Source: https://law.justia.com/cases/federal/appellate-courts/F2/925/682/366623/
Timestamp: 2019-11-14 11:34:36
Document Index: 278346935

Matched Legal Cases: ['§ 77', '§ 78', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77']

Ballay, Stephen J., Bandosz, Albert J., Beebee, Susan,beebee, Peter C., Behmer, L. Nelson, Behmer, Robert L.,bell, Elizabeth W., Broccolini, Agnes M., Burke, Jr., Johnj., Zappitelli, Sophie Chelyk and John A., Deal, Richard A.,deal, Jr., William W., Dudugjian, Carl, As Trustee, Espinoza(schimmel), Bobbi S., Flamm, George S., Flansburg, Frank M.,gallagher, David G. and Jacqueline, Goldman, Arthur S.,gould, Herbert E., Hoover, Robert A., Jacobs, Richard W.,merriken, Charles J. and Phylliss A., Munger, Edith L.,persons, Jr., Oren M., Resnick, Albert, Richter, Ronald Andlynn, Robinson, Edmund H., Smedley, L., As Trustee, Smith,allen and Christine, Uhrman, Gary H., Weyforth, Philip A.,williamson, Dennis, Zappitelli, Michael J. and Anna O.,zook, Dunwoody, for Zook, Melissa D., and Zook, Ii, Williamh.d., and Zook, Suzanne C., Goldfine, Sanford D., Staniskis, Peter v. Legg Mason Wood Walker, Inc., Appellant in 90-1412.ballay, Stephen J., Bandosz, Albert J., Beebee, Susan,beebee, Peter C., Behmer, L. Nelson, Behmer, Robert L.,bell, Elizabeth W., Broccolini, Agnes M., Burke, Jr., Johnj., Zappitelli, Sophie Chelyk and John A., Deal, Richard A.,deal, Jr., William W., Dudugjian, Carl, As Trustee, Espinoza(schimmel), Bobbi S., Flamm, George S., Flansburg, Frank M.,gallaher, David G. and Jacqueline, Goldman, Arthur S.,gould, Herbert E., Hoover, Robert A., Jacobs, Richard W.,merriken, Charles J. and Phylliss A., Munger, Edith L.,persons, Jr., Oren M., Resnick, Albert, Richter, Ronald Andlynn, Robinson, Edmund H., Smedley, L., As Trustee, Smith,allen and Christine, Uhrman, Gary H., Weyforth, Philip A.,williamson, Dennis, Zappitelli, Michael J. and Anna O., Zookdunwoody, for Zook, Melissa D., and Zook, Ii, William H.d.,and Zook, Suzanne C., Goldfine, Sanford D., Staniskis, Peter v. Legg Mason Wood Walker, Inc.appeal of Stephen J. Ballay, Albert J. Bandosz, Susanbeebee, Peter C. Beebee, Nelson L. Behmer, Robert L. Behmer,elizabeth W. Bell, Agnes M. Broccolini, John J. Burke, Jr.,sophie Chelyk and John A. Zappitelli, Richard A. Deal,william W. Deal, Jr., Carl Dudugjian, As Trustee, Bobbi S.espinoza (schimmel), George G. Flamm, Frank M. Flansburg,david G. and Jacqueline Gallagher, Sanford D. Goldfine,arthur S. Goldman, Herbert E. Gould, Robert A. Hoover,richard W. Jacobs, Charles J. and Phylliss A. Merriken,edith L. Munger, Oren M. Persons, Jr., Albert Resnick,ronald and Lynn Richter, Edmund H. Robinson, L. Smedley, Astrustee, Allen and Christine Smith, Peter Staniskis, Gary H.uhrman, Philip A. Weyforth, Dennis Williamson, Michael J.and Anna O. Zappitelli, Dunwoody Zook, for Melissa D. Zookand William H.d. Zook, Ii, and Suzanne C. Zook, Appellants in 90-1427, 925 F.2d 682 (3d Cir. 1991) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Third Circuit › 1991 › Ballay, Stephen J., Bandosz, Albert J., Beebee, Susan,beebee, Peter C., Behmer, L. Nelson, Behmer, R...
