The opinion of the court was delivered by: WEINER
The above captioned case is before this Court pursuant to 28 U.S.C. § 1407 on the Order of the Judicial Panel on Multidistrict Litigation filed on December 12, 1972 for the purposes of coordinated or consolidated pretrial proceedings.
The eleven individual cases
which constitute this litigation primarily involve alleged violations of Sections 10(b), 13, 14(a), and 18 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m, 78n(a), and 78r, Rule 10b-5 of the Securities and Exchange Commission, and Sections 11, 12, and 17 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77 l, and 77q, coupled with various allegations of violations of other sections of the Securities acts and common law.
It is not necessary, nor would it be helpful, to embark upon a detailed examination of the quite complex factual bases of each suit. It is sufficient to note, at this time, that eight of the cases are predicated upon a complaint brought by stockholders of Lum's Inc. (now known as Caesar's World) allegedly for damages suffered by them which resulted from the sale, on September 30, 1969, of Caesars Palace to Lum's Inc. Seven of these actions contain class allegations.
Two other suits, Kraut and Gregorio, are derivative actions filed on behalf of Lum's Inc.
Essentially, the plaintiffs' complaints center around allegations that the January 12, 1971 registration statement, the September 30, 1969 registration statement, and the Lum's 1969 Annual Report were materially false and misleading and that the defendants disseminated false and misleading information concerning the financial status of Caesars Palace which prevented investors from obtaining adequate information in these matters in violation of § 10(b) and Rule 10b-5. It is further generally alleged that false and misleading statements were made by the defendants in August of 1969 in connection with the solicitation of proxies from stockholders of Lum's Inc. in order to approve the Caesars Palace acquisition in violation of § 14(a) and Rule 14a-9 of the 1934 Act. In addition, the derivative suits allege breaches of fiduciary duty by certain directors and improper performance by defendant-accountants of duties imposed upon them by the Securities Acts.
Various defendants, including Desert Palace, Desert Palace, Inc., and numerous individual defendants, have requested this Court to transfer six of the lawsuits involved in this litigation, Brooks, Fenichal, Kraut, Gregorio, Margoles v. Powell, and Silver to the District of Nevada pursuant to 28 U.S.C. § 1404(a) which provides that:
"For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought."
In support of their position the movants point out that, as those acts and transactions which comprise the basis of the alleged § 10(b) and Rule 10b-5 violations occurred in Las Vegas, Nevada, suit could have been brought against all defendants in that district; that the material records are located in Nevada; that a great number of witnesses and defendants are located in Nevada and that the expense and inconvenience of traveling to New York for depositions and trial would be excessive; that compulsory process for the attendance of witnesses would be available to a far greater degree in Nevada; and that 28 U.S.C. § 1404(a) empowers a district court to authorize transfer if it is warranted to promote the interests of justice. Further, defendants point out that the possibility of an earlier trial in Nevada is a consideration which weighs in favor of transfer and that, given the fact that the bulk of the transactions which are involved in these matters occurred in Nevada, the plaintiff's choice of forum is entitled to de minimus weight.
Plaintiffs, in opposition, argue that the plaintiff's choice of forum is entitled to great weight; that transfer of these cases would result in fragmentation, duplication, and waste;
that the Cope action should be transferred to New York from Nevada; that a number of parties and witnesses, including Lum's underwriter and plaintiffs' accountants, are present in New York and would only be available with great difficulty in Nevada; that Caesar's Palace has an office in New York and trades on the New York Stock Exchange; that a number of witnesses are in Florida; and, that the files of the Securities Exchange Commission, which form a large portion of the plaintiffs' case, are in New York. In addition, the plaintiffs point out that transfer would seriously deplete their financial situation and that they would be willing to conduct depositions and to accept copies of documents in Nevada and Florida in order to keep the balance of expenses within permissible limits.
It is clear that a judge to whom cases are assigned by the Judicial Panel on Multidistrict Litigation for pretrial proceedings has the power to issue orders directing transfer of cases from the judicial districts in which they were filed to another district for trial if the convenience of parties and witnesses and other relevant factors warrant such action. Pfizer, Inc. v. Lord, 447 F.2d 122 (2d Cir. 1971); In Re Seeberg-Commonwealth United Litigation, (S.D.N.Y. 1970, M-19-95); cf. Van Dusen v. Barrack, 376 U.S. 612, 84 S. Ct. 805, 11 L. Ed. 2d 945 (1964). However, given the limited record which is before us at this time with regard to the conflicting viewpoints outlined above, it is our opinion that further discovery and deposition testimony must be forthcoming prior to our determination of these transfer motions. Therefore, in the exercise of our discretion, we will at this time, decline to pass on this question until discovery testimony furnishes a proper foundation for our ruling.
