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ZICKLIN v. BREUER

March 24, 1982

Carole ZICKLIN, Plaintiff,
v.
G. W. BREUER, et al., Defendants



The opinion of the court was delivered by: OWEN

OPINION AND ORDER

Defendant Bankers Trust Corporation ("Bankers Trust") moved to dismiss plaintiff's Rule 10b-5 claims pursuant to Rules 9(b) and 12(b)(6), and for summary judgment and statutory costs as to plaintiff's Section 11 claims pursuant to Rule 56(b). For the reasons set forth below, I dismiss plaintiff's Rule 10b-5 claim against Bankers Trust, grant Bankers Trust's motion for summary judgment on plaintiff's Section 11 claim, and deny Bankers Trust's motion for costs.

 Plaintiff, together with the plaintiffs in five other related cases, moved to consolidate their cases pursuant to Rule 42(a) and to allow certain named individuals to intervene in the consolidated action as parties plaintiff pursuant to Rule 24(b)(2). For the reasons set forth below, I grant these motions.

 I. The Bankers Trust Motions

 In broad outline, the facts are as follows. Basic Earth Science Systems, Inc. ("BESS"), the name defendant, is a petroleum engineering company. In December, 1980, BESS sold securities to the public pursuant to a registration statement dated December 18, 1980. The prospectus which accompanied that registration statement valued BESS's proven oil and gas reserves as of September 30, 1980 at $ 132,682,000. It was signed by BESS and by certain underwriters, including John Muir & Co. which acted as the principal and managing underwriter. Bankers Trust did not prepare or sign the December Prospectus. Bankers Trust, acting for its customers, did however purchase a substantial number of shares from John Muir & Co.

 In June 1981, BESS issued a press release announcing that the present value of its oil and gas reserves was less than 50% of the amount it had stated in its December Prospectus. This lawsuit followed. Plaintiff has alleged that a variety of defendants, including Bankers Trust, violated Section 11 and Rule 10b-5 during the course of the transaction detailed above. Specifically, plaintiff alleges that Bankers Trust is liable as a statutory underwriter for the material errors in the prospectus and is liable in fraud for its participation in the entire transaction.

 A. Plaintiff's Section 11 Claims

 Section 11 provides a civil remedy for purchasers of securities against "every underwriter with respect to such security" where "any part of the registration statement ... contained an untrue statement of a material fact or omitted to state a material fact required to be stated." 15 U.S.C. § 77k(a). Section 2(11) defines an underwriter as

 
any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking ....

 15 U.S.C. § 77b.

 Therefore, in order for this action to survive summary judgment, plaintiff must demonstrate that there is at least a factual dispute as to whether Bankers Trust is a statutory underwriter. I conclude that plaintiff has failed to meet even that burden.

 In capsule, plaintiff contends that Bankers Trust fits within the Section 2(11) definition because Bankers Trust purchased a significant number of BESS shares on the offering, acted as an important link in the chain of distribution, and issued reports touting BESS shares to its customers at the time that it was buying and selling securities for its customers' accounts. As a matter of law, however, these contentions taken together do not make out a Section 11 violation.

 From my review of the uncontested facts, Bankers Trust was merely acting in a manner characteristic of the practices of the so-called "trusts and estates" department of any commercial bank. Barred as commercial banks are from owning stock or acting as underwriters, see Glass-Steagell Act, 12 U.S.C. §§ 224, 335, Bankers Trust permissibly serves as the account manager for certain of its customers on the investment advisory accounts they maintain at the bank. As a part of that service, Bankers Trust issues reports describing and recommending certain securities, such as the BESS offering, and buys and sells shares for their accounts. Bankers Trust maintains a relationship with its customers; in no manner did it have a relationship with BESS, John Muir & Co., or the underwriting itself. Plaintiff, therefore, must properly plead some greater nexus between the investment management department of ...


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