USCA1 Opinion

[NOT FOR PUBLICATION]

United States Court of Appeals

For the First Circuit
____________________

No. 97-1221

CHANNING M. WELLS III, ROBERT R. JUENGST,

INDIVIDUALLY AND ON BEHALF OF ALL OTHERS
SIMILARLY SITUATED,
Plaintiffs - Appellants,

v.

MONARCH CAPITAL CORPORATION, ET AL.,

Defendants - Appellees.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. A. David Mazzone, Senior U.S. District Judge]

__________________________

____________________

Before

Selya, Circuit Judge,

_____________
Hill,* Senior Circuit Judge,
____________________
and Boudin, Circuit Judge.
_____________

_____________________

Edward F. Haber, with

________________

whom Thomas G. Shapiro, Michelle H.

__________________ ___________

Blauner, Shapiro Haber & Urmy LLP, Herbert E. Milstein, Lisa M.

_______ _________________________ ____________________ _______
Mezzetti,
________

Cohen,
Milstein, Hausfeld & Toll, P.L.L.C.,
________________________________________________

Calhoun,
Benzin, Kademenos &
Heichel
__________________________________________

were

on

brief

and

for

appellants.
Thomas L. Riesenberg, with whom
____________________

Ernst & Young LLP, Irvin B.

_________________ ________

Nathan, Andrew T. Karron, Arnold & Porter, Kathryn A. Oberly and

______ ________________ ________________ _________________
William P. Hammer were on brief for appellees.
_________________

____________________

OCTOBER 29, 1997

____________________

____________________

Of the Eleventh Circuit, sitting by designation.

Per Curiam.
Per Curiam.
__________

no

reasonable trier

In this case the district court found that

of

fact

Appellee Ernst & Young LLP

and granted its

could

conclude

that

Defendant-

(E&Y) had engaged in securities fraud

motion for summary judgment.

For the following

reasons, we affirm.

I.

PROCEDURAL BACKGROUND

This appeal from summary judgment is all that remains from a

shareholder class

action filed in 1991

by Plaintiffs-Appellants

Channing M. Wells, III et al. (the Class)1 under Section 10(b) of

______

the Securities Exchange Act of 1934, 15 U.S.C.

10b-5

promulgated thereunder,

17

C.F.R.

78j(b), and Rule

240.10b-5,

against

Monarch Capital Corporation

and

largest subsidiary,

Life), and

Monarch

Monarch Life s

Life Insurance

Co., Inc.

Monarch Defendants),

(Monarch Capital), its

Life

wholly owned

Insurance

Co.

(Monarch

subsidiary, Springfield

(Springfield Life)

and E&Y.

wholly owned

(collectively, the

Fourteen months

after filing the

complaint, the Class settled with the Monarch Defendants for $4.7

million.

Following the settlement, the only remaining defendant

was E&Y.

The gravamen of the Class complaint against E&Y alleged

that E&Y violated federal securities laws and state law by making

material misrepresentations

Defendants

1989

in (and omissions from)

consolidated financial

statements

the Monarch

(and E&Y s

____________________

Wells

represented

a class

of

shareholders

who

purchased

Monarch Capital stock between November 10, 1989, and November 14,
1990, at prices ranging from $16 1/8 to $4 3/8 per share.

-2-

accompanying 1990 audit

Class alleged,

of Monarch

opinion) with scienter.

by materially overstating the

It

did so, the

statutory surplus2

Capital s subsidiaries, more particularly,

of the Cash Management Account (CMA).

the value

See Part II.B. infra.

___
_____

The

end result of these actions, the Class complained, was to mislead

investors

by

artificially

inflating

the

price

of

Monarch

Capital s stock.

