Opinion ID: 347126
Heading Depth: 1
Heading Rank: 4

Heading: Sufficiency of the Evidence to Support the Sale Finding.

Text: 20 Wasson contends that since he did not personally execute the sale of the unregistered securities, the finding under § 2(3) of the Securities Act of 1933, 15 U.S.C. § 77b(3), that he sold or offered to sell those securities is without substantial basis in the evidence. He acknowledges that decisions involving violations of § 5 prosecuted under § 12(1) of the 1933 Act 7 may suggest a definition of sale which includes participants in a transaction who do not actually contact the ultimate purchaser, but argues that this definition ought not to be applied to violations of § 5 prosecuted under § 15 of the 1934 Act. 8 He reasons that since § 12 has no aider and abettor provision, courts have given a more expansive definition to its sale term. Such a broad definition is unnecessary under § 15, he argues, because that provision includes a sanction for aiders and abettors. 21 Courts considering the sale or offer to sell in § 12 proceedings have developed two distinct standards for determining whether an individual's actions makes him a seller under § 2(3). The Fifth Circuit adopted a proximate cause test in Hill York Corp. v. American Int'l Franchises, Inc., 448 F.2d 680 (5th Cir. 1971). In that case, the Court held 22 that the proper test is the one previously forged by the court in Lennerth v. Mendenhall, supra. (234 F.Supp. 59 (N.D.Ohio 1964))     the line of demarcation must be drawn in terms of cause and effect: To borrow a phrase from the law of negligence, did the injury to the plaintiff flow directly and proximately from the actions of this particular defendant? 23 Id. at 693. 24 In developing the negligence-related standard, the Fifth Circuit explicitly rejected the broader participation theory followed by the Southern District of New York in Wonneman v. Stratford Securities Co., Inc., CCH Fed.Sec.L.Rep. P 90,923 (S.D.N.Y.1959). The participation concept would hold liable virtually every person who participated in the events leading up to the transaction. In our view, neither theory is wholly satisfactory. The participation theory is too broad in that it extends liability to persons for remote or incidental connection with the transaction. See Hill York Corp. v. American Int'l Franchises, Inc., supra at 692. The sale term in § 2(3) was meant to be interpreted liberally, Roe v. United States, 316 F.2d 617, 620 (5th Cir. 1963); Creswell-Keith, Inc. v. Willingham, 264 F.2d 76, 80 (8th Cir. 1959), but not so liberally that all participants in a transaction share liability. 25 Our difficulty with the Fifth Circuit's proximate cause test is that it fails to elucidate or focus the trier of fact's attention on those policies which the Act was designed to implement and which, in our judgment, ought to be the basis for a sale or offer to sell determination. 26 The Securities Act of 1933 was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). See H.R.Rep.No.85, 73rd Cong., 1st Sess., 1-5 (1933). To accomplish this end, registration and disclosure requirements were imposed on those with access to relevant information. The point of sale is a crucial step in the Act's disclosure scheme in that many of the Act's regulatory provisions are triggered by the actor's involvement in a sale or  offer to sell. In our judgment, the sale point assumes this importance because in it is the occasion where, at least in theory, relevant information can be obtained from the seller and disclosed to the buyer. Of course, securities transactions as a rule involve various intermediaries between the issuer and ultimate purchaser; identifying a sales point where seller contacts buyer is often impossible. We are not suggesting that a sales point must be identified for each transaction and liability imposed according to each individual's proximity to that point. However, we do believe that one factor which ought to be considered in determining the sale or offer to sell issue is whether the defendant was uniquely positioned to ask relevant questions, acquire material information, or disclose his findings. 27 With this in mind, we begin with Wasson's argument that the sale term of § 5, as prosecuted under § 15, requires that the broker actually execute the sale. We cannot accept this interpretation for several reasons. First, it ignores the way in which brokerage houses function. In that system, the registered representative procures an order, but oftentimes backroom personnel complete the transaction by locating a willing buyer. Thus, the absence of direct contact between a broker and the ultimate purchaser is in no sense determinative of his seller status. Hill York Corp. v. American Int'l Franchises, Inc., supra, at 692. More importantly, Wasson's interpretation would relieve a broker who has initial contact with the seller from liability for failing to investigate or disclose relevant information concerning the stock if he does not actually execute the sale. This interpretation would shield a broker from liability who failed to pass on material information acquired from the issuer or who completely neglected his responsibility to investigate the source and transferability of the stock. We believe such a result is completely inconsistent with the Act's disclosure aims and ignores the oftentimes crucial positioning of a broker to obtain necessary information from the seller. 28 Under the circumstances of this case, we have no difficulty finding that Wasson sold or offered to sell the S & M securities. His involvement with the transaction at the initial stage was extensive. He followed the market quotations of S & M stock at Proman's request, opened an account for Davidson, arranged with Proman and Davidson to have the shares sold through the latter's account, consulted with Proman concerning the source of the stock and the nature of the transaction, learned from Davidson or Proman that Davidson did not own the shares, that the automobiles were for several persons other than Davidson, and that the assignment of funds was designed to allow delivery of the vehicles before the settlement date. In essence, Wasson completely controlled the transaction until he disclosed some of his findings to his superiors at Walston and Company. We believe Wasson should be treated as a seller because of his extensive role in facilitating the sale because he was made aware of questionable circumstances surrounding the transaction which should have been investigated more fully and revealed in detail to his superiors, and because his position in the flow of information made his failure to fully investigate or disclose all the more serious. 29