Opinion ID: 567912
Heading Depth: 3
Heading Rank: 2

Heading: The Scope of Section 12(2) After Pinter

Text: 18 On appeal, Ryder argues that sound policy and statutory interpretation require that the definition of seller used in Section 12(2) cases be broader than the Pinter definition for section 12(1) cases. In particular, appellant differentiates section 12(1) which imposes strict liability from section 12(2) which allegedly requires a showing of negligence. Compare Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682, 689 (3d Cir.1991) (section 12(2) makes actionable negligent misrepresentation); Casella v. Webb, 883 F.2d 805, 809 (9th Cir.1989) (Based on section 12(2)'s language, [s]ellers may defeat recovery only by proving they did not know 'and in the exercise of reasonable care could not have known' of the untruth or omission.) with Pharo, 621 F.2d at 665 n. 6 (Though the cases and the commentators interpret sections 12(1) and 12(2) as strict liability statutes, a plausible argument can be made that the latter statute is not.). Thus, Ryder asserts that the broader substantial factor test of Foster should still apply to determine the ambit of section 12(2); and, under that test, whether First American was a substantial factor in the sale of the commercial paper to Ryder is an issue of fact, inappropriate for summary judgment according to plaintiff. 19 Although the Pinter Court expressly declined to take a position on the meaning of seller within section 12(2), it conceded in dicta that most courts and commentators give the term the same meaning as in section 12(1). 10 486 U.S. at 642 n. 20, 108 S.Ct. at 2076 n. 20. Thus the Court found that the decisions under § 12(2) addressing the seller question were relevant to the scope of section 12(1). Id. Moreover, and most important, it observed that the operative language of the two sections was identical. 20 The language of securities provisions comes first in interpreting their respective scope and meaning. Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 472, 97 S.Ct. 1292, 1300, 51 L.Ed.2d 480 (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 96 S.Ct. 1375, 1383, 47 L.Ed.2d 668 (1976). The statute at issue uses identical language in sections 12(1) and 12(2) to indicate (i) the person(s) who may be held liable (any person who ... offers or sells a security), (ii) the person(s) who may sue (the person purchasing a security from him), and (iii) the remedy available if the statute is violated (recover the consideration paid for such security, or damages if he no longer owns the security). 15 U.S.C. § 77l (1)-(2). See also Moore v. Kayport Package Express, Inc., 885 F.2d 531, 536 (9th Cir.1989) (It is plain from the statute that the word 'offers' means the same thing in both sections.). Without differentiating between subsections, the Court stated: The inclusion of the phrase 'solicitation of an offer to buy' within the definition of 'offer' brings an individual who engages in solicitation, an activity not inherently confined to the actual owner, within the scope of § 12. Pinter, 486 U.S. at 643, 108 S.Ct. at 2076. Accordingly, based on the statutory language, we find that a solicitor of a purchase of securities he or she does not own is within the ambit of either section 12(1) or section 12(2). 21 As with section 12(1), there is no support in either the statutory language or legislative history for expansion of section 12(2) liability beyond persons who pass title or offer securities, including those who solicit offers for their own benefit or that of the securities owner. Much of the same reasoning the Supreme Court used to reject the substantial-factor test as employed by the Fifth Circuit (See Dahl v. Pinter, 787 F.2d 985 (5th Cir.1986)) to determine section 12(1)'s scope, also applies to whether that test has continued validity under section 12(2): 22 The deficiency of the substantial-factor test is that it divorces the analysis of seller status from any reference to the applicable statutory language and from any examination of § 12 in the context of the total statutory scheme. Those courts that have adopted the approach have not attempted to ground their analysis in the statutory language. See n. 25, supra. Instead, they substitute the concept of substantial participation in the sales transaction, or proximate causation of the plaintiff's purchase, for the words offers or sells in § 12. The purchase from requirement of § 12 focuses on the defendant's relationship with the plaintiff-purchaser. The substantial-factor test, on the other hand, focuses on the defendant's degree of involvement in the securities transaction and its surrounding circumstances. 