Petition for Writ of Certiorari — Deane v. Thomson McKinnon Securities, Inc.

Supreme Court, U.S.

85 -9 88 9 FiLED

AUG 6 1985

JOSEPH F. SPANIOL, JR,

No. i CLERK

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1985

JACK DEANE and JOSEPH DEANE,

Petitioners,

V.

THOMSON MCKINNON SECURITIES, INC.

PEAT, MARWICK, MITCHELL & Co.

MEDICAL AND BUSINESS FACILITIES

(A Louisiana Limited Partnership)

Respondents.

oe

On Writ of Certiorari to the

Court of Appeals for the

District of Columbia Circuit

PETITION FOR WRIT OF CERTIORARI

A. FRED FREEDMAN

FREEDMAN & CUTLER, Chtd.

7411 Riggs Road, Suite 216

Hyattsville, Md. 20783

(301) 445-2100

Counsel for Petitioners

SRE LS: A TNE IE mo

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

ad

QUESTIONS PRESENTED

I. Did the Court of Appeals act contrary

to precedents established by this Court

in affirming the District Court's dismissal

of Petitioner's Complaint brought to

enforce civil remedies under the Securities

Act and Exchange Act?

II. Did the Court of Appeals err in

failing to rule on the availability to

Petitioners of a private right of action

under Section 17 of the Securities Act?

TABLE 0: CONTENTS

Page

QUESTIONS PRESENTED ....cceee i

TABLE OF CONTENTS ...ccccccecs ii

TABLE OF AUTHORITIES ........ iii

OPINIONS BELOW ..cccccccccees 1

JURISDICTION ...cccccccccccece 1

FEDERAL STATUTES ...cescceres 1

STATEMENT OF THE CASE .....-. 2

REASONS FOR GRANTING

THE PETITION @eeeeeeeneeenee#eee#8e#8e#s# 4

I. THE COURT OF APPEALS ACTED

CONTRARY TO PRECEDENTS

ESTABLISHED BY THIS COURT

IN AFFIRMING THE DISTRICT

COURT'S DISMISSAL OF

PETITIONERS COMPLAINT... 4

II. THE COURT OF APPEALS ERRED

IN FAILING TO CONSIDER THE

AVAILABILITY OF A PRIVATE

RIGHT OF ACTION UNDER

SECTION 17 OF THE SECURI-

TIES ACT. e*ee3e83xeee#ee#2e#28?8e8e8t 288 @ 10

CONCLUSION e@eeseeee#ee#e?2ee#e8teeeeee st 14

CERTIFICATE OF SERVICE ...... 15

APPENDICES eee0neeeneesteeeeee eee @ 16

ii

Cases

Crystal v.

TABLE OF AUTHORITIES

Foy,

5 2 vw Supp. 422 (S.D.N.Y.)

(1983) @eeeee*eeee#34e3eesee721eoe#eec###eee#eee#2e#€#8 eee

Decker v. Massey Ferguson, Ltd.,

681 F.2d 111 (2d Cir. 1982

Herman & Maclean v. Huddleston,

103 S.ct. 683 (1983)

Ross v. A.D. Robins, Co.

607 F.2d 545 (2d cir. 1979)

Cert denied, 446 3.S. 946

(1980)

Segal v. Gordon,

r¥ F.2d 602 (

2d Cir.

Statutes:

1972)

Securities Act of 1933

15 U.S.C. 77q(2)(1)

Rule 10b-5 under the

Securities Exchange Act

of 1934 17 CFR 240.10b-5

iii

Page

OPINIONS BELOW

Plaintiffs appeal from the order of

the Court of Appeals for the District of

Columbia Circuit (App. A) affirming the

Memorandum Opinion of the District Court

of April 30, 1984 (App. B) which dismissed

Appellant's Second Amended Complaint

without leave to amend.

JURISDICTION

The Court has jurisdiction of this

matter pursuant to 28 U.S.C. § 201(c) to

review an important question under the

federal securities laws which has been

erroneously decided by a Federal Court

of Appeals in conflict with applicable

decisions of this Court.

