Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-95-05086/USCOURTS-ca10-95-05086-0/pdf.json

Parties Involved:
Wynema Anna Cross
Appellant
Home-Stake Production Company
Appellee

Document Text:

.... i • 

UNITED STATES COURT OF APPEALS 

Office of the Clerk 

Byron White United States Courthouse 

1823 Stout Street 

Denver, co 80257 

Patrick Fisher 

Clerk 

Elisabeth Shumaker 

Chief Deputy Clerk 

January 31, 1996 

TO: ALL RECIPIENTS OF THE CAPTIONED OPINION 

RE: 95-5086, Anixter v. Home-stake Production Company 

Filed January 29, 1996 by Judge Lucero 

Please be advised that the attached dissent was 

omitted from the decision as filed January 29, 1996. 

Very truly yours, 

Patrick Fisher, 

Clerk 

ayv~VL£- Barbara Schermerhorn 

Deputy Clerk 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 1 
No. 95-5086 -- Anixter v. Home-Stake Production Co. 

BRORBY, Circuit Judge, dissenting. 

I dissent. 

The significant facts are simple. Appellant failed to object to a jury instruction and she 

likewise failed to object to the use of a general verdict. She now asks for a retrial due to a courtmade change in the law occurring five years after the trial. 

I would apply Union Pacific R.R. v. Lumbert, 401 F.2d 699, 701 (lOth Cir. 1968). This case 

quite simply holds where no objection was made to the use of a general verdict, the general verdict 

must be upheld where there is substantial evidence supporting any ground of recovery. The majority 

correctly concludes there exists substantial supporting evidence. I see no reason to reward Appellant 

for her failure to object. 

An examination of applicable case law within the circuit reveals inconsistencies. We have 

applied the "absolute certainty" analysis now utilized by the majority. We have also applied a 

harmless error analysis and the substantial evidence analysis which I advocate in this dissent. 

The majority applies the "absolute certainty" analysis as advanced by this court in Farrell 

v. Klein Tools, Inc., 866 F.2d 1294, 1299-1301 (lOth Cir. 1989). As the majority notes, Farrell 

relied on two then recent Tenth Circuit opinions in rejecting, without overruling, the harmless error 

standard we had previously applied. (Majority slip opinion at 31.) See Asbill v. Housing Authority 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 2 
• 

ofChoctaw Nation of Okla., 726 F.2d 1499, 1504 (lOth Cir. 1984) (applying a "litmus test" to see 

whethertheappellantwasunjustlyprejudiced);Lusbyv. TG. & Y Stores, Inc., 749F.2d 1423,1436 

(lOth Cir.), cert. granted and vacated on other grounds, 474 U.S. 805 (1984); Employers Liab. 

Assurance Corp. v. Freeman, 229 F.2d 547, 551 (lOth Cir. 1955). Farrell and the majority opinion 

describe the general rule "that when one of two or more issues submitted to the jury was submitted 

erroneously, a general verdict cannot stand because it cannot be determined whether the jury relied 

on the improper ground." Farrell, 866 F.2d at 1299. Although the Farrell opinion outlines in great 

detail the inconsistency in our circuit regarding the use of the harmless error standard and the 

absolute certainty analysis, it fails to address whether an objection to the general verdict form had 

been made at trial. This distinction is important in light of the cases within our circuit which hold 

that "in the absence of a pertinent objection to the charge or a request for a specific interrogatory a 

'general verdict is upheld where there is substantial evidence supporting any ground of recovery in 

favor of an appellee."' Lumbert, 401 F.2d at 701 (quoting Vareltzis v. Luckenbach S.S. Co., 258 F.2d 

78,80 (2d Cir. 1958)). 

The Lumbert decision and its progeny carve out a pertinent exception to the general rule 

which the majority fails to acknowledge. See Malandris v. Merrill Lynch, Pierce, Fenner & Smith 

Inc., 703 F.2d 1152, 1176 & n.20 (lOth Cir. 1981) (en bane) (plurality opinion), cert. denied, 464 

U.S. 824 (1983) (holding that where no objection was made to the charge and there was sufficient 

evidence to sustain ruling under other theories "any error in submitting the [improper] theory should 

not now be considered on appeal"). See also Hinds v. General Motors Corp., 988 F.2d 1039, 1047 

(lOth Cir. 1993) (holding that "'a party's failure to object to a verdict on the ground of inconsistency 

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Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 3 
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• 

prior to the jury's discharge waives his right to raise the issue in a posttrial motion or on appeal 

unless the verdict is inconsistent on its face so that entry of judgment upon the verdict is plain error'" 

(quoting Diamond Shamrock Corp. v. Zinke & Trumbo, Ltd., 791 F.2d 1416, 1424 (lOth Cir.), cert. 

denied, 479 U.S. 1007 (1986))); Aspen Highlands Skiing Corp. v. Aspen Skiing Co., 738 F.2d 1509, 

1522 (1Oth Cir.) (holding that nonobjected-to general verdict should be upheld "if the proof on 

various theories is sufficient to sustain the general verdict."), cert. granted, 469 U.S. 1071 (1984), 

affd, 472 U.S. 585 (1985). Other circuits also apply this rule. See Vareltzis, 258 F.2d at 80; State 

Fuel Co. v. Gulf Oil Corp., 179 F.2d 390, 396 (1st Cir. 1950); Cross v. Ryan, 124 F.2d 883, 887 (7th 

Cir. 1941), cert. denied, 316 U.S. 682 (1942). 

The confusion regarding whether the harmless error standard or the absolute certainty or 

substantial evidence analysis should be applied is perpetuated because many of the opinions dealing 

with this issue either acknowledge one standard, then apply another or fail to specify whether an 

objection was made to the use of a general verdict form at trial. See City of Wichita v. United States 

Gypsum Co.,_ F.3d _, 1996 WL 5546 (lOth Cir. Jan. 5, 1996); Farrell, 866 F.2d 1294; 

McMurrayv. Deere & Co., 858 F.2d 1436 (lOth Cir. 1988); Smith v. FMC Corp., 754 F.2d 873 (lOth 

Cir. 1985). This confusion is also enhanced by the similarity between the harmless error standard 

and the substantial evidence analysis. However, because no objection was made to the use of a 

general verdict form I do not believe it is appropriate to apply either the harmless error standard or 

the absolute certainty analysis in this case. Instead, I believe that Lumbert mandates we affirm the 

verdict if there is substantial evidence supporting any permissible ground of recovery. I agree with 

the majority's findings that "the record supports finding Cross liable for a primary violation of 

3 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 4 
• 

• 

§ lO(b)" and would therefore affirm the jury's verdict. (Majority slip opinion at 26.) 

I also find it important to note that Fed. R. Civ. P. 51 precludes a party from assigning "as 

error the giving or failure to give an instruction unless that party objects thereto before the jury 

retires to consider its verdict." In Comins v. Scrivener, 214 F.2d 810, 814 (lOth Cir. 1954), we held 

that where no exceptions were taken to the jury instructions, no question was preserved for appeal 

regarding the instructions. See also CityofNewportv. Fact Concerts, Inc., 453 U.S. 247,256 (1981) 

(holding that no "'right' to review existed at all once petitioner failed to except to the charge at 

trial."). To mitigate the harshness of this rule appellate courts have invoked on occasion a review 

for plain error. City of Newport, 453 U.S. at 256. In the Tenth Circuit, we have "recognized a 

narrow exception to the application of Rule 51 in the interest of justice." Glasscock v. Wilson 

Constructors, Inc., 627 F.2d 1065, 1068 (lOth Cir. 1980). However, we rarely apply this narrow 

exception. /d. In the case at bar, we know that no objection was made to the aider and abettor 

instruction before the jury retired to deliberate. It is true that at the time of trial the instruction 

correctly stated the applicable law, however, that does not mandate the result that a case can be tried 

and no objection made and then an appellant be allowed to take advantage of a change in the law 

which occurs five years later simply because a jury may have acted upon the instruction. I do not 

believe the interests of justice support such a windfall. I also do not find these circumstances rise 

to the level of plain error. 

I am aware of the Supreme Court's holding in O'Connor v. Ohio, 385 U.S. 92,93 (1966) (per 

curiam), that a defendant's "failure to object to a practice that Ohio had long allowed cannot strip 

4 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 5 
him of his right to attack the practice following its invalidation by this Court." I believe this opinion 

is distinguishable, however, because O'Connor dealt with a criminal defendant's constitutional right 

to remain silent rather than with a statutorily created basis of liability. The opinion and those 

following it also differ in that they involve changes in the Supreme Court's interpretations of state 

laws. See also United States v. Zeigler, 19 F.3d 486, 494 (lOth Cir.), cert. denied, 115 S. Ct. 517 

(1994) (excusing the government's failure to object to sentence below because it was in accordance 

with then applicable law); Doby v. Beto, 371 F.2d. 111, 113 (5th Cir. 1967) (holding that failure to 

object cannot bar appellant from challenging validity of a search warrant because he could not be 

charged with failure to anticipate the Supreme Court's invalidation of a long-settled Texas practice). 

The bottom line is the appellant in this case did not object to the jury instruction on aider or 

abettor liability or to the use of a general verdict form. By failing to object she waived her right to 

appeal the jury verdict where it was supported by substantial evidence and the interests of justice do 

not require otherwise. If anything, the interests of justice require that after nearly twenty-three years 

of traveling up and down the judicial system, this case finally be laid to rest. For these reasons I 

respectfully dissent. 

