Source: http://ny.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19890405_0040788.C02.htm/qx
Timestamp: 2016-10-28 14:11:43
Document Index: 448758955

Matched Legal Cases: ['§ 771', '§ 771', '§ 12', '§ 12', '§ 12', '§ 12', '§ 771', '§ 12', '§ 12', '§ 12', '§ 771', '§ 12']

| Wilson v. Saintine Exploration and Drilling Corp.
Wilson v. Saintine Exploration and Drilling Corp.
KENNETH J. WILSON, PLAINTIFF-APPELLEE,v.SAINTINE EXPLORATION AND DRILLING CORPORATION AND THE ESTATE OF ROBERT D.P. WELCH, FRED A. RODOLFY AND RUFFA & HANOVER, P.C., DEFENDANTS, RUFFA & HANOVER, P.C., DEFENDANT-APPELLANT
We vacate our earlier opinion to reconsider the imposition of collateral participant liability under Section 12(2) of the Securities Act of 1933 in light of the Supreme Court's decision in Pinter v. Dahl, 108 S. Ct. 2063 (1988). Affirmed. Judge Timbers filed a dissenting opinion.
Timbers, Winter and Mahoney, Circuit Judges.
We have vacated our prior opinion in this matter, reported at 844 F.2d 81 (2d Cir. 1988), so that the parties might rebrief and reargue the case in light of Pinter v. Dahl, 486 U.S. 622, 108 S. Ct. 2063, 100 L. Ed. 2d 658 (1988). In view of the suggestion in Judge Timber's dissent, we invited the Securities and Exchange Commission ("SEC") to file a brief amicus curiae. We now affirm our original holding, though on the rather different grounds required by Pinter.
In our previous opinion, we held that Ruffa & Hanover was not liable for Wilson's loss under Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(2)(1982). We recognized that although Ruffa & Hanover was not a "person who . . . offers or sells a security," it was potentially liable under Section 12(2) as a collateral participant. See Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir. 1973)(in banc). Lanza stated, however, that the standard of liability dictated by the language of Section 12(2), reasonable care, applied only to actual sellers in privity with the plaintiff and that scienter had to be shown to hold collateral participants liable. Id. at 1298. In that context, our prior decision in the instant matter held that loss causation was also an element of an action against collateral participants under Section 12(2). We concluded that, because the misrepresentation was unrelated to Wilson's loss, Ruffa & Hanover was not liable under Section 12(2).
On June 7, 1988, the panel denied by a two-to-one vote, Judge Timbers dissenting, a petition for rehearing. Subsequent to that denial, the Supreme Court addressed the meaning of the words "any person who . . . offers or sells a security," as used in Section 12(1) of the Securities Act of 1933, 15 U.S.C. § 771(1)(1982). Because this language is identical to the language of Section 12(2), we decided to reconsider our decision in light of Pinter.
Pinter involved the threshold question of the meaning of "any person who . . . offers or sells a security" as that phrase is used in Section 12(1). It expressly held that only statutory "sellers" may be liable under Section 12(1) and that collateral participants who do not solicit sales cannot be liable under Section 12(1) whether or not loss causation is proven. Pinter thus stated that, although privity is not essential, "the language of Section 12[1] contemplates a buyer-seller relationship not unlike traditional contractual privity." Pinter, 108 S .Ct. at 2076. The Court went on to include as statutory sellers only those who actually solicit the sale of securities for financial gain. Id. at 2079. The opinion expressly rejected various tests that have been utilized by courts to include non-soliciting collateral participants as defendants in actions under Section 12(1) even where those participants were essential to the transaction. It thus stated,
there is no support in the statutory language . . . for expansion of § 12(1) primary liability beyond persons who pass title and persons who 'offer,' including those who 'solicit' offers. Indeed, § 12's failure to impose express liability for mere participation in unlawful sales transactions suggests that Congress did not intend that the section impose liability on participants collateral to the offer or sale.
Id. at 2080. The opinion went on to explain that even if a plaintiff were to prove causation, presumably including loss causation, that would be insufficient to hold someone liable under Section 12(1) who had not solicited sales. Id. at 2081. ("Further, no congressional intent to incorporate tort law doctrines of reliance and causation into § 12(1) emerges from the language or the legislative history of the statute.").
