Source: https://casetext.com/case/klein-v-computer-devices-inc
Timestamp: 2018-12-15 17:26:21
Document Index: 463279667

Matched Legal Cases: ['§ 10', '§ 1292', '§ 77', '§ 77', '§ 12', '§ 12', '§ 12', '§ 12']

Klein v. Computer Devices, Inc, 602 F. Supp. 837 | Casetext
Klein v. Computer Devices, Inc.
602 F. Supp. 837 (S.D.N.Y. 1985)
United States District Court, S.D. New YorkFeb 21, 1985
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Booth, Lipton Lipton, New York City, for plaintiffs Klein and Hoffman; Philip H. Kalban, New York City, of counsel.
Pomerantz, Levy, Haudek, Block Grossman, New York City, Berman, Devalerio Pease, Sumner Woodrow, Boston, Mass., for plaintiff Davella; Stephen P. Hoffman, Lawrence D. Paskowitz, New York City, of counsel.
Brown, Wood, Ivey, Mitchell Petty, New York City, for defendant A.G. Becker Paribas Inc.; Henry F. Minnerop, Judith Welcom, Stuart J.M. Breslow, New York City, of counsel, Louis Loss, New York City, of special counsel.
On July 8, 1983, there was a public offering of one million shares of common stock of Computer Devices, Inc., at $11.25 per share. The value of these shares declined and Computer Devices, Inc., subsequently filed for bankruptcy. Purchasers of the stock filed complaints alleging violations of the securities laws by the officers and directors of Computer Devices, Inc., and by Becker Paribas Incorporated ("Becker"), the lead underwriter of the public offering. The defendants moved to dismiss the complaints on various grounds. The motions were granted in part and denied in part. See Klein v. Computer Devices, Inc., 591 F. Supp. 270 (S.D.N.Y. 1984) (the "Opinion").
There are two actions before this Court: Klein v. Computer Devices, Inc., No. 83 Civ. 6456 (S.D.N.Y. filed Aug. 31, 1983), and Davella v. A.G. Becker Paribas, Inc., No. 83 Civ. 8318 (S.D.N.Y. filed Nov. 15, 1983). Throughout this opinion, the Court refers to the second amended complaint in the Klein action as "the Klein complaint" and to the amended complaint in the Davella action as "the Davella complaint."
Effective June 1, 1984, Becker changed its name from A.G. Becker Paribas Incorporated to Becker Paribas Incorporated.
The plaintiffs in the Klein action had also sued Computer Devices, Inc. They later moved to dismiss the action against Computer Devices, Inc., and the motion was granted without opposition.
Becker now moves for reargument of the Opinion with respect to the denial of Becker's motion to dismiss the plaintiffs' claims under section 12(2) of the Securities Act of 1933 (the "Securities Act") for lack of privity between the plaintiffs and Becker. In the alternative, Becker moves for an order pursuant to 28 U.S.C. § 1292(b) certifying the Court's order for interlocutory appeal.
The plaintiffs argue that this motion is untimely and should be stricken or denied. In response, Becker moves to extend its time to serve its motion for reargument. The Court grants this motion.
Becker argues that the Court failed to consider the unique statutory status of an underwriter with respect to its liability under section 12(2). Becker argues that this section unambiguously requires privity between the buyer and the seller. Although it acknowledges that the courts have sidestepped the privity requirement by utilizing such theories as participation, aiding and abetting, and conspiracy, Becker contends that such theories are not applicable to an underwriter because of the statutory limitations that Congress articulated in sections 11 and 12.
Becker states that the "Court appears to have held that a managing underwriter, solely by performing the duties typical of managing underwriters, may be held liable in damages for the proceeds of the entire public offering of securities sold to the public, regardless of the particular number of shares underwritten and sold by him." Defendant Becker's Memorandum of Law in Support of Its Motion for Reargument at 3. Becker further states that this holding "is of great importance to the entire investment banking community, as it threatens to vastly expand the financial exposure of a managing underwriter in a public offering." Id.
[a]ny person who . . . offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, . . . shall be liable to the person purchasing such security from him. . . .
15 U.S.C. § 77 l (1982).
[i]n case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security . . . may . . . sue . . . every underwriter with respect to such security.
[i]n no event shall any underwriter (unless such underwriter shall have knowingly received from the issuer for acting as an underwriter some benefit, directly or indirectly, in which all other underwriters similarly situated did not share in proportion to their respective interests in the underwriting) be liable in any suit . . . for damages in excess of the total price at which the securities underwritten by him and distributed to the public were offered to the public.
15 U.S.C. § 77k(e) (1982). See 78 Cong.Rec. 8709 (1934) (statement of Rep. Rayburn) ("There has been a question ever since the adoption of the Securities Act of 1933 with reference to the underwriter. We make it clear in these amendments that hereafter under no circumstances shall an underwriter be held responsible for any more of the issue than he himself personally underwrites.").