The plaintiff in Margoles v. Lum's Inc. has requested this Court to order consolidation
of his case with five other cases presently before us in this same litigation, Kraut, Brooks, Gregorio, Margoles v. Powell, and Fenichal, on the grounds that each of these suits attack the same basic transactions and involve common parties and issues.
Movant places heavy reliance upon the Second Circuit's discussion of consolidation in a stockholder's derivative action, MacAlister v. Guterma, 263 F.2d 65, 68 (2d Cir. 1958), and upon a number of related stockholder class actions similar to the instant cases in which consolidation has been approved, see, e.g., Feldman v. Hanley, 49 F.R.D. 48 (S.D.N.Y. 1969); Abrams v. Occidental Petroleum Corp., 44 F.R.D. 543 (S.D.N.Y. 1968); Fields v. Wolfson, 41 F.R.D. 329 (S.D.N.Y. 1967), urging that the dangers envisioned by the MacAlister court, duplication of suits, increased costs to the litigants, delay, and ineffective use of judicial time will inevitably result if such action is not taken in their case. In addition, plaintiff contends that inconsistent results and conflicting class determinations would result from a failure to consolidate.
Defendants' opposition to consolidation is premised primarily upon the proposition that, although the claims made in Margoles v. Powell are essentially duplicative of those made in Margoles v. Lum's, Inc., the converse is not true and, therefore, consolidation should not be granted. In effect, it is the contention of the defendant that Margoles v. Lum's, Inc. includes claims relating to franchising and restaurant and related activities which are not common to the other suits and would only cause confusion if consolidation with them was permitted.
In answer, plaintiff argues that the fact that total identity of issues and parties is not present does not foreclose consolidation, citing Skirvin v. Mesta, 141 F.2d 668 (10th Cir. 1944), and other related cases, so long as substantial identity of parties and issues is present.
Again, as in the foregoing motions to transfer, it is our conclusion that it would be inappropriate for us to attempt to determine this question given the incipient posture of the present proceedings. Therefore, in the exercise of our discretion, we will likewise decline to pass upon consolidation until further discovery has been completed and the true issues have been further clarified to our satisfaction.
MOTION TO DISMISS: CHANNING SECURITIES
In Channing Securities, the principal sellers-defendants, including Desert Palace, Inc., Desert Palace, and numerous individual defendants, have filed motions to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). Plaintiffs Channing Securities, Inc. and Channing Shares, Inc. (hereinafter "Channing"), are open-end diversified management investment companies which purchased $3,500,000 and $6,500,000, respectively, in principal amount of 7% convertible senior subordinated debentures of defendant Caesar's World. Inc. in September of 1969 pursuant to a registration statement and prospectus issued by Caesar's World. The moving defendants were shareholders, employees, officers, and/or partners, or were otherwise connected with the corporation and partnership which sold the Caesars Palace Hotel and Casino to Caesar's World. Essentially, plaintiffs allege that the September, 1969 registration statement and prospectus contained various misstatements and omissions in violation of § 10(b) of the 1934 Act and of §§ 11, 12(2), and 17(a) of the 1933 Act. The principal seller-defendants have filed motions to dismiss plaintiffs' first, second, third and fourth causes of action. Each of these motions will be discussed in turn.
Defendants claim that Channing's allegations of violations of § 10(b) and Rule 10b-5 are deficient in that there is no allegation of scienter in the complaint, and that there was no duty on the part of any of the moving defendants to disclose information to Channing. Plaintiffs argue, to the contrary, that scienter is sufficiently alleged in their complaint and that privity is not a necessary element of a claim under § 10(b) or Rule 10b-5.
We agree with the plaintiffs that, without attempting to determine the troublesome and much debated question of whether or not scienter is a requisite element of a 10b-5 violation, see, e.g., Heit v. Weitzen, 402 F.2d 909, 913-914 (2d Cir. 1968); SEC v. Van Horn, 371 F.2d 181, 185 (7th Cir. 1966); Weber v. C.M.P. Corp., 242 F. Supp. 321 (S.D.N.Y. 1965); VI Loss, Securities Regulations, 3883-88 (Supp. 1969), the allegation that defendants did "intentionally, wilfully, and knowingly"
make untrue statements of material facts would be more than sufficient to state a private claim for damages under 10b-5. See Globus v. Law Research Service, Inc., 418 F.2d 1276, 1291 (2d Cir. 1969), cert. denied, 397 U.S. 913, 90 S. Ct. 913, 25 L. Ed. 2d 93 (1970); Heit v. Weitzen, supra, 402 F.2d at 914; cf. Ellis v. Carter, 291 F.2d 270, 274 (9th Cir. 1961).
