Bass v. Janney Montgomery Scott, Inc.

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

ELECTRONIC CITATION: 2000 FED App. 0135P (6th Cir.)

File Name: 00a0135p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

_________________

;



JACK M. BASS, JR.,



Plaintiff-Appellant/



Cross-Appellee,



Nos. 98-6150/6226



v. >





SCOTT, INC.; GARRY A. FULD, 

JANNEY MONTGOMERY

Defendants-Appellees/ 

Cross-Appellants, 









TECHNIGEN CORPORATION;



JOYTEC, LTD.; LAWRENCE A.

Defendants, 

NESIS,





JOHN GRAY; NORMAN T. 



Defendants-Appellees. 

WILDE, JR.,



1

Appeal from the United States District Court

for the Middle District of Tennessee at Nashville.

No. 91-00097—Robert L. Echols, Chief District Judge.

Argued: September 14, 1999

1

2 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 31

Scott, et al. Scott, et al.

Decided and Filed: April 17, 2000 the plan of distribution in part signals that the notes might not

be securities, but that factor by itself is not dispositive.”);

Before: GUY, RYAN, and MOORE, Circuit Judges. Trust Co. of Louisiana v. NNP Inc., 104 F.3d 1478, 1489 (5th

Cir. 1997) (“A debt instrument may be distributed to but one

_________________ investor, yet still be a security.”). The fact that Bass and

Technigen entered into the transaction for investment reasons

COUNSEL combined with the fact that there are no risk-reducing factors

other than federal and Tennessee securities laws weigh in

ARGUED: Daniel Wallace Small, Nashville, Tennessee, for favor of the notes being securities. Because the defendants

Appellant. Ames Davis, WALLER, LANSDEN, DORTCH have failed to rebut the presumption that the notes are

& DAVIS, Nashville, Tennessee, for Appellees. ON BRIEF: securities, I would hold that the district court erred when it

Daniel Wallace Small, Nashville, Tennessee, Jeffrey Alan concluded that the promissory notes at issue in this case do

Greene, CASTLEMAN & GREENE, Goodlettsville, not qualify as securities for the purpose of federal and

Tennessee, for Appellant. Ames Davis, Kathryn S. Tennessee securities laws.

Crenshaw, James W. White, WALLER, LANSDEN,

DORTCH & DAVIS, Nashville, Tennessee, for Appellees.

RYAN, J., delivered the opinion of the court, in which

GUY, J., joined. MOORE, J. (pp. 26-31), delivered a

separate opinion concurring in the judgment.

_________________

OPINION

_________________

RYAN, Circuit Judge. Foremost among the issues we must

decide in this appeal is whether the inclusion of stock

purchase warrants along with a promissory note given in

consideration of a loan renders the transaction subject to

federal and Tennessee securities laws. We hold that it does,

and because the district court ruled to the contrary, we

reverse, in part, the judgment for the defendants.

The case came to litigation because the plaintiff, Jack M.

Bass, Jr. , made two loans totaling $600,000 to a company

called Technigen Corporation, and Technigen defaulted on

repayment. The loans were intended to serve as “bridge

loans” to help Technigen meet its operations costs in the

period leading up to the issuance of Technigen securities in a

30 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 3

Scott, et al. Scott, et al.

[1933 and 1934] Acts were held not to apply.” Id. The private placement. The defendant, Janney Montgomery Scott,

magistrate judge in the present case, apparently focusing on Inc., was the lead underwriter of the private placement; it was

the Supreme Court’s statement that the notes in Reves were also Janney that solicited the participation of Bass in the loan

uncollateralized, concluded that the fourth factor weighed transaction. When the private placement failed, Technigen

against a finding that the notes were securities because “[i]n was unable to repay the loans, and Bass brought suit against

the present case plaintiff sought to obtain, and did obtain, both Technigen and Janney for federal and Tennessee

certain collateral in order to reduce his exposure to loss.” J.A. securities fraud, for other federal and Tennessee securities law

at 474 (Magistrate Judge’s R & R at 22). violations, and for common law fraud. Bass subsequently

settled with Technigen, but the suit against Janney went to

Several circuit courts, however, have not focused on trial.

whether the loans were secured or collateralized when

considering the fourth factor; instead, they have interpreted At trial, the district court granted Janney’s motion for

the Supreme Court’s analysis of the fourth factor in Reves to summary judgment with regard to the securities law claims,

emphasize whether there is a risk-reducing factor such as on the ground that the bridge loans were not securities. The

another regulatory scheme that reduces the risk of the jury found Janney liable for negligent misrepresentation only,

investment. Stoiber, 161 F.3d at 751 (“The fourth and final and awarded Bass damages of $350,000. Because the jury

inquiry looks to the adequacy of regulatory schemes other found Bass contributorily negligent, the award was reduced to

than the federal Securities Acts in reducing risk to the $192,500 under Tennessee’s comparative fault rule. Both

lender.”); Wright v. Downs, 1992 WL 168104, *3 (6th Cir. sides appeal.

July 17, 1992) (unpublished) (“[T]he fourth factor is whether

some regulatory scheme exists to reduce the risk of the We conclude that because the consideration given in

investment.”); see also Pollack, 27 F.3d at 814-15. In this exchange for the bridge loans included warrants for the

case, the defendants have provided no evidence to show that purchase of Technigen common stock, the federal and state

there is another regulatory scheme available to reduce the risk securities laws were invoked as a matter of law. We therefore

of Bass’s investment other than federal and state securities reverse the dismissal of Bass’s state and federal securities

laws. Furthermore, the lien that Bass received as collateral fraud claims and in all other respects affirm the judgment of

was insufficient to reduce significantly the risk of his the district court.

investment. Thus, the fourth factor weighs in favor of the

notes being securities in this case. I.