The Pinter court expressly limited its holding to Section 12(1) and reserved decision on whether the identical language of Sections 12(1) and 12(2) has a common meaning. Id. at 2076 n.20. We have held, however, that the two sections are identical in meaning, Schillner v. H. Vaughan Clarke & Co., 134 F.2d 875 (2d Cir. 1943), and that Pinter applies to Section 12(2). Capri v. Murphy, 856 F.2d 473, slip op. at 6032 (2d Cir. 1988). We are thus obliged to consider the implications of Pinter for our caselaw under Section 12(2).
Persons who are not in privity with the plaintiff but who would have been collateral participants under our former caselaw will now be statutory sellers within the meaning of Pinter if they solicited the sales in question for a financial gain. Such persons may now be liable under Section 12 whether or not scienter or loss causation is shown. For example, in Mayer v. Oil Field Systems Corp., 803 F.2d 749 (2d Cir. 1986), a partnership's general partners fulfilled their pay-out obligation to limited partners by exchanging all shares of the partnership for stock of another entity. That stock traded at a disappointing price, and the limited partners sued. We held that the general partners were not in privity with the limited partners and were thus collateral participants. Because they lacked scienter, they could not be liable under Section 12(2). 803 F.2d at 756. Had Mayer been decided under the Pinter standard, however, we would have had to consider, not whether the general partners had scienter, but whether their causing the exchange for financial gain was the legal equivalent of solicitation of a sale.
It is clear that Ruffa & Hanover falls within the category of participants whose potential liability is contracted rather than expanded by Pinter. Wilson expressly concedes that the firm's participation in the sale consisted solely of the ministerial act of mailing a copy of the private placement memorandum to Wilson at Rodolfy's request. That cannot under any view be considered the kind of solicitation necessary under Pinter. It is clear from the Court's opinion that its concern had to do with persons such as brokers who might act on the seller's behalf for a profit. See Pinter, 108 S. Ct. at 2082. Moreover, Pinter expressly cautioned that the draconian provisions of Section 12 must not be extended to include lawyers, such as Ruffa & Hanover, who have performed only their usual professional functions in preparing documents for an offering. 108 S. Ct. at 2081. Indeed, Justice Blackmun's opinion expressly disapproved of the rationale of the leading decision of this circuit, Katz v. Amos Treat & Co., 411 F.2d 1046, 1053 (2d Cir. 1969), holding a lawyer liable under Section 12(1), in circumstances in which the lawyer had actual contact with the purchaser. Id. at 2081, n.27. Of course, it does not follow that lawyers are exempt from the concept of a "seller" under Section 12 where they earn a commission from an actual seller for persuading their clients to make a particular investment. Cf. Brady v. duPont, 828 F.2d 75, 77 (2d Cir. 1987).
Wilson seeks support from footnote 24 of the Pinter decision, which states that the Court did not rule upon the existence of aider and abettor liability under Section 12, citing the decisions in Mayer and In re Caesars Palace Securities Litigation, 360 F. Supp. 366 (S.D.N.Y. 1973). Our prior caselaw, however, made no distinction under Section 12 between liability based on aiding and abetting and liability based on collateral participation. Indeed, it treated the terms as synonymous and used them interchangeably, as the Caesar's Palace opinion stated, 360 F. Supp. at 380. We agree with the amicus brief filed by the SEC that persons who do not meet the Pinter test for statutory sellers may not be held liable under Section 12 as aiders and abettors.
Brief of the Securities and Exchange Commission at 19. We agree. We also agree with the SEC that aiding and abetting liability under Section 12 would be wholly "anomalous" in light of Pinter, because such liability "is likely as broad as, if not broader than, the . . . similar tests rejected by the Pinter court." Id. at 20. Pinter would indeed be unworthy of Supreme Court attention if aiding and abetting liability existed under Section 12(2) because all non-selling collateral participants insulated by Pinter would nevertheless be liable as aiders and abettors.
