Source: http://www.ecases.us/case/c329946/fed-sec-l-rep-p-95351-billie-jean-woodward-v-metro-bank-of-dallas/
Timestamp: 2020-03-30 17:13:48
Document Index: 84626270

Matched Legal Cases: ['§ 1601', '§ 78', '§ 8', '§ 8', '§ 7', '§ 78', '§ 221', '§ 221', '§ 78']

Fed. Sec. L. Rep. P 95,351 Billie Jean Woodward v. Metro Bank of Dallas, Fifth Circuit, US Court of Appeals Cases, Federal Courts, COURT CASE
Fed. Sec. L. Rep. P 95,351 Billie Jean Woodward v. Metro Bank of Dallas , 522 F.2d 84 ( 1975 )
To place our ultimate discussion of Metro's liability in its proper context, a brief review of this Court's current position on Rule 10b-5 seems appropriate. The generous remedial compass of the federal securities laws is well-known; countless cases have recognized the broad protection crafted by the courts from the securities legislation and the concomitant flexible approach attuned to economic realities. E. g., United Housing Foundation, Inc. v. Forman, 1975, --- U.S. ---, ---, 95 S. Ct. 2051, 2057-2058, 44 L. Ed. 2d 621, 629-30; Tcherepnin v. Knight, 1967, 389 U.S. 332, 336, 88 S. Ct. 548, 553, 19 L. Ed. 2d 564, 569; SEC v. Capital Gains Research Bureau, Inc., 1963, 375 U.S. 180, 186, 84 S. Ct. 275, 279, 11 L. Ed. 2d 237, 243; Dupuy v. Dupuy, 5 Cir. 1975, 511 F.2d 641, 643; Smallwood v. Pearl Brewing Co., 5 Cir. 1974, 489 F.2d 579, 592, Cert. denied, 419 U.S. 873, 95 S. Ct. 134, 42 L. Ed. 2d 113; Hooper v. Mountain States Securities Corp., 5 Cir. 1960, 282 F.2d 195, 201-02, Cert. denied, 1961, 365 U.S. 814, 81 S. Ct. 695, 5 L. Ed. 2d 693.14 Yet the very breadth of present 10b-5 law imposes a duty on the courts to evaluate a proposed expansion of the Rule's coverage in light of the facts and circumstances of the new case. See Herpich v. Wallace, 5 Cir. 1970,430 F.2d 792; Accord, Clement A. Evans & Co. v. McAlpine, 5 Cir. 1970, 434 F.2d 100, 103, Cert. denied sub nom., Clement A. Evans & Co. v. A. M. Kidder & Co., 1971, 402 U.S. 988, 91 S. Ct. 1660, 29 L. Ed. 2d 153. The court must ask whether the conduct in the case before it was the type of behavior meant to be forbidden by the securities acts,15 remembering that business transactions are not all reducible to a purchase or sale of a security. Many areas of business activity are governed by state laws, such as the Uniform Commercial Code, or other federal laws, such as the Truth-in-Lending Act, 15 U.S.C. § 1601 Et seq. (1970) and the antitrust laws. Some transactions, it is only logical to assume, should be left to the operation of these other laws; for Rule 10b-5 was not designed to be the ethical Ten Commandments for all securities transactions. As this Court stated in Herpich v. Wallace, supra, 430 F.2d at 804-05:
A preliminary task in every 10b-5 case is to find some "security" that was the object of the activities in question. See Tcherepnin v. Knight, 1967,389 U.S. 332, 88 S. Ct. 548, 19 L. Ed. 2d 564; SEC v. C. M. Joiner Leasing Corp., 1943, 320 U.S. 344, 64 S. Ct. 120, 88 L. Ed. 88. The broad definition of a "security" in section 3(a)(10) of the Exchange Act, 15 U.S.C. § 78c(a)(10) (1970), encompasses any "investment contract."16 The classic definition of "investment contract," introduced in SEC v. W. J. Howey Co., 1946, 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244, provides that
