# Opposition — John Nuveen & Co. v. Sanders

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition
- **Published:** January 1, 1976
- **Citation:** 425 U.S. 929

## Text

fem LDICHAEL KODAK, JR
Supreme Court of the United States

OCTOBER TERM, 1975.

No. 75-1065

JOHN NUVEEN & CO., INC., 4 Corporation, INVESTORS
SYNDICATE OF AMERICA, INC., a CORPORATION, AND
INVESTORS DIVERSIFIED SERVICES, INC., A

ORPORATION, -
CORPORAT! Petitioners,
VS.

HENRY T. SANDERS,
Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT.

BRIEF FOR RESPONDENT IN OPPOSITION.

RICHARD ORLIKOFF,
208 South LaSalle Street,
Chicago, Illinois 60604,
Attorney for Respondent.

JOsEPH O. KosTNER,
JOHN N. TIERNEY,

RoBERT J. PETERS,
SALVATORE A. BARBATANO,
ETTELSON & O’HAGAN,

Of Counsel.

Gunthorp-Warren Printing Company. Chicago e« Financial 66565

TABLE OF CONTENTS.

PAGE
IG Gio, cove ae Cer |
PGS uchau Gis eduuendudauan budbeeedarelk l
Questions Presented... 0... ccc cece cece, 2
Statutes and Rules Involved......................... 2
Statement of the Case... 0.0... ccc ene 3
Reasons for Denying the Petition.................... 5

I. It Is Settled Law That Non-Prime, Short-Term
Notes Sold to the Public for Investment Purposes
Are Securities Subject to the Federal Securities
Ml BAdehé phatudnkieedheeddcuaiked dee. 5

Il. The Decision Below Properly Holds Petitioners
Liable for Nuveen’s Failure to Make a Reason-
able Investigation of Winter & Hirsch, Inc..... 8

III. Issues of Scienter and Negligence Are Irrelevant
to the Standard of Liability Employed by the

We ET ce vaci ae uuie cu ceeduuecuncec., 13
IV. The Decision Below Does Not Enlarge the Statu-
tory Duties of an Underwriter............... 14

V. The Decision Sought to Be Reviewed May Be
Sustained on Several Grounds Not Reached by
the Court of Appeals...................... 15

A. The Lieber, Bleiweis Audit of Winter &
Hirsch, Inc. Was Uncertified, or at Best
Qualified in Such Manner That Nuveen
Could Not Reasonably Have Relied on It.. 15

B. Petitioners Are Liable to Respondent and
the Class Represented by Respondent for
Nuveen’s Failure to Comply with Rule 27
of the National Association of Securities
Nase h abu oe 8 eoeldaneblne.. 16

‘3

C. Nuveen Misrepresented WH Commercial
Paper and Omitted to State Material Facts
Necessary to Make the Statements Made Not
Misleading in Violation of Section 12(2)
of the 1933 Act, Section 10(b) of the

1934 Act, and Rule 10b-5............. 17
I 2 no an ae coe Ee ne A 18
SN oud Shc ebeee ae cadetendeéucseeckeeeees Al-A3

TABLE OF AUTHORITIES.

Cases.

Affiliated Ute Citizens v. U. S., 406 U. S. 128 (1972),

reh. denied, 407 U. S. 916, 408 U. S. 931 (1972).... 16
Anderson v. Francis I. duPont & Co., 291 F. Supp. 705

i en PL cc. beeen iaeeskeaanbadhecee s 6
Bellah v. First National Bank, 495 F. 2d 1109 (Sth Cir.

eT Te Ee ee oe ee re rr Te 7
Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723

Tt Lcclciihseaeteneeebaaks eee ew oak ae ca 10-12

C. N. S. Enterprises. Inc. v. G. & G. Enterprises, Inc., 508
F. 2d 1354 (7th Cir. 1975), cert. denied, 96 S. Ct.
I ie ie ae ale a ee 6,7

Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480
F. 2d 341 (2d Cir. 1973), cert. denied, 414 U. S. 910
er ne 12, 14

