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Harden v. Raffensperger

September 15, 1995




Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 88-C-1057 -- Larry J. McKinney, Judge.

Before BAUER, REAVLEY *fn** and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

ARGUED DECEMBER 5, 1994 *fn*


This interlocutory appeal presents three certified questions from the district court. We must consider whether a person who acts as a "qualified independent underwriter" pursuant to the rules of the National Association of Securities Dealers ("NASD") is subject to underwriters' liability under section 11 of the Securities Act of 1933. The district court concluded that qualified independent underwriters are subject to section 11 liability and that appellant Raffensperger, Hughes & Co. ("Raffensperger") had not established a defense to such liability as a matter of law. We must also determine whether the "bespeaks caution" doctrine renders the alleged untrue statements and admissions from the registration statement immaterial as a matter of law. The district court was of the view that the statements could not be so characterized. It therefore denied Raffensperger's motion for summary judgment. For the reasons that follow, we affirm.


A. Facts

Firstmark Corporation, a financial services company and member of the NASD, chose to issue $20 million in short term notes through a subsidiary. NASD rules prohibited Firstmark from using an affiliated company as its underwriter without first retaining an independent company known as a "qualified independent underwriter" to perform due diligence on the registration statement and to recommend a minimum yield. See NASD Compliance Manual, (CCH) para. 1882, Sch. E, sec. 3(c)(1) (1994). *fn1 Firstmark retained Raffensperger as its qualified independent underwriter. Raffensperger agreed to recommend the minimum yield rate on the Firstmark notes and to assist in preparing the registration statement. In return, Raffensperger received approximately $80,000.

Firstmark's registration statement contained a statement that "[i]f [Firstmark's] plans to restore profitability to its day-to-day operations are not successful . . . the Company's stockholder's equity will continue to erode." R.56, Ex.1 at 8 [hereinafter, "plans to restore statement"]. In another statement, Firstmark said:

The Company is seeking federal insurance . . . through either the Federal Savings and Loan Insurance Corporation (FSLIC) or the Federal Deposit Insurance Corporation (FDIC). . . . The application with FHLB [Federal Home Loan Bank] has been placed in an inactive status pending the outcome of the application with FDIC. FDIC expects to conclude their field examination by September 30, 1986, and to render a decision on the application within 90 days thereafter. If the application with the FDIC is denied, the Company intends to reactivate the application with the FHLB. . . .

There is no assurance that either the FHLB application or the FDIC application will be approved[.]

Id. at 6 [hereinafter, "insurance statement"]. Raffensperger consulted officers and agents of Firstmark to verify these statements and the other information in the registration statement. At no time did Raffensperger agree to buy, sell, distribute, or solicit orders for the Firstmark notes. After Firstmark issued the notes, its insurance application was denied officially. The company subsequently declared bankruptcy before the notes were paid.

B. Earlier Proceedings

Purchasers of the Firstmark notes filed a class action lawsuit against Raffensperger. They claimed that the registration statement contained material falsehoods and omitted material facts in violation of 15 U.S.C. sec. 77k(a)(5), which authorizes suits against statutory underwriters. *fn2 Raffensperger moved for summary judgment on the ground that it was not an "underwriter" because it neither offered, purchased, sold, nor distributed the Firstmark notes. Alternatively, it contended that it was not liable because it had exercised due diligence and had included sufficient cautionary language in the registration statement.

