Court Opinion

ID: 9462827
Source: CourtListenerOpinion
Date Created: 2023-08-04 22:51:21.25168+00
Date Added: 2024-06-11T17:37:48.460142
License: Public Domain

ON PETITION FOR REHEARING
Appellees Charnay, Davis and Maheu have petitioned for a rehearing, contending, inter alia, that the decision of this court entered May 7, 1976, is in direct conflict with the decision of the Supreme Court in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668, entered March 30, 1976. Prior to filing its opinion this court considered the effect of Ernst & Ernst and concluded that our opinion was not in conflict with the holding in that case. After re-examination of the opinion in Ernst & Ernst in the light of the petition for rehearing, we reach the same result, but deem it advisable to enter this supplemental order explaining and clarifying the reasons for our conclusion.
Ernst & Ernst v. Hochfelder was a civil action for damages for alleged negligent conduct. The issues before the Court and *358its conclusions are summarized in the following excerpts from the Court’s opinion:
“We granted certiorari to resolve the question whether a private cause of action for damages will lie under § 10(b) and Rule 10b-5 in the absence of any allegation of ‘scienter’- — intent to deceive, manipulate, or defraud. 421 U.S. 909, 95 S.Ct. 1557, 43 L.Ed.2d 773 (1975). We conclude that it will not and therefore we reverse. [96 S.Ct. 1381]
“Use of the word ‘manipulative’ is especially significant. It is and was virtually a term of art when used in connection with securities markets. It connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities. [96 S.Ct. 1384]
“When a statute speaks so specifically in terms of manipulation and deception, and of implementing devices and contrivances — the commonly understood terminology of intentional wrongdoing — and when its history reflects no more expansive intent, we are quite unwilling to extend the scope of the statute to negligent conduct.
Recognizing that § 10(b) and Rule 10b-5 might be held to require proof of more than negligent nonfeasance by Ernst & Ernst as a precondition to the imposition of civil liability, respondents further contend that the case should be remanded for trial under whatever standard is adopted. Throughout the lengthy history of this case respondents have proceeded on a theory of liability premised on negligence, specifically disclaiming that Ernst & Ernst had engaged in fraud or intentional misconduct. In these circumstances, we think it inappropriate to remand the action for further proceedings.” [96 S.Ct. 1391]
This case obviously involves more than negligent conduct. Appellees argue, however, that in holding that the indictment was not fatally defective by reason of its purported failure to allege a specific intent to defraud our decision is contrary to the holding in Ernst & Ernst. Appellees misconstrue the basis of our disposition of this issue.
Although we did state that the cases have held that there is no requirement of proof that a defendant knew he was violating a particular S.E.C. rule, we did not hold that scienter per se was not a required element of the offense. Rather we noted that it was necessary for the prosecution to show an intentional act with “a realization on the defendant’s part that he was doing a wrongful act.” Similarly, Judge Sneed in his concurring opinion noted that “the intent necessary ... is merely that of intending to do the acts prohibited, rather than intent to violate the statute.” These statements are consistent with the holding in Ernst & Ernst.
Specific allegations in the indictment charging the requisite mental state and scienter include the following:
Count II charges that the defendants and their co-conspirators “did unlawfully, wilfully and knowingly, in connection with the purchase and sale of securities, to wit, the common stock of Air West, directly and indirectly, by the use of the means and instrumentalities of interstate commerce and the mails and the facilities of a national securities exchange, (a) employ a device, scheme, and artifice to defraud, (b) make untrue statements of material facts and omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and (c) engage in acts, practices and courses of business which operated as a fraud and deceit upon purchasers and sellers of Air West securities.”
Count III charges that the defendants and their co-conspirators “did devise and intend to devise a scheme and artifice to defraud the directors and stockholders of Air West, which said scheme and artifice to defraud is set forth more fully in paragraphs 13 and 14a through 14e of Count I of this indictment.”
*359Paragraph 13 of Count I describes the means by which the conspiracy would be carried out. Paragraph 14 lists overt acts committed in furtherance of the conspiracy.
We conclude that these and other similar allegations in the indictment are sufficient to charge the requisite intent and scienter under Ernst & Ernst.
The panel as constituted in this case has voted to deny the petition for rehearing and to reject the suggestion for a rehearing in banc.
The full court has been advised of the suggestion for in banc rehearing, and no judge of the court has requested a vote on the suggestion for rehearing in banc. Fed. R.App.P. 35(b).
The petition for rehearing is denied and the suggestion for a rehearing in banc is rejected.