels are secondarily liable to the plaintiff class under an aiding and abetting theory and a "controlling persons" theory.
In order to make out a case of aiding and abetting a security violation under Rule 10b-5, Holman must show:
(1) an independent wrongful act -- an underlying securities violation;
(2) knowledge by aider and abettor of that wrongful act; and