Ballay, Stephen J., Bandosz, Albert J., Beebee, Susan,beebee, Peter C., Behmer, L. Nelson, Behmer, Robert L.,bell, Elizabeth W., Broccolini, Agnes M., Burke, Jr., Johnj., Zappitelli, Sophie Chelyk and John A., Deal, Richard A.,deal, Jr., William W., Dudugjian, Carl, As Trustee, Espinoza(schimmel), Bobbi S., Flamm, George S., Flansburg, Frank M.,gallagher, David G. and Jacqueline, Goldman, Arthur S.,gould, Herbert E., Hoover, Robert A., Jacobs, Richard W.,merriken, Charles J. and Phylliss A., Munger, Edith L.,persons, Jr., Oren M., Resnick, Albert, Richter, Ronald Andlynn, Robinson, Edmund H., Smedley, L., As Trustee, Smith,allen and Christine, Uhrman, Gary H., Weyforth, Philip A.,williamson, Dennis, Zappitelli, Michael J. and Anna O.,zook, Dunwoody, for Zook, Melissa D., and Zook, Ii, Williamh.d., and Zook, Suzanne C., Goldfine, Sanford D., Staniskis, Peter v. Legg Mason Wood Walker, Inc., Appellant in 90-1412.ballay, Stephen J., Bandosz, Albert J., Beebee, Susan,beebee, Peter C., Behmer, L. Nelson, Behmer, Robert L.,bell, Elizabeth W., Broccolini, Agnes M., Burke, Jr., Johnj., Zappitelli, Sophie Chelyk and John A., Deal, Richard A.,deal, Jr., William W., Dudugjian, Carl, As Trustee, Espinoza(schimmel), Bobbi S., Flamm, George S., Flansburg, Frank M.,gallaher, David G. and Jacqueline, Goldman, Arthur S.,gould, Herbert E., Hoover, Robert A., Jacobs, Richard W.,merriken, Charles J. and Phylliss A., Munger, Edith L.,persons, Jr., Oren M., Resnick, Albert, Richter, Ronald Andlynn, Robinson, Edmund H., Smedley, L., As Trustee, Smith,allen and Christine, Uhrman, Gary H., Weyforth, Philip A.,williamson, Dennis, Zappitelli, Michael J. and Anna O., Zookdunwoody, for Zook, Melissa D., and Zook, Ii, William H.d.,and Zook, Suzanne C., Goldfine, Sanford D., Staniskis, Peter v. Legg Mason Wood Walker, Inc.appeal of Stephen J. Ballay, Albert J. Bandosz, Susanbeebee, Peter C. Beebee, Nelson L. Behmer, Robert L. Behmer,elizabeth W. Bell, Agnes M. Broccolini, John J. Burke, Jr.,sophie Chelyk and John A. Zappitelli, Richard A. Deal,william W. Deal, Jr., Carl Dudugjian, As Trustee, Bobbi S.espinoza (schimmel), George G. Flamm, Frank M. Flansburg,david G. and Jacqueline Gallagher, Sanford D. Goldfine,arthur S. Goldman, Herbert E. Gould, Robert A. Hoover,richard W. Jacobs, Charles J. and Phylliss A. Merriken,edith L. Munger, Oren M. Persons, Jr., Albert Resnick,ronald and Lynn Richter, Edmund H. Robinson, L. Smedley, Astrustee, Allen and Christine Smith, Peter Staniskis, Gary H.uhrman, Philip A. Weyforth, Dennis Williamson, Michael J.and Anna O. Zappitelli, Dunwoody Zook, for Melissa D. Zookand William H.d. Zook, Ii, and Suzanne C. Zook, Appellants in 90-1427, 925 F.2d 682 (3d Cir. 1991)
US Court of Appeals for the Third Circuit - 925 F.2d 682 (3d Cir. 1991) Argued Dec. 10, 1990. Decided Feb. 15, 1991. Rehearing and Rehearing In BancDenied March 21, 1991
In this lawsuit brought by the named investors against their brokerage firm, Legg Mason Wood Walker, Inc. ("Legg Mason"), for alleged oral misrepresentations made concerning the book value calculation of securities, two issues require resolution in this appeal following a jury trial. The first presents an issue not yet ruled upon by any federal appellate court: whether section 12(2) of the Securities Act of 1933 affords a remedy to a buyer of securities in the secondary market.1 This question is purely one of statutory construction which implicates our plenary standard of review. Chrysler Credit Corp. v. First Nat'l Bank and Trust Co., 746 F.2d 200, 202 (3d Cir. 1984); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981). We believe that the language and the legislative history of section 12(2) demonstrate that Congress did not there intend to protect buyers in the aftermarket, and we hold that section 12(2) provides a remedy to buyers of securities only in the initial distributions. The district court thus erred as a matter of law in sending this count of the complaint to the jury. We will reverse the judgment of the district court on this count and remand for the entry of judgment in favor of Legg Mason.