Certainly some promissory notes are "securities" within the meaning of the securities acts, notwithstanding the exclusion for notes with maturity not less than nine months. SEC v. Continental Commodities Corp., 5 Cir. 1974,497 F.2d 516, 524; See Securities Act. Rel. No. 4412, 26 Fed.Reg. 9158-59 (1961); Cf. Zeller v. Bogue Electric Mfg. Corp., 2 Cir. 1973, 476 F.2d 795, 799-800, Cert. denied, 414 U.S. 908, 94 S. Ct. 217, 38 L. Ed. 2d 146. In fact, this Court's earlier observations that "almost all notes" are securities reflected the well-known breadth of remedial coverage afforded by the Exchange Act. Rekant v. Desser, 5 Cir. 1970, 425 F.2d 872, 878; Lehigh Valley Trust Co. v. Central Nat'l Bank, 5 Cir. 1969, 409 F.2d 989, 992. On the other hand, when we are dealing with documents on the definitional fringes, we must tread carefully. The delicate distinction that determines each case is the commercial/investment dichotomy. In Bellah v. First National Bank, 5 Cir. 1974, 495 F.2d 1109, and McClure v. First National Bank, 5 Cir. 1974, 497 F.2d 490, Cert. denied, 1975, 420 U.S. 930, 95 S. Ct. 1132, 43 L. Ed. 2d 402, analysis under the commercial/investment rubric led to the conclusion that the notes were not securities, while in SEC v. Continental Commodities Corp., 5 Cir. 1974, 497 F.2d 516, the same approach resulted in a holding that a note was a security.
The conclusions of law filed by the trial court in this case indicate that it relied on the erroneous legal standard of the section 3(a)(10) nine month maturity period in its decision to dismiss for want of jurisdiction. Although we find the debate on the question whether Mrs. Woodward's note was commercial or investment intriguing, we choose to postpone its resolution to another day. The question is close, given the history she recites, and it seems possible to us that her notes were for "investment."18 If this case had not been fully tried, we would have been forced to remand to the district court for further consideration in light of the correct standard. Fortunately, however, a remand here is unnecessary, since the court wisely allowed the parties to present the entire case before finally deciding to dismiss. Even if we were to characterize the note as a security, we would have answered only the first question. Equally important is the issue whether the bank is a proper party in this case. This question turns on the standard governing liability for aiders and abettors under 10b-5. Application of this legal standard to the trial court's findings of fact permits us to affirm the result below on different grounds. See Helvering v. Gowran, 1937, 302 U.S. 238, 245, 58 S. Ct. 154, 158, 82 L. Ed. 224, 230; Associated Builders, Inc. v. Alabama Power Co., 5 Cir. 1974, 505 F.2d 97, 102; Cf. Hooper v. Mountain States Sec. Corp., 5 Cir. 1960, 282 F.2d 195.
