Bateman Eichler, Hill Richards, Incorporated v. Berner

• Decision Date: 11 June 1985
• Docket Number: No. 84-679,84-679
• Citation: 472 U.S. 299,105 S.Ct. 2622,86 L.Ed.2d 215
• Parties: BATEMAN EICHLER, HILL RICHARDS, INCORPORATED, Petitioner, v. Carl F. BERNER et al
• Court: U.S. Supreme Court

472 U.S. 299

105 S.Ct. 2622

86 L.Ed.2d 215

BATEMAN EICHLER, HILL RICHARDS, INCORPORATED, Petitioner,

v Carl F. BERNER et al.

No. 84-679.

Argued April 15, 1985.

Decided June 11, 1985.

Syllabus

Respondent investors (hereafter respondents) filed a damages action in Federal District Court, alleging that they incurred substantial trading losses after a securities broker (employed by petitioner) and the officer of a corporation fraudulently induced respondents to purchase stock in the corporation by divulging false and materially incomplete information about the corporation on the pretext that it was accurate inside information. Respondents contended that this alleged scheme violated, inter alia, § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 promulgated thereunder. The District Court dismissed the complaint on the ground that, because respondents themselves had violated the same laws under which recovery was sought by trading on what they believed was inside information, they were in pari delicto with the broker and corporate insider and thus were barred from recovery. The Court of Appeals reversed.

Held: There is no basis at this stage of the litigation for applying the in pari delicto defense to bar respondents' action. Pp. 306-319.

(a) An implied private damages action under the federal securities laws may be barred on the grounds of the plaintiff's own culpability only where (i) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and (ii) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public. Cf. Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 88 S.Ct. 1981, 20 L.Ed.2d 982. Pp. 306-311.

(b) Because a tippee's duty to disclose material nonpublic information typically is derivative from the insider-tipper's duty, the tippee in these circumstances cannot be said to be as culpable as the tipper whose breach of duty gave rise to the tippee's liability in the first place. Moreover, insiders and broker-dealers who selectively disclose material non-public information about the issuer commit a potentially broader range of violations than do tippees who trade on the basis of that information. Absent other culpable actions by a tippee that can fairly be said to outweigh these violations by insiders and broker-dealers, the tippee cannot properly be characterized as being of substantially equal culpability as his tippers. Pp. 311-314.

(c) Denying the in pari delicto defense in such circumstances will best promote protection of the investing public and the national economy. First, allowing a defrauded tippee to bring suit against his defrauding tipper promotes the important goal of exposing wrongdoers and rendering them more easily subject to civil, administrative, and criminal penalties. Second, deterrence of insider trading most frequently will be maximized by bringing enforcement pressures to bear on the sources of such information corporate insiders and broker-dealers. Third, insiders and broker-dealers will in many circumstances be more responsive to the deterrent pressures of potential sanctions. Finally, there are means other than the in pari delicto defense to deter tippee trading. Although there might well be situations in which the relative culpabilities of tippees and their sources merit a different mix of deterrent incentives, in cases such as the instant one the public interest will most frequently be advanced if defrauded tippees are permitted to bring suit and to expose illegal practices by corporate insiders and broker-dealers to full public view for appropriate sanctions. Pp. 315-319.

730 F.2d 1319, affirmed.

Robert S. Warren, Los Angeles, Cal., for petitioner.

Geoffrey P. Knudsen, San Francisco, Cal., for respondents.

Bruce N. Kuhlik, Washington, D.C., for S.E.C. as amicus curiae in support of the respondents, by special leave of Court.

- Justice BRENNAN delivered the opinion of the Court.

The question presented by this case is whether the common-law in pari delicto defense bars a private damages action under the federal securities laws against corporate insiders and broker-dealers who fraudulently induce investors to purchase securities by misrepresenting that they are conveying material nonpublic information about the issuer.