23 486 U.S. at 651, 108 S.Ct. at 2080-2081. For the same reasons the Pinter Court enunciated with regard to section 12(1), we have heretofore held that privity is not required under section 12(2). At the same time, however, we recognize that the purchase from requirement and the limitation of participants to those who solicit a purchase of securities (statutory restrictions which apply to section 12 generally) narrow the field of potential sellers to a greater degree than that required by the substantial factor test on its face. 24 In other words, even though the substantial factor test as applied to section 12(1) encompasses persons who pass title and who solicit the purchase of unregistered securities as statutory sellers, that test could extend the statute's scope to include participants only remotely related to a sale transaction, such as lawyers and accountants whose involvement is that of merely providing professional services. Pinter, 486 U.S. at 651, 108 S.Ct. at 2081. The buyer does not, in any meaningful sense, 'purchas[e] the security from' such a person. Id. Nor do such participants solicit the purchase of securities as that word is understood in common parlance. 25 We conclude that this circuit's use of the substantial factor test must be modified to comport with Pinter and its emphasis on statutory language. 11 As a practical matter, the difference between the two tests may not have much effect in this circuit because some form of solicitation has usually been required under the substantial factor test, at least in the more recent cases, before imposing liability on a participant who does not own the securities being sold. See, e.g., Hill, 448 F.2d at 693 (defendants sought out and trained the original incorporators to solicit additional capital for the corporation, provided sales brochures to secure the capital and rendered advice on the corporation's development, in effect doing everything but effectuat[ing] the sale); Junker, 650 F.2d at 1360 (at shareholders' meeting defendant lawyer urged approval of merger between two related companies and thus was an active negotiator). Cf. Foster, 759 F.2d at 846 (underwriter not held liable because did not attempt to persuade plaintiff to buy, and plaintiff obtained independent advice); Croy v. Campbell, 624 F.2d 709 (5th Cir.1980) (lawyer not held liable for recommending investment because he made no representations concerning project's advisability, did not prepare sales brochure, and did not attempt to persuade the plaintiffs to invest). 26 Nevertheless, the Pinter Court took great pains to emphasize that the substantial factor test, on its face at least, is a departure from the scope of the statutory language of section 12(1); that conclusion applies to the identical operative language in section 12(2). The Court also pointed out that the substantial factor test incorporates the tort law doctrine of proximate cause and in the process introduces an element of uncertainty into an area that demands certainty and predictability. Pinter, 486 U.S. at 652, 108 S.Ct. at 2081. Although the Pinter test is not itself a model of clarity, our duty is to apply it as faithfully as we can. Further, it does provide clearer guidelines and offers more predictive value to participants in securities transactions than do previous section 12(2) tests used by the circuits, including this one, which have not required privity as a basis for liability. 27 We find that applying Pinter to section 12(2) is also consistent with that statute's relationship to the other provisions and underlying policies of the statutory scheme Congress has provided for the protection of investors in securities. As with section 12(1), the scope of other relevant provisions of the 1933 Act has been determined principally by examining their respective statutory language in conjunction with the definitions in section 2(3). For example, the Court has made clear, in the context of interpreting § 17(a) of the Securities Act, 15 U.S.C. § 77l (a), that transactions other than traditional sales of securities are within the scope of § 2(3) and passage of title is not important. Pinter, 486 U.S. at 643, 108 S.Ct. at 2076 (citing United States v. Naftalin, 441 U.S. 768, 773, 99 S.Ct. 2077, 2081, 60 L.Ed.2d 624 (1979)). In Naftalin, the Court stated that [t]he statutory terms [offer and sell], which Congress expressly intended to define broadly, ... are expansive enough to encompass the entire selling process, including the seller/agent transaction. Id. See also Rubin v. United States, 449 U.S. 424, 430, 101 S.Ct. 698, 701, 66 L.Ed.2d 633 (1981) ([I]t is not essential under the terms of the Act [section 2(3) ] that full title pass to a transferee for the transaction to be an 'offer' or a 'sale.' ) (citation omitted). The Court determined its reading of section 17(a) of the 1933 Act in Rubin to be wholly consistent with the history and purposes of the Securities Act of 1933. Id. 28 Extending or contracting the application of a statute is most acceptable when it does not upset an entire statutory scheme, render other provisions superfluous, or create statutory gaps Congress intended to fill. 12 In contrast to other provisions,  § 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. Pinter, 486 U.S. at 650, 108 S.Ct. at 2080 (citing to 15 U.S.C. § 77b(11), section 5 of the 1933 Act; 15 U.S.C. § 78i(e), section 9 of the 1934 Act; and 15 U.S.C. § 77k, section 11 of the 1933 Act, as examples of Congress' awareness of the collateral participation concept). The fact that Congress made every underwriter liable in § 11, but not in § 12, suggests that underwriters are not to be liable under § 12 solely by virtue of their status as underwriters. Foster, 759 F.2d at 845. Likewise, 12(2) liability should not be imposed upon banks for collateral participation in a securities transaction or merely because of their status. 