1. Proscribed conduct. Subsumed within the first element are several factors of independent significance. First, some sort of fraud, in the special 10b-5 sense of the word, must have been committed. See Herpich v. Wallace, 5 Cir. 1970, 430 F.2d 792, 802;20 Accord, Dupuy v. Dupuy, 5 Cir. 1975,511 F.2d 641, 643. Second, this Circuit recognizes some continuing vitality of the scienter requirement, at least to the extent that something more than ordinary negligence is required for 10b-5 liability. Sargent v. Genesco, Inc., 5 Cir. 1974, 492 F.2d 750, 761; Smallwood v. Pearl Brewing Co., 5 Cir. 1974, 489 F.2d 579, 606, Cert. denied, 419 U.S. 873, 95 S. Ct. 134, 42 L. Ed. 2d 113. The third component inherent in the first element of "proscribed conduct" is that of materiality. In Affiliated Ute Citizens v. United States, 1972, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741, the Supreme Court held that
2. Purchase or Sale. The second basic element set out in Sargent rests on the "in connection with" language of the Rule. In Birnbaum v. Newport Steel Corp., 2 Cir. 1952, 193 F.2d 461, Cert. denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L. Ed. 1356, the Second Circuit announced the rule that plaintiffs must be purchasers or sellers in order to invoke Rule 10b-5. The Birnbaum rule was construed liberally in Superintendent of Ins. v. Bankers Life & Cas. Co., 1971, 404 U.S. 6, 92 S. Ct. 165, 30 L. Ed. 2d 128; nevertheless, as this Court has asserted, "(b)loody but unbowed, Birnbaum still stands." Rekant v. Desser, 5 Cir. 1970, 425 F.2d 872; Lutgert v. Vanderbilt Bank, 5 Cir. 1975, 508 F.2d 1035; see the extensive discussion of Birnbaum in Smallwood v. Pearl Brewing Co., supra, 489 F.2d at 589-95. Finally, the "in connection with" requirement encompasses the notion of privity, which seems to be to defendants what Birnbaum is to plaintiffs. Like most other legal concepts in the cocoon of Rule 10b-5, the common law variety of privity has undergone a metamorphosis, its definition assuming utterly new contours. See Sargent v. Genesco, Inc., 5 Cir. 1974, 492 F.2d 750; Rekant v. Desser, 5 Cir. 1970, 425 F.2d 872; Hooper v. Mountain States Securities Corp., supra,282 F.2d 195; Cf. Iroquois Indus., Inc. v. Syracuse China Corp., 2 Cir. 1969, 417 F.2d 963, Cert. denied, 1970, 399 U.S. 909, 90 S. Ct. 2199, 26 L. Ed. 2d 561. Groping for words to express the formula that justifies isolating the defendant and holding him responsible for a plaintiff's alleged injury, courts have spoken of a nexus between the two parties, Sargent v. Genesco, Inc., supra, 492 F.2d at 761, and of some legally cognizable relationship between plaintiffs and defendants, Lewis v. Marine Midland Grace Trust Co., S.D.N.Y.1973, 63 F.R.D. 39. From the central point of privity, whirling outward with a strong centrifugal force, the Rule has brought within its galaxy more and more parties: from partners, tippees, and professional consultants, to conspirators and aiders and abettors. Our task, as we must accept it, is to ascertain in the case before us whether Metro Bank's acts and omissions possessed enough centripetal momentum to impel it into the sphere of 10b-5's reach.
The elements of an aiding and abetting claim have not yet crystallized into a set pattern; however, we find the Sixth Circuit's analysis in SEC v. Coffey, 6 Cir. 1974, 493 F.2d 1304, Cert. denied, 1975, --- U.S. ---, 95 S. Ct. 2675, 42 L. Ed. 2d 837, helpful:
493 F.2d at 1316. The elements adopted by the Third Circuit in Landy v. Federal Deposit Ins. Corp., 3 Cir. 1973, 486 F.2d 139, Cert. denied, 1974, 416 U.S. 960, 94 S. Ct. 1979, 40 L. Ed. 2d 312, are similar to the Coffey test, but Landy refers to "an independent wrong" instead of a securities law violation, and knowledge of the wrong's existence instead of awareness of a role in improper activity. Finally, Landy omits the "knowing" requirement for the substantial assistance aspect. The first two Landy elements pose a danger of over-inclusiveness and seem to lose sight of the necessary connection to the securities laws. One could know of the existence of a "wrong" without being aware of his role in the scheme, and it is the participation that is at issue. The scienter requirement scales upward when activity is more remote;23 therefore, the assistance rendered should be both substantial and knowing. A remote party must not only be aware of his role, but he should also know when and to what degree he is furthering the fraud.
