Opinion ID: 532765
Heading Depth: 1
Heading Rank: 2

Heading: Meaning of Seller Under Sec. 12(2)

Text: 19 Section 12(2) of the Securities Act provides that any person who offers or sells a security by means of a prospectus or oral communication that makes misstatements or omissions of material fact shall be liable to the person purchasing such a security from him. 15 U.S.C. Sec. 77l (2) (1988). Relying on our decision in Collins v. Signetics Corp, 605 F.2d 110 (3d Cir.1979), the district court held that plaintiffs failed to state a claim against the Craftmatic defendants because under Collins, only the immediate seller of securities is liable to the purchaser for violations of Sec. 12(2). Consequently, the court dismissed Count III with respect to the Craftmatic defendants. 20 Since our decision in Collins, the Supreme Court in Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988), has considered the scope of the term seller in the context of Sec. 12(1). 7 In Pinter, the Court stated that although the language of Sec. 12(1) contemplates a buyer-seller relationship not unlike traditional contract privity, its scope is not limited to those who pass title. Id. 108 S.Ct. at 2076 (citing Sec. 2(3), Securities Act of 1933, 15 U.S.C. Sec. 77b(3) (1988) (definition of sell and offer)). Therefore, because solicitation is the stage at which an investor is most likely to be injured, id. at 2078, the Court held the term seller to include one who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner. Id. at 2079. 21 The Craftmatic defendants contend that the holding in Pinter is limited to Sec. 12(1) and should not be applied in this case. Examining the statute, we note that Sec. 12(1) and Sec. 12(2) use identical language to indicate the persons who may be held liable (any person who ... offers or sells a security), the persons who may sue (the person purchasing such a security from him), as well as the remedy available (recover the consideration paid for such security ..., or ... damages if he no longer owns the security). 15 U.S.C. Sec. 77l (1)-(2) (1988). Although the Pinter Court expressly declined to decide the scope of seller liability under Sec. 12(2), the Court recognized that the same language governs both sections and that most courts and commentators identify the same defendant class for each section. 108 S.Ct. at 2076 n. 20. Since Pinter, other courts of appeals have addressed this question and have concluded that the Pinter approach to Sec. 12(1) should be applied to Sec. 12(2). See Crawford v. Glenns, Inc., 876 F.2d 507, 510 (5th Cir.1989) (test for Sec. 12(2) status reformulated in light of Pinter ); Wilson v. Saintine Exploration & Drilling Corp., 872 F.2d 1124, 1126 (2d Cir.1989) (we must consider implications of Pinter under Sec. 12(2)); Schlifke v. Seafirst Corp., 866 F.2d 935, 940 (7th Cir.1989) (Pinter undermines strict privity concept under Sec. 12(2)); Abell v. Potomac Insurance Co., 858 F.2d 1104, 1115 (5th Cir.1988) (Pinter Court interpreted Sec. 12(1) based on plain language and would presumably do the same with Sec. 12(2)), judgment vacated on other grounds, --- U.S. ----, 109 S.Ct. 3236, 106 L.Ed.2d 584, cert. denied, --- U.S. ----, 109 S.Ct. 3242, 106 L.Ed.2d 589 (1989); Capri v. Murphy, 856 F.2d 473, 478 (2d Cir.1988) (section 12(2) claim should be considered in light of Pinter ). Thus, given the identical language of sections 12(1) and 12(2), as well as the Securities Act's overall objective of disclosure, 8 we see no reason to distinguish the scope of seller for purposes of Sec. 12(1) and Sec. 12(2). 9 22 In Pinter, after citing a number of authorities, including Collins, that limited Sec. 12 liability, the Court stated that [w]e do not read Sec. 12(1) so restrictively. 108 S.Ct. at 2077. We adopt the Pinter analysis and hold that liability under Sec. 12(2) extends not only to those who pass title to the purchaser, but also to those who successfully solicit the purchase, motivated by their own or the securities owner's financial interests. See id. at 2079-80. 23 In evaluating whether participation falls within the scope of a Sec. 12 seller, it is important to note that the term solicitation does not encompass all activities related to the purchase transaction. In Pinter, the Court stated that Congress did not intend to hold persons liable whose participation was collateral to the offer or sale. Id. at 2080. 10 The Court rejected a test for seller that imposed liability on persons whose actions were merely a substantial factor in causing the purchase. Id. at 2080 & n. 25. Moreover, the language of Sec. 12, which makes a participant liable to the person purchasing such a security from him ..., precludes actions against remote sellers, id. at 2077 n. 21, and focuses the inquiry on the relationship between the purchaser and the participant, rather than on the latter's degree of involvement in the transaction. See id. at 2081. 