The defendants have failed to rebut the presumption of the Bass is a sophisticated investor, having worked since 1955

“family resemblance” test, which initially considers all notes as an investment broker and analyst, and having served on the

to be securities, because the notes in this case do not National Association of Securities Dealers’ disciplinary

resemble any of the non-securities enumerated in Reves and committee.

an examination of the four factors does not indicate that the

notes should be added to the list of non-securities. Although Bass’s first dealings with the Janney defendants were in

the second factor — the method of distribution — weighs 1988 in a matter unrelated to this case, when Bass agreed to

against the notes being considered securities, this factor alone provide a bridge loan to a company called Cardinal

is not dispositive. See Stoiber, 161 F.3d at 752 (“Admittedly Technologies. Janney was the underwriter for the subsequent

financing whose proceeds would, in part, be used to repay the

4 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 29

Scott, et al. Scott, et al.

bridge loan. This transaction was successfully completed to The third factor addresses the reasonable expectations of

the satisfaction of all parties, and as a result, Bass indicated to the investing public. The magistrate judge concluded that

Janney that he would be receptive to any offers to repeat the “[t]his factor is not particularly helpful because there was no

experience. investing public in this case, there was only plaintiff.” J.A. at

473-74 (Magistrate Judge’s R & R at 21-22). The third Reves

In December 1989, Janney approached Bass to learn factor, however, is an objective test that turns on whether a

whether he would be interested in providing a bridge loan in reasonable purchaser would have perceived the notes to be an

a transaction substantially similar to that with Cardinal investment. Reves, 494 U.S. at 68-69. It therefore makes

Technologies. The borrower this time would be a Canadian little difference that there was only one investor in this case

company called Technigen Corporation; this was the first time because the fact that the notes were offered only to Bass does

Bass had heard of Technigen. Technigen had at one time not affect the objective expectations of a reasonable purchaser

been involved in oil and mineral operations, but since its 1986 in his position.

acquisition of Joytec, Ltd., a company involved in the

development and manufacture of indoor computerized golf I believe that a reasonable purchaser in Bass’s position

simulators, had been primarily concerned with the would have considered the notes to be securities. First, the

manufacture and development of Joytec’s golf simulator sellers in this case explicitly designated the notes as

technology. securities. J.A. at 116 (Mem. of Financing Terms). As the

District of Columbia Circuit explained, “When a note seller

Through one of Bass’s brokers, Janney sent Bass a packet calls a note an investment, in the absence of contrary

of information about Technigen/Joytec and their simulator, as indications ‘it would be reasonable for a prospective

well as documents outlining the securities offering for which purchaser to take the [offeror] at its word.’” Stoiber v.

the proposed loan was to be made, and Janney’s internal Securities and Exchange Commission, 161 F.3d 745, 751

projections concerning Technigen’s prospects. Technigen (D.C. Cir. 1998) (quoting Reves, 494 U.S. at 69) (alteration in

was seeking $3-$5 million from the offering to get Joytec’s original), cert. denied, --- U.S. ---, 119 S. Ct. 1464 (1999).

simulator into production, and needed approximately Moreover, Bass has testified that the defendants referred to

$500,000 to fund its operations until the offering was the notes as securities when they contacted him about the

complete. Bass agreed to provide the loan. investment. Thus, the evidence, when considered in the light

most favorable to Bass, demonstrates that a reasonable

The initial loan, closed February 6, 1990, was in the amount purchaser would have considered the notes to be investments

of $500,000, in return for which Bass received a promissory given the circumstances in this case.

note in a like amount, bearing an interest rate of 12%, and

having a one-year term. If the private placement closed The fourth factor assesses whether there is some risk-

successfully before the end of the one-year term, the note reducing factor that suggests that the instruments were not in

would become due upon that closing. Joytec guaranteed the fact securities. Reves, 494 U.S. at 69-70. When analyzing the

loan, and it was additionally secured by a lien on virtually all fourth factor in Reves, the Supreme Court mentioned that the

assets of Technigen and Joytec. Bass also received a purchase notes in that case were “uncollateralized and uninsured.” Id.

warrant for Technigen common stock exercisable for 250,000 at 69. The Court then went on to conclude that the fourth

to 750,000 shares. Finally, Bass received a hypothecation and factor weighed in favor of the notes being securities because

the notes “would escape federal regulation entirely if the

28 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 5

Scott, et al. Scott, et al.

securities. Thus, the only question at issue in this case is pledge of all Joytec shares held by Technigen, and assignment

whether the promissory notes should be added as a new of a debenture held by Technigen.

category of non-securities — a question that turns solely on

the four factors articulated in Reves. Three months later, Bass provided a second bridge loan to

Technigen in the amount of $100,000. The second loan was

Unlike the majority, I believe that the first Reves factor — to come due on the same date as the first, and the promissory

the motivations that would prompt reasonable parties to enter note was amended to include the second loan in its principal

into the transaction — weighs in favor of the notes being amount. The guarantee, hypothecation and pledge of shares,

securities. The Supreme Court explained in Reves that the and debenture assignment were all also extended to the

first factor suggested that the notes were securities because second loan, and the warrant was amended to cover the

“[the issuer] sold the notes in an effort to raise capital for its purchase of 362,500 to 1,087,500 shares of Technigen

general business operations, and purchasers bought them in common stock. In addition, Bass received a hypothecation

order to earn a profit in the form of interest.” Id. at 67-68 and pledge of 200,000 shares of Technigen common stock

(footnote omitted); see also Pollack v. Laidlaw Holdings, owned by its president.

