Opinion ID: 216493
Heading Depth: 1
Heading Rank: 3

Heading: Underwriter Liability Requires Participation in Activities Involving the Distribution of Securities to the Public

Text: a. The Statute's Plain Language To interpret the statutory definition of underwriter, we begin, as we must, with the statute's text, considering the ordinary meaning of Congress's chosen language as informed by its punctuation. See BedRoc Ltd., LLC v. United States, 541 U.S. 176, 183, 124 S.Ct. 1587, 158 L.Ed.2d 338 (2004); Dobrova v. Holder, 607 F.3d 297, 301 (2d Cir.2010) (Statutory analysis necessarily begins with the plain meaning of a law's text and, absent ambiguity, will generally end there. (internal quotation marks and brackets omitted)); see also United States Nat'l Bank of Or. v. Indep. Ins. Agents of Am., Inc., 508 U.S. 439, 454, 113 S.Ct. 2173, 124 L.Ed.2d 402 (1993) (observing that plain meaning of statutory text will typically heed the commands of its punctuation). Applying these principles here, we conclude that common to all categories of persons identified as underwriters by the plain language of § 77b(a)(11) is activity related to the actual distribution of securities. With respect to the first two categories of persons qualifying as underwritersthose who (1) purchase from an issuer or (2) offer or sell for an issuer this is evidenced by the fact that the distribution requirement is set off from the two antecedent activities by a comma. See 15 U.S.C. § 77b(a)(11) (defining underwriter as any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security  (emphasis added)); Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd., 186 F.3d 210, 215 (2d Cir.1999) (When a modifier is set off from a series of antecedents by a comma, the modifier should be read to apply to each of those antecedents.), abrogated on other grounds by Sarhank Grp. v. Oracle Corp., 404 F.3d 657 (2d Cir.2005); accord Stepnowski v. Comm'r of Internal Revenue, 456 F.3d 320, 324 (3d Cir.2006); cf. Allard K. Lowenstein Int'l Human Rights Project v. Dep't of Homeland Sec., 626 F.3d 678, 681 (2d Cir.2010) (noting corollary rule regarding last antecedents dictating that qualifying phrase not separated from prior items by comma usually refers only to immediately antecedent item). Indeed, this interpretation is especially warranted here because the first category, persons purchasing from an issuer with a view to, is incomplete unless read in conjunction with the distribution of any security. With respect to the last two categories of persons qualifying as underwriters, their connection to the activity of distribution is evidenced by use of the phrase such undertaking, which plainly references the aforesaid purchases, offers, or sales relating to the distribution of securities. 15 U.S.C. § 77b(a)(11) (defining underwriter as any person who . . . participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking (emphasis added)); see 17 Oxford English Dictionary 101 (2d ed.1989) (defining such as [o]f the character, degree or extent described . . . in what has been said); Webster's Third New International Dictionary 2283 (1961) (defining such as something previously characterized or specified); Black's Law Dictionary 1570 (9th ed.2009) (defining such as [t]hat or those; having just been mentioned); see also In re Refco, Inc. Sec. Litig., No. 05 Civ 8626, 2008 WL 3843343, at  (S.D.N.Y. Aug. 14, 2008) (concluding that `participation' in question in § 77b(a)(11) is participation in the `undertaking' referred to immediately before). Thus, to qualify as an underwriter under the participation prongs of the statutory definition, a person must participate, directly or indirectly, in purchasing securities from an issuer with a view to distribution, in offering or selling securities for an issuer in connection with a distribution, or in the underwriting of such an offering. See generally Alameda Cnty. Emps.' Ret. Ass'n v. Ebbers (In re WorldCom Sec. Litig.), 308 F.Supp.2d 338, 344 (S.D.N.Y. 2004) (Cote, J.) (According to the statutory definition of an underwriter . . . liability under Section 11 extends to any person who has purchased securities from an issuer for distribution, or who offers or sells securities for an issuer for that purpose, or who participates directly or indirectly in those tasks.). Nothing in the statute's text supports expanding the definition of underwriter to reach persons not themselves participating in such purchases, offers, or sales, but whose actions may facilitate the participation of others in such undertakings. [6] b. Relevant Precedent Plaintiffs acknowledge that § 77b(a)(11) references activities relating to the distribution of securities. Nevertheless, they submit that our precedent has construed the term underwriter broadly to include any person who is `engaged in steps necessary to the distribution of security issues.' SEC v. Kern, 425 F.3d 143, 152 (2d Cir.2005) (quoting SEC v. Chinese Consol. Benevolent Ass'n, Inc., 120 F.2d 738, 741 (2d Cir.1941)). Relying on this language, plaintiffs submit that any persons playing an essential role in a public offering including the Rating Agency defendants may be liable as underwriters. We disagree. Contrary to plaintiffs' contention, our prior cases do not hold that anyone taking steps that facilitate the eventual sale of a registered security fits the statutory definition of underwriter. Rather, in SEC v. Kern , we stated that underwriter references those who take steps necessary to the distribution of securities. Id. at 152. While we explained that distribution encompasses the entire process by which in the course of a public offering the block of securities is dispersed and ultimately comes to rest in the hands of the investing public, id. at 152 (internal quotation marks omitted), this precedent cannot be read to expand the definition of underwriter to those who participate only in non-distributional activities that may facilitate securities' offering by others. [7] Rather, Kern is fairly construed to instruct that persons playing roles essential in the actual distribution of securities qualify as underwriters. See SEC v. Kern, 425 F.3d at 152; United States v. Abrams, 357 F.2d 539, 547 (2d Cir.1966) (The [1933 Act] . . . defines an underwriter as one who takes from an issuer with a view toward distribution.  (emphasis added)); see also SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072, 1086 (9th Cir.2010) (defining underwriter as [a]ny intermediary between the issuer and the investor that is an essential cog in the distribution process (internal quotation marks omitted)); In re Refco, Inc. Sec. Litig., 2008 WL 3843343, at  ([T]he breadth of the definition of `underwriter' is intended to sweep up allbut onlythose who play a role in the distribution of the securities.). Indeed, the cases cited by plaintiffs all involved defendants who themselves participated in distributing securities. See, e.g., SEC v. Kern, 425 F.3d at 152 (defendants acquired securities from affiliates with a view to distribution); SEC v. N. Am. Research & Dev. Corp., 424 F.2d 63, 72 (1970) (defendant participate[ed] in a distribution by acquiring and selling shares); SEC v. Culpepper, 270 F.2d 241, 247 (2d Cir.1959) (defendant publicly resold shares he received as repayment); SEC v. Chinese Consol. Benevolent Ass'n, Inc., 120 F.2d at 740-41 (defendant solicited orders, obtained [] cash from purchasers, and forwarded bonds); Special Situations Fund v. Cocchiola, No. 02-3099, 2007 WL 2261557, at -8 (D.N.J. Aug. 3, 2007) (identifying fact issue regarding underwriter status when documents named defendants as underwriters and stated that they had purchased shares and received underwriting fee). [8] In urging otherwise, plaintiffs also rely on Harden v. Raffensperger, Hughes & Co., 65 F.3d 1392 (7th Cir.1995), wherein the Seventh Circuit held a qualified independent underwriter (QIU) subject to § 11 underwriter liability because it was necessary to the distribution. Id. at 1400-01 (internal quotation marks omitted). That conclusion, however, is not as broad as plaintiffs urge because the court in Harden made clear that its inquiry was limited to the statutorily enumerated activities, i.e., whether defendant had participated in purchas[ing] . . . notes with a view to distribution, or offering or selling notes in connection with their distribution. Id. at 1400. Moreover, Harden is easily distinguished from the instant cases. There, the Seventh Circuit emphasized the appropriateness of imposing § 11 liability on a QIU who voluntarily and explicitly assumed the liabilities of an underwriter because, in accordance with NASD rules, the issuer could not use a non-independent affiliate as its underwriter without a QIU. Id. at 1397-99, 1401-03. By contrast, nothing in plaintiffs' complaints suggest that the Rating Agencies explicitly assumed the responsibilities of underwriters. Plaintiffs' allegations that the Rating Agencies assumed the historic role of underwriters by evaluating loan data and assisting in the creation of the securities falls well short of alleging that the Agenciesexplicitly, or otherwiseparticipated in the distribution of the securities. See, e.g., New Jersey Carpenters Vacation Fund v. Royal Bank of Scot. Grp., PLC, 720 F.Supp.2d 254, 263 (S.D.N.Y.2010) (concluding that allegations that Moody's and S & P played a significant, if not major, role in initial securitization decisions was insufficient to create underwriter liability when plaintiffs made no factual allegation regarding rating agencies' participation in sale or distribution of securities, such as assisting in investor `road shows,' or purchasing the securities themselves for re-sale). Indeed, unlike in Harden, all of the certificate transactions here at issue involved traditional underwriters other than the Rating Agencies. Nor are we persuaded that Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988), requires a different result. There, the Supreme Court declined to extend § 12(1)'s liability provision for sellers of unregistered securities to anyone whose participation in the buy-sell transaction is a substantial factor in causing the transaction to take place. Id. at 648-51, 108 S.Ct. 2063 (internal quotation marks omitted). [9] Explaining that nothing in § 12(1)'s language suggested imposing liability on participants collateral to the offer or sale, the Court stated that, in contrast, Congress employed the collateral participation concept in other provisions of the 1933 Act. Id. at 650 & n. 26, 108 S.Ct. 2063. The Court then noted that § 11's inclusion of many who are participants in the activities leading up to the sale lent strong support to its conclusion that § 12 imposed no similar participant liability. Id. at 650 n. 26, 108 S.Ct. 2063. Unlike plaintiffs, we do not interpret this discussion as supporting imposition of § 11 underwriter liability on everyone playing a facilitating role in the eventual sale or offer of securities. First, Pinter 's discussion of § 11 participant liability was confined to a footnote and is dictum. See Central Va. Cmty. Coll. v. Katz, 546 U.S. 356, 363, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006) ([W]e are not bound to follow our dicta in a prior case in which the point now at issue was not fully debated.); Sai Kwan Wong v. Doar, 571 F.3d 247, 257 (2d Cir.2009). Second, the Court's statement that § 11, as opposed to § 12, imposes participant liability does not answer the question: participation in