We similarly must disagree with movants' contention that privity is a prerequisite to recovery under § 10(b) and Rule 10b-5 and that they, thereby, had no duty to disclose information to the plaintiffs. In Iroquois Industries v. Syracuse China Corp., 417 F.2d 963, 967-968 (2d Cir. 1969), cert. denied, 399 U.S. 909, 90 S. Ct. 2199, 26 L. Ed. 2d 561 (1970), the Second Circuit carefully analyzed the relevant case law and concluded that liability under 10b-5 does not depend on privity between plaintiff and defendant. The reasoning of the court in Freed v. Szabo Food Service, Inc., CCH Fed. Sec. L. Rep. para. 91,317 at 94, 363-4-5 (N.D. Ill. 1964), is persuasive:
"The requirement of privity is no longer strictly enforced, and instead courts are requiring rather that the plaintiff allege that he has relied upon misleading statements uttered by the defendants concerning the securities in question; that he has purchased the securities from whatever source, relying upon these misleading statements; and that through such purchase he has suffered damage . . .
". . . To hold otherwise would allow a corporation whose stock is issued publicly to make misrepresentations concerning the stock without any fear of liability as long as its stock was only sold to the public in the market by underwriters or others. Such a rule would ignore the realities of the public securities market, and such was certainly not the intention of Congress."
We, therefore, have no doubt that, under the prevailing state of the law, the absence of privity does not amount to a fatal defect of proof in a 10b-5 situation. Cochran v. Channing Corp., 211 F. Supp. 239, 245 (S.D.N.Y. 1962); see, e.g., Heit v. Weitzen, supra, 402 F.2d at 913; VI Loss, supra, at 3893-97 (citing cases at 3894); Ruder, Pitfalls in the Development of a Federal Law of Corporations by Implication through Rule 10b-5, 59 Nw. U.L. Rev. 185, 196-206 (1964).
However, no court has yet advocated an unconditional abandonment of privity, and it is axiomatic that some legally cognizable relationship, perhaps akin to the "semblance of privity" concept espoused in Joseph v. Farnsworth Radio & Television Corp., 99 F. Supp. 701, 706 (S.D.N.Y. 1951), must be present between the parties before liability may be imposed. As Judge Friendly has intimated in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 867 (2d Cir. 1968) (concurring opinion), if this underlying concept of privity was totally disregarded, a burden out of all proportion to the fault involved might be cast upon anyone who makes false assertions in the marketplace. It is our feeling that, given our reading of the complaint
and the basic posture of these proceedings, an actionable relationship exists between the parties to this motion, cf. Drake v. Thor Power Tool Co., 282 F. Supp. 94, 104 (N.D. Ill. 1967); Gann v. Bernz-Omatic Corp., 262 F. Supp. 301 (S.D.N.Y. 1966); Cochran v. Channing, supra, and that dismissal is not warranted at this time. However, if, within the course of discovery proceedings, information becomes available to the defendants which leads them to conclude that a total absence of privity exists, as defined in the case law in this area, they may resubmit this question to the Court for our consideration.
The defendants argue that the claims made under §§ 11 and 12(2) of the 1933 Act, Securities Act of 1933, 15 U.S.C. §§ 77k, 77l(2), are barred by the applicable Statute of Limitations, Securities Act of 1933, 15 U.S.C. § 77m, which requires the initiation of such actions within one year after the discovery of the untrue statement or omission or within one year after such discovery should have been made by the exercise of reasonable diligence or, in any event, in case of liability under § 11, not more than three years after the security was bona fide offered to the parties, and, under § 12(2), not more than three years after the security was sold. Plaintiffs contend that they were not on notice of any wrongdoing until the public disclosure of the SEC investigation in December of 1971, less than a year before the action was commenced, and have, thereby, commenced their suit within the limits established by the statute.
As the instant proceedings are yet in their early stages of development, any attempt by this Court to dispose of these conflicting factual contentions would be an exercise in pure guesswork. Clearly, further discovery is required before either party is able to produce proof sufficient for us to render a decision. Thus, our determination will be held in abeyance until such time as this information is brought to our attention by the parties.
