Sharp v. Coopers & Lybrand

OPINION

Plaintiffs, investors in an oil drilling venture, alleged in this class action that the defendant, a major accounting firm, is liable to them for misstatements in several opinion letters which advised them as to the supposed tax consequences of those investments. Four theories of liability have been advanced by the plaintiffs: (1) liability for violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and of Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, by employees of the defendant (Count One); (2) liability as a controlling person of its employees under § 20(a) of the Securities Exchange Act (also Count One); (3) fraudulent misrepresentations by defendant’s employees (Count Two); and (4) negligent breach by employees of the defendant of their common law duty owed to plaintiffs (Count Three). We have pendent jurisdiction over the last two claims.

We certified a class consisting of all persons who purchased these securities after July 22, 1971, 70 F.R.D. 544 (E.D.Pa.1976). There ensued an apparent novelty in our jurisprudence: a jury trial of issues common to the class under the Rule 10b — 5, § 20(a) and pendent claims. These issues included foreseeability of damages, the exercise of reasonable care, whether there were misrepresentations and omissions and, if so, their materiality and scienter, and whether the defendant controlled an employee for § 20(a) purposes and adequately supervised him. We bifurcated the trial, and individual issues such as reliance, amount of damages and statute of limitations defenses have not yet been tried. After the jury returned answers to special interrogatories, plaintiffs moved for judgment n. o. v. with respect to one of those answers and to vacate the judgment as to Count Three (negligence), and the defendant moved for judgment on all counts in accordance with those answers, for judgment n. o. v. on the fraud and Securities Exchange Act counts and for a new trial on various grounds. We will grant only the plaintiffs’ motion to vacate the judgment as to Count Three.

I. FACTS AT TRIAL:

Plaintiffs are persons who purchased limited partnership interests in oil wells to be drilled in Kansas and Ohio, of which West-land Minerals Corporation (WMC) was general partner and promoter. As a result of criminal fraud by WMC, many of these wells were never drilled and much of the invested money was diverted to WMC’s own use. Economic Concepts, Inc. (ECI), the selling agent for these limited partnerships, and WMC sought to engage in April 1971 the services of defendant in rendering opinions as to the federal income tax consequences of these limited partnerships. In July the defendant decided to write such *883 opinion letters, and on July 22, 1971, an opinion letter signed by a Coopers & Lybrand partner in its name was sent to Charles Raymond, president of WMC, stating that “based solely on the facts contained [in the WMC Limited Partnership Agreement] and without verification by us” a limited partner who contributed $65,000 in cash could deduct approximately $128,000 on his 1971 tax return. That letter was drafted by defendant’s employee Herman Higgins, who was at that time a tax supervisor working directly under the supervision of four partners of defendant. The letter was written specifically for the use of one Muhammed Ali, a potential WMC investor, with regard to reducing the amount of taxes that would be withheld from a fight purse. In early October 1971 Higgins told David Wright, a partner in the defendant firm, that copies of the July 22 letter had been shown to individual investors besides Ali, and Wright determined that a letter which would be seen by other investors should be more complete. Higgins redrafted the opinion letter, and on October 11, 1971, defendant sent another opinion letter, signed in defendant’s name by Wright, and a covering letter to Raymond.

The jury found that the October 11 letter contained both material misrepresentations and material omissions, and that Higgins acted either recklessly or with intent to defraud in preparing the letters. Much of the evidence concerning those misrepresentations and omissions and their recklessness came from plaintiffs’ expert witness, Professor Bernard Wolfman of the Harvard Law School, a specialist in federal income taxation. Most of his testimony was not rebutted by the defendant. Professor Wolfman explained the principles behind this tax shelter: a taxpayer who in 1971 contributed $25,000 to a partnership involved in a bona fide oil drilling venture, which then obtained for each $25,000 contribution an additional $25,000 bona fide bank loan that was fully secured by partnership property (the as yet undrilled wells) and then expended all of that $50,000 for drilling, could under the law applicable in 1971 deduct the full $50,000 from his taxable income. The effect would be to accelerate the tax deduction available to the investor in 1971. Professor Wolfman’s expert testimony in concert with other evidence provided the basis for the jury’s findings that the October 11 letter misrepresented or omitted to state material facts in at least three ways.

