Herman Lean v. Huddleston Huddleston v. Herman Lean, s. 81-680
| Decision Date | 24 January 1983 |
| Docket Number | Nos. 81-680,81-1076,s. 81-680 |
| Citation | 103 S.Ct. 683,459 U.S. 375,74 L.Ed.2d 548 |
| Parties | HERMAN & MacLEAN, Petitioner, v. Ralph E. HUDDLESTON et al. Ralph E. HUDDLESTON et al., Petitioner, v. HERMAN & MacLEAN |
| Court | U.S. Supreme Court |
Alleging that they were defrauded by misrepresentations in a registration statement and prospectus for certain securities, purchasers of such securities brought a class action in Federal District Court against most of the participants in the offering, seeking recovery under § 10(b) of the Securities Exchange Act of 1934 (1934 Act), which makes it unlawful for "any" person to use "any" manipulative or deceptive device or contrivance in the purchase or sale of "any" security. The trial judge instructed the jury to determine whether the plaintiffs had proved their cause of action by a preponderance of the evidence, and judgment was entered on the basis of a jury verdict in plaintiffs' favor. The Court of Appeals held that a cause of action may be maintained under § 10(b) for fraudulent misrepresentations and omissions even when, as in this case, that conduct might also be actionable under § 11 of the Securities Act of 1933 (1933 Act), which expressly allows purchasers of a registered security to sue certain enumerated parties who play a direct role in a registered offering when false or misleading information is included in a registration statement. However, the Court of Appeals concluded that a plaintiff seeking recovery under § 10(b) of the 1934 Act must prove his case by "clear and convincing" evidence, and reversed and remanded on other grounds.
Held:
1. The availability of an express remedy under § 11 of the 1933 Act does not preclude defrauded purchasers of registered securities from maintaining an action under § 10(b) of the 1934 Act. Pp. 380-387.
(a) The two provisions involve distinct causes of action and were intended to address different types of wrongdoing. Under § 11, a plaintiff need only show a material misstatement or omission in a registration statement to establish a prima facie case. Such an action must be brought by a purchaser of a registered security, and can only be brought against certain parties. In contrast, § 10(b) is a "catchall" antifraud provision and requires a purchaser or seller of a security, in order to estab- lish a cause of action, to prove that the defendant acted with scienter. Pp. 380-382.
(b) To exempt conduct actionable under § 11 from liability under § 10(b) would conflict with the basic purpose of the 1933 Act: to provide greater protection to purchasers of registered securities. It is hardly a novel proposition that the two Acts prohibit some of the same conduct. Cf. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668. A cumulative construction of the remedies under the Acts is also supported by the fact that when Congress comprehensively revised the securities laws in 1975, federal courts had consistently recognized an implied private right of action under § 10(b) even where express remedies under § 11 or other provisions were available. A cumulative construction of the securities laws also furthers their broad remedial purposes. Pp. 382-387.
2. Persons seeking recovery under § 10(b) need prove their cause of action by a preponderance of the evidence only, not by clear and convincing evidence. The preponderance standard has been consistently employed in private actions under the securities laws. Cf. SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88. Reference to the traditional use of a higher burden of proof in civil fraud actions at common law is unavailing here. An important purpose of the federal securities statutes was to rectify perceived deficiencies in the available common-law protections by establishing higher standards of conduct in the securities industry. The balance of the parties' interests in this case warrants use of the preponderance standard, which allows both parties to share the risk of error in roughly equal fashion. While defendants face the risk of opprobrium that may result from a finding of fraudulent conduct, defrauded investors are among the very individuals Congress sought to protect in the securities laws, and if they prove that it is more likely than not that they were defrauded, they should recover. Pp. 387-391.
640 F.2d 534, affirmed in part, reversed in part, and remanded.
James L. Truitt, Dallas, Tex., for Herman & MacLean.
Robert H. Jaffe, Springfield, N.J., for Huddleston, et al., and Paul Gonson, Washington, D.C., for Securities and Exchange Commission as amicus curiae by special leave of Court.
