Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-90-04189/USCOURTS-ca10-90-04189-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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Tenth Ci:-rnir 

UNITED STATES COURT OF APPEALS 

JUL 2 1992 

TENTH CIRCUIT 

_________ __,;c .ROBERT L. HOECK.ER 

Clerk SECURITIES AND EXCHANGE COMMISSION, ) 

) 

Plaintiff-Appellee, ) 

) 

v. ) 

) 

JACK JOHNSTON, ) 

) 

Defendant-Appellant, ) 

) 

and ) 

) 

PROS INTERNATIONAL, INC.; RICHARD C. ) 

LANDERMAN; GEORGE CRAIG STAYNER; ) 

DAVID M. LAMOREAUX, ) 

) 

Defendants. ) 

ORDER AND JUDGMENT* 

No. 90-4189 

(D.C. No. 87-C-751-S) 

(D. Utah) 

Before SEYMOUR, and BARRETT, Circuit Judges, and BROWN,* District 

Judge. 

Summary judgment is not appropriate when the "evidence 

presents a sufficient disagreement to require submission to a 

jury." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 

*This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppel. 10th Cir. R. 36.3. 

*The Honorable Wesley E. Brown, Senior United Stated District 

Judge for the District of Kansas, sitting by designation. 

Appellate Case: 90-4189 Document: 010110275087 Date Filed: 07/28/1992 Page: 1
(1986). In this case the district court granted the SEC's motion 

for summary judgment against Jack Johnston, finding that "Johnston 

knew or should have known" of the conduct underlying the 

violations of the securities laws alleged in this case. SEC v. 

PROS Int'l, Inc., No. 87-C-0751-S, slip op. at 8 (D. Utah Oct. 4, 

1990) (hereinafter "Op."). On appeal, Mr. Johnston argues that 

summary judgment was improper in light of deposition testimony 

that he did not know of the alleged conduct. Because we agree that 

the district court necessarily made credibility determinations in 

order to grant the SEC's summary judgment motion, we reverse. 

In reviewing a district court's grant of summary judgment, 

"[w]e view the evidence and draw inferences in the light most 

favorable to the party against whom summary judgment is sought, 

and we consider questions of law de novo. If a genuine issue of 

material fact exists, summary judgment is inappropriate." Mee v. 

Ortega, No. 90-1288, 1992 WL 133314, at *l, (10th Cir. June 18, 

1992) (citation omitted); see Fed. R. Civ. P. 56(c). 

The district court concluded that Johnston violated several 

provisions of the securities laws, and issued a permanent 

injunction enjoining him from future violations and retaining 

jurisdiction to enforce the injunction in the future. The 

district court specifically held that Johnston violated Section 

l0(b) of the Exchange Act, 15 U.S.C. § 78j(b); Rule l0b-5, 17 

C.F.R. § 240.l0b-5; Section 17(a) of the Securities Act, 15 u.s.c. 

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Appellate Case: 90-4189 Document: 010110275087 Date Filed: 07/28/1992 Page: 2
§ 77q(a); and Sections 5(a) and 5(c) of the Securities Act, 15 

U.S.C. §§ 77e (a) & (c). On the strength of these violations, the 

district court granted the injunctive relief sought by the SEC. 

Mr. Johnston orchestrated an effort to revive defunct 

Delaware corporations in hopes of selling the revived corporations 

to businesspeople seeking to bring companies public. 1 Mr. 

Johnston said that he had heard about the possibility of reviving 

corporations over a number of years. Appellant's App., vol. II, 

doc. 18 at 457. He anticipated that the venture would be 

extremely lucrative. Id. at 461-63. He hired an attorney and an 

investigator to identify the corporations and take the steps 

necessary to revive them. When asked by his attorney, he provided 

individuals to serve as officers and directors of the corporations 

in order to facilitate revival. This litigation stems from the 

revival of one such corporation, Ad-Print. 

Ad-Print was revived by Mr. Johnston's team and then used by 

another corporation (PROS) as a vehicle to avoid the registration 

requirements of the securities laws. The purported revival and 

the subsequent merger and issuance of new stock provide the basis 

1 Apparently the people involved believed that by reviving 

corporations that were defunct prior to 1933, the registration 

requirements of the '33 Act would not attach to any securities 

issued by the purportedly revived corporation. Thus, persons 

seeking to issue securities could merge with the revived 

corporation and cirumvent the registration requirements. 

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Appellate Case: 90-4189 Document: 010110275087 Date Filed: 07/28/1992 Page: 3
for the SEC's action and the district court's holding. The 

parties agree as to the sequence and nature of the relevant 

events. They disagree as to Mr. Johnston's level of understanding 

and participation in those events. He maintains that not only did 

he not know that the revival scheme was illegal, but that he 

relied on his lawyer to conduct it in a legal fashion. 2 He claims 

further that he did not know any of the details of the scheme. 

Testimony at his deposition supports this claim on appeal. See 

Appellant's App., vol. II, doc. 18 at 451-80. 