According to Burke, who served as Legg Mason's Bryn Mawr, Pennsylvania branch manager, Legg Mason is a full service brokerage house2 which subscribes to a value philosophy of investing. Employing this value philosophy, Legg Mason promotes investment in the undervalued stock of companies that show potential for future growth. Legg Mason's Anthony Pearce-Batten, a securities analyst in Legg Mason's Baltimore, Maryland research department, articulated this philosophy as "look [ing] for out of favor situations which possess characteristics in one form or another that gives one the basis for believing that there is limited risk involved with investing in those stocks." Typically, "out of favor situations" would involve purchasing securities from companies that have recently emerged from bankruptcy or reorganization, as had Wickes. Investing in these companies is attractive because, according to Legg Mason's theory, these companies present little "downside" risk.
An August 10, 1987, Legg Mason research report concerning Wickes suggested that "positives outweigh the negatives--buy," and listed Wickes' book value per share at $23.70.5 The report also stated: "It is worth observing that current assets comprise almost two thirds of Wickes' $3.5 billion asset base net of goodwill ..." (emphasis added). Another Legg Mason report, dated August 25, 1987, included a computation of Wickes' book value per share of stock at $25.00 with the notation "(excludes goodwill)." A third and undated Legg Mason document also recommended the purchase of Wickes securities and included the statement that "... with the stock presently selling at less than 40 percent of stated book value (excluding goodwill), any share repurchases would generate substantial equity growth" (emphasis added). A Legg Mason vice president, David Nelson, admitted that all of these references to goodwill were erroneous.
In their Amended Complaint, the investors pled causes of action under section 12(2) of the 1933 Securities Act, 15 U.S.C. § 77l(2), and section 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j. Because sixteen of the investors had signed customer contracts containing arbitration provisions, Legg Mason moved for a stay of all proceedings and to compel arbitration of these investors' claims. The district court ordered the common law and the 1934 Securities Exchange Act claims to arbitration, but denied the motion to compel arbitration of the 1933 Securities Act claims. Legg Mason appealed and we affirmed the district court. Ballay v. Legg Mason Wood Walker, Inc., 878 F.2d 729 (3d Cir. 1989).
Legg Mason moved, inter alia, for judgment N.O.V. and for a new trial, asserting that section 12(2) should not be applied to secondary markets. The district court denied the motions, applying section 12(2) to aftermarket trading, reasoning that the plain language of section 12(2) did not limit its application to initial distributions of securities and that the broad remedial purposes of the Securities Act of 1933 were not rigidly restricted to initial distributions. The district court found particularly persuasive the Supreme Court's application of section 17 of the 1933 Act, section 12(2)'s criminal analogue, to secondary markets. See United States v. Naftalin, 441 U.S. 768, 99 S. Ct. 2077, 60 L. Ed. 2d 624 (1979). Therefore, the district court confirmed its earlier conclusion, reached in denying Legg Mason's motion to dismiss, that section 12(2) applied to secondary market trading. The court then certified for interlocutory appeal the issue of "whether [section 12(2) ] can be applied to fraud occurring in the secondary markets." We denied Legg Mason's petition for interlocutory appeal. After the parties stipulated as to damages, the district court entered its judgment against Legg Mason for $1,129,496.55.