First, Professor Wolfman testified that writing such a letter was reckless on its face in that it omitted. to state that the non-recourse loan which the letter assumed lending institutions would make to WMC, the value of which loan would be deductible by the taxpayer according to the opinion letter, would have to be secured by collateral (j. e., the oil wells) whose value was equal to or greater than the amount of that loan. Non-recourse loans of the type contemplated by the opinion letter (i. e., with no personal liability to the limited partners) are very rarely entered into by banks for oil drilling ventures, according to Professor Wolfman, because it is hard to secure them fully by undrilled wells, whose value is not known. Unless the value of the property used by the partnership to secure the loan were equal to the amount of the loan, Professor Wolfman explained, the amount of the loan would not be deductible to the limited partner under § 752(c) of the Internal Revenue Code. To assume this unlikely fact that the loans would be thus secured without stating the assumption was itself reckless, he said.

Second, the plaintiffs introduced evidence, principally through Higgins’ testimony before a grand jury, that at the time Higgins drafted the October 11 letter he was aware of a number of facts because of his close relationship with ECI and WMC. In particular, this evidence suggested that Higgins as of October 11: (a) had recommended to WMC that it take the bank loans through mere bookkeeping transactions “without having to make a bank loan in the normal sense that we think of,” (b) knew that WMC had acquired a bank, International Bank & Trust of the Bahamas (IBT), (c) knew that IBT was insolvent, or at least unable to make the loans necessary to fund *884 the oil drilling ventures contemplated by the WMC limited partnership agreements and (d) knew that the actual drilling costs for each limited partnership would be less than $140,000. Higgins testified at his deposition that, while under the transaction contemplated by this “paper loan” WMC would not have access to the money it would “borrow” from IBT, that was “not a difference . . . that in my opinion would be that critical from the tax point of view.” As it turned out, many of these facts were untrue as a result of WMC’s fraud.

Professor Wolf man stated that if the writer had made such a recommendation and was aware of these facts, the October 11 letter contained a number of misstatements: that the driller would receive $140,-000 in cash, that there would be partnership borrowing and that such borrowing would be from a suitable bank or other lending agency. These misrepresentations, which the jury could have found were intentional or at least reckless, in turn rendered the opinion as to tax consequences a misrepresentation, again at best recklessly made, because it was based on assumptions known to be false.

Third, the plaintiffs established that as of October 11 Higgins had decided to leave defendant’s employ and that he had as of October 8 taken a leave of absence and was remaining there only to finish the opinion letter. There was evidence that by October 6 Higgins was working closely with ECI, WMC’s selling agent, and on October 16 he got powers of attorney from Raymond to execute and file papers for WMC, of which Raymond was president, and for IBT, of which he was board chairman. Professor Wolfman testified that it was improper for an employee of an accounting firm who was employed by ECI to write a tax opinion letter and that the failure to disclose his relationship with the selling agent would be a material omission which would appear to have been intentional or reckless.

The jury concluded that, while Higgins caused the material misrepresentations and omissions in the October 11 letter recklessly or with an intent to defraud, no partner of the defendant firm caused any misstatements with such scienter. It also found no misrepresentations or omissions in the July 22 letter, so that liability is limited to those relying on the October 11 letter. With respect to the plaintiffs’ negligence claim, the jury determined that defendant failed to exercise reasonable care but said that it was not foreseeable to the defendant that plaintiffs would be injured as a result of its negligent misrepresentations. With respect to common law fraud, the jury determined there was clear and convincing proof that the misrepresentations and omissions were made recklessly but not that they were made with knowledge and intent to deceive. Again, liability can arise only from reliance on the October 11 letter. The responses to interrogatories under § 20(a) of the Securities Exchange Act were that the defendant had the power to control Higgins’ wrongful activities and that its good-faith defense of reasonably adequate supervision of Higgins had not been made out.

