Westcap Enterprises v. City Colleges of Chicago (In Re Westcap Enterprises)

REVISED 10/17/00

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 99-20514
_____________________

In The Matter Of: WESTCAP ENTERPRISES; WESTCAP CORP.,

Debtors.

-----------------------------

WESTCAP ENTERPRISES; WESTCAP CORPORATION,

Appellants-Cross-Appellees,

versus

CITY COLLEGES OF CHICAGO; BOARD OF TRUSTEES,
OF COMMUNITY COLLEGE DISTRICT NO. 508 COUNTY
OF COOK STATE OF ILLINOIS,

Appellees-Cross-Appellants.

------------------------------

In The Matter Of: WESTCAP ENTERPRISES, INC.,

Debtor,

THE WESTCAP CORP.; WESTCAP ENTERPRISES, INC.,

Appellants.

------------------------------

In The Matter Of: WESTCAP ENTERPRISES, INC.,

Debtor,

WESTCAP CORP.,

Appellant-Cross-Appellee,
 versus

BOARD OF TRUSTEES OF COMMUNITY COLLEGE
DISTRICT NO. 508 COUNTY OF COOK STATE
OF ILLINOIS,

Appellee-Cross-Appellant.

_________________________________________________________________

Appeals from the United States District Court for the
Southern District of Texas
_________________________________________________________________
October 13, 2000

Before JOLLY and DeMOSS, Circuit Judges, and DAVID D. DOWD,*
District Judge.

E. GRADY JOLLY, Circuit Judge:

City Colleges of Chicago got stung badly in the crash of the

bond market in the fall of 1993-–and, in particular, the crash of

the mortgage-backed bond market. It was indeed a risky investment

for City Colleges. City Colleges lost about half its entire

portfolio. City Colleges ultimately sued the seller of the bonds,

Westcap, which had been forced into bankruptcy. After a bench

trial, the bankruptcy judge entered judgment in favor of City

Colleges against Westcap, and the district court ultimately

affirmed a judgment of more than $51 million. On appeal, the

question is whether, under Texas securities law, Westcap made

material misrepresentations or omissions relating to interest rate

*
District Judge of the Northern District of Ohio, sitting by
designation.

2
movements, the high risk of the investment and the suitability of

the investment for City Colleges’ portfolio. We conclude that the

alleged misrepresentations and omissions were not material to the

decision of the investor because the record shows that City

Colleges fully understood the nature of the market, the risk of the

investment, and its proportion of the investment to its portfolio.

We therefore reverse and remand for entry of judgment in favor of

Westcap.

I

A

City Colleges of Chicago is a not-for-profit entity consisting

of seven accredited community colleges in the city of Chicago. The

majority of its funding is provided by local property taxes and

state grants. A seven-member board of trustees, all appointed by

the mayor of Chicago, oversees the operation of the colleges. The

Westcap Corporation is a Delaware-based holding company with its

principal place of business in Houston, Texas. Westcap Enterprises

is a wholly-owned subsidiary of the Westcap Corporation. Westcap

Enterprises, along with several other similar wholly-owned

subsidiary entities organized as a single operating entity, was in

the business of selling financial securities. Principally, these

sales involved federal government-agency backed securities made to

institutional investors.

3
 B

Relative to this appeal, Westcap employed two individuals,

Craig Leibold and Jeffrey Oetting, who solicited the investment

business of City Colleges through its long-term treasurer, Dr.

Phillip Luhmann. During 1993, in roughly three periods of time,

Dr. Luhmann purchased from Westcap collateralized mortgage

obligations (“CMOs”), a particular type of mortgage-backed security

(“MBSs”), amounting into the tens of millions of dollars. The

first set of purchases, in the spring and summer, proved

profitable, with Luhmann selling his purchases quickly after

buying.1 The last block of purchases, from September through

November, turned disastrous, and is the only one at issue in this

appeal.2 This last group, with a combined purchase price of

approximately $100 million , plummeted by approximately $70 million

1
On March 31, 1993, Dr. Luhmann purchased his first principal-
only bond (a “PO”) from Westcap. He sold the security twelve days
later for a profit. He bought another PO on April 30, 1993, and
sold it seven days later, again at a profit. (Finding of Fact ¶
58.)
Between July 13, 1993 and September 2, 1993, Dr. Luhmann
purchased in excess of $100 million in CMOs from Westcap, all of
which he sold within weeks of purchase. (¶¶ 59-62.)
2
Although Dr. Luhmann had purchased tens of millions in CMOs
from Westcap prior to September, he had sold these bonds for a
profit in every instance prior to September. The September-
November purchases are the only transactions resulting in an
“injury” to City Colleges. Because the bankruptcy court concluded
that by November, Dr. Luhmann should have known better than to
continue these purchases, only the September and October purchases
are at issue.

4
in value when interest rates spiked dramatically in the winter of

1993-94. After the market recovered somewhat, City Colleges

elected to sell the securities and suffered a loss in excess of $50

million. It is this loss that precipitated City Colleges’ lawsuit.

That City Colleges suffered severe losses is not in dispute. Nor

is there any serious dispute about the volatile nature of the bonds

in which Luhmann extensively invested the City Colleges’ investment

portfolio.

1

Because the volatility of these bonds is at the center of this

case, we describe the material characteristics of these financial

instruments. The parties presented the testimony of several

experts, as well as the testimony of the principal protagonists, as

to the nature of these bonds.3 We note only several salient

features. First, the CMOs all involved government agency backing,

e.g., Fannie Mae/Freddie Mac/Ginnie Mae, and, thus, for practical

3
The bankruptcy court described these securities at great
length. (¶¶ 16-36.) The district court also described these
bonds. See also Banca Cremi, S.A. v. Alex, Brown & Sons, Inc., 132
F.3d 1017, 1022-23 (4th Cir. 1997); Frank v. Bear Stearns & Co.,
2000 WL 19191, *1, 11 S.W.3d 380 (Tex.App.-Houston [14th dist.], no
writ) (“It is undisputed that these securities were extremely
volatile and not suitable for less sophisticated investors.”). See
also id. at *5 n.1 (“In order to make CMOs more attractive to
investors, most of the risk for an entire pool of mortgages was
concentrated in the lowest class of securities . . . . [T]hese
securities were so undesirable that they were known in the trade as
‘toxic waste’ or ‘waste products.’”).