29 We do not shun Ryder's argument that section 12(2)'s scope ought to be broader than that of section 12(1), since its language indicates that negligence is required as opposed to strict liability under section 12(1), even though other circuits have rejected the same argument in light of Pinter. See, e.g., Moore, 885 F.2d at 536; Abell v. Potomac Ins. Co., 858 F.2d 1104, 1115 (5th Cir.1988). We note, however, that because the two provisions cover different aspects of a securities transaction and yet retain the same purpose, it is not illogical or inconsistent for them to prohibit the same conduct and thus have an identical scope. Section 12(1) creates liability for the sale of unregistered securities, while section 12(2) creates liability for omissions and misrepresentations in a prospectus or oral communication. Yet both sections were enacted to promote full and fair disclosure of information to potential buyers of securities. The shared purpose of these sections strengthens our conclusion that Pinter 's reasoning applies equally to both sections. Moore, 885 F.2d at 536. 13 And, as noted elsewhere, the purchased from and solicitation restrictions which Pinter emphasized in defining the ambit of section 12(1) apply equally to section 12(2). If Congress intended that section 12(2)'s scope be broader than that of section 12(1) it could have said so. 30 Moreover, we are quite convinced that section 10(b) of the 1934 Act, the catch-all anti-fraud provision, and its accompanying Rule 10b-5 adequately fill any gaps created by applying Pinter to section 12(2). While a Rule 10b-5 misstatement or omission must be made knowingly, a section 10(b) action can be brought by a purchaser or seller of any security against any person who has used any manipulative or deceptive device in connection with the purchase or sale of securities. Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 103 S.Ct. 683, 687, 74 L.Ed.2d 548 (1983) (quoting 15 U.S.C. § 78j) (emphasis in original). There need not even be an identifiable party to whom the misstatement or omission is directed, as long as a trade takes place and influences the marketplace. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 861-63 (2d Cir.1968). Ryder chose, however, not to pursue a 10b-5 claim even though it claims that First American had knowledge of Integrated's deteriorating financial condition. 31 Ryder also argues that section 12(2) ought to be interpreted broadly and liberally in order to provide adequate protection to the investing public. See Rubin, 449 U.S. at 431, 101 S.Ct. at 702. The ultimate question is one of congressional intent, however, which we believe is served by applying Pinter to section 12(2), and not one of whether this Court thinks it can improve upon the statutory scheme that Congress enacted into law. Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 99 S.Ct. 2479, 2490, 61 L.Ed.2d 82 (1979). While the Supreme Court has indicated that the remedial purpose of the securities laws is not to be ignored in a court's interpretation of securities laws, Herman & MacLean, 459 U.S. at 386-87, 103 S.Ct. at 689, generalized references to the 'remedial purposes' of the 1934 Act will not justify reading a provision 'more broadly than its language and the statutory scheme reasonably permit.'  Touche Ross, 442 U.S. at 578, 99 S.Ct. at 2490 (citation omitted). In short, we do not find persuasive Ryder's argument that a more liberal interpretation of the term seller in section 12(2) is necessary to comport with either that section's standard of liability or the general remedial purposes of the 1933 Act. 32 Lastly, we note that applying Pinter to section 12(2) is consistent with relevant banking law and industry custom. With regard to industry custom, banks currently offer, as an accommodation to their customers, brokerage services that are virtually identical to the services offered by Schwab, or any other securities firm that engages solely in retail discount brokerage. 14 Securities Indus. Ass'n v. Board of Governors of the Federal Reserve Sys., 468 U.S. 207, 211-12, 104 S.Ct. 3003, 3007, 82 L.Ed.2d 158 (1984). Congress endorsed this traditional banking service in 1933. Section 16 of the Glass-Steagall Act, enacted as part of the Banking Act of 1933, authorizes banks to continue the practice of purchasing and selling ... securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for [their] own account[s]. 12 U.S.C.A. § 24 Seventh. See also 48 Fed.Reg. 37006 (1983) (Banks may engage in buying and selling securities solely as agent for the account of customers, but may not engage in securities underwriting or dealing or investment advice or research services.). We find that applying Pinter to section 12(2) is consistent with the Glass-Steagall Act. 15 33