5 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 6 
PUBLISH D'TI1LED 

Uui:cd Sta•c:; Co~rt cT Avv~~ 

Te::tth Circuit 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

IVAN A. ANIXTER; BLANCHE 

DICKENSON; DOLLY K. YOSHIDA, on 

behalf of themselves and all 

others similarly situated, 

Plaintiffs-Appellees, 

v. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

HOME-STAKE PRODUCTION COMPANY, an ) 

Oklahoma corporation; HOME-STAKE ) 

1971 PROGRAM OPERATING CORPORATION;) 

HOME-STAKE 1970 PROGRAM OPERATING ) 

CORPORATION; HOME-STAKE 1969 ) 

PROGRAM OPERATING CORPORATION; ) 

HOME-STAKE 1968 PROGRAM OPERATING ) 

CORPORATION; HOME-STAKE 1967 ) 

PROGRAM OPERATING CORPORATION; ) 

HOME-STAKE 1966 PROGRAM OPERATING ) 

CORPORATION; HOME-STAKE 1965 ) 

PROGRAM OPERATING CORPORATION; ) 

ROBERT S. TRIPPET; E.M. KUNKEL; ) 

THOMAS A. LANDRITH; J.D. METCALFE; ) 

H.B. GUTELIUS; H.L. FITZGERALD, ) 

Defendants, 

and 

) 

) 

) 

) 

) 

WYNEMA ANNA CROSS, Executrix of ) 

the Estate of Norman C. Cross, Jr.,) 

Defendant-Appellant. 

) 

) 

) 

A.M. ANDERSON; BANK OF AMERICA ) 

NATIONAL TRUST AND SAVINGS ) 

ASSOCIATION, as Trustee for Merl ) 

McHenry, Joseph A. Buda, Arthur ) 

Bueche, George V.T. and Helen ) 

Burgess; DEWEY J. CALI; WILLIAM H. ) 

COLQUHOUN; S.W. CORBIN; ROBERT B. ) 

COBURN; VIGIL B. DAY; WILLIAM H. ) 

DENNLER; MARIO DIMARTINO; STELLA ) 

DIMARTINO; JOHN M. EVANS; MARGARET ) 

C. EVERETT; ISADOR H. FINKELSTEIN; ) 

JOSEPH H. GAUSS; H.W. GOULDTHORPE; ) 

RALPH HART; JAMES J. HAYES; EARL D.) 

JAN 2 9 1996 

PATRiCK FiSK~R 

C~er:~ 

No. 95-5086 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 7 
HILBURN; JOSEPH E. HORAK; GERALD A.) 

HOYT; RICHARD M. HURST; RALPH 

IANNUCCI; EMILY IANNUCCI; MILTON 

KENT; HOWARD KICHERER; ELIZABETH 

KICHERER; JOHN KOKOSZKA; MILLIE B. 

LASSING; JOSEPH LEVIN; MARIE F. 

LEVIN; JOHN D. LOCKTON; DENNIS G. 

LYONS; FERDINAND F. MCALLISTER; 

RUSSELL W. MCFALL; JAMES MADDEN; 

ALBERT MANGANELLI; NICHOLAS A. 

MARCHESE; STANLEY A. MARKS; JOHN 

MARTIN; C.W. MOELLER; ANDREW 

OVERBY; CARL E. PALERMO; FRANK A. 

PALERMO; ROY T. PARKER, JR.; BRUCE 

M. ROBERTSON; D.D. SCARFF; M.L. 

SCARFF; A.E. SCHUBERT; WILLIAM R. 

SMART; E. STARR; JANET G. STEWART; 

GERALD TOOMEY; PAUL TOWNSEND; 

VERNON UNDERWOOD; H.B. WALDRON, 

JR.; TED B. WESTFALL, 

Plaintiffs-Appellees, 

v. 

) 

F.) 

) 

) 

) 

) 

) 

) 

) 

G.) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

HOME-STAKE PRODUCTION COMPANY, an ) 

Oklahoma corporation; HOME-STAKE ) 

1970 PROGRAM OPERATING CORPORATION,) 

a Delaware corporation; ROBERT S. ) 

TRIPPET; HARRY HELLER; SIMPSON ) 

THACHER AND BARTLETT, a ) 

partnership; THOMAS A. LANDRITH, ) 

JR.; E.M. KUNKEL; MCAFEE, TAFT, ) 

MARK, BOND, RUCKS, AND WOODRUFF, ) 

a professional corporation and its ) 

professional employees and ) 

attorneys and partners, their ) 

successors and assigns, ) 

Defendants, 

and 

) 

) 

) 

) 

) 

WYNEMA ANNA CROSS, Executrix of the) 

Estate of Norman C. Cross, Jr., ) 

Defendant-Appellant. 

) 

) 

) 

A.M. ANDERSON; RICHARD J. ANTON; ) 

BANK OF AMERICAN NATIONAL TRUST AND) 

SAVINGS ASSOCIATION, as Trustee ) 

for Merl McHenry, E.P. Bernuth, ) 

Sophie K. Bernuth, Joseph A. Buda, ) 

George and Helen Burgess; DEWEY ) 

2 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 8 
CALI; ROBERT B. COBURN; COBURN & ) 

LIBBY, INC.; EDWARD V. COONAN; S.W.) 

CORBIN; WILLIAM H. DENNLER; MARIO ) 

DIMARTINO; STELLA DIMARTINO; JOHN ) 

EVANS; MARGARET C. EVERETT; L.L. ) 

FERGUSON; ISADOR H. FINKELSTEIN; ) 

H.W. GOULDTHORPE; GEORGE L. HALLER;) 

JACK HANSON; RALPH HART; F.H. HOLT;) 

JOSEPH E. HORAK; GERALD A. HOYT; ) 

HOWARD G. KICHERER; ELIZABETH C. ) 

KICHERER; JOHN KOKOSZKA; MILLE B. ) 

LASSING; JOSEPH LEVIN; MARIE LEVIN;) 

JOHN D. LOCKTON; D.W. LYNCH; D.B. ) 

LYNCH; DENNIS G. LYONS; FERDINAND ) 

F. MCALLISTER; RUSSELL MCFALL; ) 

JAMES F. MADDEN; ALBERT MANGANELLI; ) 

NICHOLAS MARCHESE; STANLEY A. ) 

MARKS; C.W. MOELLER; WILLIAM H. ) 

MORTENSEN; CARL OLSON; PATRICIA ) 

OLSON; CARL PALERMO; FRANK PALERMO; ) 

ROY T. PARKER; HELEN M. REEDER; ) 

D.D. SCARFF; M.L. SCARFF; RICHARD ) 

SCOTT; LOUIS P. SINGER; WILLIAM R. ) 

SMART; J. STANFORD SMITH; G. CURTIS) 

STEWART; PAUL TOWNSEND; VERNON ) 

UNDERWOOD; TED B. WESTFALL; J. ) 

HOWARD WOOD; SIDNEY WOOLWICH; ) 

MURRAY ZIMMERMAN I ) 

) 

Plaintiffs-Appellees, ) 

v. ) 

) 

HOME-STAKE PRODUCTION COMPANY, an ) 

Oklahoma corporation; HOME-STAKE ) 

1969 PROGRAM OPERATING CORPORATION,) 

a Delaware corporation; ROBERT s. ) 

TRIPPET; E.M. KUNKEL; THOMAS A. ) 

LANDRITH, JR.; HARRY HELLER; ) 

WILLIAM BLUM; SIMPSON THACHER AND ) 

BARTLETT; WILLIAM D. LEWIS; RICHARD) 

A. GANONG; LEWIS & GANONG, a ) 

partnership, ) 

) 

Defendants, ) 

) 

and ) 

) 

WYNEMA ANNA CROSS, Executrix of the) 

Estate of Norman C. Cross, Jr., ) 

) 

Defendant-Appellant. ) 

3 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 9 
.. 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF OKLAHOMA 

(D.C. No. M.D.L. 153, 73-C-382 and 73-C-377 (Consolidated)) 

B. Hayden Crawford (Robert L. Bainbridge and Kyle B. Haskins with 

him on the briefs), of Crawford, Crowe, Bainbridge & Haskins, 

P.A., Tulsa, Oklahoma, for Defendant-Appellant. 

Elihu Inselbuch, of Caplin & Drysdale, Chartered, New York, New 

York (Peter Van N. Lockwood, of Caplin & Drysdale, Chartered, New 

York, New York, William H. Hinkle, of Hinkle, Zeringue & Smith, 

Tulsa, Oklahoma, and William A. Wineberg and Michael R. Simmonds, 

of Wineberg, Simmonds & Marita, San Francisco, California with him 

on the briefs), for Plaintiff-Appellee. 

Before BALDOCK, BRORBY and LUCERO, Circuit Judges. 

LUCERO, Circuit Judge. 

More than thirty years ago, Home-Stake Production Company 

began offering securities registered with the Securities Exchange 

Commission ("SEC") in the form of interests in oil and gas 

drilling programs. The securities represented units of 

participation in annual oil production subsidiaries Home-Stake 

established each year between 1964 and 1972, referred to as 

Program Operating Corporations ("Programs"). These offerings 

purported to present investors both the promise of return on 

investment and attractive tax deductions of intangible drilling 

costs. In fact, we are told, the Home-Stake venture resembled a 

classic Ponzi swindle. Instead of going to oil development, 

investments made in later-year Programs were paid to earlier-year 

investors as "income" from oil production. Inevitably, the scheme 

collapsed, but only after investors had lost tens of millions of 

4 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 10 
dollars. This securities fraud case, first filed in 1973, already 

has been the subject of four published opinions by this court. 

Over the past four years it has been ordered dismissed, 

reinstated, remanded, and now, appealed once more. 

In this appeal we must resolve whether again to dismiss or 

remand judgments against Home-Stake's outside auditor for 

violating§ lO(b) of the Securities Exchange Act of 1934, 15 

u.s.c. § 78j (b), and Rule lOb-S of the SEC, 17 C.F.R. § 240.10b-5. 

Appellant, Wynema ~~na Cross, executrix of the estate of Norman C. 

Cross, Jr., raises several issues on appeal. The question 

dominating our review is whether we can let stand a general jury 

verdict returned on a securities fraud claim that included an 

instruction on aiding and abetting liability, an implied cause of 

action that has since been found invalid by the Supreme Court in 

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

N.A., 114 S. Ct. 1439 (1994). In the balance is a choice between 

vacating a jury award plaintiffs won on claims filed more than 

twenty-two years ago, and maintaining judgments now totalling more 

than $40 million when the jury may have found liability on an 

invalid legal theory. We conclude that the aiding and abetting 

instruction hopelessly taints the general verdict and that remand 

for a new trial is necessary. 