24 Thus, although an issuer is no longer immunized from Sec. 12 liability, neither is an issuer liable solely on the basis of its involvement in preparing the prospectus. The purchaser must demonstrate direct and active participation in the solicitation of the immediate sale to hold the issuer liable as a Sec. 12(2) seller. See Moore v. Kayport Package Express, Inc., 885 F.2d 531, 536-37 (9th Cir.1989) (mere performance of professional services without active solicitation of the purchase does not give rise to Sec. 12(2) liability); Wilson, 872 F.2d at 1127 (one who prepares documents for offering is Sec. 12(2) seller if commission was earned from actual seller for persuading client to make particular investment); Abell, 858 F.2d at 1114 & n. 8 (issuers are sellers to extent they utilize a system analogous to that of automobile manufacturers; that is, to the extent they create distribution chains and engage in intensive marketing to convince public to purchase their securities); Capri, 856 F.2d at 478-79 (defendant who played major role in setting up venture is not a Sec. 12(2) seller unless plaintiffs can show defendant actually solicited their investment); cf. id. at 477-78 (general partners in coal mining venture are liable as Sec. 12(2) sellers, even though they had no direct communication with investors, in light of district court finding that promoter acted only upon authorization of partners and that promotor was agent of partners). 25 Plaintiffs have also alleged that defendants conspired with and aided and abetted one another in violating Sec. 12(2). Prior to Pinter, we identified the elements necessary to sustain a charge of aiding and abetting securities violations. See Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 799 (3d Cir.), cert. denied, 439 U.S. 930, 99 S.Ct. 318, 58 L.Ed.2d 323 (1978). Nonetheless, we did not specifically determine whether aider-abettor liability is appropriate under Sec. 12(2). See Collins, 605 F.2d at 114; see also Pinter, 108 S.Ct. at 2079 n. 24 (Collins left open whether aiding and abetting liability is available; we need not consider whether this theory is appropriate under Sec. 12(1) to decide Pinter ). 26 Since Pinter, two courts of appeals have declined to recognize a right of action for aiding and abetting under Sec. 12(2). See Royal American Managers, Inc. v. IRC Holding Corp., 885 F.2d 1011, 1017 (2d Cir.1989) (no separate aider and abettor liability under Sec. 12); Schlifke v. Seafirst Corp., 866 F.2d 935, 942 (7th Cir.1989) (we see no reason to imply a right of action for aiding and abetting under Sec. 12(2)). This view finds support in the language of Sec. 12(2), which expressly limits liability to those who offer or sell. Moreover, it would be anomalous to recognize aider and abettor liability in light of Pinter 's clear direction that Sec. 12(2) liability does not extend to collateral participants. Finally, as one court has noted, Sec. 12(2) provides for civil liability and a rescission remedy and, therefore, is not analogous to criminal or tort law, where aider and abettor liability has been recognized. Wilson, 872 F.2d at 1127. Thus, we hold that persons who fail to qualify as sellers under the Pinter standard may not be held liable under Sec. 12(2) on an aiding and abetting theory. 27 Applying these principles, we must determine whether the allegations in the complaint, if true, support plaintiffs' claim that the Craftmatic defendants were sellers within the meaning of Sec. 12(2). In Count III of their Complaint, plaintiffs allege that: 28 Each of the defendants ... either sold said securities directly to plaintiffs ... or solicited plaintiffs ... to buy Craftmatic common stock ... and in so acting were motivated by a desire to serve their own financial interests or the financial interests of the owner(s) of Craftmatic securities, and they ... conspired with and aided and abetted one another in connection with the preparation of the false and misleading Prospectus and Registration Statement used in conjunction with the sale of Craftmatic securities. 29 We find that plaintiffs' claim that the Craftmatic defendants were sellers for purposes of Sec. 12(2) is sufficient to survive a Rule 12(b)(6) motion to dismiss. It cannot be said at this juncture that plaintiffs can prove no set of facts that would entitle them to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir.1984). Therefore, to the extent that plaintiffs in all other respects have sufficiently alleged a violation of Sec. 12(2) against the Craftmatic defendants, they may maintain that action.