Opinion ID: 352275
Heading Depth: 1
Heading Rank: 3

Heading: securities exchange act claim

Text: 22 This brings us to what we regard as the chief question in the case: whether appellants have standing to sue under Section 10(b) of the 1934 Act and Rule 10b-5. Specifically, the issue is whether under the definition of sale in Section 3(a)(14) of the 1934 Act, 15 U.S.C. § 78c(a)(14) (1970), a pledge fulfills the familiar requirement that the fraud occur in connection with the purchase or sale of a security. 23 In resolving the standing question against appellants, the district court relied on McClure v. First National Bank of Lubbock, 497 F.2d 490 (5 Cir. 1974), cert. denied, 420 U.S. 930 (1975). There the court acknowledged that a pledgor might be liable for fraud under Section 10(b) after his default and a consequent sale of the securities by the pledgee, but held that the pledge itself did not constitute a sale. At the time of the decision below in the instant case, the district court did not have the benefit of our subsequent decision which rejected the rationale of McClure in a case arising under Section 17(a) of the 1933 Act. United States v. Gentile, 530 F.2d 461 (2 Cir.), cert. denied, 426 U.S. 936 (1976). We hold that Gentile and our earlier decision in SEC v. Guild Films Co., 279 F.2d 485 (2 Cir.), cert. denied, 364 U.S. 819 (1960), control here and require that appellants be granted standing. 24 In Guild Films we held a pledge of stock to be a sale within the meaning of Section 2(3) of the 1933 Act, 15 U.S.C. § 77b(3) (1970), 8 in the context of determining that the pledgees there involved were person(s) who (have) purchased from an issuer within the meaning of the definition of underwriter in Section 2(11) of the 1933 Act, 15 U.S.C. § 77b(11) (1970). SEC v. Guild Films Co., supra, 279 F.2d at 489. 9 Gentile reaffirmed and expanded this holding. The defendant there was charged with a conspiracy to pledge fraudulently issued securities in violation of Section 17(a) of the 1933 Act, 15 U.S.C. § 77q(a) (1970). We again held a pledge to constitute a sale within Section 2(3), this time to satisfy the requirements of Section 17(a) that the fraud occur in the offer or sale of any securities. United States v. Gentile, supra, 530 F.2d at 466-67. We held: 25 In effect, the pledgee assumes a very real investment risk that the pledged securities will have continuing value, a risk that is identical in nature to the risk taken by investors which serves as the indisputable basis for statutory regulation of securities transactions. We therefore find no reason to treat the equivalent risks differently under the statute. Id. at 467. 10 26 The fact that Gentile was a criminal case in which civil standing was not an issue does not diminish its persuasion as a precedent with respect to the Section 10(b) claim before us. The existence of a sale is as essential to a criminal prosecution for violation of Section 17(a) as it is to a civil action under that section. We find no basis on the face of either the 1933 Act or the 1934 Act for denominating a pledge as a sale for criminal but not for civil purposes. 27 Nor would the standing policy enunciated by the Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), support such a conclusion. We recognize that the Court there expressed concern about vexatious suits by a potentially limitless class of plaintiffs. We further recognize that the granting of standing to pledgees creates potential plaintiffs where none might have existed. But a closer look at Blue Chip demonstrates that the specific concerns there expressed by the Court have no bearing on the question before us of granting standing to pledgees. The Court in Blue Chip had before it a plaintiff who claimed that the defendant's misrepresentations caused it to refrain from purchasing securities. The Court observed that the rule of Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2 Cir.), cert. denied, 343 U.S. 956 (1952), requiring a purchase or sale, had the virtue of excluding a class of plaintiffs who had not dealt in the security at all and whose cases as a result would stand or fall on oral testimony. Requiring that the plaintiff have dealt in the security would assure that each case stand upon at least one objectively demonstrable fact. Id. at 746-47. A pledge which occurs pursuant to a loan contract is just as concrete a transaction as is a normal transfer of title. 11 28 We believe that the rationale underlying our holding in Gentile with respect to Sections 2(3) and 17(a) of the 1933 Act is persuasive authority for holding that a pledge constitutes a contract to sell or otherwise dispose of a security within the meaning of Section 3(14) of the 1934 Act. Accordingly, on the facts of this case, we hold that both a sale and a purchase may be cognizable under Section 10(b) of the 1934 Act. Appellants were purchasers by virtue of their acceptance of the pledge by Arnold and Fowler; and Bankers Trust was a seller by virtue of its release of the Kateses' pledge. 29 We therefore reverse the dismissal of appellants' Securities Exchange Act claim and remand the case to the district court with directions to grant leave to appellants to amend their complaint in accordance with this opinion. See Rogers v. White Metal Rolling & Stamping Corp., 249 F.2d 262 (2 Cir. 1957), cert. denied, 356 U.S. 936 (1958). 12 30 Affirmed as to the dismissal of the Regulation U claim against European-American and Franklin National; but as to the dismissal of the Securities Exchange Act claim against Bankers Trust, reversed and remanded with directions to grant leave to appellants to amend their complaint in accordance with this opinion. 13