5
purposes, no principal invested was ever at risk. If held for the

duration of the bond term, a purchaser is sure to recoup his

investment principal. Second, the bonds were sold in tranches,

with each tranche carrying a particular payment stream of interest

and/or principal over time. Some CMOs were “interest onlys,” or

“IOs,” while others were “principal onlys,” or “POs”; the bonds at

issue here are the latter, or, to be specific, “support class POs.”

As stated by the bankruptcy court, “[a] support-class bond is the

least stable of the three classes of bond that make up the FNMA

1993-205 and FNMA 1993-237 securities. The support-class tranche

receives payments of principal only after all other classes . . .

have received their scheduled payments.” (FoF ¶ 23.) Third, CMOs

are very interest-rate sensitive; specifically, the given yield of

a particular tranche is dependent on how quickly homeowners

refinance mortgages because of an interest rate change. The

particular rate at which refinancings are being done at a given

period of time is measured as a “PSA” number or speed; the higher

the number, the faster that repayments are occurring and vice

versa.4 Higher PSAs mean quicker repayments of the bonds. If PSA

speeds increase over initial estimates, the bonds generate higher

yields. This increased yield increases the market value of the

bond. The dynamic also works in reverse. Fourth, these yields

4
“PSA” stands for “Public Securities Association.”

6
could vary quite significantly with even small changes in interest

rates; for instance, an increase in interest rates of even one-half

a percent would decrease the rate of mortgage refinancings,

decreasing the PSA number, and thus stretching out over a longer

period of time a particular tranche’s receipt of principal and/or

interest payments, perhaps dramatically, and in turn reducing its

yield and market price. Fifth, the volatility of the price of a

particular tranche corresponded roughly to its seniority. That is,

a more senior tranche, such as an “A” tranche, had a superior

entitlement to the cash flow and consequently was less volatile.

Conversely, a “G” tranche typically received no payments until all

preceding letter tranches had been paid.5 On the upside, a

so-called “support-class PO,” the last tranche in a series, might

have very significant yields with increased refinancing rates as it

received the excess cash flow in months or years well ahead of

those projected. The tranches on which City Colleges lost money

were all “G” or “H” tranches of two particular bond series,

purchased by Dr. Luhmann in eleven separate transactions valued

from $708,000 to almost $24.5 million. In total, from September 9

5
Therefore, the impact of even small increases in interest
rates creating slowdowns in PSA rates was felt most dramatically by
the most junior tranches. Examining one of the bonds at issue,
FNMA 1993-205H, Mr. Weiner, one of the plaintiff’s experts, stated,
“[s]o this bond is really a bet on faster repayments. It’s a bet
on falling interest rates . . . .”

7
through November 3, 1993, City Colleges paid $100.78 million for

bonds with a face value of $120.7 million.

2

We now turn to background details. As we have said, the

individual solely responsible for City Colleges’ investment

portfolio was Dr. Philip Luhmann, whose doctorate was in

education; indeed, his studies focused on school finance. Dr.

Luhmann was the long-time treasurer for City Colleges, appointed in

1966. Until this incident, which cost him his job, Dr. Luhmann had

received exemplary reviews. His performance had been described as

“excellent,” and he had been characterized as “cautious to a fault”

and “the epitome of financial conservatism.” Perhaps based on this

reputation, the City Colleges’ board of trustees appears to have

become complacent in its oversight duties of him and City Colleges’

investments.

These oversight failures occurred at a time when Dr. Luhmann

was shifting his investment strategy. In 1987, he began investing

in MBSs. In 1991, he began to purchase CMOs. This shift was not

initiated by Westcap; Dr. Luhmann did not make his first purchases

of CMOs from Westcap until the spring of 1993 and he continued to

8
purchase other CMO products from other brokers during the entire

time in which he purchased from Westcap.6

We also note the City Colleges’ written investment policy,

which was furnished to Westcap. That investment policy, on paper,

appeared a conservative one.7 The policy allowed purchases of

bonds issued by federal government agencies. Furthermore, under

this policy, it was the duty of the Treasurer to “assure that all

purchased securities will mature or be redeemable by such time as

6
Indeed, the bankruptcy court concluded that “Dr. Luhmann
purchased POs from brokers other than Westcap for six months before
he purchased anything from Westcap. His PO purchases during those
six months totaled over $50 million.” (¶ 135.)
7
As provided to Westcap by at least April 21, 1993, as part of
an audited financial statement, the policy stated:

City Colleges is authorized to invest in securities which
are guaranteed by the full faith and credit of the United
States of America as to principal and interest,
repurchase agreements, certificates of deposit,
commercial paper of certain companies, the Illinois
Public Treasurer’s Investment Pool and certain other
investments as permitted by Chapter 85, Section 901, et
seq. of the Illinois Revised Statutes, as
amended . . . . City Colleges intends to hold its
investments until they mature.

The Investment Policy further provided:

The Treasurer may invest restricted and unrestricted
funds . . . in the following types of securities,
provided that such securities shall mature or be
redeemable on a date or dates prior to the time when, in
the judgment of the Treasurer, the funds so invested will
be required for expenditure by the Board.

(FoF, ¶ 99.)

9
their proceeds are required for reasonably anticipated expenditure

purposes.”

3

We next consider Dr. Luhmann’s interactions with Westcap’s

salesmen, Leibold and Oetting. Underlying the bankruptcy court’s

legal conclusions was its finding that Leibold and Oetting sold

CMOs to Dr. Luhmann, who knew very little about these securities

and lacked the means by which to analyze the brokers’

representations. The bankruptcy court found Dr. Luhmann to be

financially unsophisticated, at least with respect to the bonds in

question. Although his doctorate in education focused on school

finance, the bankruptcy court concluded that the degree provided no

training in investments. Finally, although City Colleges had

provided Dr. Luhmann with a sophisticated financial analytical tool

in the form of a “Bloomberg” system, Dr. Luhmann did not know how

to use its more sophisticated features. The bankruptcy court did

conclude, however, that “[b]y the time Dr. Luhmann made his first

purchase from Westcap he had certain generic information available

to him about POs. He knew and understood that an increase in

mortgage interest rates would have some negative effect on the

present value of a PO.”

The bankruptcy court also made several findings with respect

to Westcap’s salesmen’s actions and knowledge. The court found

10
that Leibold and Oetting never presented anything in writing to Dr.