I. BACKGROUND 

In March 1973, Ivan A. Anixter, along with others, filed a 

lawsuit in the Northern District of California alleging violations 

of federal securities laws. Defendants included primary officers 

and directors of Home-Stake, its outside auditors and attorneys, 

5 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 11 
and certain broker-dealers who marketed its securities. This 

case, along with other individual actions against Home-Stake, was 

transferred and consolidated in the Northern District of Oklahoma. 

In 1977, the district court certified nine separate plaintiff 

classes, one for investors in each of the annual Programs.l The 

case went to trial in 1988. Plaintiffs from all nine classes and 

individually consolidated actions won jury verdicts against 

defendants totalling approximately $130 million. Because of 

settlements between the parties, only claims from the 1969 and 

1970 Programs remain against the appellant, who was substituted 

for Cross upon his death in 1985. Appellees are the class 

representatives of the plaintiff investors in Home-Stake Programs. 

A. Issues at Trial and the Jury Verdict 

Because the primary issue in this appeal involves Cross's 

direct liability to appellees, we focus on the relevant facts 

concerning his involvement in the Home-Stake enterprise and 

allegations made regarding his direct participation in the alleged 

fraud. Against Cross, plaintiffs alleged primary violations of 

Section lO(b) of the Securities Exchange Act of 1934 and Rule lOb5 of the SEC, aiding and abetting primary violations of Section 

lO(b) and Rule lOb-S, and liability under Section 11 of the 

Securities Act of 1933. Our analysis requires some extended 

recitation of facts. 

Home-Stake was an affiliate to the annual Programs and 

possessed the contractual rights to a percentage of the Programs' 

1 In re Home-Stake Prod. Co. Sec. Litig., 76 F.R.D. 351, 376 

(N.D. Okla. 1977). 

6 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 12 
revenue in return for developing and recovering oil reserves, the 

rights to which were owned by the Programs. Investors bought 

interests in the Programs, not Home-Stake itself. Plaintiffs 

alleged that the materials used to sell interests in the Programs 

contained many untrue and misleading statements, as well as 

omissions of material fact. In particular, plaintiffs alleged 

that despite rosy reports and projections in materials 

disseminated to potential investors, very little oil was actually 

being produced by Home-Stake and its subsidiaries, and that large 

"royalty" payments paid out to early investors in fact came not 

from oil production but from other investors.2 

Cross's lOb-S liability rested on his alleged participation 

in the preparation and filing of the registration statements, 

program books, and prospectuses, and especially his certifications 

and opinion letters verifying Home-Stake's overall health, made 

with knowledge of the false statements contained therein, or with 

reckless disregard as to the truth or falsity of the statements. 

Specifically, plaintiffs alleged that Cross's behavior 

"constitutes participation in or an aiding and abetting of the 

material misstatements, omissions and fraudulent course of conduct 

2 One of the aspects of the alleged scheme was the allocation of 

"production revenue" or "pro rev" among investors in the different 

Programs. According to evidence presented at trial, Home-Stake's 

top officers, with the knowledge of Cross, would make different 

distributions of pro rev to like investors, depending on how 

likely the investor would be to make additional investments in 

Home-Stake's Programs, and the chances that the investor would 

become disgruntled without pro rev distributions. Other alleged 

fraudulent acts by Home-Stake included failure to develop 

reserves, inflating value of assets, and overselling of units in 

the 1969 and 1970 Programs. Apparently, none of this was 

discussed in the prospectuses or Program Books, creating a false 

and misleading impression of the investment. 

7 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 13 
or fraudulent scheme engaged in" by other defendants, principally 

the top officers and directors of Home-Stake. Thus, plaintiffs 

brought both primary and aiding and abetting securities fraud 

claims against Cross. 

Much of Cross's participation is not in serious dispute. 

Home-Stake retained Cross as its independent auditor for 1968-

1971. Cross prepared documents used by Home-Stake, consented to 

have his name appear in registration statements filed with the 

SEC, and certified certain financial materials disseminated by 

Home-Stake. Relevant to claims made by investors in the 1969 and 

1970 Program, Cross prepared Home-Stake's consolidated financial 

statements for 1968 and 1969. He also prepared the beginning (or 

"start-up") balance sheets for the 1969 and 1970 Programs, which 

were included, respectively, in the 1969 and 1970 Program 

registration statements and prospectuses.3 The registration 

statements and attached prospectuses were filed with the SEC. 

Cross consented to the use of his report on the 1969 and 1970 

Program balance sheets in the SEC filings. 

Cross also provided Home-Stake with opinions on the 1969 and 

1970 Programs' beginning balance sheet he prepared.4 These 

3 The one-page "start-up" balance sheet for the 1969 Program 

indicates only that at its inception the Program had $100,000 in 

assets. A note at the bottom of the balance sheet states that the 

Program planned on offering $12.02 million worth of participating 

interests to prospective investors, and that, "[r]eference should 

be made elsewhere in the Prospectus for details of the Offering 

and the oil and gas secondary development program and for 

information concerning an affiliated interest (Home-Stake 

Production Company) which will assist in carrying out the 

Program." The same notation appears in the start-up balance sheet 

for the 1970 Program. 

4 For example, the prospectus for the Home-Stake 1969 Program 

8 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 14 
opinions were also contained in the registration statements and 

prospectuses filed with the SEC. Cross also provided opinion 

letters for Home-Stake's consolidated financial statements for 

1968-1970. The opinion letters for Home-Stake's financial 

statements, addressed to the Home-Stake board of directors, were 

included in Home-Stake's 1969 and 1970 annual reports but were not 

included in the Program prospectuses or registration statements. 

In 1969 and 1970, Home-Stake also published and mailed to 

Program participants documents known as "Program Books" or "Black 

Books." These documents, which included descriptions of specific 

oil recovery programs, estimates of anticipated returns, etc., 

were not registered with the SEC and contained information 

inconsistent with or contradicting the prospectuses. Home-Stake's 

financial statements, audited by Cross, allegedly also were 

included either with the Program Books or as part of Home-Stake's 

"sales kit." Allegedly, the Program Books and sales kits were the 

contained the following "Auditor's Report" following the balance 

sheet: 

TO: HOME-STAKE 1969 PROGRAM OPERATING CORPORATION 

We have examined the balance sheet of HOME-STAKE 

1969 PROGRAM OPERATING CORPORATION (a Delaware 

corporation and a wholly-owned subsidiary of Home-Stake 

Production Company) as of March 10, 1969. Our 

examination was made in accordance with generally 

accepted auditing standards, and accordingly included 

such tests of the accounting records and such other 

auditing procedures as we considered necessary in the 

circumstances. 

In our opinion, the accompanying balance sheet 

presents fairly the financial position of Home-Stake 

1969 Program Operating Corporation as of March 10, 1969, 

in conformity with generally accepted accounting 

principles. 

NORMAN C. CROSS, Jr. 

Certified Public Accountant 

9 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 15 
primary methods of marketing Program units; the SEC-filed 

prospectuses were made available to investors only upon request. 

Finally, Cross was also involved in the prospectus for a 

rescission offer made to investors in the 1970 Program. In 1971, 

the SEC filed a complaint against Home-Stake in federal district 

court, alleging that its officers and directors failed to meet 

information requirements to investors and misstated the use of 

investments in the 1970 Program. As part of a consent decree 

entered into with the SEC, Home-Stake made a rescission offer to 

its 1970 Program investors. The offer documents included a 

Rescission Offer Prospectus. Plaintiffs alleged that the 

Rescission Offer Prospectus itself failed to disclose material 

facts. Cross prepared an opinion on Home-Stake's 1970 

consolidated financial statement and an opinion on the beginning 

balance sheet of the 1970 Program, included as part of the 1970 

Rescission Offer Registration Statement.S 

After a three week trial on the issue of defendants' 

liability, the district court instructed the jury on both Rule 

lOb-S liability and "aiding and abetting a violation of lOb-5." 

The jury returned verdicts for the 1969 and 1970 Program classes 

5 The 1970 financial statement included in the Rescission Offer 

Prospectus differed from the one dated three months later in HomeStake's 1970 Annual Report. The latter version noted that, unlike 

previous years, Home-Stake's petroleum engineers did not provide 

assurances that revenues from future oil development for the 1970 

Program would be realized. Through a fairly complex accounting 

maneuver, Home-Stake treated these future receivables as present 

revenues of the company. The financial statement included in the 

Rescission Offer Prospectus did not note the absence of assurances 

for the 1970 Program. 

At trial, plaintiffs argued that Cross should have given a 

qualified opinion on Home-Stake's 1970 consolidated financial 

statement, in part because of this omission. 

10 

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against Cross. The court ultimately entered judgments against 

appellant and the other defendants in the amount of about $10.8 

million for Rule lOb-5 violations. On a case that was approaching 

the age of majority, another $36 million in prejudgment interest 

was awarded for these lOb-5 judgments. 

B. Proceedings A£ter Trial 

Since the jury verdicts in 1988 and 1989, this case has been 

affected by four Supreme Court cases. While the district court 

judgment was on appeal, the Supreme Court, in Lampf. Pleva, 

Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 359 

(1991), held that a federal, not state, limitations period applies 

to§ lO(b) claims, and applied the new rule to the Lampf 

plaintiffs. The same day the Court also decided James B. Beam 

Distilling Co. v. Georgia, 501 U.S. 529, 544 (1991), which 

clarified the retroactive effect of Supreme Court decisions on 

pending cases, holding that when the Court applies a rule of law 

to litigants in the case before it, the rule applies "with respect 

to all others not barred by procedural requirements or res 

judicata." Based on these two cases, the Tenth Circuit ordered 

plaintiffs' claims dismissed, Anixter v. Home-Stake Prod. Co., 939 

F.2d 1420 (lOth Cir. 1991) (Anixter I), and reaffirmed this 

mandate on rehearing in Anixter v. Home-Stake Prod. Co., 947 F.2d 

897 (lOth Cir. 1991) (Anixter II). In December 1991 Congress 

enacted legislation which ordered courts to apply to pre-Lampf § 

lO(b) claims the limitations period applicable in the appropriate 

jurisdiction prior to Lampf, and which allowed plaintiffs to 

reinstate claims that were dismissed as time barred under Lampf if 

11 

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they would have been timely under the pre-Lampf limitations 

period.6 Section 27A of the Securities Exchange Act of 1934 (§ 

476 of the Federal Deposit Insurance Corporation Improvement Act 

of 1991) (codified as 15 U.S.C. § 78aa-1 (1988 ed., Supp. V)). 