After

the 1992 settlement,

three years.3

conference.

motion for

summary judgment.

opposition

to E&Y s

Class

filed

Stating,

Class]

Class

its

Three months later,

a motion

Action Complaint.

own

motion

for

liability

for

under Section

____________________

E&Y

for

In

on the

10(b) and

filed its

leave to

file a

January 1996,

partial

summary

page opinion, that

virtually abandoned the case,

judgment

E&Y filed a

In response, the Class

motion and

in its forty-five

summary

stagnant for

Then, in March 1995, the district court sua sponte

__________

scheduled a status

Second Amended

the case remained

the

judgment.

Plaintiffs [the

the district court granted

Class

claims

for

denied

the Class

primary

motions.

An insurance company s
admitted

assets

(or

statutory surplus
statutory

assets

is comprised of its
minus

statutory

liabilities).

During this period of inactivity, the Supreme Court issued its

decision in Central Bank of Denver, N.A. v. First Interstate Bank

___________________________
_____________________
of Denver, N.A.,
________________
plaintiff

may not

Section 10(b) as
those who aid and
district
secondary

511 U.S.

164 (1994),

maintain an

aiding and

the text of the

abet a

court found,

10(b) violation.

after

in favor

Central Bank,
_____________

of E&Y on

abetting.

-3-

a private

abetting suit

under

1934 Act does not itself reach

liability claims against

summary judgment

holding that

Id. at 177.
__
that

E&Y were barred

all claims for

all

The

pending

and granted

aiding and

This appeal follows.

II.

A.

the

FACTUAL BACKGROUND

Monarch Capital - the Parent Holding Company

____________________________________________

Monarch Capital was

a typical financial holding

1970s

Its operations

and 1980s.

included

company of

insurance and

insurance services, corporate, real estate investment and venture

capital,

and investment

Monarch Capital

By 1989,

Capital

it was

management.

For

centered its focus on its

clear that this

was in severe

focus was

nearly two

decades,

real estate business.

in error.

financial distress, with

Monarch

reported losses

totaling millions

of dollars.

annual

report to

shareholders,

results

for the

Monarch

Capital announced plans to terminate its capital markets

and

real estate

insurance

spiral,

past two

The present

placed

years have been

Capital continued

action struck the

in

to

[o]ur financial

on its

pull out

to

the

downward

deteriorate financially.

death knell blow;

by

profitable

of its

into bankruptcy4 and subsidiary

receivership

his 1989

very disappointing.

concentrate

Despite vows

Capital was forced

was

conceded that

operations and

sector.

Monarch

Even its president, in

parent Monarch

Monarch Life

Massachusetts

insurance

____________________

The bankruptcy action stayed the Class

claims against Monarch

Capital.

When

the

settlement

agreement

was

finalized,

bankruptcy court approved Monarch Capital s reorganization

discharging and releasing the Class

-4-

commissioner.5

claims against it.

the

plan,

____________________

5
for

Monarch Life was

regulated by the Commissioner

the Commonwealth

insurance company,

of Massachusetts.

it was

Mass. Gen. L. ch. 175

211

C.M.R.

Part

required to

19:01, et seq.,
________

as loans, between it and its

law,

an

L. ch.
insurance

unsecured loan
assets

and

a state

file annual

regulated

statements,

25, annual audited financial statements,

containing current information

Mass. Gen.

As

of Insurance

175

registration statements

about material transactions, such

unregulated parent holding company.

193N(b)(iii)(1).

company

to its

and

is

prohibited

parent holding

statutory surplus.

Under
from

Massachusetts
including

company in its

Mass. Gen. L. ch. 175

note 2 supra.
_____

-5-

an

admitted

11; see
___

B.

