
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                                [NOT FOR PUBLICATION]                            United States Court of Appeals                                For the First Circuit                                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-
