Court Opinion

ID: 9472243
Source: CourtListenerOpinion
Date Created: 2023-08-05 03:54:09.135547+00
Date Added: 2024-06-11T17:42:49.690461
License: Public Domain

WALD, Circuit Judge,
dissenting:
I must dissent from the panel’s decision that Rule 10b-5 does not protect a person who is fraudulently induced to exchange $50,000 in return for a worthless security. The majority, I think mistakenly, finds no “purchase or sale” for Security Exchange Act purposes, because the preconditions laid down by Northland to issuing the warrant had not been met, and hence there was no “meeting of the minds” between Watkins and Northland. By imposing its own “meeting of the minds” prerequisite to a “purchase or sale” under the Act the majority shields from the investor protection provisions of the Securities Exchange Act *1432the very kind of fraudulent conduct which was a core concern of the drafters. Furthermore, the panel’s restrictive reading of “purchase or sale” in this case on the one hand is directly at odds with the broad reading of “purchase or sale” that other courts have adopted to effectuate the Act’s remedial purposes and on the other hand serves none of the policies which the Supreme Court has in different factual contexts invoked to justify a purchaser or seller requirement for standing in private damage actions.
The facts of this case have been amply, and in the main accurately, detailed in the majority opinion. Because this is an appeal from the district court’s granting of the defendants’ motion for summary judgment, we must view the facts and the reasonable inferences that may be. drawn from them in the light most favorable to the appellant. See National Souvenir Center, Inc. v. Historic Figures, Inc., 728 F.2d 503, 512 (D.C.Cir.1984). So viewed, I believe the majority has given too short shrift to several crucial facts which militate against dismissal of the defrauded company’s claim before any trial has been held. Based on the uncontested facts before the trial court, this is what happened on the critical days in early March.
On March 8, after failing to get requested instructions from Allied, the lead SBIC on whom Northland relied to set the final terms of its intended investment, North-land called Claxton directly and asked how it should transmit the money it intended to invest in Watkins in time for the closing scheduled for March 9. Claxton instructed Northland to wire the funds directly to Watkins’ bank account. We can therefore presume Claxton was aware on March 9 that Northland’s $50,000 had already been deposited in Watkins’ account.
On March 9, Claxton met with David Gladstone, executive vice-president of Allied, to close the deal, but they were unable to do so. There is no question Claxton knew at this time that Allied’s proposal for the joint investment was different from Watkins’ proposal of the contemplated transaction. This was one reason no deal came off. Nonetheless, despite the failure to close the deal on March 9, and with full knowledge that Northland desired to participate in a loan along with other SBICs only on Allied’s terms, Claxton did not return Northland’s $50,000. Rather, acting as a duly authorized officer of Watkins, he sent Northland, alone among the SBIC’s, a stock warrant and debenture note for $50,-000, the precise amount deposited in Watkins’ account, subject to the terms of the agreement ultimately worked out.1 From these facts, it must be inferred in appellant’s favor that the warrant and note were sent by Claxton in return for Northland’s $50,000.
There is little question that Claxton’s undisputed conduct — use of forged financial statements to induce investment in his company — is a target of Rule 10b-5. See Baurer v. Planning Group, Inc., 669 F.2d 770, 773 n. 14 (D.C.Cir.1981) (“Rule 10b-5 reaches ‘any person’ engaged in fraud to induce the purchase of securities”) (quoting A. Bromberg & L. Lowenfels, Securities Law § 2.1 (1981)). There is also little question that Northland was injured by such misrepresentation because it lost $50,000, which Watkins appropriated to its own use. The majority nonetheless concludes that because Allied’s fortuitous discovery of the forgery prevented the deal from closing, Northland cannot maintain a Rule 10b-5 action.