what? A plain reading of the text points us to one answer: participation in the distribution of securities, either through the purchase of securities from an issuer with a view towards distribution, the sale or offer of such securities by an issuer, or the underwriting of such undertakings. c. Legislative History and Purpose Even if we were to identify ambiguity in the text or in our prior case law, which we do not, an examination of § 11's legislative history and purpose reinforces our holding that the Rating Agencies do not qualify as `underwriters.' See, e.g., General Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 600, 124 S.Ct. 1236, 157 L.Ed.2d 1094 (2004) (interpreting statute in light of text, structure, purpose, and history); Slayton v. Am. Express Co., 604 F.3d 758, 770-71 (2d Cir.2010). In so analyzing the statute, we are mindful that although the securities laws are interpreted expansively to effectuate their remedial purposes, the ultimate question is one of congressional intent, not one of whether the court can improve the law. Pinter v. Dahl, 486 U.S. at 653, 108 S.Ct. 2063 (internal quotation marks and brackets omitted). Moreover, while the term underwriter is interpreted broadly, it must be read in relation to the underwriting function that [it] is intended to capture. In re Refco, Inc. Sec. Litig., 2008 WL 3843343, at . A House Report explains that underwriter was defined broadly enough to include not only the ordinary underwriter, who for a commission promises to see that an issue is disposed of at a certain price, but also . . . the person who purchases an issue outright with the idea of then selling that issue to the public. H.R.Rep. No. 73-85, at 13 (1933). Additionally, the definition encompassed two other groups of persons who perform functions, similar in character, in the distribution: (1) underwriters of the underwriter, and (2) participants in the underwriting or outright purchase. . . who are given a certain share or interest. Id. A later House Report states that changes were made to exclude from the definition those who merely furnish an underwriter money, and to adopt a test of participation in the underwriting undertaking rather than that of a mere interest in it. H.R.Rep. No. 73-152, at 24 (1933). By focusing on persons playing roles similar to those disposing of or reselling securities, or those participating in such actions, these reports indicate that congressional intent was to include as underwriters all persons who might operate as conduits for securities being placed into the hands of the investing public. 2 Thomas Lee Hazen, Law of Securities Regulation § 4.27[1] (6th ed.2011) (emphasis added); see Ackerberg v. Johnson, 892 F.2d 1328, 1335-36 (8th Cir.1989) (same); see also New Jersey Carpenters Vacation Fund v. Royal Bank of Scot. Grp., PLC, 720 F.Supp.2d at 262-63 & n. 7 (concluding that § 11's legislative history suggests underwriter definition revolves around the sale and distribution of securities). In short, Congress did not intend for strict underwriter liability to extend to persons merely interested in a distribution by virtue of their provision of non-distribution services to an offeror. See In re WorldCom Sec. Litig., 308 F.Supp.2d at 344 (Having a relationship with an issuer or underwriter . . . does not transform one into an underwriter.). Indeed, the strict liability nature of the statutory cause of action suggests the opposite. Pinter v. Dahl, 486 U.S. at 652, 108 S.Ct. 2063. As we have previously noted, § 11 ensures accurate disclosures in registration statements by imposing in terrorem liability on a limited list of persons. See In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d at 359-60; see also Herman & MacLean v. Huddleston, 459 U.S. at 381-82 & n. 13, 103 S.Ct. 683 (noting that § 11, designed to assure compliance with disclosure provisions, can be brought only against the issuer, its directors or partners, underwriters, and [named experts]). To be sure, direct or indirect participation in underwriting subjects a person to strict liability. 15 U.S.C. § 77b(a)(11). But the participation must be in the statutorily enumerated distributional activities, not in non-distributional activities that may facilitate the eventual distribution by others. This approach avoids the implausible result of transforming every lawyer, accountant, and other professional whose work is theoretically necessary to bringing a security to market into an underwriter subject to strict liability under § 11, a dramatic outcome that Congress provided no sign of intending. Rather, the legislative history signals that § 11 was designed to impose its exacting standards regarding the provision of accurate and complete information only on the people (or entities) responsible for distributing securities to the public, that is, on those engaged in the public offering. See H.R.Rep. No. 73-85, at 5 (noting that 1933 Act's civil liabilities impose fiduciary-like responsibilities on all those responsible for statements upon the face of which the public is solicited to invest its money, namely, directors of the issues, its experts, and the underwriters who sponsor the issue); id. at 22 (noting that § 11 liability is imposed against those responsible for a false or misleading statement because a security's value is affected by registration statement's information). [10] In sum, we conclude that the text, case law, legislative history, and purpose of the statute demonstrate that Congress intended the participation clause of the underwriter definition to reach those who participate in purchasing securities with a view towards distribution, or in offering or selling securities for an issuer in connection with a distribution, but not further.