Source: http://www.law.cornell.edu/supremecourt/text/486/622
Timestamp: 2013-12-08 22:32:09
Document Index: 2827848

Matched Legal Cases: ['§ 12', '§ 12', '§ 10', '§ 10', '§ 12', '§ 12', '§ 12', '§ 12', '§ 12', '§ 230', '§ 12', '§ 12', '§ 12', '§ 10', '§ 12', '§ 12', '§ 598', '§ 12']

Billy J. "B.J." PINTER, et al., Petitioners v. Maurice DAHL, et al. | Supreme Court | LII / Legal Information Institute
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486 U.S. 622 (108 S.Ct. 2063, 100 L.Ed.2d 658)
Argued: Dec. 9, 1987.
Petitioner Pinter, an oil and gas producer and registered securities dealer, sold unregistered securities consisting of fractional undivided interests in oil and gas leases to respondent Dahl, a real estate broker and investor who was experienced in oil and gas ventures. Dahl touted the venture to the other respondentshis friends, family, and business associatesand assisted them in completing subscription agreement forms prepared by Pinter, but received no commission from Pinter when each of them invested in unregistered interests on the basis of Dahl's involvement. When the venture failed, respondents sued Pinter in Federal District Court, seeking rescission under § 12(1) of the Securities Act of 1933 (Act) for the unlawful sale of unregistered securities. After a bench trial, the court granted judgment for respondents, apparently rejecting Pinter's common-law in pari delicto defense to Dahl's suit. The Court of Appeals affirmed, ruling that such defense was not available because § 12(1) creates a "strict liability offense" rather than liability based on intentional conduct, and distinguishing Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 105 S.Ct. 2622, 86 L.Ed.2d 215, which held that the defense applies in actions under § 10(b) of the Securities Exchange Act of 1934, on the ground that § 10(b) contains an element of scienter. The court also held that Dahl was not a "seller" within the meaning of § 12(1) and therefore could not be held liable in contribution for the other respondents' claims against Pinter, since, although Dahl's conduct was a "substantial factor" in causing the other respondents' purchases, there was no evidence that he had sought or received financial benefit for himself or anyone other than the other respondents.
Held: 1. The in pari delicto defense is available in a § 12(1) private rescission action. Pp. 632-641.
2. A nonowner of securities must solicit the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner, in order to qualify as a "seller" within the meaning of § 12(1), which provides that "any person who . . . offers or sells a security" in violation of the Act's registration requirement "shall be liable to the person purchasing such security from him." Pp. 641-655.
The questions presented by this case are (a) whether the common-law in pari delicto defense is available in a private action brought under § 12(1) of the Securities Act of 1933 (Securities Act), 48 Stat. 74, as amended, 15 U.S.C. 77a et seq., for the rescission of the sale of unregistered securities, and (b) whether one must intend to confer a benefit on himself or on a third party in order to qualify as a "seller" within the meaning of § 12(1).
* The controversy arises out of the sale prior to 1982 of unregistered securities (fractional undivided interests in oil and gas leases) by petitioner Billy J. "B.J." Pinter to respondents Maurice Dahl and Dahl's friends, family, and business associates.
Pinter is an oil and gas producer in Texas and Oklahoma, and a registered securities dealer in Texas. Dahl is a California real estate broker and investor, who, at the time of his dealings with Pinter, was a veteran of two unsuccessful oil and gas ventures. In pursuit of further investment opportunities, Dahl employed an oil field expert to locate and acquire oil and gas leases. This expert introduced Dahl to Pinter. Dahl advanced $20,000 to Pinter to acquire leases, with the understanding that they would be held in the name of Pinter's Black Gold Oil Company and that Dahl would have a right of first refusal to drill certain wells on the leasehold properties. Pinter located leases in Oklahoma, and Dahl toured the properties, often without Pinter, in order to talk to others and "get a feel for the properties." App. to Pet. for Cert. 32. Upon examining the geology, drilling logs, and production history assembled by Pinter, Dahl concluded, in the words of the District Court, that "there was no way to lose." Ibid.