The second limb of the Coffey tree calls for general awareness that one's role was part of an overall activity that is improper. In this connection, the surrounding circumstances and expectations of the parties are critical. If the alleged aider and abettor conducts what appears to be a transaction in the ordinary course of his business, more evidence of his complicity is essential. The analysis of aiding-abetting liability at this point unavoidably harks back to the nature of the security that is the object of the transaction. Transactions occur as a whole and only later are they subjected to the scalpel of the legal dissector. If the securities involved are shares of common stock and someone aids and abets a fraud perpetrated in their sale, the culprit would be hard pressed to argue innocence once his awareness of the general sales activity was shown. On the other hand, if the document is barely a security at all, like a loan, then other independent commercial assumptions come into play, and the alleged aider-abettor may be unaware of any improper activity. Still, even for facially ordinary commercial transactions, a court may be influenced by a special duty imposed by the securities acts on the particular type of party, such as an insider,24 a controlling person,25 an accountant,26 or a broker.27 Generally speaking, though, the securities acts do not impose strict liability upon all who come in contact with a security. The postman who mails a fraudulent letter is not covered by the Act, nor is the company that manufactured the paper on which the violating documents are printed. See Hochfelder v. Midwest Stock Exchange, 7 Cir. 1974, 503 F.2d 364, Cert. denied, 419 U.S. 875, 95 S. Ct. 137, 42 L. Ed. 2d 114; SEC v. National Bankers Life Ins. Co., N.D.Tex.1971, 324 F. Supp. 189, Aff'd, 5 Cir. 1971, 448 F.2d 652; Branham v. Material Sys. Corp., S.D.Fla.1973, 354 F. Supp. 1048. Rather, as Professor Bromberg points out, "the clue to liability is some sort of knowledge." A Bromberg, Securities Law: Fraud § 8.5(582) (1974). See SEC v. National Bankers Life Ins. Co., supra, 324 F.Supp. at 195; Kerbs v. Fall River Indus., Inc., 10 Cir. 1974, 502 F.2d 731, 740; Zabriskie v. Lewis, 10 Cir. 1974, 507 F.2d 546, 554. Knowledge may be shown by circumstantial evidence, or by reckless conduct, but the proof must demonstrate actual awareness of the party's role in the fraudulent scheme. As Professor Ruder argued, using an example remarkably similar to the case at hand:
The final requirement for aiding-abetting liability is that of knowing, substantial assistance of the violation. Most problematic in this area is the issue whether, or to what extent, silence and inaction can fulfill the requirement. This issue turns on the nature of the duty owed by the alleged aider and abettor to the other parties to the transaction. The standards courts have used for measuring culpability by silence have varied. Some declare without qualification that silence and inaction alone can create liability for aiding-abetting. E. g., Kerbs v. Fall River Indus., Inc., 10 Cir. 1974, 502 F.2d 731, 740; Brennan v. Midwestern United Life Ins. Co., 7 Cir. 1969, 417 F.2d 147, 154, Cert. denied, 1970, 397 U.S. 989, 90 S. Ct. 1122, 25 L. Ed. 2d 397; Green v. Jonhop, D.Ore.1973, 358 F. Supp. 413, 419; Anderson v. Francis I. du Pont & Co., D.Minn.1968, 291 F. Supp. 705, 709. Other courts squarely reject the notion that inaction alone is enough, distinguishing the contrary authority. E. g., Landy v. Federal Deposit Ins. Corp., supra, 486 F.2d at 161-62; Wessel v. Buhler, 9 Cir. 1971, 437 F.2d 279, 283. The Sixth Circuit in SEC v. Coffey, supra, 493 F.2d at 1317, suggested a rule imposing liability "only where it is shown that the silence of the accused aider and abettor was consciously intended to aid the securities law violation." Taking a slightly different approach, the Ninth Circuit held that liability for silence or inaction arises "only when a duty to disclose has arisen." Strong v. France, 9 Cir. 1973, 474 F.2d 747, 752.
