Moore v. Kayport Package Exp., Inc.
| Decision Date | 06 September 1989 |
| Docket Number | No. 88-5564,88-5564 |
| Citation | 885 F.2d 531 |
| Parties | , Fed. Sec. L. Rep. P 94,922, 14 Fed.R.Serv.3d 765, RICO Bus.Disp.Guide 7302 William MOORE; Ross Carlock; Almut Carlock; Judy Cates; John Cates; Elsie Claverie; Raymond Claverie; Frank Claverie; Phyllis Claverie, et al., Plaintiffs-Appellants, v. KAYPORT PACKAGE EXPRESS, INC.; Celani, Celani & Associates, Inc.; Tax and Financial Programming, Inc.; Portfolio Programming, Inc.; Miller, Balter & Company; Bernard A. Minkow, a Law Corporation; Scott Spolin, a Law Corporation; F. George Celani, an Individual; Aaron M. Binder, et al.; Walter Uhrman; G. Kirk Ellis, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
James D. Murray, Los Angeles, Cal., for plaintiffs-appellants.
Donald C. Erickson and Conrad R. Aragon, Lawler, Felix & Hall, Los Angeles, Cal., for defendants-appellees Tax & Financial Programming, Inc. and Portfolio Programming, Inc.
Martin K. Deniston, Edelman & Dicker, Los Angeles, Cal., for defendants-appellees Jack Miller, Max Balter and Miller, Balter & Co.
Peter B. Gelblum and Elia Weinbach, Mitchell, Silberberg & Knupp, and Diana Greene Gordon, Phillips, Nizer, Benjamin, Krim & Ballon, Los Angeles, Cal., for defendants-appellees Bernard A. Minkow and Bernard A. Minkow, a Law Corp.
Kenneth A. Holland and Eric L. Troff, Musick, Peeler & Garrett, Los Angeles, Cal., for defendants-appellees Scott Spolin and Scott Spolin, a Law Corp.
John A. Blue and Stanley L. Friedman, Adams, Duque & Hazeltine, Los Angeles, Cal., for defendants-appellees Walter Uhrman and G. Kirk Ellis.
Appeal from the United States District Court for the Central District of California.
Before HALL, WIGGINS and THOMPSON, Circuit Judges.
Defrauded investors who lost money in the purchase of unregistered securities sued the principals involved, as well as various accountants, lawyers and stockbrokers. The investors' second amended complaint was dismissed as against the accountants, lawyers and stockbrokers; however, they obtained judgment against the principals for $854,722.85 plus attorney fees of $284,722.85. The principals are F. George Celani, Aaron M. Binder, Kayport Package Express, Inc., and Celani, Celani & Celani Associates, Inc. They do not appeal. The investors do. They contend the district court erred in dismissing their second amended complaint against the accountants, lawyers and stockbrokers, and in twice denying leave to file a third amended complaint. We affirm in part and remand in part.
The principals organized tax shelter limited partnerships. Limited partnership interests in these partnerships were securities within the meaning of the federal securities laws. The limited partnership interests were not registered, nor were they exempt from registration. In 1981 and 1982 sales of these limited partnership interests totaled $3.8 million. Not only did the principals fail to register the limited partnership interests, they engaged in fraudulent practices and made fraudulent representations in connection with sales of the interests. The investors bought the interests (the "securities"), lost money, and in September 1983 they filed their initial complaint. They alleged violations of section 12(2) of the Securities Act of 1933, 15 U.S.C. Sec. 77l (2), and various pendent state causes of action. Before any responsive pleading was filed, they filed their first amended complaint.
Several of the accountant and lawyer defendants filed motions to dismiss the first amended complaint under Fed.R.Civ.P. 12(b)(6) ("rule 12(b)(6)"), asserting that plaintiffs had failed to state any claim The investors filed their second amended complaint in February 1984. The accountant and lawyer defendants, now joined by the stockbroker defendants, brought motions to dismiss. On grounds similar to those previously stated, the district court granted essentially all of these motions. The court dismissed the section 12(2) federal claim against the accountant and lawyer defendants, and dismissed the pendent state claims against these defendants and against the stockbroker defendants.
on which relief could be granted and had failed to plead fraud with the specificity required by Fed.R.Civ.P. 9(b) ("rule 9(b)"). The district court granted these motions with leave to amend. The court's order specified the deficiencies of the first amended complaint and outlined the manner in which the complaint should be amended. The court noted that the complaint was stated in general and conclusory terms, and was devoid of facts supporting the charges of fraud as to the moving defendants. Further, the court ruled that under the authority of Hokama v. E.F. Hutton and Co., 566 F.Supp. 636 (C.D. Cal.1983), and SEC v. Murphy, 626 F.2d 633 (9th Cir.1980), the investors had not alleged facts to show that the accountant and lawyer defendants had been a substantial factor in the securities transactions; therefore these defendants were not subject to liability under section 12(2) of the Act.