Dahl assisted his fellow investors in completing the subscription-agreement form prepared by Pinter. Each letter-contract signed by the purchaser stated that the participating interests were being sold without the benefit of registration under the Securities Act, in reliance on Securities and Exchange Commission (SEC or Commission) Rule 146, 17 CFR § 230.146 (1982).
In fact, the oil and gas interests involved in this suit were never registered with the Commission. Respondents' investment checks were made payable to Black Gold Oil Company. Dahl received no commission from Pinter in connection with the other respondents' purchases.
When the venture failed and their interests proved to be worthless, respondents brought suit against Pinter in the United States District Court for the Northern District of Texas, seeking rescission under § 12(1) of the Securities Act, 15 U.S.C. 77l (1), for the unlawful sale of unregistered securities.
The District Court, after a bench trial, granted judgment for respondent-investors. Id., at 92. The court concluded that Pinter had not proved that the oil and gas interests were entitled to the private-offering exemption from registration. App. to Pet. for Cert. a-37. Accordingly, the court ruled that, because the securities were unregistered, respondents were entitled to rescission pursuant to § 12(1). Ibid.
The court concluded that the defense is not available in an action under § 12(1) because that section creates "a strict liability offense" rather than liability based on intentional misconduct. It thereby distinguished our recent decision in Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 105 S.Ct. 2622, 86 L.Ed.2d 215 (1985), where we held that the in pari delicto defense is applicable in an action under § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. 78j(b), which contains an element of scienter. Noting that Dahl was "as 'culpable' as Pinter in the sense that his conduct was an equal producing cause of the illegal transaction," the court nevertheless held that "absent a showing that Dahl's conduct was 'offensive to the dictates of natural justice,' " the in pari delicto defense was not available. 787 F.2d, at 988, quoting Keystone Driller Co. v. General Excavator Co., 290 U.S. 240, 245, 54 S.Ct. 146, 147, 78 L.Ed. 293 (1933).
The Court of Appeals next considered whether Dahl was himself a "seller" of the oil and gas interests within the meaning of § 12(1), for if he was, the court assumed, he could be held liable in contribution for the other plaintiffs' claims against Pinter.
787 F.2d, at 990, and n. 8. Citing Fifth Circuit precedent, the court described a statutory seller as "(1) one who parts with title to securities in exchange for consideration or (2) one whose participation in the buy-sell transaction is a substantial factor in causing the transaction to take place." Id., at 990. While acknowledging that Dahl's conduct was a "substantial factor" in causing the other plaintiffs to purchase securities from Pinter, the court declined to hold that Dahl was a "seller" for purposes of § 12(1). Instead, the court went on to refine its test to include a threshold requirement that one who acts as a "promoter" be "motivated by a desire to confer a direct or indirect benefit on someone other than the person he has advised to purchase." 787 F.2d, at 991. The court reasoned that "a rule imposing liability (without fault or knowledge) on friends and family members who give one another gratuitous advise on investment matters unreasonably interferes with well-established patterns of social discourse." Ibid. Accordingly, since the court found no evidence that Dahl sought or received any financial benefit in return for his advice, it declined to impose liability on Dahl for "mere gregariousness." Ibid.
The dissenting judge took issue with the majority's analysis on both points. First, assuming that this Court's decision in Bateman Eichler applied to all securities cases, the dissent concluded that Dahl's suit should be barred by the in pari delicto doctrine because Dahl was a "catalyst" for the entire transaction and knew that the securities were unregistered. 787 F.2d, at 991. In addition, the dissent maintained that Dahl's conduct transformed him into a "seller" of unregistered securities to the other plaintiffs under the Fifth Circuit's established "substantial factor" test. Id., at 991-992. It added that, even under the majority's expectation-of-financial-benefit refinement, Dahl's promotional activities rendered him a "seller" because "more investors means that the investment program receives the requisite amount of financing at a smaller risk to each investor." Id., at 992, n. 3.