The Cash Management Account (CMA)

_________________________________

Monarch

Capital

subsidiaries in 1985.

established

the CMA

Pursuant to

Capital, Monarch Life, and Springfield

any available

requiring funds could

and its

a Short-Term

the STIP, Monarch

Life agreed to pool, on a

cash into the

draw upon the CMA to

and obtain them from the

STIP agreement

itself

It was formalized in 1986 by

Investment Pool Agreement (STIP).

daily basis,

for

CMA.6

A STIP

meet operating costs

CMA at short-term interest rates.

provided that pooled funds would

the depositing company in cash on

party

The

be available to

a demand basis.7

The official

purpose of

the CMA was

to minimize administrative

external borrowing costs,

and maximize investment returns.

unofficial purpose of the CMA,

an unsecured,

and enable

The

the Class contended, was to offer

unregulated line of

it to obtain

expenses and

credit to a

illegal dividends.8

faltering parent

The

Class accused

____________________

Springfield Life was a Vermont corporation.

regulators initially

Vermont insurance

questioned Springfield Life s

inclusion of

the CMA investment in its statutory surplus, but acquiesced after

the

STIP was

subsidiaries,

formalized.
First

Another

one of

Life

Insurance

Variable

Variable), an Arkansas corporation, was

STIP.

When

the

Arkansas

Monarch

Capital s

Company

(First

an original party to the

Department

of

Insurance

raised

objections to the CMA, First Variable ceased participation in the

STIP.

Monarch

Capital disclosed the existence

insurance regulators
statement.
credit with

in June

1986, in

of the CMA to

an amended

state

registration

It declared that it had $125 million in bank lines of

which to

guarantee on

funds to the STIP participants.

demand

the availability

of

Under Massachusetts insurance

dividends
and

to Monarch Capital

only if its statutory

was reasonable
adequate

in relation

for its

financial

laws, Monarch

only out of

Life could

pay

its statutory surplus

surplus (after paying such dividends)

to its

outstanding liabilities

needs.

Mass. Gen.

L.

and

ch. 175

-6-

the

Monarch Defendants

of abusing the

CMA by using

Monarch Capital s long-term, speculative real estate

After settling with

it to fund

activities.

the Monarch Defendants, the Class turned its

attention to E&Y s role in this sequence of events.

C.

The 1989 Audited Consolidated Financial Statements and 1990

_____________________________________________________________

Unqualified Opinion of E&Y as to the CMA

________________________________________

By December

Monarch Life

$15.1

31, 1989,

to Monarch Capital

million

Together,

from

the

(statutory

Capital s

life

(Footnote

statements)9

to

and

balances

million figure

basis)

insurance

to

subsidiaries

issued

report

1989

in

Capital.

Monarch

as part

Life

and

E&Y included

of

equity

at

from

they were

Monarch

of

stockholder s

Monarch Capital s

____________________

Life

approximately $125 million.

approximately $125

million

CMA

the CMA

were $110.6 million;

Springfield

combined

Springfield Life were

this

outstanding loans via

December

the $138.1

of

Monarch

31,

1989

consolidated financial

1990

concerning

those

193N(j)-(1).

Footnote F states in pertinent part:

Retained earnings include

statutory

basis

accounting

the

generally

principles

Corporation s
that are

to

adjustments from a

life

basis

insurance

not available

Corporation

Stockholder s

the

Corporation

December
dividends
conditions

31,

of

1989.

these subsidiaries
loan or advances
million

at

however,

payments

of

this

would

31,

by

was $136.5

1989;

from

the

subsidiaries

December

available for distribution,

to

for

for distribution

at

equity

accepted

amount
require

under

certain

approval

by

regulatory authorities.

Statutory basis stockholder s

-7-

equity of

financial statements.10

1.

The Contentions of the Class.

_____________________________

The Class claims that E&Y committed securities fraud when it

intentionally

misrepresented to

Monarch Capital

investors that

Monarch Capital s life insurance subsidiaries had $138 million in

statutory

surplus

distribution

over

$125

or

restricted

to Monarch

million

of

distributed to Monarch

E&Y

accomplished

this

assets

(not

available

Capital under Massachusetts

the

$138

million

Capital and spent

fraud, avers

the

had

law), when

already

by December 31,

Class,

for

been

1989.

by improperly

including

($110.6

the CMA balances of Monarch

million

and

$15.1

Life and Springfield Life

million,

respectively)

in

the

computation of statutory surplus used to determine the (statutory

basis) stockholder s equity of each insurance company.