The Court agrees that sections 11 and 12 should be read together when construing the liability of an underwriter, such as Becker, under section 12(2). For this reason, an underwriter who is alleged to have violated section 12(2) merely by performing the functions of a typical lead underwriter cannot be liable as a participator under section 12(2), unless the plaintiff bought its stock from that underwriter. It is possible, however, that an underwriter can be liable as a participator if the underwriter participates in the sales transaction to a greater degree. Moreover, an underwriter, whether the lead underwriter or just a member of the syndicate, who aids and abets or conspires in the preparation of a false prospectus to be used in selling securities to purchasers, can be liable under section 12(2). Cf. Akerman v. Oryx Communications, Inc., [Current] Fed.Sec.L.Rep. ¶ 91,680 (S.D.N.Y. 1984) (The defendant-underwriters' motion for summary judgment dismissing the complaint for lack of privity under section 12(2) was granted. The court found that the plaintiffs were unable to proffer any evidence that the underwriters of the issuance of stock aided, abetted, or conspired in transactions effected by the immediate sellers of stock.); Competitive Associates, Inc. v. International Health Sciences, Inc., Fed.Sec.L.Rep. ¶ 94,966 (S.D.N.Y. 1975) (After a trial on the merits, the court found that a conspiracy existed and that its objective was to make the underwriting and public offering of the issuer a success beyond its normal expectations. The court further found that there was no evidence that the lead underwriter was a party to the conspiracy or should have known of it and that the underwriter was not liable under section 12(2).). This will require proof of some sort of scienter. See Lanza v. Drexel Co., 479 F.2d 1277, 1298 (2d Cir. 1973) (en banc) ("[S]ection [12(2)] requires privity or, in the absence of privity, scienter.") (footnotes omitted); In re Caesars Palace Securities Litigation, 360 F. Supp. 366, 383 (S.D.N.Y. 1973). See also L. Loss, Fundamentals of Securities Regulation 1184-1185 (1983). Requiring proof of scienter brings these theories of liability under section 12(2) close to liability under section 10(b) of the Securities Exchange Act of 1934 wherein the liability of an underwriter is not limited. See Frankel v. Wyllie Thornhill, Inc., 537 F. Supp. 730, 744 (W.D.Va. 1982).
Persons participating directly in a violation of [section 12] will not escape liability under the express language of the Act; similarly, those persons who are aware of and, to some lesser degree, participate in a violation of the securities laws and either enter into an agreement with or give assistance to the primary wrongdoers should not be permitted to escape the imposition of liability. As one commentator has pointed out, "[s]uch individuals will be subject to liability because they have acted knowingly or recklessly" to assist in such conduct or to be a part of a proscribed course of action.
In re Caesars Palace Securities Litigation, 360 F. Supp. 366, 383 (S.D.N.Y. 1973) (footnote omitted).
[T]here [is] a distinction under § 12 between the liability of the seller proper and the liability of other persons, in that the seller proper would have the burden under the statute of proving his innocence but that the plaintiff obviously would have the burden of proving that the other persons had participated in an unlawful sale, a burden that (at least under § 12(2) as distinguished from § 12(1)) would almost inevitably involve proof by the plaintiff of some sort of scienter on their part.
Plaintiffs . . . have actually alleged . . . that the [defendants] aided and abetted the § 12(2) violations. . . . This theory of liability is an accepted one, the elements of which apparently are the same as those of aiding and abetting under Rule 10b-5. What is required is that "the aider and abettor be aware of the violation or act recklessly in that regard and give assistance to the primary wrongdoers. It is the participation with the knowledge that a fraud is being committed that leads to liability." Stern v. American Bankshares Corp., 429 F. Supp. 818, 824 (E.D.Wis. 1977). See also Pharo v. Smith, 621 F.2d 656 (5th Cir. 1980); Securities Exchange Commission v. Murphy, 626 F.2d 633 (9th Cir. 1980); In re Itel Securities Litigation, 89 F.R.D. 104 (N.D.Cal. 1981); Sandusky Land, Ltd. v. Uniplan Groups, Inc., 400 F. Supp. 440 (N.D.Ohio 1975); In re Caesars Palace Securities Litigation, 360 F. Supp. 366 (S.D.N.Y. 1973).
Frankel v. Wyllie Thornhill, Inc., 537 F. Supp. 730, 744 (W.D.Va. 1982).
The substantial participation exception is not met because the allegations relating to Becker's participation in the sales transactions only allege the activities of the typical lead underwriter. The plaintiff alleges that
an underwriter . . . who, by contract or otherwise, deals with the registrant; organizes the selling effort; receives some benefit directly or indirectly in which all other underwriters similarly situated do not share in proportion to their respective interests in the underwriting; or represents any other underwriters in such matters as maintaining the records of the distribution, arranging the allotments of securities offered or arranging for appropriate stabilization activities, if any.
The Davella complaint alleges that Becker substantially participated in the sales transactions by performing the duties of the lead underwriter and by aiding and participating in the preparation of the false prospectus. This complaint, too, fails to adequately state a section 12(2) claim against Becker.
In the Davella complaint, the plaintiff alleges that
This complaint merges the substantial participation exception and the aiding and abetting exception. While it is true that an aider and abettor is a participator in the transaction, such a theory is inadequate here because of the failure to allege scienter on the part of Becker. Therefore, the section 12(2) claim in the Davella complaint must also be dismissed.
In conclusion, Becker's motion for reargument is granted. Upon reargument, the Court dismisses the section 12(2) claims in both complaints for the reasons stated above. The section 12(2) claim in the Klein complaint is dismissed with prejudice. The Klein plaintiffs had stipulated that the second amended complaint would be their final complaint. Moreover, the section 10(b) claim therein is substantially similar to their section 12(2) claim. The dismissal of the section 12(2) claim in the Davella complaint is with leave to replead. (There is no section 10(b) claim in this complaint.) The Davella plaintiff has twenty (20) days from the date of this decision to amend the complaint. Becker's motion for certification is denied.
The Court notes that the section 11 claims of the plaintiffs still remain and that ultimately the plaintiffs would have had to make a choice between their section 11 and section 12 claims. See In re Itel Securities Litigation, 89 F.R.D. 104, 115 (N.D.Cal. 1981); In re the Gap Stores Securities Litigation, 79 F.R.D. 283, 307 (N.D.Cal. 1978); III L. Loss, Securities Regulation 1700 n. 46 (2d ed. 1960).