Inc., 27 F.3d 808, 812 (2nd Cir.) (“The inquiry is whether the

motivations are investment (suggesting a security) or In May 1990, Janney commenced the private placement of

commercial or consumer (suggesting a non-security).”), cert. Technigen securities as promised, but in June was forced to

denied, 513 U.S. 963 (1994). Like the parties in Reves, both withdraw the offering due to insufficient subscription. As a

of the parties in this case were motivated by investment result, Technigen was unable to repay the bridge loans.

considerations: Technigen issued the notes to obtain capital

for its general business and manufacturing operations, and Immediately before and during the period of the two bridge

Bass purchased the notes because he hoped to earn a profit in loans, Technigen and its president, Lawrence A. Nesis, had

the form of interest on the notes. Joint Appendix (“J.A.”) at been receiving considerable bad press as well as unwanted

951-52 (Bass Test.). attention from Canadian government regulators. Specifically,

Nesis had been accused of issuing misleading press releases

The second factor requires an examination of the plan of for the purpose of manipulating Technigen’s stock price. In

distribution for the notes. If the notes are offered and sold to these press releases, Nesis claimed that Joytec’s simulator

a broad segment of the public or if the notes are instruments was enjoying huge success in Japan and North America, with

that are commonly traded for speculation or investment, then large orders pouring in from reputable companies, including

this factor suggests that the notes are securities. Reves, 494 Sony. These claims were false. As a result, Technigen and

U.S. at 66. In the present case, this factor weighs against the Nesis were investigated by the British Columbia Securities

notes qualifying as securities. Bass acknowledges that Commission (BCSC). Ultimately, Nesis and the BCSC

“unlike in the Reves case, the particular note [that he entered into a consent decree whereby Nesis agreed that the

received] was not itself widely issued.” Bass’s Reply Br. at press releases were misleading and that he would not act as an

7. Indeed, as the magistrate judge explained, “The only officer or director of any company whose shares were listed

solicitation connected with the note was directed toward on the Vancouver Stock Exchange. Shortly before the

plaintiff and was done in a limited and private manner.” J.A. consent decree was entered, Technigen delisted on the

at 473 (Magistrate Judge’s Report and Recommendation (“R Vancouver Stock Exchange; it continued trading on the

& R”) at 21). NASDAQ, where it had been listed for almost two years.

6 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 27

Scott, et al. Scott, et al.

At the time he agreed to make the first bridge loan to The Supreme Court has adopted the “family resemblance”

Technigen, Bass knew about both the BCSC investigation and test for determining whether certain promissory notes qualify

the delisting from the Vancouver Stock Exchange. However, as securities. Reves, 494 U.S. at 63-66. In Reves, the Court

Technigen characterized the investigation as a was careful to point out that, according to the family

misunderstanding, and the delisting as an effort to avoid resemblance test, every note is initially presumed to qualify as

stigma by leaving an exchange reputed to be riddled with a security. Id. at 65-67. Indeed, this presumption that all

corruption. Apparently, both Bass and Janney accepted notes are securities can only be overcome in one of two ways:

Technigen’s characterization at face value. the notes must bear a strong resemblance, in terms of the four

factors considered in the Reves decision, to one of the

As underwriter of the private placement of securities for judicially 2created categories of notes that do not qualify as

which the Bass loans were bridge financings, Janney was securities, or the notes must have characteristics that, after

required to perform a “due diligence” investigation of considering the four Reves factors, weigh in favor of adding

Technigen. However, Janney’s performance does not appear the notes as a new category to the enumerated list of non-

to have been markedly diligent; although its Lexis-Nexis securities. Id.

search for news articles mentioning Technigen turned up a

number of hits, no one at Janney reviewed the uncovered The four Reves factors that determine the note’s status as a

articles until well after the commitment to underwrite the security are: (1) “the motivations that would prompt a

offering was firm. Indeed, although the titles to the articles reasonable seller and buyer to enter into [the transaction],” (2)

were compiled into a list, it is not clear that even the titles “the ‘plan of distribution’ of the instrument,” (3) “the

were reviewed for content. According to the trial testimony reasonable expectations of the investing public,” and (4)

of one of Janney’s officers, had any of the more provocatively “whether some factor such as the existence of another

entitled articles (“Scam Capital of the World,” “A Strange regulatory scheme significantly reduces the risk of the

Way to Run a Company”) been brought to the attention of a instrument, thereby rendering application of the Securities

responsible decision-maker at Janney, Janney would not have Acts unnecessary.” Id. at 66-67 (quotation omitted). In the

agreed to underwrite the offering. present case, the defendants do not argue that the promissory

notes bear a strong resemblance to any of the notes that the

In March 1990, Janney first received information that Supreme Court has explicitly identified as being non-

Technigen’s president, Nesis, had entered into the November

20, 1989, consent decree with the BCSC. As part of a

memorandum sent in the regular course of business in April 2

Those notes that, according to the Supreme Court, are not securities

or May of 1990, Janney forwarded the information to Bass. include:

In hindsight, this method of disclosure appears lax, but may, [T]he note delivered in consumer financing, the note secured by

as the defendants suggest, have been in keeping with the fact a mortgage on a home, the short-term note secured by a lien on

that, at the time, Janney did not consider the information to be a small business or some of its assets, the note evidencing a

a deal-breaker for itself, and therefore not likely to be for ‘character’ loan to a bank customer, short-term notes secured by

Bass. an assignment of accounts receivable, [] a note which simply

formalizes an open-account debt incurred in the ordinary course

of business (particularly if, as in the case of the customer of a

The Technigen offering failed in June 1990, and, as we broker, it is collateralized)[,and] . . . notes evidencing loans by

have said, Technigen defaulted on the loans. Soon thereafter, commercial banks for current operations.

Reves, 494 U.S. at 65 (quotations omitted).

26 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 7

Scott, et al. Scott, et al.

______________________ news articles were brought to Bass’s attention which revealed

both that Technigen/Joytec had never had any technology or

CONCURRENCE product worth investing in, and that Technigen’s delisting

______________________ from the Vancouver Stock Exchange might have been in

anticipation of the BCSC consent decree. Bass brought these

KAREN NELSON MOORE, Circuit Judge, concurring. I articles to the attention of Janney at that time; at trial he

concur in the judgment of the majority, but I write separately described the Janney officer to whom he showed the articles

with respect to Part II.A.1.a of Judge Ryan’s opinion because as “shocked.” In February 1991, Bass brought suit against

I believe that the promissory notes at issue in this case, like Technigen and Janney.

the stock purchase warrants, should be characterized as

securities for the purpose of federal and Tennessee securities After Technigen reached a $350,000 settlement agreement

laws. with Bass and dropped out of the case, the charges remaining

against Janney were for the violations of :