Luhmann about the characteristics of these CMOs; that they never

fully described to Dr. Luhmann the risks of the securities; that

they told Dr. Luhmann that he could purchase and probably sell for

a profit before actually having to pay his purchase; that they knew

Dr. Luhmann was not a buy-and-hold investor; that they represented

an interest rate spike as merely a buying opportunity; and that

they talked Dr. Luhmann into buying despite the fact that he had

voiced his concern that he thought he was buying too much. The

bankruptcy court also concluded that “Leibold and Oetting knew or

should have known that the securities being sold to City Colleges

between September 9, 1993 and November 3, 1993 comprised all or

almost all of City Colleges’ entire investment portfolio . . . .”

Moreover, the bankruptcy court found

at September 27-30, 1993 it had to be clear to Leibold,
Oetting and Westcap, if not prior thereto, that the
magnitude of POs being acquired by City Colleges was far
in excess of any rational amount; especially in light of
the volatility (in terms of the present or market value),
the desire of Dr. Luhmann to sell the POs he had
committed City Colleges to acquire and the magnitude of
the amount Leibold was convincing Dr. Luhmann to acquire
on and after September 30, 1993.

The bankruptcy court also stated:

This Court specifically declines to find that at
September 27-30, 1993, Leibold, Oetting or Westcap
believed that Dr. [Luhmann] knew what he was doing in
being talked out of selling the POs he already had and
into acquiring substantially more of them (i.e., up to
$100 million in cost). This Court finds to the contrary.

11
 In this Court’s view, it is not credible that Leibold,
Oetting or Westcap could have believed September 27, 1993
that Dr. Luhmann was in fact a sophisticated investor
(with respect to POs) at the time he was talked into
retaining the POs he had and in acquiring those POs that
he did acquire between September 30, 1993 and November 3,
1993.8

Finally, the bankruptcy court concluded:

Leibold knew by [approximately September 27-30, 1993],
from his prior dealings with Dr. Luhmann, that he was not

8
We can find no evidence that supports a conclusion that Dr.
Luhmann did not know and understand what he was doing. Indeed, as
we note later in this opinion, the evidence is to the contrary.
Whether he was appropriately sensitive to the consequences of what
he was doing is another matter. Any conclusions in this respect,
however, are largely speculative and grounded in post-conduct
evaluation. We make special note that the testimony of Mark
Salter, Westcap’s head trader, does not support the bankruptcy
court’s characterization. Mr. Salter testified that after the
sales on November 1 and 3 he became concerned and “wasn’t
comfortable selling him any more PO’s. . . . I wasn’t comfortable
that this guy knew what he was doing any more.” (10/7, pp. 68-69.)
Thus, it was not until after Luhmann’s purchases of the POs at
issue in this case that a principal at Westcap came to the
conclusion that Luhmann might not be as sophisticated as he had
once appeared to be.
We acknowledge that Westcap’s compliance officer, Thomas
Anderson, had raised the City Colleges’ account in a management
meeting as the “account of the week” in early August of 1993. (FoF
¶ 93.) This meeting, however, did not question the suitability of
CMOs for City Colleges or the ability of Dr. Luhmann to understand
his investments. Instead, Anderson’s concern focused on whether
the “markups” charged to City Colleges were appropriate in light of
the heavy activity in the account. There is no evidence that the
commissions charged by Westcap were inappropriate. Moreover, the
testimony of Mr. Anderson is unequivocal that Westcap had no duty
under government or security dealer association rules to determine
suitability for institutions with substantial portfolios, such as
City Colleges. See testimony of Mark Salter, 10/7, pp. 29, 30, 31.
Moreover, sales of these type of government-backed securities were
exempt from otherwise applicable suitability rules. Id. (10/3,
vol. I, pp. 58-59.)

12
 exercising any independent judgment about purchasing
these POs and was relying solely on Leibold’s
recommendations. . . . These circumstances, as well as
Dr. Luhmann’s obvious trust and confidence in Leibold,
which trust and confidence had been created by the
circumstances of their prior dealings, had basically
seduced Dr. Luhmann. . . . Leibold knew when he told Dr.
Luhmann [that he could purchase POs and still sell for
a profit before actually having to purchase the
securities] that Dr. Luhmann would rely on his advice (or
was highly likely to) and that Dr. Luhmann did not have
any means to determine what interest rates might do and
was not exercising any independent judgment at this point
regarding these investments.

The district court affirmed these findings, stating “[w]hat Luhmann

did not know was the magnitude of the risk.”

In sum, on the findings stated above, the bankruptcy court

concluded that Leibold and Oetting knowingly sold Dr. Luhmann

securities contrary to City Colleges’ investment policy with

respect to the type of securities sold, and with respect to the

magnitude of purchases. Because the risks were great, and the

share of the portfolio was disproportionate, the court determined

that these investments were not suitable investments for City

Colleges and that omitting to warn City Colleges in this respect

was material and caused the damages at issue. Therefore, the sales

pitch that a profit could possibly be made from additional

purchases, or by holding onto bonds already purchased, was made

misleading by the omission by Westcap that the investment was

highly dangerous and the size of the investment disproportionate to

City Colleges’ portfolio–-and hence was an unsuitable investment.

13
Specifically, the bankruptcy court concluded that “[b]ut for

Leibold’s sales tactics at or shortly before September 30, 1993,

Dr. Luhmann would have sold out the POs in City Colleges’ portfolio

that he bought from Westcap and would not have acquired those he

bought on and after September 30, 1993. City Colleges’ loss would

have been $2,000,000 instead of approximately $50,000,000.”

4

Finally, because we do not think that the alleged

misrepresentations and omissions here, as well as the financial

losses, can be understood or analyzed without reference to the

market context, we note that it is undisputed in the record that

the mortgage-backed securities market experienced a fluctuation of

historical proportion in this period. From prepayments in the

summer of 1993 “at probably the fastest pace in history,”9

prepayments became minimal due to a more than a doubling of

interest rates in a six-month period. Without contradiction,

Westcap’s expert characterized these interest rates as “an

exceptionally large movement in a short period of time. Movements

of this magnitude in interest rates over that short of a period is

a very rare and unusual event.” (10/9, vol. I, p. 91.) The

evidence at trial showed that refinancings as a percentage of all

mortgage originations fell from seventy percent of the total

9
(Testimony of Mark Salter, 10/7, p. 49.)

14
originations in October 1993 to approximately ten percent of

originations in October 1994.