The resolution of our first issue, whether section 12(2) of the 1933 Act creates a cause of action for an oral misrepresentation in the secondary market, requires that we begin with the precise language of section 12(2). See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 96 S. Ct. 1375, 1383, 47 L. Ed. 2d 668 (1976) (the starting point in every case involving statutory construction is the statutory language). Section 12 reads:
Monetary Management Group, Inc. v. Kidder, Peabody & Co., Inc., 615 F. Supp. 1217, 1222 (D.C.Mo.1985).
Crucial to our resolution of whether section 12(2) applies to the secondary market is the meaning of the words "oral communication" in the phrase "prospectus or oral communication." Because the 1933 Act does not define "oral communication," we must interpret the plain meaning of these words in light of their context in the statute and in keeping with the intent of Congress in passing the 1933 Act. See K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291, 108 S. Ct. 1811, 1817, 100 L. Ed. 2d 313 (1988) ("if the statute is clear and unambiguous, that is the end of the matter, for the court ... must give effect to the unambiguously expressed intent of Congress.").
We agree with both parties that the words "prospectus or oral communication" must be construed as related terms. We are persuaded that the plain meaning of the words "prospectus or oral communication" together is that buyers may recover for material misrepresentations made in a prospectus or in an oral communication related to a prospectus or initial offering. See Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 8, 105 S. Ct. 2458, 2462, 86 L. Ed. 2d 1 (1985) ("words grouped in a list should be given related meaning") (citation omitted). This reading comports with the canon of construction noscitur a sociis, which instructs that a provision should not be viewed "in isolation but in light of the words that accompany it and give [it] meaning." Massachusetts v. Morash, 490 U.S. 107, 109 S. Ct. 1668, 1673, 104 L. Ed. 2d 98 (1989). As the Supreme Court noted when construing the meaning of one term in a phrase:
Jarecki v. G.D. Searle & Co., 367 U.S. 303, 307, 81 S. Ct. 1579, 1582, 6 L. Ed. 2d 859 (1961).
The fact that "oral communication" keeps company with "prospectus" suggests, as both parties have admitted, that the more general term be limited to conform to the more restrictive term where consonant with the legislative intent. We deduce no evidence that Congress intended an expansive meaning of oral communication unconnected to the term "prospectus." Congress defined the term "prospectus" as any "prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security," in section 2(10), 15 U.S.C. § 77b(10).
We believe that Congress employed the term "prospectus" as a term of art which describes the transmittal of information concerning the sale of a security in an initial distribution. In addition to its definition, the use of the term "prospectus" in various sections of the 1933 Act supports a reading restricted to initial distributions. Section 10 of the 1933 Act, 15 U.S.C. § 77j, which mandates the information required in a prospectus, clearly ties a prospectus with registration statements filed with the Securities Exchange Commission. For example, a prospectus shall contain the information required in a registration statement, but may omit some documents required of registration statements. 15 U.S.C. § 77j(a) (1). Section 10(a) (3) provides for current information in a prospectus used over nine months from the effective date of the registration statement. 15 U.S.C. § 77j(a) (3). Even an abbreviated prospectus authorized by section 10(b), 15 U.S.C. § 77j(b), which is not subject to the registration statement requirements of section 11, 15 U.S.C. § 77k, must be filed with the registration statement. Further, under section 5(b) (1), 15 U.S.C. § 77e(b) (1), a prospectus not meeting the requirements of section 10 may not be used in interstate commerce to sell registered securities. In addition, in its award of special powers to the Securities Exchange Commission, Congress gave the Commission power to amend requirements for "registration requirements and prospectuses." 15 U.S.C. § 77s. Thus Congress repeatedly used the term "prospectus" in provisions concerning registration statement requirements in initial distributions.
