First Golden Bancorporation v. Weiszmann

• Decision Date: 15 August 1991
• Docket Number: No. 89-1377,89-1377
• Parties: , Fed. Sec. L. Rep. P 96,201, 21 Fed.R.Serv.3d 623 FIRST GOLDEN BANCORPORATION, Plaintiff, v. Ronald F. WEISZMANN, Defendant, Third-Party Plaintiff and Appellant, v. MORGAN STANLEY & CO., INCORPORATED, A Delaware Corporation; Timothy Taebel and Lindner Management, Third-Party Defendants and Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 726

942 F.2d 726

60 USLW 2176, Fed. Sec. L. Rep. P 96,201,

21 Fed.R.Serv.3d 623

FIRST GOLDEN BANCORPORATION, Plaintiff, v. Ronald F. WEISZMANN, Defendant, Third-Party Plaintiff and Appellant, v. MORGAN STANLEY & CO., INCORPORATED, A Delaware Corporation;

Timothy Taebel and Lindner Management, Third-Party

Defendants and Appellees.

No. 89-1377.

United States Court of Appeals Tenth Circuit.

Aug. 15, 1991.

Timothy J. Flanagan of Kelly, Stansfield & O'Donnell, Denver, Colo. (Robert J. Eber, with him on the brief), for defendant, third-party plaintiff and appellant.

Edward W. Stern of Parcel, Mauro, Hultin & Spaanstra, P.C., Denver, Colo. (Cheryl Burnside with him on the brief), for third-party defendants and appellees Morgan Stanley & Co. Inc. and Timothy Taebel.

Charles E. Merrill of Husch, Eppenberber, Donohue, Cornfeld & Jenkins, St. Louis, Mo., for third-party defendant and appellee Lindner Management Corp.

Before ANDERSON, BALDOCK and EBEL, Circuit Judges.

EBEL, Circuit Judge.

This is an appeal from the district court's order granting summary judgment to the appellees, third-party defendants in the action below. The third-party defendants were impleaded under Fed.R.Civ.P. 14(a) after the appellant, the third-party plaintiff, was made a defendant in a suit to recover short-swing profits under section 16(b) of the Securities Exchange Act of 1934 (codified at 15 U.S.C. § 78p(b)). The primary case settled. The district court than granted summary judgment in favor of the third-party defendants on all the third-party claims. This appeal followed. We affirm in part and vacate and remand in part.

FACTS

Appellant in this case, Ronald Weiszmann, was the third party-plaintiff in the action below. He had acquired stock in First Golden Bancorporation, the original Claims two and three of the third-party complaint--claims for outrageous conduct and breach of contract--were eventually dismissed by the district court, ¹ and the case was set for trial. Thereafter, First Golden and Weiszmann settled the primary lawsuit on terms that Weiszmann did not pay any money to First Golden but he was required to dismiss his counterclaims against First Golden. The third-party defendants then moved for summary judgment on all of Weiszmann's remaining third-party claims. The district court granted the summary judgment motion and dismissed all the third-party claims with prejudice. The court dismissed Weiszmann's first claim for indemnity because it held, as a matter of law, that there was no right to indemnity for liability under section 16(b) of the Securities Exchange Act of 1934. The court dismissed the remaining third-party claims because it held that Weiszmann had settled First Golden's claims against him without incurring any liability or paying any damages to First Golden, and thus, there was no underlying liability upon which Weiszmann could predicate third-party claims under Fed.R.Civ.P. 14(a). The court indicated that a third-party action can be maintained under Rule 14(a) only for claims where the third-party defendant is asserted to be secondarily liable to the third-party plaintiff for the third-party plaintiff's liability to the plaintiff.

                plaintiff, as a result of a tender offer he had made for First Golden Stock.   He ultimately sold his First Golden stock, and First Golden alleged that the sale was within six months of the time he acquired it, thus, making Weiszmann liable under section 16(b) of the Securities Exchange Act of 1934 for the profits from the sale.   First Golden sued Weiszmann to recover the resultant short-swing profit.   Weiszmann, in turn, brought counterclaims against First Golden and initiated a third-party complaint against the appellees:  Morgan Stanley and its representative Timothy Taebel, who acted as Weiszmann's financial advisor during the course of the section 16(b) violation, and Lindner Management, the eventual purchaser of the stock.   His third-party complaint was based on seven different claims:  1) indemnity;  2) outrageous conduct;  3) breach of contract;  4) fraud under section 10(b) of the Securities Exchange Act of 1934;  5) controlling person liability;  6) principal-agent liability;  and 7) negligent misrepresentation.   The relief he sought in the third-party complaint was, inter alia, indemnification for any liability he may have to First Golden, reimbursement of attorneys' fees and costs incurred to defend that lawsuit, and a recovery of commissions and profit realized by Morgan Stanley from the sale of the stock
                