II. COMMON LAW NEGLIGENCE:

After considerable dubitation as to whether the defendant could owe a duty to the plaintiff investors to exercise reasonable care in writing its opinion letters, we charged the jury and included interrogatories as to negligence. The questions we deemed common to the class were the existence of a duty to the plaintiffs and the defendant’s standard of care. After the jury found that the defendant was negligent but that the named plaintiff’s injury was not foreseeable to it, we entered judgment for the defendant on Count Three on the ground that defendant owed no duty of reasonable care to plaintiffs whose injury was not foreseeable. Plaintiffs have moved for judgment n. o. v. on the foreseeability issue and assert they should be allowed to pursue individual damage claims on a negligence theory.

There looms a threshold question of what common law governs as to this pendent claim. As a federal court exercising pendent jurisdiction, we are bound to in *885 voke the choice of laws rules of the forum state, 1A Moore’s Federal Practice ¶ 0.305[3] at 3056 (1977), at least where there is direct authority from the highest court of a state. Cf. Towner v. Commissioner of Internal Revenue, 182 F.2d 90S, 907 (2d Cir.), cert. denied, sub nom. Estate of Farrell, 340 U.S. 912, 71 S.Ct. 293, 95 L.Ed. 659 (1950). The controlling Pennsylvania choice of laws principle in tort cases generally is that enunciated in Griffith v. United Air Lines, Inc., 416 Pa. 1, 203 A.2d 796 (1964), that the law of the state bearing the most significant relationship with the occurrences and parties in a case ought to be applied. Neither party has argued on these motions that the selection of applicable state law is significant or that a particular state law should apply. We believe, to the contrary, that determining whose law applies might be crucial to the liability of the defendant under the negligence claim on the issue of duty.

Our difficulty with making a choice of law analysis at this point is that we do not yet know in the case of each individual plaintiff which state has the most significant relationship with the occurrences and the parties. Normally, in a tort case this will be the state in which the injury occurred. However, individual cases may contain individual factors which could cause us, under Pennsylvania’s choice of law rules, to look to a state other than the state of injury.

But even if we were to reach the usual result in tort cases and apply the law of the state of injury, we still do not know which law to apply since on this record we do not know the state in which each of the individual plaintiffs was injured. That the interests of more than one state are involved is inevitable. The problem is that we do not know on this record how many or which states are involved with respect to each plaintiff’s claim. Therefore, any discussion of the law of any given state at this time would be both premature and futile. Since the pendent common law claims involve several state law questions, such as the duty of accountants to third persons, reliance, statute of limitations defenses and damages, it is manifestly impossible for us to decide those questions as to each individual state until we first determine which state law to apply.