On this same point, defendants state that the plaintiff has failed to allege facts indicating that their action was timely brought under the Statute of Limitations and that such pleadings are required by the courts in actions under §§ 11 and 12(2) of the 1933 Act. Phillips v. J.H. Lederer & Co., Inc., CCH Fed. Sec. L. Rep. para. 91,039 (S.D.N.Y. 1961) (failure to allege the time or circumstances of discovery are "material allegations which must be set forth in the complaint where an action is brought more than one year after the sale."); Buchholtz v. Renard, 188 F. Supp. 888, 892 (S.D.N.Y. 1960); Premier Industries, Inc. v. Delaware Valley Financial Corp., 185 F. Supp. 694, 696 (E.D. Pa. 1960); III Loss, supra, at 1744-45 (2d ed. 1961). The relevant decisions have consistently interpreted § 77m as substantive rather than procedural, e.g., Rosenberg v. Hano & Co., 26 F. Supp. 160 (E.D. Pa. 1938), in the sense that it is viewed as setting forth an essential ingredient of a private cause of action based upon §§ 11 and 12(2). As a result, a failure to plead facts in conformity with this section is fatal to such claims. Premier Industries, Inc. v. Delaware Valley Financial Corp., supra ; Osborne v. Mallory, 86 F. Supp. 869 (S.D.N.Y. 1949); Fischman v. Raytheon Mfg. Co., 9 F.R.D. 707 (S.D.N.Y. 1949), rev'd on other grounds, 188 F.2d 783 (2d Cir. 1951).
Given plaintiff's failure to affirmatively plead such facts, defendant urges this Court to dismiss Channing's second and third causes of action. However, in light of the liberal pleading requirements established by the Federal Rules, we are of the opinion that such action would be somewhat harsh. See Wright, Federal Courts 239 (1963). Plaintiff is, therefore, given leave to amend his complaint to include specific allegations in conformity with 15 U.S.C. § 77m in connection with his claim for relief under §§ 11 and 12(2) of the 1933 Act. See Premier Industries v. Delaware Valley Financial Corp., supra, 185 F. Supp. at 697.
The defendant-movants next argue that they cannot be held liable as a matter of law for violation of § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77 l (2), as they are not within the category of individuals to whom this section is applicable.
Section 12(2) of the Act provides:
(2) offers 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 the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omissions), 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, 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 such security."
The difficult question which is specifically raised by this motion to dismiss, whether persons who allegedly conspired with or aided and abetted other persons to violate § 12(2)
are subject to liability under this section of the 1933 Act, has been confronted by few courts and commentators prior to this time. Having due regard for the purposes and policies underlying the Act and recognizing that the issue presents an important question in the ever-developing area of securities regulations, we hold that persons who do no more than conspire in or aid and abet a violation of this type are not necessarily excluded from the imposition of § 12(2) liability.
Numerous courts have confronted the offeror-seller requirement of § 12(2) and have concluded that liability under this section is not limited solely to those parties who technically are the sellers or offerors of the securities in question "in the mystical sense of passing 'title'." III Loss, supra, at 1713-14, and cases cited therein.
In a recent discussion of the extent of liability under § 12, the Fifth Circuit Court of Appeals, in Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 692-693 (5th Cir. 1971), held that a seller, under this section, is not required to be the person who passes title, and noted that "the term 'seller' has sometimes been accorded a broader construction under Section 12(2) than under Section 12(1)."
Id. at 692. Although liability in Hill York was premised on § 12(1), the Court expressly formulated a standard applicable to both §§ 12(1) and 12(2):
"[We] adopt a test which we believe states a rational and workable standard for imposition of liability under either section. Its base lies between the antiquated 'strict privity' concept and the overbroad 'participation' concept which would hold all those liable who participated in events leading up to the transaction. See Wonneman v. Stratford Securities Co., Inc., CCH Fed. Sec. L. Rep. para. 90,923 (S.D.N.Y. 1959) and Wonneman v. Stratford Securities Co., Inc., CCH Fed. Sec. L. Rep. para. 91,034 (S.D.N.Y. 1961). We hold that the proper test is the one previously forged by the court in Lennerth v. Mendenhall, supra, [234 F. Supp. 59 (N.D. Ohio, E.D. 1964)]. '. . . the line of demarcation must be drawn in terms of cause and effect: To borrow a phrase from the law of negligence, did the injury to the plaintiff flow directly and proximately from the actions of this particular defendant?' 234 F. Supp. at 65. See also Nicewarner v. Bleavins, supra, [244 F. Supp. 261, 266 (D. Colo. 1965)]." Id. at 692-693.
