As Modified on Denial of Rehearing En Banc June 8, 1977.
HARLINGTON WOOD, Jr., Circuit Judge.
On April 19, 1976, the United States Supreme Court granted defendants' Petition for Certiorari, and vacated this court's order entered on October 30, 1975, in Sanders II,
In Sanders II the principal question was stated to be "whether an underwriter of short term commercial paper who acted in the mistaken but honest belief that financial statements prepared by certified public accountants correctly represented the condition of the issuer is liable to its customers for losses sustained as a result of the issuer's default." 524 F.2d at 1066. The district court held Nuveen liable on the theory that it breached a duty to make reasonable inquiries that would have led to the discovery of issuer's fraud. This court affirmed.
The problem now is to determine the effect of Hochfelder on this case. In Hochfelder the majority held that "scienter", that is, an intent to deceive, manipulate or defraud, is required to establish a private cause of action for damages under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5. Negligence is not sufficient. The Court added: "In certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act. We need not address here the question whether, in some circumstances, reckless behavior is sufficient for civil liability under § 10(b) and Rule 10b-5." 425 U.S. at 194 n. 12, 96 S.Ct. at 1381. The Court further noted that there are certain express civil remedies subject to significant procedural restrictions provided in the Securities Act of 1933,
Plaintiff's complaint as amended asserts claims under §§ 12(2) and 17 of the Securities Act of 1933, 15 U.S.C. §§ 77l (2) and 77q, §§ 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t, and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. 240.10b-5.
In Sanders II this court found Nuveen's liability to rest on Rule 10b-5.
In Hochfelder the Supreme Court left open the question of whether or not in some circumstances "reckless behavior", which was not there defined, could constitute scienter for civil liability under § 10(b) and Rule 10b-5. We believe, contrary to Nuveen's urging, that "reckless behavior" can be sufficient to constitute scienter. We have already so held in Bailey v. Meister Brau, Inc., 535 F.2d 982 (7th Cir. 1976), and
In view of the Supreme Court's analysis in Hochfelder of the statutory scheme of implied private remedies and express remedies, the definition of "reckless behavior" should not be a liberal one lest any discernible distinction between "scienter" and "negligence" be obliterated for these purposes. We believe "reckless" in these circumstances comes closer to being a lesser form of intent than merely a greater degree of ordinary negligence. We perceive it to be not just a difference in degree, but also in kind. Plaintiff argues for something less, relying in part on Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), where Mr. Justice Rehnquist, writing for the Court about the tort of misrepresentation and deceit, stated that "the typical fact situation in which the classic tort misrepresentation and deceit evolved was light years away from the world of commercial transactions to which Rule 10b-5 is applicable." 421 U.S. at 744-745, 95 S.Ct. at 1929. That comment is made in relation to privity of dealing. Personal contact between potential defendant and potential plaintiff in "today's universe of commercial transactions" is recognized as the exception and not the rule. The Court in Blue Chip Stamps limited the benefit of Rule 10b-5 to actual purchasers or sellers of securities, and excluded those who claim they did not enter into a transaction which later turned out to be better than they had anticipated because of an alleged misleading and pessimistic prospectus. That case does not hold that none of the old concepts of fraud and deceit, or recklessness, have application in the present context.
In the present case the trial judge found that Nuveen, due to negligence, made misleading statements of material fact and omitted to make statements of material fact necessary to make the statements not misleading in selling the notes to members of the plaintiff class. Underlying is the finding that Nuveen's investigation of the issuer was deficient and that an appropriate investigation would have revealed the issuer's fraud. There was no finding that Nuveen's acts of commission or omission were reckless, that is, that they were so highly unreasonable and such an extreme departure from the standards of ordinary care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it. On reviewing the record we likewise find no basis to sustain the judgment because of any reckless conduct on the part of Nuveen.
Therefore, at this point, as we now view the case, we must determine whether we are compelled to allow Nuveen's motion for summary reversal of the judgment below, or whether upon remand to this court the permissible scope of our reconsideration is broad enough to permit consideration of other pleaded issues which were originally present in the case and which were not expressly or impliedly ruled upon by the Supreme Court in Hochfelder. We may not contravene a specific instruction or disregard the disposition of any question of law contained in the mandate. Nuveen relies on Hermann v. Brownell, 274 F.2d 842 (9th Cir. 1960), cert. denied sub. nom., Herrmann v. Rogers, 364 U.S. 821, 81 S.Ct. 56, 5 L.Ed.2d 50, but that case stands only for the proposition that upon remand the jurisdiction
Following that view we must next examine the other causes alleged by plaintiff and an additional approach urged by Amicus Curiae.
The other claims which were pleaded by plaintiff deserve further consideration.
Plaintiff argues that the judgment should be sustained under § 17(a) of the 1933 Act,
For the purposes of this case we see no need to try to resolve those opposing views in an effort to decide whether a private right of action exists under § 17(a) where it no longer has the accompanying support of a viable 10b-5 claim as noted in Schaefer v. First National Bank of Lincolnwood, supra, and considered in Reid v. Mann, supra. We need not reach that question since we are persuaded by defendants' additional position that even if such a private cause of action does exist under § 17(a), it would require proof of scienter. Proof of scienter is unquestionably required as to subsections (1) and (3) which specifically refer to fraud. Subsection (2), on the other hand, does not expressly refer to fraud. In the 1933 Act, Congress expressly provided for civil liability in Sections 11 and 12(2)
Even if we assume that an implied cause of action does exist under § 17(a), for the same reasons expressed by the Court in Hochfelder we do not believe that such cause of action can be premised upon negligent wrongdoing. See Texas Gulf Sulphur Co., 401 F.2d at 867-8; Vacca v. Intra Management Corp., 415 F.Supp. 248 (E.D.Penn.1976); Thompson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 401 F.Supp. 111, 115 (W.D.Okla.1975). In the absence of scienter, judgment for plaintiff cannot be sustained under § 17(a) in this case.
