Court Opinion

ID: 197625
Source: CourtListenerOpinion
Date Created: 2011-02-07 03:34:20+00
Date Added: 2024-06-11T13:08:54.872210
License: Public Domain

[NOT FOR PUBLICATION]

                  United States Court of Appeals
                      For the First Circuit
                                           

No. 97-1221

            CHANNING M. WELLS III, ROBERT R. JUENGST,
             INDIVIDUALLY AND ON BEHALF OF ALL OTHERS
                       SIMILARLY SITUATED,
                     Plaintiffs - Appellants,

                                v.

               MONARCH CAPITAL CORPORATION, ET AL.,
                     Defendants - Appellees.

                                           

           APPEAL FROM THE UNITED STATES DISTRICT COURT

                FOR THE DISTRICT OF MASSACHUSETTS

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

                                           

                              Before

                      Selya, Circuit Judge,
                                                    
                   Hill,* Senior Circuit Judge,
                                                        
                    and Boudin, Circuit Judge.
                                                       

                                           

     Edward  F. Haber, with  whom Thomas G.  Shapiro, Michelle H.
                                                                           
Blauner, Shapiro Haber  & Urmy LLP, Herbert E.  Milstein, Lisa M.
                                                                           
Mezzetti,  Cohen,   Milstein,  Hausfeld  &  Toll,  P.L.L.C.,  and
                                                                     
Calhoun,   Benzin,  Kademenos  &   Heichel  were  on   brief  for
                                                    
appellants.
     Thomas L. Riesenberg, with whom  Ernst & Young LLP, Irvin B.
                                                                           
Nathan, Andrew T. Karron, Arnold  & Porter, Kathryn A. Oberly and
                                                                       
William P. Hammer were on brief for appellees.
                           

                                           

                         OCTOBER 29, 1997
                                           

                    
                              

*  Of the Eleventh Circuit, sitting by designation.

          Per Curiam.  In this case the district court found that
                    Per Curiam.
                              

no  reasonable trier  of  fact  could  conclude  that  Defendant-

Appellee Ernst & Young LLP  (E&Y) had engaged in securities fraud

and granted its  motion for summary judgment.   For the following

reasons, we affirm.

                    I.  PROCEDURAL BACKGROUND

     This appeal from summary judgment is all that remains from a

shareholder class  action filed in 1991  by Plaintiffs-Appellants

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

the Securities Exchange Act of 1934, 15 U.S.C.   78j(b), and Rule

10b-5  promulgated thereunder,  17  C.F.R.    240.10b-5,  against

Monarch Capital Corporation  (Monarch Capital), its  wholly owned

and  largest subsidiary,  Monarch  Life  Insurance  Co.  (Monarch

Life), and  Monarch Life s  wholly owned  subsidiary, Springfield

Life Insurance  Co., Inc.  (Springfield Life)  (collectively, the

Monarch Defendants),  and E&Y.  Fourteen months  after filing the

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

million.   Following the settlement, the only remaining defendant

was E&Y.  The gravamen of the Class complaint against E&Y alleged

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

material misrepresentations  in (and omissions from)  the Monarch

Defendants   1989  consolidated financial  statements  (and E&Y s
                    
                              

1   Wells  represented  a class  of  shareholders  who  purchased
Monarch Capital stock between November 10, 1989, and November 14,
1990, at prices ranging from $16 1/8 to $4 3/8 per share.

                               -2-

accompanying 1990 audit  opinion) with scienter.  It  did so, the

Class alleged,  by materially overstating the  statutory surplus2

of Monarch  Capital s subsidiaries, more particularly,  the value

of the Cash Management Account (CMA).  See Part II.B. infra.  The
                                                                     

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

investors  by   artificially  inflating  the   price  of  Monarch

Capital s stock.

     After  the 1992 settlement,  the case remained  stagnant for

three years.3  Then, in March 1995, the district court sua sponte
                                                                           

scheduled a status  conference.  Three months later,  E&Y filed a

motion for  summary judgment.   In response, the Class  filed its

opposition  to E&Y s  motion and  a motion  for  leave to  file a

Second Amended  Class  Action Complaint.   In  January 1996,  the

Class   filed  its  own  motion  for  partial  summary  judgment.

Stating,  in its forty-five  page opinion, that   Plaintiffs [the

Class]  virtually abandoned the case,  the district court granted

summary  judgment  for  E&Y  on the  Class   claims  for  primary

liability  under Section  10(b) and  denied  the Class   motions.

