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Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

FIRST GOLDEN BANCORPORATION 

Plaintiff, 

v. 

RONALD F. WEISZMANN, 

Defendant, Third-Party 

Plaintiff and Appellant, 

v. 

MORGAN STANLEY & CO., INCORPORATED, 

A Delaware Corporation; TIMOTHY 

TAEBEL and LINDNER MANAGEMENT 

Third-Party Defendants and 

Appellees. 

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FILED 

United St.at.es Court of Appeals 

Tenth Ci;-cPit 

AUG 15 1991 

ROBERT L. HOECKER 

Clerk 

No. 89-1377 

Appeal from the United States District Court 

for the District of Colorado 

(D.C. Civil Action No. 85-B-2114) 

Timothy J. Flanagan of Kelly, Stansfield & O'Donnell, Denver, 

Colorado (Robert J. Eber with him on the brief) for Defendant, 

Third-Party Plaintiff and Appellant. 

Edward W. Stern of Parcel, Mauro, Hultin & Spaanstra, P.C., 

Denver, Colorado (Cheryl Burnside with him on the brief) for 

Third-Party Defendants and Appellees Morgan Stanley & Co. 

Incorporated and Timothy Taebel. Charles E. Merrill of Husch, 

Eppenberber, Donohue, Cornfeld & Jenkins, St. Louis, Missouri for 

the Third-Party Defendant and Appellee Lindner Management 

Corporation. 

Before ANDERSON, BALDOCK, and EBEL, Circuit Judges. 

EBEL, Circuit Judge. 

Appellate Case: 89-1377 Document: 01019715788 Date Filed: 08/15/1991 Page: 1 
This is an appeal from the district court's order granting 

summary judgment to the appellees, third-party defendants in the 

action below. The third-party defendants were impleaded under 

Fed. R. Civ. P. 14(a) after the appellant, the third-party 

plaintiff, was made a defendant in a suit to recover short-swing 

profits under section 16(b) of the Securities Exchange Act of 1934 

(codified at 15 u.s.c. § 78p(b)). The primary case settled. The 

district court than granted summary judgment in favor of the 

third-party defendants on all the third-party claims. This appeal 

followed. We affirm in part and vacate and remand in part. 

FACTS 

Appellant in this case, Ronald Weiszmann, was the third 

party-plaintiff in the action below. He had acquired stock in 

First Golden Bancorporation, the original plaintiff, as a result 

of a tender offer he had made for First Golden Stock. He 

ultimately sold his First Golden stock, and First Golden alleged 

that the sale was within six months of the time he acquired it, 

thus, making Weiszmann liable under section 16(b) of the 

Securities Exchange Act of 1934 for the profits from the sale. 

First Golden sued Weiszmann to recover the resultant short-swing 

profit. Weiszmann, in turn, brought counterclaims against First 

Golden and initiated a third-party complaint against the 

appellees: Morgan Stanley and its representative Timothy Taebel, 

who acted as Weiszmann's financial advisor during the course of 

the section 16(b) violation, and Lindner Management, the eventual 

purchaser of the stock. His third-party complaint was based on 

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seven different claims: 1) indemnity; 2) outrageous conduct; 3) 

breach of contract; 4) fraud under section lO(b) of the Securities 

Exchange Act of 1934; 5) controlling person liability; 6) 

principal-agent liability; and 7) negligent misrepresentation. 

The relief he sought in the third-party complaint was, inter alia, 

indemnification for any liability he may have to First Golden, 

reimbursement of attorneys' fees and costs incurred to defend that 

lawsuit, and a recovery of commissions and profit realized by 

Morgan Stanley from the sale of the stock. 

Claims two and three of the third-party complaint--claims for 

outrageous conduct and breach of contract--were eventually 

dismissed by the district court, 1 and the case was set for trial. 

Thereafter, First Golden and Weiszmann settled the primary lawsuit 

on terms that Weiszmann did not pay any money to First Golden but 

he was required to dismiss his counterclaims against First Golden. 