The plaintiffs have moved for judgment n. o. v. with respect to the jury’s finding that the defendant could not foresee that the named plaintiff would be likely to be injured by its negligence. Whatever its merits, we are unable to consider this motion because the plaintiffs did not move for a directed verdict under F.R.Civ.P. 50(a) as to foreseeability or as to Count Three generally. A motion for judgment n. o. v. based on a ground not raised in a party’s motion for a directed verdict cannot be granted. C. Albert Sauter Co., Inc. v. Richard S. Sauter Co., Inc., 368 F.Supp. 501, 509 (E.D.Pa.1973); 5A Moore’s Federal Practice ¶ 50.08, at 50-86 & n.3 (1977). The Third Circuit has interpreted strictly the requirement of F.R.Civ.P. 50(b) that a motion for a directed verdict after the presentation of all evidence is a prerequisite to a motion for judgment n. o. v. DeMarines v. KLM Royal Dutch Airlines, 580 F.2d 1193 at 1195 n.4 (3d Cir. 1978); Lowenstein v. Pepsi-Cola Bottling Co. of Pennsauken, 536 F.2d 9 (3d Cir.), cert. denied, 429 U.S. 966, 97 S.Ct. 396, 50 L.Ed.2d 334 (1976); Beebe v. Highland Tank and Manufacturing Co., 373 F.2d 886 (3d Cir.), cert. denied sub nom. National Molasses Co. v. Beebe, 388 U.S. 911, 87 S.Ct. 2115, 18 L.Ed.2d 1350 (1967). See also 9 C. Wright & A. Miller, Federal Practice & Procedure § 2537, at 596—98 (1971). Indeed, to entertain the plaintiffs’ motion might deprive defendant of its Seventh Amendment rights to a trial by jury on Count Three as to foreseeability. Lowenstein v. Pepsi-Cola Bottling Co. of Pennsauken, 536 F.2d at 11; Sulmeyer v. Coca Cola Co., 515 F.2d 835, 846 n.17 (5th Cir. 1975), cert. denied, 424 U.S. 934, 96 S.Ct. 1148, 47 L.Ed.2d 341 (1976), citing Slocum v. New York Life Insurance Co., 228 U.S. 364, 33 S.Ct. 523, 57 L.Ed. 879 (1913). The importance of the policies served by the Rules and the Seventh Amendment forbids us under the law of this circuit to consider plaintiffs’ arguments in chambers that plaintiffs’ *886 injuries were as a matter of law foreseeable as curing the failure to move for a directed verdict as to that interrogatory on that basis. Lowenstein v. Pepsi-Cola Bottling Co. of Pennsauken 536 F.2d at 12 & n.7. The plaintiffs’ motion for judgment n. o. v. therefore will be denied.

Although we cannot grant plaintiffs’ motion, we conclude nevertheless in light of the uncertainty as to what state law applies that judgment should not have been entered as to any plaintiff on Count Three. For at least some plaintiffs, the lack of privity with defendant might not foreclose the existence of a duty. Similarly the non-foreseeability found by the jury might not foreclose all plaintiffs. It is possible that under the law of some states, foreseeability is not required to impose a duty on accountants to exercise reasonable care. More likely, some states may impose liability on accountants for negligence to all persons whom the accountants foresaw or should have foreseen would have used or would have relied on the opinion letter rather than those whose injury was foreseeable. See Restatement (Second) of Torts § 552 (1965) (limiting liability for negligently supplied false information without direct reference to foreseeability) and Illustrations 5, 6. Because there is no legal or factual finding which forecloses all plaintiffs from recovery on Count Three, we will vacate our judgment for defendant on that count.

III. COMMON LAW FRAUD AND FORESEEABILITY:

Defendant contends both that the jury’s finding of non-foreseeability of injury compels judgment in its favor on Count Two, alleging fraudulent misrepresentation, and that it is entitled to judgment n. o. v. because there was no evidence of . its scienter. We are again thrust into a situation in which we cannot decide what state law to apply without knowing with regard to each plaintiff all the states, laws and interests involved, and we are therefore unable to grant the defendant’s motions at this time.

IV. HIGGINS’ RULE 10b-5 VIOLATIONS:

A. Foreseeability and Rule 10b-5.

The jury determined that Herman Higgins made material misrepresentations and omissions in the October 11 opinion letter either recklessly or with intent to defraud. The defendant advances several grounds why it is entitled nonetheless either to a verdict in its favor on Count One, alleging violation of Rule 10b-5 under § 10(b) of the Securities Exchange Act, or to a new trial on that count. Among these is the contention that the jury’s finding of non-foreseeability of injury compels such a judgment in order to make the verdict on all counts consistent with the jury’s answers to interrogatories, and that we must take the view of the case that renders these answers consistent, Atlantic & Gulf Stevedores, Inc. v. Ellerman Lines, Ltd., 369 U.S. 355, 82 S.Ct. 780, 7 L.Ed.2d 798 (1962). 1 Underpinning this argument is a failure to ask the crucial question, “foreseeability of what ?” and to make distinctions among the various possible answers. The foreseeability which is required under Rule 10b-5 is not foreseeability that a plaintiff might be injured, but merely that the defendant knew or should have known the opinion letter would be promulgated to investors.

