The opinion of the court was delivered by: SHARP
MORELL E. SHARP, District Judge.
In simplest terms, this case centers around the acquisition of West Tacoma Newsprint Co. by Boise Cascade Corporation in November, 1969. In return for their shares in Newsprint, the stockholders, various publishing companies, received shares of Boise which were listed on the New York Stock Exchange and showed a per share market value at that time of approximately $75.
In 1971 and 1972, Boise was forced to write down its assets for a variety of reasons. The alleged partial effect of these write-downs was a drastic reduction in the price of Boise's shares, to approximately $12.00 per share. In 1972, the Tribune Publishing Co., one of the former shareholders in Newsprint, instituted a civil action alleging various violations of federal and state securities laws by Boise, its accountant, Arthur Andersen & Co., its inside directors and officers and the outside directors. Specifically, plaintiffs charged violations of §§ 12(2) and 17(a) of the Securities Act of 1933, 15 U.S.C.A. §§ 77l(2) and 77q(a); §§ 10(b) and 13(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. §§ 78j(b) and 78m(a) and Rule 10b-5, 17 C.F.R. 240.10b-5; and R.C.W.A. 21.20.010 and 21.20.430. A short time later, similar civil actions were filed by the McClatchy newspapers and the Chronicle Publishing Co. On September 10, 1973, the Judicial Panel on Multidistrict Litigation ordered these three cases, the West Tacoma Newsprint cases, consolidated for pretrial purposes together with a case from the Eastern District of Missouri, Lewin, et al. v. Boise Cascade Corp., et al. Lewin involves a merger of a corporation into Boise at almost the same time Newsprint was acquired and involving the same financial statements of Boise. Most of the claims in Lewin are identical to the claims in the West Tacoma Newsprint cases.
Still another civil action was filed in this district in June, 1974, by the Longview and World Publishing companies against the same corporate and individual defendants. The allegations in this action are the same as in the other West Tacoma Newsprint cases.
In April, 1973, the Court appointed a Special Master to supervise discovery in the West Tacoma Newsprint cases. After the opinion of the Judicial Panel on Multidistrict Litigation in September, 1973, the order of reference was declared to be in full force and effect as to all the cases.
By Order of March 19, 1976, motions by defendants to sever the various cases for trial were denied. The Court granted motions by plaintiffs to consolidate the West Tacoma Newsprint cases for trial but reserved ruling on whether to consolidate the Lewin case until the completion of discovery.
Amended complaints were filed in May and June of 1975 in most of the cases. As of this date, it appears that all counsel have expended over 50,000 lawyer man hours in this litigation and that in excess of 900,000 documents have been produced.
A summary of the relevant allegations of misrepresentation and omission would be inadequate in order to show the true nature of this litigation. Instead, the most relevant portion of the complaint in the Chronicle case, paragraph 21, is set forth in full in the Appendix to this Opinion and Order.
Defendants see the number of plaintiffs as a primary problem in managing the trial. They feel that each plaintiff has a different measure of reliance and that it will be necessary to contain the proof of each plaintiff to that particular plaintiff.
The question of reliance is, of course, a vital one in establishing liability under both the state and federal securities laws. This is particularly true under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b) and S.E.C. Rule 10b-5. An examination of that factor provides some idea of the difficulties facing the trier of facts in this case.
The materiality of an omission has been held to create a presumption of reliance, or causation, in a securities fraud case. See Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972). While reliance may be disproved, the burden placed upon defendants to do so varies according to the context of the transaction. The Ninth Circuit advanced the following rationale for not requiring proof of reliance in an open-market situation:
Materiality circumstantially establishes the reliance of some market traders and hence the inflation in the stock price -- when the purchase is made the causational chain between defendant's conduct and plaintiff's loss is sufficiently established to make out a prima facie case.
Blackie v. Barrack, 524 F.2d 891, 906 (9th Cir. 1976). Thus, if deception affected the market resulting in damage to a plaintiff, the opportunity to rebut presumed causation has been found to be "virtually meaningless." Little, et al. v. First California Company, et al., 532 F.2d 1302, 1304 (9th Cir. 1976). If presumed causation exists with respect to any facet of this complaint, it will be necessary to determine the character of the transaction in order to determine whether and to what extent the presumption may be disproved.
Both misrepresentations and omissions are alleged in this case, and while the two are not mutually exclusive, see Little, et al. v. First California Company, et al., supra, at 1304, the trier of fact may have to analyze each of the allegations in paragraph 21 with respect to each of the parties to determine the character of each transaction.
Other portions of the complaints present complicated concepts that will involve lengthy explanation and documentary evidence.
For example, the complaints allege that Boise failed to make proper provision for discount reserves with respect to its land sales. These reserves would reflect the difference between the interest charged on the unpaid balances on the notes of land purchasers and the then current market rate of interest. The foundation for this will likely require proof that a market rate of interest existed with respect to the land sales in question; the rate or rates charged by Boise; the amount of time that the market rate exceeded the rate actually charged and the amount of interest outstanding at various times. It may also be necessary to present evidence regarding the reasonableness of the rate or rates charged by Boise as well as proof relating to usury laws and state regulations, if any, of land sales and installment purchase contracts.
As another example, plaintiffs claim that Boise chose improper bases for the valuation of assets acquired in corporate acquisitions effected under 26 U.S.C.A. § 334(b)(2). As a result, it is alleged that Boise failed to note that it could be liable for up to $5,000,000 in federal income taxes. One of the issues here would be whether Boise properly accrued potential judgments resulting from litigation with the Internal Revenue Service before a United States District Court and the United States Tax Court. From the testimony produced at a hearing before the Court, it appears the potential tax liabilities may not have been accrued at one time. Rather, a portion of each liability may have been accrued during various stages of the litigations in question in the form of an unpaid tax obligation. It may have been reasonable and proper to determine at the outset of the litigation that it would be likely that no tax would be found owing, but to accrue a portion after an adverse judgment and to accrue the remainder after an unsuccessful appeal. Or, it may be that the entire amount was accrued in increments at various times throughout the litigation.
Other portions of the complaints which present unique and difficult accounting concepts are the following:
Boise's quarterly financial statements for the first three quarters of each year, including 1969, failed to recognize ratably and proportionately various adjustments made in the fourth quarter and therefore overstated net income for the first three quarters accordingly. The effect of said fourth quarter adjustments was concealed by the device of pooling the financial results of profitable companies acquired by merger during the year.
In addition to the complex accounting and proof questions, there is the very real possibility of substantial prejudice to the defendants due to evidence that Boise settled numerous civil actions brought by the State of California and others alleging improper land development and marketing practices. It is alleged that Boise knew of these practices and their nature and that it failed to maintain a reserve fund to satisfy potential judgments and ...