The Class

____________________

the Corporation s life insurance subsidiaries

was

$138.1

December

31,

million
1989

and $141.9
and

1988,

million

at

respectively

. . . .

10

The February 12, 1990,

Auditors

Report

of Ernst & Young Independent

states in pertinent part:

We have audited the accompanying consolidated

statements of financial

condition of Monarch

Capital Corporation [and

subsidiaries] as of

December 31, 1989 . . . .

We

conducted our

audits in

accordance with

generally accepted auditing standards . . . .

In

our

opinion,

referred

to

the

above

financial

present

statements

fairly, in

all

material respects, the consolidated financial

condition of Monarch
subsidiaries

Capital Corporation and

at December 31,

1989 . .

. in

conformity with generally accepted accounting

principles.

-8-

claims that

1989

the E&Y

consolidated

material,

overstatements on

financial

lulling the

the Monarch

statements and

investing public

1990

into a

Defendants

report

false

were

sense of

liquidity,

and

were

made

with

the

requisite

Section

10(b)

scienter necessary to establish securities fraud.

2.

The Contentions of E&Y.

_______________________

Countering

that, by

that this is

not a negligence

including CMA assets

case, E&Y claims

in its computations

of statutory

surplus, it acted without requisite Section 10(b) scienter, as it

relied on the opinion of state insurance examiners.

that it

is uncontroverted in

insurance

regulators,

with

the record that

jurisdiction

concluded in a regulatory examination

months

before

includable

statutory

when

its

1990

report,

calculating

surplus and that

the Massachusetts

over

Monarch

report, issued only a

that

life

E&Y contends

the

CMA

insurance

E&Y explicitly read

was

Life,

few

properly

subsidiary s

and relied upon

this conclusion

Massachusetts

by noting

has approved

admitted asset.

upon

the

carrying

three

reviewed

of

its

neither the Class nor

purported

[the]

State of

the [CMA]

as

an

market professionals

overstatements

investment decisions or recommendations.

that

papers:

This balance should be considered admissible. 11

E&Y claims that

relied

in its work

of

its

partners

their

own

independent

in

Further, E&Y

contemporaneously

and

making

internal

their

contends

performed

or

collectibility

____________________

11
with

E&Y claims that its auditors even raised this issue directly
the Massachusetts

regulators who

confirmed

that the

should be included as a statutory asset of Monarch Life.

-9-

CMA

analyses

and determined

Life s $125 million

that

Monarch

Life s

and

CMA investment was collectible

Springfield

from Monarch

Capital.

III.

We review

for

STANDARD OF REVIEW

the grant by

the district court of

summary judgment de novo.

________

335, 338 (1st Cir.

1994).

Merino Calenti
______________

The district court

E&Y s motion

v. Boto, 24 F.3d
____

viewed the record

in

the

light most

favorable

to

inferences in favor of the Class.

Income Portfolio, Inc.,

_______________________

defeat summary

there

is a

the

Lucia v.
_____

36 F.3d 170,

judgment, the

genuine issue

Class and

all

Prospect Street High

____________________

174 (1st Cir.

Class must

for trial.

indulged

1994).

present facts

See
___

To

showing

Mulero-Rodr guez v.
________________

Ponte, Inc., 98 F.3d 670, 673 (1st Cir. 1996).

___________

IV.

A.

DISCUSSION

The District Court Opinion

__________________________

After Central Bank of Denver, N.A. v. First Interstate Bank

____________________________
______________________

of Denver, N.A., 511 U.S.

________________

164 (1994), the district

court found

that

a claim of

securities fraud under

only the making of a

commission of

itself

material misstatement (or omission) or the

a manipulative

reach [secondary

10(b) violation.

Section 10(b) prohibits

act

and that

actors] who

aid

its text

and abet

Id. at 177; see note 3 supra.

___
___
_____

does not

a [Section]

It then focused

-10-

its

analysis on the

Class

remaining primary

liability claims,

i.e., those based upon E&Y s 1990 audit opinion regarding Monarch
____

Capital s

1989 financial

statements,

as

published in

Monarch

Capital s 1989 annual report and its 1989 Form 10K.

