McFarland v. Memorex Corp.

• Decision Date: 17 January 1984
• Docket Number: C-79-2926-WAI and C-80-0241-WAI.,No. C-79-2007-WAI,C-79-2007-WAI
• Citation: 581 F. Supp. 878
• Court: U.S. District Court — Northern District of California
• Parties: Craig T. McFARLAND, et al., Plaintiffs, v. MEMOREX CORPORATION, et al., Defendants.

581 F. Supp. 878

Craig T. McFARLAND, et al., Plaintiffs, v. MEMOREX CORPORATION, et al., Defendants.

Nos. C-79-2007-WAI, C-79-2926-WAI and C-80-0241-WAI.

United States District Court, N.D. California.

January 17, 1984.

J. Michael Brennan, Gibson, Dunn & Crutcher, Newport Beach, Cal., Barry P. Goode, McCutchen, Doyle, Brown & Enersen, Douglas M. Schwab, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., Mitchell A. Kramer, Steven Kapustin, Philadelphia, Pa., Kenneth R. Logan, Simpson, Thacher & Bartlett, New York City, for defendants.

John W. Allured, Law Offices of David B. Gold, San Francisco, Cal., for plaintiffs.

ORDER

INGRAM, District Judge.

Plaintiffs request that this court reconsider its decision in McFarland v. Memorex, 493 F.Supp. 631 (N.D.Cal.1980) in light of recent Ninth Circuit authority and a recent order of this court. At issue is the viability of a claim for relief under section 12(2) of the 1933 Securities Act, 15 U.S.C. § 77l(2), against defendants Memorex Corporation and its president, Robert Wilson, as well as a claim under section 15 of the 1933 Act against controlling persons as alleged in plaintiffs' Second Amended Complaint.

In McFarland v. Memorex, supra, at 647-648, this court held that "seller" liability under section 12(2) was limited to the defendant/underwriters in strict privity with the plaintiff/security purchasers. Defendants Memorex and Wilson were found not in privity and were dismissed as to section 12(2) claims pursuant to then prevailing authority.

In subsequent cases, the Ninth Circuit has broadened the definition of a "seller" under section 12(2) to include persons whose participation in the security sales transaction directly and proximately caused plaintiffs' injuries. See, e.g., Admiralty Fund v. Jones, 677 F.2d 1289, 1294 (9th Cir.1982). This court applied that broadened definition in denying a motion to dismiss brought by a defendant broker/dealer who had allegedly violated section 12(2) in supervising its agent who had traded out of inventory. Frogner v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 1983 CCH Fed.Sec.L.Rep. ¶ 99,504 (N.D.Cal.1983).

Plaintiffs also request that should Memorex be susceptible to section 12(2) allegations, so should its officers and directors as controlling persons under section 15, 15 U.S.C. § 77o.

Defendants oppose reconsideration on the basis of general untimeliness and prejudice due to potentially expanded discovery and other entanglements common to litigation of this magnitude. They most vehemently oppose reconsideration because of apparent doubt cast by the Ninth Circuit by the further application of common law tort principles which increase the scope of liability under the federal securities laws.

In Admiralty Fund v. Jones, supra, the court noted that fairly recent Supreme Court authority had questioned the wisdom of fixing participant or aiding and abetting liability, in favor of a "strict statutory construction approach to the securities acts...." 677 F.2d at 1294, n. 3. The court prefaced its observation by noting "little difference between the scope of liability under an aider and abettor theory and that under the participant theory relied upon in SEC v. Murphy, 626 F.2d 633 (9th Cir.1980) a participant is one who was a substantial factor in the security sales transaction." Id. at p. 1295, n. 4.

Defendants also cite Wright v. Schock, 571 F.Supp. 642, 1983 CCH Fed.Sec.L.Rep. ¶ 99,411 (N.D.Cal.1983), in which Chief Judge Peckham, in light of Jones, doubted the "continuing viability" of participant or aiding and abetting liability under section 12(2), citing, inter alia, McFarland, supra, at 647.

Defendants further contend that even if Memorex is to be considered accountable under section 12(2), Wilson, as president, should not. See Simkins v. National Executive Planners, Ltd., 1981-82 CCH Fed. Sec.L.Rep. ¶ 98,304 (M.D.N.1981). They finally submit that the firm commitment underwriting arrangement between Memorex and its underwriters insulates Memorex and Wilson from section 12(2) liability. See Collins v. Signetics, Inc., 605 F.2d 110 (3rd Cir.1979).

The court believes reconsideration is appropriate. There is no authority that this circuit has actually dispensed with either participant or aiding and abetting liability under section 12(2). The footnote in Jones, supra, is clearly dicta, especially in light of the disposition of the case, reversing summary judgment to consider whether the defendant therein was a substantial factor in the security sales transaction. Chief Judge Peckham's comments in Wright, relied on by defendants herein, amount to no more than a recognition of that dicta. Moreover, he nevertheless analyzed the section 12(2) liability of certain defendants in Wright, after careful review of the substantial evidence presented, on the basis of whether their acts or conduct were a substantial factor in the sales transaction. Wright, supra, 571 F.Supp. 642, at pp. 96, 359-362.

This court is not alone in assessing the impact of the Jones footnote as it does. In Hokama v. E.F. Hutton & Co., 566 F.Supp. 636 (C.D.Cal.1983), Judge Pfaelzer cogently reasons that more recent Supreme Court authority casts doubt on the querulous subscript:

The Supreme Court has subsequent to Jones reiterated that "the securities laws combatting fraud should be construed `not technically and restrictively, but flexibly to effectuate (their remedial) purposes.' citation omitted," Herman v. MacLean v. Huddleston, ___ U.S. ___, 103 S.Ct. 683 74 L.Ed.2d 548 (1983). Id., at 641.

Even though Huddleston was based upon a section 10b-5, 1934 Act, violation, this court agrees with Hokama that the message applies equally to the 1933 Act. Hokama, supra at 641.

Hokama also correctly points out the distinction between primary participant liability, which is based upon acts or conduct as a substantial factor in the sales transaction, and secondary liability. Id., at 641-2. The latter concerns aiders and abettors who knowingly assist in a primary violation. Id., citing Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94-7 (5th Cir.1975). This court finds the prevailing authority respects both theories with Jones not to the contrary.

Applying this authority to the instant case, the court notes that the Second Amended Complaint...