FEDERAL STATUTES

This case involves the following

federal statutes the full text of which

is set out in Appendix C.

1. Section 17(a), Securities Act of 1933,

15 U.S.C. 77q(a)(1), Appendix Cc.

2. Rule 19b-5 under the Securities

Exchange Act of 1934, 17 CFR

240.10b-5, Appendix Cc.

STATEMENT OF THE CASE

Petitioners brought this action for

recission of the sale of securities sold

to them in violation of the Securities

Act of 1933 [15 U.S.C. 77q(a)(1)] ("Secu-

rities Act") and Rule 10b-5 promulgated

under the Securities Exchange Act of 1934

[17 C.F.R. 240.10b-5] ("Exchange Act").

The securities, Hospital Revenue Bonds of

New Orleans General Hospital Corp. ("Bonds")

were sold to Petitioners through an "Official

Statement". 1/

As directed in an order dismissing

petitioners' Amended Complaint, Petitioners'

if The Official Statement is a prospectus-

like document setting forth material

facts concerning the issuer, on which

prospective purchasers can reiy. the

term “Official Statemen=" is utilized to

differentiate the documents from a

"Prospectus" denoting that it is the

source of representations relative to the

offering of a security, exempt from the

registration under the Securities Act.

-%2-«

Second Amended Complaint set forth repre-

sentations made in the Official Statement

alleged to be false or misleading; the

true state of facts; the source from

which the truth was ascertained and the

factual predicate for a showing of scienter

on the part of the defendants. The same

procedure was repeated for the represen-

tations and statements in the Feasibility

Study included in the Official Statement

The allegations in the Complaint

fell into three categories. First,

misrepresentations and omissions as to

the quality of Management. Second,

misrepresentations and omissions with

respect to accounting and financial

matters. Third, misstatements in the

Feasibility Study relating to the

ability of the Issuer to pay debt

service. The materiality of the quoted

representations and smissions were

conceded in the Official Statement to be

crucial to the operation of the Issuer as

a new corporate entity.

REASONS FOR GRANTING THE PETITION

I. THE COURT OF APPEALS ACTED

CONTRARY TO PRECEDENTS ESTABLISHED BY

THIS COURT IN AFFIRMING THE DISTRICT

COURT'S DISMISSAL OF PETITIONER'S

COMPLAINT

The Court of Appeals and District

Court adopted artificial pleading require-

ments for a private right of action under

the Securities Act and Exchange Act

contrary to principles established by

this Court in Herman & Maclean v.

Huddelston, 103 S.Ct. 683 (1983),

where this Court invalidated artificial

proof requirements in Securities Act

cases.

The Lower Courts applied a more

stringent pleading standard than would be

required in pleading common law fraud.

In the present case, a sophisticated

securities deception, where proof will

depend on extensive discovery of

management systems and records, the

Lower Courts' requirements deny a

defrauded investor an opportunity

to maintain an action.

This Court has held that the

provisions of the securities laws are not

coexistent with common law doctrines of

fraud. "Indeed, an important purpose of

the federal securities statutes was to

rectify perceived deficiencies in the

available common law protections by

establishing higher standards of conduct

in the securties industry." Herman &

Maclean v. Huddleston, supra. The cases

relied upon by the Trial Court and Court

of Appeals go far beyond "specificity"

and impose a standard requiring an

investor to plead all available

evidence. The Lower Courts relied on

aad

Decker v. Massey Ferguson, Ltd., 681 F.2d

111 (2d Cir. 1982); Ross v. A.H. Robbins,

607 F.2d 545 (2d Cir. 1979); Segal v.

Gordon, 467 F.2d 602 (2d Cir. 1972);

Crystal v. Foy, 562 F. Supp. 422

(S.D.N.Y. 1983).

The rationale of the cases relied

on by the Lower Court was that the arti-

Ficial pleading requirement was necessary

"to prevent strike suits", Crystal v.

Foy, supra, or “the protection of the

EOY, supra

good name of the defendants", Segal v.