As the majority has explained, Plaintiff Jack Bass cannot

sustain his securities claims unless he shows, as a threshold 1. Section 10(b) of the Securities Exchange Act of

matter, that the financial instruments at issue in this case 1934 (manipulative and deceptive devices in

qualify as securities within the meaning of the Securities Act connection with the purchase or sale of any

of 1933 and the Securities Exchange Act of 1934. See Reves security), 15 U.S.C. § 78j(b);

v. Ernst & Young, 494 U.S. 56, 60 (1990). The definition of

“security” contained in § 2(a)(1) of the Securities Act of 2. Section 12(a)(1) of the Securities Act of 1933

19331 states that a security includes: (civil liabilities arising from sale of unregistered

securities or sale of securities without a

[A]ny note, stock, treasury stock, bond, debenture, prospectus), 15 U.S.C. § 77l(a)(1);

evidence of indebtedness, . . . or, in general, any interest

or instrument commonly known as a “security,” or any 3. Section 12(a)(2) of the Securities Act of 1933

certificate of interest or participation in, temporary or (civil liabilities arising from misrepresentation

interim certificate for, receipt for, guarantee of, or of a material fact in a prospectus), 15 U.S.C.

warrant or right to subscribe to or purchase, any of the § 77l(a)(2);

foregoing.

4. Section 15 of the Securities Act of 1933 and

15 U.S.C. § 77b(a)(1); see also 15 U.S.C. § 78c(a)(10). Section 20(a) of the Securities Exchange Act of

1934 (controlling person vicarious liability), 15

U.S.C. §§ 77o, 78t(a);

1

The Supreme Court has repeatedly held that “‘[t]he definition of a 5. Sections 21 and 22 of the Tennessee Securities

security in § 3(a)(10) of the 1934 Act, . . . is virtually identical [to the Act of 1980 (fraudulent acts or devices in

definition in the Securities Act of 1933] and, for present purposes, the connection with the sale or purchase of any

coverage of the two Acts may be considered the same.’” Reves, 494 U.S. security), Tenn. Code Ann. §§ 48-2-121, 48-2-

at 61 n.1 (quotation omitted). Furthermore, the Tennessee statutory

definition of the term “security” is virtually identical to the definition in 122; and

the 1934 Act. See TENN. CODE ANN. § 48-2-102(12).

8 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 25

Scott, et al. Scott, et al.

6. the common law against intentional and such tort-feasor “has paid more than the proportionate share

negligent misrepresentation. of the shared liability.” Tenn. Code Ann. § 29-11-102.

All securities law claims were dismissed on summary When the jury awarded Bass $350,000 in damages, it was

judgment but the district court retained jurisdiction on aware that he had requested $600,000 in damages, plus

diversity grounds. The jury returned a verdict of no liability interest and punitive damages. It was also aware that he had

for intentional or reckless misrepresentation, but found already received $350,000 in settlement from Technigen. It

Janney liable for negligent misrepresentation. The jury also does not appear that the jury failed to take into account the

found that Bass had been contributorily negligent, and amount of the Technigen settlement, nor that requiring Janney

apportioned liability 45% to Bass and 55% to Janney. Bass to pay its 55% share of the jury award resulted in a payment

was awarded $350,000 in damages, which was reduced under by Janney of a portion attributable to Technigen.

Tennessee’s comparative fault rule to $192,500 due to Bass’s

contributory negligence. Bass appeals the summary judgment Furthermore, there has been no showing that Technigen and

in Janney’s favor with regard to the securities law claims; the Janney were tort-feasors jointly causing Bass’s damages.

denial of his own motion for summary judgment with regard Indeed, on the face of it, Technigen was liable to Bass in

to certain securities law claims; the district court’s exclusion contract, on the defaulted promissory notes, and not as a joint

of certain documentary evidence and expert witness tort-feasor with Janney. The point is clinched by the fact that

testimony; and the amount of the damage award. The Janney the jury expressly assessed the fault in tort of “others” at zero

defendants cross-appeal the denial of their motion for on the verdict form. In other words, not only was Janney not

judgment as a matter of law, as well as the amount of the required to pay more than its pro rata share of Bass’s

damage award. damages, it had no joint tort-feasor from whom to seek

contribution under the statute. The district court committed

II. no error in refusing to reduce the damage award pursuant to

the Act.

A. Securities Law Claims

III.

The district court dismissed all of Bass’s federal and state

securities law claims on the ground that the promissory notes For the foregoing reasons, we REVERSE the district

Bass received were not securities. Bass appeals the dismissal court’s grant of summary judgment dismissing the plaintiff’s

of the securities law claims on the ground that both the federal and state securities law claims and REMAND those

promissory notes and the warrants for the purchase of claims for reconsideration, but AFFIRM the judgment of the

Technigen common stock he received in exchange for the district court in all other respects.

$600,000 he made to Technigen were securities as a matter of

law.

The district court adopted the Report and Recommendation

of a United States Magistrate Judge applying the “family

resemblance” test announced by the United States Supreme

Court in Reves v. Ernst & Young, 494 U.S. 56 (1990), to

determine that the notes were not securities. Neither the

24 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 9

Scott, et al. Scott, et al.

(1) It does not discharge any of the other tort-feasors Report and Recommendation nor the Order of the district

from liability for the injury or wrongful death unless its court adopting it addressed the matter of the warrants, but

terms so provide; but it reduces the claim against the because our review of the judgment below is de novo and

others to the extent of any amount stipulated by the because we think resolution of this issue is critical to a proper

release or the covenant, or in the amount of the decision in the case, we shall address it.

consideration paid for it, whichever is the greater; and

(2) It discharges the tort-feasor to whom it is given 1. Presence of Securities

from all liability for contribution to any other tort-feasor.

