Ackerman v. Schwartz

• Citation: 947 F.2d 841
• Decision Date: 09 August 1991
• Docket Number: No. 91-1794,91-1794
• Parties: , Fed. Sec. L. Rep. P 96,460, RICO Bus.Disp.Guide 7895 Jerry ACKERMAN, et al., Plaintiffs-Appellants, v. Howard K. SCHWARTZ and Bassey, Selesko and Couzens P.C., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 841

947 F.2d 841

60 USLW 2388, Fed. Sec. L. Rep. P 96,460,

RICO Bus.Disp.Guide 7895

Jerry ACKERMAN, et al., Plaintiffs-Appellants, v. Howard K. SCHWARTZ and Bassey, Selesko and Couzens P.C.,

Defendants-Appellees.

No. 91-1794.

United States Court of Appeals, Seventh Circuit.

Submitted Aug. 9, 1991. ^*

Decided Nov. 14, 1991.

Robert W. Mysliwiec, Jones, Obenchain, Ford, Pankow & Lewis, South Bend, Ind., for plaintiffs-appellants.

Paul E. Becher, J. Scott Troeger, Barnes & Thornburg, Elkhart, Ind., William J. Reinke, Ernest J. Szarwark, Barnes & Thornburg, South Bend, Ind., for defendants-appellees.

Before COFFEY, EASTERBROOK, and RIPPLE, Circuit Judges.

EASTERBROOK, Circuit Judge.

In 1983 and 1984 Gary Van Waeyenberghe and Carl Leibowitz promoted a tax shelter: each $10,000 invested would produce an immediate tax credit of $20,000, a deduction of $10,000, and the opportunity to reap profits from an ethanol manufacturing business. Like most opportunities too good to be true, this was too good to be true--although that did not stop more than 100 persons from taking the bait. The IRS disallowed the deductions and credits while tacking on interest and penalties. To make matters worse, Van Waeyenberghe and Leibowitz siphoned off the cash. Both pleaded guilty to tax and securities crimes; Leibowitz also was convicted of hiring a hit man to dispose of Van Waeyenberghe, after he concluded that Van Waeyenberghe might sing to the authorities. United States v. Leibowitz, 857 F.2d 373 (7th Cir.1988), 919 F.2d 482 (7th Cir.1990).

It was a fiasco. The money is gone; Van Waeyenberghe and Leibowitz are in prison. The investors turned to the most convenient solvent party--Howard Schwartz, who wrote an opinion saying that taxpayers were entitled under the Internal Revenue Code to the credits and deductions Van Waeyenberghe and Leibowitz touted. (Schwartz's law firm is the other defendant, and we suppose the firm's insurer also takes keen interest; for simplicity we refer only to Schwartz.)

The offering circular promised that the investors' money would be used to lease equipment to manufacture ethanol for use as fuel. Multi-Equipment Leasing Corp. (MEL) would receive money (designated as "rental") and order equipment from Good-Wrench Industries, which was to subcontract the work to S & H Manufacturing Company. According to the offering documents, each $10,000 of prepaid rent would lead MEL to purchase equipment with a market value of $100,000; after using the cash for a down payment, MEL would issue its 14-year note for the balance. MEL would sublease the equipment on the investors' behalf to Organized Producers Energy Corp. (OPEC), which would make ethanol. OPEC promised to pay as rental a portion of its profits, which MEL would pass on to the investors after deducting the balance of the purchase price owed to Good-Wrench. OPEC was to put the equipment in service by the end of 1983; the documents asserted that the investors would be entitled to the investment tax credit on the $100,000 purchase price and to amortize the rentals as ordinary and necessary business expenses. Were all this done at arms' length and real prices, the tax angle would be implausible enough. But it was not done at arms' length; Leibowitz and Van Waeyenberghe controlled all four firms directly or indirectly. It was not done at market prices; the stills, burners, and related equipment said to have a market value of $100,000 were worth some $5,000. In the end, it was not done at all; Leibowitz, Van Waeyenberghe, and a few confederates skedaddled with the money.

