Jakubowski personally filled out a Stock Order Form provided by Cragin Corp. On the form Jakubowski specifically indicated that the purchaser of 35,000 shares of Cragin stock was Diane Wrobel, a secretary at Jakubowski's law firm and an account holder at Cragin Bank. This was an untrue statement of fact because the purchaser was not the secretary; the purchaser was GCA or Hart, who was not an account holder at Cragin. After filling out the Stock Order Form, Jakubowski directed the secretary to sign it and then delivered the form to Cragin Corp.
Jakubowski contends that the factual allegations in the complaint do not establish that he made an untrue statement of fact or omitted to state a fact within the meaning of Rule 10b-5. He offers several arguments in support of this contention, none of them persuasive.
First, Jakubowski argues that he is not liable because he "made no representations of fact to anyone, much less misrepresentations of fact." (Def.'s Mem. in Supp. at 21, 18.) As noted above, however, Jakubowski represented that the purchaser of the Cragin stock was a secretary at his firm, when in fact the purchaser was Hart or GCA.
Second, Jakubowski argues that he is not liable because he personally "had no contact with the issuing thrifts." (Def.'s Mem. in Supp. at 18, 21, 27.) As noted above, however, Jakubowski not only filled out the form and directed the secretary to sign it; he also personally delivered the form to Cragin Corp. In this sense, Jakubowski clearly had contact with the issuing thrifts. Even if Jakubowski had not had direct contact with the issuing thrifts, his argument would fail because it rests on the mistaken theory that a party who has no contact with the "other side" cannot be liable for a violation of Section 10(b) and Rule 10b-5. This theory is inconsistent with the express language of Rule 10b-5, which imposes liability on any person who directly or indirectly makes any untrue statement of material fact. This theory is also inconsistent with SEC v. Holschuh, 694 F.2d 130 (7th Cir. 1982), which expressly rejects the theory that "actual or first-hand contact with offerees or buyers [is] a condition precedent to primary liability" for violations of Section 10(b). Id. at 142; see also id. at 140 (reaching same conclusion for violations of related securities laws).
Jakubowski's efforts to distinguish his case from Holschuh (Def.'s Mem. in Supp. at 22-24) are unpersuasive. Like Holschuh, Jakubowski "was a substantial and necessary participant" in the relevant transactions. Holschuh, 694 F.2d at 140. Jakubowski sought out the secretary, persuaded her to allow her conversion rights to be used, filled out the Stock Order Form, directed the secretary to sign it, and delivered the form to Cragin. Like Holschuh, Jakubowski was "responsible" for the relevant misstatement, and, conversely, the relevant misstatement was "traceable" to Jakubowski. Id. at 142.
Third, Jakubowski argues that he is not liable because he did not sign the Stock Order Form. (Def.'s Mem. in Supp. at 21-22, 27.) According to the complaint, however, Jakubowski filled out the form, provided his own name and address in the address box, directed the secretary to sign the form, and delivered the form to Cragin. These actions clearly support a finding that Jakubowski made an untrue statement of fact under Rule 10b-5, which must be read "flexibly, not technically and restrictively." In re Leslie Fay Companies, 871 F. Supp. 686, 696 (S.D.N.Y. 1995) (quoting Superintendent of Ins. v. Bankers Life and Casualty Co., 404 U.S. 6, 12, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971)). Jakubowski cites no authority for the proposition that Rule 10b-5 extends to the person who signs a document containing an untrue statement of material fact but not to the person who prepares the document, counsels another to sign the document, and delivers the document. The Seventh Circuit apparently reached the opposite conclusion when it noted that a defendant cannot escape liability for securities fraud "by participating in all except the final steps" of a transaction. Holschuh, 694 F.2d at 140.
