Sanders v. John Nuveen & Co., Inc.

• Citation: 619 F.2d 1222
• Decision Date: 30 May 1980
• Docket Number: Nos. 79-1192,79-1248 and 79-1657,s. 79-1192
• Parties: Fed. Sec. L. Rep. P 97,372 Henry T. SANDERS et al., Plaintiff-Appellees, v. JOHN NUVEEN & CO., INC., Investors Diversified Services, Inc. and Investors Syndicate of America, Inc., Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1222

619 F.2d 1222

Fed. Sec. L. Rep. P 97,372

Henry T. SANDERS et al., Plaintiff-Appellees, v. JOHN NUVEEN & CO., INC., Investors Diversified Services Inc. and Investors Syndicate of America, Inc. Defendants-Appellants.

Nos. 79-1192, 79-1248 and 79-1657.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 5, 1979.

Decided April 29, 1980.

Rehearing Denied May 30, 1980.

Allan Horwich, Chicago, Ill., for defendants-appellants.

Richard Orlikoff, Chicago, Ill., for plaintiffs-appellees.

Before TONE and WOOD, Circuit Judges, and DUMBAULD, Senior District Judge. ^*

TONE, Circuit Judge.

The issue we decide on this appeal is whether plaintiff class members have established their claims under § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l (2). Holding that they have, we affirm the district court's judgment in their favor.

The case has been here three times previously. 463 F.2d 1075 (7th Cir.), cert. denied, 409 U.S. 1009, 93 S.Ct. 443, 34 L.Ed.2d 302 (1972) (Sanders I ); 524 F.2d 1064 (7th Cir. 1975), vacated and remanded, 425 U.S. 929, 96 S.Ct. 1659, 48 L.Ed.2d 172 (1976) (Sanders II ); 554 F.2d 790 (7th Cir. 1977) (Sanders III ). It is enough at this point to say that our affirmance in Sanders II of the judgment in plaintiffs' favor based on § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), was rendered untenable by the holding of the Supreme Court in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), that scienter is an element of a private cause of action under § 10(b); and that in Sanders III we therefore remanded the case to the district court primarily for a determination of plaintiffs' claims under § 12(2) of the 1933 Act. ¹ On remand that court held an evidentiary hearing ² and then made additional findings in favor of plaintiffs and entered judgment accordingly.

The background facts having been stated in detail in Sanders II and revisited in Sanders III, we shall do no more here than summarize those facts that are now material.

Plaintiff class consists of forty-two purchasers of unsecured short term promissory notes aggregating $1,612,500 issued by Winter & Hirsch, Inc. (WH), a consumer finance company. The purchases were made from John Nuveen & Co., Inc. during a seven-month period immediately preceding WH's default on the notes in February 1970. The defendants other than Nuveen are corporations found to be controlling persons of Nuveen.

Nuveen was the exclusive underwriter of the WH notes, which were sold, like other commercial paper, through its branch offices throughout the United States. As the underwriter, it bought the notes from WH and resold them to customers at a profit. According to the head of Nuveen's commercial paper department, Nuveen sold commercial paper, including the notes of WH, on the basis "that there should be no question but what the paper will be paid at maturity."

Nuveen prepared and circulated to prospective customers "commercial paper reports" on the WH commercial paper that it held for sale. Three members of the plaintiff class testified to having received copies of these reports before they bought WH notes. Two other members testified to having received commercial paper reports, but could not swear to having received them before making their purchases. Nine class members, including the three who had received reports before purchasing, testified that, when they bought their WH notes, Nuveen salesmen made oral statements about the quality of the notes. There was no evidence of oral communications to any other class members. All class members received the usual written confirmations advising them that they had purchased certain described notes and that Nuveen had sold the notes as principal.

WH's default was the product of a fraud it perpetrated with the connivance of the certified public accountants who audited its financial statements and rendered opinions thereon. In summary, over a period of ten years WH continually issued financial statements in which accounts receivable were overstated and some of its indebtedness was omitted. By 1970 WH's financial statements overstated accounts receivable by some $14,000,000 and failed to reflect some $1,750,000 of indebtedness. When the notes in issue in this case were purchased by members of the plaintiff class, WH's liabilities exceeded its assets.