As

to these

record failed

documents, the

to show that

district court found

E&Y made a material

that the

misstatement or

omission affecting the purchase or sale of Monarch Capital stock.

See SEC v. MacDonald, 699 F.2d 47, 49 (1st Cir. 1983)(substantial

___ ___
_________

likelihood that

misstatements were

actually significant

deliberations of a

reasonable shareholder).

the

to

record failed

omissions,

show that

any E&Y

purportedly relied upon by

Section 10(b)

scienter.

It

in the

also found that

misrepresentations or

the Class, were made with

Ernst & Ernst v. Hochfelder,

______________
__________

425 U.S.

185 (1976) (section 10(b) cannot

negligent

conduct

alone).

be read to impose liability for

The

motion for summary judgment.

district

Under a

court

granted E&Y s

de novo review, we examine

_______

each element separately.

B.

The Element of Materiality

__________________________

In most

circumstances,

disputes over

the

materiality

of

allegedly false or misleading statements must be reserved for the

trier of

1217

fact.

Shaw v.
____

Digital Equipment Corp., 82

_______________________

F.3d 1194,

(1st Cir. 1996); see Basic Inc. v. Levinson, 485 U.S. 224,
___ ___________
________

236 (1988);

expression

Lucia, 36 F.3d at
_____

of

corporate

misstatement, can

under the

176.

But

optimism,

even

give rise

securities laws.

to a genuine

Shaw, 82

not every unfulfilled

if

characterized

issue of

F.3d at 1217;

as

materiality

Lucia, 36

____

_____

-11-

F.3d at 176

(leaving open the possibility

determinations

may

be made

judgment is warranted . . .

as

matter

that some materiality

of law).

if reasonable minds could not differ

as to the materiality of the undisclosed information.

Van Dorn Co., 961 F.2d

____________

Summary

965, 970 (1st Cir. 1992).

Milton v.
______

The mere fact

that

is

an investor might find information interesting or desirable

not

Rather,

alter

sufficient

to

information is

the

there is a

total mix
_________

satisfy

material

the

materiality

only if its

disclosure would

of facts available to the investor and

substantial likelihood that a

______________________

would consider it important

969 (emphasis in

requirement.

reasonable shareholder

to the investment decision.

original) (citing Basic,

_____

if

485 U.S. at

Id. at
___

231-32);

see also Lucia, 36 F.3d at 174.

________ _____

Here, the district court found that all material information

about the CMA was disclosed.

have

concluded

omissions in its

that

It determined that a jury could not

E&Y made

material

misrepresentations

1990 opinion because the opinion

or

did not alter

the

total mix

961

F.2d at

of information available to the

972.

reasoned, were

Other public

available to the

filings,

Class.

Milton,
______

the district

Class and clearly

court

revealed the

existence and true nature of the CMA.12

____________________

12

These public filings included:

report

and

Form

10K;

Capital s

subsidiaries,

Monarch

Capital s

stockholders;

the

Monarch Capital s 1989 annual

financial

Monarch

Life

president s

on

insurance

and

of

Monarch

Springfield

pessimistic

message

Life;

to

annual statements filed by Monarch Life with state

insurance regulators listing the STIP;

report

statements

Monarch

Life

examiners; and

filed by Monarch Life and

issued

in

statutory

the triennial examination

November

1989,

basis financial

Springfield Life with state

-12-

by

state

statements

insurance

After reviewing the record, we

demonstrate

surplus

that

the

in Footnote

financial

disclosure of

F of

Monarch

statements, filed in

investors, but merely

agree.

The undisputed facts

Monarch

Life s

Capital s 1989

March 1990, was

consolidated

not material to

duplicative of prior filings.

clear that it was not a primary source of reliance for

analysts evaluating insurance

companies.

record does

concrete evidence

the

Class

not reflect any

to

indicate that

E&Y s

material to investors, Anderson v.