The majority purports to rest this conclusion on the strict tenets of contract law which it says require a “meeting of the minds” between Watkins and Northland before Northland can be a “purchaser” of *1433securities so as to come within the protective orbit of the antifraud provisions of the Securities Exchange Act. Maj.Op., at 1427 n. 9. In so doing, it shortchanges the investor here in three respects.
First, it ignores the well accepted principle of contract law that a person who knows the terms of an agreement proposed by another party, and who subsequently accepts performance by that party, cannot avoid his contractual obligations by claiming there was “no meeting of the minds.”2 See Amicizia Societa Navegazione v. Chilean Nitrate & Iodine Sales Corp., 184 F.Supp. 116 (S.D.N.Y.1959), aff'd, 274 F.2d 805 (2d Cir.), cert. denied, 363 U.S. 843, 80 S.Ct. 1612, 4 L.Ed.2d 1727 (1960); see, e.g., Associated Hardware Supply Co. v. Big Wheel Distributing Co., 355 F.2d 114 (3d Cir.1965); In re Mailers Unlimited, Inc., 6 B.R. 238, 240 (Bkrtcy.E.D.Pa.1980). “The manifestations of the. parties are operative [to contractually bind them] in accordance with the meaning attached to them by one of the parties if that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party.” Restatement (Second) of Contracts § 20(2) (1979). And “the conduct of a party [such as acceptance of performance] may mainfest assent even though he does not in fact assent.” Restatement (Second) of Contracts § 19(3) (1979). Here, Claxton knew of the terms Northland desired when it sent its $50,000, but Northland did not know that Watkins had proposed its own terms. Thus, North-land could reasonably regard Watkins’ acceptance of its $50,000 as manifesting assent to those terms, and Watkins, having accepted the money, cannot later claim no contract was formed because there was no meeting of the minds.
Second, the majority ignores the definition of “sale” in the Securities Act of 1933, passed only one year before the Securities Exchange Act and authoritatively used as a source for definition of statutory terms common to both Acts. The Securities Exchange Act of 1934 did not explicitly define “purchase or sale,” but there is “no reason to believe that Congress intended, one year after the passage of the Securities Act, to dilute the concept of sale in the Securities Exchange Act.” Lawrence v. Securities Exchange Comm., 398 F.2d 276, 280 (1st Cir.1968).3 In the 1933 Act Congress explicitly provided that “sale” includes any “disposition of ... an interest in a security for value,” 15 U.S.C. § 77b(3), and thereby obviously envisioned coverage of transactions like that between Northland and Watkins here.
Third, the majority fails to identify a single policy reason why a court should *1434ignore both contract law principles and federal securities law history, and read Rule 10b-5’s “purchase or sale” prerequisite more restrictively than the common law. All of this it does in the name of the test for standing to bring a private damage suit adopted by Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Maj.Op. at 1426-1427. I disagree, however, that Blue Chip in any way supports the majority's conclusion that no purchase or sale occurred in this case.
In Blue Chip, the Supreme Court, following the rule first laid down in Birnbaum v. Newport Steel Co., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), announced that only “purchasers or sellers” of securities have standing to bring private damage actions under Rule 10b-5. In doing so, Blue Chip never talked about “meeting of the minds” as part of its “purchaser or seller” requirement. Rather, it explained that the Birnbaum rule denied standing to three classes of potential plaintiffs: (1) offerees who allege merely that they would have purchased a security but for the fraud, (2) shareholders who allege merely that they would have sold their shares but for the fraud, and (3) shareholders who allege that the fraud decreased the value of their investment, but who do not allege that the fraud influenced their investment decisions. See Blue Chip, 421 U.S. at 738-39, 95 S.Ct. at 1926-27. The stated purpose of Blue Chip’s adoption of the Birnbaum standing doctrine was the prevention of “strike suits” and the elimination of private damage actions that would require a treacherous inquiry into the plaintiffs’ subjective decisions regarding whether to invest or sell. See 421 U.S. at 740, 746, 95 S.Ct. at 1927, 1930.
