The opinion of the court was delivered by: GOETTEL
These two securities fraud actions are presently before the Court on the defendants' motions to dismiss the complaints pursuant to Rule 9(b) and Rule 12(b)(6) of the Federal Rules of Civil Procedure. Both actions involve the same public offering of 1,000,000 shares of common stock issued on July 8, 1983, by Computer Devices, Inc. ("CDI"). The thrust of both actions is that the registration statement, particularly the prospectus accompanying the offering, was false and misleading.
In one action,
plaintiff Davella seeks damages against the officers and directors of CDI (the "individual defendants") and the lead underwriter, A.G. Becker Paribus, Inc. ("Becker"), under sections 11, 12(2), and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77k, 77l (2), and 77o (1982), on behalf of a class consisting of all persons who purchased common stock of CDI pursuant to the July 8, 1983, public offering. In the other action, plaintiffs Klein and Hoffman make the same claims against the same defendants, as well as a claim against Becker and individual defendant Seaforth M. Lyle
for alleged violations of section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) (1982), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1983), promulgated thereunder.
These latter two plaintiffs seek recovery on behalf of a class consisting of all persons who purchased shares of CDI common stock between July 8, 1983, and August 17, 1983,
whether such persons purchased their shares from the underwriters who participated in the public offering, or in the open market.
to dismiss plaintiff Hoffman's section 11 claim,
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Becker argues that Hoffman has not alleged that he purchased the CDI stock pursuant to the July 8 public offering and that in the absence of such an averment, Hoffman has failed to state a claim under section 11. The Court agrees with the defendants for the following reasons.
Section 11(a) provides that:
In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security. . . may, either at law or in equity, in any court of competent jurisdiction, sue [five categories of people named herein].
15 U.S.C. § 77k (1982) (emphasis added).
The phrase "any person acquiring such security," has been interpreted as limiting recovery to purchasers of shares issued and sold pursuant to the registration statement claimed to be defective. Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967); Lorber v. Beebe, 407 F. Supp. 279, 285-86 (S.D.N.Y. 1975); Colonial Realty Corp. v. Brunswick Corp., 257 F. Supp. 875 (S.D.N.Y. 1966). Thus, persons who buy shares that are the direct subject of the defective registration statement, whether bought in the process of distribution or in the open market,
can bring a suit under section 11. Barnes v. Osofsky, supra, 373 F.2d 269; Lorber v. Beebe, supra, 407 F. Supp. at 386-87; Colonial Realty Corp. v. Brunswick Corp., supra, 257 F. Supp. 875; L. Loss, Fundamentals of Securities Regulation 1030 (1983). "It follows that a plaintiff in order to have a valid § 11 cause of action, must plead and prove that his stock was issued pursuant to the particular registration statement alleged to be defective. . . . [I]f he fails to do this, his § 11 claim must be dismissed." Lorber v. Beebe, supra, 407 F. Supp. at 286 (citation omitted).
A review of the Klein complaint
shows that Hoffman has not pleaded that the stock he purchased was issued pursuant to the allegedly defective prospectus. Hoffman states that on or about August 1, 1983, he purchased 3000 shares of CDI stock from Becker.
In the plaintiffs' papers, it is stated that Hoffman is unable at this point to state whether his CDI shares were among those issued on the July 8, 1983, offering. The reason given for this is that discovery, which would provide the answer, has been stayed pending decision on these motions. However, without an allegation that the shares were purchased pursuant to the allegedly defective prosectus, i.e., that the shares were the direct subject of the prospectus, Hoffman cannot maintain an action under section 11. See Barnes v. Osofsky, supra, 373 F.2d at 273; Lorber v. Beebe, supra, 407 F. Supp. at 286. Thus, his section 11 claim must be dismissed.
The individual defendants and Becker separately move to dismiss the section 12(2) claims in both complaints, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, for failure to state a claim upon which relief can be granted. The individual defendants argue that section 12(2) was enacted to create a cause of action in favor of a purchaser against his immediate seller and that, consequently, the complaints fail to state a cause of action against these defendants because there is no allegation that they sold securities to any plaintiff, or participated in any relevant buy-sell transaction. Likewise, Becker argues that section 12(2) requires privity between the buyer and seller and that the claims of plaintiffs Klein and Davella
must be dismissed, therefore, because they have not alleged that they purchased their shares of CDI stock from Becker. For the following reasons, the Court disagrees with the defendants.
Section 12(2) of the Securities Act provides that:
Any person who . . . 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 light of the circumstances under which they were made, not misleading . . . 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.
This section, as compared with common law rescission, provides several advantages to the buyer. L. Loss, supra, at 1023. For example, "[s]ection 12(2) permits the buyer to pierce the privity requirement that normally prevails in common law rescission to the extent of reaching . . . controlling persons . . ., "sellers' who are agents rather than principals, and others who participate in the sale more or less in the criminal aider and abettor sense." Id. at 1025 (footnote omitted). Thus, although section 12 seems to contemplate an action by a buyer against his immediate seller only, many circuits have allowed the buyer to sue others. See, e.g., Securities and Exchange Commission v. Seaboard Corp., 677 F.2d 1289, 1294 (9th Cir. 1982);
Stokes v. Lokken, 644 F.2d 779, 785 (8th Cir. 1981);
Junker v. Crory, 650 F.2d 1349, 1360 (5th Cir. 1981);
Lawler v. Gilliam, 569 F.2d 1283, 1287-88 (4th Cir. 1978);
Lanza v. Drexel & Co., 479 F.2d 1277, 1298-99 (2d Cir. 1973) (en banc).
See generally L. Loss, supra, at 1179-89. ...