Three of the violations found by the district court require 

scienter. 3 

Scienter is "a mental state embracing intent to deceive, 

manipulate, or defraud." [Ernst & Ernst v.J Hochfelder, 

425 U.S. [185,] 193 [(1976)). This intent requirement 

can be satisfied by a showing of recklessness. Reckless 

behavior is conduct that is "an extreme departure from 

the standards of ordinary care and which presents a 

danger of misleading buyers or sellers that is either 

known to the defendant or so obvious that the actor must 

have been aware of it." Hackbart [v. Holmes], 675 F.2d 

[1114,] 1118 [(10th Cir. 1992)]. 

Board of County Commissioners of San Juan County v. Liberty Group, 

Nos. 90-2266, 90-2275, 91-2166, 1992 WL 110823, at *7 n.3 (10th 

Cir. May 28, 1992). Mr. Johnston argues that any resolution of 

2 We do not suggest that Mr. Johnston has effectively 

established the defense of reliance on counsel. We simply 

conclude infra that summary judgment in favor of the SEC was 

improper on the scienter issue because of material fact issues. 

3 Scienter is a necessary element of a lO(b), lOb-5, and 17(a) 

offense. 

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Appellate Case: 90-4189 Document: 010110275087 Date Filed: 07/28/1992 Page: 4
the scienter question necessarily entails a credibility 

determination. In short, he asserts the district court could not 

find a violation of the securities laws unless it chose not to 

believe his testimony that he did not know about the conduct of 

those in his employ. 

"Summary judgment is generally inappropriate when mental 

state is an issue, unless no reasonable inference supports the 

adverse party's claim." Vucinich v. Paine, Webber, Jackson & 

Curtis, Inc., 739 F.2d 1434, 1436 (9th Cir. 1984); see National 

Union Fire Ins. Co. v. Turtur, 892 F.2d 199, 205 (2d Cir. 1989) 

(same); Romero v. Union Pac. R.R., 615 F.2d 1303, 1309 (10th Cir. 

1980) (same). In granting summary judgment, the court below 

reasoned that: "Based on the evidence presented to the court it is 

difficult to believe Johnston was not aware of the fraudulent 

activities of his agents." Op. at 12 (emphasis added). Earlier 

in its opinion, the court denied Mr. Johnston's motion for summary 

judgment. In support of denial, the court reasoned: "The SEC 

disputes, with credible evidence and testimony, Johnston's defense 

that he lacked the necessary scienter for the above-referenced 

securities laws violations." Op. at 7 (emphasis added). The 

conclusion that the district court granted the SEC's motion 

because it found Mr. Johnston's testimony less credible than the 

SEC's evidence is inescapable. 4 

4 Importantly, neither the district court nor the parties cite 

any cases that conclude that a defendant had the requisite 

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Appellate Case: 90-4189 Document: 010110275087 Date Filed: 07/28/1992 Page: 5
Admittedly, Mr. Johnston's testimony is difficult to accept; 

it is not however incredible as a matter of law. 5 In deciding 

that Mr. Johnston was not telling the whole truth, the district 

court intruded on the exclusive province of the trier of fact. A 

jury that believed Mr. Johnston could reasonably conclude that his 

behavior did not amount to recklessness as defined by Hackbart, 

675 F.2d at 1118. This possibility alone suffices to preclude 

summary judgment in this case. 

The district court also concluded that Mr. Johnston had 

violated Sections 5(a) and (c) of the Securities Act. These 

provisions prohibit the sale of unregistered securities, and their 

violation does not require scienter. We see no error in the 

district court's rejection of Mr. Johnston's defense of withdraw!. 

As we can discern no material fact in dispute and agree with the 

scienter. In all of the cases cited by the SEC, summary judgment 

was granted for a defendant because the plaintiff failed to point 

to evidence that would support a jury finding of scienter. See 

Mutual Fund Investors, Inc. v. Putnam Management Co., 553 F.2d 

620, 624 (9th Cir. 1977) (summary judgment for defendant in an 

antitrust case); In re Apple Computer Sec. Lit., 886 F.2d 1109, 

1117 (9th Cir. 1989) ("However, plaintiffs produced no evidence 

controverting defendants' good faith basis for making the other 

statements."), cert. denied, 496 U.S. 943 (1990); see also 

O'Connor v. R.F. Lafferty & Co., Inc., No. 90-1371, 1992 WL 

110869, at *4 (10th Cir. May 28, 1992) (summary judgment for 

defendant under l0b-5 where no evidence of intentional or reckless 

conduct appeared in record). 

5 If Mr. Johnston's testimony were impossible to believe, so 

that a judgment j.n.o.v. would be required were a jury to rule in 

his favor, summary judgment would be appropriate. 

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Appellate Case: 90-4189 Document: 010110275087 Date Filed: 07/28/1992 Page: 6
district court's legal conclusions, we conclude that summary 

judgment on the Section 5 claims was appropriate for substantially 

the reasons stated by the district court. 

The district court granted injunctive relief on the basis of 

the violations discussed above and Mr. Johnston's past and 

continued involvement in securities. Because it is impossible 

for us to tell what part the violations we reverse played in the 

decision to enjoin Mr. Johnston, we must reverse the district 

court's grant of injunctive relief. 

The decision entered below is REVERSED and REMANDED for 

further proceedings in accordance with this opinion. 

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Entered for the Court 

Stephanie K. Seymour 

Circuit Judge 

Appellate Case: 90-4189 Document: 010110275087 Date Filed: 07/28/1992 Page: 7