Pursuant to§ 27A, plaintiffs moved to reinstate their§ lO(b) 

claims and to vacate the mandate in Anixter II. While those 

motions were pending, the Supreme Court, on consideration of 

Anixter II, vacated our judgment and remanded for reconsideration 

in light of § 27A. Dennler v. Trippet, 503 U.S. 978 (1992) 

(mem.). On remand this court upheld§ 27A's constitutionality as 

applied to this case, and reinstated plaintiffs' § lO(b) claims, 

Anixter v. Home-Stake Prod. Co., 977 F.2d 1533, 1547 (lOth Cir. 

1992) (Anixter III), and, in a separate opinion, upheld the 

damages award and remanded the case for a redetermination of 

prejudgment interest, Anixter v. Home-Stake Prod. Co., 977 F.2d 

6 Section 27A provides: 

(a) Effect on pending causes of action 

The limitations period for any private civil action 

implied under [§ lO(b)] that was commenced on or before 

June 19, 1991, shall be the limitation period provided 

by the laws applicable in the jurisdiction . . . 

(b) Effect on dismissed causes of action 

Any private civil action implied under [§ lO(b)] that 

was commenced on or before June 19, 1991--

(1) which was dismissed as time barred subsequent to 

June 19, 1991, and 

(2) which would have been timely filed under [the 

applicable limitations period in the jurisdiction as 

existed on June 19, 1991], 

shall be reinstated on motion by the plaintiff not later 

than 60 days after December 19, 1991. 

15 u.s.c. § 78aa-1. 

12 

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1549, 1553-55 (lOth Cir. 1992) (Anixter IV), cert. denied, 113 S. 

Ct. 1841 (1993). 

As the only remaining nonsettling defendant, appellant, as 

executrix of the Cross estate, unsuccessfully contested an award 

of prejudgment interest to plaintiffs in the 1969 and 1970 Program 

classes. While the district court was considering postjudgment 

motions, the Supreme Court decided Central Bank of Denver. N.A. v. 

First Interstate Bank of Denver, N.A., 114 S. Ct. 1439, 1448 

(1994), which holds that no aiding and abetting liability can be 

implied under§ lO(b). Based on this case, appellant moved for 

dismissal or, alternatively, for a new trial, arguing that Cross 

was not a primary violator of§ lO(b), and that his reckless 

behavior could not subject him to§ lO(b) liability. The trial 

court denied the motion and the judgment was appealed to this 

court. Five days after filing the notice of appeal, the Supreme 

Court decided Plaut v. Spendthrift Farm, Inc., 115 S. Ct. 1447 

(1995), which held part of § 27A unconstitutional to the extent it 

ordered the judiciary to reopen cases dismissed under Lampf. 

II. DISCUSSION 

Appellant raises four separate issues. First, the case was 

improperly reinstated under § 27A(b), a provision that was deemed 

unconstitutional in Plaut. Thus the case should be considered 

dismissed and the appeal moot. Second, the claims against Cross 

should be dismissed because his actions do not constitute a 

primary violation of Rule lOb-5, and the Supreme Court's decision 

in Central Bank of Denver precludes private implied actions for 

aiding and abetting such violations. Alternatively, appellant 

13 

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argues that a new trial is necessary to determine Cross's 

liability for a primary violation because the jury verdict against 

Cross was ambiguous and did not distinguish between aiding and 

abetting and primary§ lO(b) violations. Third, appellant argues 

that Cross did not possess the proper state of mind for a primary 

violation of Section lO(b). Fourth, appellant challenges the 

propriety of the district court's prejudgment interest award. 

A. Does Plaut Require Dismissal? 

In Anixter III, this court reinstated the claims that had 

been dismissed as time-barred under Lampf. Anixter III, 977 F.2d 

at 1547. Appellant argues that the Supreme Court's recent 

decision in Plaut requires dismissal of those claims once again. 

Although this argument was not raised below, inasmuch as Plaut was 

decided after appellant filed her notice of appeal, we may 

consider changes in governing law arising during the pendency of 

the appeal. See, ~. United States v. Novey, 922 F.2d 624, 629 

(lOth Cir. 1991). 

In Plaut, the Supreme Court considered the constitutionality 

of § 27A(b). That subsection requires reinstatement, upon timely 

motion, of any case dismissed as time barred under Lampf, if the 

case was filed before Lampf and if it would have been timely under 

the limitation period that applied in the relevant jurisdiction 

prior to Lampf. § 27A(b). Plaut holds that § 27A(b) violates the 

constitutional separation of powers doctrine "to the extent that 

it requires federal courts to reopen final judgments entered 

before its enactment." Plaut, 115 S. Ct. at 1463. When 

retroactive legislation, such as § 27A, "requires its own 

14 

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application in a case already finally adjudicated, it does no more 

and no less than 'reverse a determination once made, in a 

particular case.'" Id. at 1456 (quoting The Federalist No. 81, p. 

545 (J. Cooke ed. 1961)). Under the structure of Article III, 

which establishes "one supreme Court" and "inferior Courts," the 

decision of an inferior court is only the final word of the 

judicial department once the time for appeal has expired. Id. at 

1457. Once a judicial decision becomes final, "Congress may not 

declare by retroactive legislation that the law applicable to the 

very case was something other than what the courts said it was." 

Id. 

Appellant argues that Plaut requires dismissal of any case 

reinstated under § 27A(b). Further, appellant insists that this 

case was reinstated under § 27A(b). Appellees, on the other hand, 

dispute that this case was reinstated under § 27A(b), because the 

district court never acted on our mandate to dismiss this case. 

In appellees' view, this case became automatically reinstated 

under § 27A(a), which applies to "pending" cases. Alternatively, 

appellees argue that even if this case was dismissed and 

subsequently reinstated under§ 27A(b), Plaut does not affect this 

case. 

It is not necessary for us to decide whether this case had 

been "dismissed" within the meaning of § 27A(b) when § 27A was 

enacted. Even if we assume this case was dismissed and thereafter 

reinstated under § 27A(b), we cannot accept appellant's argument 

that Plaut requires dismissal of all cases reinstated under § 

27A(b). The term "dismissed causes of action" under § 27A(b) 

15 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 21 
arguably includes dismissed cases that are still pending on 

appeal, and finally dismissed cases that have completed their 

journey through the federal courts. See Plaut, 115 S. Ct. at 1452 

(recognizing distinction); Durning v. Citibank. Intern., 990 F.2d 

1133, 1137-38 (9th Cir. 1993) (same). Plaut invalidates § 27A(b) 

only "to the extent that it requires federal courts to reopen 

final judgments entered before its enactment." Plaut, 115 S. Ct. 

at 1463 (emphasis added) . 

This court did not reopen a final judgment when it reinstated 

plaintiff's claims, as we recognized in Johnston v. Cigna Corp., 

14 F.3d 486, 489 (lOth Cir. 1993), cert. denied, 115 S. Ct. 1792 

(1995). In Johnston, we distinguished Anixter from a final case 

that had already made its way through the courts. We noted that 

"[f]or purposes of retroactive legislation, a case is final only 

after the availability of appeal is exhausted, and the time for a 

petition for certiorari has elapsed or the petition has been 

denied. Because the Anixter plaintiffs' petition for certiorari 

was before the Supreme Court at the time section 27A was enacted, 

the case had not completed its journey through the appellate 

process and was therefore not final." Id. at 489 n.6 (citations 

omitted) . We conclude that Plaut does not apply to this case 

because reinstatement of the claims at issue did not operate to 

reopen a final judgment. Cf. Axel Johnson Inc. v. Arthur Andersen 

& Co., 6 F.3d 78,83-85 (2d. Cir. 1993) (finding no separation of 

16 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 22 
powers violation from reinstatement under 27A(b) of dismissed case 

still subject to appeal). 

B. Cross's Liability under Section lO(b) 

Appellant challenges the sufficiency of the evidence finding 

Cross liable for violating§ lO(b). According to appellant, the 

jury could only have found Cross to be an aider and abettor in the 

Home-Stake fraud. Because the Supreme Court recently eliminated 

aiding and abetting liability as an implied private cause of 

action, appellant urges us to reverse the judgment. In the 

alternative, appellant argues that the jury's verdict was tainted 

because it was improvidently instructed that lOb-S liability could 

be found for aiding and abetting another's securities fraud 

violation. We must first consider what acts make up a "primary" 

violation of§ lO(b), and how they differ from those that could be 

characterized only as "aiding and abetting." 

1. Primary Violations under Section lO(b) 

Together, the 1933 Securities Act and the 1934 Securities 

Exchange Act "'embrace a fundamental purpose ... to substitute a 

philosophy of full disclosure for the philosophy of caveat 

emptor.'" Central Bank of Denver, 114 S. Ct. at 1445 (quoting 

Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 

151 (1972)). Section lO(b) is the general antifraud provision of 

the 1934 Act. Id. It states: 

It shall be unlawful for any person, directly or 

indirectly, by the use of any means or instrumentality 

of interstate commerce or of the mails, or of any 

facility of any national securities exchange--

(b) To use or employ, in connection with the 

purchase or sale of any security registered on a 

national securities exchange or any security not so 

17 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 23 
registered, any manipulative or deceptive device or 

contrivance in contravention of such rules and 

regulations as the [SEC] may prescribe . . . . 

lS U.S.C. § 78j. In its parallel regulation, Rule lOb-S, the SEC 

frames the prohibition similarly: 

It shall be unlawful for any person, directly or 

indirectly, by the use of any means or instrumentality 

of interstate commerce, or of the mails or of any 

facility of any national securities exchange, 

(a) To employ any device, scheme, or artifice to 

defraud, 

(b) To make any untrue statement of a material fact 

or to omit to state a material fact necessary in order 

to make the statements made, in the light of the 

circumstances under which they were made, not 

misleading, or 

(c) To engage in any act, practice, or course of 

business which operates or would operate as a fraud or 

deceit upon any person, 

in connection with the purchase or sale of any security. 