City National Bank of Fort Smith, Ark. v. Vanderboom,

290 F. Supp. 592 (W. D. Ark. 1968), aff'd, 422 F. 2d

221 (8th Cir. 1970), cert. denied, 399 U.$.905 (1970) 6
Cohen v. Franchard Corp., 478 F. 2d 115 (2d Cir. 1973),

cert. denied, 414 U. S. 857 (1973)................ 13

Ernst & Ernst v. Hochfelder, 503 F. 24 1100 (7th Cir.
1974), cert. granted, 421 U. §. 909 (1975)........ 13,14

ili

Escott v. BarChris Construction Corp., 283 F. Supp. 643

Se Wi IG ood onde ue due neeeskebaasdanae 14
Feit v. Leasco Data Processing Equipment Corp., 332

SO SD OS A) ere 14
Foremost-McKesson, Inc. v. Provident Securities Co., ....

U.S. ......, 44 U. S. L. W. 4056 (Jan. 13, 1976)..... 12
Franklin Savings Bank, The v. Levy, CCH Sec. L. Rep.

€ 95,389 (Current Binder) (S. D. N. Y. 12/29/75)... 6
Globus v. Law Research Service, Inc., 418 F. 2d 1276 (2d

Cir. 1969), cert. denied, 397 U. S. 913 (1970)..... 13
Jaffke v. Dunham, 352 U. S. 280 (1957)............ 15

Johns Hopkins University v. Hutton, 326 F. Supp. 250
(D. Md. 1971), aff'd in part, rev'd in part, 488 F. 2d
912 (4th Cir. 1973), cert. denied, 416 U.S.916 (1974) 13

Joseph v. Norman’s Health Club, 336 F. Supp. 307 (E. D.
Pr ae ee

Lino v. City Investing, 487 F. 2d 689 (3d Cir. 1973)... 7
McClure v. First National Bank, 497 F. 2d 490 (Sth Cir.
1974), cert. denied, 420 U. S. 930 (1975)......... 7
Rochez Bros, Inc. v. Rhoades, 491 F. 2d 402 (3d Cir.
WE 4600664 s cena ew eae ab eecaeencene 13
SEC v. Capital Gains Research Bureau, Inc., 375 U. S. 180
SE SatuSCWEs ses eekebbhabccoetnekasllaee, 7,9, 10

SEC v. C. M. Joiner Leasing Corp., 320 U. S. 344 (1943) 7

SEC v. Continental Commodities Corp., 497 F. 2d 516
Ss DUO hoe eeee ke ucveuusckebakesoucdwes 6

SEC v. First Securities Company of Chicago, 463 F. 2d
981 (7th Cir. 1972), cert. denied sub nom. McKy v.

Hochfelder, 409 U. S. 880 (1972)..............24, 16
SEC v. Goldman Sachs & Co., CCH Fed. Sec. L. Rep.
i earee Ge. GA OF. H. BORED. gc ccccccccccccccces 8

iv
SEC v. W. J. Howey Co. 328 U. S. 293 (1946)........ 7

Shapiro v. Merrill Lynch, 495 F. 2d 228 (2d Cir. 1974).. 13
Smith v. Manausa, 385 F. Supp. 443 (E. D. Ky. 1974)...

Tcherepnin v. Knight, 389 U. S. 332 (1967).......... 7

Tomera v. Galt, 511 F. 2d 504 (7th Cir. 1975)........ 13

United Housing Foundation, Inc. v. Forman, ...... U. S.
iwi p We We GR BUme CIRO vc cccisiccdcccccese 9

United States v. Hill, 298 F. Supp. 1221 (D. Conn. 1969)

Welch v. Goldman, Sachs & Co., 398 ©. Supp. 1393 (S. D.
Pe ee DD boa 6065 Whneebedseebbendeesncs 6

Zabriskie v. Lewis, 507 F. 2d 546 (10th Cir. 1974)..... 6

Zeller v. Bogue Electric Manufacturing Corp., 476 F. 2d
795 (2d Cir. 1973), cert. denied, 414 U. S. 908 (1973) 6