(b) No evidence of a release or covenant not to sue a. Promissory Notes

received by another tort-feasor or payment therefor may

be introduced by a defendant at the trial of an action by In a matter as fundamental to the federal securities laws as

a claimant for injury or wrongful death, but may be the very definition of a security, analysis must begin with the

introduced upon motion after judgment to reduce a plain language of the Securities Acts themselves. The

judgment by the amount stipulated by the release or the Securities Act of 1933 defines securities as

covenant or by the amount of the consideration paid for

it, whichever is greater. any note, stock, treasury stock, bond, debenture, evidence

of indebtedness, certificate of interest or participation in

Tenn. Code Ann. § 29-11-105. This statute was rendered any profit-sharing agreement, . . . put, call, straddle,

obsolete in 1992 by Tennessee’s adoption of a system of option, or privilege on any security, . . . or, in general,

comparative fault. McIntyre v. Balentine, 833 S.W.2d 52 any interest or instrument commonly known as a

(Tenn. 1992). However, the Tennessee Supreme Court “security”, or any certificate of interest or participation

expressly retained the statutory remedy of contribution among in, temporary or interim certificate for, receipt for,

tort-feasors for “cases in which prior to McIntyre the cause of guarantee of, or warrant or right to subscribe to or

action arose, the suit was filed and the parties had made purchase, any of the foregoing.

irrevocable litigation decisions based on pre-McIntyre law.” 15 U.S.C. § 77b(a)(1) (emphasis supplied). The definition

General Elec. Co. v. Process Control Co., 969 S.W.2d 914, in the Securities Exchange Act of 1934, 15 U.S.C.

916 (Tenn. 1998). Bass’s complaint was filed in February § 78c(a)(10), is identical except that it exempts notes with a

1991; the settlement with Technigen took place in March repayment term of less than nine months; despite this subtle

1992; McIntyre was decided in May 1992. The defendants difference, the Supreme Court treats these definitions as

argue that therefore they may set off the damage award functionally indistinguishable in almost all cases, Reves, 494

against them by the $350,000 Bass received from Technigen U.S. at 61 n.1. The definition includes both “any note” and

in his settlement with them, pursuant to the statute. “any . . . warrant or right to subscribe to or purchase” any

The defendants mischaracterize the Act, which was security. 15 U.S.C. § 78c(a)(10).

intended to cover the situation in which two tort-feasors are Under the Tennessee Securities Act of 1980,

“jointly or severally liable in tort for the same injury to person

or property or for the same wrongful death,” but “judgment “[s]ecurity” means any note, stock, treasury stock, bond,

has not been recovered against all or any of them” and one debenture, evidence of indebtedness, certificate of

interest or participation in any profit-sharing agreement,

10 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 23

Scott, et al. Scott, et al.

. . . or, in general, any interest or instrument commonly D. Damage Award

known as a “security,” or any certificate of interest or

participation in, temporary or interim certificate for, Both parties appeal the amount of the damages awarded by

receipt for, guarantee of, or warrant or right to subscribe the jury. In a diversity case, this court will review a jury’s

to or purchase, any of the foregoing. damage award under an extremely deferential standard, not

disturbing it “‘unless it manifests plain injustice, or is so

Tenn. Code Ann. § 48-2-102(12). This language closely grossly excessive as to be clearly erroneous.’” Chatman v.

tracks the language of the federal statutory definition. With Slagle, 107 F.3d 380, 385 (6th Cir. 1997) (citation omitted).

regard to notes and warrants, the language is identical to that

of the 1933 Act’s definition.

1. The Plaintiff’s Argument

In Reves, the Supreme Court explained, with disarming

candor, that for purposes of giving judicial interpretation to Bass argues that because only he presented evidence at trial

the plain meaning of language employed by Congress in as to how damages ought properly to be calculated, the jury

enacting a statute, that words do not always mean what they was not empowered to award damages in an amount lower

say: than that which he requested. Not surprisingly, Bass was able

to produce no case law to support the proposition that the jury

While common stock is the quintessence of a security, was under some compulsion to accept at face value the

and investors therefore justifiably assume that a sale of calculations he presented. Because the jury could quite

stock is covered by the Securities Acts, the same simply properly have included in its own calculations the amount of

cannot be said of notes, which are used in a variety of Bass’s settlement with Technigen or his retention of the

settings, not all of which involve investments. Thus, the Technigen stock and warrants, we cannot conclude that the

phrase “any note” [in the definition of security] should jury’s award was either plainly unjust or clearly erroneous on

not be interpreted to mean literally “any note,” but must these grounds.

be understood against the backdrop of what Congress

was attempting to accomplish in enacting the Securities 2. The Defendants’ Argument

Acts.

The Janney defendants, for their part, argue that Tennessee

Reves, 494 U.S. at 62-63 (citation omitted). law provides a statutory right to a setoff of the judgment

against them by an amount equal to the settlement between

The Reves Court adopted a “family resemblance” test to the plaintiff and Janney’s erstwhile codefendant, Technigen.

determine whether particular notes could be classified as The relevant Tennessee statute, a section of the Uniform

securities. Contribution Among Tort-feasors Act (the Act), reads as

follows:

The test begins with the language of the statute; because

the Securities Acts define “security” to include “any (a) When a release or covenant not to sue or not to

note,” we begin with a presumption that every note is a enforce judgment is given in good faith to one (1) of two

security. We nonetheless recognize that this presumption (2) or more persons liable in tort for the same injury or

cannot be irrebuttable. As we have said, . . . Congress the same wrongful death:

was concerned with regulating the investment market,

22 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 11

Scott, et al. Scott, et al.

which [Bass] subsequently assert[ed],” nor did Bass appear to not with creating a general federal cause of action for

act with “the intention or expectation that such conduct will fraud.

be acted upon by the other party.” Janney, for its part, did not

have “a lack of knowledge and an inability to learn the truth Id. at 65 (footnote omitted). “In an attempt to give more

as to the facts in question; . . . reliance on [Bass’s] conduct[; content to that dividing line,” the Supreme Court, in a

or] action based thereon which change[d its] position strikingly creative exercise in statutory construction identified

prejudicially” with regard to Bass’s actions and omissions. the following list of notes which are not securities: notes

Ratification is a doctrine unrelated to the purpose the delivered in consumer financing, notes secured by a mortgage

defendants attempt to bend it to. on a home, notes secured by a lien on a small business or

some of its assets, notes relating to a “character” loan to a

The defendants’ arguments based on principles of waiver, bank customer, short-term notes secured by an assignment of

estoppel, and ratification are entirely without merit. accounts receivables, notes which formalize an open-account

indebtedness incurred in the ordinary course of business, and

3. Reliance notes given in connection with loans by a commercial bank to

a business for current operations. Id.

