Court Opinion

ID: 8923601
Source: CourtListenerOpinion
Date Created: 2022-11-27 06:28:02.940527+00
Date Added: 2024-06-11T17:09:20.779060
License: Public Domain

LIVELY, Chief Judge,
concurring and dissenting.
I concur in the majority’s conclusion that the district court properly certified this case as a class action. I also concur in the majority’s affirmance of the district court’s holding that the sales of “adventures” in Dare to Be Great (DTBG) were sales of “securities” within the meaning of federal securities laws. In addition, I concur in the majority’s conclusion that the district court erred in holding that the notes from plaintiffs to Avco were “securities” within the meaning of the federal securities laws. Finally, I concur in the majority’s affirmance of the district court’s finding that there was no liability to the plaintiffs under section 10(b) of the 1934 Act and Rule 10b-5 for lack of proof of scienter.
I respectfully dissent, however, from the majority’s affirmance of the judgment for the plaintiffs based on the theory that Avco and McCormick were liable as “sellers” of the DTBG adventures under section 12(2) of the 1933 Act. In the first place, though the majority purports to affirm a finding by the district court of liability under section 12(2) I am unable to conclude that this was the basis of the district court’s judgment. The district court considered the notes securities, and the whole tenor of its findings and conclusions derives from the erroneous holding that the notes were securities. This is shown most clearly by the measure of damages which the district court applied. The district court granted recovery to the plaintiffs of the amounts paid to Avco on the promissory notes. The recovery is unrelated to the total amounts of their investments in DTBG adventures, yet these were the only securities involved in the transaction. The remedy prescribed for violation of section 12(2) is recovery of “the consideration paid for such security....” 15 U.S.C. § 77i (2) (1970). If the district court intended to find the defendants liable under section 12(2) for sales of the DTBG “adventures,” the recovery would necessarily have been related to the amount of the plaintiffs’ investments in DTBG, not to the amounts they borrowed from Avco to make these investments. I would reverse the judgment of the district court as being based on the erroneous conclusion that the promissory notes were securities.
In my opinion the majority has misread section 12(2) and has reached the wrong result, even if it is assumed that the district court did base its finding of liability on section 12(2). The federal securities laws are complex, but they do display a studied approach to a variety of problems. Different participants in various stages and types of securities transactions are treated individually. In this scheme section 12(2) of the 1933 Act focuses on the liability of persons who offer or sell securities using communications which contain untrue statements or which omit material facts. Only sellers and offerors of securities are reached by section 12(2). Other participants in securities transactions are treated in other provisions of the securities laws. To bring other participants within the reach of section' 12(2) by invoking the broad “remedial purposes” of federal securities legislation is contrary to a consistent refusal by the Supreme Court to so construe these statutes. For example in Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 99 S.Ct. 2479, 2490, 61 L.Ed.2d 82 (1979), the Court stated:
The invocation of the “remedial purposes” of the 1934 Act is similarly unavailing. Only last Term, we emphasized that generalized references to the “remedial purposes” of the 1934 Act will not justify reading a provision “more broadly that its language and the statutory scheme reasonably permit.” SEC v. Sloan, 436 U.S. 103, 116 [98 S.Ct. 1702, 1711, 56 L.Ed.2d 148] (1978); see Ernst & Ernst v. Hochfelder, 425 U.S., at 200 [96 S.Ct. at 1384]. Certainly, the mere fact that § 17(a) was designed to provide protection for brokers’ customers does not require the implication of a private damages action in their behalf. Cannon v. University of Chicago, supra [442 U.S.] at 688, and n. 9 [99 S.Ct. at 1953, and n. 9]; Securities Investor Protection Corp. v. Barbour, supra [421 U.S.], at 421 [95 S.Ct. at 1739]. To the extent our analysis in today’s decision differs from that of the Court in Borak, it suffices to say that in a series of cases since Borak we have adhered to a stricter *1070standard for the implication of private causes of action, and we follow that stricter standard today. Cannon v. University of Chicago, supra [442 U.S.], at 688-709 [99 S.Ct. at 1953-1964]. The ultimate question is one of congressional intent, not one of whether this Court thinks that it can improve upon the statutory scheme that Congress enacted into law.
In relying on the “proximate cause” theory to treat Avco and McCormick as sellers for purposes of section 12(2) the majority contravenes an express limitation placed by the Supreme Court on application of the federal securities laws. In Touche Ross the Court described reliance on tort principles as a basis for finding a private right of action under the 1934 Act as “entirely misplaced.” The Court emphasized that the problems is one of statutory construction, not the application of general principles of substantive law. 442 U.S. at 568, 99 S.Ct. at 2485.
I agree with the construction of section 12(2) and the reasoning applied by Judge Aldisert in Collins v. Signetics Corp., 605 F.2d 110, 113 (3d Cir.1979):
We have no difficulty in concluding that Congress intended the unambiguous language of § 12(2) to mean exactly what it says: “Any person who — ... (2) offers or sells a security ... shall be liable to the person purchasing from him ____” This section is designed as a vehicle for a purchaser to claim against his immediate seller. Any broader interpretation would not only torture the plain meaning of the statutory language but would also frustrate the statutory schema because Congress has also provided a specific remedy for a purchaser to utilize against the issuer as distinguished from the seller of a security. Thus, § 11 gives anyone acquiring a security a specific right of action for misrepresentations against every person who signed the registration statement, or was a director or partner of the issuer or prepared a certified statement contained in the registration statement, or was an underwriter with respect to the security. 15 U.S.C. § 77k.
Ascertainment of congressional intent with respect to the standard of liability created by a particular section of the securities acts must “rest primarily on the language of that section.” Ernst and Ernst v. Hochfelder, 425 U.S. 185, 200, 96 S.Ct. 1375, 1384, 47 L.Ed.2d 668 (1976) . In interpreting liability provisions of the acts, we must respect recent Supreme Court teachings that militate against excessively expansive readings. Thus, proof of an actual purchase or sale rather than a lost opportunity to purchase is necessary to recover for a violation of Rule 10b-5, Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), and scienter is necessary to establish a 10b-5 violation, Ernst & Ernst v. Hochfelder, supra. A defeated tender offeror has no implied cause of action for damages under § 14(e) of the Securities Exchange Act of 1934 or under Rule 10b-5. Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 42, 97 S.Ct. 926 [949], 51 L.Ed.2d 124 (1977) . Without allegations of manipulation or deception, no 10b-5 cause of action exists for simple breach of fiduciary duty to minority stockholders. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). Section 12(k) of the Exchange Act does not authorize the Commission to suspend trading in a security for more than one ten-day period on the basis of a single set of circumstances, SEC v. Sloan, 436 U.S. 103, 98 S.Ct. 1702, 56 L.Ed.2d 148 (1978), and an employees’ non-contributory, compulsory pension plan is not a security within the meaning of the Securities Acts, International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979).
One other comment appears in order. Avco and McCormick obviously were not sellers or offerors of DTBG adventures. Yet the majority holds them liable as indirect participants whose activities were a substantial factor in the transactions between the plaintiffs and DTBG. In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), the Supreme Court held that secondary liability may not be imposed under section 10(b) for mere negligence; scienter is required. The majority has found that there was no scienter, and thus no Rule 10b-5 liability. By permitting recovery under section 12(2) on the basis of McCormick’s failure to show that he would not have known of the fraudulent nature of the DTBG scheme even if he had exercised reasonable care, the majority permits the plaintiffs to evade the Ernst & Ernst requirement that secondary liability may be based only on scienter.
*1071I would reverse the judgment of the district court.