Statutes and Rules.
Securities Act of 1933

Section 11, 15 U.S.C. § 77k................... 9
Section 12(2), 15 U. S.C. § 771(2)............. 2,17
Securities Exchange Act of 1934
Section 3(a)(10), 15 U. S.C. § 78c(a)(10)...... 5
Section 10(b), 15 U. S. C. § 78j(b)...2, 5,9, 11, 12,17
Section 14, 15 U. S.C. § 78n................... 12
Section ISA, 15 U. S. C. § 780-3................ 16
Section 16(b), 15 U. $.C. 8 a 12
Title 28, United States Code \.
Se accu oie ee ee 5

General Rules and Regulations under the Securities Ex-
change Act of 1934

Rule 10b-5, 17 CFR 240.10b-5....... 2, 5, 8, 10-13, 17
National Association of Securities Dealers, Inc., Rules of
Fair Practice, Article II], Rule 27................. 2, 16

Miscellaneous.

American Automobile Insurance Brokers, Inc., Avail.
DUT ac he lueiee nn vie uheeuecesdscakesetaucs

American Automobile Insurance Brok Rule 10b-5.

4. The amici, apparently feeling themselves free of the positions
taken below by the parties, argue that the Court below erroneously
characterized Nuveen as an underwriter. On oral argument before
the Court of Appeals petitioners conceded that if the WH notes were
securities Nuveen was an underwriter. ~~: with the agree-
ment of petitioners, and by leave of the Court below, has caused
a portion of the oral argument below to be transcribed and trans-
mitted to this Court. The relevant colloquy is set forth in the
Appendix hereto, A2.

5. “Fraud” and “deceit” as used in § 10b and Rule 10b-5 are not
to be equated with the common-law cause of action for fraud, or

(Continued on next page)

10

The Court below looked to the entire statutory scheme and
the context of the transaction in weighing the proper application
of the 1934 Act. A. 9. In order for an underwriter to sell
notes on the basis that they will be paid when due, it must make
a reasonable investigation to determine whether the issuer's finan-
cial statements possess any integrity. The underwriter should at
least determine whether an audit in fact has been made. On
the other hand, in the context of the sale of short-term securities,
the validity of long-range projections and future business pros-
pects have little significance; the underwriter should not be
liable under Rule 10b-5 for a failure to investigate such pro-
jections and prospects.

Petitioners contend that if the burden of reasonable investiga-
tion of the issuer is placed upon underwriters of commercial
paper that financing instrument will be destroyed. Undoubtedly
many corporations, underwriters and broker-dealers flocked to
the short-term note in order to avoid the expense and burden
of registration with the SEC. And, as with other types of secur-
ities, numerous defalcations have occurred among issuers of
commercial paper.° However, the great bulk of commercial

(Continued from preceding page)

the classic tort of deceit. Blue Chip Stamps, et al. v. Manor Drug
Stores, 421 U. S. 723 (1975); SEC v. Capital Gains Research
Bureau, Inc., 375 U. S. 180, 194 (1963).

6. Among the companies that have dishonored their commercial
paper are the following. Atlantic Acceptance Corporation, Ltd.,
see “Report of Atlantic Acceptance Urges Sweeping Rule Changes”,
N. Y. Times, 12/12/69, p. 89, col. 5; Pioneer Finance Co. ($3 mil-
lion in commercial paper), see “Pioneer Finance; ‘Tight Money’
Claims A Casualty”, N. Y. Times 9/26/66, p. 63, col. 3; Mill
Factors Corporation ($6.7 millions of commercial paper) “Heavy,
Heavy . . .”, Forbes, 8/15/71”, p. 21, “Financial Collapse and Hu-
man Tragedy Stalk Mill Factors,” N. Y. Times 4/23/69, p. 71, col.
1; Penn Central Transportation Company ($85 million of commercial
paper), see Staff Report of the SEC to the Special Subcommittee
on Investigations, Committee on Interstate and Freight Commerce,
The Financial Collapse of the Penn Central Company (August,
1972); Beverly Hills Bancorporation ($13 millions of commercial
paper), see “Bancorp on Coast Reveals Problems”, N. Y. Times,

(Continued on next page)

il

paper is prime paper eligible for discount with the Federal
Reserve Bank and is exempt both from the registration and
anti-fraud provisions of the 1933 and 1934 Acts. Non-prime
commercial paper sold to the public in small denominations
through underwriters and dealers on an investment basis is not
and should not be exempt from either the registration or anti-
fraud provisions. The need of the public for protection from
fraud in the sale of such paper is not less than the need for
such protection in the sale and distribution to the public of any
other type of security. The burgeoning of the market for com-
mercial paper is not an argument for lowering the statutory
shield of protection for the investing public.