The defendants’ final argument is that Bass could not as a

matter of law have relied reasonably or justifiably upon the The Court then established a four-factor framework for

defendants’ investigations in connection with the bridge loan determining, first, whether a note bears a resemblance to one

transaction. Under Tennessee law, “[g]enerally, a party of the identified seven instruments, and second, whether an

dealing on equal terms with another is not justified in relying additional category should be added to the list.

upon representations where the means of knowledge are

readily within his reach.” Solomon v. First Am. Nat’l Bank of The first factor is the motivation prompting the transaction:

Nashville, 774 S.W.2d 935, 943 (Tenn. Ct. App. 1989). if the seller’s motivation is “to raise money for the general use

Furthermore, the defendants argue, Bass was highly of a business enterprise . . . and the buyer is interested

experienced as an investor and should have known better than primarily in the profit the note is expected to generate, the

to assume that Janney’s interests were aligned with his. In instrument is likely to be a ‘security.’” Id. at 66.

addition, the information regarding Technigen’s reputation

was as available to him as to the defendants, and Bass had his Second is the plan of distribution: if there is “‘common

own attorney able to conduct any investigations Bass thought trading for speculation or investment,’” the note looks more

necessary. like a security. Id. (citation omitted). This factor has

historically been problematic in application; in Marine Bank

Despite the defendants’ protestations, the question of v. Weaver, 455 U.S. 551 (1982), the Supreme Court held that

whether Bass’s reliance was reasonable is beyond doubt a the arrangement in that case, by virtue of being a “unique

question of fact for a jury to decide, and not a fit subject for agreement, negotiated one-on-one by the parties,” was not a

judgment as a matter of law. This argument, too, is without security. Id. at 560. However, it is clear that paradigmatic

merit. securities, such as stocks, can be offered and sold to a single

person, while yet remaining securities. See Landreth Timber

Co. v. Landreth, 471 U.S. 681, 692 (1985).

12 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 21

Scott, et al. Scott, et al.

The third factor is “the reasonable expectations of the failing to act, as to induce a belief that it was his

investing public.” Reves, 494 U.S. at 66. Reasonable public intention and purpose to waive.”

expectations will govern the characterization, even where the

underlying economic realities belie those expectations. Id. at Brewer v. Brewer, 869 S.W.2d 928, 934 (Tenn. Ct. App.

66-67. 1993) (citations omitted).

The final consideration is “whether some factor such as the The Tennessee Court of Appeals has stated that the

existence of another regulatory scheme significantly reduces

the risk of the instrument, thereby rendering application of the elements of equitable estoppel as related to the party

Securities Acts unnecessary.” Id. at 67. In application, this estopped are (1) conduct which amounts to a false

factor comprises, in addition to comprehensive regulatory representation or concealment of material facts, or

schemes, the presence or absence of risk-reducing factors conduct which is calculated to convey the impression that

such as collateral or insurance. Id. at 69. the facts are otherwise than, and inconsistent with, those

which the party subsequently asserts; (2) the intention or

Although the promissory notes received by Bass bear expectation that such conduct will be acted upon by the

similarities to at least two of the enumerated categories of other party; and (3) actual or constructive knowledge of

notes which are not securities—notes secured by a lien on a the real facts. The elements as related to the party

small business or some of its assets, and notes given in claiming the estoppel are (1) a lack of knowledge and an

connection with loans by a commercial bank to a business for inability to learn the truth as to the facts in question; (2)

current operations, see id. at 65—we decline to struggle to fit reliance on the conduct of the estopped party; and (3)

an atypical peg into a standardized hole when the Supreme action based thereon which changes his position

Court has provided, in its four-factor test, a tool for custom prejudicially.

fitting.

Aussenberg v. Kramer, 944 S.W.2d 367, 371 (Tenn. Ct. App.

Applying the Supreme Court’s test, the first factor is a 1996).

washout, since the motivation prompting the transaction on

Technigen’s end is one typical in commercial loan Finally, in Tennessee, “[a] ratification occurs when the

transactions, that is, an effort to raise interim funds to launch party, knowing all the facts necessary to form an opinion,

a new enterprise, but from Bass’s perspective looks more like deliberately assents to be bound.” Yearby v. Shannon, No.

a transaction for profit. The second factor, the plan of 03A01-9509-CV-00345, 1996 WL 87446, at *3 (Tenn. Ct.

distribution, tilts against the notes being securities, since the App. Feb. 29, 1996). In general it is a principle of agency,

transaction was unique, negotiated with a single buyer and whereby one person assents explicitly or implicitly to be

negotiated term by term, rather than being offered in a bound by the actions of another.

wholesale or potentially wholesale fashion. The third factor

is again largely a washout, since the reasonable expectation of None of Bass’s actions or omissions complained of are

the investing public would normally be that bridge loans are such “as to induce a belief that it was his intention and

not securities, and yet, as Bass points out repeatedly, the term purpose to waive.” Similarly, the acts and omissions do not

sheet for the transaction prepared by Janney—probably a form amount to “a false representation or concealment of material

document usually used in venture financings—referred to the facts, or conduct which is calculated to convey the impression

that the facts are otherwise than, and inconsistent with, those

20 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 13

Scott, et al. Scott, et al.

arguable that he qualified as a Technigen insider, and as such notes under the rubric of securities. The fourth factor again

was prevented by the securities laws from selling Technigen mitigates against these notes being securities, since, as

stock without disclosing his knowledge of Technigen’s true applied in Reves, the existence of collateral is significant as a

worth. Finally, even if he was not absolutely barred from risk-reducing factor, and these notes were heavily secured by

selling the stock, the mitigation rule does not require parties the assets of both Technigen and Joytec, Technigen and

to unload junk stock on unwitting investors. Joytec stock, and Joytec’s guarantee.