Gordon, supra, p. 607. On the basis of

this Judicial Legislation, the District

Court stayed discovery and required

petitioners to plead all available evidence

in the complaint, presumably for the

Trial Court to determine whether the

Claim was a “strike suit” before discovery

could be commenced.

Petitioners alleged in their complaint

that specific statements in the official

= 6 «

statement utilized to sell the Bonds were

false. Further, Petitioners described the

source from which plaintiffs concluded

that these statements were, in fact,

false. The sources were reports to

securities holders and an audit report

which plaintiff was able to obtain.

The Auditor and the Bond Indenture

Trustee's reports were dismissed by

the District court as being “conclusory

statements." The Court lost sight of the

fact that the conclusions were not

conclusions of Petitioners or Counsel,

but of expert witnesses who could have

testified to these conclusions.

The Second Amended Complaint quoted

representations made in the Official

Statement, such as:

"The hospital administration has

instituted certain internal and

external review processes. The

internal processes involve intensive

reviews intended to permit the

identification of developing trends

and establishment of a reliable

information system."

a

which alleged that the representatins

were false and contrasted the represen-

tations with statements in the Auditors'

report stating:

"The hospital has not maintained

certain customary accounting records

and supporting documents relating to

transactions with its patients and

suppliers, nor in our opinion, is the

system of internal controls adequate

to provide safeguards over its assets

and assure the proper recording of

transactions.

The District Court's Order, dis-

missing the Second Amended Complaint

without leave to amend, required Petitioners

to detail the basis of the Accountant's

Opinion by specifying the Book required

and those which were not maintained.

Since discovery had been suspended

by order of the Court, Petitioners could

not obtain these details.

Artificial pleading requiremens are

contrary to the pleading philosophy of

the Federal Rules of civil Procedure and

thwart a federal securities act claim

more effectively than the artificial

proof requirements voided by this Court

in Herman & MacLean v. Hudleston, supra.

The fellowing quotes from the cases

relied upon by the District Court and

Court of Appeals contrasted with quotations

from Herman & MacLean v. Huddleston, supra

demonstrate the disparity of concept:

Decker v. Massey Ferguson, Ltd., supra,

"It is a serious matter to charge a

person with fraud and hence no one is

permitted to do so unless he is ina

position and is willing to put himself

on record as to what the alleged

fraud consists of specifically.”

Ross v. A.H. Robinson Co., supra,

"In the context of securities Litigation,

Rule 9(b) serves an additional important

purpose, It operates to diminish the

possibility that ‘a plaintiff é with a

largely groundless claim (will be

able) to simply take up the time of a

number of other people (by extensive

discovery) with the right to do so

representing an in terrorem increment

of the settlement value, rather than

a reasonable hope that the process

will reveal relevant evidence'"

Crystal v. Foy, supra,

"For this reason, courts have been

careful to protect against those who

would abuse the federal discovery

rules as "a hunting License to conjure

up a claim that does not exist.'"

In contrast, this Court stated in

Herman & MacLean v. Huddleston, supra,

Il.

"The interests of defendants ina

securities case do not differ

qualitatively from the interests of

the defendnats sued for violations

of other federal statutes such as

the antitrust or civil rights laws,

for which proof by a propoundance

of the evidence suffices. On the

other hand, the interets of plaintiffs

in such suits are significant.

Defrauded investors are among the

very individuals Congress sought to

protect in the securites laws. If

they prove tht it is more likely

than not that they were defrauded,

they should recover."

THE COURT OF APPEALS ERRED IN i

FAILING TO CONSIDER THE AVAILABILITY

OF A PRIVATE RIGHT OF ACTION

UNDER SECTION 17 OF THE SECURITIES

ACT.

The Court of Appeals declined to

decide whether a private right of action

was available under Section 17(a) of

the Securities Act. this allowed the

- 10 -

ened

opinion of the trial Court to stand on

this issue.

The Trial Court stated:

"The weight of case authority

suggests, however, that an implied

right of action is doubtful and

unavailable."

