## Facts

- Investors bought limited partnership interests in oil-drilling programs promoted by Westland Minerals Corporation (WMC), which marketed the interests using promised tax benefits.
- Coopers & Lybrand (C&L) was retained to prepare tax opinion letters to support sales of the partnership interests.
- C&L employee Herman Higgins drafted opinion letters addressing expected tax consequences; the letters were issued on firm letterhead and signed by a partner.
- Plaintiffs alleged the opinion letters materially misstated and omitted facts about the tax benefits and the transaction’s structure, including a key nonrecourse financing arrangement tied to the claimed deductions.
- WMC’s underlying venture involved criminal fraud; many wells were not drilled and investor funds were diverted.
- A class was certified for purchasers after July 22, 1971, and the case proceeded to a bifurcated jury trial on class-wide liability issues first, with individual issues (including reliance and damages) reserved.
- The jury found the October 11, 1971 opinion letter contained material misrepresentations and omissions and that Higgins acted recklessly or with intent to defraud.
- The jury also found C&L controlled Higgins for purposes of Exchange Act § 20(a) and failed to supervise his work adequately.
- The special verdict included answers on negligence and foreseeability that produced ambiguity or inconsistency when compared with the fraud-based findings.

## Issues

1. Whether the special verdict required judgment for C&L on all counts or instead supported liability for federal securities fraud, controlling-person liability, and common law fraud.
2. Whether the jury’s foreseeability finding on negligence required judgment for C&L on the negligence claim and affected the fraud-based claims.
3. Whether the court should grant JNOV or a new trial in light of asserted conflicts or ambiguities in the special interrogatories.

## Decision

- The court denied C&L’s post-trial motions seeking judgment in its favor on all counts, JNOV on the federal securities and fraud claims, or a new trial.
- The court denied plaintiffs’ motion for JNOV on a special-verdict answer.
- The court granted plaintiffs’ motion to vacate the judgment on Count III (negligence), concluding the negligence verdict could not stand as rendered.
- The court treated the jury’s findings as establishing, for the liability phase, that the October 11 letter was materially false or misleading, made with sufficient scienter for Rule 10b-5 and common law fraud, and attributable to C&L under § 20(a) based on control and inadequate supervision.

## Legal Principles

- A materially misleading opinion letter used to market securities can support liability under Exchange Act § 10(b) and Rule 10b-5 where the preparer acted with intent to defraud or recklessness.
- An entity may be liable as a controlling person under Exchange Act § 20(a) when it controlled the primary violator and failed adequately to supervise the conduct giving rise to the violation.
- Special-verdict findings relevant to negligence (including foreseeability) do not automatically defeat fraud-based liability where the jury separately found material misrepresentations or omissions and scienter sufficient for securities fraud and common law fraud.
- A court may vacate a negligence judgment where the special interrogatories, as framed and answered, yield a legally flawed or inconsistent result when compared with the record and other findings.

## Conclusion

After a class-phase special verdict, the court preserved the jury’s liability determinations on federal securities fraud, § 20(a) controlling-person liability, and common law fraud arising from a materially misleading tax opinion letter, while vacating the negligence judgment due to problems in the negligence/foreseeability findings and denying the remaining post-trial motions.


Sharp v. Coopers & Lybrand, 457 F. Supp. 879 (E.D. Pa. 1978)