Berner v. Lazzaro
| Decision Date | 23 July 1984 |
| Docket Number | No. 83-1972,83-1972 |
| Citation | 730 F.2d 1319 |
| Parties | Fed. Sec. L. Rep. P 91,424 Carl F. BERNER, Charles Bruner, Dennis T. Demetre, Lawrence Epstein, Barry S. Glass, Herbert Greenbaum, Robert M. Jacobs, Arnold R. Keiles, Harry Mittleman and Gary L. Nobel, Plaintiffs-Appellants, v. Charles P. LAZZARO; Bateman Eichler, Hill Richards Incorporated, Leslie L. Neadeau, and T.O.N.M. Oil & Gas Exploration Corporation, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Larry Lavoie, Asst. U.S. Atty., Daniel J. Kraus, S.E.C., Washington, D.C., Geoffrey P. Knudsen, Boone, Knudsen & Martin, P.C., San Francisco, Cal., for plaintiffs-appellants.
Phillip L. Bosl, Gibson, Dunn & Crutcher, Los Angeles, Cal., for defendants-appellees.
Appeal from the United States District Court for the Northern District of California.
Before ANDERSON, SCHROEDER, and ALARCON, Circuit Judges.
Appellants seek a reversal of the judgment of the district court granting appellees' motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure For purposes of reviewing the lower court's dismissal of appellant's action for failure to state a claim, we must accept the facts alleged in the complaint as true. California Dump Truck Owners Assn., Inc. v. Associated General Contractors of America, 562 F.2d 607, 614 (9th Cir.1977).
12(b). 1 The trial court determined that the application of the in pari delicto doctrine barred appellants from any right to recovery. Because we feel 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, we reverse and remand for a trial on the merits of appellants' claims
Appellant's complaint alleges that Charles Lazzaro, a registered representative of the broker dealer firm Bateman Eichler, Hill Richards, Inc., and Leslie Neadeau, president of T.O.N.M. Oil and Gas Exploration Corporation, conspired to manipulate the market price of T.O.N.M. stock by disseminating false information on the pretext that it was inside information.
T.O.N.M. common stock is traded over the counter through the National Association of Securities Dealers System. Appellants purchased T.O.N.M. stock through Lazzaro and other brokers "on the premise" that Lazzaro was privy to "certain information not otherwise available to the general public." Lazzaro allegedly induced appellants to purchase T.O.N.M. stock by representing to them that he knew T.O.N.M.'s president personally and by telling them the following material nonpublic information about T.O.N.M.: it had acquired the rights to a large gold deposit discovered in Surinam; it was about to enter into a joint venture agreement with a large mining company to mine the gold; it would issue to its shareholders stock in its subsidiary without additional consideration; and as a result of these developments the value of T.O.N.M. stock would increase dramatically. He told appellants that the price of T.O.N.M.'s stock would increase from $1.50 per share to between $10 and $15 per share upon publication of the information. Appellants sought confirmation of the foregoing information from Neadeau. He would neither confirm nor deny it. Instead he said that such information was "not public knowledge" and that Lazzaro was very "trustworthy and a good man."
The complaint alleges that these false representations were made with knowledge of their falsity with the intention of creating an artificially high demand and price for such stock. The representations are alleged to be false or materially incomplete. Appellants purchased T.O.N.M. stock in reliance on the defendants' misrepresentations and as a result of their unlawful scheme.
The price of the stock rose to $7 per share in the latter part of 1980 as a result of the defendants' manipulation. In the second quarter of 1981, the stock fell sharply to less than $1 per share. Thereafter, appellants sold their T.O.N.M. stock at prices substantially below those at which they purchased the stock.
The district court dismissed appellants' damage claims under Sec. 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder on the ground that appellants were in pari delicto with Lazzaro and Neadeau. The court explained that appellants had admitted in their complaint "that they had acted on insider information and therefore were tippees." "If the allegations of the complaint are true," the court stated, "both plaintiffs and defendants violated the particular statutory provision under which recovery is sought." The district court concluded that under such circumstances the in pari delicto doctrine automatically barred plaintiffs' claims without balancing relative fault.