As well, the exemptions9 Congress provided to the definition of "prospectus" in section 2(10) are consistent with the overall policy to ensure full disclosure to purchasers in batch offerings. These provisions permit offerors of securities to provide additional information to potential investors that is not subject to the requirements of section 10 where these communications either merely add to information previously provided the investor in the form of a section 10 prospectus, or clearly "state [ ] from whom a written prospectus meeting the requirements of [section 10] may be obtained."
Therefore reading "prospectus" expansively would be contrary to the definition of the word "prospectus" as defined and used in the 1933 Act. If it had intended an expansive meaning for the term "prospectus", Congress more simply could have drafted section 12(2) to describe all "written or oral communications". See 2A Singer, Sutherland Stat. Const. Sec. 47.29 (4th ed. 1984) (" [i]n the absence of legislative intent to the contrary, or other overriding evidence of a different meaning, technical terms or terms of art used in a statute are presumed to have their technical meaning") (footnotes omitted).
As the jury verdict in this case demonstrates, an expansive reading of "oral communication" would permit a buyer to recover under section 12(2) for mere misrepresentations where that same buyer could not meet the scienter, reliance, and causation elements of a section 10(b) claim. Specifically because recovery under section 10(b) requires proof of scienter, mere negligent misrepresentation is not actionable under section 10(b). For a section 10(b) claim, something more, such as fraud, must be proven. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S. Ct. 1375, 1381, 47 L. Ed. 2d 668 (1976) (" 'scienter'--intent to deceive, manipulate, or defraud" is required for a private cause of action under section 10(b) and Rule 10b-5). Section 12(2), on the other hand, makes actionable negligent misrepresentation absent proof of scienter or fraud. Interpreting section 12(2) so that "oral communication" refers to both initial and secondary trading, then, would create an anomaly in that sellers in the aftermarket would be liable only for oral and not written misrepresentations because the term "prospectus" is limited to initial offerings. Legg Mason would thus be liable only for Batten's oral misrepresentation made over the "squawk box", but not for the three written reports containing the same misrepresentations. This distinction makes no logical sense.
We have to this point limited our examination to the language of section 12(2) alone to conclude that it should not be expanded to aftermarket trading. In addition, the "object and structure of the Act as a whole" support this interpretation based upon the maxim noscitur a sociis. See Dole v. United Steelworkers of America, --- U.S. ----, 110 S. Ct. 929, 935, 108 L. Ed. 2d 23 (1990) (reviewing legislative purpose and structure to interpret phrase).
The "object" of the 1933 Act informs our view of section 12(2). During the aftermath of the 1929 stock market crash, Congress sought to stabilize the market and reduce fraud through the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. See H.R.Rep. No. 85, 73d Cong., 1st Sess. 1, 2 (1933); Conference Report, H.R.Rep. No. 1838, 73d Cong., 2d Sess., 1 (1934). Together these statutes regulate both initial issuances and aftermarket trading of securities. Hochfelder, 425 U.S. at 195, 96 S. Ct. at 1382. Neither statute preempts recovery under either common law. 15 U.S.C. § 77p.