                    
                              

2  An insurance company s  statutory surplus  is comprised of its
 admitted   assets    (or   statutory  assets   minus   statutory
liabilities).

3  During this period of inactivity, the Supreme Court issued its
decision in Central Bank of Denver, N.A. v. First Interstate Bank
                                                                           
of  Denver, N.A.,  511 U.S. 164 (1994),  holding that  a private
                          
plaintiff  may not  maintain an  aiding and  abetting suit  under
Section 10(b) as  the text of the  1934 Act does not itself reach
those who aid and  abet a   10(b) violation.    Id. at 177.   The
                                                            
district  court found,  after  Central  Bank,  that  all  pending
                                                      
secondary  liability claims against  E&Y were barred  and granted
summary judgment  in favor  of E&Y on  all claims for  aiding and
abetting.

                               -3-

This appeal follows.

                     II.  FACTUAL BACKGROUND

A.  Monarch Capital - the Parent Holding Company
                                                          

     Monarch Capital was  a typical financial holding  company of

the  1970s  and 1980s.    Its operations  included  insurance and

insurance services, corporate, real estate investment and venture

capital,  and investment  management.   For  nearly two  decades,

Monarch Capital  centered its focus on its  real estate business.

By 1989,  it was  clear that this  focus was  in error.   Monarch

Capital  was in severe  financial distress, with  reported losses

totaling millions  of dollars.   Even its president, in  his 1989

annual  report to  shareholders,  conceded that   [o]ur financial

results  for the  past two  years have been  very disappointing. 

Monarch  Capital announced plans to terminate its capital markets

and  real estate  operations and  concentrate  on its  profitable

insurance  sector.   Despite vows  to  pull out  of its  downward

spiral,  Monarch  Capital continued  to  deteriorate financially.

The present  action struck the  death knell blow;  parent Monarch

Capital was forced  into bankruptcy4 and subsidiary  Monarch Life

was   placed  in  receivership  by  the  Massachusetts  insurance

                    
                              

4  The bankruptcy action stayed the Class  claims against Monarch
Capital.   When  the  settlement  agreement  was  finalized,  the
bankruptcy court approved Monarch Capital s reorganization  plan,
discharging and releasing the Class  claims against it.

                               -4-

commissioner.5

                    
                              

5   Monarch Life was  regulated by the Commissioner  of Insurance
for  the Commonwealth  of Massachusetts.   As  a state  regulated
insurance company,  it was  required to  file annual  statements,
Mass. Gen. L. ch. 175    25, annual audited financial statements,
211  C.M.R.  Part  19:01, et  seq.,  and  registration statements
                                            
containing current information  about material transactions, such
as loans, between it and its  unregulated parent holding company.
Mass. Gen.  L. ch.  175   193N(b)(iii)(1).   Under  Massachusetts
law,  an  insurance  company  is  prohibited  from  including  an
unsecured loan  to its  parent holding  company in its   admitted
assets  and  statutory surplus.   Mass. Gen. L. ch. 175   11; see
                                                                           
note 2 supra.
                      

                               -5-

B.  The Cash Management Account (CMA)
                                               

     Monarch  Capital  established  the CMA  for  itself  and its

subsidiaries in 1985.  It was formalized in 1986 by  a Short-Term

Investment Pool Agreement (STIP).  Pursuant to  the STIP, Monarch

Capital, Monarch Life, and Springfield  Life agreed to pool, on a

daily basis,  any available  cash into the  CMA.6   A STIP  party

requiring funds could  draw upon the CMA to  meet operating costs

and obtain them from the  CMA at short-term interest rates.   The

STIP agreement  provided that pooled funds would  be available to

the depositing company in cash on  a demand basis.7  The official

purpose of  the CMA was  to minimize administrative  expenses and

external borrowing costs,  and maximize investment returns.   The

unofficial purpose of the CMA,  the Class contended, was to offer

an unsecured,  unregulated line of  credit to a  faltering parent

and enable  it to obtain  illegal dividends.8  The  Class accused
                    
                              

6  Springfield Life was a Vermont corporation.  Vermont insurance
regulators initially  questioned Springfield Life s  inclusion of
the CMA investment in its statutory surplus, but acquiesced after
the  STIP was  formalized.    Another  one of  Monarch  Capital s
subsidiaries,  First  Variable  Life  Insurance  Company   (First
Variable), an Arkansas corporation, was  an original party to the
STIP.    When   the  Arkansas  Department  of   Insurance  raised
objections to the CMA, First Variable ceased participation in the
STIP.