II

Now we backtrack a bit to say a word about the procedural

history of the case. Sometime after these events we have just

related, Westcap sought refuge in bankruptcy. City Colleges filed

proofs of claims against Westcap after Westcap filed bankruptcy in

April of 1996. These claims were tried before the bankruptcy court

in a nine-day bench trial, after which the bankruptcy court found

Westcap liable and awarded City Colleges damages. The bankruptcy

court entered an extensive memorandum opinion, in which it made

lengthy findings of fact and conclusions of law, some of which we

have just discussed. Upon appeal, the district court affirmed the

determination of liability but reversed and remanded on the method

of calculation used to fix City Colleges’ damages. Upon remand,

the bankruptcy court recalculated damages and awarded City Colleges

post-petition interest, a determination subsequently affirmed in

whole by the district court. This appeal followed.

III

We review the bankruptcy court’s findings of fact under a

“clearly erroneous” standard. See Fed. R. Civ. P. 52(a); In re

United States Abatement Corp., 79 F.3d 393, 397-98 (5th Cir. 1996).

“If a finding is not supported by substantial evidence, it will be

15
found to be clearly erroneous.” WRIGHT & MILLER, 9A FEDERAL PRACTICE &

PROCEDURE, § 2585, p. 576 (1995). When the district court has

affirmed the bankruptcy court’s findings, the review for clear

error is strict. See Traina v. Whitney Nat. Bank, 109 F.3d 244,

246 (5th Cir. 1997). We review mixed questions of law and fact, as

well as pure questions of law, de novo. See Bass v. Denney (In re

Bass), 171 F.3d 1016, 1021 (5th Cir. 1999). Whether a statement or

omission concerns a material fact is a mixed question of law and

fact, and is thus subject to de novo review. See TSC Indus., Inc.

v. Northway, Inc., 426 U.S. 438, 450 (1976); In re Bass, 171 F.3d

at 1021.

IV

The primary issue on appeal is a mixed question of fact and

law: whether Westcap’s salesmen, Leibold and Oetting, made

material misrepresentations or omissions to Dr. Luhmann in the

course of selling City Colleges a highly volatile security. We

examine the facts here and apply Texas law, as the district court

upheld liability here on the basis of the bankruptcy court’s

finding of a violation of article 581-33 of the Texas Securities

16
Act.10 See Tex. Rev. Civ. Stat. art. 581-33(A) (Vernon’s Supp.

2000).

V

The Texas act, in relevant part, provides:

A person who offers or sells a security . . . by means of
an untrue statement of a material fact or an omission to
state a material fact necessary to make the statement
made, in the light of the circumstances under which they
are made, not misleading, is liable to the person buying

10
City Colleges brought claims under federal securities law,
Texas and Illinois securities law, and Texas common law principles
of negligence, fraud, misrepresentation, and deceit. The
bankruptcy court did not apply the Illinois Act, concluding that
the Texas Act and the Illinois Act are effectively the same and the
result would be the same under either Act as applied. The
bankruptcy court rejected City Colleges’ common law claims on the
basis that Luhmann’s reliance was not legally justifiable under the
circumstances. Likewise, the bankruptcy court rejected City
Colleges’ claims under federal securities law because City Colleges
failed to meet the requirements for reasonable reliance and due
diligence required under federal security law, a requirement that
does not exist under the Texas statute. Specifically, the
bankruptcy court concluded that Dr. Luhmann knew of some risk and
thus was on notice that he should determine the extent of his
exposure with respect to these investments. These rulings have not
been appealed and are not before this court.
The bankruptcy court, however, concluded that Westcap was
liable under common law principles of negligence, based on an
application of Restatement (Second) of Torts § 551(2)(c). Even if
this Restatement section is applicable in Texas, a point of dispute
we need not reach, see, e.g., SmithKline Beecham Corp. v. Doe, 903
S.W.2d 347, 352 (Tex. 1995), that provision requires disclosure of
facts to another party to a business transaction “if he knows that
the other is . . . under a mistake as to them.” For the reasons
stated in this opinion, the record does not show that Luhmann was
under a mistake as to the “facts basic to the transaction” or that
Westcap’s representatives knew that Luhmann was mistaken as to
these facts. Therefore, we reject negligence as a basis for
liability for essentially the same reasons that we reverse
liability based on the Texas Securities Act.

17
 the security from him . . . . However, a person is not
liable if he sustains the burden of proof that either (a)
the buyer knew of the untruth or omission or (b) he (the
offeror or seller) did not know, and in the exercise of
reasonable care could not have known, of the untruth or
omission.11

The Texas Securities Act does not require that the buyer prove his

own due diligence. See Lutheran Bhd. v. Kidder Peabody & Co., 829

S.W.2d 300, 307 (Tex.App.), judgment set aside on other grounds,

840 S.W.2d 384 (Tex. 1992). Nor does the Act require a buyer’s

reliance on the misrepresentations or omissions. See Granader v.

McBee, 23 F.3d 120, 123 (5th Cir. 1994). Under Texas law, a

statement or omission is material, “if there was an appreciable

likelihood that it could have significantly affected the investment

decisions of a reasonable investor by substantially altering the

information available to him in deciding whether to invest.” Beebe

v. Compaq Computer Corp., 940 S.W.2d 304, 306 (Tex.App.–Hous. [14th

Dist.] 1997, no writ). See also Lutheran Bhd., 829 S.W.2d at 307

11
We note that the Act speaks exclusively to liability for
sales of a security. See, e.g., Pitman v. Lightfoot, 937 S.W.2d
496, 531 (Tex. App.–San Antonio 1996) (“[T]he plaintiff must show
the untrue statements were made before the sale occurred.”);
Nicholas v. Crocker, 687 S.W.2d at 368; Calpetco 1981 v. Marshall
Exploration, Inc., 989 F.2d 1408, 1418 (5th Cir. 1993). Here, the
large measure of damages reflected in part a finding that but for
Westcap’s misrepresentations and omissions, Luhmann would have sold
his September purchases in time to avoid major market losses.
Westcap argues forcefully that there can be no violation of the
Texas statute for Luhmann’s decision to retain securities he had
already purchased. We need not decide this issue, however, as we
reverse on other grounds.

18
(“To be material, a misrepresentation or omission must have

influenced the buyer’s actions to the extent that the buyer would

not have entered into the transaction had the representation not

been made.”). Thus, in considering whether an expression of

opinion can be actionable, Texas courts look to the statement’s

specificity and the relative knowledge of the speaker and the

recipient. See Paull v. Capital Resource Management, Inc., 987

S.W.2d 214, 218 (Tex.App.–-Austin 1999, pet. denied). Also,

“[b]ecause the Texas Securities Act is so similar to the federal

Securities Exchange Act, Texas courts look to decisions of the

federal courts to aid in the interpretation of the Texas Act.”