The defendant is correct, however, in stating that the Third Circuit requires *887 foreseeability as an element of a 10b-5 claim. In Landy v. Federal Deposit Insurance Corp., 486 F.2d 139, 168 (3d Cir. 1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974), the court held that an accountant’s alleged misstatements in reports could not be the basis of a 10b-5 action because

“None of the directors’ reports was made in a manner reasonably calculated to influence the investing public [and there] is no proof that any were disseminated to the public or that any investor saw them except for Landy, a director and counsel for the bank.”

See also Wessel v. Buhler, 437 F.2d 279, 282 (9th Cir. 1971); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860-62 (2d Cir. 1968) (en banc), cert. denied sub nom. Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1976). As we concluded in SEC v. Penn Central Co., 450 F.Supp. 908, 912-13 (E.D. Pa.1978), the “in connection with” requirement of Rule 10b-5 2 imposes in these cases the limitation that defendants can be liable for misrepresentations and omissions only if the defendants reasonably could foresee that these misstatements would be used in connection with the purchase or sale of a security — i. e., would go to a class of persons (including the plaintiff or plaintiffs in a private damage action) for their consideration in deciding whether to purchase or whether to sell securities. Accord, Competitive Associates, Inc. v. Laventhol, Krekstein, Horwath & Horwath, 516 F.2d 811, 815 (2d Cir. 1975). Defendant points to no evidence, nor could it, suggesting non-foreseeability in this sense. We hold as a matter of law that the defendant foresaw and reasonably could foresee that the October 11 opinion letter would be shown to potential investors in WMC limited partnerships, and we therefore conclude that this letter was used in connection with the purchase of those partnership interests. 3

In so holding, we conclude that an accounting firm’s rendering of opinions to a client as to the tax consequences of purchases and sales of the client’s securities, where the firm is or should be aware the opinion will be disseminated to potential purchasers and sellers of those securities, is analogous for Rule 10b-5 purposes to preparing or certifying financial statements which it actually or constructively knows will be used in the same way. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 n.33, 96 S.Ct. 1375, 1391, 47 L.Ed.2d 668 (1976) (“experts who perform services or express opinions with respect to matters under the [Securities Exchange] Acts”); Gold v. DCL Inc., 399 F.Supp. 1123, 1127 (S.D.N.Y.1973).

The other cases from this circuit cited by defendant for the proposition that foreseeability of loss is necessary in a 10b — 5 case are not relevant to this motion. The court in Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 194 (3d Cir. 1976), discussed the requisite of a causal connection between fraudulent conduct and a purchase or sale of securities and concluded that the defendants’ fraudulent refusal to sell stock had an insufficient causal nexus with plaintiffs’ stock purchases. Similarly, Judge Adams held in Ketchum v. Green, 557 F.2d 1022, 1027 (3d Cir.), cert. denied, 434 U.S. 940, 98 S.Ct. 431, 54 L.Ed.2d 300 (1977), that the fraud-sale of securities relationship was too attenuated in a case involving an intra-corporate struggle for control. In our case the causal nexus takes a classic form, between an accountant’s misrepresentation and purchases of securities, and causation follows from objective materiality, which has been proven, and subjective reliance, which has not been at issue in the trial thus far.