In May 1984, the investors sought leave to file a third amended complaint. In their proposed third amended complaint accompanying their motion, the investors realleged their section 12(2) claim, this time adding the stockbrokers as defendants. They also introduced new federal claims (1) under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) ("section 10(b)"), and rule 10b-5 thereunder, 17 C.F.R. Sec. 140.10b-5 ("rule 10b-5"); and (2) under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Sec. 1962(c). 1 The court denied leave to file the third amended complaint. The court explained that the section 12(2) claim was subject to dismissal because it lacked allegations of any facts to show that any of the accountants, lawyers or stockbrokers had been in privity with any investor in any sales transaction or had been a substantial factor in bringing about any sales transaction. Further, the court determined that the claim based upon section 10(b) and rule 10b-5 was not pleaded with specificity as required by rule 9(b), and that the RICO claim lacked allegations of a racketeering enterprise injury.
Following the district court's 1984 denial of leave to file the proposed third amended complaint, the investors' case languished in the district court. In mid-1987, the district court, on its own motion, issued an order to show cause why the complaint should not be dismissed for lack of prosecution. On June 13, 1987, the investors filed a second motion for leave to file a third amended complaint. 2 On July 30, 1987, the district court denied this motion, and set a trial date for the case to proceed to trial under the surviving counts of the second amended complaint. The principal defendants defaulted, and the district court entered judgment against them. All counts of the second amended complaint against the accountant, lawyer and stockbroker defendants
were dismissed. This appeal followed.
The investors-appellants argue the district court erroneously dismissed their section 12(2) claim which they alleged against the accountant and lawyer defendants in the second amended complaint. 3 Section 12(2) of the Securities Act of 1933 imposes civil liability on a person who offers or sells securities by means of a prospectus or oral communication containing material misrepresentations or omissions. Jett v. Sunderman, 840 F.2d 1487, 1491 (9th Cir.1988). The investors contend the accountant and lawyer defendants were liable as "sellers" under section 12(2) because their actions were a substantial factor in bringing about the sales transactions.
This circuit has applied the "substantial factor test" to determine who may be liable as a "seller" under section 12(2), see, e.g., id. at 1491-92. Under this test, persons who did not pass title in a sales transaction, and thus were not in privity with the purchaser, may nonetheless be liable as a "seller" if their actions were both necessary to and a substantial factor in bringing about the sales transaction. Id. The district court in the present case applied this test. It concluded that the facts alleged in the second amended complaint failed to show that any of the accountant or lawyer defendants had been in privity with any investor or had been a substantial factor in bringing about any of the sales transactions. On this basis, the district court dismissed the investors' section 12(2) claims against the accountant and lawyer defendants.
After the district court's judgment in this case, the Supreme Court defined the scope of the term "seller" under section 12(1) of the Securities Act of 1933. Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988). In Pinter, the Court held that liability extends beyond those who pass title to a security; those who solicit a purchase may also face liability as "sellers" under section 12(1) of the Securities Act. 108 S.Ct. at 2075-82. Although the Court did not define "solicit," it explained that a person whose motivation is solely to benefit the buyer cannot be deemed to have solicited a purchase. Rather, liability extends only to those who solicit a purchase, "motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Id. at 2079.
The Court's analysis in Pinter was based almost entirely on the language of section 12(1), and the definitions in section 2(3) of the Securities Act of 1933, 15 U.S.C. Sec. 77b(3) ("section 2(3)"). Section 12(1) makes a person liable for the offer or sale of an illegally unregistered security, and section 2(3) defines offer to include a "solicitation of an offer to buy." 15 U.S.C. Sec. 77b(3). According to this language, the Court concluded that those who solicit a purchase are within the ambit of section 12(1). The...
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