In this case, by contrast, Northland obviously does not fall within any of the three classes of plaintiffs that Blue Chip sought to eliminate. In fact, the policies reflected in Blue Chip do not apply at all, since Northland paid its money and received securities in return. No court would have to embark on a subjective inquiry in order to decide whether a “purchase or sale” occurred in this case; under the facts alleged, it seems quite clear that an objective exchange of money and securities between Northland and Claxton took place. Quite candidly, the majority’s concerns regarding the Blue Chip standing doctrine entirely elude me.
In fact, a closer examination of the Blue Chip case reveals that the exchange of money for securities that occurred in this case should be considered a “purchase or sale” for the purposes of Rule 10b-5. As the Court noted in Blue Chip, the bounds of standing to sue cannot be “derive[d] from the language of [section] 10(b).” 421 U.S. at 737, 95 S.Ct. at 1926. Accordingly, the Court turned to “policy considerations ... to flesh out the portions of the law with respect to which neither the congressional enactment nor the administrative regulations offer conclusive guidance.” Id. While recognizing the overriding remedial policy behind the implied cause of action under section 10(b) — to allow “deserving plaintiffs [to] recover ... damages which in fact have been caused by violations of Rule 10b-5,” 421 U.S. at 738, 95 S.Ct. at 1926— the court nonetheless adopted the Birn-baum rule because that rule has “countervailing advantages ... purely as a matter of policy,” namely limiting the potential for widespread vexatious litigation. 421 U.S. at 739-40, 95 S.Ct. at 1927-28. I can imagine no legitimate need for such a “limiting principle” to bar this suit, however,'where money and securities changed hands, and the plaintiff apparently lost a sizeable sum.
Contrary to the majority’s statement, Blue Chip’s holding was thus not “based ultimately on its interpreting] ... the language of the Act and its legislative history,” so much as on its balancing of the injuries that would flow from including or excluding nonsellers and nonpurchasers from the Rule’s protection.4 Blue Chip’s *1435policy analysis thus can be instructively applied here. The majority’s “meeting of the minds” prerequisite, like the Birn-baum rule, has the “disadvantage” of “preventing] some deserving plaintiffs from recovering damages that in fact have been caused by violations of Rule 10b-5.” 421 U.S. at 738, 95 S.Ct. at 1926. On the other hand, it not only has none of the “countervailing advantages” of the Birnbaum rule in preventing “strike suits” and litigation turning on subjective proof of what a plaintiff would have done in a hypothetical situation, but in fact, the “meeting of the minds” requirement is in tension with the purposes of the Birnbaum rule because it invites a defendant to rebut objective evidence of a sale with subjective contentions that the parties never actually agreed to the terms of the transaction. See Blue Chip, 421 U.S. at 747, 95 S.Ct. at 1931. The majority’s tunnel-visioned focus on Blue Chip’s discussion of the Act’s language and history is thus understandable since, unlike the Court in that case, it can point to no policy of the Act which is advanced in this case by restricting standing of an actual investor, who pays money intending to purchase one kind of security, but receives a different and ultimately worthless kind from the seller.