2. Waiver, Estoppel, and Ratification For these reasons, obedience to the Supreme Court’s

balancing formula in Reves requires that we affirm the district

The defendants’ second theory to explain why Bass should court’s conclusion that the notes were not securities as a

not be permitted to recover against them is based on matter of law.

principles of waiver, estoppel, and ratification. The

defendants argue that Bass’s own conduct prevents him from b. Warrants

complaining about the transaction. First, Bass knew that

Technigen’s president was under investigation at the time he However, with regard to the warrants which were included

extended the first bridge loan. Second, he knew that Nesis in the transaction as an additional means of enticing Bass into

had entered into a consent decree with the BCSC at a commitment, a different conclusion is called for. The

approximately the time he extended the second bridge loan, Janney defendants argue that in the context of a commercial

and yet did not at that time seek rescission of the transaction. loan, warrants issued secondarily to the underlying loan

Third, he did not bring suit against the defendants until nearly transaction are not to be considered securities; essentially, this

six months after the failure of the Technigen private is a version of the “underlying economic reality” approach to

placement. Fourth, despite his concerns over Technigen’s securities transactions. The only authority cited for this

reputation, Bass sought to retain and did retain shares of proposition is Rispo v. Spring Lake Mews, Inc., 485 F. Supp

Technigen stock after the failure of the Technigen offering 462 (E.D. Pa. 1980); our own independent research reveals no

and as part of his settlement with Technigen. Fifth, the failure supporting precedent from this circuit. In Rispo, the district

to sell the Technigen shares or to exercise the warrants itself court held that a promise, made incidental to a commercial

amounted to a ratification of the underlying transaction. In loan transaction, to deliver three shares of stock was not the

sum, the argument amounts to a statement that one who sale or purchase of a security. Id. at 466. Overlooking for the

retains the benefits of a transaction should not be permitted to moment that this court is under no obligation to follow the

complain about it. decision of a district court from outside the Sixth Circuit, the

holding in Rispo was dubious in 1980, in light of the plain

This argument must be addressed in light of Tennessee law. language of the definition section of both federal Securities

In Tennessee, Acts, and increasingly so after 1985, when the Supreme Court

decided that stock is a security per se, regardless of the

[w]aiver is a voluntary relinquishment or renunciation of particular circumstances in which it changes hands, and

a known right. “It may be proved by express declaration; further that an investment contract analysis was not applicable

or by acts and declarations manifesting an intent and to transactions involving paradigmatic securities. Landreth

purpose not to claim the supposed advantage; or by a Timber, 471 U.S. at 696-97.

course of acts and conduct, or by so neglecting and

14 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 19

Scott, et al. Scott, et al.

An analysis that departs from the plain language of the 1. Failure to Mitigate

statutory definition in order to give effect to the apparent

underlying intentions of the parties to a transaction is an First, claiming that there was insufficient evidence to

inappropriate application of judicial authority and flies in the support the verdict for the plaintiff, Janney argues that Bass

face of the fundamental purposes for which the federal unjustifiably failed to mitigate his damages by attempting to

securities laws were drafted. Indeed, of predominant exercise his stock warrants, even at a time when the market

importance is not whether a particular transaction ideally price of Technigen stock was sufficiently high that his profits

should invoke the protections of the securities laws, but rather on sale would have exceeded $2 million.

the certainty enjoyed by the transacting parties that the

protections of those laws may be extended to every exchange Janney is correct that, under Tennessee law,

involving securities. The Securities Acts define warrants as

securities no matter what the context in which they change [g]enerally, one who is injured by the wrongful or

hands and put parties on notice that the securities laws will negligent act of another, whether by tort or breach of

apply to any exchange of warrants. If the parties do not wish contract, is bound to exercise reasonable care and

the securities laws to apply to a given transaction, they need diligence to avoid loss or to minimize or lessen the

only structure it as a straight loan. A contrary rule would be resulting damage, and to the extent that his damages are

little more than an invitation to litigation: How important a the result of his active and unreasonable enhancement

role would the warrants need to play in a transaction for them thereof, or due to his failure to exercise such care and

to rise to the level of securities? This is not the sort of diligence, he cannot recover.

question this court has any mandate, or any inclination, to

address. Cook & Nichols, Inc. v. Peat, Marwick, Mitchell & Co., 480

S.W.2d 542, 545 (Tenn. Ct. App. 1971). However, to note

We believe that the district court erred as a matter of law in that Bass should have made efforts to mitigate where possible

dismissing all of Bass’s securities law claims on the ground is a far cry from demonstrating that he had an opportunity to

that the promissory notes were not securities. The notes do so and squandered it. Warrants for the purchase of

themselves were not securities, but the loan transaction also unregistered stock cannot be exercised on a moment’s notice.

involved the exchange of warrants, which are securities in First, Bass would have had to inform Technigen of his desire

whatever context they change hands. to exercise, and paid the exercise price. Second, he would

have had to request that Technigen register the converted

2. Reversible Error shares, an expensive and time-consuming process, and one

Technigen might have balked at entering into on behalf of an

Janney argues forcefully that even if the district court opposing party in a lawsuit. Third, he would then have had to

committed error in holding that the warrants were not sell the shares. It is probable that the attempt to sell so many

securities, the error was necessarily harmless—at least with shares at once would have had an immediate effect on the

regard to the securities fraud counts—in light of the jury market price for Technigen common stock, especially given

verdict which did not find the defendants liable for intentional the volatility it had demonstrated during the period in

or reckless misrepresentation. We acknowledge that the question. There is therefore no reason to believe that Bass

essential elements of fraud under the securities laws closely would have been able to sell his shares for $2 million even

track those for common law fraud. See Ockerman v. May had he tried. In addition, as Bass pointed out at trial, it is

18 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 15

Scott, et al. Scott, et al.