Fourth, Jakubowski argues that he is not liable because he owed "no duty of disclosure" to the issuing thrifts. (Def.'s Mem. in Supp. at 18, 21, 28.) Rule 10b-5 makes it unlawful for any person to make a misrepresentation of material fact or alternatively to make an omission of material fact where there is a duty to speak. Rule 10b-5; SEC v. First Jersey Sec., Inc., 890 F. Supp. 1185, 1209 (S.D.N.Y. 1995). The duty to speak arises only where the plaintiff alleges an omission of material fact, not where the plaintiff alleges an affirmative misstatement of material fact. Id.; see Schatz v. Rosenberg, 943 F.2d 485, 490 (4th Cir. 1991) (citing Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 496 (7th Cir. 1986) (noting that duty to speak required where claim alleges failure to speak, not where claim alleges affirmative misstatement), cert. denied, 503 U.S. 936 (1992). As explained above, the complaint alleges that Jakubowski made an affirmative misstatement of fact. This makes it unnecessary for the court to consider the alternative possibility that Jakubowski also made an omission of material fact where he had a duty to speak.
For present purposes, therefore, it is irrelevant whether Jakubowski had a duty to speak.
Fifth, Jakubowski argues that he is not liable because a professional is not responsible for the misrepresentations of another, even when he is aware of those misrepresentations. (Def.'s Mem. in Supp. at 25-28; Def.'s Reply at 6-7.) This argument is fundamentally flawed because this case involves a misrepresentation by Jakubowski, not a misrepresentation by "another." In light of this fact, the cases cited by Jakubowski
are irrelevant because they do not involve professional persons who make affirmative misrepresentations. Rather, they involve professionals who fail to "blow the whistle" on clients who make affirmative misrepresentations. See Schatz, 943 F.2d at 491 (noting difference between professionals who make "affirmative misrepresentations" and professionals who simply "fail to tattle on their client[s]").
Sixth, Jakubowski argues that he is not liable because he was "little more than a finder," citing SEC v. Great American Industries, Inc., 407 F.2d 453, 460-61 (2d Cir. 1968), cert. denied, 395 U.S. 920, 23 L. Ed. 2d 237, 89 S. Ct. 1770 (1969). (Def.'s Mem. in Supp. at 22.) In Great American, Judge Friendly observed that imposing a duty to disclose on a finder in a real estate transaction "would require most careful consideration." Great American, 407 F.2d at 460-61. This observation has little relevance to the instant case. In the first place, Judge Friendly expressly declined to answer the question he raised. See id. at 461 (finding "no need" to address the question). In the second place, even if a finder in a real estate transaction had no duty to disclose, that would preclude liability for omissions of fact but not for affirmative misstatements of fact. In the third place, Jakubowski was not a finder in a real estate transaction. He clearly did more than "find" the secretary: He filled out the Stock Order Form (making an untrue statement of fact), directed the secretary to sign the form, and delivered the form to Cragin.
Seventh, Jakubowski argues that he is not liable because he did not "control" the secretary who signed the form. (Def.'s Mem. in Supp. at 24-25.) This argument is both unpersuasive and irrelevant. The argument is unpersuasive because Jakubowski did in fact "control" the secretary to the extent necessary to make him responsible for her signature on the form. Jakubowski sought out the secretary, persuaded her to let her conversion rights be used, filled out the form, directed the secretary to sign the form, and delivered the form to Cragin. To the extent that the secretary's signature amounts to a misstatement of fact within the meaning of Rule 10b-5, Jakubowski was responsible for that misstatement. In this sense, the factual allegations in the complaint would allege that Jakubowski made an untrue statement of fact not only directly (when he filled out and delivered the form) but also indirectly (when he directed the secretary to sign it). In any event, the argument is irrelevant because Jakubowski himself made an untrue statement of fact when he filled out and delivered the Stock Order Form. Whether the secretary also made a misstatement when she signed the form under the acknowledgment, and whether Jakubowski "controlled" her when she made the misstatement, is irrelevant.
Jakubowski cites Barker for the proposition that a professional cannot "control" a third party (Def.'s Mem. in Supp. at 24-25), but Barker has no direct bearing on this case. The short passage of Barker cited by Jakubowski, 797 F.2d at 494, does not address liability under Section 10(b) of the Securities Act of 1934. Instead, it addresses liability under Section 15 of the Securities Act of 1933, which specifically imposes liability on anyone who "controls any person liable under sections 11 or 12" of that act. Id. Neither Barker nor any other case cited by Jakubowski "imports" this specific analysis from Section 15 of the Securities Act of 1933 to Section 10(b) of the Securities Act of 1934. The subsequent passages of Barker that do address Section 10(b) merely hold that failure to blow the whistle does not create liability unless the defendant has a duty to blow the whistle. See id. at 495-96. As noted above, this holding is relevant to cases that allege omissions of material fact but not to cases that -- like the case at bar -- allege an affirmative misstatement of material fact.