With the Securities Act of 1933, Congress sought to establish safeguards for investors in batch offerings of securities by establishing registration and disclosure requirements designed in part to protect investors from fraud and to promote ethical standards of honesty and fair dealing. Hochfelder, 425 U.S. at 195, 96 S. Ct. at 1382. The Securities Exchange Act of 1934, on the other hand, was enacted "to provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets and for other purposes." In Re Data Access Systems Sec. Litigation, 843 F.2d 1537, 1548 (3d Cir.), cert. den. sub nom., Vitiello v. I. Kahlowsky & Co., 488 U.S. 849, 109 S. Ct. 131, 102 L. Ed. 2d 103 (1988).10 While Congress intended that both statutes would protect investors against fraud, Data Access, 843 F.2d at 1548, the more specific intent with respect to the 1933 Act controls here where the statutory language requires a restrictive reading and Congress did not express a contrary intent.11
H.R. No. 85, 73d Cong., 1st Sess. 7 (1933); see also, e.g., Panek v. Bogucz, 718 F. Supp. 1228, 1232 (D.N.J. 1989) (noting the thrust of the 1933 Act to offer protection to investors in initial offerings); Mix v. E.F. Hutton & Co., Inc., 720 F. Supp. 8, 12 (D.D.C. 1989) (citing United States v. Naftalin, 441 U.S. 768, 99 S. Ct. 2077, 60 L. Ed. 2d 624 (1979), to describe purpose of 1933 Act to prevent fraud in initial distributions); Ralph v. Prudential-Bache Sec., Inc., 692 F. Supp. 1322, 1324 (S.D. Fla. 1988) (same). Nothing in the legislative history or structure of the 1933 Act indicates that Congress intended to broaden section 12(2) beyond the Act's principal purpose of regulating the distribution of new offerings. Cf. Mix, 720 F. Supp. at 8 (holding section 12(2) restricted to initial distributions absent clear congressional mandate to read section 12(2) expansively).
In addition, the "structure" of the Act supports the more narrow reading of section 12(2). See Dole, --- U.S. ----, 110 S. Ct. at 935, 936 (looking to language and import of other statutory provisions). Section 12(2) follows section 11 and section 12(1), which govern the registration of securities and create civil liability for sales of unregistered securities, respectively, and appears before section 13, which provides the statute of limitation for both sections 11 and 12. All of these sections deal with initial distributions. 15 U.S.C. §§ 77k, 77l(1). Congress' placement of section 12(2) squarely among 1933 Act provisions concerned solely with initial distributions of securities indicates that it designed section 12(2) to protect buyers of initial offers against fraud and misrepresentation.
Section 17(a) of the 1933 Securities Act, 15 U.S.C. § 77q(a), proscribes fraudulent conduct and makes it a crime. Wilko v. Swan, 127 F. Supp. 55, 58 (S.D.N.Y. 1955); see Steinberg, Section 17(a) of the Securities Act of 1933 after Naftalin and Redington, 68 Geo.L.Rev. 163, 177 (1979). Because the language of section 17(a) (2) and of section 12(2) is similar, these sections have been referred to as civil and criminal analogues. Since the Supreme Court has held Section 17(a) applicable to secondary markets, the investors urge that by analogy section 12(2) ought also to be interpreted expansively. United States v. Naftalin, 441 U.S. 768, 99 S. Ct. 2077, 60 L. Ed. 2d 624 (1979). We decline this suggestion, however, because the language of the two sections differs materially and we do not find the reasoning of the Supreme Court for expanding the reach of section 17(a) applicable to section 12(2).