As this and other courts have recognized, the remedial policies of the anti-fraud provision of the Security Exchange Act embodied in Rule 10b-5 command a liberal interpretation of “purchase or sale”; accordingly, the courts have read the rule to allow private damage suits in situations much less recognizable as traditional sales or purchases than this one. See Sacks v. Reynolds Securities, Inc., 593 F.2d 1234, 1240 (D.C.Cir.1978); Broad v. Rockwell International Corp., 614 F.2d 418, 435 (5th Cir.1980), aff'd in part and rev’d in part on other grounds, 642 F.2d 929 (5th Cir.) (en banc), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380 (1981); Goodman v. Epstein, 582 F.2d 388, 410 (7th Cir.1978), cert. denied, 440 U.S. 939, 99 S.Ct. 1289, 59 L.Ed.2d 499 (1979); Mader v. Armel, 402 F.2d 158, 160 (6th Cir.1968), cert. denied, 394 U.S. 930, 89 S.Ct. 1188, 22 L.Ed.2d 459 (1969); Vine v. Beneficial Finance Co., 374 F.2d 627, 634 (2d Cir.), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967). Thus, courts have granted standing to plaintiffs: (i) whose securities were converted to claims for cash by merger or liquidation,5 (ii) where stock was pledged as collateral for a loan,6 (iii) and where a shareholder agreement granted a corporation a right of first refusal to purchase stock.7 These decisions demonstrate that, for purposes of standing to sue under Rule 10b-5, all that is required is a non-gratuitous “surrendering of control, change in ownership, or change in the fundamental nature of an investment____” Sacks, 593 F.2d at 1240; see also Baurer, 669 F.2d at 779 (a purchase of a security occurred since “notes were ... disposed of ... and value was given [in return]”); see also 15 U.S.C. § 77b(3) (1933 Act definition of “sale” includes any disposition of a security for value).
Although the majority says it takes no issue with the holdings of these cases, Maj.Op. text at n. 17, its self imposed requirement in this case that there be a “meeting of the minds” in fact poses an irreconcilable conflict with them. Under *1436the majority’s test, for instance, a merger or liquidation’s transformation of a stockholder’s shares into claims for cash would involve no “meeting of the minds” since the stockholder never agrees to dispose of the stock for a bargained price. The majority’s cite to one isolated Rule 10b-5 case that did invoke the “meeting of the minds” doctrine, see Maj.Op. at 1427 (citing Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir.1972)), also fails to persuade. Radiation Dynamics was an insider trading case in which the issue was whether the defendant had already agreed to purchase the shares before he acquired the inside information. If the fraud postdated the agreement to purchase, no cognizable injury occurred. The court used a “meeting of the minds” test to determine at what point the agreement was reached. That use of the “meeting of the minds” test in no way predetermines its requirement as an element of a “purchase or sale” under the Securities Exchange Act. Where, as here, the commitment is completed by the very act of paying for the security, injury is attributable to the fraud whether or not an actual agreement was reached. Thus, Radiation Dynamics does not stand for the proposition that no sale or purchase can exist without a “meeting of the minds.” In this case, the policies of the Act require recognition that a “sale” occurred when the deal failed to close and Claxton nevertheless sent Northland a stock purchase warrant and a debenture note rather than returning Northland’s $50,000.8
In sum, I find that the majority’s insistence on a meeting of the minds, in the strict contract law sense, as a prerequisite to finding a purchase or sale for purposes of allowing a private damages action under the Securities Exchange Act contravenes the remedial policy of Rule 10b-5, conflicts with prevailing precedent, which broadly construes the purchase or sale requirement for Rule 10b-5 actions, and is totally unjustified by the Supreme Court’s Blue Chip opinion.9 For these reasons, I dissent.