We think that the best solution is a blend of the Coffey test and the Strong test. When it is impossible to find any duty of disclosure, an alleged aider-abettor should be found liable only if scienter of the high "conscious intent" variety can be proved. Where some special duty of disclosure exists,28 then liability should be possible with a lesser degree of scienter. Cf. City National Bank v. Vanderboom, 8 Cir. 1970, 422 F.2d 221, Cert. denied, 399 U.S. 905, 90 S. Ct. 2196, 26 L. Ed. 2d 560; Accord, Vohs v. Dickson, 5 Cir. 1974, 495 F.2d 607, 621-22; Clement A. Evans & Co. v. McAlpine, supra, 434 F.2d at 103. In a case combining silence/inaction with affirmative assistance, the degree of knowledge required should depend on how ordinary the assisting activity is in the business involved.29 If the evidence shows no more than transactions constituting the daily grist of the mill, we would be loathe to find 10b-5 liability without clear proof of intent to violate the securities laws. Conversely, if the method or transaction is atypical or lacks business justification, it may be possible to infer the knowledge necessary for aiding and abetting liability. In any case, the assistance must be substantial before liability can be imposed under 10b-5. See Landy v. Federal Deposit Ins. Corp., supra, 486 F.2d at 163; A. Bromberg, Securities Law: Fraud § 8.5(530) (1974). Substantiality is a function of all the circumstances.
We find it impossible to attach some nefarious significance to the statement on the Regulation U form that the loan was to provide working capital. Regulation U was promulgated under the authority of the Securities Exchange Act § 7, 15 U.S.C. § 78g (1970). That section was enacted "(f)or the purpose of preventing the excessive use of credit for the purchase or carrying of securities." The bank's concern with the Regulation U statement is whether the loan is "purpose" or "nonpurpose" I. e. whether or not it will be used for the purpose of purchasing or carrying any margin stock. See 12 C.F.R. § 221.1 (1975); E. F. Hutton & Co. v. Brown, S.D.Tex.1969, 305 F. Supp. 371, 384; cf. 12 C.F.R. § 221.120(a) (1975). Once the bank has determined that the loan is nonpurpose, as the Metro Starnes loan clearly was, its responsibility ends. The fact that Mrs. Woodward may have relied on the statement does not suffice to connect Metro to any fraud.
The proceeds of the February note were turned over immediately by Starnes to CIC's account and used to pay a substantial number of CIC checks. Metro's role in this was simply to pay the checks drawn on the account. In sharp contrast is the bank's behavior in Carroll v. First National Bank, 7 Cir. 1969, 413 F.2d 353, cert. denied, 1970, 396 U.S. 1003, 90 S. Ct. 552, 24 L. Ed. 2d 494, where the bank facilitated a credit bubble fraud by arranging for persons other than the designated customers to pay drafts and purchase securities in order to conceal the precarious nature of the purchases, and by holding a large number of uncollectible drafts in the hopes that the value of the purchased securities would rise. Simply paying checks in accordance with its customer's order raises no inference of fraud or substantial assistance to a fraud.
See also Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2 Cir. 1974, 495 F.2d 228; Walling v. Beverly Enterprises, 9 Cir. 1973, 476 F.2d 393; Travis v. Anthes Imperial Ltd., 8 Cir. 1973, 473 F.2d 515; Kahan v. Rosenstiel, 3 Cir. 1970, 424 F.2d 161, Cert. denied sub nom., Glen Alden Corp. v. Kahan, 398 U.S. 950, 90 S. Ct. 1870, 26 L. Ed. 2d 290; Carroll v. First National Bank, 7 Cir. 1969, 413 F.2d 353, Cert. denied, 1970, 396 U.S. 1003, 90 S. Ct. 552, 24 L. Ed. 2d 494
See SEC v. National Securities, Inc., 1969, 393 U.S. 453, 466, 89 S. Ct. 564, 572, 21 L. Ed. 2d 668, 680; Herpich v. Wallace, 5 Cir. 1970, 430 F.2d 792, 809; City National Bank v. Vanderboom, 8 Cir. 1970, 422 F.2d 221, 229, Cert. denied, 399 U.S. 905, 90 S. Ct. 2196, 26 L. Ed. 2d 560
Although the Howey test has received some criticism, See, e. g., Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811, 13 Cal. Rptr. 186, 361 P.2d 906 (1961); Hawaii v. Hawaii Market Center, Inc., 52 Haw. 642, 485 P.2d 105 (1971), the Supreme Court reaffirmed its vitality in United Housing Foundation, Inc. v. Forman, 1975, --- U.S. ---, 95 S. Ct. 2051, 44 L. Ed. 2d 621
(t)ogether the section and the rule aim at reaching "misleading or deceptive activities, whether or not they are precisely and technically sufficient to sustain a common law action for fraud and deceit," Cady, Roberts & Co., 40 S.E.C. 907, (1961), carried on "in connection with" the purchase or sale of securities. They are not intended as a specification of particular acts or practices that constitute "manipulative or deceptive devices or contrivances," but are instead designed to encompass the infinite variety of devices that are alien to the "climate of fair dealing," SEC v. Capital Gains Research Bur., 375 U.S. 180, 201, 84 S. Ct. 275, 288, 11 L. Ed. 2d 237 (1963), that Congress sought to create and maintain.