These consolidated cases raise two unresolved questions concerning Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). The first is whether purchasers of registered securities who allege they were defrauded by misrepresentations in a registration statement may maintain an action under Section 10(b) notwithstanding the express remedy for misstatements and omissions in registration statements provided by Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k. The second question is whether persons seeking recovery under Section 10(b) must prove their cause of action by clear and convincing evidence rather than by a preponderance of the evidence.
In 1969 Texas International Speedway, Inc. ("TIS"), filed a registration statement and prospectus with the Securities and Exchange Commission offering a total of $4,398,900 in securities to the public. The proceeds of the sale were to be used to finance the construction of an automobile speedway. The entire issue was sold on the offering date, October 30, 1969. TIS did not meet with success, however, and the corporation filed a petition for bankruptcy on November 30, 1970.
In 1972 plaintiffs Huddleston and Bradley instituted a class action in the United States District Court for the Southern District of Texas 1 on behalf of themselves and other purchasers of TIS securities. The complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act") and SEC Rule 10b-5 promulgated thereunder, 17 CFR 240.10b-5.2 Plaintiffs sued most of the participants in the offering, including the accounting firm, Herman & MacLean, which had issued an opinion concerning certain financial statements and a pro forma balance sheet 3 that were contained in the registration statement and prospectus. Plaintiffs claimed that the defendants had engaged in a fraudulent scheme to misrepresent or conceal material facts regarding the financial condition of TIS, including the costs incurred in building the speedway.
After a three-week trial, the District Judge submitted the case to the jury on special interrogatories relating to liability. The judge instructed the jury that liability could be found only if the defendants acted with scienter.4 The judge also instructed the jury to determine whether plaintiffs had proven their cause of action by a preponderance of the evi- dence. After the jury rendered a verdict in favor of the plaintiffs on the submitted issues, the judge concluded that Herman & MacLean and others had violated Section 10(b) and Rule 10b-5 by making fraudulent misrepresentations in the TIS registration statement.5 The court then determined the amount of damages and entered judgment for the plaintiffs.
On appeal, the United States Court of Appeals for the Fifth Circuit held that a cause of action may be maintained under Section 10(b) of the 1934 Act for fraudulent misrepresentations and omissions even when that conduct might also be actionable under Section 11 of the Securities Act of 1933 ("the 1933 Act"). Huddleston v. Herman & MacLean, 640 F.2d 534, 540-543 (1981). However, the Court of Appeals disagreed with the District Court as to the appropriate standard of proof for an action under Section 10(b), concluding that a plaintiff must prove his case by "clear and convincing" evidence. Id., at 545-546. The Court of Appeals reversed the District Court's judgment on other grounds and remanded the case for a new trial. Id., at 547-550, 560.
We granted certiorari to consider whether an implied cause of action under Section 10(b) of the 1934 Act will lie for conduct subject to an express civil remedy under the 1933 Act, an issue we have previously reserved,6 and to decide the standard of proof applicable to actions under Section 10(b).7 --- U.S. ----, 102 S.Ct. 1766, 72 L.Ed.2d 173 (1982). We now affirm the court of appeals' holding that plaintiffs could maintain an action under Section 10(b) of the 1934 Act, but we reverse as to the applicable standard of proof.
The Securities Act of 1933 and the Securities Exchange Act of 1934 "constitute interrelated components of the federal regulatory scheme governing transactions in securities." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206, 96 S.Ct. 1375, 1387, 47 L.Ed.2d 668 (1976). The Acts created several express private rights of action,8 one of which is contained in Section 11 of the 1933 Act. In addition to the private actions created explicitly by the 1933 and 1934 Acts, federal courts have implied private remedies under other provisions of the two laws.9 Most significantly for present purposes, a private right of action under Section 10(b) of the 1934 Act and Rule 10b-5 has been consistently recognized for more than 35 years.10 The existence of this implied remedy is simply beyond peradventure.
The issue in this case is whether a party should be barred from invoking this established remedy for fraud because the allegedly fraudulent conduct would apparently also provide the basis for a damage action under Section 11 of the 1933 Act.11 The resolution of this issue turns on the fact that the two provisions involve distinct causes of action and were intended to address different types of wrongdoing.
Section 11 of the 1933 Act allows purchasers of a registered...
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