7  Monarch  Capital disclosed the existence  of the CMA to  state
insurance regulators  in June  1986, in  an amended  registration
statement.  It declared that it had $125 million in bank lines of
credit with  which to  guarantee on  demand  the availability  of
funds to the STIP participants.

8   Under Massachusetts insurance  laws, Monarch  Life could  pay
dividends  to Monarch Capital  only out of  its statutory surplus
and  only if its statutory  surplus (after paying such dividends)
was reasonable  in relation  to its  outstanding liabilities  and
adequate  for its  financial  needs.   Mass. Gen.  L.  ch. 175   

                               -6-

the  Monarch Defendants  of abusing the  CMA by using  it to fund

Monarch Capital s long-term, speculative real estate  activities.

After settling with  the Monarch Defendants, the Class turned its

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

C.  The 1989  Audited Consolidated Financial Statements and  1990
                                                                           

Unqualified Opinion of E&Y as to the CMA
                                                  

     By December  31, 1989,  outstanding loans via  the CMA  from

Monarch Life  to Monarch Capital  were $110.6 million;  they were

$15.1  million   from  Springfield   Life  to   Monarch  Capital.

Together,  the  combined   CMA  balances  of  Monarch   Life  and

Springfield Life were  approximately $125 million.   E&Y included

this  approximately $125  million figure  as part  of  the $138.1

million  (statutory   basis)  stockholder s  equity   of  Monarch

Capital s  life  insurance  subsidiaries  at  December  31,  1989

(Footnote  F  to  Monarch Capital s  1989  consolidated financial

statements)9  and  issued  a  report  in  1990  concerning  those
                    
                              

193N(j)-(1).

9  Footnote F states in pertinent part:

          Retained earnings include  adjustments from a
          statutory  basis  to   a  generally  accepted
          accounting   principles    basis   for    the
          Corporation s  life  insurance   subsidiaries
          that are  not available  for distribution  by
          the   Corporation  at   December  31,   1989.
          Stockholder s  equity  of  these subsidiaries
          available for distribution,  loan or advances
          to  the  Corporation  was $136.5  million  at
          December  31,  1989;   however,  payments  of
          dividends  from  this  amount  under  certain
          conditions   would   require    approval   by
          regulatory authorities.

               Statutory basis stockholder s  equity of

                               -7-

financial statements.10

1.  The Contentions of the Class.
                                           

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

intentionally  misrepresented to  Monarch Capital  investors that

Monarch Capital s life insurance subsidiaries had $138 million in

statutory  surplus  or  restricted  assets  (not  available   for

distribution  to Monarch  Capital under Massachusetts  law), when

over  $125  million   of  the  $138  million   had  already  been

distributed to Monarch  Capital and spent  by December 31,  1989.

E&Y  accomplished  this  fraud, avers  the  Class,  by improperly

including  the CMA balances of Monarch  Life and Springfield Life

($110.6   million  and  $15.1   million,  respectively)   in  the

computation of statutory surplus used to determine the (statutory

basis) stockholder s equity of each insurance company.  The Class
                    
                              

          the Corporation s life insurance subsidiaries
          was  $138.1  million  and $141.9  million  at
          December  31,  1989  and  1988,  respectively
          . . . .

10   The February 12, 1990,  Report  of Ernst & Young Independent
Auditors  states in pertinent part:

          We have audited the accompanying consolidated
          statements of financial  condition of Monarch
          Capital Corporation [and  subsidiaries] as of
          December 31, 1989 . . . . 

          We  conducted our  audits in  accordance with
          generally accepted auditing standards . . . .

          In  our  opinion,  the  financial  statements
          referred  to  above  present  fairly, in  all
          material respects, the consolidated financial
          condition of Monarch  Capital Corporation and
          subsidiaries  at December 31,  1989 . .  . in
          conformity with generally accepted accounting
          principles.

                               -8-

claims that  the E&Y  overstatements on  the Monarch  Defendants 

1989  consolidated  financial  statements and  1990  report  were

material,  lulling the  investing public  into a  false  sense of

liquidity,  and  were  made  with  the  requisite  Section  10(b)

scienter necessary to establish securities fraud.