Contrary to the fears of petitioners and amici curiae, the
Court below specifically immunized underwriters from the obli-
gations of a guarantor. “Although the underwriter cannot be a
guarantor of the soundness of any issue, he may not give it his
implied stamp of approval without having a reasonable basis
for concluding that the issue is sound.” A. 9-10. If the proper
examination is made by the underwriter the dishonored notes
will not become his obligation.

Nor does the decision below contravene any ruling or expres-
sion of this Court in Blue Chip Stamps. The reading of Blue
Chip Stamps by petitioners distorts and misapplies that decision.
Blue Chip Stamps concerns standing of a plaintiff to sue under
$ 10(b) or Rule 10b-5, not standards of liability under that sec-
tion or Rule. There this Court expressly stated: “Blue Chip did
not here present the question of whether an implied action under
§ 10(b) of the 1934 Act and Rule 10b-5 will lie for actions
made a violation of the 1933 Act and the subject of express civil
remedies under the 1933 Act. We therefore have no occasion to
pass on this issue.” (citations omitted) 421 U. S. at 752, n. 15.

(Continued from preceding page)

12/31/73, p. 27, col. 7; Franklin N. Y. Corporation, see N. Y.
Times, 1/13/75, p. 44 col. 7. Many of these defalcations are dis-
cussed in Note, The Commercial Paper Market and the Securities
Act, 39 U. Chi. L. Rev. 362, at 378 (1972).

12

Foremost-McKesson, Inc. v. Provident Securities Co., 44 U. S.
L. W. 4056 (January 13, 1976), also relied on by petitioners,
deals with the question of standing to sue under § 16(b) of the
1934 Act—a section which imposes absolute liability for viola-
tion of its provisions. Determination of liability under § 10(b)
and Rule 10b-5 is not reasonably susceptible to the type of
absolute treatment applied in Foremost-McKesson. Determina-
tion of the identity of those a statute is designed to protect
involves considerations different in kind from a determination
of the conduct the statute prohibits, especially in construing
language such as “manipulative or deceptive device or con-
trivance .. .”

The cases applying § 14 of the 1934 Act, 15 U. S. C. § 78n
(proxy viclation), are more to the point in the construction of
analogous sections of the securities laws than the cases con-
struing § 16(b). In the decision below it is pointed out that in
Chris-Craft Industries, Inc. Vv. Piper Aircraft Corp., 480 F. 2d
341, 370 (2d Cir. 1973), cert. denied, 414 U. S. 910 (1973),
the standards for underwriters expressed in the 1933 Act were
used as a guide to determine the liability of an underwriter in a
case arising under § 14 of the 1934 Act. A. 8, n.

The decision below is one of reason and common sense, and
it is firmly grounded in the statutory scheme of the 1933 and
1934 Acts. Rule 10b-5 was expressly designed to cover the
scheme or device that does not fit neatly within the technical
provisions of the 1933 Act but which nevertheless operates to
deprive the investing public of its protections.

To hold an underwriter liable under Rule 10b-5 for failure
to make a reasonable investigation of the issuer is not to imply
remedies where none are expressed, but to apply recognized
standards of conduct in situations where those standards are
necessary for the protection of the investing public.

13

III. Issues of Scienter and Negligence Are Irrelevant To the
Standard of Liability Employed by the Court Below.

Petitioners argue that under Rule 10b-5 there can be no
liability without scienter, and proof of negligence is not enough.

Respondent believes the position of petitioners on the need
for proof of scienter in a Rule 10b-5 cause of action is errone-
ous, Petitioners invoke war cries that have long been stilled.’
More to the point, however, those issues simply are not relevant
to the decision below.