The third-party defendants then moved for summary judgment on all 

of Weiszmann's remaining third-party claims. The district court 

granted the summary judgment motion and dismissed all the thirdparty claims with prejudice. The court dismissed Weiszmann's 

first claim for indemnity because it held, as a matter of law, 

that there was no right to indemnity for liability under section 

16(b) of the Securities Exchange Act of 1934. The court dismissed 

the remaining third-party claims because it held that Weiszmann 

had settled First Golden's claims against him without incurring 

any liability or paying any damages to First Golden, and thus, 

there was no underlying liability upon which Weiszmann could 

1 The dismissal of these two claims is not contested on appeal. 

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predicate third-party claims under Fed. R. Civ. P. 14(a). The 

court indicated that a third-party action can be maintained under 

Rule 14(a) only for claims where the third-party defendant is 

asserted to be secondarily liable to the third-party plaintiff for 

the third-party plaintiff's liability to the plaintiff. 

ANALYSIS 

I. No Indemnity For Section 16(b) Violations 

We agree with the district court that the third-party 

defendants were "entitled to judgment as a matter of law on 

Weiszmann's first claim for indemnity." Courts have rejected 

indemnity for a variety of securities violations because indemnity 

contravened "the public policy enunciated by the federal 

securities laws." A. Bromberg & L. Lowenfels, 2 Securities Fraud 

& Commodities Fraud, § 5.7 (277), at 5:82:78. See also King v. 

Gibbs, 876 F.2d 1275, 1281-82 (7th Cir. 1989); Stewart v. American 

Int'l. Oil & Gas Co., 845 F.2d 196, 200 (9th Cir. 1988); Stowell 

v. Ted S. Finkel Inv. Servs., 641 F.2d 323, 325 (5th Cir. 1981); 

Laventhol, Krekstein, Horwath & Horwath v. Horwitch, 637 F.2d 672, 

676 (9th Cir. 1980), cert. denied, sub nom., Frank v. U.S. Trust 

Co. of New York, 452 U.S. 963 (1981); Globus v. Law Research 

Serv., 418 F.2d 1276, 1288-89 (2d Cir. 1969), cert. denied, 397 

U.S. 913 (1970); Alvarado Partners, L.P. v. Mehta, 723 F. Supp. 

540, 549 (D. Colo. 1989), dismissed without opinion, __ F.2d --' 

--' 1991 W.L. 109139 (10th Cir.) (appeal dismissed as moot). 

Thus, one court has explained that 

"Congress did not promulgate the 1933 and 1934 Acts to 

protect the parties who violate the Acts' provisions. 

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In fact, the immediate concern of Congress was not to 

insure that parties injured by fraudulent activities 

were reimbursed but rather was to prevent future 

fraudulent activity. The United States in 1933 and 1934 

was in the midst of a prolonged period of depression 

which Congress believed was caused in large part by 

excessive stock market speculation. Congress imposed 

civil liability on offenders of the Acts because 

experience had shown that criminal liability alone was 

insufficient to deter further wrongdoing. Some courts 

that have interpreted the 1933 and 1934 Acts have 

already concluded that providing a right to indemnity 

would undermine the deterrent purpose of the Acts. 

In re Olympia Brewing Co. Securities Litig., 674 F. Supp. 597, 

612-13 (N.D. Ill. 1987) (citations omitted). 

We find that these general concerns are also applicable to 

indemnification in section 16(b) cases, even though section 16(b) 

does not require proof of fraudulent intent. Section 16(b) is a 

prophylactic anti-fraud statute. The policy behind section 16(b) 

was to deter transactions which have a high potential for fraud. 

However, Congress determined that it was not practical to require 

proof of improper intent or scienter in cases of insider trading, 

and thus, section 16(b) was written to impose strict liability. 

That Congress felt the most effective way to deter fraud in this 

area was through use of strict liability does not, however, 

minimize the purpose behind the statute to prevent fraudulent 

trading based upon improper insider information or manipulation. 

In relevant part, section 16(b) reads: 

For the purpose of preventing the unfair use of 

information which may have been obtained by such 

beneficial owner, director, or officer by reason of his 

relationship to the issuer, any profit realized by him 

from any purchase and sale, or any sale and purchase, of 

any equity security of such issuer (other than an 

exempted security) within any period of less than six 

months, unless such security was acquired in good faith 

in connection with a debt previously contracted, shall 

inure to and be recoverable by the issuer, irrespective 

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of any intention on the part of such beneficial owner, 

director, or officer in entering into such transaction 

of holding the security purchased or of not repurchasing 

the security sold for a period exceeding six months. 