17 C.F.R. § 240.10b-S. In deciding whether conduct violates Rule 

lOb-S, "we turn first to the language of § lO(b)" because "the 

starting point in every case involving construction of a statute 

is the language of the statute itself." Ernst & Ernst v. 

Hochfelder, 42S U.S. 18S, 197 (1976) (quoting Blue Chip Stamps v. 

Manor Drug Stores, 421 u.s. 723, 7S6 (197S) (Powell, J., 

concurring)). To the extent Rule lOb-S could be read more broadly 

than§ lO(b), the text of the statute controls. See Central Bank 

of Denver, 114 S. Ct. at 1446. 

In Central Bank of Denver, 114 S. Ct. 1439 (1994), the 

Supreme Court concluded that § lO(b) "prohibits only the making of 

a material misstatement (or omission) or the commission of a 

manipulative act." Id. at 1448. By adopting this interpretation 

of the statute, the Court specifically eliminated private actions 

predicated on aiding or abetting those who engage in the 

18 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 24 
prohibited conduct. Id. at 1455.7 Recognizing the potentially 

sweeping effect of its holding on what had been settled securities 

law, the Court made clear its focus: 

The absence of § 10(b) aiding and abetting liability 

does not mean that secondary actors in the securities 

markets are always free from liability under the 

securities Acts. Any person or entity, including a 

lawyer, accountant, or bank, who employs a manipulative 

device or makes a material misstatement (or omission) on 

which a purchaser or seller of securities relies may be 

liable as a primary violator under 10b-5, assuming all 

of the requirements for primary liability under Rule 

10b-5 are met. 

Id. (emphasis in original) . 

Here, we must determine whether Cross himself committed a 

violation of § 10(b) and Rule 10b-5, or whether the sum of his 

conduct only amounted to aiding and abetting others in their 

violations. Unfortunately, deciding when conduct constituting 

aiding and abetting rises to the level of prohibited primary 

conduct is not well settled.8 Appellant and appellees both rely 

on Central Bank of Denver to illuminate the distinctions. 

7 The Court applied its holding to the parties before it; 

therefore, aiding and abetting a§ 10(b) violation cannot be the 

basis of liability in private actions still before the courts. 

See James B. Beam Distilling Co., 501 U.S. at 544. 

8 Commentators have long recognized vagaries in the borders 

between primary and secondary liability. See generally Daniel R. 

Fischel, Secondary Liability Under Section 10(b) of the Securities 

Act of 1934, 69 Cal. L. Rev. 80, 103-111 (1981); David S. Ruder, 

Multiple Defendants in Securities Law Fraud Cases: Aiding and 

Abetting, Conspiracy, In Pari Delicto, Indemnification, and 

Contribution, 120 U. Pa. L. Rev. 597, 600 (1972); Ben D. Orlanski, 

Comment, Whose Representations Are These Anyway? Attorney 

Prospectus Liability After Central Bank, 42 U.C.L.A. L. Rev. 885, 

895-96 (1995); Timothy M. Metzger, Comment, Abandoning 

Accountants' Liability for Aiding and Abetting 10b-5 Securities 

Fraud, 87 Nw. U. L. Rev. 1374, 1390 (1993). Central Bank of 

Denver requires courts to delineate primary liability much more 

clearly. 

19 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 25 
Appellant believes that the case demonstrates Cross's acts and his 

peripheral position in the fraud are not behavior of the type that 

give rise to§ 10(b) liability; appellees read the case as 

reinforcing their view that accountants who make or certify 

material misstatements are still subject to liability. 

In Central Bank of Denver, the defendant bank was the 

indenture trustee for $26 million in bonds issued by a public 

building authority. The bonds were secured by landowner 

assessment liens. According to the bond covenants, the land 

subject to the liens had to be worth at least 160% of the bonds' 

outstanding principal and interest. The covenants also required 

the developer to provide the bank with evidence that the proper 

ratio was met. The bank learned of a decline in value of the 

property securing the bonds, and that the developer's assurances 

were suspect. Nevertheless, the bank went along with the 

developer and postponed an independent review of the developer's 

appraisal until after the new bonds were issued. The bonds were 

issued, the building authority defaulted on them, and bond 

purchasers sued the bank as an aider and abettor of the fraud 

perpetrated by the building authority, the underwriter and the 

developer. Id. at 1443. 

The Supreme Court ruled that the bank could not be held 

liable as an aider and abettor under§ 10(b). "[T]he text of the 

1934 Act does not itself reach those who aid and abet a§ 10(b) 

violation .... [T]he statute prohibits only the making of a 

material misstatement (or omission) or the commission of a 

manipulative act." Id. at 1448. Despite the language of§ 10(b) 

20 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 26 
prohibiting one from "directly or indirectly" employing a 

deceptive device, "[t]he proscription does not include giving aid 

to a person who commits a manipulative or deceptive act." Id. 

Underscoring the Court's conclusion is the recognition that aiding 

and abetting behavior could establish liability without 

demonstrating reliance by plaintiff on the aider and abettor's 

acts. Id. at 1449. Liability without reliance was previously 

rejected in Basic. Inc. v. Levinson, 485 U.S. 224, 243 (1988). 

Central Bank of Denver, 114 S.Ct. at 1449-50. 

As recited previously, allegations against Cross were based 

both on his assistance in preparing parts of prospectuses HomeStake distributed to potential investors and certifications and 

opinion letters regarding some of Home-Stake's and its Programs 

financial data (some of which were filed with the SEC), as well as 

opinions he prepared on Home-Stake's consolidated financial 

statements. The parties disagree about whether Cross's acts were 

primary or aiding and abetting violations. Appellant argues that 

none of Cross's acts constituted fraudulent misrepresentations or 

omissions relied on by investing plaintiffs; at most the acts only 

aided Home-Stake in committing the alleged fraud. Appellees point 

to Cross's certifications and opinion letters as evidence that he 

himself made misrepresentations or omissions sufficient to subject 

him to primary liability.9 

9 Section 10(b) proscribes both "manipulative" and "deceptive" 

practices in the sale of a security. Because, however, the term 

"manipulation" is "virtually a term of art" in the securities 

fraud context (involving wash sales, rigged prices, and other 

practices intended to mislead investors), and has little 

application with respect to the role of auditors, our focus is on 

the term "deception," or "misrepresentation." See Santa Fe 

21 

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To establish a primary liability claim under§ lO(b), a 

plaintiff must prove the following facts: (1) that the defendant 

made an untrue statement of material fact, or failed to state a 

material fact; {2) that the conduct occurred in connection with 

the purchase or sale of a security; (3) that the defendant made 

the statement or omission with scienter; and (4) that plaintiff 

relied on the misrepresentation, and sustained damages as a 

proximate result of the misrepresentation. Farlow v. Peat, 

Marwick, Mitchell & Co., 956 F.2d 982, 986 (lOth Cir. 1992). This 

contrasts with aider and abettor liability, which required 

plaintiff to prove (1) the existence of a primary violation of the 

securities laws by another; (2) knowledge of the primary violation 

by alleged aider and abettor; and (3) substantial assistance by 

the alleged aider and abettor in achieving the primary violation. 

Id. The critical element separating primary from aiding and 

abetting violations is the existence of a representation, either 

by statement or omission, made by the defendant, that is relied 

upon by the plaintiff. Reliance only on representations made by 

others cannot itself form the basis of liability. See Central 

Bank of Denver, 114 S. Ct. at 1448. 

Clearly, accountants may make representations in their role 

as auditor to a firm selling securities. See, ~, Herman & 

MacLean v. Huddleston, 459 U.S. 375 (1983) (defendant accountant 

found primarily liable for violating§ lO(b) based on 

representations made in registration statements filed with the 

SEC) . Typical representations include certifications of financial 

Indus., Inc. v. Green, 430 U.S. 462, 476 (1977). 

22 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 28 
statements and opinion letters. See DiLeo v. Ernst & Young, 901 

F.2d 624, 628 (7th Cir.), cert. denied, 498 U.S. 941 (1990). An 

accountant's false and misleading representations in connection 

with the purchase or sale of any security, if made with the proper 

state of mind and if relied upon by those purchasing or selling a 

security, can constitute a primary violation. Central Bank of 

Denver, 114 s. Ct. at 1455; see also Frymire-Brinati v. KPMG Peat 

Marwick, 2 F.3d 183, 189-90 (7th Cir. 1993); Akin v. 0-L Invs., 

Inc., 959 F.2d 521, 526-27 (5th Cir. 1992); Zoelsch v. Arthur 

Andersen & Co., 824 F.2d 27, 34-35 (D.C. Cir. 1987); Fischel, 

supra, at 107-08.10 There is no requirement that the alleged 

violator directly communicate misrepresentations to plaintiffs for 

primary liability to attach. SEC v. Holschuh, 694 F.2d 130, 142 

(7th Cir. 1982) ("actual or first-hand contact with offerees or 

buyers [is not] a condition precedent to primary liability for 

antifraud violations"). Nevertheless, for an accountant's 

misrepresentation to be actionable as a primary violation, there 

10 Some post-Central Bank of Denver cases have held that third 

party defendants can be liable for statements made by others, 

where the defendant substantially participated in preparing the 

statements. See, ~' In re Software Toolworks. Inc., 50 F.3d 

615, 628 n.3 (9th Cir. 1994) (accountant may be primarily liable 

based on "significant role" in drafting letter client sent to 

SEC), cert. denied., 116 S. Ct. 274 (1995); In re ZZZZ Best Sec. 