Apparently, the Second Circuit takes the view that section 20(a) of the Act, 15 U.S.C. § 78t (1970), which deals with "controlling persons," is the exclusive way to hold someone secondarily liable. See Gordon v. Burr, S.D.N.Y.1973, 366 F. Supp. 156, Aff'd, 2 Cir. 1974, 506 F.2d 1080. While this may be an unnecessarily restrictive approach to the securities acts, it is a question that we need not resolve here. Even under the arguably less stringent theory of aiding and abetting, we cannot condemn these defendants
Compare the Supreme Court's definition of aiding and abetting in the criminal area enunciated in Nye & Nissen v. United States, 1949, 336 U.S. 613, 69 S. Ct. 766, 93 L. Ed. 919:
E. g., SEC v. Texas Gulf Sulphur, 2 Cir. 1968, 401 F.2d 833, Cert. denied sub nom., Coates v. SEC, 1969, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756; Rekant v. Desser, 5 Cir. 1970, 425 F.2d 872
Cf. Affiliated Ute Citizens v. United States, 1972, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (no special duty for ordinary function of transfer agent)
Accounting Terminology Bulletin No. 1 P. 34, APB Accounting Principles: Original Pronouncements (CCH 1973)
DocketNumber： 74-2897
Citation Numbers： 522 F.2d 84
Filed Date： 11/3/1975
Hiram M. Reed, Laura M. Reed, a Widow, and Hiram M. Reed, ... , 266 F.2d 314 ( 1959 )
Carroll v. First National Bank of Lincolnwood , 413 F.2d 353 ( 1969 )
fed-sec-l-rep-p-92526-iroquois-industries-inc-v-syracuse-china , 417 F.2d 963 ( 1969 )
Fed. Sec. L. Rep. P 96,189 First Virginia Bankshares v. ... , 559 F.2d 1307 ( 1977 )
fed-sec-l-rep-p-96275-david-e-rolf , 570 F.2d 38 ( 1978 )
Fed. Sec. L. Rep. P 97,326 David Broad v. Rockwell ... , 614 F.2d 418 ( 1980 )
Fed. Sec. L. Rep. P 97,346 Robert L. Alley, Cross-Appellee ... , 614 F.2d 1372 ( 1980 )
fed-sec-l-rep-p-97569-united-american-bank-of-nashville-v-william , 620 F.2d 1108 ( 1980 )
Fed. Sec. L. Rep. P 97,590 Ralph Falls, Jr. v. William ... , 621 F.2d 1362 ( 1980 )
fed-sec-l-rep-p-97525-lawrence-oleck-and-theodore-oleck-v-alan-h , 623 F.2d 791 ( 1980 )
Fed. Sec. L. Rep. P 97,615 Dan J. Croy and Anne S. Croy v. ... , 624 F.2d 709 ( 1980 )