Undoubtably, the language of § 12(2) envisions the presence of some "element of privity." But the Hill York decision, coupled with a recognition of the remedial intent of the federal securities laws, is persuasive authority for the expansion of this concept of privity beyond the narrow bounds which a strict interpretation of the offeror-seller requirement might otherwise dictate.
A review of the decisions touching on this issue clearly evidences the fact that gradual but progressive expansion of this concept has taken place. See III Loss, supra, at 1712-21: VI Loss, supra, at 3834-42. Brokers have repeatedly been included within the coverage of both parts of § 12, whether the broker represents both parties to the transaction or only the seller. Cady v. Murphy, 113 F.2d 988 (1st Cir. 1940), cert. denied, 311 U.S. 705, 61 S. Ct. 175, 85 L. Ed. 458; Wall v. Wagner, 125 F. Supp. 854, 858 (D. Neb. 1954), aff'd without consideration of the point sub nom. Whittaker v. Wall, 226 F.2d 868 (8th Cir. 1955); Valve Line Fund, Inc. v. Marcus, CCH Fed. Sec. L. Rep. para. 91,523 at 94,969 (S.D.N.Y. 1965). And as Prof. Loss states, once the liability of a broker under § 12 is established, "it is hard to distinguish the case of an officer or director or employee or other non-broker agent of the seller who actively participates in the sale." III Loss, supra, at 1716. See Lennerth v. Mendenhall, 234 F. Supp. 59 (N.D. Ohio 1964); Wall v. Wagner, supra ; cf. Nicewarner v. Bleavins, 244 F. Supp. 261, 266 (D. Colo. 1965); Wonneman v. Stratford Securities Co., CCH Fed. Sec. L. Rep. para. 91,034 at 93,459-60 (S.D.N.Y. 1961).
In Katz v. Amos Treat & Co., 411 F.2d 1046 (2d Cir. 1969), one of the defendants, Wofsey, an attorney for the defendant brokerage corporation and special counsel for the issuing corporation, was charged with violations of § 12 of the 1933 Act. Although Judge Friendly, in his opinion, conceded that the attorney had not taken any initiative in the offering, "the evidence clearly warranted the inference that on both occasions in April 1961, he had not simply answered Katz' questions, but had placed Treat in a position to tackle Katz for the money." Id. at 1053. Concluding that Wofsey "had been a party to a solicitation," the Court held that liability under § 12(1) could be present. In addition, as a result of the many misrepresentations which had allegedly been made to Katz by each of the defendants including Wofsey, the Court found liability to be present under §§ 12(2) and 17(a) of the 1933 Act and § 10(b) of the 1934 Act:
"[We] think the plaintiff made a case sufficient for submission to the jury that statements approximating one or more of [ the misrepresentations ] were made or adopted by or on behalf of each of appellees [ sic ], who knew or ought to have known of their falsity." Id. at 1055. (emphasis added)
Furthermore, the recitation of facts in Katz indicates that shares of stock were neither transferred by or through Wofsey nor that the attorney in any way benefited monetarily as a result of the transaction.
The Katz decision, controlling in this Circuit, appears to adopt an extremely liberal standard of privity in § 12(2) situations, essentially requiring only some indicia of participation or solicitation on the part of an individual to warrant the imposition of liability.
Therefore, as a result of Katz, Hill York, and related decisions in this area, it would be nothing more than an exercise in semantic hair-splitting for this Court to attempt to delineate a legally cognizable distinction between those categories of persons who have previously been exposed to liability under § 12(2) and those persons charged with aiding and abetting and conspiring in the violation of § 12(2). No one of these formulations is a "magic word"; in effect, each of them indicates participation to one degree or another.
Determination of the extent of this participation and whether or not it is sufficient to impose liability upon the secondary defendants must obviously await discovery. And concededly, the initial burden of proving this requisite participation would rest with the plaintiff. See III Loss, supra, at 1716.
Our decision on this point has also been influenced by the general statutory scheme of the federal securities laws and those decisions dealing with situations comparable to the instant case in the criminal area. Prof. Loss has outlined this scheme with precision:
"It [the 1933 Act] deals only with disclosure and fraud in the sale of securities. It has but two important substantive provisions, §§ 5 and 17(a). Non-compliance with § 5 results in civil liability under § 12(1). Faulty compliance results in liability under § 11. And § 17(a) has its counterpart in § 12(2). It all makes a rather neat pattern. Within the area of §§ 5 and 17(a), §§ 11 and 12 . . . are all embracing." III Loss, supra, at 1785.