The Commission must prove that Jakubowski's misstatement was "material." It is well-established that "an omission or misstatement is material if a substantial likelihood exists that a reasonable investor would find the omitted or misstated fact significant in deciding whether to buy or sell a security, and on what terms to buy or sell." Branch-Hess Vending Services Employees' Pension Trust v. Guebert, 751 F. Supp. 1333, 1340 (C.D. Ill. 1990) (citing Basic Inc. v. Levinson, 485 U.S. 224, 231, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988)). "Materiality has an element of causation built in, because a statement is material only if it so alters the 'total mix' of information available to the investor that it has the potential to affect the [investment] decision." LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928, 931 (7th Cir.) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976)), cert. denied, 488 U.S. 926 (1988). The purpose of the materiality element is "to filter out essentially useless information that a reasonable investor would not consider significant, even as part of a larger 'mix' of factors to consider in making his investment decision." Basic, 485 U.S. at 234 (citing TSC, 426 U.S. at 448-49).
In this context the term "investment decision" necessarily encompasses decisions to sell as well as decisions to purchase securities. A narrower definition of "investment decision" -- limited to the purchase of securities -- might better comport with traditional notions of "investment." E.g., Black's Law Dictionary 741 (5th ed. 1979) (defining "investment" as "an expenditure to acquire property or other assets in order to produce revenue"); id. at 518 (defining "expenditure" as "spending or payment of money"). However, such a narrow definition would contradict both the language of Section 10(b), which proscribes fraud "in the purchase or sale of any security" (emphasis added), and the underlying purpose of the section, which aimed to "cover frauds practiced on the seller as well as on the buyer," Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 941-42 (2d Cir.) (Friendly, J.), cert. denied, 469 U.S. 884, 83 L. Ed. 2d 190, 105 S. Ct. 253 (1984). Such a narrow definition would also overturn numerous cases applying Section 10(b) to frauds on sellers. E.g., Superintendent of Ins. v. Bankers Life and Casualty Co., 404 U.S. 6, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971); Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972). Since the definition of "investment decision" includes the decision to sell, there can be no doubt that "[a] statement or an omission is material if it reasonably could have been expected to influence the decision to sell." Nelson v. Serwold, 576 F.2d 1332, 1335 (9th Cir.) (citing Affiliated Ute Citizens, 406 U.S. at 153), cert. denied, 439 U.S. 970, 58 L. Ed. 2d 431, 99 S. Ct. 464 (1978).
In this case, Jakubowski stated (falsely) on the Stock Order Form that the purchaser of the Cragin stock was the secretary (rather than Hart or GCA). This misstatement was material because it affected Cragin's investment decision. Specifically, it caused Cragin to sell 35,000 shares of stock to Hart or GCA rather than selling those shares to qualified holders of conversion rights. If Jakubowski had stated the truth on the Stock Order Form, then Cragin would not have sold the stocks to Hart or GCA because a regulation promulgated by the Office of Thrift Supervision ("OTS") prohibited the transfer of the secretary's conversion rights to Hart or GCA.
Jakubowski argues that the OTS regulation did not actually prohibit his conduct.