Litig., 864 F. Supp. 960, 970 (C.D. Cal. 1994) (accounting firm 

that was "intricately involved" in creating false documents 

published by client is a primary violator); Cashman v. Coopers & 

Lybrand, 877 F. Supp. 425, 432-34 (N.D. Ill. 1995) (primary 

liability attaches where accountant charged with playing a 

"central role in the drafting and formation of the alleged 

misstatements" that were incorporated into prospectus). To the 

extent these cases allow liability to attach without requiring a 

representation to be made by defendant, and reformulate the 

"substantial assistance" element of aiding and abetting liability 

into primary liability, they do not comport with Central Bank of 

Denver. 

23 

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must be a showing that he knew or should have known that his 

representation would be communicated to investors because § lO(b} 

and Rule lOb-S focus on fraud made "in connection with the sale or 

purchase" of a security. Frymire-Brinati, 2 F.3d at 189-90; Akin, 

9S9 F.2d at S26-27; Zoelsch, 824 F.2d at 34-3s.ll 

Reading the language of § lO(b) and lOb-S through the lens of 

Central Bank of Denver, we conclude that in order for accountants 

to "use or employ" a "deception" actionable under the antifraud 

law, they must themselves make a false or misleading statement (or 

omission) that they know or should know will reach potential 

investors.12 In addition to being consistent with the language of 

11 In the wake of Central Bank of Denver a number of district 

courts have outlined the type of behavior that is now insufficient 

to subject a peripheral party to liability under lOb-S. See, ~' 

In re Kendall Square Research Corp. Sec. Litig., 868 F. Supp. 26, 

28 (D. Mass. 1994) (accountant's review and approval of misleading 

financial statements cannot itself rise to a lOb-S violation); 

Vosgerichian v. Commodore Int'l, 862 F. Supp. 1371, 1378 (E.D. Pa. 

1994) (allegations regarding accountant who "advised" and gave 

guidance to client who made an allegedly fraudulent 

misrepresentation is insufficient for§ lO(b) liability). 

12 The extent to which an accountant can be liable under§ lO(b) 

for omissions is not settled. "'When an allegation of fraud is 

based upon nondisclosure, there can be no fraud absent a duty to 

speak.'" Central Bank of Denver, 114 S. Ct. at 1447 (quoting 

Chiarella v. United States, 44S U.S. 222, 234-3S (1980)). In 

Windon Third Oil & Gas Drilling Partnership v. FDIC, 80S F.2d 342 

(lOth Cir. 1986), cert. denied, 480 U.S. 947 (1987), we found that 

a duty to disclose only arises "'because of a fiduciary or other 

similar relation of trust and confidence between [parties].' ... 

Without a duty to disclose, silence cannot be made fraudulent." 

Id. at 347 (quoting Chiarella, 44S U.S. at 228). Other courts 

have determined that accountants may have a special duty to 

disclose "when they make affirmative statements on which they know 

the investors will rely." See Akin, 9S9 F.2d at S31-32 

(collecting cases). This circuit has not decided whether an 

accountant's auditing report of a public company's financial 

statement by itself creates a fiduciary relationship. Cf. Rudolph 

v. Arthur Andersen & Co., 800 F.2d 1040, 1043-44 (11th Cir. 1986) 

(when a public auditing firm gives an opinion or certifies 

statements it assumes a role carrying a relationship of trust with 

24 

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the statute, this rule, though far from a bright line, provides 

more guidance to litigants than a rule allowing liability to 

attach to an accountant or other outside professional who provided 

"significant" or "substantial" assistance to the representations 

of others. See Central Bank of Denver, 114 S. Ct. at 1454 

(certainty and predictability are crucial to securities markets). 

The record in this case contains much evidence that could 

sustain a finding of primary liability. Most of appellees' 

arguments went to representations Cross made as Home-Stake's 

auditor. He issued opinions on the 1969 and 1970 Program's start 

up balance sheets. He certified Home-Stake's Consolidated 

financial statements for those years. Cross's opinions and 

certification letters were reproduced in prospectuses, annual 

reports, registration statements, and other Home-Stake promotional 

material. Appellees' expert testified that Cross must have known 

that his opinions themselves were false and misleading. Based on 

the verdicts the jury returned against all the defendants, it 

could have concluded that any or all of these representations were 

false and misleading, that Cross was reckless in making the 

representations, and that Cross knew or should have known that his 

the public), cert. denied, 480 U.S. 946 (1987); United States v. 

Arthur Young & Co., 465 U.S. 805, 817-18 (1984) (an accountant who 

audits the financial statement of a public company has a special 

public responsibility, in view of the great reliance investors 

place on financial statements; an auditor's scrutiny of these 

statements is necessary to "assure[] that the integrity of the 

securities markets will be preserved"). With respect to 

actionable omissions, investor reliance will be presumed. 

Affiliated Ute Citizens, 406 U.S. at 153-54. 

25 

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representations would reach potential investors and that they 

would reasonably rely on them. 

2. Does the Aiding and Abetting Instruction Taint the Verdict? 

Although the record supports finding Cross liable for a 

primary violation of § lO(b), we still must determine whether the 

jury did find him liable as a primary violator. Appellant urges 

us to remand for a new trial on the theory that it is not clear 

from the jury verdict whether Cross's liability under Rule lOb-S 

rested on finding a primary or aiding and abetting violation.l3 

See, ~, Dillard & Sons Constr .. Inc. v. Burnup & Sims Comtec, 

13 After instructing the jury on the elements of a Rule lOb-S 

violation, the district court continued: 

PLAINTIFFS HAVE ALSO CHARGED THESE DEFENDANTS WITH AIDING AND 

ABETTING A VIOLATION OF RULE lO(B) (S) [sic]. A CLAIM OF 

AIDING AND ABETTED [sic] A VIOLATION OF RULE lO(B) (S) MAY BE 

ASSERTED AGAINST ANY PARTY WHO KNOWINGLY OR RECKLESSLY 

RENDERS SUBSTANTIAL ASSISTANCE TO SOMEONE ELSE WHO VIOLATES 

RULE 10 (B) (S). 

IN ORDER TO PROVE LIABILITY OF ANY OF THE DEFENDANTS FOR 

AIDING AND ABETTING A VIOLATION OF RULE lO(B) (S), PLAINTIFFS 

MUST PROVE BY A PREPONDERANCE OF THE EVIDENCE THE FOLLOWING 3 

ELEMENTS: FIRST, THAT SOME OTHER PERSON OR ENTITY VIOLATED 

RULE lO(B) (S). PLAINTIFFS HAVE THE BURDEN OF PROVING BY A 

PREPONDERANCE OF THE EVIDENCE ALL OF THE ELEMENTS THAT MUST 

BE SHOWN TO PROVE A VIOLATION OF RULE lO(B) (S) BY SUCH OTHER 

PERSON. AND I HAVE JUST INSTRUCTED YOU ON THAT. 

SECOND, WHAT THE DEFENDANT - - THAT THE DEFENDANT WHO 

ALLEGEDLY AIDED AND ABETTED THE VIOLATION OF RULE lO(B) (S) 

POSSESSED A GENERAL AWARENESS OF THE WRONG AND HIS ROLE IN 

FURTHERING IT; AND, THIRD, THAT THE ALLEGED AIDER AND ABETTOR 

KNOWINGLY OR RECKLESSLY RENDERED SUBSTANTIAL ASSISTANCE TO 

THE PERSON OR ENTITY WHICH VIOLATED RULE lO(B) (S). 

RECKLESSLY MEANS AN EXTREME DEPARTURE FROM THE STANDARDS OF 

ORDINARY CARE WHICH PRESENTS A DANGER OF MISLEADING BUYERS 

THAT IS EITHER KNOWN TO THE DEFENDANT OR IS SO OBVIOUS THAT 

THE DEFENDANTS [sic] MUST HAVE BEEN AWARE OF IT. IT IS NOT 

ENOUGH THAT THE DEFENDANT WAS SIMPLY CARELESS OR NEGLIGENT. 

BECAUSE YOU CANNOT KNOW WHAT A PERSON IS THINKING, YOU MUST 

DETERMINE KNOWLEDGE OF FALSITY OR RECKLESSNESS BY THE 

EVIDENCE OF THE DEFENDANT'S ACTS AND WORDS IN LIGHT OF ALL OF 

THE SURROUNDING CIRCUMSTANCES AT THE TIME. 

26 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 32 
Inc., 51 F.3d 910, 915-17 (lOth Cir. 1995) (requiring new trial 

where jury returned general verdict and one of the jury 

instructions was erroneous) . It is uncontested that the jury was 

instructed on aiding and abetting, as well as primary, liability, 

and returned a general verdict against Cross.l4 First, however, 

we must determine whether Appellant's request to remand for a new 

trial is an issue that was properly preserved for appeal. 

a. Waiver 

It was in a reply brief before the district court that 

appellant first asserted that ambiguity in the jury verdict 

necessitated a new trial. On appeal, appellees argue that 

appellant did not properly raise the issue of a new trial before 

the district court and, consequently, the issue is waived. In the 

district court, appellant raised the effect of Central Bank of 

Denver on the jury's verdict in her Supplement to Motion to Alter 

or Amend Judgment and Brief in Support ("Motion to Alter 

Judgment"). In that pleading, appellant argued that the evidence 

before the jury could not support a finding of primary liability, 

and that the verdict must be reversed because of the Supreme 

Court's decision in Central Bank of Denver.lS In response, 

14 The Rule lOb-S verdict against Cross for the 1970 Program 

Class read: "We, the jury, do find that Norman C. Cross, Jr. is 

liable to William Grohne and members of the 1970 Program Class for 

violation of Rule lOb-S." The jury returned similar verdicts in 

favor of the 1969 class plaintiffs. 

15 In her Motion to Alter Judgment, appellant described Cross's 

conduct alleged in the record, the jury instructions on primary 

and aiding and abetting liability, as well as the general verdict 

forms returned by the jury with respect to Cross. Appellant 

concluded, "[t]he decision in Central Bank dictates a finding here 

that the underlying judgment must be vacated and reversed." 

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Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 33 
appellees argued that the jury could have found--and did find--

Cross liable for primary§ lO(b) and Rule lOb-S violations. 