2.  The Contentions of E&Y. 
                                     

     Countering  that this is  not a negligence  case, E&Y claims

that, by  including CMA assets  in its computations  of statutory

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

relied on the opinion of state insurance examiners.  E&Y contends

that it  is uncontroverted in  the record that  the Massachusetts

insurance  regulators,  with  jurisdiction   over  Monarch  Life,

concluded in a regulatory examination  report, issued only a  few

months  before  its  1990  report,  that  the  CMA  was  properly

includable  when  calculating   a  life  insurance   subsidiary s

statutory  surplus and that  E&Y explicitly read  and relied upon

this conclusion  by noting  in its work  papers:  [the]  State of

Massachusetts  has approved  the  carrying  of  the [CMA]  as  an

admitted asset.  This balance should be considered admissible. 11

     E&Y claims that  neither the Class nor  market professionals

relied  upon  its   purported  overstatements  in   making  their

investment decisions or recommendations.   Further, E&Y  contends

that  three  of  its   partners  contemporaneously  performed  or

reviewed  their  own  independent   and  internal  collectibility
                    
                              

11   E&Y claims that its auditors even raised this issue directly
with  the Massachusetts  regulators who  confirmed  that the  CMA
should be included as a statutory asset of Monarch Life.

                               -9-

analyses  and determined  that  Monarch  Life s  and  Springfield

Life s $125 million  CMA investment was collectible  from Monarch

Capital.

                     III.  STANDARD OF REVIEW

     We review  the grant by  the district court of  E&Y s motion

for  summary judgment de  novo.  Merino Calenti  v. Boto, 24 F.3d
335, 338 (1st Cir.  1994).  The district court  viewed the record

in  the  light most  favorable  to  the  Class and  indulged  all

inferences in favor of the Class.  Lucia v.  Prospect Street High
                                                                           

Income  Portfolio, Inc.,  36 F.3d 170,  174 (1st Cir.  1994).  To
                                 

defeat summary  judgment, the  Class must  present facts  showing

there  is a  genuine issue  for trial.   See  Mulero-Rodr guez v.
                                                                        

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

                         IV.  DISCUSSION

A.  The District Court Opinion
                                        

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

of Denver,  N.A., 511 U.S. 164 (1994), the district  court found
                          

that  a claim of  securities fraud under  Section 10(b) prohibits

 only the making of a  material misstatement (or omission) or the

commission of  a manipulative  act  and that  its text   does not

itself  reach [secondary  actors] who  aid  and abet  a [Section]

10(b) violation.   Id. at 177; see note 3 supra.  It then focused
                                                         

                               -10-

its  analysis on the  Class  remaining primary  liability claims,

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

Capital s  1989 financial  statements,  as  published in  Monarch

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

     As  to these  documents, the  district court found  that the

record failed  to show that  E&Y made a material  misstatement or

omission affecting the purchase or sale of Monarch Capital stock.

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

likelihood that  misstatements were  actually significant  in the

deliberations of a  reasonable shareholder).  It  also found that

the  record failed  to  show that  any E&Y  misrepresentations or

omissions,  purportedly relied upon by  the Class, were made with

Section 10(b)  scienter.  Ernst  & Ernst v. Hochfelder,  425 U.S.
185 (1976) (section 10(b) cannot  be read to impose liability for

negligent  conduct  alone).   The  district  court  granted E&Y s

motion for summary judgment.  Under a  de novo review, we examine
                                                        

each element separately.

B.  The Element of Materiality
                                        

     In most  circumstances,  disputes over  the  materiality  of

allegedly false or misleading statements must be reserved for the

trier of  fact.  Shaw v.  Digital Equipment Corp., 82 F.3d 1194,
                                                           

1217  (1st Cir. 1996); see Basic  Inc. v. Levinson, 485 U.S. 224,
                                                            

236 (1988);  Lucia, 36 F.3d at  176.   But  not every unfulfilled
                            

expression  of  corporate  optimism,  even  if  characterized  as

misstatement, can  give rise  to a genuine  issue of  materiality

under the  securities laws.    Shaw, 82 F.3d at 1217;  Lucia, 36
                                                                       

                               -11-

F.3d at 176  (leaving open the possibility  that some materiality

determinations  may  be made  as  a  matter  of law).     Summary

judgment is warranted . . .  if reasonable minds could not differ

as to the materiality of the undisclosed information.   Milton v.
                                                                        

Van Dorn Co., 961 F.2d 965, 970 (1st Cir. 1992).   The mere fact
                      

that  an investor might find information interesting or desirable

is   not  sufficient  to  satisfy  the  materiality  requirement.

