Court Opinion

ID: 9477465
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:24:18.390889+00
Date Added: 2024-06-11T17:45:53.637830
License: Public Domain

TIMBERS, Circuit Judge,
dissenting:
I regret that I am unable to join in Judge Winter’s innovative majority opinion. I am unable to do so because holding that proof of loss causation is a requisite element of an action under § 12(2) of the Securities Act of 1933 is contrary to the language of the statute, legislative intent, and relevant precedent, including prior decisions of our Court.
The language of the statute itself, which imposes liability for a material misrepresentation “by means of” a prospectus or oral communication, argues against a requirement of causation. After stating that a buyer suing under § 12(2) does not have to prove reliance, Professor Louis Loss, the nation’s leading commentator on securities law, observed:
“Inevitably, ... some element of reliance (which is subjective) is inherent in the concept of materiality (which is an *87objective, ‘reasonably prudent person’ concept). But, especially since Congress left § 12(2) alone when it amended § 11 in 1934 to require proof of reliance in some circumstances, that element should not be permitted to come in the back door by way of a definition of materiality-
This legislative history also argues against reading something like a reliance (or causation) requirement into the statutory reference to a sale ‘by means of a misleading prospectus or oral communication.” (emphasis added).
Loss, Fundamentals of Securities Regulation 890 (1988) (footnote omitted).
Professor Loss also has pointed out that “[rjecission and § 12(2) are substantially the same” (emphasis in original), id. at 888, and “[t]he elements of recission, in a nutshell, are ‘misrepresentation’ of a ‘material’ ‘fact’ on which the buyer justifiably ‘relied.’ The buyer need not show any causal connection between the misrepresentation and his damage; indeed, he need not even show that he has been damaged.” Id. at 873 (emphasis added).
In the seminal case of Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 696 (5 Cir.1971) (Clark, J.) (citations omitted), the Fifth Circuit stated, in construing § 12(2), that when determining the materiality of the omission
“[o]ne note of caution should be sounded here. A causation test should not be read into this Section. A plaintiff does not have to prove that the sale would not have occurred absent the misrepresentation or omission.” (emphasis added).
See also Sanders v. John Nuveen & Co., 619 F.2d 1222, 1225 (7 Cir.1980), cert. denied, 450 U.S. 1005 (1981); Gilbert v. Nixon, 429 F.2d 348, 356 (10 Cir.1970); Klein v. Computer Devices, Inc., 591 F.Supp. 270, 277 (S.D.N.Y.1984), reargument on other grounds, 602 F.Supp. 837 (S.D.N.Y.1985).
The statement quoted above from Hill York Corp. is in accord with the law of this Circuit which has cited Hill York Corp. with approval. Jackson v. Oppenheim, 533 F.2d 826, 829 (2 Cir.1976) (Oakes, J.). In Jackson, we stated that, to recover under § 12(2), a buyer of stock need not prove that the alleged “misleading nature” of the communication to him “caused” the eventual purchase. Id. In accordance with the language of § 12(2), we further stated that the buyer does have to prove that the challenged sale was effected “by means of” the communication viewed as a whole. Id. We went on to explain that this is to say that “the communication as a whole must have been instrumental in the sale of ... [the] shares of ... stock.” Id. at 829-30. Although a buyer need not show that the alleged misleading communication had a “decisive effect” on his decision to buy, he must show that it at least stands in “some causal relationship” to that decision. Id. at 830 (emphasis added). It is clear from our discussion, however, that proof of a “causal relationship” is a less stringent requirement than proof of “causation”. We also expressly stated that we were not refuting those courts which held that reliance need not be proven by plaintiffs in § 12(2) actions. Id. at 830 n. 8; see also Akerman v. Oryx Communications, Inc., 810 F.2d 336, 344 (2 Cir.1987) (Meskill, J.) (§ 12(2) imposes liability regardless of reliance by purchaser); Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1034 (2 Cir.1979, as amended 1980) (Lumbard, J.) (absent allegation by seller that buyer of stock knew of falsity of misrepresentations, buyer not required to show reliance on misrepresentation to recover under § 12(2)).
Furthermore, at issue in Jackson was a misleading oral communication, as compared to the misleading private placement memorandum at issue in the instant case. After stating that some proof of a causal relationship is necessary, we stated in a footnote that
“The situation is entirely different, of course, where liability is based on a misleading prospectus constituting an offer of sale. In such cases liability may be based on the misleading ‘offer’ by prospectus even though the prospectus is mailed after the confirmation of the sale.”
*88Jackson, supra, 533 F.2d at 830 n. 10. Thus, in the instant case, an even lesser standard than “causal relationship” applies.
As the majority points out, we have expanded liability under § 12(2) beyond the immediate and direct seller of the securities. Mayer v. Oil Field Sys. Corp., 803 F.2d 749, 756 (2 Cir.1986); Lanza v. Drexel & Co., 479 F.2d 1277, 1298 (2 Cir.1973) (en bane). Before holding a “participant, aider and abettor, or coconspirator” liable under § 12(2), however, a plaintiff is required to show “privity or, in the absence of privity, scienter.” Lanza, supra, 479 F.2d at 1298. As the majority recognizes, some other circuits also have accepted a broader definition of “seller” under various circumstances. There is no mention of an additional requirement of proof of loss causation in any of these cases. Indeed, no court, so far as I know, has held as the majority does today, that loss causation is a requisite element of a § 12(2) action.
We have rejected an attempt to apply a standard used in § 10(b) cases to a § 12(2) case. We held that, although an intent to defraud criterion is required by § 10(b) and Rule 10b-5, “[w]e do not understand ... why the latter standard should be applied to § 12(2).” Franklin Sav. Bank of New York v. Levy, 551 F.2d 521, 526-27 (2 Cir.1977) (Mulligan, J.). I believe that the majority’s decision to impose proof of loss causation, a necessary element of a § 10(b) claim, on a § 12(2) claim is wholly unwarranted.
Underlying the majority’s decision appears to be dissatisfaction with our prior decisions to permit expanded liability under § 12(2) when certain conditions are met. Yet, at this late date — more than half a century after enactment of both the 1933 Act and the 1934 Act — I do not believe that we should engraft the elements of a 1934 Act § 10(b) claim on a 1933 Act § 12(2) claim, particularly when doing so not only misconstrues the plain language of the statute and legislative intent, but requires us to overrule our own precedents.
If such a drastic change in this remedial statute is to be made, it should be done by Congress, not by our Court. See Loss, Fundamentals of Securities Regulation, supra, at 890.1
I would affirm the judgment entered on Judge Sprizzo's well reasoned district court decision. From the majority's refusal to do so, I respectfully but emphatically dissent.

. There are two housekeeping matters that I am constrained to mention.
First, before a holding of first impression such as this by the majority goes in the books, I should have thought that the Securities and Exchange Commission would have been invited to file an amicus brief. After all, the Commission has had more than a half century of administering the 1933 Act (ever since that responsibility was transferred to the SEC from the FTC by the 1934 Act) and presumably has some expertise that we should not foreclose ourselves from obtaining.
Second, under all the circumstances, I should have thought this an appropriate case in which to request an en banc poll before filing the opinion. It is undeniably a case of great importance (whose radiations will have an impact beyond our Circuit) and it conflicts with prior decisions of our Court. I am mindful that I have no role in requesting en banc consideration at this stage of the case, and that en banc prior to the panel decision is unusual. But this is a most unusual case.