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LA SALLE NAT. BANK v. ARTHUR ANDERSEN & CO.

February 5, 1982

LA SALLE NATIONAL BANK, PLAINTIFF,
v.
ARTHUR ANDERSEN & CO., ET AL., DEFENDANTS. BANK OF CALIFORNIA, PLAINTIFF, V. ARTHUR ANDERSEN & CO., ET AL., DEFENDANTS. THE FIRST PACIFIC BANK OF CHICAGO, PLAINTIFF, V. ARTHUR ANDERSEN & CO., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Bua, District Judge.

ORDER

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, and section 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 $7,500,000.00.

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 ¶ 9.

"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 follows:

  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].
  3.  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 $7,500,000.00 (hereinafter
      the "Offering"). The net proceeds from this
      proposed sale were purportedly to be used to
      retire certain borrowings with a certain bank
      and GRC [an ARC subsidiary] and to supplement
      ARC's working capital. Plaintiff was among
      those to whom the Offering was made.
      [Complaint ¶ 17].

  4.  Plaintiff reviewed [ARC's financial statements
      and 10K Forms] in detail and materially relied
      upon them in making its decision in the summer
      of 1977 to invest in ARC through the Offering.
      [Complaint ¶ 18].
  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 ...


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