Petitioners presumptively anticipate the decision of this Court
in Ernst & Ernst v. Hochfelder, 503 F. 2d 1100 (7th Cir.
1974), cert. granted, 421 U. S. 909 (1975) (No. 74-1042),
and pray this Court grant the writ and reverse summarily if the
Court should require a showing of scienter in that case. That
prayer is far-fetched. First, the issue in Hochfelder is whether
Ernst & Ernst is liable as an aider and abettor of a violator of
Rule 10b-5, not whether Ernst & Ernst was a direct perpetrator
of a securities act violation in the context of particular trans-
actions. Ernst & Ernst did not sell securities to anyone. Respond-
ent and the members of the represented class purchased their
notes directly from Nuveen. In Hochfelder there is no nexus
of a transaction between Ernst & Ernst and a plaintiff; in this
case there is complete privity.

In the securities acts Congress has made the extent of liability
imposed upon a participant in a securities transaction dependent

7. Among recent cases holding that specific intent to deceive is
not necessary to establish liability under § 10(b) are Rochez Bros.,
Inc. v. Rhoades, 491 F. 2d 402, 407-8 (3d Cir. 1974); Cohen vy.
Franchard Corp., 478 F. 2d 115, 123 (2d Cir. 1973), cert. denied,
414 U. S. 857 (1973); Globus v. Law Research Service, Inc., 418
F. 2d 1276, 1291 (2d Cir. 1969), cert. denied, 397 U. S. 913
(1970); Shapiro v. Merrill Lynch, 495 F. 2d 228, 238-9 (2d Cir.
1974); Johns Hopkins University v. Hutton, 326 F. Supp. 250, 256
(D. Md. 1971), aff'd in part and rev'd in part, 488 F. 2d 912 (4th
Cir. 1973), cert. denied, 416 U. S. 916 (1974); Tomera v. Galt, 511
F. 2d 504 (7th Cir. 1975).

14

upon the culpability of the unlawful conduct and the relation-
ship between the defendant and the transaction that resulted in
the plaintiffs injury. The standards of liability range from
absolute liability to subtle gradations of negligence. The more
direct the relationship, the lesser the culpability required for
liability.

The bold assertion that if this Court rules scienter a require-
ment of proof in Hochfelder then this case should be summarily
reversed is to swing a very broad axe indeed. A ruling that an
aider and abettor must have an intent to deceive has little appli-
cability to the fact situation in this case.

IV. The Decision Below Does Not Enlarge the Statutory
Duties of an Underwriter.

Petitioners say that the decision below requires the under-
writer to verify the accuracy of the report of an expert such as
an independent public accountant. Nothing in the decision be-
low supports that assertion. Underwriters customarily do and
must have face-to-face meetings with auditors. In the situations
examined by the courts in Chris-Craft Industries, Inc. v. Piper
Aircraft Corp., 480 F. 2d 341 (2d Cir. 1973), Feit v. Leasco
Data Processing Equipment Corp., 332 F. Supp. 544 (E. D.
N. Y. 1971); and Escott v. BarChris Construction Corp., 283
F. Supp. 643 (S. D. N. Y. 1968), the underwriters involved
each had face-to-face (“due diligence”) sessions with the issuer's
accountants. Textbooks, manuals and guidelines for underwriters
routinely call for such face-to-face sessions.* The purpose of
these meetings is for the underwriters to determine that the
auditor really exists and is competent and independent, and has
done his job.

In the instant case the so-called “work papers” of Lieber,
Bleiweis were one-half inch thick. A glance at these work
papers would have made it known that no audit of WH had

8. See PLI Securities Law Institute—II, The Review of Securities
Regulation, 975-77 (V. 7, No. 3, Feb. 6, 1974).

15

been performed by Lieber, Bleiweis. That was only one of
several steps that, if taken, would have uncovered WH’s fraud,
or raised suspicions which mandated further investigation.
Respondent believes that is the correct reading of the decision
below on this point.