This court has not previously addressed the question of the application of the defense of in pari delicto to a private action by an investor to recover losses caused by the fraudulent misrepresentations of a broker concerning alleged insider information.
We begin our discussion by noting that in pari delicto is a common law doctrine of "complex scope, contents, and effects." Perma Life Mufflers, Inc. v. International Parts Co., 392 U.S. 134, 140, 88 S.Ct. 1981, 1985, 20 L.Ed.2d 982 (1968). Although it literally means "of equal fault", id. at 138, 88 S.Ct. at 1984, there is a "lack of agreement on a definition of the term 'in pari delicto', as well as a disagreement, perhaps, on the standards that should govern the use of the defense to which the term is properly applied." Id. at 153, 88 S.Ct. at 1992 (Harlan, J. concurring and dissenting).
Historically, the doctrine of in pari delicto has been used to protect the integrity of the court where it was called upon to decide between two wrongdoers. See, Limitations on Defenses Under 10(b): In Pari Delicto and Unclean Hands, 5 U.Richmond L.Rev. 251, 257 (1971). In pari delicto has traditionally been applied in the interest of society, rather than that of individual litigants. 3 Pomeroy, Equity Jurisprudence, Sec. 940-941 (5th ed. 1941). Thus, where private suits are encouraged to further specific public policies, the question has often arisen concerning whether the doctrine of in pari delicto should be limited in order to advance societal interests. Fisher, Tipsters, Tippees and the Doctrine of In Pari Delicto, 50 B.U.L.Rev. 87, 93 (1970). Some courts have refused to allow the interposition of the defense when the defendant's misconduct exceeds that of the plaintiff, or when the defense would be detrimental to the public interest. 3 Pomeroy, Sec. 941.
In Mallis v. Bankers Trust Co., 615 F.2d 68, 76 (2nd Cir.1980), cert. denied, 449 U.S. 1123, 101 S.Ct. 938, 67 L.Ed.2d 109 (1981), the court noted that
In Perma Life the majority commented that "[w]e have often indicated the inappropriateness of invoking broad common-law barriers to relief where a private suit serves important public purposes". Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 138, 88 S.Ct. 1981, 1984, 20 L.Ed.2d 982 (1968). Public policy encourages private actions as enforcement devices for the public interest, even though a windfall may accrue to a wrongdoing plaintiff. Murray, Securities Regulation--In Pari Delicto as a Bar to Private Antifraud Action by Tippee Against Tipper, 43 Mo.L.Rev. 378, 381 (1978).
The Supreme Court has not considered the applicability of the in pari delicto defense as an absolute bar to private actions under the federal securities laws. The Court has reviewed the use of this defense in private antitrust actions. In Perma Life, 392 U.S. at 138, 88 S.Ct. at 1984, a majority of the court held that under the facts before it there was no basis for applying the doctrine of in pari delicto in an antitrust action. This court confronted the impact of Perma Life on antitrust cases in Javelin Corp. v. Uniroyal, Inc., 546 F.2d 276 (9th Cir.1976), cert. denied, 431 U.S. 938, 97 S.Ct. 2651, 53 L.Ed.2d 256 (1977); Accord, THI Hawaii v. First Commerce Financial Corp., 627 F.2d 991 (9th Cir.1980).
In Javelin, we stated that a plaintiff is not barred from recovering because of the equitable defense of in pari delicto unless "the illegal conspiracy constituting the antitrust violation would not have been formed but for the plaintiff's participation." Javelin, 546 F.2d at 279. In formulating this test, we noted our agreement with the approach suggested by Justice White in Perma Life. Javelin, 546 F.2d at 279 n. 3. There, Justice White stated:
I would deny recovery where plaintiff and defendant bear substantially equal responsibility for the injury resulting to one of them but permit recovery in favor of the one less responsible where one is more responsible than the other.
Thus, in private antitrust actions, it is the law of this circuit that the doctrine of in pari delicto does not apply where the facts show that the plaintiff is less than co-equally responsible for his injury. We see no valid reason for creating a different rule for private actions initiated under the federal securities laws.
In the matter before us, the complaint alleges that the fraudulent scheme was originated by the broker and his coconspirators to manipulate the market price of T.O.N.M. stock for their financial benefit. The complaint further provides that the...
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