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CRAIG v. FIRST AMERICAN CAPITAL RESOURCES

June 26, 1990

PAUL L. CRAIG, Ph.D., Plaintiff,
v.
FIRST AMERICAN CAPITAL RESOURCES, INC., MARK ANTHONY, and CARL GERARD BITLER, Defendants



The opinion of the court was delivered by: BUA

 NICHOLAS J. BUA, UNITED STATES DISTRICT JUDGE

 Plaintiff Dr. Paul L. Craig filed this action alleging that a securities brokerage firm, defendant First American Capital Resources, Inc. ("First American"), and two of its employees, defendants Mark Anthony and Carl Bitler, committed fraud and engaged in other misconduct in handling various securities transactions on his behalf. Bitler now moves to dismiss all of the claims asserted against him. For the reasons stated herein, Bitler's motion to dismiss is granted as to Counts I-V and VII; the motion is denied as to Count VI.

 FACTS *fn1"

 Craig's involvement with First American began in about September 1987. Around that time, Craig, a resident of Anchorage, Alaska, became aware of a seafood processing company called Seafood From Alaska, Inc. ("SFA"). When Craig contacted SFA to inquire about investing in the company, he was directed to Anthony. Anthony had engineered the initial public offering of SFA stock while working for Chicago-based First American. Upon being contacted by Craig, Anthony persuaded Craig to invest in SFA through First American.

 Over the course of the next year, Anthony, acting as First American's agent, made numerous misrepresentations to Craig, inducing Craig into several other investments in which he suffered substantial monetary losses. Anthony also executed a series of unauthorized trades on Craig's accounts at First American, causing Craig to suffer further monetary losses. On November 3, 1988, after Craig became aware of the unauthorized trading on his accounts, he contacted First American to complain. At that time, Craig was informed that Anthony no longer worked for First American.

 On November 8, 1988, Craig had a telephone conversation with Bitler, who identified himself as the new president of First American. During that conversation, Craig advised Bitler of the unauthorized trading which had taken place on his accounts at First American. Bitler assured Craig that misrepresentations had been made to him by Anthony and that the unauthorized transactions which Anthony had executed would be "reversed." Approximately two weeks later, Craig had another conversation with Bitler, during which Bitler represented that he had reversed Anthony's unauthorized trades as he had promised. Bitler stated that written confirmations evidencing the fact that the trades had been reversed "were in the mail" and that slow delivery of mail to Alaska was the reason Craig had not yet received the confirmations. Craig subsequently learned that the unauthorized trades had not been reversed. He then filed this action.

 The first three counts of Craig's seven-count complaint allege violations of federal securities laws. Count I alleges that defendants violated § 12(2) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77l(2); Count II alleges that defendants committed securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; Count III asserts claims for "control person" liability pursuant to § 15 of the 1933 Act, 15 U.S.C. § 77o, and § 20 of the 1934 Act, 15 U.S.C. § 78t. Count IV asserts a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. Finally, Counts V-VII allege state law claims for breach of fiduciary duty, common law fraud, and negligent misrepresentation. Bitler's motion seeks his dismissal from each count.

 DISCUSSION

 I. Count I: Violation of § 12(2) of the 1933 Act

 Craig alleges three alternative theories for holding Bitler liable under § 12(2) of the 1933 Act. He claims that Bitler is liable for either committing a direct violation of § 12(2), entering into a conspiracy to violate § 12(2), or aiding and abetting in a violation of § 12(2).

 A. Direct Violation

 By its express terms, § 12(2) limits liability to "sellers" and "offerors" of securities. *fn2" The Seventh Circuit recently pointed out that many district courts in this circuit, relying on dicta in Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980), cert. denied, 450 U.S. 1005, 101 S. Ct. 1719, 68 L. Ed. 2d 210 (1981), have held that to be liable as a "seller" or "offeror" under § 12(2), the defendant must be in privity with the plaintiff-purchaser. See Schlifke v. Seafirst Corp., 866 F.2d 935, 939 (7th Cir. 1989) (citing Steinberg v. Illinois Co., 659 F. Supp. 58, 60 (N.D. Ill. 1987) (collecting cases), and Kennedy v. Nicastro, 503 F. Supp. 1116, 1118 (N.D. Ill. 1980)). This court, however, has never embraced a strict privity requirement for § 12(2). In fact, in Ambling v. Blackstone Cattle Co., Inc., 658 F. Supp. 1459 (N.D. Ill. 1987), this court expressed reservations about whether § 12(2) really requires strict privity between the plaintiff-purchaser and the defendant-seller and doubted whether the Seventh Circuit would adopt such an approach when called upon to actually decide the issue. Id. at 1465-66.

 Subsequent to Ambling, in Pinter v. Dahl, 486 U.S. 622, 100 L. Ed. 2d 658, 108 S. Ct. 2063 (1988), the Supreme Court refused to adopt a strict privity requirement for cases alleging violations of § 12(1) of the 1933 Act. The Seventh Circuit then stated, in Schlifke, "The language in Pinter v. Dahl, coupled with prevailing case law in other circuits, seems to undermine the continuing viability of the strict privity concept under section 12(2)." 866 F.2d at 940. The Schlifke court, however, refused to adopt a specific test for determining who can be a "seller" or "offeror" under § 12(2). Instead, the court found that under any of the various tests employed for determining who is a "seller" under § 12(2) -- including the "proximate cause" test and "substantial factor test" *fn3" -- the defendant in Schlifke was not a "seller" of securities. 866 F.2d at 940-41.

 As in Schlifke, this court need not determine the precise parameters of the "offers or sells" language in § 12(2), for under any reasonable definition of "offeror" or "seller," Craig's claim that Bitler is liable for a direct violation of § 12(2) as a seller of securities must fail. The complaint does not allege that Bitler participated in soliciting Craig's purchase of securities or that Bitler even communicated with Craig before he purchased securities. Nor does the complaint allege that Bitler took any action at First American to facilitate Craig's securities transactions. The only action allegedly taken by Bitler in connection with Craig's transactions was his misrepresentations concerning the reversal of certain trades; those misrepresentations were allegedly made by Bitler sometime after Craig's securities transactions had already been completed. Therefore, in no way can Bitler be considered a proximate cause or a "substantial factor" in causing Craig's transactions to take place. See Beck v. Cantor, Fitzgerald & Co., Inc., 621 F. Supp. 1547, 1561-62 (N.D. Ill. 1985) ("There is no question that under any stretch of the term, 'strict privity' does not apply to [defendant] whose conduct did not occur until well after the plaintiff bought his . . . stock. . . . Indeed, . . . even under the 'substantial factor' and 'transaction causation' tests enunciated by other circuits which have not required 'strict privity' under Section 12(2), [defendant] did not have both prior and significant involvement in the events leading to and causing the sales transaction.") As a result, Bitler is not liable as a direct seller of securities under § 12(2).

 B. Aiding and Abetting

 In addition to questioning "the continuing viability of the strict privity concept," the Schlifke court spoke disapprovingly of the doctrine of aiding and abetting liability under § 12(2). Noting that this circuit has never recognized aiding and abetting liability under § 12(2), the court stated: "Notions of aiding and abetting liability would be inconsistent with the intent and language of the statutory provision ...


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