Our reconsideration thus leads to the conclusion that Ruffa & Hanover cannot be held liable under Section 12(2), whether or not loss causation is proven, because Ruffa & Hanover did not solicit the sale in question. This conclusion does not alter either our earlier result or the legal standards under which non-selling collateral participants may be liable in this circuit. In our original opinion, we held that a suit against a collateral participant under Section 12(2) had to meet the requirements of a Section 10(b) action. Pinter's holding that collateral participants who do not solicit sales cannot be held liable under Section 12(2) in no way diminishes their potential liability under Section 10(b).
We therefore affirm. We also vacate the panel's previous denial of the petition for rehearing. Wilson is of course free to file a new petition for rehearing and suggestion for rehearing in banc.*fn1
This is the latest, but probably not the last, chapter in this "wondrous strange" case.*fn1
The ultimate issue is whether a defrauded purchaser of securities (plaintiff Kenneth J. Wilson) may recover under § 12(2) of the Securities Act of 1933, 15 U.S.C. § 771(2)(1982), the $47,513.40 awarded to him by the district court, in view of what the district court found to be the concededly egregious fraud committed by a Manhattan law firm (defendant Ruffa & Hanover, P.C.) in preparing and distributing a private-placement memorandam in connection with the sale of the securities.
I would either affirm the judgment of the district court or at least remand the case to the district court to make appropriate findings of fact and conclusions of law in the light of Pinter v. Dahl, 486 U.S. 622, , 108 S. Ct. 2063, 100 L. Ed. 2d 658 (1988), which was decided long after the decision of the district court in the instant case. From the refusal of the majority to do either, I respectfully dissent.
Emerging from the morass of prior proceedings in this case,*fn2 we are confronted with the novel and startling procedure devised by the majority, in its puzzling struggle to avoid a remand to the district court, of dealing with the district court's decision by piggy-backing it on a phantom record in order to apply Pinter to the instant case. The record before us contains no findings of fact or conclusions of law whatsoever by the district court on the Pinter issue; nor was the district court afforded any opportunity to make findings of fact or conclusions of law on that issue. This strikes me as a wholly unacceptable and dangerous course of procedure, leading inevitably, as it has here, to appellate fact finding. The Supreme Court in Pinter had this to say regarding the absence of findings by the district court on a critical issue in that case:
486 U.S. at , 108 S. Ct. at 2083 (footnote omitted). Moreover, in another § 12(2) case decided by our Court subsequent to Pinter the panel remanded the case to the district court for findings of fact on the issue of a party's potential solicitation where the party had "played a major role in setting up the . . . venture", but whose contacts with the buyers were uncertain. Capri v. Murphy, 856 F.2d 473, 478-79 (2 Cir. 1988). Here, although defendant's contact with plaintiff is known, defendant's role in the venture is not clear and should be determined on remand.
As stated above, at the time the district court made its findings of fact in the instant case, Pinter had not been decided, and the district court followed Second Circuit law as set forth in Katz v. Amos Treat & Co., 411 F.2d 1046 (2 Cir. 1969). It held that, since the law firm Ruffa & Hanover had materially participated in the securities transaction with the required scienter, it was liable under § 12(2) as an aider and abettor,*fn3 rather than as a seller as that term was then defined. An examination of what appear to be the requirements of Pinter, however, strongly indicates that the facts necessary properly to apply its analysis were not found by the district court in the instant case.
In Pinter, the Court construed the language "any person who offers or sells a security" found in § 12(1)*fn4 of the Securities Act of 1933, which delineates liability for selling certain unregistered securities. 15 U.S.C. § 771(1)(1982). The Court held that, while it was clear that this language imposes liability on an owner who passes title or offers to pass title in a security for value, liability also will extend to certain people who solicit an offer to buy. Pinter, supra, 486 U.S. at , 108 S. Ct. at 2076. Since Ruffa & Hanover were not the owners of the securities sold in the instant case, if Pinter applies the firm would be liable only if it were found to have solicited the sale.
Pinter does not define solicitation beyond stating that it is not solicitation to recommend the purchase of a security solely to benefit the buyer. "Liability extends only to the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Id. at 2079 (emphasis added). It also is clear that mere participation in the solicitation by another is not solicitation, id. at 2081 n.27, which is why lawyers performing . . . "only their professional services" are not liable under § 12. Id. at 2081. The proper focus of the analysis appears to be on "the defendant's relationship with the plaintiff-purchaser", rather than "the defendant's degree of involvement in the securities transaction and its surrounding circumstances". Id.