Similarly, the court’s refusal to permit the plaintiff’s Zima & Co., 27 F.3d 1151, 1156 (6th Cir. 1994). However,

securities law expert to testify was not an abuse of discretion. we are not persuaded that the structural similarity between the

Bass complains that his case for common law fraud was two causes of action is necessarily dispositive of the dispute

prejudiced by the fact that the jury was never permitted to in this case.

hear testimony regarding Janney’s affirmative, statutory duty

of due diligence. In fact, that duty had no impact on the cause Although the essential elements of common law and

of action for common law fraud. securities fraud are the same, the securities laws impose a

special duty on underwriters to perform a so-called “due

The securities laws are relevant to the bridge loan diligence” investigation of the issuer of any securities they

transaction solely by virtue of the presence of the Technigen underwrite. Because the securities laws properly apply to the

warrants, which were included as consideration for the bridge bridge loan transaction as a result of the exchange of warrants

loans Bass extended to Technigen. These warrants were not with the promissory notes, and because Janney was the lead

warrants for the purchase of the securities Janney was underwriter for the private placement of Technigen securities

underwriting, but rather for previously issued Technigen for which the loans were a bridge financing, Janney was under

common stock. Therefore, with regard to the warrants whose a statutorily imposed duty to perform due diligence on

presence in the transaction invoked the federal and state Technigen and Joytec. The jury below was not instructed as

securities laws, Janney was not an underwriter, and therefore to Janney’s duty of due diligence. We therefore decline to

owed no duty to Bass arising out of the securities laws. accept Janney’s invitation to treat the error as harmless as a

matter of law.

With regard to the Technigen offering for which the Bass

loans were a bridge financing, Janney was an underwriter. As 3. The Plaintiff’s Motion for Summary Judgment

an underwriter, Janney owed a duty of due diligence to

Technigen but not, we are satisfied, to Bass, because Bass had Bass argues that it is he, rather than the defendants, who is

no direct involvement in that offering. Any duty Janney owed entitled to judgment as a matter of law on at least two of his

to Bass arose not from the securities laws but rather from securities law claims, namely, the violation of Section 10(b)

Janney’s role in soliciting Bass’s participation in the of the Securities Exchange Act of 1934 and that of Section 21

transaction. The jury knew that Janney solicited Bass’s of the Tennessee Securities Act of 1980. He alleges that the

participation when it found that Janney lacked intent to Janney defendants omitted to supply material information

defraud. which reasonable minds could not disagree would influence

his decision to accept the Technigen securities. First, the

Bass has failed to demonstrate sufficient evidence of Janney defendants internally circulated a memo stating their

prejudice against his case to warrant a finding that the district belief that the private placement of Technigen securities that

judge abused his discretion in excluding the specified they were underwriting would not be successful unless the

evidence. price of Technigen common stock rebounded from

approximately $1.50 to $2.50; it had dropped to $1.50 from

C. Jury Verdict on Common Law Fraud a recent high of around $15.00. This memo was not provided

to Bass. Second, the defendants failed to disclose the

The defendants cross-appeal the jury verdict on common contents of the negative newspaper articles regarding

law fraud, advancing a number of theories as to why Bass Technigen, although Bass acknowledges that the defendants

should not have been permitted to prevail at trial.

16 Bass v. Janney Montgomery Nos. 98-6150/6226 Nos. 98-6150/6226 Bass v. Janney Montgomery 17

Scott, et al. Scott, et al.

were not aware of the contents of these articles. Third, the B. Evidentiary Rulings

defendants delayed disclosure of the fact that Technigen’s

president had been banned from the Vancouver Stock Bass complains that the district court prevented him from

Exchange. introducing some of his evidence regarding Technigen’s

reputation as a “scam company.” He argues that his common

In addition, Bass claims that the remaining elements of a law fraud case was prejudiced because he was not permitted

claim under either anti-fraud provision have been met as a to demonstrate the extent and ubiquity of Technigen’s poor

matter of law; those elements are scienter, reasonable reputation. He complains further that his own expert witness

reliance, and loss causation. Bass would have it that the was excluded from testifying, and that the defendants’ expert

omissions enumerated above are reckless per se, and relies on witness was permitted to testify as to the industry standard of

presumptions he describes as irrebuttable to demonstrate care for underwriters with regard to bridge loan participants,

reliance and causation. again, with prejudicial effect to his common law fraud case.

We are not persuaded by the plaintiff’s reasoning. This court reviews evidentiary rulings of the kind

“Summary judgment is appropriate only when there is no complained of here for abuse of discretion only, and “we will

genuine issue of material fact and the moving party is entitled not reverse a judgment unless we believe that errors at trial

to judgment as a matter of law. Moreover, the court is to had a substantial effect on the final result.” In re Air Crash

construe the evidence and all inferences to be drawn from it Disaster, 86 F.3d 498, 532-33 (6th Cir. 1996). In general,

in the light most favorable to the nonmoving party.” Kraus v.

Sobel Corrugated Containers, Inc., 915 F.2d 227, 229 (6th [a]lthough relevant, evidence may be excluded if its

Cir. 1990) (citations omitted). Here, issues of material fact probative value is substantially outweighed by . . .

abound. With regard first to the alleged omissions, Janney considerations of undue delay, waste of time, or needless

produced testimonial evidence at trial disputing the presentation of cumulative evidence.

materiality of the undisclosed facts. Construing this

testimonial evidence in the light most favorable to Janney, Fed. R. Evid. 403.

Bass’s motion could not have been granted by the district

court. Similarly, the Janney defendants dispute the In this case, the district judge was within his discretion to

recklessness of the alleged omissions, creating another determine that admission of the entire corpus of negative

genuine issue of material fact. Finally, Bass has not even articles would be cumulative, redundant, and a waste of time.

proven what portion, if any, of the $600,000 purchase price he The point that Technigen had an easily ascertainable

paid for the $600,000 interest-bearing promissory notes and reputation as a shady operation could easily be made with the

the stock purchase warrants could properly be allocated to the introduction of only a small number of articles, and indeed

warrants, let alone that any of his financial losses arose from was a fact not really contested by the defendants. To have

his purchase of the warrants. permitted a dead horse to be flogged at great length in the

jury’s presence would not merely have wasted judicial time

In short, because genuine issues of material fact remain, and resources; it also would have risked prejudicing the jury

Bass was not entitled to judgment as a matter of law, and we well beyond the intrinsic probative value of the evidence.

will therefore not disturb the judgment of the district court in The district judge did not abuse his discretion in excluding

this respect. some of the negative articles.