. At argument, counsel for Northland stated that, although the district court record is unclear, in fact no other SBIC received stock warrants. Appellees did not take issue with this assertion. Even if the Appellees had taken issue and the record was therefore less than totally clear, as the majority states, we still must assume on review of this grant of summary judgment that Claxton sent a stock warrant and debenture note only to Northland. See Maj.Op. at n. 2.

. Even where a person accepts performance without knowing the terms on which performance is tendered, the person is obligated to pay for the value received. See Corbin on Contracts, § 102 (1963). This legal obligation is a recognition of the reality that some kind of exchange or "sale” has taken place.

. See Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1029 (6th Cir.1979); National Bank of Commerce v. All American Assurance Co., 583 F.2d 1295, 1298 (5th Cir.1978) ("although there are slight differences in wording between the 1933 Securities Act and the 1934 Securities Exchange Act, the definitions of [purchase and sale] are functionally equivalent”); Daniel v. International Brotherhood of Teamsters, 561 F.2d 1223, 1242 (7th Cir.1977) (in both [the 1933 and 1934] Acts a ‘sale’ of an interest [in a security] ... depends upon whether there has been a disposition of it"), rev’d on other grounds, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979); Mallis v. Federal Deposit Insurance Corp., 568 F.2d 824, 828-30 (2d Cir.1977) (relying on 1933 Act definition of sale to hold a pledger of a security is a seller, and therefore has standing to sue under Rule 10b-5), cert. dismissed, 435 U.S. 381, 98 S.Ct. 1117, 55 L.Ed.2d 357 (1978); L. Loss, Fundamentals of Securities Regulation, 655-56, 922-23 (1983) ("there is authority for looking to the 1933 Act definition [of sale] in construing the 1934 Act on an in pari materia approach”); cf. Rubin v. United States, 449 U.S. 424, 432, 101 S.Ct. 698, 702, 66 L.Ed.2d 633 (1981) (Blackmun, J., concurring) (referring to definition of sale in 1934 Act in interpreting 1933 Act to cover pledges of securities); International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 556 n. 8, 99 S.Ct. 790, 795 n. 8, 58 L.Ed.2d 808 (1979) (implying that a sale under the 1934 Act includes any disposition for value, but noting the Court “need not decide whether the meaning of ‘sale’ under the Securities Exchange Act is any different from its meaning under the Securities Act”).

. In fact, the Blue Chip majority’s heavy reliance on policy prompted three justices who concurred in the majority opinion to issue a separate opinion “emphasizing] the significance of *1435the text of the Acts of 1933 and 1934 and especially the language of § 10(b) and rule 10b-5.” Blue Chip, 421 U.S. at 755, 95 S.Ct. at 1935 (Powell, L, joined by Stewart and Marshall, JJ., concurring).

. See Alley v. Miramon, 614 F.2d 1372, 1380-81, 1384-85 (5th Cir.1980) (liquidation deemed forced sale); Bolton v. Gramlich, 540 F.Supp. 822, 839-40 (S.D.N.Y.1982) (same); Valente v. Pepsico, 454 F.Supp. 1228, 1236-37 (D.Del.1978) (merger deemed forced sale); see also L. Loss, supra note 3, at 923-24 (1983).

. See Chemical Bank v. Arthur Andersen & Co., 552 F.Supp. 439, 450-51 (S.D.N.Y.1982), rev’d on other grounds, 726 F.2d 930 (2d Cir.1984); see also L. Loss, supra note 3, at 925.

. See McCloskey v. McCloskey, 450 F.Supp. 991 (E.D.Pa.1978), (noting "if Congress had intended to limit [section 10b] to exclude [an] executory contract ... it could simply have defined the term as any non-executory contract." (emphasis in original)).

. Of course, before Northland can recover from any principal of Watkins, it must show he acted with the requisite scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Thus, my position in this case would not automatically impose liability on any defendant if, as the facts were developed at trial, he can show that he was not aware of the fraudulent scheme to induce investment.

. In responding to this dissent, the majority makes several discrete arguments to which I reply in this note:
(a) It argues that Blue Chip pointed out the difference between the phrase "offer and sale” in the 1933 Act and "sale” in the 1934 Act and thereby inferred a broader coverage of transactions under the 1933 Act. See Maj.Op. 1426 n. 5. There is no debate on that point. I argue something quite different — that "sale” means the same thing in both Acts. See supra 1433 n. 3. The authorities are unanimous on this point, and there is not even a whisper in Blue Chip to the contrary.
(b) Nor is there any dispute, as the majority suggests, see Maj.Op. 1426 n. 7, over Blue Chip’s holding that one who did not buy or sell or security has no standing to bring a Rule 10b-5 damages action. Again, that has nothing to do with whether the facts here fall within the definition of "sale.”
(c) In its footnote 11, the majority misper-ceives my view of the facts. I do not contend that by sending $50,000 to Watkins, Northland was making an independent offer. I maintain rather that because Northland tendered performance (i.e., payment) under terms proposed by the other SBIC’s as part of the joint venture, and because Claxton knew that Northland made the payment intending to be a joint venturer under these terms and that the joint venture did not close, he was obligated to return North-land’s money or else be held legally responsible for having "sold” the warrants he mailed out in return for the money.