ANALYSIS

I. No Indemnity For Section 16(b) Violations

We agree with the district court that the third-party defendants were "entitled to judgment as a matter of law on Weiszmann's first claim for indemnity." Courts have rejected indemnity for a variety of securities violations because indemnity contravened "the public policy enunciated by the federal securities laws." A. Bromberg & L. Lowenfels, 2 Securities Fraud & Commodities Fraud, § 5.7 (277), at 5:82:78. See also King v. Gibbs, 876 F.2d 1275, 1281-82 (7th Cir.1989); Stewart v. American Int'l. Oil & Gas Co., 845 F.2d 196, 200 (9th Cir.1988); Stowell v. Ted S. Finkel Inv. Servs., 641 F.2d 323, 325 (5th Cir.1981); Laventhol, Krekstein, Horwath & Horwath v. Horwitch, 637 F.2d 672, 676 (9th Cir.1980), cert. denied, sub nom., Frank v. U.S. Trust Co. of New York, 452 U.S. 963, 101 S.Ct. 3114, 69 L.Ed.2d 975 (1981); Globus v. Law Research Serv., 418 F.2d 1276, 1288-89 (2d Cir.1969), cert. denied, 397 U.S. 913, 90 S.Ct. 913, 25 L.Ed.2d 93 (1970); Alvarado Partners, L.P. v. Mehta, 723 F.Supp. 540, 549 (D.Colo.1989), dismissed without opinion, 936 F.2d 582, (10th Cir.) (appeal dismissed as moot). Thus, one court has explained that

"Congress did not promulgate the 1933 and 1934 Acts to protect the parties who violate the Acts' provisions. In fact, the immediate concern of Congress was not In re Olympia Brewing Co. Securities Litig., 674 F.Supp. 597, 612-13 (N.D.Ill.1987) (citations omitted).

                to insure that parties injured by fraudulent activities were reimbursed but rather was to prevent future fraudulent activity.   The United States in 1933 and 1934 was in the midst of a prolonged period of depression which Congress believed was caused in large part by excessive stock market speculation.   Congress imposed civil liability on offenders of the Acts because experience had shown that criminal liability alone was insufficient to deter further wrongdoing.   Some courts that have interpreted the 1933 and 1934 Acts have already concluded that providing a right to indemnity would undermine the deterrent purpose of the Acts."
                

We find that these general concerns are also applicable to indemnification in section 16(b) cases, even though section 16(b) does not require proof of fraudulent intent. Section 16(b) is a prophylactic anti-fraud statute. The policy behind section 16(b) was to deter transactions which have a high potential for fraud. However, Congress determined that it was not practical to require proof of improper intent or scienter in cases of insider trading, and thus, section 16(b) was written to impose strict liability. That Congress felt the most effective way to deter fraud in this area was through use of strict liability does not, however, minimize the purpose behind the statute to prevent fraudulent trading based upon improper insider information or manipulation.

In relevant part, section 16(b) reads:

For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months.

The statute does not require proof that the trading information was improperly obtained; it is enough to prove an insider relationship which gives rise to the potential that improper information "may have been obtained" and utilized in the trade. We find a "clear congressional intent to provide a catch-all, prophylactic remedy, not requiring proof of actual misconduct...." L. Hazen, The Law of Securities Regulation, § 12.3, at 417 (1985) (citing, Hearings on S.Res. 84 & S.Res. 97 Before The Senate Comm. on Banking and Currency, 73d Cong., 1st Sess., pt. 15, at 6557 (1934)). Thus, we hold that the public policy behind section 16(b) renders invalid any attempt by an insider to seek indemnification for his liability under section 16(b). ²

There is support for our holding. In Bunker Ramo-Eltra Corp. v. Fairchild Indus., 639 F.Supp. 409, 419 (D.Md.1986), dismissed without opinion, 801 F.2d 393 (4th Cir.1986) (dismissed for lack of a final appealable order), the court found that an indemnification agreement was void because if the "indemnification is found to be valid, then the defendants would have been able to waive, in effect, the requirement of section 16(b).... This result would frustrate the public policy behind the prohibition of insider trading within the six-month time period found in section 16(b)."

II. The Remaining Third-Party Claims

Weiszmann also contests the granting of summary judgment on the rest of his third-party claims following the district court's dismissal of his first claim for indemnity.

                These claims, numbered four through seven, asserted section 10(b) liability, controlling person liability, principle-agent liability, and negligent misrepresentation.   The relief requested included indemnification and recovery of Morgan Stanley's

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