Opinion ID: 567912
Heading Depth: 3
Heading Rank: 1

Heading: The Scope of Section 12(2) Prior to Pinter

Text: 12 A brief summary of the evolution of section 12(2) as an anti-fraud measure in the arena of securities regulation is useful in analyzing the effect of Pinter on this circuit's interpretation of the scope of that statute. In the early years following the passage of the 1933 Act, courts were reluctant to impose 12(2) liability beyond the immediate seller of securities. In furtherance of the remedial purposes of the Act, 7 however, a number of courts slowly expanded the definition of seller so as to abolish any threshold requirement of contractual privity. 13 Accordingly, prior to Pinter a split existed among circuits as to whether a section 12(2) plaintiff must establish privity between the plaintiff-purchaser and the defendant-seller in order for the defendant to be considered a seller. The Third and Seventh Circuits had held that section 12(2) required privity. 8 The Second, Fourth, Fifth, Sixth, Eighth, Ninth and Eleventh Circuits had held otherwise, using either a substantial factor test, a proximate cause test or a variation thereof 9 to define the class of participants who, albeit not owners of the securities, could nevertheless be liable under section 12(2). Quincy Co-operative Bank v. A.G. Edwards & Sons, Inc., 655 F.Supp. 78, 83 (D.Mass.1986). See also Davis v. Avco Financial Serv., 739 F.2d 1057, 1063-67 (6th Cir.1984) (discussing the various approaches). Those circuits who did not require privity under section 12(2) varied on how far the ambit of that statute extended, even when employing the same test. 14 This circuit's most recent interpretation of section 12(2) dates back to 1985, before the Supreme Court issued Pinter. In Foster v. Jesup and Lamont Securities Co., Inc., 759 F.2d 838 (11th Cir.1985), this court stated that [s]ection 12 will reach those 'whose participation in the buy-sell transaction is a substantial factor in causing the transaction to take place.'  Id. at 844 (quoting Pharo, 621 F.2d at 667). Secondary participants who did not effectuate the sale could be liable if a plaintiff's injury flowed directly and proximately from their actions, i.e. they were key participants, active negotiators, or the motivating force behind a sale of securities. Foster, 759 F.2d at 844 (citing Junker v. Crory, 650 F.2d 1349, 1360 (5th Cir.1981); Hill York Corp. v. American Int'l Franchises, Inc., 448 F.2d 680, 693 (5th Cir.1971)). 15 In Foster, the defendant underwriter's name was prominently displayed on the offering document the seller of securities gave to the plaintiff. The underwriter and the seller of securities had entered into an agency agreement whereby the underwriter promised to use its best efforts to sell interests in a limited partnership in exchange for a 10% commission; however, that agreement was subsequently rescinded. While the plaintiff bought his interest in the partnership from the president of the general partner in the limited partnership and the defendant underwriter sold no interests in the partnership to anyone, the evidence established that the plaintiff relied on the fact that the underwriter's name was displayed on the offering document. The Foster court nevertheless held that such reliance was not enough to constitute a substantial factor in the sale of a security. Foster, 759 F.2d at 845. Otherwise, all underwriters would always be potentially liable under section 12 simply by virtue of their status--an outcome not justified by the language of the securities provision at issue. Id. 16 In our case, the district court did not follow Foster 's test for section 12(2) status, choosing instead to adopt Pinter 's definition of seller as determined under section 12(1). In Pinter, the Court held that liability extends beyond those who pass title to a security, thus rejecting the privity requirement adopted by the Third and Seventh Circuits. The Court recognized that [i]n common parlance, a person may offer or sell property without necessarily being the person who transfers title to, or other interest in, that property. Pinter, 486 U.S. at 642-43, 108 S.Ct. at 2076. Rather than relying entirely on ordinary understanding of the statutory language, however, the Court's analysis in Pinter was based principally on the meaning of the language of section 12(1) as set forth in the corresponding definitions in section 2(3) of the 1933 Act. 17 As stated in footnote 1, supra, section 12(1) makes a person liable for the offer or sale of an unregistered security. Section 2(3) defines sale or sell to include every contract of sale or disposition of a security or interest in a security, for value, and the terms offer to sell, offer for sale, or offer to include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. 15 U.S.C.A. § 77b(3). According to this language, the Pinter Court concluded that participants in the transfer of securities who solicit a purchase may also be liable as sellers under section 12(1) of the 1933 Act--even though they do not own the securities. Pinter, 486 U.S. at 644, 645, 108 S.Ct. at 2077, 2077. While the Court declined to expressly define solicit, it explained that a participant whose motivation is solely to benefit the buyer cannot be deemed to have solicited a purchase. Instead, liability extends only to one who solicits a purchase and is motivated at least in part by a desire to serve his own financial interests or those of the securities owner. Id. at 647, 108 S.Ct. at 2079.