Although some of the language of section 17(a) (2), making unlawful certain conduct "by means of any untrue statement [or omission] of a material fact ..." closely parallels sections 12(2)'s language, there are important and significant differences. Section 17(a) lacks the phrase "prospectus or oral communication" contained in section 12(2) and instead proscribes, as unlawful, conduct employed "directly or indirectly ... to obtain money or property by means of any untrue statement...." 15 U.S.C. § 77q(a) (emphasis added). These words--"directly or indirectly"--convey a legislative intent to encompass all conduct meeting the other elements of a section 17(a) claim. The words "prospectus or oral communication," in contrast, do not encompass the universe of methods as do "directly and indirectly." In fact, inclusion of "prospectus or oral communication" in section 17(a) would eviscerate the word "indirectly".12
We are also convinced that the reasons underlying the Naftalin holding that section 17(a) of the 1933 Act applies to both initial and aftermarket transactions do not apply to section 12(2). In Naftalin, the Court found that " [n]othing on the face of the statute" supported Naftalin's reading that section 17(a) (1) applied only to initial distributions of stock; the statutory language, according to the Court, made "no distinction" between initial and secondary tradings. Naftalin, 441 U.S. at 778, 99 S. Ct. at 2084. Naftalin's suggestion that the phrase "upon a purchaser" in section 17(a) (3) should be grafted onto section 17(a) (1) to exclude secondary tradings was rejected; each subsection "proscribes a distinct category of misconduct" as evidenced by use of the conjunctive "or". Naftalin, 441 U.S. at 773, 774, 99 S. Ct. at 2081, 2082. Moreover, Congress made its intent for unrestricted use of section 17(a) explicit in the legislative history: " [t]he Act subjects the sale of old or outstanding securities to the same criminal penalties and injunctive authority for fraud, deception, or misrepresentation as in the case of new issues put out after the approval of the act." Naftalin, 441 U.S. at 778, 99 S. Ct. at 2084 (quoting S.Rep. No. 47, 73d Cong., 1st Sess., 4 (1933)).
In contrast to section 17(a), section 12(2) has no such clear legislative mandate. The legislative history is devoid of any indication that the reach of section 12(2) was intended to be broader than the limited scope of sections 11 and 12(1). Although Congress specifically stated that the antifraud provision of section 17(a) was meant to reach secondary markets as well as initial distributions, it failed to make the same application with respect to section 12(2). We recognize that legislative history can be a legitimate guide to discovering a statutory purpose obscured by ambiguity, but " [i]n the absence of a 'clearly expressed legislative intention to the contrary,' the language of the statute itself 'must ordinarily be regarded as conclusive....' " United States v. James, 478 U.S. 597, 606, 106 S. Ct. 3116, 3121, 92 L. Ed. 2d 483 (1986) (quoting Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S. Ct. 2051, 2056, 64 L. Ed. 2d 766 (1980)).
In concluding that section 12(2) claims apply only to initial offerings, we are mindful that the 1933 and 1934 Acts should be construed in pari materia, that is, as coordinating statutes which contain some overlapping provisions. See Herman & McLean v. Huddleston, 459 U.S. 375, 390, 103 S. Ct. 683, 691, 74 L. Ed. 2d 548 (1983) (sections that address "different types of wrongdoing," may prohibit some of the same conduct). Nevertheless, one provision should be narrowly interpreted, when consistent with legislative intent, so as not to eviscerate requirements for recovery under another complementary provision. As the verdict in this case particularly demonstrates, the application of section 12(2) to secondary trading would permit purchasers of securities to prevail against sellers in instances where those purchasers cannot recover under section 10(b) of the Securities Exchange Act of 1934.
Under section 10(b) and its implementing rule, 10b-5, a purchaser of securities may bring a private cause of action. Hochfelder, 425 U.S. at 195-197, 96 S. Ct. at 1382-84; Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975). The elements of proof required and damages recoverable under section 10(b), however, differ substantially from those of section 12(2). In contrast to section 10(b), section 12(2) requires no proof of scienter or reliance, and embodies a more relaxed standard of causation. If it were determined that section 12(2) applies to secondary market trading, the more lenient requirements of section 12(2) would effectively eliminate the use of section 10(b) by securities purchasers.13 Such a construction would overrule, sub silencio, section 10(b) as a remedy for purchasers.
The different remedies available under section 12(2) and section 10(b), also indicate that section 12(2) should be restricted to initial distributions. Section 12(2) provides for rescissionary damages, Pinter v. Dahl, 486 U.S. 622, 641 n. 18, 108 S. Ct. 2063, 2076 n. 18, 100 L. Ed. 2d 658 (1988), and section 10(b) permits recovery only of actual damages, see Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972). There is good reason why sellers in initial distributions should be liable for rescissionary damages. These sellers receive the full purchase price from the investors and are the investors' sole source of information concerning the value of the security. The same is not true of sellers in the aftermarket, such as Legg Mason, who receive only a commission and who are not the investors' sole source of information concerning the value of the stock.