Schwartz gave the promoters an opinion letter reciting "facts" that made this venture look legitimate--that the four corporations were unaffiliated, that the equipment would be sold at market price, that all of the equipment would be placed in service by the end of 1983, and so on--and concluding that the IRS would be unable to deny investors the $20,000 credit and $10,000 deduction per $10,000 unit of investment. The "facts" so recited were fictions. Schwartz says that he told Robert Clemente, an associate at the law firm, to conduct the due diligence inquiry. Clemente recalls things differently, testifying at his deposition that Schwartz said he would check the facts personally. Whether the lack of inquiry was attributable to an Alfonse-and-Gaston routine or to utter indifference to the truth, there was no verification. The letter says that the law firm examined documents "as we deem relevant" and relied on unnamed persons for unspecified facts. Although it added that "[w]e have not made an attempt to independently verify the various representations", the letter also said that it was prepared "in a manner that ... complies with the requirements of both the proposed Treasury Regulations [Treas.Reg. 230] and [the ABA's] Formal Opinion 346". Both Regulation 230 and Opinion 346 require a lawyer to verify questionable assertions by the promoters. Assertions that every piece of equipment in an ethanol manufacturing business has a market value of precisely $100,000, that the transactions among four shell corporations were at arms' length, and that equipment that could not be ordered until late 1983 (counsel's letter is dated August 30, 1983, and the money-raising lay ahead) would be placed in service by the end of December 1983, carry warning signals--especially considering that one of the promoters, Leibowitz, was a disbarred lawyer--so a reader of the letter might well infer that the law firm had inquired independently. The letter explained that under Opinion 346 the author of a tax opinion must "make inquiry as to all relevant facts, be satisfied the material facts are accurately and completely described in the offering materials, and assure that any representations as to future activities are clearly identified, reasonable and complete", so the reader would not have to be a connoisseur of the ABA's ethics opinions to get the point.

The complaint initiating this lawsuit on behalf of 106 bilked investors is considerably longer than Schwartz's opinion letter but no better thought out. Despite amendments it is packed with implausible assertions and references to inapplicable statutes. The district court sliced off claims based on Indiana's securities law, and state and federal versions of RICO, in a thoughtful opinion. 733 F.Supp. 1231, 1251-56 (N.D.Ind.1989). We see no need to add to the district court's discussion of these issues. The district court also granted summary judgment to Schwartz on claims under the federal securities laws and state malpractice law--limited to the 1983 tax shelter. Id. at 1240-51. By the time Schwartz wrote a comfort letter concerning the 1984 program, the district court believed, he may have had actual knowledge of the falsity of the representations and may have become involved as a co-venturer. (Evidence in the record suggests that MEL invested in a partnership of which Schwartz was a general partner.) The district judge concluded that Schwartz could not be liable under the federal securities laws because he was not a "seller" (excluding liability under § 12 of the Securities Act of 1933, 15 U.S.C. § 77l ) and because he did not have the mental state necessary for liability under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the SEC's Rule 10b-5, 17 C.F.R. § 240.10b-5. The malpractice claim foundered, the district court held, because Schwartz owed no duty to the investors. We turn first to plaintiffs' claims under § 12.

I

Section 12 creates a remedy against any person (1) who "offers or sells a security in violation of section 5" (that is, sells a security that should have been registered but was not) or (2) who "offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of a material fact". A person who violates either § 12(1) or § 12(2) "shall be liable to the person purchasing such security from him" under a rescissionary standard. Pinter v. Dahl, 486 U.S. 622, 641-54, 108 S.Ct. 2063, 2075-83, 100 L.Ed.2d 658 (1988), holds that although § 12(1) reaches "sellers" who do not stand in a relation of privity to the purchaser, it does not reach persons such as attorneys who facilitated the sale but were not statutory "sellers". That holding dooms the plaintiffs' efforts to hold Schwartz liable under § 12.

Although the investors maintain that Schwartz is amenable to liability under § 12(2) even if not under § 12(1), the statute does not permit such differentiation. Both § 12(1) and § 12(2) identify the person who "offers or sells a security" as the one potentially liable. "Offer" and "sell" are defined terms in the '33 Act (see § 2(3)) and cannot mean one thing in § 12(1) and something else in § 12(2). "Clearly the word [sell] has the same meaning in subdivision (2) as in subdivision (1) of section 12." Schillner v. H. Vaughan Clarke & Co. 134 F.2d 875, 878 (2d Cir.1943). Moreover, only "the person purchasing such security from" a seller may use § 12; this language, which the Court emphasized in Pinter, applies to both subsection (1) and subsection (2). Under Pinter a lawyer is not a seller, and the investor is not "the person purchasing such security from" a lawyer. 486 U.S. at 651 & n. 27, 108 S.Ct. at 2081 & n. 27. Plaintiffs' theory that Schwartz is a seller because his opinion letter played an important role in making the units marketable is just another version of the proposition that § 12 covers anyone whose participation is a "substantial factor" leading to the transaction. Pinter considered and rejected, id. at 648-54, 108 S.Ct. at 2079-82, the "substantial factor" approach to liability under § 12.

If the language of § 12 left any doubt, the structure of the '33 Act would resolve it. Section 12 must be understood as a partner to § 11. Pinter, 486 U.S. at 650 n. 26, 108 S.Ct. at 2080 n. 26. Section 11 creates liability for the issuer, underwriter, and anyone who...