Appellant, in her reply brief, responded to appellees' position, 

arguing in the alternative that if it were not clear that the jury 

found Cross liable as an aider and abettor, it certainly was not 

obvious that he was found liable as a primary violator--thus a new 

trial was necessary to determine Cross's liability.l6 

The district court, in its order disposing of appellant's 

postjudgment motion, found that the parties agreed that the 

general verdict returned by the jury in this case does not 

distinguish between primary and aiding and abetting violations, 

and continued that "the issue here is whether the evidence 

supports a finding that Norman Cross' conduct constituted a 

primary violation of§ lO(b) ." The district court denied 

appellant's motion, but did not directly address the jury's 

findings with respect to primary liability, and completely ignored 

appellant's request for a new trial based on ambiguity in the 

general verdict. 

"It is the general rule, of course, that a federal appellate 

court does not consider an issue not passed upon below." 

Singleton v. Wulff, 428 U.S. 106, 120 (1976); see also Rademacher 

v. Colorado Ass'n of Soil Conservation Dists. Medical Benefit 

Plan, 11 F.3d 1567, 1571 (lOth Cir. 1993) (issues not argued to 

the district court "ordinarily will not be considered on appeal"). 

16 Appellant had moved for a new trial at the conclusion of the 

damages phase of the original trial in 1989. In addition, 

appellant requested oral argument on issues raised in her Motion 

to Alter Judgment. 

28 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 34 
The purpose of the discretionary rule requiring the lower court to 

have passed on an issue for its preservation on appeal is to 

ensure "'that litigants may not be surprised on appeal by final 

decision there of issues upon which they have had no opportunity 

to introduce evidence . . . [or] to present whatever legal 

arguments [they] may have ... '" Lyons v. Jefferson Bank & 

Trust, 994 F.2d 716, 720 (lOth Cir. 1993) (quoting Singleton, 428 

U.S. at 120) (further internal quotation omitted). Allowing 

appellants to present issues not raised below would also undermine 

"the 'need for finality in litigation and conservation of judicial 

resources.'" Tele-Communications, Inc. v. Commissioner, 12 F.3d 

1005, 1007 (lOth Cir. 1993) (quoting Hicks v. Gates Rubber Co., 

928 F.2d 966, 970-71 (lOth Cir. 1991)). "The policy of declining 

to consider an argument not raised below is strongest where the 

district judge was not aware of the argument." Hicks, 928 F.2d at 

970 (quoting Richerson v. Jones, 572 F.2d 89, 97 (3d Cir. 1978)). 

Of course the rule is not inflexible and "'the matter of what 

questions may be taken up and resolved for the first time on 

appeal is one left primarily to the discretion of the courts of 

appeals, to be exercised on the facts of individual cases.'" 

Colorado Interstate Corp. v. CIT Group/Equip. Fin .. Inc., 993 F.2d 

743, 751 (lOth Cir. 1993) (quoting Singleton, 428 U.S. at 121) 

(reviewing issue for first time on appeal; issue was considered by 

district court, although without the benefit of argument, and 

issue was a question of law that was fully briefed on appeal). 

This is an appropriate case to exercise our discretion and 

consider whether remand for a new trial is necessary. Even 

29 

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.· 

characterizing the requested remand for a new trial as an "issue" 

rather than an alternative form of relief, it is appropriate in 

these unique circumstances to consider the matter. It would not 

satisfy any policy behind the rule to turn our back on this 

significant question. Appellant's opening brief did raise the 

problem with the jury instructions in the wake of Central Bank of 

Denver. She pointed out the instructions and the general verdicts 

returned by the jury. The issue of remand to determine Cross's 

liability arose only in response to appellees' contention that the 

jury found Cross a primary violator; the evidence against Cross 

was discussed at great length. Appellees raised both factual and 

legal reasons why the jury found Cross liable as a primary 

violator. Raising the issue of a new trial in the reply brief 

caused appellees no prejudice. The district court had the issue 

adequately before it. This issue has been extensively briefed on 

appeal, and no factual findings by the district court can guide us 

in resolving this question; if the jury could have found Cross 

liable as an aider and abettor rather than as a primary violator, 

we must remand. Finally, appellant's position below was 

consistent with its position on appeal. In this very old, very 

complex case it serves no purpose to ignore the possibility that 

appellant was found liable on a more than forty million dollar 

judgment based on a nonexistent cause of action. 

b. Can the jury verdict stand? 

Appellant contends that the jury instruction on aiding and 

abetting liability, a theory of liability that has since been 

determined incorrect, taints the entire general verdict. She 

30 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 36 
requests a new trial to determine Cross's liability under§ lO(b). 

Appellees, although conceding that the aiding and abetting 

instruction was erroneous, argue that the overwhelming evidence 

against Cross as a primary violator avoids the need for a new 

trial. In effect, appellees suggest that even with the improper 

instruction it is clear that the jury returned a verdict against 

Cross as a primary violator. 

Generally, where a jury has returned a general verdict and 

one theory of liability upon which the verdict may have rested was 

erroneous, the verdict cannot stand because one cannot determine 

whether the jury relied on the improper ground. Sunkist Growers. 

Inc. v. Winckler & Smith Citrus Prods. Co., 370 U.S. 19, 29-30 

(1962) (reversing jury verdict in favor of plaintiffs for 

conspiracy to violate antitrust acts where defendants were exempt 

from one of the theories of liability submitted to jury) . 

Although in the past we allowed jury verdicts to stand if the 

improper instruction was harmless, see Lusby v. T.G. & Y Stores. 

Inc., 749 F.2d 1423, 1436 (lOth Cir. 1984), vacated sub nom. City 

of Lawton v. Lusby, 474 U.S. 805 (1985), more recently we have 

adhered strictly to the general rule and have remanded cases where 

we could not say "with absolute certainty" that the jury was not 

influenced by the submission of the improper or erroneous 

instruction. Farrell v. Klein Tools. Inc., 866 F.2d 1294, 1299-

1301 (lOth Cir. 1989) (citing McMurray v. Deere and Co., 858 F.2d 

1436 (lOth Cir. 1988) and Smith v. FMC Corp., 754 F.2d 873 (lOth 

Cir. 1985)). 

31 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 37 
Farrell demonstrates how far a party must go to overcome the 

presumption of taint in a general verdict based on multiple 

theories of liability, one of which was improper. There, an iron 

worker injured in a fall sued a company he believed improperly 

manufactured his safety harness. The defendant argued that it did 

not make the harness plaintiff used and, alternatively, either 

that the harness was improperly used or that plaintiff assumed the 

risk. The trial court instructed the jury on improper use and 

assumption of the risk. The jury returned a general verdict for 

defendant. On appeal, we found insufficient evidence to support 

the jury instruction regarding improper use of the harness. We 

noted that defendant presented overwhelming evidence that it did 

not manufacture the harness plaintiff used, and that the abnormal 

use defense was not referred to in either the opening statements 

or the closing arguments. We considered it "highly unlikely that 

the jury's verdict was affected by the abnormal use instruction." 

Id. at 1298. Nevertheless we remanded the case for a new trial 

because we could not "say with absolute certainty that the jury 

was not influenced by the submission of the improper instruction." 

Id. at 1301. 

The posture of this case bears striking parallels to Farrell. 

The bulk of the evidence and the argument on Cross's liability 

involved his certification of balance sheets included in 

prospectuses made available to the Program investors, and his 

audits and opinion letters on Home-Stake's consolidated financial 

statements. The thrust of the evidence went to his acts as a 

primary violator. Yet, some evidence and arguments in the record 

32 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 38 
could be interpreted as going to aiding and abetting liability 

rather than to actual statements or omissions. For example, it is 

not clear whether the jury treated the entire Program prospectuses 

as representations attributable to Cross, or whether Cross was 

held liable for failing to insure that the prospectuses, prepared 

in large part by Home-Stake, were not misleading. 

Appellees suggest that we can tell from the verdict forms 

that the jury found Cross liable as a primary violator, 

particularly because it found him liable for violating § 11 of the 

1933 Act, lS U.S.C. § 77k. Because liability under § 11 requires 

finding that Cross allowed his name to be used in connection with 

a registration statement containing false or misleading 

information, see lS U.S.C. § 77k(a) (4), the jury found that Cross 

made an actionable misrepresentation. The jury also found Cross 

liable under Rule lOb-S, which includes the element of scienter. 

By combining the § 11 and lOb-S verdicts, all the elements of 

primary liability are satisfied. 

While appellees' premises are accurate, the conclusion of 

primary liability does not necessarily follow. The syllogism 

flounders upon the possibility that § 11 liability attached to 

Cross for different representations than the Rule lOb-S liability. 

Unlike liability under lOb-S, parties can be held liable under § 

11 even for negligent misrepresentations; accountants bear the 

burden of demonstrating due diligence once a plaintiff shows a 

material misstatement or omission in a registration statement. lS 

U.S.C. § 77k(b); Herman & MacLean, 4S9 U.S. at 382. Rule lOb-S 

33 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 39 
violations require a showing of scienter because it, unlike § 11, 

is an antifraud provision. Id. 

In this case, the jury may have found § 11 liability against 

Cross for negligently certifying the Program registration 

statements, or, more specifically, the start-up balance sheets. 

Rule 10b-5 liability could have been based on recklessness in his 

audit of Home-Stake's financial statements (which were not 

included in the 1969 or 1970 Program registration statements) , or 

in his failure to properly supervise the remainder of the Program 

prospectuses. See id. at 381 n.11 ("Accountants are liable under 

§ 11 only for those matters which purport to have been prepared or 

certified by them."). It is possible that the jury findings of a 

material misrepresentation and Cross's reckless state of mind 

never matched up.17 

It is obvious from our discussion analyzing accountant 

behavior under§ 10(b) that distinctions in conduct between 

primary and secondary liability are elusive. Prior to Central 

Bank of Denver the distinction was academic. Now it is pivotal. 