Grotjohn Precise Connexiones Int’l v. JEM Fin., Inc., 12 S.W.3d

859, 868 (Tex.App.–Texarkana)(no writ)(citing Searsy v. Commercial

Trading Corp., 560 S.W.2d 637 (Tex. 1977)).12 The United States

Supreme Court has defined “material” as follows: “[T]here must be

a substantial likelihood that the disclosure of the omitted fact

would have been viewed by the reasonable investor as having

significantly altered the ‘total mix’ of information made

available.” TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449

(1976). See also Birdwell v. State of Texas, 804 S.W.2d 900, 903

12
See Beebe, 940 S.W.2d at 306 (“While cases dealing with the
federal securities laws are not dispositive concerning our
interpretation of the Texas Securities Act, they may provide
persuasive guidance.”).

19
& n.4 (Tex. Crim. App.)(en banc)(“[A]ll of the generally accepted

[federal] formulations [of materiality] concentrate on the

importance of the misrepresentation or nondisclosure as they relate

to the reasonable investor’s decision whether to invest or

act.”)(citing cases from Ninth, Fifth, Second, and Tenth Circuits).

Our opinion today also is informed by the following observation of

the Texas Supreme Court:

An actionable representation is one concerning a material
fact; a pure expression of opinion will not support an
action for fraud. In particular, an expression of
opinion about monetary value is not a representation of
fact which gives rise to an action for fraud. Whether
a statement is an actionable statement of "fact" or
merely one of "opinion" often depends on the
circumstances in which a statement is made. Among the
relevant circumstances are the statement's specificity,
the speaker's knowledge, the comparative levels of the
speaker's and the hearer's knowledge, and whether the
statement relates to the present or the future.

Transp. Ins. Co. v. Faircloth, 898 S.W.2d 269, 276 (Tex. 1995)

(involving common law fraud claim).

VI

We turn now to apply these principles to the facts of this

case. We can affirm the conclusion that Westcap is liable to City

Colleges if the evidence supports the legal conclusion that

Westcap’s salesmen made either material misrepresentations or

material omissions that caused damage here to City Colleges. We

20
first address the alleged affirmative misrepresentations as a basis

for liability.

A

Although City Colleges argues broadly that Leibold and Oetting

engaged in affirmative misrepresentations from the beginning of

their relationship with Dr. Luhmann, City Colleges and the

bankruptcy court focused only on the September-November 1993 time

period. This is true because the injury alleged by City Colleges

resulted only from these transactions. City Colleges points to a

statement by Leibold to Luhmann on or about September 27-30, 1993:

Leibold said that Luhmann should not sell the securities Luhmann

already held and that he could even buy more and still make a

profit. Particularly, City Colleges defines this statement, in the

context of other statements made, as a misrepresentation that

interest rates would go down and that Luhmann could later sell the

securities he held for a profit. Specifically, City Colleges

argues: “Westcap was found liable because it, inter alia, (i)

affirmatively misrepresented that interest rates would go down, and

thus that City Colleges could sell the disputed securities for a

profit, and (ii) omitted to disclose the degree of risk associated

with the POs if interest rates would rise.”13

13
There is no evidence in the record that in the September
transactions, Westcap’s salesmen represented to Dr. Luhmann
specifically that interest rates would go down. In fact, the

21
 This alleged misrepresentation also relates to the bankruptcy

court’s findings that Westcap representatives told Dr. Luhmann that

he could purchase and sell for a profit before actually having to

pay for his purchase; that an interest rate spike was merely a

buying opportunity; and that they thus talked Dr. Luhmann into

buying despite the fact that he had voiced his concern that he

thought he was buying too much.14

City Colleges’ basic argument admits that the only

misrepresentations made here are predicated upon an alleged

representation about the movement of interest rates. Leibold’s

statements may be high-pressure sales tactics, but they do not

amount to material misrepresentations. Leibold certainly did not

represent that he had special knowledge as to the movement of

bankruptcy court explicitly stated that “[i]t should be pointed out
that Liebold, in making his recommendation, did not affirmatively
misrepresent present or past facts . . . .” (RE 256.) Interest
rates, however, would have to fall in order for City Colleges to
make a profit, which was suggested by Westcap’s salesmen. Because
this prediction, standing alone, cannot form the basis of
liability, the bankruptcy court therefore concluded that “the
condition of the market and the direction of the market was not
open ‘equally’ to Dr. Luhmann.” (RE 256.) As we discuss, that
finding has no support in the record. Indeed, as we discuss, the
evidence is to the contrary.
14
Luhmann testified that in September 1993, he told Leibold
that he did not want to purchase more securities, that he thought
he had bought too much, but that Leibold nevertheless talked him
into buying more by pointing out past profits and asking if Luhmann
could afford to pass up the possibility of future profits. (11/12,
p. 59.)

22
interest rates. Indeed, he did not imply it. But, whatever the

case, Luhmann reasonably can be expected to have known that no one

can predict such movement with any degree of certainty, and that

expressions in this respect are only opinions.15 Moreover, Luhmann

admitted that Leibold made no promises to him about his ability to

profit.16 Luhmann’s testimony supports only one conclusion:

15
Luhmann’s testimony indicated that Leibold’s statements about
the market were not unique and were not Luhmann’s only source of
information. Luhmann testified that he relied on the predictions
of another broker, a Mr. Herring from Prudential, for his views on
the movement of interest rates. (11/2, vol. II., pp. 51-52.)
Likewise, the bankruptcy court noted that “[i]n the Fall of 1993,
Prudential also gave Dr. Luhmann its opinion that mortgage rates
would go down again.” (Opinion, RE 233.) Thus, the record does
not even support that Leibold’s views on interest rates were
determinative in Luhmann’s decisionmaking.
16
We note the following line of questioning:

Q. Now, Mr. Leibold when he made comments to you about
the likelihood that you could sell these bonds
before the settlement date didn’t make any promise
to you that that would happen, did he?
A. [Luhmann] No.
Q. And he didn’t make any assurance to you that that
would happen did he?
A. No.
Q. And he didn’t quantify how likely he thought it
was, did he?
A. No.
Q. And he didn’t give you any explanation of why he
thought that was likely?
A. No.
Q. Did you ask him any questions about what the basis
for his belief that you could get out of these
before the settlement date at a profit was?
A. No, it was going on past experience.
Q. Did you ask him how certain he was that your
experience in these bonds would be the same as they

23
Luhmann knew Leibold’s expression of opinion or prediction was

based on unpredictable interest rate changes, or, in other words,

was just a best guess. Thus, the very basis of the alleged

misrepresentation is simply a nonactionable opinion upon which no

liability can rest. See, e.g., Krim v. BancTexas Group, Inc., 989

F.2d 1435, 1446 (5th Cir. 1993); Raab v. General Physics Corp., 4

F.3d 286, 290 (4th Cir. 1993) (“No reasonable investor would rely

[on ‘loose prediction[s]’ of growth]. . . . ‘[P]rojections of

future performance not worded as guarantees are generally not

actionable under the federal securities laws’”)(citation omitted.)17

were in the past?
A. No.
Q. You understood, did you not, that market conditions
would determine whether you could get out of these
bonds before the settlement date at a profit?
A. Yes.
Q. And those market conditions included what was going
to happen with the rate of interest?
A. Yes.
Q. And it was going to depend somewhat on what
happened to mortgage payments and how quickly they
were made.
A. Yes.