The statute does not require proof that the trading 

information was improperly obtained; it is enough to prove an 

insider relationship which gives rise to.the potential that 

improper information "may have been obtained" and utilized in the 

trade. We find a "clear congressional intent to provide a catchall, prophylactic remedy, not requiring proof of actual misconduct 

II L. Hazen, The Law of Securities Regulation, § 12.3, at 

417 (1985) (citing, Hearings on S. Res. 84 & S. Res. 97 Before The 

Senate Comm. on Banking and Currency, 73d Cong., 1st Sess., pt. 

15, at 6557 (1934)). Thus, we hold that the public policy behind 

section 16(b) renders invalid any attempt by an insider to seek 

indemnification for his liability under section 16(b). 2 

There is support for our holding. In Bunker Ramo-Eltra Corp. 

v. Fairchild Indus., 639 F. Supp. 409, 419 (D. Md. 1986), 

dismissed without opinion, 801 F.2d 393 (4th Cir. 1986) (dismissed 

for lack of a final appealable order), the court found that an 

indemnification agreement was void because if the "indemnification 

is found to be valid, then the defendants would have been able to 

waive, in effect, the requirement of section 16(b) ••.• This 

result would frustrate the public policy behind the prohibition of 

insider trading within the six-month time period found in section 

16(b)." 

2 We do not address in this opinion claims for indemnity that may 

arise under other provisions of the securities laws. 

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II. The Remaining Third-Party Claims 

Weiszmann also contests the granting of summary judgment on 

the rest of his third-party claims following the district court's 

dismissal of his first claim for indemnity. These claims, 

numbered four through seven, asserted section lO(b) liability, 

controlling person liability, principle-agent liability, and 

negligent misrepresentation. The relief requested included 

indemnification and recovery of Morgan Stanley's profits and 

commissions. These claims were dismissed with prejudice once 

summary judgment was granted on the first claim for indemnity. 

The district court treated these claims as if they were all 

claims for reimbursement for damages stemming from liability that 

Weiszmann might have to First Golden. The court dismissed them 

because it concluded that Weiszmann had incurred no liability to 

First Golden, and thus, there was no underlying liability to be 

shifted to the third-party defendants under section 14(a). 3 At 

the very least, the district court appears to have given 

inadequate consideration to the possibility that some or all of 

Weiszmann's remaining claims may have been ancillary claims under 

Fed. R. Civ. P. 18(a). The district court possessed the 

discretion to retain jurisdiction over ancillary claims even 

3 The district court stated, "Because . . . Weiszmann settled 

[First Golden's] claim ... without Weiszmann incurring any 

liability or paying any damages to [First Golden], Weiszmann no 

longer possessed a viable third party claim against Morgan Stanley 

and Lindner for which it could collect damages under Fed. R. Civ. 

P. 14(a). Accordingly, I conclude as a matter of law that Morgan 

Stanley is entitled to summary judgment on Weiszmann's entire 

third party complaint." Dist. Ct. Order at 6. 

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though the main third-party claim for indemnity had been 

dismissed. 

We find our recent opinion in King Fisher Marine Service, 

Inc. v. 21st Phoenix Corp., 893 F.2d 1155, 1166-72 (10th Cir. 

1990), particularly helpful to this analysis. In King Fisher a 

contractor sued a development company in federal court on 

diversity grounds. That defendant impleaded under Rule 14(a) the 

contract supervisor, who was non-diverse from the defendant. The 

defendant also asserted against the third-party defendant various 

other damage claims in its third-party action. These claims, 

although related to the transaction involved in the 14(a) claim, 

were not claims for "liability over" but were, instead, separate 

claims for damages. We affirmed the jurisdiction of the district 

court under Fed. R. Civ. P. 18(a) to hear the additional thirdparty claims so long as the ancillary claims arose out of the same 

transaction or occurrence as the initial claim for liability. 

King Fisher, 893 F.2d at 1171. Many other courts have come to the 

same conclusion. See United States v. City of Twin Falls, 806 

F.2d 862, 866-68 (9th Cir. 1986), cert. denied, 482 U.S. 914 

(1987); Nishimatsu Constr. Co., Ltd. v. Houston Nat'l. Bank, 515 

F.2d 1200, 1204-1205 & n.2 (5th Cir. 1975); In re Citisource, Inc. 

Securities Litig. v. City of New York, 694 F. Supp. 1069, 1084 

(S.D.N.Y. 1988). 

In the instant case, the district court had jurisdiction over 

Weiszmann's Rule 14(a) claim even though Weiszmann ultimately lost 

that claim on the merits. Rule 14(a) reads in relevant part: 

At any time after commencement of the action a defending 

party, as a third-party plaintiff, may cause a summons 

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and complaint to be served upon a person not a party to 

the action who is or may be liable to the third-party 

plaintiff for all or part of the plaintiff's claim 

against the third-party plaintiff. 