The other main line of authority invoked by the defendant involves the limi *888 tation of damages recoverable in a Rule 10b-5 action to those proximately caused by defendants’ fraud. Courts have mentioned foreseeability of injury in that context, e. g., Garnatz v. Stifel, Nicolaus & Co., Inc., 559 F.2d 1357, 1361 (8th Cir. 1977), cert. denied, 435 U.S. 951, 98 S.Ct. 1578, 55 L.Ed.2d 801 (1978); See also Miller v. Schweickart, 413 F.Supp. 1062, 1067-68 (S.D.N.Y.1976); 2 A. Bromberg, Securities Law: Fraud, SEC Rule 10b-5 § 8.7(2), at 218 (1973) (“Foreseeability has a role to play in determining the measure of damages . . . ”). To the extent that the jury’s finding of non-foreseeability would be relevant to that issue, it cannot be deemed competent because the damages issue has not yet been tried and hence the plaintiffs were not required at the trial of common issues to prove proximately caused damages. What role, if any, foreseeability will play in that determination cannot be ascertained until a later date.

Defendant also relies heavily on Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), to impose a foreseeability requirement, mainly on the bases of (1) the Securities and Exchange Commission’s proposed standard for recovery for negligent violations of Rule 10b-5, which the Court rejected in holding scienter is required, id. at 198 n.18, 96 S.Ct. 1375, and (2) the Court’s citation of Ultramares v. Touche, Niven & Co., 255 N.Y. 170, 174 N.E. 441 (1931), id. at 215 n.33. The SEC proposed that a defendant’s liability for negligence be limited to those persons whose reliance could be foreseen by the defendant, which requirement has been met here in any case. Moreover, there is no reason to expect that the Court, in rejecting the sufficiency of negligence for 10b-5 liability, in any sense adopted this limitation. 4 Nor should the citation of Ultramares v. Touche, Niven & Co., in Ernst & Ernst and in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 747-48, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), suggest endorsement of a foreseeability rule. In both cases the Court echoed Chief Judge Cardozo’s concern about the overbreadth of the class of plaintiffs to whom persons doing business might be liable, but neither opinion suggests limiting an accountant’s liability to purchasers and sellers for fraudulent, as opposed to negligent conduct. Thus once there is a breach of a duty extending to persons beyond those in privity with an accountant, i. e., once there is fraud and not mere failure to exercise reasonable care,

“If the certified financial statements [or opinions] are intended to be used and are used, to the knowledge of the accountants, in the sale of securities by the company or someone else to the public, there would seem to be little question that the purchasers are persons entitled to complaint of that breach of duty, even under Cardozo’s opinion in the Ultramares case which is discussed in Ernst & Ernst.”

R. Jennings & H. Marsh, Securities Regulations: Cases and Materials 1132 (1977).

B. Recklessness and Rule 10b-5.

In moving for judgment n. o. v. and for a new trial, defendant takes the alternative positions that it is entitled to judgment because reckless conduct is not grounds for 10b-5 liability and that our charge as to recklessness erroneously defined that legal standard. The former position was rejected expressly by the Third Circuit in Coleco Industries, Inc. v. Berman, 567 F.2d 569 (3d Cir. 1977), where it held in accordance with other courts which had decided the issue, explicitly unresolved in Hochfelder, 425 U.S. at 194 n.12, 96 S.Ct. 1375, that recklessness is sufficient to impose such liability. Concluding that the *889 defendants’ conduct was not reckless under any of the judicial standards of recklessness, the Third Circuit in Coleco did not expound upon the precise standard defining the lower boundary of 10b-5 scienter. We derived our charge to the jury from the following definition of recklessness formulated in Franke v. Midwestern Oklahoma Development Authority, 428 F.Supp. 719, 725 (W.D.Okl.1976), and adopted by the Seventh Circuit in three of the recklessness cases cited in Coleco, 567 F.2d at 574 n.6:

“[Rjeckless conduct may be defined as a highly unreasonable omission [or misrepresentation], involving not merely simple, or even inexcusable, negligence, but 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.” (citations omitted)