The general verdicts shed no light on whether the jury found Cross 

liable because of his substantial assistance to Home-Stake's 

independent fraudulent acts, or whether his liability rested on 

actual representations he made that reached investors. The 

chances that the jury was confused by the aiding and abetting 

17 Appellees argue that no evidence supported an aiding and 

abetting verdict. We need not determine whether this is correct, 

however, because the instruction, whether warranted or not, could 

have influenced the jury. See Farrell, 866 F.2d at 1297-1301. 

34 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 40 
• 

instruction cannot be dismissed as remote--and even if remote, 

Farrell requires us to remand. 

Although not raised by the parties, the dissent believes that 

appellant is not entitled to the rule in Farrell because she did 

not object at trial to the aiding and abetting instruction and did 

not request a special interrogatory on aiding and abetting 

liability. In the ordinary case, pursuant to Fed. R. Civ. P. 51, 

when a party fails to object to a jury instruction or request a 

special interrogatory a general jury verdict is upheld "where 

there is substantial evidence supporting any ground of recovery in 

favor of an appellee." Union Pac. R.R. Co. v. Lumbert, 401 F.2d 

699, 701 (lOth Cir. 1968) (quotation omitted) .18 The policy 

underlying the objection requirement in Rule 51 is to force the 

parties to give the trial court an adequate opportunity to cure an 

error in the instructions before the jury is sent out to 

deliberate. Metromedia Corp. v. Fugazy, 983 F.2d 350, 363 (2d 

Cir. 1992), cert. denied, 113 S. Ct. 2445 (1993). On the other 

hand, a countervailing policy is that absent injustice we apply 

the law in effect at the time we render a decision. See Peterson 

v. Shearson/American Exgress. Inc., 849 F.2d 464, 466-67 (lOth 

Cir. 1988). 

The dissent does not refer to any case applying the 

substantial evidence or plain error standard to litigants whose 

18 None of the cases cited by the dissent stands for the 

proposition that we affirm a general jury verdict if substantial 

evidence supports any ground of recovery, even if objection to a 

jury instruction was timely made under Rule 51. Rather, the 

cases, including Lumbert, involve the failure to raise an error in 

the instructions or the verdict before the jury was discharged, 

and a failure to ask for a specific interrogatory. 

35 

Appellate Case: 95-5086 Document: 01019287532 Date Filed: 01/29/1996 Page: 41 
claimed error was based on a change in the law that arose after 

trial. To the contrary, in Key v. Rutherford, 645 F.2d 880 (lOth 

Cir. 1981), we refused to apply Rule 51 in just such a situation. 

There, the plaintiff in a § 1983 case failed to object to an 

instruction giving the defendant municipality qualified immunity 

based on the good faith of its members. At the time of the jury 

verdict, the availability of qualified municipal immunity was an 

unsettled question. The Supreme Court thereafter decided, in Owen 

v. City of Independence, 445 U.S. 622 (1980), that municipalities 

were not entitled to such a rule. We held that: 

The trial judge here did not have the benefit of the 

Owen decision when he formulated his instructions. On 

this record, the jury could have found in favor of 

[appellee] solely because of the good faith defense 

instruction. We believe that the interests of justice 

are best served by remanding this case for a new trial 

in light of the holding in Owen. 

Key, 645 F.2d at 883. See also Gilchrist v. Jim Slemons Imports. 

Inc., 803 F.2d 1488, 1495 (9th Cir. 1986) (failing to object as 

required by Rule 51 does not preclude appeal based on supervening 

change in the law of employment discrimination); United States v. 

Washington, 12 F.3d 1128, 1139 (D.C. Cir.) ("The superveningdecision doctrine reflects the principle that it would be unfair, 

and even contrary to the efficient administration of justice, to 

expect a defendant to object at trial where existing law appears 

so clear as to foreclose any possibility of success"), cert. 

denied, 115 S. Ct. 98 (1994). 

When the jury instructions were tendered in this case, at 

least six published opinions of this court recognized an implied 

private cause of action for aiding and abetting a lOb-S violation. 

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• 

See U.S. Indus .. Inc. v. Touche Ross & Co, 854 F.2d 1223, 1231 

(lOth Cir. 1988); Windon Third Oil and Gas Drilling Partnership v. 

FDIC, 805 F.2d 342, 344-45 (lOth Cir. 1986), cert. denied, 480 

U.S. 947 (1987); Cronin v. Midwestern Okla. Dev. Auth., 619 F.2d 

856, 860 (lOth Cir. 1980); McCown v. Heidler, 527 F.2d 204, 207 

(lOth Cir. 1975); Zabriskie v. Lewis, 507 F.2d 546, 553 (lOth Cir. 

1974); Kerbs v. Fall River Indus .. Inc., 502 F.2d 731, 740 (lOth 

Cir. 1974). It was likewise clear in 1988 that one who aided and 

abetted a fraudulent scheme shared equal liability with the 

primarily violators. McCown, 527 F.2d at 207. Thus it would have 

been futile for appellant to object below either to the aiding and 

abetting instruction or the general verdict form. Like the court 

in Key, we believe that in this case the interests of justice and 

the policies underlying Rule 51 reject forcing an appellant to 

object to a jury instruction where, based on the state of the then 

applicable law, her objection would have been futile. 

C. Scienter 

Appellant argues that remand is unnecessary, and that we 

should reverse the judgment because Cross only acted recklessly 

with respect to the Home-Stake fraud, and recklessness does not 

satisfy the scienter requirement for liability in a civil action 

under§ lO(b). The district court correctly rejected this 

argument.19 

A private cause of action for damages under§ lO(b) and Rule 

lOb-S will not lie in the absence of proof of "scienter," defined 

19 For purposes of this analysis we assume Cross acted only 

recklessly. Appellees do not claim that Cross's behavior was 

knowing or intentional. 

37 

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.. 

• 

as "the intent to deceive, manipulate, or defraud." Ernst & Ernst 

v. Hochfelder, 425 U.S. 185, 193 (1976) (emphasis added). In 

Ernst & Ernst, the Court expressly declined to address "the 

question whether, in some circumstances, reckless behavior is 

sufficient for civil liability under§ lO(b) and Rule lOb-5." Id. 

at 193-94, n.l2. The Supreme Court has still not spoken on this 

question. In Hackbart v. Holmes, 675 F.2d 1114, 1117 (lOth Cir. 

1982), this court held that "recklessness" satisfies the scienter 

requirement for a primary violation of § lO(b) .20 We defined 

"recklessness" as "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 is so obvious that the actor must have been aware of it." Id. 

at 1118 (quotation and citation omitted) .21 Appellant contends 

that Farlow v. Peat, Marwick. Mitchell & Co., 956 F.2d 982 (lOth 

Cir. 1992), overrules Hackbart sub silentio. Alternatively, she 

argues that Hackbart is inconsistent with the reading given Ernst 

& Ernst by Central Bank of Denver and must now be overruled. 

Neither proposition is correct. However, some language in Farlow 

does support appellant's argument. 

Farlow involved a claim against an accounting firm for aiding 

and abetting a securities fraud sche~e; the court's opinion 

20 Every circuit that has decided the issue likewise allows the 

scienter element to be fulfilled by a showing of recklessness. 

See generally Hollinger v. Titan Capital CokP., 914 F.2d 1564, 

1568 n.6 (9th Cir. 1990) (citing standard in ten circuits), cert. 

denied, 499 u.s. 976 (1991). 

21 The trial court in this case relied on the Hackbart definition 

of "recklessness" when giving the jury instruction. 

38 

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• 

focused primarily on the extent to which the pleading requirements 

of Fed. R. Civ. P. 9(b) apply to securities fraud claims. 

According to the court, in order to establish primary liability 

under§ lO(b), a party must allege and prove: 

facts showing that the conduct complained of occurred 

"in connection with" the purchase or sale of a 

security--that the actor made an untrue statement of a 

material fact, or failed to state a material fact, that 

in so doing. the party acted knowingly with intent to 

deceive or defraud, and that plaintiff relied on the 

misrepresentations, and sustained damages as a proximate 

result of the misrepresentation. 

Id. (citing Stevens v. Vowell, 343 F.2d 374 (lOth Cir. 1965)) 

(emphasis added). Later in the opinion, however, the court quotes 

approvingly from Ross v. Bolton, 904 F.2d 819 (2d Cir. 1990), that 

for aiding and abetting liability, as opposed to primary 

liability, the scienter requirement increases from recklessness, 

"'so that [plaintiffs] need to show that [defendants] acted with 

actual intent.'" Farlow 956 F.2d at 987 (quoting Ross, 904 F.2d 

at 824). 

While Farlow can be read to support either reckless disregard 

or actual intent as the standard for scienter, it did not 

expressly overrule Hackbart, and later Tenth Circuit decisions 

approve of the recklessness standard for primary violations. See 

First Interstate Bank of Denver. N.A. v. Pring, 969 F.2d 891, 901 

(lOth Cir. 1992), ("The established rule is that recklessness is 

sufficient scienter for a primary violation of § lO(b) and Rule 

lOb-S"), rev'd on other grounds sub nom., Central Bank of Denver. 

N.A. v. First Interstate Bank of Denver. N.A., 114 S. Ct. 1439 

(1994) . This circuit still maintains that recklessness as defined 

39 

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• 

in Hackbart is sufficient scienter for finding civil § lO(b) 

primary violations.22 

CONCLUSION 

This is a very old case, and it is with a heavy heart that we 

act to prolong it. Our decision, however, is mandated by a 

supervening change in the law of securities fraud. We REVERSE the 

district court's judgment and REMAND the case against appellant 

for a new trial to determine whether, in light of Central Bank of 

Denver, Cross violated§ lO(b) and Rule lOb-5. Because we remand 

the case against appellant in its entirety, we do not address the 

issue of prejudgment interest. 

22 Central Bank of Denver does not address the scienter 

requirement for primary violations. In noting that § lO(b) only 

proscribes "knowing or intentional conduct," the Court does no 

more than quote Ernst & Ernst, which itself left open the 

possibility that "knowing or intentional" could include reckless. 

Central Bank of Denver, 114 S. Ct. at 1446. 

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