Plaintiff next argues that the judgment should be sustained on the ground that Nuveen violated Rule 27 of the National Association of Securities Dealers, Inc.,
To support a view that violations of the rules of exchanges and associations promulgated in accordance with federal security laws may provide a basis for private damage actions under those laws, plaintiff cites Buttrey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d 135 (7th Cir. 1969), cert. denied, 396 U.S. 838, 90 S.Ct. 98, 24 L.Ed.2d 88, and S.E.C. v. First Securities Co. of Chicago, 463 F.2d 981 (7th Cir. 1972), cert. denied sub nom. McKy v. Hochfelder, 409 U.S. 880, 93 S.Ct. 85, 34 L.Ed.2d 134 (1972). In Buttrey, the "know your customer rule" of the New York Stock Exchange was held to be actionable in private suits for damages where the defendant was alleged to have had adverse knowledge about a customer, including knowledge of fraudulent activity, but proceeded to do business with the customer in direct violation of specific admonitions in the rule. In Buttrey, the court cited Colonial Realty Corporation
The court in Buttrey noted that the facts alleged were tantamount to fraud and thereby gave rise to a private civil damage action. 410 F.2d at 143.
In First Securities, supra, subsection c of Rule 27 was involved. That subsection specifically requires each member to review correspondence relative to the solicitation or execution of any security transaction. Contrary to Rule 27(c), the president of First Securities enforced a rule forbidding anyone other than himself to open mail addressed to him. The restriction of access to the mail enabled the president of First Securities to perpetrate a fraud. In finding an implied right to a civil damage action under Rule 27(c), the court stated:
The case at bar is distinguishable from both First Securities and Buttrey since the district court did not find and our reading of the record in the present case does not support a finding of fraud. Thus, we are unable to accept plaintiff's argument that the district court's judgment may be supported on an implied cause of action under Rule 27.
Furthermore, we are mindful of the admonition in Colonial against adopting a simplistic all-or-nothing approach in deciding whether a private civil damage action exists. Thus, although unnecessary to our decision here since fraud is not present, we note the difficulty in deciding the question simply on the basis of fraud without considering at the same time the specific rule or subsection in issue, which may, as here, differ in specificity from the types of rules involved in Buttrey and First Securities and thus make less appropriate the conclusion that an implied cause of action exists. Cf. Lange v. H. Hentz & Co., 418 F.Supp. 1376 (N.D.Tex.1976); Plunkett v. Dominick & Dominick, Inc., 414 F.Supp. 885 (D.Conn.1976).
Plaintiff has one remaining possible basis to support the judgment which was pleaded, § 12(2) of the 1933 Act. Although the trial court made certain incomplete findings of fact pertinent to § 12(2) consideration, the court did not reach a conclusion of law as to liability under that section. In Sanders II, 524 F.2d at 1069, this court did not rely on § 12(2) of the 1933 Act in
Regrettably, at this stage in this protracted litigation we cannot resolve the remaining § 12(2) issue on the present record. We are compelled to reverse and remand for further proceedings as may be necessary for the district court to make additional findings of fact and reach conclusions of law to support such judgment as the district court may reach on the possible liability of Nuveen under § 12(2) of the 1933 Act.
Defendants' Motion for Summary Reversal is denied.
Reversed and Remanded for further proceedings consistent with this Opinion.
ON MOTION FOR REHEARING EN BANC
Plaintiff-appellee Henry T. Sanders, on May 6, 1977 filed what he labeled a Petition for Rehearing en banc or for Modification of Judgment which raised four issues:
1. Appellee reads the opinion as requiring a purchaser of securities to prove reliance in order to recover under § 12(2) of the Securities Act of 1933, and argues to the contrary. This court did not in Sanders II or in the present case directly address the issue of reliance under § 12(2) as the district court had made no findings on the § 12(2) allegation of liability. No opinion on that issue was therefore expressed or intended to be expressed.
2. Appellee reargues that the judgment of the district court should have been affirmed on the ground that Nuveen violated Rule 27 of N.A.S.D. No additional comment is required on that issue.
3. The appellee also moves that the judgment be modified to provide that each party shall bear its own costs on appeal as being equitable in the circumstances of this case. We agree and the judgment therefore shall be modified accordingly.
4. Finally, the appellee argues that it did not disclaim the § 12(1) theory advanced by the SEC as amicus curiae, and seeks a ruling of this court that it be permitted on remand to amend its complaint to assert claims under § 12(1) of the 1933 Act against defendants. This court understood the counsel for plaintiff at oral argument, as mentioned in the opinion, to disclaim the SEC theory which had not been pleaded or argued. However, the disclaimer of that issue under those circumstances as a basis for affirming the judgment on appeal does not foreclose the plaintiff's proposed amendment to their complaint, a matter we
Subject to the above modification regarding costs, the Motion for Modification is denied.
On consideration of the appellee's "Motion for Rehearing en banc," no judge in active service having requested a vote thereon, the motion is denied.
Any person who —
shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.