(11/12, vol. I, pp. 79-80.)
17
Some of the bankruptcy court’s conclusions, moreover, seem
contrary to any conclusion that representations about the movement
of interest rates could serve as a material misrepresentation. For
instance, the court stated: “[T]his Court concludes that since Dr.
Luhmann was aware that mortgage interest rates might or might not
decline in the near term, and that an increase in mortgage interest
rates would have a negative impact on the present value of the POs,
that he was under a duty to determine the extent of the risk of a
potential increase in mortgage interest rates prior to acquiring

24
 Therefore, because Luhmann knew that no one could reliably

predict the movement of the relevant interest rates, we must

conclude that Westcap made no material affirmative

misrepresentation to Dr. Luhmann with respect to the sale of these

securities.

B

Given this conclusion, liability must rise or fall on the

finding of material omissions regarding the high-risk nature of the

purchased securities, as well as omissions with respect to the

relative size of Luhmann’s investment in these securities. The

bankruptcy court referred to this omission as one of “suitability,”

that is, that Westcap’s salesmen knew that the risk and size of

City Colleges’ investment in these securities was not suitable for

the size and purpose of the City Colleges’ portfolio. Because

Leibold and Oetting were fully aware of this “unsuitability,” their

failure to warn Luhmann of the extraordinarily high risk of

these securities.” (Opinion, RE 247-48.) A finding that he was
aware that mortgage rates might move in either direction undercuts
the materiality of any alleged misrepresentation.
Additionally, the bankruptcy court concluded: “Apparently Dr.
Luhmann never considered that the downward spiral of mortgage
interest rates that City Colleges had benefitted from (in buying
POs) during the period November 1992 to September 1, 1993 would
come to an end and catch him with an inventory of POs that declined
in market value.” (Opinion, RE 245.) That statement suggests that
the fault here was Luhmann’s basic disregard of the plain fact that
where a market value increases, it may also fall.

25
investing too much in these securities was a material omission

under Texas securities laws.

As we have earlier noted, under Texas law, an omission is

material only if the fact or facts omitted would have substantially

altered the information available to the investor relative to his

investment decision. See Beebe, 940 S.W.2d at 306; Lutheran Bhd.,

829 S.W.2d at 307. It is uncontested that Leibold and Oetting did

not specifically discuss the suitability of the September

transactions in terms of risk and size relative to City Colleges’

portfolio. Thus, we think whether the omission here-–the failure

to warn of the unsuitability of this investment-–was material,

turns on whether Leibold and Oetting had special knowledge of the

risks of these securities and special knowledge of the size of city

Colleges’ investment in these securities that Dr. Luhmann did not

have, which special knowledge could have affected his decision to

purchase.

1

First, and foremost, the record amply demonstrates that

Luhmann was aware of the significant risks associated with these

securities. Luhmann admitted that in the fall of 1993, the

critical period here, he was cognizant of the relationship between

interest rate movements, especially increasing interest rates, and

26
his ability to profit through quick purchases and quick sales of

these securities.18

18
For instance, Luhmann testified to the following:

Q. You understood, did you not, that market conditions
would determine whether you could get out of these
bonds before the settlement date at a profit?
A. Yes.
Q. And those market conditions included what was going
to happen with the rate of interest?
A. Yes.
Q. And it was going to depend somewhat on what
happened to mortgage prepayments and how quickly
they were made.
A. Yes.
Q. Now, at the time Mr. Leibold gave you his views
about what was likely to happen with the market
price you in fact knew that the rate of prepayments
of mortgages determined how much and how fast
prepayments on PO securities would be made,
correct?
A. I believe so.
Q. And you knew that this rate of prepayment affected
the yield that you would receive on a security,
principal on the security. Is that right?
A. I suppose so.
Q. And you knew that if the prepayment slowed the
average length or life of that bond would increase
so that the amount that you could receive on the
bond would be stretched out in time.
A. Yes.
Q. And that is in fact how yield is determined,
correct?
A. Yes.
Q. And you knew, did you not, that if the length of
the bond was stretched out so that the yield was
very low, the price for the bond would be lower
than the price would be if the yield on the bond
was very high.
A. That makes sense, yes.
Q. Now, you considered whether you wanted to buy the
bonds in light of the fact that you might not make
a profit before the settlement date, didn’t you?

27
Testimony related to Luhmann’s understanding of the PSA/yield

dynamic also supports this conclusion.19 Based on this testimony,

A. I suppose I did.
Q. And you went ahead and bought them anyway, correct?
A. Yes.
Q. And you bought them knowing that there was a
possibility that you weren’t going to be able to
make a profit before the settlement date.
A. I suppose so.
Q. In fact, you knew that there was a possibility that
you wouldn’t be able to make a profit on the bonds
ever; you might have to hold them until maturity,
correct?
A. That was my usual assumption, that if I couldn’t
sell them I would hold them, yes.

19
We note the following exchange related to a yield table
printed in July of 1993:

Q. And this yield table indicates that if interest
rates went up 100 basis points, the PSA would
likely drop to 375 and the yield would drop from
slightly over 11 to about three-and-a-half,
correct?
A. That’s correct.
. . .
The Court: . . . So, a 1 percent change in interest
rates . . . would produce almost an 8
percent change in the yield.
A. That’s correct, because the length of the security
would have been – because the security would have
been paid out over a much longer period.
The Court: Okay. And why is that true? Or what was
your understanding about why that would
be true?
A. Because the prepayments would go down and,
therefore, it wouldn’t be paid off as soon. If the
interest rates went up, people wouldn’t refinance
their mortgages as often, and so the prepayment
speeds would go down and the mortgage wouldn’t be –
the total wouldn’t be paid off as quickly.