We do not believe this formulation to differ fundamentally from the standard adopted by the district court in Coleco, 423 F.Supp. 275, 296 (E.D.Pa.1976), “a misrepresentation so recklessly made that the culpability attaching to such reckless conduct closely approaches that which attaches to conscious deception,” and we originally attempted to incorporate the latter in our charge. We ultimately decided, however, that the Cole-co language added little and that because of its legal rather than factual orientation (i. e., degree of culpability) would have been more confusing than helpful to the jury. We believe that our charge correctly reflected the meaning of “recklessness” and that the record amply supported the jury’s finding that Higgins made misrepresentations or omissions either with that mental state or with intent to defraud.

C. WMC Partnerships as Securities.

Advancing the contention that the WMC limited partnership interests were securities within the meaning of the Securities Exchange Act only if the purchasers of them intended to profit from the actions of others and not if they purchased them merely for tax shelters, defendant argues that we erred in holding these interests were securities as a matter of law. Cl. § 3(a)(10) of the Securities Exchange Act, 15 U.S.C. § 78e(a)(10). But the very eases cited by the defendant tend to refute the proposition that there is an equation between securities and defendant’s narrow definition of profit motivation. Rather, the meaning of securities under this legislation should be and has been interpreted like that under the Securities Act of 1933, see 2 L. Loss, Securities Regulation 795-96 (1961), which the Supreme Court has held to embody

“a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”

SEC v. Howey Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946). The record clearly establishes that WMC partnership shares promised to investors “profits” in the broad sense meant by the Court, based on, inter alia, the tax consequences forecast by defendant. Moreover, courts have more recently reinforced and indeed broadened the doctrine that the definition of a security is “to be liberally construed under the federal securities laws,” Ballard & Cordell Corp. v. Zoller & Danneberg Exploration, Ltd., 544 F.2d 1059, 1063 (10th Cir. 1976), cert. denied, 431 U.S. 965, 97 S.Ct. 2921, 53 L.Ed.2d 1060 (1977), in view of the fact that remedial legislation such as these laws should be broadly construed. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). See also Nor-Tex Agencies, Inc. v. Jones, 482 F.2d 1093, 1098 (5th Cir. 1973), cert. denied, 415 U. S. 977, 94 S.Ct. 1563, 39 L.Ed.2d 873 (1974).

V. LIABILITY OF DEFENDANT FOR HIGGINS’ RULE 10b-5 VIOLATIONS:

Even assuming Higgins violated Rule 10b-5 by misrepresenting and omitting to state material facts in the October 11 opinion letter, the defendant says it cannot be liable for those acts, particularly in light of the jury’s finding that no partner in the *890 defendant firm caused the misrepresentations or omissions to be made. We concluded as a matter of law that the defendant should be held liable on the basis of respondeat superior for acts of Higgins committed in the scope of his employment with Coopers & Lybrand, and we framed interrogatories to the jury concerning defendant’s secondary liability under § 20(a) of the Securities Exchange Act, the “controlling persons” provision. The defendant argues that it is entitled to judgment on Count One due to the inapplicability of agency principles to it and the lack of evidence to sustain a § 20(a) violation, and alternatively that there should be a new trial because our charge was erroneous as to these issues.

A. Respondeat Superior.

The Third Circuit held unequivocally in Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880, 884-86 (3d Cir. 1975), on the basis of the congressional intent behind the Securities Exchange Act that “the principles of agency, i. e., respondeat superior, are inappropriate to impose secondary liability in a securities violation case.” Id. at 884. The plaintiff contends that the court undercut this holding in Gould v. American-Hawaiian Steamship Co., 535 F.2d 761 (3d Cir. 1976), by suggesting that under Rochez there can be primary as opposed to secondary liability under respondeat superior. We do not believe that any such distinction exists, and we read Gould as reaffirming this aspect of Rochez,