We feel that the Court of Appeals' notion that the in pari delicto defense should not be allowed in actions involving strict liability offenses is without support in history or logic.
The doctrine traditionally has been applied in any action based on conduct that "transgresses statutory prohibitions." 2 Restatement of Contracts § 598, Comment a (1932). Courts have recognized the defense in cases involving strict liability offenses. See, e.g., UFITEC, S.A. v. Carter, 20 Cal.3d 238, 250, 142 Cal.Rptr. 279, 285-286, 571 P.2d 990, 996-997 (1977) (violation of Federal Reserve margin requirements); Miller v. California Roofing Co., 55 Cal.App.2d 136, 130 P.2d 740 (1942) (sale of stock without permit from State Corporation Commission). One of the premises on which the in pari delicto doctrine is grounded is that "denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality." Bateman Eichler, 472 U.S., at 306, 105 S.Ct., at 2626-2627. The need to deter illegal conduct is not eliminated simply because a statute creates a strict liability offense rather than punishing willful or negligent misconduct. Regardless of the degree of scienter, there may be circumstances in which the statutory goal of deterring illegal conduct is served more effectively by preclusion of suit than by recovery. In those circumstances, the in pari delicto defense should be afforded. Cf. A.C. Frost & Co. v. Coeur D'Alene Mines Corp., 312 U.S. 38, 43-44, 61 S.Ct. 414, 417, 85 L.Ed. 500, and n. 2 (1941).
In Bateman Eichler, the Court granted certiorari to resolve a conflict of authority "over the proper scope of the in pari delicto defense in securities litigation." 472 U.S., at 305, 105 S.Ct., at 2626. The Court formulated the standards under which the defense should be recognized in language applicable generally to federal securities litigation. The formulation was articulated in the specific context of deciding when "a private action for damages in implied causes of action under the federal securities laws may be barred on the grounds of the plaintiff's own culpability." Id., at 310, 105 S.Ct., at 2629. Nevertheless, the Court's rejection of the distinction between implied and express private causes of action, especially when considered in light of the broad question on which the Court granted certiorari, makes clear that the Court assumed that the in pari delicto defense should be equally available when Congress expressly provides for private remedies. Thus, we conclude that Bateman Eichler provides the appropriate test for allowance of the in pari delicto defense in a private action under any of the federal securities laws.
Our task, then, is to determine whether, pursuant to this test, recognition of the defense is proper in a suit for rescission brought under § 12(1) of the Securities Act. All parties in this case, as well as the Commission, maintain that the defense should be available.
Under the first prong of the Bateman Eichler test, as we have noted above, a defendant cannot escape liability unless, as a direct result of the plaintiff's own actions, the plaintiff bears at least substantially equal responsibility for the underlying illegality. The plaintiff must be an active, voluntary participant in the unlawful activity that is the subject of the suit. See Woolf v. S.D. Cohn & Co., 515 F.2d 591, 604 (CA5 1975), vacated and remanded on other grounds, 426 U.S. 944, 96 S.Ct. 3161, 49 L.Ed.2d 1181 (1976); see also Bateman Eichler, 472 U.S., at 312, 105 S.Ct. at 2630. "Plaintiffs who are truly in pari delicto are those who have themselves violated the law in cooperation with the defendant." Perma Life, 392 U.S., at 153, 88 S.Ct., at 1992 (Harlan, J., concurring in part and dissenting in part). Unless the degrees of fault are essentially indistinguishable or the plaintiff's responsibility is clearly greater, the in pari delicto defense should not be allowed, and the plaintiff should be compensated. See id., at 146, 88 S.Ct., at 1992 (WHITE, J., concurring); id., at 147, 88 S.Ct., at 1989 (Fortas, J., concurring in result); id., at 149, 88 S.Ct., at 1989 (MARSHALL, J., concurring in result); Bateman Eichler, 472 U.S., at 312-314, 105 S.Ct., at 2630-2631. Refusal of relief to those less blameworthy would frustrate the purpose of the securities laws; it would not serve to discourage the actions of those most responsible for organizing forbidden schemes;