18. Plaintiff Wilson never communicated either orally or in writing with any person in the law firm of Ruffa & Hanover."
While there is no dispute that the two findings set forth above were made, I believe that the panel majority reads too much into them, especially when it uses them to make its own third finding. At first blush the two findings would indicate that Ruffa & Hanover did no more than prepare the offering documents and participate in the solicitation activity of Rodolfy and Welch, which is the sort of conduct by a law firm that the Court in Pinter stated ordinarily would not constitute solicitation. Pinter, supra, 486 U.S. at , 108 S. Ct. at 2081.
Rather than eschew the temptation to supply the missing finding of fact--that Ruffa & Hanover did not solicit Wilson--the panel majority barrels ahead with disdain for its proper role as an appellate court and makes its own finding of fact. It does so by stating baldly, "Ruffa & Hanover did not solicit the sale in question". Majority Opinion at 9. If this is not appellate fact finding, I do not know what is. It is not the business of appellate courts to sift the evidence in order to make needed findings of fact, even if there is adequate evidence to make such findings.
Kelley v. Everglades Drainage Dist., 319 U.S. 415, 421-22, 63 S. Ct. 1141, 87 L. Ed. 1485, 63 S. Ct. 1141 (1943).
The panel majority's supplying of its own critical finding of fact is unwise for the reason that, in view of what has been found by the district court, it is indeed possible that further proper findings may establish that Ruffa & Hanover did solicit Wilson within the meaning of Pinter. Clearly, the preparation and sending of the memorandum to Wilson under proper circumstances, would constitute solicitation. For example, if the law firm had a significant role in Saintine Exploration and Drilling Corp. ("Saintine"), its sending of the memorandum to Wilson may have been done more as a principal and "seller" than as a mere "law firm", and it may have been done with the intent to confer financial benefit on itself or on Saintine.*fn5 Yet what is not clear from the limited present findings by the district court is the relationship between the law firm and the principals of Saintine. We do not know whether the law firm was more heavily involved in Saintine than a lawyer ordinarily would be involved with a client. We do not know what kind of fee arrangement the law firm had with Saintine. There is some suggestion in the trial transcript that Ruffa & Hanover "solicited" investments. These facts would be important, not because they would go to the law firm's involvement in the securities transaction, but because they would help define the law firm's relationship with Wilson--whether the law firm sent the confidential private placement memorandum with the intent to confer a financial benefit on itself or on Saintine.
The reason we do not know these facts is that, prior to Pinter, neither the district court nor the parties knew that the question of the solicitation of Wilson by the law firm would become an issue in the case. The Supreme Court has made clear the course an appellate court should follow when the view of the law upon which the district court based its findings of fact has been found to be erroneous. "Where findings are infirm because of an erroneous view of the law, a remand is the proper course unless the record permits only one resolution of the factual issue." Pullman-Standard v. Swint, 456 U.S. 273, 292, 72 L. Ed. 2d 66, 102 S. Ct. 1781 (1982) (citing Kelley v. Southern Pac. Co., 419 U.S. 318, 331-32, 95 S. Ct. 472, 42 L. Ed. 2d 498 (1974)).
Finally, the panel majority makes much of the fact that at oral argument appellant's attorney stated that a remand was unnecessary because he could think of no further evidence he could offer as to the law firm's participation in the solicitation of Wilson. That both parties and the panel majority would like to avoid a remand, is of no moment. Leaving aside the fact that there are critical aspects of the relationship between the law firm and Saintine that remain unexplored (see the specific areas set forth above as to which the district court should make findings of fact), the parties cannot by agreement dispense with the requirement that a judgment be founded on proper findings of fact. Swanson v. Levy, 509 F.2d 859, 861 (9 Cir. 1975) ("The requirement that the district court find the facts specially and state separately its conclusions of law must be fairly observed and may not be waived by the parties,"); Waialua Agr. Co. v. Maneja, 178 F.2d 603, 606-07 (9 Cir. 1949) (same) (citing Kelley v. Everglades Drainage Dist., supra, 319 U.S. at 421) cert. denied, 339 U.S. 920, 70 S. Ct. 622, 94 L. Ed. 1344 (1950).