Nuveen “most likely” did not examine the federal tax returns
of WH, although that was Nuveen’s accepted procedure. The last
two federal tax returns filed by WH did not correspond at all to
the audited statements WH sent to Nuveen for those years.
Nuveen did not cause the corporate records or contracts of WH
to be examined. The corporate records had not been maintained
since 1966.

Certain’. on these facts the decision below cannot be read
as an expansion of the hitherto defined duties of an underwriter.

V. The Decision Sought To Be Reviewed May Be Sustained
on Several Grounds Not Reached by the Court of Appeals.

In reaching its decision the Court below assumed or accepted
several arguments and contentions advanced by petitioners. If
this case is to be reviewed respondent contends that the finding
of liability and the judgment entered below may be sustained
on grounds not relied on by the Court of Appeals, or on one
issue not resolved by the trial court. The judgment of the trial
court may be sustained on any ground that is supported in the
record. Jaffke v. Dunham, 352 U. S. 280 (1957).

A. The Lieber, Bleiweis Audit of Winter & Hirsch, Inc. Was
Uncertified, or at Best Qualified in Such Manner That Nuveen
Could Not Reasonably Have Relied on It.

In checking the creditworthiness of WH Nuveen relied pri-
marily upon annual and semi-annual audit reports which WH
sent to it. Those audit reports were completely fictitious and
bore no relationship to WH’s books and records or to WH’s
federal income tax returns.

16

The audit reports were so unusual or peculiar that Nuveen
could not reasonably and properly rely on them. Respondent
contends and the last credit investigator employed by Nuveen
testified that the Lieber, Bleiweis audit reports of WH were un-
certified. At best they were qualified audit reports.

Thus a serious question exists in this case as to whether
Nuveen met the standard of an underwriter, a broker-dealer, or
simply that of a reasonable investor is relying on the audit
reports. No one in this case has yet contended that a seller of
securities has no obligation of any kind to his buyers. The
federal securities acts substitute a policy of full disclosure to
investors for the philosophy of caveat emptor in the sale of
securities. Affiliated Ute Citizens v. U. S., 406 U. S. 128,153-4,
reh. denied, 407 U. S. 916, 408 U. S. 931 (1972).

B. Petitioners Are Liable To Respondent and the Class Repre-
sented by Respondent for Nuveen’s Failure To Comply with
Rule 27 of the National Association of Securities Dealers.

Rule 27 of the National Association of Securities Dealers
(“NASD”) requires that a securities dealer adopt and promul-
gate written procedures to be followed in selling securities, and
to properly supervise its salesmen. The rules of the NASD
were promulgated pursuant to § 15SA of the 1934 Act, 15
U. S. C. § 780-3. Violation of those rules provides a basis for
private damage actions. SEC v. First Securities Company of
Chicago, 463 F. 2d 981 (7th Cir. 1972) cert. denied sub nom.
McKy v. Hochfelder, 409 U. S. 880 (1972). Nuveen failed
to establish, maintain and enforce written procedures for the
sale of investment securities, or properly to supervise the sales-
men employed by it in the sale of the short-term notes here at
issue, and is liable for that failure.

17

C. Nuveen Misrepresented WH Commercial Paper and Omitted
To State Material Facts Necessary To Make the Statements
Made Not Misleading in Violation of Section 12(2) of the
1933 Act, Section 10(b) of the 1934 Act, and Rule 10b-5.

Respondent proved direct misrepresentations made by Nuveen
salesmen to various members of the class in connection with
the sale of WH notes to them. In addition, Nuveen did not
communicate to purchasers of WH notes the fact that those
notes were only rated “desirable” rather than “prime” and were
more speculative with greater attendant risks than prime paper.
That was an omission to state a material fact necessary to make
the statements made not misleading.

Should the writ of certiorari issue, respondent will request
this Court to sustain the judgment for respondent and the mem-
bers of the class on the ground that the misstatements of and
omissions to state material facts in connection with the sale of
WH notes to respondent and the represented class are violations
of § 12(2) of the 1933 Act as well as of § 10(b) of the 1934
Act and Rule 10b-5.

18

CONCLUSION.