28
it is abundantly clear that Luhmann knew the dangerous risks behind

these securities.20

In addition to his explicit testimony, Luhmann’s history of

purchases further undercuts the finding that he lacked the

awareness of the risks of the securities he was purchasing. It is

undisputed that Luhmann began purchasing MBSs in 1987, and CMOs in

1991, several years before his dealings with Westcap in 1993.

There is nothing in the record that supports an inference that

these purchases were made in ignorance.21 To be sure, he had traded

in approximately $50 million worth of these very same securities

with other brokers. These products were as complex as those

(11/12, vol. II, pp. 37-38.)
20
We additionally note Luhmann’s testimony that he had access
to mortgage rate information on his Bloomberg system (Id. at pp.
39-40). Moreover, when asked if he thought someone else could
predict interest rate movements, he replied, “No, but I guess I was
relying basically on the brokers to advise me on what was a good
thing to do.” (Id. at p. 41.)
21
The bankruptcy court correctly found that “Dr. Luhmann had
acquired POs for City Colleges prior to commencing to buy them from
Westcap. As a result, through prospectuses and other sources he
had detailed information available to him about the characteristics
of POs. (RE 242.) Although Westcap did not provide prospectuses to
Dr. Luhmann, Dr. Luhmann testified that these documents did not
play a role in his decisionmaking. Moreover, the prospectuses that
he did have provided explicit warnings about POs. For example, a
spring 1993 document, cited by the bankruptcy court, warns that POs
are not suitable for all investors, that the yield is sensitive to
mortgage repayments, and that “[t]he timing of changes in the rate
of prepayments may significantly affect the actual yield to
maturity to investors . . . .” (RE 242-43.)

29
securities on which City Colleges lost money. It is undisputed

that Luhmann had prospectuses for other CMO securities he had

purchased. He had seen and analyzed yield tables from his

purchases from other brokers and from Westcap. He possessed a

system capable of analyzing these securities, and admitted he knew

how to use it sufficiently to appreciate the risk of these

securities.22 These prior purchases and sales, the facts of which

were undisputed, imply knowledge about the basic risk

characteristics of the purchased securities.23

22

Q. By this time, Dr. Luhmann, March of 1993, what
types of investment analysis had you learned to do
with respect to collateralized mortgage obligations
on the Bloomberg which you had purchased in the
fall of 1992?

A. I had learned how to pull up the yield table and to
put in the price of the securities as it was
offered and to substitute various PSAs in the table
and to see what that would – how those – these
things would affect the projected yield and payment
windows.

(11/4, vol. I, p. 32.)

23
Finally, we note that several of the bankruptcy court’s
findings as to Luhmann’s understanding of the risk of these
securities, and his determination as to the suitability of these
securities for his portfolio, cut across the judgment below. For
instance, on the suitability question, the bankruptcy court found
that “Dr. Luhmann should have realized that these securities were
unsuitable for City Colleges,” (RE 227), and that “Dr. Luhmann
apparently felt that the disputed POs were suitable for purchase by
City Colleges because they offered the potential of a good yield
and because he had been successful in selling the previous

30
 2

Our review of the record also convinces us that there is

simply no evidence to suggest that Westcap possessed special

knowledge on which to make a suitability determination about the

size of the sale of these bonds vis-á-vis City Colleges’

portfolio.24

(a)

First, it is undisputed that Luhmann refused to disclose the

City Colleges’ portfolio to Westcap. Indeed, Luhmann admitted that

it was not his practice to provide his portfolio to brokers.25

purchases at a profit at or near the settlement date . . . .” (RE
228.) On the question of Dr. Luhmann’s understanding of the risk
with these securities, the bankruptcy court stated that “Dr.
Luhmann must have understood what a one percent (1%) increase in
mortgage interest rates would negatively affect the present value
of a PO. Dr. Luhmann did not stop to think about the effect of a
one-quarter percent(1/4%) increase in mortgage interest rates.” (RE
245.) Moreover, the bankruptcy court found that “Dr. Luhmann knew
that Leibold might be wrong about interest rates. Therefore, while
he was persuaded and misled, he was not deceived in the sense that
he knew Leibold might be wrong. He was deceived into believing
that the odds were more in his favor that they were.” There is no
evidence in the record to support a finding of deception.
Therefore, these statements serve only to undermine the legal
conclusions of the bankruptcy court.
24
Although the bankruptcy court found that Leibold and Oetting
generally knew the size of the City Colleges’ portfolio, our
reading of the record indicates that this is not altogether clear.

25
Although the bankruptcy court did not credit Westcap’s
testimony, we note that this testimony is consistent with Luhmann’s
testimony. For instance, Oetting testifed that he asked for City
Colleges’ portfolio, but Luhmann said that he did not have one

31
(11/12, p. 15.) Luhmann also admitted that he did not tell Leibold

and Oetting, or others, City Colleges’ cash flow needs.26 (11/12,

vol. II, p. 11.) Furthermore, there is nothing in the record to

suggest that Leibold could have known the extent of purchases from

other brokers, i.e., that Luhmann was also purchasing millions of

dollars of other CMOs from other brokers.27 In sum, the evidence

does not support a conclusion that a warning from Westcap would

have imparted anything that Luhmann did not already know given his

long history of transacting in these securities, the scale of his

available. (Oetting, 10/4, p. 45.)
26
Westcap’s testimony was consistent in this respect. For
instance, Leibold was asked, “[d]id [Luhmann] ever give you any
information prior to the conversations you had with him beginning
in November of 1993 about any cash flow needs or money needs or
payroll issues, anything of that sort?” Leibold replied, “No, he
did not.” (10/2, vol. II, p. 147.) (See also TR 10/1, vol. II, p.
186, 222; TR 10/2 vol. I, p. 6; 10/2, vol I, pp. 44-46.)
27
Luhmann gave every indication to Leibold and Oetting of being
a sophisticated investor: He had a portfolio measured in the tens
of millions; he had traded extensively in the very securities
Westcap was selling; and he worked with a substantial number of
brokers. Furthermore, he possessed the tools necessary to
appreciate the risks involved with his investments. Specifically,
he had a $20,000 per year split-screen Bloomberg system. Also,
Luhmann did not enter into a relationship with Westcap easily;
almost a full year passed from Westcap’s first contact with Luhmann
and his first purchase. Such initial reticence implies the
capacity for independent decision-making. Luhmann’s investment
pattern–-buying and quick selling/profit taking and not holding any
one security more than five weeks--also tends to demonstrate
sophistication. This appearance of sophistication is relevant
because it speaks to whether Westcap knew about the materiality of
its omission. See Tex. Rev. Civ. Stat. art. 581-33(A)(2)(b).