________

We also note

disclosures

statutory

put

It is also

insurance

that the

forward by

were genuinely

Liberty Lobby, Inc., 477 U.S.

___________________

242, 243 (1986), nor does it

this element

reflect a genuine issue of fact

of their claim.

See Mulero-Rodr guez, 98

___ ________________

on

F.3d at

673.

C.

The Element of Scienter

_______________________

The

scienter

requirement

misstatements or

omissions were

699 F.2d

or if

at 49,

is

if

made knowingly,

they were

Commodity Corp. of Boston

__________________________

satisfied

the

material

see MacDonald,
___ _________

made recklessly.

See
___

First
_____

v. Commodity Futures Trading Comm n,

_________________________________

676 F.2d 1, 7 (1st Cir. 1982).13

Like materiality,

scienter [is

____________________

regulators.

13
are:

Acts

of commission or omission

are made recklessly if

they

. .

. so

extreme

highly unreasonable

departure

ordinary

care

misleading the

as

from

the

to present

plaintiff to the

the danger was either known

or so

obvious that

been aware

of it.

and such

an

standards

of

of

danger

extent that

to the defendant

the defendant must

Hoffman
_______

have

v. Estabrook &
____________

Co., Inc., 587 F.2d 509, 517 (1st Cir. 1978)

__________

-13-

a] fact-specific

issue which

should ordinarily

be left

to the

trier of fact.

In re Apple Computer Securities Litigation, 886

___________________________________________

F.2d 1109, 1113 (9th Cir.

1989).14

However, summary judgment is

not automatically precluded even in cases where

are at issue.

motive or intent

Vel zquez v. Chard n, 736 F.2d 831, 833 (1st Cir.

_________
_______

1984); Smith v. Stratus Computer, Inc., 40 F.3d 11, 13 (1st

_____
______________________

1994)(where intent is

merely upon

an issue the non-moving party

conclusory allegations, improbable

unsupported speculation,

Medina-Mu oz
____________

Co., 896 F.2d 5, 8 (1st Cir. 1990)).

___

scienter issue

basis in

statements

is appropriate only
____

the record

was made

requisite

cannot rest

inferences, and

v. R.J. Reynolds Tobacco

______________________

[S]ummary judgment

where

for concluding that

with

Cir.

there is

any of

scienter.

on the

no rational

the challenged

Provenz
_______

v.

Miller,
______

102

F.3d

1478,

1490

(9th

Cir.

1996)(emphasis

original), petition for cert. filed, 65 U.S.L.W. 3756

_________________________

5, 1997)(No.

96-1770).

However,

granted summary judgment

lack of

763 F.2d 491,

F.2d

1040,

court and

that

See, e.g.,
___ ____

(7th

Cir.

have

based on a

would allow for an inference of

Bryson v. Royal Business Group,

______
_____________________

493-95 (1st Cir. 1985); Renovitch

_________

1047

(U.S. May

others

to Section 10(b) defendants

concrete evidence

fraudulent intent.

this

in

1990);

v. Kaufman, 905
_______

In re Worlds of Wonder
__________________________

____________________

(citation omitted).

14

Where the non-moving party has indicated

that he can produce

the requisite quantum of evidence to enable him to reach the jury

with his
Cir. 1984)

claim,

Vel zquez
_________

v. Chard n, 736
_______

(citing Hahn v. Sargent, 523

____
_______

F.2d 831,

833 (1st

F.2d 461, 468 (1st Cir.

1975)),
judgment
issue.

trial courts should

where

use restraint in

discriminatory animus

of the

granting summary
defendants is

in

Id.
___

-14-

Securities Litigation, 35 F.3d 1407, 1424 (9th Cir. 1994).15

_____________________

The district

intended

court found

to proscribe

negligence.

knowing

Hochfelder,
__________

that Section

or

425 U.S.

10(b) scienter

was

intentional misconduct,

not

at 197.

Since

Hochfelder,
__________

recklessness can

Section 10(b).