Respondent prays that the Petition For A Writ Of Certiorari
be denied.

Respectfully submitted,

RICHARD ORLIKOFF,
208 South LaSalle Street,
Chicago, Illinois 60604,
Attorney for Respondent.

JosEPH O. KOSTNER,
JOHN N. TIERNEY,

ROBERT J. PETERS,
SALVATORE A. BARBATANO,
ETTELSON & O’HAGAN,

Of Counsel.

Al

APPENDIX TO BRIEF FOR RESPONDENT IN
OPPOSITION.

RULE 27 OF ARTICLE Ili OF THE RULES OF FAIR
PRACTICE OF THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.

SUPERVISION.
Written procedures.

(a) Each member shall establish, maintain and enforce
written procedures which will enable it to supervise properly
the activities of each registered representative and associated
person to assure compliance with applicable securities laws,
rules, regulations and statements of policy promulgated there-
under and with the rules of this Association.

Responsibility of member.

(b) Final responsibility for proper supervision shall rest
with the member. The member shall designate a partner,
officer or manager in each office of supervisory jurisdiction,
including the main office, to carry out the written supervisory
procedures. A copy of such procedures shall be kept in each
such Office.

Written approval.

(c) Each member shall be responsible for keeping and pre-
serving appropriate records for carrying out the member's
supervisory procedures. Each member shall review and endorse
in writing, on an internal record, all transactions and all corre-
spondence of its registered representatives pertaining to the
solicitation or execution of any securities transaction.

Review of activities and annual inspection.

A2

(d) Each member shall review the activities of each office,
which shall include the periodic examination of customer ac-
counts to detect and prevent irregularities or abuses and at least
an annual inspection of each office of supervisory jurisdiction.

Qualifications investigated.

(e) Each member shall have the responsibility and duty to
ascertain by investigation the good character, business repute,
qualifications and experience of any person prior to making such
a certification in the application of such person for registration
with this Association.

Office of supervisory jurisdiction.

(f) “Office of supervisory jurisdiction” means any office
designated as directly responsible for the review of the activities
of registered representatives or associated persons in such office
and/or in other offices of the member.

EXCERPTS FROM ORAL ARGUMENT BEFORE THE
UNITED STATES COURT OF APPEALS.

Mr. Horwich (for Defendants-Appellants): “This case deals
with the question of the responsibility of a broker-dealer selling
commercial paper. It pertains to a class action brought by ap-
proximately 43 class members against the broker-dealer and
alleged controlling persons in connection with the sale of com-
mercial paper of a small consumer finance company, Winter &
Hirsch. .. .

“, . . There is a separate basic issue on each of the two ap-
peals. The basic issue on the first appeal from the basic judgment
in favor of the class against the defendants is whether a broker-
dealer selling commercial paper has a responsibility to discover
a joint fraud conducted by the issuer and the issuer’s auditor.”

The Court: “Do you dispute the fact that the broker-dealer

is an underwriter?”

A3

Mr. Horwich: “I do not. I think that under Section 2(11)
Nuveen was probably a statutory underwriter.”

The Court: “Probably, or do you agree that he was an
underwriter?”

Mr. Horwich: “I would agree.”
The Court: “You don’t challenge that conclusion of law?”

Mr. Horwich: “No, but I do not think that that affects the
standard of liability that is placed on Nuveen in this situation.”

The Court: “Is that an issue, though, whether it does? They
argue otherwise, I think, on that.”

Mr. Horwich: “Yes, they do, your Honor. But we believe
that the principal provision on which the District Court relied
—plaintiffs relied—Section 11—has no application to this case
for several primary reasons. The first one is—there is no regis-
tration statement here.”

The Court: “I understand that, but do you agree that even
if the case is simply a 10b-5 case, the standard of care for an
underwriter is the same as the standard of care for a broker-
dealer?”

Mr. Horwich: “If it’s an underwriter outside the context of
Section 11, I don’t believe that there is any difference in the
standard. I think whether or not it’s a statutory underwriter is
really immaterial in determining the standard there.”

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_1635%3A3. Public record. Not legal advice.