32
prior transactions, his superior knowledge of his own portfolio and

cash flow needs, and his demonstrated trading success in these

bonds.

(b)

Second, because the district court held Westcap liable to City

Colleges for its failing to warn it about the risk of overbuying in

proportion to its portfolio, we think it relevant that Luhmann’s

superiors, who clearly understood the size and purposes of City

Colleges’s portfolio, were also aware of the Luhmann’s investments

in these securities. In other words, not only was Luhmann fully

aware of the risks of these securities vis-á-vis City Colleges’

portfolio, but so too were those to whom he answered. Luhmann made

quarterly reports to City Colleges’ board of trustees, reports that

were first reviewed by the board’s Committee on Financial and

Administrative services. These reports listed the investments the

City Colleges held.28 The City Colleges’ board of trustees was

comprised of individuals with sophisticated legal, accounting, and

financial backgrounds capable of analyzing these reports.

Mr. Gidwitz, the chairman of City Colleges’ board, admitted

that he knew that Luhmann had dramatically varied the size of his

28
See Fischel testimony, 10/9, vol. I, p. 43, (“[T]he informa-
tion regarding the amount of City Colleges’ investments in
mortgage-backed securities of various types in comparison to the
total investments made was disclosed to the board . . . .”).

33
holdings in government agency MBSs within a period of months,

despite the fact that City Colleges’ investment policy was one of

long-term holding and that these were bonds with twenty to thirty-

year maturities.29 Gidwitz also knew that Luhmann was receiving

rates of return double to triple the yields from other government

securities, which indicates a high risk.30 Gidwitz testified that

he never informed Luhmann that he thought his actions were not in

conformity with City Colleges’ investment policy. An outside

auditor made no mention that Luhmann’s investments were violating

City Colleges’ investment policy.31 Consistent with this evidence

29
Indeed, holdings of these securities as reported at one point
quadrupled from the last preceding report. As of November 30,
1992, the board knew that Luhmann had invested almost fifty
percent, or $53.5 million, of City Colleges’ portfolio in MBSs. By
March of the next year, this number had fallen to approximately $28
million. Then, in May of 1993, Luhmann reported that he held $73.2
million in MBSs, or seventy-five percent of its total portfolio.
Indeed, the investment summary sheet provided to the Finance
Committee dated May 31, 1993, shows the following investments:
$7.85 million in treasury securities; $12 million in “GNMA Mortgage
Backed Securities”; and $73.2 million in “Other Agency Mortgage
Backed Securities.” See also DX 15.11, “Summary of Investment
Reports to CCC Financial and Administrative Services Committee
3/31/90 - 9/30/93,” (detailing City Colleges’ total investments on
given dates, with amounts and percentages held in “other agency”
MBSs).
30
Based on this report, Gidwitz stated that he made a mental
note to call Dr. Luhmann because he thought this number was
“unusually high and significantly high.” Gidwitz never, however,
called Luhmann.
31
See Fischel testimony, 10/9, vol. I, p. 46: “And then, if
you look at the financial statement itself, there is a statement by
Arthur Anderson that the financial statements referred to, present

34
are Luhmann’s statements that he had no discussions with the

auditors about the propriety or legality of his investments.

Thus, the evidence fairly shows that City Colleges was well

aware of Luhmann’s pattern of investment practices as related to

these securities. In sum, Luhmann and the City Colleges had in

their possession the information necessary to appreciate the risks

of the investments he was making. Luhmann, and the board, knew the

overall size of City Colleges’ portfolio and the percent of that

portfolio held in MBSs. Thus, given this superior knowledge on the

part of Luhmann and his superiors concerning the risk of these

securities in proportion to the size and purpose of City Colleges’

portfolio, any omission on the part of Westcap about the risk of

and magnitude of purchases made in the fall of 1993 simply could

not have been material to investment decisions that were made.32

fairly in all material respects, the financial position of the City
Colleges, and that everything done is in conformity with generally
accepted accounting principals, and significantly, there is no
statement about any non-compliance with the investment policy,
which is what Arthur Anderson is delegated to investigate pursuant
to the policy itself.” See also id. at 54-56.
32
We should make clear that Westcap’s lack of supervision may
well have contributed to the extent of these sales. As found by
the bankruptcy court, Westcap can be faulted for its system of
internal checks against aggressive salesmanship. The record,
however, equally demonstrates City Colleges’ failure to exercise
its supervisory duties over Luhmann’s investment activities, a
failing that contributed to the overbuying of these securities.
Each of these facts, however, has limited relevance to this appeal,
which turns on whether the alleged misrepresentations and/or
omissions were material to the purchasing decisions made by City

35
In the final analysis, we think, as the record makes clear, that

the cause of these tremendous financial losses was not any material

misrepresentations or omissions on the part of Westcap, but instead

resulted from the missteps of an individual who, perhaps because of

lack of supervision or too-good salesmanship, simply lost his way.33

VII

In sum, for the reasons we have discussed in some detail, the

record in this case shows that Dr. Luhmann knew Westcap had no

special knowledge regarding interest rates and no special ability

to predict the movement of these rates. The record also shows that

the statements that Westcap allegedly omitted would not have

Colleges through Dr. Luhmann.
33
Luhmann admitted explicitly that his over purchases were a
simple case of losing track of what he was doing.

The Court: By why 80 million. I mean, out of
whatever it was, 110 or whatever, that’s
the thing that kind of surprises me –

[Luhmann]: Yes, it –

The Court: –- for a conservative investor to put 80
percent into one security, one type of
security.

[Luhmann]: Yes, I know it’s no reason and it doesn’t
excuse me for doing it, but at the time I
was awfully busy and I really lost track
of where we were. I should have kept
better track, but I didn’t.

(11/12, vol. II, p. 42.) Therefore, the responsibility must fall
on Luhmann.

36
substantially altered the information available to Dr. Luhmann or

City Colleges in deciding whether to invest because all the

necessary information about the risk of these bonds, and their

appropriate place and proportion in City Colleges’ portfolio, was

known to Dr. Luhmann and/or his superiors. Therefore, because City

Colleges’ claim under the Texas Securities Act fails the

“materiality” requirement, the judgment of the district court is

REVERSED and the case is REMANDED for entry of judgment for

Westcap.

REVERSED and REMANDED for entry of judgment.

37