Fed. R. Civ. P. 14(a) (emphasis added). Thus, once Weiszmann was 

sued by First Golden, Rule 14(a) allowed him to bring an impleader 

action against the third-party defendants who might have been 

liable to him. So long as the Rule 14(a) claim is not a sham, the 

district court has jurisdiction over the claim even if the thirdparty claimant does not prevail on the claim. 

Having brought a proper third-party claim, Rule lB(a) then 

allowed Weiszmann to join "either as independent or as alternative 

claims, as many claims, legal, equitable, or maritime, as the 

party has against an opposing party." Fed. R. Civ. P. lB(a). To 

the extent that Weiszmann has included non-indemnity claims 

against the third-party defendants, they are properly considered 

ancillary claims under Rule lB(a). 

The fact that the main claim between First Golden and 

Weiszmann thereafter settled does not necessarily defeat 

jurisdiction of the district court over the third-party claims. 

When the main claim disappears, either through settlement or 

otherwise, 

[t)he vast majority of the cases conclude that the court 

retains jurisdiction over the impleader claim, and has 

discretion to proceed to litigate it. In determining 

how to proceed, the court may be influenced by timing. 

If the underlying suit is resolved quite early in the 

proceedings • . . the timing may augur toward dismissal 

of the impleader claim. If, on the other hand, the 

underlying claim is resolved after the case has been 

pending for some considerable time, or if the statute of 

limitations will have run • • • the court should retain 

jurisdiction • • 

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3 Moore's Federal Practice 1114.26 at 14-126 (footnote omitted). 

This court has stated that "'if jurisdictional prerequisites are 

satisfied when the suit is begun, subsequent events will not work 

an ouster of jurisdiction.'" King Fisher, 893 F.2d at 1172 

(citing Dery v. Wyer, 265 F.2d 804, 808 (2d Cir. 1959)). 

Indeed, even if both the primary lawsuit and that portion of 

the third-party suit that seeks liability under Rule 14(a) are 

extinguished, any remaining third-party claims that were properly 

ancillary to the original Rule 14(a) claim may, at the discretion 

of the district court, be retained for disposition. In re 

Citisource, 694 F. Supp. at 1084. Although there may ordinarily 

be a reluctance to retain such ancillary claims once the primary 

indemnity claim is gone, there may be special circumstances that 

would persuade the district court to exercise its discretion to 

retain jurisdiction over the ancillary claims including, for 

example, if the district court has invested substantial time in 

preparing those claims for trial or if there would be statute of 

limitation problems if such claims are dismissed. 

Here, we find ambiguity in the district court's holding that 

because the third party's "motion for summary judgment is granted 

as to Weiszmann's first claim for indemnity, Weiszmann's remaining 

third party claims, based solely on Fed. R. Civ. P. 14(a), fall as 

a matter of law." Dist. Ct. Order at 5 (emphasis added). If by 

this statement the district court meant that, under the Federal 

Rules of Civil Procedure, a granting of summary judgment on the 

first claim for indemnity required dismissal of the other thirdparty claims, that would constitute error. However, to the extent 

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that the remaining third-party claims were in reality just 

disguised indemnity claims for a section 16(b) violation, it would 

have been appropriate to dismiss them with prejudice. See, ~, 

Goldberg v. Touche Ross & Co., 531 F. Supp. 86, 87 (S.D.N.Y 1982); 

Greene v. Emersons, Ltd., Fed. Sec. L. Rep. (CCH) 1199,582 (1983-84 

Transfer Binder) (S.D.N.Y. 1983). 

An examination of each of Weiszmann's remaining third-party 

claims is necessary to distinguish those claims that are simply 

"liability over" claims from those claims that ask for independent 

affirmative relief against the third-party defendants. Obviously, 

Weiszmann's first third-party claim--titled as 11 indemnity 11 --is 

simply a claim of "liability over," and thus the district court 

was correct in dismissing it with prejudice. That result is 

mandated by our holding that there is no right to indemnity under 

section 16 (b). 

