John Nuveen Co Inc v. Sanders, 80-299

• Decision Date: 23 March 1981
• Docket Number: No. 80-299,80-299
• Citation: 101 S.Ct. 1719,450 U.S. 1005,68 L.Ed.2d 210
• Parties: JOHN NUVEEN & CO., INC., et al. v. Henry T. SANDERS et al
• Court: U.S. Supreme Court

450 U.S. 1005

101 S.Ct. 1719

68 L.Ed.2d 210

JOHN NUVEEN & CO., INC., et al.

v Henry T. SANDERS et al

No. 80-299

Supreme Court of the United States

March 23, 1981

On petition for writ of certiorari to the United States Court of Appeals for the Seventh Circuit.

The petition for a writ of certiorari is denied.

Justice POWELL, with whom Justice REHNQUIST joins, dissenting.

This securities controversy, which has been in litigation for 11 years, involves sales of commercial paper in the 1960's. The Court of Appeals for the Seventh Circuit has heard the case four times on various issues over the years, and the present petition for certiorari is the third to come before the Supreme Court. The Court today denies further review, and it is indeed long past time that this litigation should come to rest. I dissent from the denial of certiorari, however, because I believe that the Court of Appeals has seriously misapplied the Securities Act of 1933. Its decision could affect adversely the efficiency of the Nation's short-term financing markets.

Justice STEVENS took no part in the consideration or decision of this petition.

I

John Nuveen & Co. (hereinafter petitioner) is a broker and dealer registered with the Securities and Exchange Commission (SEC). In the late 1960's, petitioner undertook to sell the short-term promissory notes—commercial paper—of Winter & Hirsch, Inc. (W&H), a consumer finance company. Relying on (i) the company's certified financial statements, (ii) responses to inquiries from banks, and (iii) a brief inspection of company records, petitioner issued a "Commercial Paper Report," similar to a prospectus, on W&H commercial paper. The report reviewed the data in certified financial statements and noted that "[t]he ratio of debt to capital funds came to 311%—Excellent! . . . Bad debts charged off came to $375,000, and recoveries in relation were $173,000—46%, an excellent showing." Respondents and other customers of petitioner made purchases.

Unknown to petitioner and to the public W&H at the time was in serious financial trouble. W&H officers had conspired with auditors from the certified public accounting firm of Lieber, Bleiweis & Co. to tamper with the company's financial statements to make the company appear profitable. Its financial statement for 1968 showed that W&H had earned $500,000; in fact, it had lost about $1 million.

When the fraud was discovered in 1970, officials from W&H and Lieber, Bleiweis, were convicted of federal fraud charges. Holders of W&H commercial paper were paid about 65 cents on the dollar. A class of plaintiffs, respondents here, sued under a variety of theories to recover the remainder. The issue presently before the Court concerns liability under § 12(2) of the Securities Act of 1933, 48 Stat. 84, as amended, 15 U.S.C. § 77l (2), which provides, in pertinent part:

"Any person who—

"(2) offers or sells a security . . . by means of a pro- spectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact . . . and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him. . . ."

The District Court held that petitioner was liable under § 12(2) because it had failed to use "reasonable care" when it issued the misleading report and recommended orally to some individuals that they buy W&H paper. The Court of Appeals affirmed. Sanders IV, 619 F.2d 1222 (7 Cir. 1980).¹ It reasoned that petitioner had failed to use "reasonable care" because petitioner had not made a reasonable investigation of W&H's financial health. Instead, petitioner had relied principally on the certified financial statements.² Its inde- pendent investigation consisted of inquiries to banks and a one-day spot check of company records. The Court of Appeals thought that petitioner also should have examined the company's tax returns, its minute books, and the workpapers of the independent accountants. Id., at 1228, citing Sanders II, 524 F.2d 1064, 1069 (7 Cir. 1975).

II

Although the opinion of the Court of Appeals is not explicit, it appears to impose a duty of "reasonable investigation" rather than § 12(2)'s requirement of "reasonable care."

A.