The district court denied Raffensperger's motion. The court determined first that qualified independent underwriters could be subject to underwriters' liability and second that genuine issues of material fact existed with respect to Raffensperger's defenses. The district court began its analysis by examining section 2(11) of the Securities Act, which, in pertinent part, defines an underwriter as "any person" who "participates or has direct or indirect participation in" the "distribution of any security." 15 U.S.C. sec. 77b(11). The district court noted that, although Raffensperger neither purchased, offered, nor sold the Firstmark notes, its services were essential to their distribution. The court then noted that, under section 5 of the Securities Act, 15 U.S.C. sec. 77e, defendants may be liable under the doctrine of "participant liability" if they were a "necessary participant" and "substantial factor" in the offer or sale of unregistered securities. R.668 at 6-8. The court applied case law analyzing section 5 because, it reasoned, both section 5 and section 11 "hinge on the definition and scope of the term 'participation' and the phrase 'direct or indirect.' " R.668 at 7. In the district court's view, both section 2(11) and the decisions interpreting section 5 make clear that "participation" should be construed broadly to encompass actions beyond financial participation. The court then reasoned that, because Raffensperger's actions were "necessary to and a substantial factor in" the distribution of the Firstmark notes, Raffensperger "participated," at least indirectly, in their distribution. R.668 at 11-12. Therefore, the court concluded, Raffensperger could be subject to section 11 liability. Next, the court determined that Raffensperger was not excused from liability under 15 U.S.C. sec. 77k(e), which limits an underwriter's exposure to the total price "at which securities underwritten by him and distributed to the public were offered to the public." The court reasoned that Raffensperger had "underwritten" all the Firstmark notes in the sense of the statutory definition. Finally, the district court rejected Raffensperger's other defenses. The court determined that genuine issues of material fact existed with respect to Raffensperger's due diligence claim. The court also rejected Raffensperger's claim that it was entitled to summary judgment under the "bespeaks caution" doctrine. Under this rule, misstatements or omissions in a registration statement that involve "soft information," such as subjective predictions, may become immaterial in light of accompanying words of caution or warning. Assuming that the doctrine applied, the district court held that Raffensperger had not shown that the statements and omissions at issue contained "soft information" rather than hard facts.

Following the district court's decision, Raffensperger moved to certify the case for interlocutory appeal. On May 13, 1994, the district court entered an order amending its previous order denying Raffensperger's motion for summary judgment. The May order stated that the court's summary judgment decision involved "controlling questions of law as to which there is substantial ground for difference of opinion" and that "[a]n immediate appeal from this Order may materially advance the ultimate termination of this litigation." R.689 at 1. The court then certified three questions for our review. *fn3



We have jurisdiction over the three issues certified by the district court pursuant to 28 U.S.C. sec. 1292(b). We review the district court's decision to deny Raffensperger summary judgment de novo. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). All facts are viewed in the light most favorable to the nonmoving party -- here the plaintiff class. Ryan v. Wersi Elec. GmbH & Co., 3 F.3d 174, 179 (7th Cir. 1993); Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873, 876 (7th Cir. 1992), cert. denied, 113 S. Ct. 2994 (1993). As the moving party, Raffensperger must establish that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Harrison, 974 F.2d at 876. Raffensperger's arguments fall into two categories: (1) it is not subject to section 11 liability because it was not an underwriter; (2) it was insulated from liability by either 15 U.S.C. sec. 77k(e)'s limitation on underwriters' liability or the "bespeaks caution" doctrine. We consider each of these main contentions in turn.

A. The Scope of Section 11

We turn first to whether Raffensperger was subject to section 11 liability when it acted as a "qualified independent underwriter" in the distribution of the Firstmark notes. Raffensperger submits that it cannot be subject to section 11 liability because its actions fell outside the scope of section 2(11)'s definition of "underwriter." Raffensperger notes that section 2(11) provides that an underwriter includes any person who "participates" or has "direct or indirect participation in" the purchase, offer, or sale of securities in connection with their distribution. Raffensperger then notes that it is undisputed that it had not purchased, sold, or offered the Firstmark notes for sale. Consequently, it concludes, it was not an underwriter. The plaintiffs respond that section 2(11)'s definition of underwriter must include more than purchasers, sellers, and distributors of securities -- otherwise much of the definition would be superfluous. Cf. infra p.14 (reproducing statutory definition). They also note that ...

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