We begin with the oft-stated principle that in order for a party to have its requested instruction given, there must be evidence in the record supporting its submission. Edwards v. City of Philadelphia, 860 F.2d 568, 575 n. 7 (3d Cir. 1988); DiRago v. American Export Lines, Inc., 636 F.2d 860, 867 (3d Cir. 1981). Additionally, a requested instruction reflecting a party's theory of its case must be legally correct. Gander v. Mr. Steak of Sun Ray, Inc., 774 F.2d 920, 924 (8th Cir. 1985).
According to the uncontested jury instruction given with respect to section 10(b)16 , the investors were required to prove the following five elements in order to establish a section 10(b) violation:
See Hoxworth v. Blinder, Robinson & Co., Inc., 903 F.2d 186, 203 (3d Cir. 1990) (noting no appellate decision on this issue as of May 9th). This issue has been litigated in the federal district courts more frequently since 1976 when the Supreme Court ruled in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976), that proof of scienter is a requirement for a section 10(b) claim under the 1934 Securities Exchange Act. The standard under section 12(2) is, however, a lesser, negligence, standard. See Hazen, A Look Beyond the Pruning of Rule 10b-5: Implied Remedies and Section 17(a) of the Securities Act of 1933, 64 Va. L. Rev. 641, 644 n. 15 (1978) (predicting increased usage of section 12(2) following Hochfelder) . In addition, the measure of damages available under section 12(2) is greater than under section 10(b). Hoxworth, 903 F.2d at 203, 203 n. 25
The investors withdrew additional counts of common law "aiding and abetting" and controlling person liability under 15 U.S.C. §§ 77o, 78t
Congress provided two exemptions to the definition of prospectus in section 2(10): (1) a communication provided to the investor after the date of registration if a prior written prospectus had been furnished to that investor, and (2) a notice, circular, advertisement, letter or communication which refers to a section 10 prospectus and does no more than identify the security, its price, and by whom orders will be executed. 15 U.S.C. § 77b(10)
See Aaron v. SEC, 446 U.S. 680, 695, 100 S. Ct. 1945, 1955, 64 L. Ed. 2d 611 (1980) (citations omitted) (holding that the SEC is required to prove scienter in an action brought under section 17(a) (1) but not sections 17(a) (2) and (3)); Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 99 S. Ct. 2479, 2490, 61 L. Ed. 2d 82 (1979) (invoking the remedial purposes of the 1934 Act does not justify reading a private right of action into section 17(a)); SEC v. Sloan, 436 U.S. 103, 116, 98 S. Ct. 1702, 1710, 56 L. Ed. 2d 148 (1978) (rejecting the suggestion that section 12(k) of the 1934 Act should be construed to permit a more "satisfactory remedy" absent support in its language and the statutory scheme).
15 U.S.C. § 77q(a) (1976) (emphasis added).
It is for this reason that we find the investors' reliance on Herman & McLean v. Huddleston, 459 U.S. 375, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983), to be misplaced. In Huddleston, the Supreme Court found section 10(b) applicable to conduct also covered by section 11 of the 1933 Act, rejecting the contention that any overlap between the two provisions would be fatal to the viability of the section 10(b) claim. Huddleston, 459 U.S. at 382, 383, 103 S. Ct. at 687, 688. In Huddleston, the availability of a remedy under section 10(b) did not render section 11 superfluous because section 11, with its negligence standard of proof, remained available to the plaintiff who could not make a claim under section 10(b) for lack of the scienter element. Some overlap, limited to cases where scienter can be proven, is not inconsistent with the purposes of the securities acts
Fed. R. Civ. P. 61. In making a non-constitutional "harmless error" determination, the court must have a sure conviction that the error did not prejudice a party, but it need not disprove every reasonable possibility of prejudice. United States v. Jannotti, 729 F.2d 213, 219-20 n. 2 (3d Cir. 1984).