OTS Regulation 12 CFR § 563b.3(i)(1), entitled "Prohibited transfers," states that "no person shall transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of conversion subscription rights, or the underlying securities to the account of another." Conceding that the regulation seems "broad in scope," Jakubowski nonetheless claims that "a review of the history and purpose behind this regulation reveals that it was never intended to prohibit simple depositors (and their sources of capital) from participating in the short-term price increase that typically follows thrift conversions." (Def.'s Mem. in Supp. at 29.) This argument has little merit. The history and purpose of the regulation cannot alter its plain meaning. See, e.g., In re Sinclair, 870 F.2d 1340, 1341 (7th Cir. 1989) (holding that where legislative history contradicts words of statute, "the statute must prevail"). Given the plain meaning of the OTS regulation, the complaint clearly alleges that Jakubowski's conduct violated the regulation. It is fair to assume that if Cragin had been aware of the violation it would have refused to sell the stocks to Hart or GCA. Therefore, Jakubowski's misrepresentation affected Cragin Corp.'s decision to sell Cragin stocks to CGA and Hart, making the misrepresentation "material" for purposes of Rule 10b-5.
Jakubowski argues that his statement on the Stock Order Form was not "material" because Cragin's decision to sell stocks to Hart and GCA was not an "investment decision." (Def.'s Mem. in Supp. at 19-21.) Specifically, Jakubowski argues that his statement on the Stock Order Form had no effect on Cragin's decisions about whether to sell stock, how much stock to sell, and what price to charge for the stock; Jakubowski's statement affected only the identity of the purchaser of 35,000 of those shares.
Whether a statement that affects only the identity of the purchaser of stock is "material" under Rule 12b-5 appears to be a question of first impression. The court concludes that such a statement is indeed material. In Basic Inc. v. Levinson, 485 U.S. 224, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988), the Supreme Court explained that the role of the materiality requirement is "to filter out essentially useless information that a reasonable investor would not consider significant, even as part of a larger 'mix' of factors to consider in making his investment decision." Id. at 234. This leads the court to ask whether the identity of the buyer of Cragin stock was "essentially useless information that [Cragin Corp.] would not consider significant," or, conversely, whether it was useful information that Cragin would consider significant. The court finds that Cragin Corp. would consider the identity of the buyer "significant" for at least two reasons. First, Cragin Corp. had an interest in abiding by OTS regulations and seeing to it that others abided by those regulations. Second, Cragin Corp. had in interest in ensuring that as many eligible accountholders as possible had the opportunity to purchase Cragin stocks. According to the Complaint,
Cragin Stock was oversubscribed by persons holding Conversion Subscription Rights. As a result, certain Cragin accountholders who attempted to exercise Conversion Subscription Rights were unable to purchase Cragin Stock at all or were only allowed to purchase a portion of what they had originally requested. GCA and Hart, however, were able to purchase the entire amount they requested at $ 10.00 per share. In addition, no Cragin Stock was made available to the general public in the initial offering and when it was subsequently available for public trading it opened at a price of $ 13.50 per share, substantially above the price paid by GCA and Hart.
(Complaint P 17.) Because the Conversion Stock offerings were oversubscribed, the misstatement by Jakubowski and the subsequent purchase of Cragin Stock by Hart and GCA deprived eligible accountholders of the opportunity to buy $ 350,000 worth of Conversion Stock. The court finds that Cragin Corp. (like any reasonable savings association) would consider this harm to its accountholders "significant." That makes Jakubowski's misstatement "material."
In reaching the opposite conclusion, Jakubowski cites LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928, 931 (7th Cir.), cert. denied, 488 U.S. 926, 102 L. Ed. 2d 329, 109 S. Ct. 311 (1988). In that case the buyer of department store company sued the seller and the seller's accounting firm, alleging that they overvalued the company's inventory. Although the seller valued the inventory before and on the closing date, the seller's accounting firm did not value the inventory until weeks after the closing date. 842 F.2d at 929-30. The Seventh Circuit held, per Judge Easterbrook, that the accounting firm's valuation was not "material" because it occurred after the closing date and therefore could not have affected the buyer's "investment decision." Id. at 931-32. In explaining this holding, Judge Easterbrook observed that:
Materiality has an element of causation built in, because a statement is material only if it so alters the "total" mix of information available to the investor that it has the potential to affect the decision. But materiality usually refers to the importance of the information, a datum that would have only a small effect on the price is not material, while a datum with the potential for a larger effect is. The valuation of the inventory [in this case] would be material in this usual sense, except for the fact that [the accounting firm] did not communicate with [the buyer] until after the closing. By then it was too late. The information, even if conventionally "material," did not affect the investment decision.