(9th

also

Cornfeld, 619 F.2d

________

cert. denied,
_____________

(without deciding)

Noting

requirement

976

F.2d at 516,

914 F.2d 1564

(1991); ITT
___

to

carelessness

scienter

requirement,

the district court concluded

judgment.

v.

that the First Circuit has assumed

satisfies the

lack of any showing of scienter

under

see First Commodity

___ _______________

that recklessness amounting

indifference

motion for summary

499 U.S.

909, 923 (2d Cir. 1980);

Corp., 676 F.2d at 7.

_____

Hoffman, 587
_______

scienter

Hollinger v. Titan Capital Corp.,

_________
___________________

Cir. 1990),

approaching

satisfy the

that

is alone sufficient to support a

Bryson, 763 F.2d at 493 n.3.

______

The

district court found that a reasonable and prudent investor would

not be misled about the CMA due to the existence of

other public

filings

and

that

E&Y s knowledge

of

these

prior disclosures

negated the possibility that it acted with scienter.

Based upon

our review

of the

voluminous record,

we agree

____________________

15

Other

actions

circuits have

against

held

accountants

that scienter
or

independent

in Section
auditors

10(b)
is

not

established merely through a showing of an error of judgment or a

misapplication of
prove that

accounting

the accounting

principles.

The

plaintiff

practices were so deficient that

must

the

audit amounted to no audit at all, or an egregious refusal to see

the

obvious,

or

to

investigate

the

doubtful,

or

that

the

accounting judgments which were made were such that no reasonable

accountant would have
the

same facts.

made the same decision if

confronted with

In re Software Toolworks, Inc., 50 F.3d 615,

________________________________

627-28 (9th Cir. 1994); Worlds of Wonder, 35 F.3d at 1426;

_________________

Fine
____

v. American Solar King Corp., 919 F.2d 290, 297 (5th Cir. 1990).
_________________________

-15-

with the district court that E&Y has not been shown to have acted

with

the requisite

independent

fraud.

In

auditor,

E&Y

had no

prepared inadequate

deliberately (or

investors.

fraudulent

Section

Nor

or

do

recklessly)

we

reckless

find

to

As

an

commit securities

that E&Y intentionally

collectibility analyses

to mislead

evidence

intent in

10(b) scienter.

motive

addition, we find no evidence

(or recklessly)

order

degree of

that

relying

on

in

Monarch Capital

E&Y

acted

with

state insurance

examiners.

As to Footnote F of

the 1990 audit opinion, there is

no evidence that E&Y deliberately or recklessly chose not to find

fault

with the

evidence

figures

contained

of conspiratorial

allegedly being perpetrated

the Class

supply any.

therein.

misconduct by

Neither

E&Y to

is

there

aid

in fraud

by the Monarch Defendants,

nor does

Bryson, 763 F.2d at

______

493-95; Hochfelder,
__________

425 U.S. at 197.

What the Class offers to prove, and the record does support,

however,

is that E&Y

made many mistakes.

For example,

it may

have been a mistake for E&Y to take Monarch Capital s word on its

own credit position.

insurance

It may have been a mistake to rely on state

department examiners

misinformed.

It

may

Capital s subsidiaries

have

who,

been a

themselves, may

mistake

to

view

have been

Monarch

statutory surplus as a regulatory, not an

accounting, issue.

rely

upon its own

And, it may have

been a mistake for

internal collectibility analyses

not models of professional accounting competence).

mistakes

such as

these do

not support

a finding

E&Y to

(which were

Nevertheless,

of scienter.

-16-

Hochfelder, 425 U.S. at 214. Under the standards set forth above,
__________

based

upon

the

facts

of

this

case,

we

find

deliberate, or reckless fraud on the part of E&Y.

not

to be

purposes.

admired, but

it

is insufficient

V.

CONCLUSION

no

knowing,

Negligence is

for Section

10(b)

Id.
___

Based upon

the above, we

affirm the grant by

court of E&Y s motion for summary judgment.

AFFIRMED.

the district

-17-