Rather,  information is  material   only if its  disclosure would

alter  the  total mix  of facts available to the investor and  if
                               

there is a  substantial likelihood that a  reasonable shareholder
                                            

would consider it important  to the investment decision.   Id. at
                                                                        

969 (emphasis in  original) (citing Basic, 485 U.S. at  231-32);
                                                   

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

     Here, the district court found that all material information

about the CMA was disclosed.  It determined that a jury could not

have  concluded  that  E&Y made  material  misrepresentations  or

omissions in its  1990 opinion because the opinion  did not alter

the  total mix   of information available to the  Class.  Milton,
961 F.2d at  972.    Other public  filings,  the district  court

reasoned, were  available to the  Class and clearly  revealed the

existence and true nature of the CMA.12
                    
                              

12  These public filings included:  Monarch Capital s 1989 annual
report   and  Form  10K;  the  financial  statements  of  Monarch
Capital s  subsidiaries,  Monarch   Life  and  Springfield  Life;
Monarch    Capital s   president s    pessimistic   message    to
stockholders;  annual statements filed by Monarch Life with state
insurance regulators listing the STIP;  the triennial examination
report  on  Monarch  Life  issued  in  November  1989,  by  state
insurance  examiners; and  statutory  basis financial  statements
filed by Monarch Life and  Springfield Life with state  insurance

                               -12-

     After reviewing the record, we  agree.  The undisputed facts

demonstrate  that  the  disclosure of  Monarch  Life s  statutory

surplus  in Footnote  F of  Monarch  Capital s 1989  consolidated

financial  statements, filed in  March 1990, was  not material to

investors, but merely  duplicative of prior filings.   It is also

clear that it was not a primary source of reliance for  insurance

analysts evaluating insurance  companies.  We also note  that the

record does  not reflect any   concrete evidence  put  forward by

the  Class  to  indicate that  E&Y s  disclosures  were genuinely

material to investors, Anderson v.  Liberty Lobby, Inc., 477 U.S.
242, 243 (1986), nor does it  reflect a genuine issue of fact  on

this element  of their claim.   See Mulero-Rodr guez, 98 F.3d at
                                                              

673.

C.  The Element of Scienter
                                     

    The  scienter   requirement  is  satisfied  if  the  material

misstatements or  omissions were  made knowingly,  see MacDonald,
699 F.2d  at 49,  or if  they were  made recklessly.   See  First
                                                                           

Commodity  Corp. of Boston  v. Commodity Futures  Trading Comm n,
                                                                          

676 F.2d 1, 7 (1st Cir. 1982).13  Like materiality,  scienter [is
                    
                              

regulators.

13  Acts  of commission or omission  are made recklessly if  they
are:

           . .  . so  highly unreasonable  and such  an
          extreme  departure  from   the  standards  of
          ordinary  care  as  to present  a  danger  of
          misleading the  plaintiff to the  extent that
          the danger was either known  to the defendant
          or so  obvious that  the defendant must  have
          been aware  of it.   Hoffman  v. Estabrook  &
                                                                 
          Co.,  Inc., 587 F.2d 509, 517 (1st Cir. 1978)
                              

                               -13-

a] fact-specific  issue which  should ordinarily  be left  to the

trier of fact.   In  re Apple Computer Securities Litigation, 886
F.2d 1109, 1113 (9th Cir.  1989).14  However, summary judgment is

not automatically precluded even in cases where  motive or intent

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

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

1994)(where intent is  an issue the non-moving party  cannot rest

 merely upon  conclusory allegations, improbable  inferences, and

unsupported speculation,  Medina-Mu oz  v. R.J. Reynolds  Tobacco
                                                                           

Co., 896 F.2d 5, 8 (1st Cir. 1990)).   [S]ummary judgment  on the
             

scienter issue  is appropriate only  where  there is  no rational
                                             

basis in  the record  for concluding that  any of  the challenged

statements  was made  with  requisite  scienter.      Provenz  v.
                                                                       

Miller,  102 F.3d 1478,  1490  (9th  Cir.   1996)(emphasis  in
                

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

5, 1997)(No.  96-1770).   However,  this  court and  others  have

granted summary judgment  to Section 10(b) defendants  based on a

lack of  concrete evidence  that  would allow for an inference of

fraudulent intent.   See, e.g.,  Bryson v. Royal  Business Group,
                                                                          

763 F.2d 491,  493-95 (1st Cir. 1985); Renovitch  v. Kaufman, 905
F.2d 1040,  1047  (7th  Cir.  1990);  In  re  Worlds  of  Wonder
                                                                           
                    
                              

          (citation omitted).