I

The respondent investors filed this action in the United States District Court for the Northern District of California, alleging that they incurred substantial trading losses as a result of a conspiracy between Charles Lazzaro, a registered securities broker employed by the petitioner Bateman Eichler, Hill Richards, Inc. (Bateman Eichler), and Leslie Neadeau, President of T.O.N.M. Oil & Gas Exploration Corporation (TONM), to induce them to purchase large quantities of TONM over-the-counter stock by divulging false and materially incomplete information about the company on the pretext that it was accurate inside information.¹ Specifically, Lazzaro is alleged to have told the respondents that he personally knew TONM insiders and had learned, inter alia, that (a) "[v]ast amounts of gold had been discovered in Surinam, and TONM had options on thousands of acres in gold- producing regions of Surinam"; ² (b) the discovery was "not publically known, but would subsequently be announced"; (c) TONM was currently engaged in negotiations with other companies to form a joint venture for mining the Surinamese gold; and (d) when this information was made public, "TONM stock, which was then selling from $1.50 to $3.00/share, would increase in value from $10 to $15/share within a short period of time, and . . . might increase to $100/share" within a year. Complaint &Par 16-17, App. 10-12.³ Some of the respondents aver that they contacted Neadeau and inquired whether Lazzaro's tips were accurate; Neadeau stated that the information was "not public knowledge" and "would neither confirm nor deny those claims," but allegedly advised that "Lazzaro was a very trustworthy and a good man." Id. ¶ 19, App. 12.

The respondents admitted in their complaint that they purchased TONM stock, much of it through Lazzaro, "on the premise that Lazzaro was privy to certain information not otherwise available to the general public." Id. ¶ 15, App. 10. Their shares initially increased dramatically in price, but ultimately declined to substantially below the purchase price when the joint mining venture fell through. Id. &Par 22-26, App. 13-14.⁴

Lazzaro and Neadeau are alleged to have made the representations set forth above knowing that the representations "were untrue and/or contained only half-truths, material omissions of fact and falsehoods," ⁵ intending that the respondents would rely thereon, and for the purpose of "influenc[ing] and manipulat[ing] the price of TONM stock" so as "to profit themselves through the taking of commissions and secret profits." Id. &Par 23, 30, 38, App. 13, 15-16.⁶ The respondents contended that this scheme violated, inter alia, § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b),⁷ and Securities and Exchange Commis- sion (SEC) Rule 10b-5 promulgated thereunder, 17 CFR § 240.10b-5 (1984).⁸ They sought capital losses and lost profits, punitive damages, and costs and attorney's fees. App. 26.⁹

The District Court dismissed the complaint for failure to state a claim. The court reasoned that "trading on insider information is itself a violation of rule 10b-5" and that the allegations in the complaint demonstrated that the respondents themselves had "violated the particular statutory provision under which recovery is sought." App. to Pet. for Cert. C-2. Thus, the court concluded, the respondents were in pari delicto with Lazzaro and Neadeau and absolutely barred from recovery. Ibid.

The Court of Appeals for the Ninth Circuit reversed. Berner v. Lazzaro, 730 F.2d 1319 (1984). Although it assumed that the respondents had violated the federal securities laws, id., at 1324, the court nevertheless concluded that "securities professionals and corporate officers who have allegedly engaged in fraud should not be permitted to invoke the in pari delicto doctrine to shield themselves from the consequences of their fraudulent misrepresentation," id., at 1320. The Court of Appeals noted that this Court had sharply restricted the availability of the in pari delicto defense in antitrust actions, see Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 88 S.Ct. 1981, 20 L.Ed.2d 982 (1968), and concluded that, essentially for three reasons, there was no basis "for creating a different rule for private actions initiated under the federal securities laws," 730 F.2d, at 1322. First, the court reasoned that, in cases such as this, defrauded tippees are not in fact "equally responsible" for the violations they allege. Ibid. Second, the court believed that allowing the defense in these circumstances would be "totally incompatible with the overall aims of the securities law" because the threat of a private damages action is necessary to deter "insider-tipster[s]" from defrauding the public. Id., at 1323. Finally, the court noted the availability of means other than an outright preclusion of suit to deter tippees from trading on inside information. Id., at 1324, n. 3.

The lower courts have divided over the proper scope of the in pari delicto defense in securities litigation.¹⁰ We granted certiorari. 469 U.S. 1105, 105 S.Ct. 776, 83 L.Ed.2d 772 (1985). We affirm.

II

The common-law defense at issue in this case derives from the Latin, in pari delicto potior est conditio defendentis: "In a case of equal or mutual fault . . . the position of the [defending] party . . . is the better one." ¹¹ The defense is grounded on two premises: first, that courts should not lend their good offices to mediating...