The opinion of the court was delivered by: Bua, District Judge.
Before the court are defendants' motions to dismiss. The
plaintiffs, two national banking associations and one Illinois
banking corporation, have charged each of the three defendant
accounting firms, Arthur Andersen & Co., Coopers & Lybrand, and
Alexander Grant & Co., with violating sections 10(b) and 18 of
the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and
78r, and sections 12(2) and 17(a) of the Securities Act of
1933, 15 U.S.C. § 77l(2) and 77q(a).*fn1 Subject
matter jurisdiction over Counts I-IV of the complaints is based
on section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa,
22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a).
The court limited the initial briefing on the motions to
dismiss to the question of subject matter jurisdiction. Each of
the three defendants contends that no "security" as defined by
the federal securities laws*fn2 was involved in the
transaction giving rise to plaintiffs' claims.*fn3
Each of the claims based on federal law arises from alleged
misrepresentations made by the defendants in connection with
the issuance of three promissory notes by American Reserve
Corporation (ARC) to plaintiffs in the aggregate amount of
According to the complaint ARC "is a holding company that,
through various subsidiaries, was engaged in . . . the business
of writing property, liability, and life insurance." Complaint
"Beginning in late 1976, ARC sought to secure financing
through an offer to sell to a limited number of institutional
investors certain Promissory Notes in the aggregate principal
amount of $7,500,000. . . . The net proceeds from this proposed
sale were purportedly to be used to retire certain borrowings
with a certain bank and [an ARC subsidiary] and to supplement
ARC's working capital. Plaintiff was among those to whom the
offering was made." Complaint ¶ 17.
Each of three banks approached by ARC were given ARC's annual
report and Form 10-K's for the fiscal years ending December 31,
1974, 1975, and 1976. Defendants Andersen and Coopers acted as
ARC's independent auditors for these years and allegedly were
responsible for certain misrepresentations and omissions
violative of the securities laws. Defendant Grant was ARC's
auditor for fiscal 1977.
On September 8, 1977, in a face-to-face meeting with
plaintiffs' representatives at ARC's offices in Chicago,
representatives of the three defendants allegedly made further
misrepresentations and omitted to state certain important facts
concerning ARC's financial condition, reinsurance arrangements,
and reserves. Allegedly in reliance on these statements, the
plaintiffs purchased ARC's promissory notes on September 15,
1977. Complaint ¶¶ 22-23.
The promissory notes were not appended to the complaints.
However, the plaintiffs did attach a copy of the notes and note
agreements dated September 15, 1977 to their memoranda in
opposition to the motions to dismiss.
The relevant allegations contained in the complaint are as
1. The Promissory Note purchased by Plaintiff for
investment, as described more fully below,
constitutes a security for purposes of federal
securities laws. [Complaint ¶ 3].
2. This action arises from the offer and sale by
ARC of certain Promissory Notes in the
aggregate principal amount of $7,500,000.00 to
a limited number of institutional investors
including Plaintiff. [Complaint ¶ 9].
5. To allay Plaintiff's fears, and to induce and
secure Plaintiff's participation in the
Offering, representatives of ARC [and the
defendants] personally met with
representatives of Plaintiff and other
institutional investors . . . [ARC financial
statements audited by defendants were]
supplied to Plaintiff, reviewed by it and
specifically relied upon in its investment
decision. [Complaint ¶ 20].
6. [T]he Defendants . . . misrepresented various
facts material to plaintiff's investment
decision . . . to induce Plaintiff's
investment purchase of ARC's Promissory Notes.
[Complaint ¶ 22].
The plaintiffs' characterization of the transaction in terms
of an "offering," an "investment," and an "investment decision"
by "institutional investors" adds very little to this court's
ability to determine whether the promissory notes are properly
considered a "security." These allegations are conclusory and
do not provide the facts necessary to establish federal
jurisdiction. As was the case in Canadian Imperial Bank of
Commerce Trust Company v. Fingland, 615 F.2d 465 (7th Cir.
1980), the court is left with the bare words "promissory note"
and conclusory allegations regarding the investment purpose of
the plaintiff bank.
The defendants, and Arthur Andersen in particular, contend
that these allegations cannot suffice to turn what is no more
than a commercial bank loan into a securities transaction in
order to establish federal jurisdiction. This court agrees.
In United Housing Foundation, Inc. v. Forman,
421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), plaintiff
alleged that certain shares representing a purchaser's
interest in a nonprofit cooperative were within the meaning of
the term "security" under the Securities Act and the Exchange
Act. Similar to the banks' reliance upon the allegation that a
"note" was purchased for investment, the plaintiff in
Forman alleged that the shares were "stock," included
in the definition of "security" in both Acts.
The Supreme Court, drawing on the reasoning of SEC v.
W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244
(1946), reversed the Court of Appeals and affirmed the district
court's dismissal for lack of subject ...