14  Where the non-moving party has indicated  that he can produce
the requisite quantum of evidence to enable him to reach the jury
with his  claim,  Vel zquez  v. Chard n, 736 F.2d 831,  833 (1st
                                                 
Cir. 1984)  (citing Hahn v. Sargent, 523 F.2d 461, 468 (1st Cir.
                                             
1975)),  trial courts should   use restraint in  granting summary
judgment  where  discriminatory animus  of the  defendants is  in
issue.  Id.
                     

                               -14-

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

     The district  court found  that Section  10(b) scienter  was

intended  to proscribe  knowing  or  intentional misconduct,  not

negligence.   Hochfelder, 425 U.S.  at 197.   Since  Hochfelder,
                                                                          

recklessness can  also  satisfy the  scienter  requirement  under

Section 10(b).   Hollinger v. Titan Capital Corp.,  914 F.2d 1564
                                                           

(9th  Cir. 1990),  cert.  denied,  499 U.S. 976  (1991); ITT  v.
                                                                       

Cornfeld, 619 F.2d 909, 923 (2d Cir. 1980);  see First Commodity
                                                                           

Corp., 676 F.2d at 7.  Noting  that the First Circuit has assumed
               

(without deciding)  that recklessness amounting  to  carelessness

approaching  indifference   satisfies the  scienter  requirement,

Hoffman, 587 F.2d at 516,  the district court concluded  that  a
                 

lack of any showing of scienter  is alone sufficient to support a

motion for summary  judgment.   Bryson, 763 F.2d at 493 n.3.  The
                                                

district court found that a reasonable and prudent investor would

not be misled about the CMA due to the existence of  other public

filings  and  that  E&Y s knowledge  of  these  prior disclosures

negated the possibility that it acted with scienter.

     Based upon  our review  of the  voluminous record,  we agree

                    
                              

15   Other  circuits have  held  that scienter  in Section  10(b)
actions  against  accountants  or  independent  auditors  is  not
established merely through a showing of an error of judgment or a
misapplication of  accounting  principles.   The  plaintiff  must
prove that  the accounting  practices were so deficient that  the
audit amounted to no audit at all, or an egregious refusal to see
the  obvious,  or  to  investigate  the  doubtful,  or  that  the
accounting judgments which were made were such that no reasonable
accountant would have  made the same decision if  confronted with
the  same facts.   In  re Software Toolworks,  Inc., 50 F.3d 615,
                                                             
627-28 (9th Cir. 1994); Worlds of  Wonder, 35 F.3d at 1426;  Fine
                                                                           
v. American Solar King Corp., 919 F.2d 290, 297 (5th Cir. 1990).
                                      

                               -15-

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

with  the requisite  degree of  Section  10(b) scienter.   As  an

independent  auditor,  E&Y  had no  motive  to  commit securities

fraud.  In  addition, we find no evidence  that E&Y intentionally

(or recklessly)  prepared inadequate  collectibility analyses  in

order  deliberately (or  recklessly)  to mislead  Monarch Capital

investors.    Nor  do  we  find  evidence  that  E&Y  acted  with

fraudulent  or  reckless  intent in  relying  on  state insurance

examiners.  As to Footnote F of  the 1990 audit opinion, there is

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

fault  with the  figures  contained  therein.  Neither  is  there

evidence  of conspiratorial  misconduct by  E&Y to  aid  in fraud

allegedly being perpetrated  by the Monarch Defendants,  nor does

the Class  supply any.   Bryson, 763 F.2d at  493-95; Hochfelder,
425 U.S. at 197.

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

however,  is that E&Y  made many mistakes.   For example,  it may

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

own credit position.  It may have been a mistake to rely on state

insurance  department examiners  who,  themselves, may  have been

misinformed.    It  may  have  been a  mistake  to  view  Monarch

Capital s subsidiaries  statutory surplus as a regulatory, not an

accounting, issue.   And, it may have  been a mistake for  E&Y to

rely  upon its own  internal collectibility analyses  (which were

not models of professional accounting competence).  Nevertheless,

mistakes  such as  these do  not support  a finding  of scienter.

                               -16-

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

based  upon  the  facts  of   this  case,  we  find  no  knowing,

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

not  to be  admired, but  it  is insufficient  for Section  10(b)

purposes.  Id.  
                        

                          V.  CONCLUSION

     Based upon  the above, we  affirm the grant by  the district

court of E&Y s motion for summary judgment.

     AFFIRMED.

                               -17-