Opinion ID: 529364
Heading Depth: 4
Heading Rank: 2

Heading: Against the Stockbrokers

Text: 26 As previously stated, the stockbrokers were not named as defendants in the investors' section 12(2) claim in the second amended complaint. It was in the proposed third amended complaint that the investors first attempted to state a section 12(2) claim against the stockbrokers. The investors alleged that the stockbroker defendants were associated with [Celani, Celani & Associates, Inc. (CCA) ], distributed sales promotion data which contained misrepresentations and omissions of fact as herein alleged, for CCA, sold units in the limited partnerships of [sic] some of the plaintiffs, recommended the CCA limited partnerships and were a substantial and motivating force in the sales to plaintiffs. 27 The stockbroker defendants argue that these allegations are insufficient to state a claim under section 12(2) because the investors do not allege that the stockbrokers solicited any sales. They rely on In re Activision Securities Litigation, 621 F.Supp. 415 (D.C.Cal.1985), in which the court granted a motion to dismiss section 12(2) claims against Morgan Stanley, one of the co-lead underwriters in a public offering. This reliance is misplaced. The district court in Activision Securities dismissed the section 12(2) claim against Morgan Stanley because the plaintiffs had not alleged that any of them had purchased securities from that firm and plaintiffs fail to allege that Morgan Stanley was a 'substantial factor' in the sale. Id. at 426. Significantly, the district court in Activision Securities refused to dismiss the plaintiffs' section 12(2) claims against any of the other underwriters, and held that a recovery could be made against underwriters who had sold securities to the plaintiffs, provided the other elements of the section 12(2) claims were established. Id. at 426. 28 In the present case, the charging paragraph of the investors' section 12(2) claim against the stockbrokers alleges that the stockbrokers sold units in the limited partnerships [to] some of the plaintiffs.... This allegation charges a violation of section 12(2) in the language of the statute as to some of the investors. See 15 U.S.C. Sec. 77l (2) (Any person who ... sells a security ... which includes an untrue statement of a material fact or omits a material fact ... shall be liable to the person purchasing such security from him....). With regard to the investors in general, it is alleged that the stockbrokers distributed sales promotion data, recommended the ... limited partnership[ ] interests and were a substantial and motivating force in the sales to them. While this is not a model form of pleading a section 12(2) claim, it satisfies the short and plain statement rule of Rule 8(a)(2) which provides that a pleading which sets forth a claim for relief shall contain a short and plain statement of the claim showing that the pleader is entitled to relief.... Cf. Harelson v. Miller Financial Corp., 854 F.2d 1141, 1142 (9th Cir.), cert. denied, --- U.S. ----, 109 S.Ct. 274, 102 L.Ed.2d 263 (1988) (salesman did not personally seek out customers but used a company brochure and presented the basic facts necessary to effectuate a sale; solicitation under section 12(2) found to exist). 29 We conclude that viewing the allegations against the stockbrokers in their totality, the investors stated a section 12(2) claim against them in the proposed third amended complaint. But this does not end our inquiry of whether the district court erred in denying leave to file the third amended complaint. 30 In its order denying leave to file the third amended complaint, the district court noted that undue delay, bad faith or dilatory motive were also factors to consider. But the district court did not base its ruling on any of these grounds. The stockbrokers argue that notwithstanding this omission, undue delay is demonstrated by the fact that the initial complaint was filed in September 1983, and the motion to file the third amended complaint was not filed until May 1984, a lapse of eight months. The stockbrokers urge that we affirm the district court because of this undue delay. 31 Based upon the record before us, we cannot make our own independent determination whether under the circumstances the delay was undue, or whether the motion to file the third amended complaint was made in bad faith or with a dilatory motive. These are matters which the district court should consider and decide in the first instance in the exercise of its discretion. It has not done so, and a remand to the district court for this purpose is appropriate. 6 32 In July 1987, the investors again sought leave to file a third amended complaint to set forth a section 12(2) claim against the stockbroker defendants. The district court denied this motion for the same reasons it had denied the earlier motion in June 1984, and because of the intervening three years of inactivity. As to the section 12(2) claim against the stockbroker defendants, however, neither the investors' attempt to reassert this claim in 1987, or the court's second rejection of it, alters our conclusion that the district court should not have rejected the section 12(2) claim on the basis that it was insufficiently pleaded. The three years of inactivity from 1984 to 1987 also has no effect on what we have concluded was the erroneous ruling by the district court in 1984.