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

Heading: Application of Pinter and Section 12(2) to First American

Text: 34 In applying Pinter and the foregoing legal principles to the securities transactions at issue, 16 we conclude that First American cannot be held liable under section 12(2) in light of the undisputed facts here. The record clearly shows and Ryder admits that First American did not own or hold the Integrated commercial paper bought by Ryder prior to or at the time Case told First American to buy the paper for Ryder. The Integrated paper was bearer paper. It was not registered in either defendant or plaintiff's name. Further, the trade dates and the settlement dates were the same, all of which evidences that there never was any ownership by defendant subsequent to the purchases. Based on Wallace Case's affidavit, the securities he selected on behalf of Ryder were purchased pursuant to his orders only. First American would then hold the securities in safekeeping until they matured or Case gave further instructions. Case Affidavit at p 4 (Sept. 19, 1990). Leo Krupp, Ryder's business consultant, stated: I know its not their [First American's] inventory because we picked the date and the maturity. Krupp Depo. at 72 (July 26, 1990). 35 Ryder nevertheless argues that based on the language of the confirmation slips for the two purchases, a jury could have reasonably inferred that First American gained and then passed title to the Integrated paper to Ryder. Those slips, prepared by defendant, stated in part: As agent We Have Sold To You.... (emphasis added). While the language uses the word sold, by also using the words as agent the language at best cuts both ways, and certainly does not negate the strength of the other evidence previously mentioned. We find that the evidence as a whole clearly establishes an agency relationship between the bank and Ryder. 36 When a broker is an agent of the purchaser of the securities, he is in reality buying on behalf of the purchaser (rather than selling on behalf of the owner if he were an agent of the owner). See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cheng, 697 F.Supp. 1224, 1228-29 (D.D.C.1988) (Although it has been held that a 'seller' under § 12(2) is not necessarily just a person who conveys title and no one else, there is no reading of the statute that would broaden its application to the broker/defendant who buys on behalf of a customer/plaintiff.) (emphasis in original). [A] broker executes orders for the purchase or sale of securities solely as agent, and if done on behalf of the buyer it is the customer, rather than the [bank] who bears the risk of loss. Securities Indus. Ass'n, 468 U.S. at 218 & n. 18, 104 S.Ct. at 3009 & n. 18. We note that risk of loss is one of the criteria for determining ownership. As we find that First American did not pass title to the Integrated paper, something more than simple execution of Ryder's orders is required for defendant to fall within the ambit of section 12(2). 37 As stated previously, with participants who do not own the securities, Pinter extends (and limits) liability to the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interest or those of the securities owner. 486 U.S. at 647, 108 S.Ct. at 2079. That case sets forth a two part test for these participants: First, whether the participant in the sale 'solicited' the purchase; and second whether the participant or the owner of the security sold benefited. Reece, Would Someone Please Tell Me the Definition of the Term 'Seller': The Confusion Surrounding Section 12(2) of the Securities Act of 1933?, 14 Del.J.Corp.L. 35 (1989). See, e.g., Wilson v. Saintine Exploration & Drilling Corp., 872 F.2d 1124, 1127 (2d Cir.1989) (lawyers should not be exempt from section 12(2) liability where they earn a commission from an actual seller for persuading their clients to make a particular investment). 38 Undoubtedly, First American offered the Integrated paper because it was motivated by its own financial interest, however great or small that was. Certainly it expected to profit from its business dealings with Ryder and from the services it provided. The issue in this case, however, is the first prong of the Pinter test, i.e. whether there was actionable solicitation by First American. Based on Pinter, without some solicitation on the part of a broker who acts as an agent of the buyer we may not impose liability under section 12(2). Even a seller's agent must solicit the purchase before section 12 applies, although we note that in contrast to a buyer's agent it would be uncommon for a seller's agent not to engage in solicitation if he or she is hired to sell a principal's securities. Cf. Pinter, 486 U.S. at 646, 108 S.Ct. at 2078 (It has long been 'quite clear,' that when a broker acting as agent of one of the principals to the transaction successfully solicits a purchase, he is a person from whom the buyer purchases within the meaning of § 12 and is therefore liable as a statutory seller.); Cady v. Murphy, 113 F.2d 988, 990 (1st Cir.1940) (broker who acted as agent of seller, or as agent for both seller and buyer, could be liable as statutory seller under section 12(2)). 39 The substance of the communications between Wallace Case and Mike Casey (the parties to the two transactions at issue), is not in dispute and reveals that Casey (working for First American) only executed Ryder's orders. Casey did not actively solicit the orders, i.e. urge or persuade Case (working for Ryder) to buy Integrated paper. See Pinter, 486 U.S. at 644, 647, 108 S.Ct. at 2077, 2078. For example, Case stated in his affidavit, [h]aving made my decision, I would then call Mike Casey at First American and place an order. Case Affidavit at p 4 (emphasis added). Leo Krupp, retained by Ryder to help Case, likewise testified that Ryder through Case instructed the bank to purchase the commercial paper. Krupp Depo. at 72. Krupp stated that Integrated paper was part of the regular pieces of commercial paper that the bank had to offer, and that Case had heard about the company before and he decided to buy it. Id. at 98-99. Mike Casey testified that, after some initial investigation, Case then instructed me to purchase Integrated Resources commercial paper for Ryder. Case Affidavit at p 6. 40 The only evidence suggesting that First American solicited the purchase of Integrated paper from Ryder is based on Frank Ryder's own deposition. He testified that Wallace Case had told him that the bank had recommended [Integrated paper] to him to purchase, and that is why he had purchased that particular paper. Ryder Depo. at 141 (July 16, 1990). See also Ryder Depo. at 92 (Frank Ryder terminated Wallace Case in part because he discovered Case had allowed First American to talk him into buying Integrated paper). 41 Even with all reasonable inferences drawn in favor of Frank Ryder, however, we do not find a genuine factual dispute. The affidavit of Wallace Case, an inter-office memo from Case while still employed by Ryder, Krupp's deposition, Mike Casey's affidavit, and Ryder's practice in making investments through other institutions, all establish that the bank did not specifically recommend or talk Ryder into buying Integrated paper. For example, it is evident both Wallace Case and Mike Casey understood that Case would make up his own mind on which securities would be appropriate to purchase. Case's affidavit states in pertinent part: 42 There was nothing extraordinary or unusual about these purchases. On each occasion I spoke with Mike Casey and Mike Casey made no representations or statements to me other than to state the securities available, their maturities and their rates. On each occasion I could have chosen other securities and commercial paper issues by companies such as GMAC, John Deere and Chrysler. On each occasion there was nothing Mike Casey did or said which caused me to select Integrated Resources commercial paper over that issued by other companies. 43