Nuveen was not aware of the fraud and held "the mistaken but honest belief that financial statements (of WH) prepared by certified public accountants correctly represented the condition of" WH. 524 F.2d at 1066. It accordingly proceeded to sell the WH notes and also to issue commercial paper reports thereon that reflected the false WH financial statements.

Sanders II held that Nuveen failed to make a reasonable investigation, which it was the duty of an underwriter to make under § 10(b) of the 1934 Act, and that such an investigation "would have revealed the fraud." Id. at 1071.

After WH had dishonored the notes sold to the plaintiff class members, it was taken over by its creditors. They established the WH Liquidating Trust, liquidated WH, and over a period of time distributed the proceeds of the liquidation to creditors, including members of the plaintiff class, who received through these distributions approximately two-thirds of the amounts they paid Nuveen for the notes. The judgment appealed from is for the unpaid balance of the purchase price of the notes and prejudgment interest thereon.

I.

Defendant's first argument is that recovery by thirty-three of the forty-two class members is defeated by the absence of evidence of receipt by them of "a prospectus or oral communication" meeting the requirements of § 12(2). That section imposes liability on

(a)ny person who

. . . (o)ffers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. . . .

Liability is in favor of "the person purchasing such security from" the person who offers or sells the security. The purchaser must not have known of the untruth or omission.

Plaintiffs contend that several kinds of communications satisfied the prospectus or oral communication requirement of the statute. We need consider only one, the commercial paper reports. ³

Defendants admit that the reports were prospectuses and that they were false and misleading. The reports repeated the false financial information contained in the WH financial statements. Also, they stated that the figures were from a detailed audit when in fact the auditors' opinions stated that no detailed audit had been made.

Defendants' only response to this argument is that, except as to the three members proved to have received copies of reports before their purchases, the reports had no "causal relationship" with the sales of the WH notes.

Although the "by means of" language in the statute requires some causal connection between the misleading representation or omission and plaintiff's purchase, defendants' interpretation of that standard is much too stringent. It is well settled that § 12(2) imposes liability without regard to whether the buyer relied on the misrepresentation or omission. Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 696 (5th Cir. 1971); Gilbert v. Nixon, 429 F.2d 348, 356-57 (10th Cir. 1970); Johns Hopkins University v. Hutton, 422 F.2d 1124, 1129-30 (4th Cir. 1970). See Kaminsky, An Analysis of Securities Litigation Under Section 12(2) and How It Compares With Rule 10b-5, 13 Hous.L.Rev. 231, 258, 265 (1976). To require a plaintiff to have received a commercial paper report before purchasing, as defendants would have us do, would tend toward erroneously imposing a reliance requirement. ⁴

The statutory language, as amplified by the legislative history, indicates that a plaintiff need not prove that he ever received the misleading prospectus. The statute imposes liability in favor of a purchaser on any person who "(o)ffers or sells a security . . . by means of a prospectus or oral communication" that is misleading. Although the statute explicitly requires privity between plaintiff-purchaser and defendant-seller, ⁵ its terms do not require that the particular sale to an individual plaintiff be directly by means of the prospectus alleged to be misleading. The causal connection contemplated by the statute is revealed in the House Report on the bill that, after changes not relevant here, became the Securities Act of 1933. See generally Landis, The Legislative History of the Securities Act of 1933, 28 Geo.Wash.L.Rev. 29 (1959). Referring to §§ 11 and 12, the two sections imposing civil liabilities, the report declared that statements issued in connection with the sale of securities,

although they may never actually have been seen by the prospective purchaser, because of their wide dissemination, determine the market price of the security which in the last analysis reflects those manifold causes that are the impelling motive of the particular purchase. The connection between the statements made and the purchase of the security is clear, and, for this reason, it is the essence of fairness to insist upon the assumption of responsibility for the making of these statements.

H.R.Rep.No.85, 73d Cong., 1st Sess. 10 (1933), ⁶ reprinted at 2 Legislative History of the Securities Act of 1933 and Securities Exchange Act of 1934, Item 18 (J. Ellenberger & E. Mahar, compilers, 1973) (hereinafter cited as Legislative History ).

Defendants argue that this is not "an open market trading case where dissemination of information to some buyers or sellers can have an impact upon the market price and thus affect transactions by people who never saw the documents." The attempted distinction lacks substance. Even though short term commercial paper is...