Section 11(a) of the 1933 Act, 15 U.S.C. § 77k(a), imposes liability on certain persons for selling securities in a registered public offering pursuant to a materially false or misleading registration statement. A registered offering is the class of financial transactions for which Congress prescribed the most stringent regulation. The standard of care imposed on an underwriter is that it must have "had, after reasonable investigation, reasonable ground to believe and did believe" that the registration statement was accurate. § 11(b)(3)(A) of the Act, 15 U.S.C. § 77k(b)(3)(A) (emphasis added).

Liability in this case was not imposed on petitioner under § 11, but under § 12(2). Under the latter section, it is necessary for sellers to show only that they "did not know, and in the exercise of reasonable care could not have known," that their statements were false or misleading. (Emphasis added.)

In providing standards of care under the 1933 Act, Congress thus used different language for different situations. "Reasonable investigation" is required for registered offerings under § 11, but nothing more than "mer[e] . . . 'reasonable care ' " is required by § 12(2). Douglas & Bates, The Fed- eral Securities Act of 1933, 43 Yale L.J. 171, 208 (1933). The difference in language is significant, because in the securities acts Congress has used its words with precision. See, e. g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 198-201, 96 S.Ct. 1375, 1383-85, 47 L.Ed.2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 755, 756, 95 S.Ct. 1917, 1934, 1935, 44 L.Ed.2d 539 (1975) (POWELL, J., concurring). "Investigation" commands a greater undertaking than "care." See Douglas & Bates, supra, at 208, n. 205.

In a brief filed in this case with the Court of Appeals, the SEC expressly stated that the standard of care under § 12(2) is less demanding than that prescribed by § 11:

"[I]t would be inconsistent with the statutory scheme to apply precisely the same standards to the scope of an underwriter's duty under Section 12(2) as the case law appropriately has applied to underwriters under Section 11. Because of the vital role played by an underwriter in the distribution of securities, and because the registration process is integral and important to the statutory scheme, we are of the view that a higher standard of care should be imposed on those actors who are critical to its proper operations. Since Congress has determined that registration is not necessary in certain defined situations, we believe that it would undermine the Congressional intent—that issuers and other persons should be relieved of registration—if the same degree of investigation were to be required to avoid potential liability whether or not a registration statement is required." Brief for SEC in Nos. 74-2047 and 75-1260 (CA7), Sanders III, p. 69.

The Court of Appeals' opinion may be read as holding that petitioner's duty of "reasonable care" under § 12(2) required it independently to investigate the accuracy and completeness of the certified financial statements. It was customary, however—and in my view entirely reasonable—for petitioner to rely on these statements as accurately reflecting W&H's finan- cial condition.³ Even under § 11 of the Act, an underwriter is explicitly absolved of the duty to investigate with respect to "any part of the registration statement purporting to be made on the authority of an expert" such as a certified accountant if "he had no reasonable ground to believe and did not believe" that the information therein was misleading. § 11(b)(3)(C) of the Act, 15 U.S.C. § 77k(b)(3)(C); see § 11(a)(4), 15 U.S.C. § 77k(a)(4). This provision is in the Act because, almost by definition, it is reasonable to rely on financial statements certified by public accountants.⁴ Yet, in this case, the Court of Appeals nevertheless seems to have imposed the higher duty prescribed by § 11 to investigate, but denied petitioner the right to rely on "the authority of an expert" that also is provided by § 11.⁵

B

The Solicitor General at this Court's request has filed a brief amicus curiae. He does not embrace the decision of the Court of Appeals, see supra, at 1009, but nevertheless suggests that we deny certiorari because, inter alia, courts in the future "will undoubtedly recognize" that the decision in this case is confined to its "unusual fact situation." Brief for United States as Amicus Curiae 7.

If it were clear that the decision fairly must be read as thus limited, I would not dissent from denial of certiorari. My concern is that the opinion of the Court of Appeals will be read as recognizing no distinction between the standards of care applicable under §§ 11 and 12(2), and particularly as casting doubt upon the reasonableness of relying upon the expertise of certified public accountants. Dealers may believe that they must undertake extensive independent financial investigations rather than rely on the accuracy of the certified financial statements. If this is so, the efficiency of the short-term financial markets will be...