Recognizing the logic that persons who are criminally responsible for violations of §§ 5 and 17(a) should similarly be subject to civil liability under §§ 11 and 12, it becomes instructive to examine cases in the criminal context.
For example, in SEC v. National Bankers Life Insurance Co., 324 F. Supp. 189 (N.D. Tex. 1971), the Court stated that aiding and abetting or conspiracy are viable counts under §§ 5 and 17(a) of the 1933 Act and Rule 10b-5. After establishing to its satisfaction that individual independent violations were present, the Court concluded that aiding and abetting liability was similarly present as "[certain] acts by persons other than issuers or underwriters are so intertwined with the acts by those persons that they are liable on the basis of aiding and abetting in the violation of Section 5 of the Securities Act of 1933." Id. at 194. The Court went on to state:
"Under this theory a defendant could be held liable, if he was involved in the acquisition of the shares to be sold. Nees v. Securities & Exchange Commission, 414 F.2d 211, 220 (9th Cir. 1969). Further a defendant could be held liable merely for taking 'steps necessary to the distribution.' Securities & Exchange Commission v. North American R & D Corp., [424 F.2d 63, 81, 2d Cir. 1970]. No intent is required to violate Section 5 as an aider and abettor and the only knowledge requirement is that a defendant 'had reason to know or should have known that the securities should have been registered.' Nees v. Securities & Exchange Commission, supra, 414 F.2d at 220-221." Id.
The Court implied a similar conclusion in its discussion of aiding and abetting liability under § 17(a). Id. at 195. And in discussing conspiracy under § 5 of the 1933 Act, the Court concluded that the absence of the words "scheme" or "conspiracy" does not bar such allegations:
"The knowledge requirement for liability under such a scheme is more than that required to hold someone as an aider and abettor to a single sale of unregistered stock or a single fraudulent act and probably something comparable to that required to hold a person liable as an aider and abettor to a scheme to defraud -- general awareness of overall improper conduct and that the act performed in some way contributes to that conduct." Id.
See also SEC v. North American R & D Corp., 424 F.2d 63 (2d Cir. 1970); SEC v. Midland Basic, Inc., 283 F. Supp. 609 (D.S.C. 1972); cf. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972); Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544 (E.D.N.Y. 1971).
Defendants cite a number of decisions in support of their motion, but we do not consider any of these opinions to be controlling in the instant case. Dorfman v. First Boston Corporation, 336 F. Supp. 1089 (E.D. Pa. 1972); Lynn v. Caraway, 252 F. Supp. 858 (W.D. La. 1966); Barlas v. Bear, Stearns & Co., 64-66 CCH Fed. Sec. L. Rep. para. 91,674 at 95,476 (N.D. Ill. 1966); First Trust & Savings Bank v. Fidelity-Philadelphia Trust Co., 112 F. Supp. 761 (D. Pa. 1953).
In First Trust & Savings Bank of Zanesville, Ohio v. Fidelity-Philadelphia Trust Co., supra, there was no indication that the defendant actively participated in any aspects of the sale. The Court characterizes Fidelity's activities as "custodial" and noted that the bank "acted in its normal capacity as a bank in effecting collection of drafts . . ." Judge Clary, in his opinion, goes on to state:
"At most, Fidelity acted as a conduit for the transmission of papers and as a stakeholder of warehouse certificates . . . [I] am of the opinion that even under the most liberal construction of that term, Fidelity did not become a seller or participate in the sale of securities by acting as a stakeholder of the collateral and as a forwarding bank for collection of drafts." Id. at 770. (emphasis added)
In Lynn v. Caraway, supra, the Court refused to impose § 12(2) liability upon a banker, Caraway, whom the prospective purchasers of the securities contacted in order to determine the reliability and trustworthiness of the seller. Apparently, the information which they received from Caraway was favorable and the purchasers, therefore, contended that, as Caraway allegedly knew of the seller's financial difficulties, his failure to relate this information to them brought him within the purview of § 12(2).
The Court determined that Caraway had not made any statement or omission prohibited by the statute and that, at the time of the conversation, he could not have had any interest in the sale of securities. To the contrary, in light of the pleadings we cannot now make such findings in connection with the Caesars Palace defendants, nor can we indulge ...