Opinion ID: 529364
Heading Depth: 2
Heading Rank: 1

Heading: Dismissal of the Section 12(2) Count in the Second Amended Complaint

Text: 8 The investors-appellants argue the district court erroneously dismissed their section 12(2) claim which they alleged against the accountant and lawyer defendants in the second amended complaint. 3 Section 12(2) of the Securities Act of 1933 imposes civil liability on a person who offers or sells securities by means of a prospectus or oral communication containing material misrepresentations or omissions. Jett v. Sunderman, 840 F.2d 1487, 1491 (9th Cir.1988). The investors contend the accountant and lawyer defendants were liable as sellers under section 12(2) because their actions were a substantial factor in bringing about the sales transactions. 9 This circuit has applied the substantial factor test to determine who may be liable as a seller under section 12(2), see, e.g., id. at 1491-92. Under this test, persons who did not pass title in a sales transaction, and thus were not in privity with the purchaser, may nonetheless be liable as a seller if their actions were both necessary to and a substantial factor in bringing about the sales transaction. Id. The district court in the present case applied this test. It concluded that the facts alleged in the second amended complaint failed to show that any of the accountant or lawyer defendants had been in privity with any investor or had been a substantial factor in bringing about any of the sales transactions. On this basis, the district court dismissed the investors' section 12(2) claims against the accountant and lawyer defendants. 10 After the district court's judgment in this case, the Supreme Court defined the scope of the term seller under section 12(1) of the Securities Act of 1933. Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988). In Pinter, the Court held that liability extends beyond those who pass title to a security; those who solicit a purchase may also face liability as sellers under section 12(1) of the Securities Act. 108 S.Ct. at 2075-82. Although the Court did not define solicit, it explained that a person whose motivation is solely to benefit the buyer cannot be deemed to have solicited a purchase. Rather, liability extends only to those who solicit a purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner. Id. at 2079. 11 The Court's analysis in Pinter was based almost entirely on the language of section 12(1), and the definitions in section 2(3) of the Securities Act of 1933, 15 U.S.C. Sec. 77b(3) (section 2(3)). Section 12(1) makes a person liable for the offer or sale of an illegally unregistered security, and section 2(3) defines offer to include a solicitation of an offer to buy. 15 U.S.C. Sec. 77b(3). According to this language, the Court concluded that those who solicit a purchase are within the ambit of section 12(1). The Court also reasoned that Congress intended to impose liability on persons who solicit, because solicitation of a buyer is perhaps the most critical stage of the selling transaction. Id. at 2078. 12 The Pinter opinion distinguishes those who solicit from those who merely assist in another's solicitation efforts. Id. at 2081 n. 27. The Court rejected the substantial factor test because it fails to distinguish between those who solicit and those whose participation is only collateral to the offer or sale. Id. at 2080. As to accountants and lawyers, the opinion suggests that the activities of these professionals must be directed toward producing a sale as opposed to merely providing professional services before section 12(1) liability may be imposed. Id. at 2081. The Court warns that an application of the broader substantial factor test might expose securities professionals, such as accountants and lawyers, whose involvement is only the performance of their professional services, to Sec. 12(1) strict liability for recission. Id. 13 Appellants contend the substantial factor standard, rather than the Pinter standard, should apply to an action brought under section 12(2) against one not in privity with the purchaser of a security. First, appellants attempt to distinguish section 12(1) on the ground that it imposes strict liability, whereas section 12(2) allows a defendant to defend by showing that he or she could not have known of the misrepresentation or omission in the exercise of reasonable care. 15 U.S.C. 77l (2). Second, appellants seek to distinguish the subsections by pointing out that section 12(2) is grounded in tort law whereas section 12(1) is grounded in contract law. They argue that the related concepts of proximate cause and substantial factor are thus appropriate in actions under the tort-based section 12(2), even though more involvement is required by Pinter in actions under section 12(1). 14 Pinter interpreted only section 12(1), and expressly declined to interpret the scope of seller under section 12(2). Id. at 2076 n. 20. However, Pinter 's analysis of section 12(1) was based on the language of the statute. We begin our analysis of section 12(2) in the same way, and note that pertinent language which is present in and applicable to section 12(2)--offers or sells and purchasing such security from him--appears by identical language which is present in and applicable to section 12(1). 4 See Wilson v. Saintine Exploration and Drilling Corp., 872 F.2d 1124, 1126 (2d Cir.1989) (citing Capri v. Murphy, 856 F.2d 473, 478 (2d Cir.1988); Schillner v. H. Vaughan Clarke & Co., 134 F.2d 875, 878 (2d Cir.1943) (Clearly the word [sell] has the same meaning in subdivision (2) as in subdivision (1) of section 12.)). Moreover, the section 2(3) definition of offers applies with equal force to sections 12(1) and 12(2); and the word offers appears as part of parallel introductory language common to both sections 12(1) and 12(2). It seems plain from the statute that the word offers means the same thing in both sections. 15 We also note that while section 12(1) creates liability for the sale of unregistered securities, and section 12(2) creates liability for omissions or misrepresentations in a prospectus or oral communication, the purpose of both sections is to promote full and fair disclosure of information to potential buyers of securities. Pinter, 108 S.Ct. at 2078. The shared purpose of these sections strengthens our conclusion that Pinter 's reasoning applies equally to both sections. See Abell v. Potomac Ins. Co., 858 F.2d 1104, 1113-15 (5th Cir.1988); Capri v. Murphy, 856 F.2d at 478. Accordingly, we hold that Pinter provides the standard for determining liability as a seller under section 12(2) as well as under section 12(1) of the Securities Act of 1933. 16 Under the Pinter standard, we now turn to a review of the specific allegations in the investors' second amended complaint. First, they alleged the accountants drafted financial documents and allowed Celani and Binder to use these documents in selling the unregistered securities. Second, they alleged that the lawyers, each of whom was retained by the principal defendants, drafted or approved the drafting of false or misleading prospectuses and financial documents, and directed the issuance of securities. Specifically, the investors alleged that (1) all the lawyers participated in meetings where the prospectuses and other promotional materials were drafted, (2) lawyers Ellis and Uhrman gave advice and counsel to the owner defendants in preparing prospectuses and other promotional materials, (3) lawyer Minkow drafted tax opinions and allowed these opinions to be included in various promotional materials, and (4) lawyer Spolin allowed his name to be used on promotional materials as general counsel to CCA. 17 Based on Pinter, we conclude that the investors failed to state a claim under section 12(2) against the accountant and lawyer defendants. Under the Pinter analysis, these professionals are only subject to section 12(2) liability if they solicited the purchases and were motivated, at least in part, by financial gain. Pinter, 108 S.Ct. at 2079. Here, the investors did not allege that the lawyers or accountants played any role at all in soliciting the purchases. Rather, the investors alleged that these defendants performed professional services in their respective capacities as accountants and lawyers. As the Court stated in Pinter, [t]he buyer does not, in any meaningful sense, 'purchas[e] the security from' such a person. Id. at 2081 (footnote omitted). 18 The district court did not err in dismissing the section 12(2) claim against the accountant and lawyer defendants. 5 Nor did the district court err in dismissing the pendent state claims against the accountant, lawyer and stockbroker defendants once the court had dismissed the federal claim on which federal jurisdiction was predicated. See United Mine Workers v. Gibbs, 383 U.S. 715, 725-26, 86 S.Ct. 1130, 1138-39, 16 L.Ed.2d 218 (1966); McGlinchy v. Shell Chemical Co., 845 F.2d 802, 811 n. 4 (9th Cir.1988). 19