However, in each of Weiszmann's remaining claims he contends 

that the third-party defendants made profits and commissions from 

the sale of the First Golden stock, and that their profits and 

commissions should be returned to him. We note that the $112,260 

sum at issue in these remaining claims is not part of First 

Golden's claims against Weiszmann because the profit made by the 

third-party defendants is clearly not profit inuring to Weiszmann 

through his sale of First Golden stock. Therefore, because First 

Golden never had a right to this $112,260, Weiszmann may be able 

to characterize this portion of his third-party claims as nonindemni ty claims. 

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More specifically, Weiszmann's fourth claim for relief is 

predicated on the section lO(b) liability because Morgan Stanley 

and Taebel allegedly failed to disclose material facts relating to 

Weiszmann's sale of the First Golden stock. The claim 

specifically states that those third-party defendants "earned at 

least $112,260.00 in profits from the transaction through fraud 

and deceit and should be forced to disgorge those profits .•.. " 

Appellant's Amended Third-Party Complaint ,, 19, at 5. Without 

addressing whether this claim states a cause of action, it does 

appear susceptible of being construed as a non-indemnity claim. 

Weiszmann asserts in his fifth claim for relief that Morgan 

Stanley had controlling person liability under section 20(a) of 

the Securities Exchange Act of 1934 (codified at 15 u.s.c. 

§ 78t(a)). In this claim Weiszmann avers that "[d]ue to Morgan 

Stanley's position as a controlling person [with regard to Timothy 

Taebel] ..• it should be held jointly and severely [sic] liable 

pursuant to Section 20(a) • 

Party Complaint ~ 26 at 5. 

" Appellant's Amended ThirdWe note that in appropriate 

circumstances courts have upheld contribution liability in a 

securities context. See, ~' Smith v. Mulvaney, 827 F.2d 558, 

560 (9th Cir. 1987). Globus v. Law Research Service, 318 F. Supp. 

955, 957-58 (S.D.N.Y. 1970), aff'd, 442 F.2d 1346 (2d Cir.), cert. 

denied, 404 U.S. 941 (1971); deHaas, 286 F. Supp. at 815-16. Once 

again, it is far from clear that Weiszmann has stated a valid 

claim under section 20(a) premised on the underlying liability of 

Taebel. However, it does not appear to be an indemnity claim. 

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In Weiszmann's sixth claim for relief, labeled "PrincipalAgent Liability," he again specifically requests a recapture of 

the $112,260 profit allegedly "earned through the breach of the 

duty of loyalty arising from the principal/agent relationship." 

Appellant's Amended Third-Party Complaint ,r 30, at 6. Without 

addressing the merits of the claim, the profits and commissions 

that the third-parties allegedly earned off the sale of 

Weiszmann's stock was clearly not recoverable by First Golden in 

its original section 16(b) action, and so Weiszmann may be correct 

that his sixth claim for relief is a non-indemnity claim. 

Finally, Weiszmann's seventh claim for relief is based on 

negligent misrepresentation. Weiszmann avers that Taebel 

affirmatively misled him and gave him false information concerning 

the transactions at issue. Specifically, Weiszmann claims that 

the third-party defendants promised that they would not solicit a 

certain individual's First Golden stock. Weiszmann states that he 

lost a valuable business opportunity by the alleged 

misrepresentation and breach of that promise by the third-party 

defendants. Although the relief sought pursuant to this claim is 

uncertain, and again we do not address the merits of this claim at 

this time, it does not appear to be a mere claim for 

indemnification. See Appellant's Amended Third-Party Complaint, 

~~ 31-32, at 6. 

We believe that the district court should, in the first 

instance, review these claims with such tools as are at its 

disposal to narrow and clarify them, and it should determine 

whether and to what extent they seek relief other than 

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indemnification. To the extent that any of such claims are 

indemnification claims for liability that Weiszmann incurred under 

section 16(b), they should be dismissed with prejudice. With 

regard to any non-indemnification claims, the district court must 

exercise its discretion and decide whether to retain jurisdiction 

over such claims or to dismiss them without prejudice. To the 

extent that the district court decides to retain jurisdiction over 

any portions of counts four through seven, it should then proceed 

to address such claims on the merits. Therefore, we remand to the 

district court for further proceedings consistent with this 

opinion. Alvarado, 723 F. Supp. at 554. 

CONCLUSION 

We AFFIRM the district court's dismissal of the first count 

in the third-party complaint because indemnity may not be had for 

a violation of section 16(b) of the Securities Exchange Act. We 

VACATE the order dismissing with prejudice counts four through 

seven of the third-party complaint and we REMAND for further 

proceedings consistent with this opinion. 

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