Court Opinion

ID: 2964919
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:33:00.395586+00
Date Added: 2024-06-11T11:43:03.687608
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USCA1 Opinion

	

                                [NOT FOR PUBLICATION]

                            United States Court of Appeals
                                For the First Circuit
                                 ____________________

          No. 97-1221

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

                                          v.

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

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

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

                                 ____________________

                                        Before

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

                                _____________________

               Edward  F. Haber, with  whom Thomas G.  Shapiro, Michelle H.
               ________________             __________________  ___________
          Blauner, Shapiro Haber  & Urmy LLP, Herbert E.  Milstein, Lisa M.
          _______  _________________________  ____________________  _______
          Mezzetti,  Cohen,   Milstein,  Hausfeld  &  Toll,  P.L.L.C.,  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-