This holding glosses over fifty years

of conflicting holdings on the

availability of private right of action

under 17(a) of the Securities Act.

Prior to this Court's decision in

Aaron v. SEC, 446 0.S. 680 64 L.Ed. 2d

611 (1980), Section 17(a) was generally

combined with Section 10(b) in private

right of action cases and most of these

cases were decided under 10(b) because

of the apparently more flexible language.

The lower Courts that sought to

differentiate between Rule 10b-5 of the

Exchange Act and 17(a) of the Securities

Act have done so on the theory that

Section 11 and 12 of the Securities Act

“>

contains specific private rights,

thet were not applicable to actions

under 10(b).

In this case, Section 11 and 12

of the Securities Act are not available

to plaintiff. Section 11 deals with

false statements in a prospectus (which

was not utilized) and Section 12

specifically excludes its applicability

to securiites exempt under Section

3(a)(2) of the Securities Act. The

Securities Act, however, specifically

provides in Section 17(c), “The

exemptions provided in Section 3

shall not apply to the provisions of

this seetion.° Thus, a orivate right

must be implied to provide redress

under the Act.

This Court held that the

availability of an express remedy

under the Securities Act did not

- 12 -

preclude a defrauded purchaser of

stock from maintaining an action

under the Exchange Act. The Court

also pointed out that the express

remedies under the Securities Act

were not exclusive under the act.

Herman & Maclean v. Huddleston

at p. 688.

The reasoning of the Court in

Herman & MacLean, supra, makes it

clear that the Court does not view

actions under Sections 11 and 12 as

exclusive under the Securities Act.

In the instant case, where no

express right of action applies to

a violation of the act, it cannot

be doubted that the Supreme Court

should imply a private right of

action,

» 13 <

CONCLUSION

Based upon the foregoing a writ

of certiorari should issue.

“ao submitted

A boy jA—

A. Fred Freedman

¢

/

,

A. Fred Freedman

FREEDMAN & CUTLER, Chtd.

7411 Riggs Rd., Suite 216

Hyattsville, Md. 20783

(301) 445-2100

- 14 =

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that a copy of the

foregoing Second Amended Complaint was

mailed, first class mail, postage prepaid

on the ist day of March, 1984, to:

CAHILL, GORDON & REINDEL

Suite 650

1990 K Street, N.W.

Washington, D.C. 20006

Counsel for Peat, Marwick,

Mitchell & Co.

STEVEN M. LEVINE, ESQ.

Suite 880

600 Maryland Ave., S.W.

Washington, D.C. 20024

Counsel for Thomson McKinnon

Securities, Inc.

/ ‘A

Lae wi

A. Fred Freedman

Counsel for Petitioners

= 1§ -

APPENDICES

APPENDIX A

UNITED STATES COURT OF APPEALS

For the District of Columbia Circuit

NO. 84-5342 September Term, 1984

Civil Action No. 83-01114

Jack Deane, individually and

for all others similarly situated, et al.,

Vv.

Thomson McKinnon Securities, Inc. et al.

APPEAL FROM THE UNITED STATES DISTRICT

COURT FOR THE DISTRICT OF COLUMBIA

Before: WRIGHT and SCALIA, Circuit Judges,

and *MARKEY, Chief Judge.

JUDGMENT

Plaintiffs' appeal from District Judge

Barrington D. Parker's dismissal with

prejudice of their second amended complaint

alleging statutory and common law violations

arising out of their purchase of revenue

bonds issued by a New Orleans hospital.

Specifically, they claim that the Official

Statement through which the bonds were

issued and an accompanying Feasibility

Study contained material misrepresentations

regarding the hospital's managerial and

accounting practices. The issues presented

have been accorded the Court's full

consideration; they occasion no need for

an opinion. See D.C. Cir. R. 13(c).

It is

ORDERED and ADJUDGED, by this Court,

that the dismissal of the complaint is

affirmed. Courts I and [II allege violations

of Section 10(b) of the Securities and

Exchange Act of 1934, 15 U.S.C. § 78j(b)

(1982), rule 10b-5 promulgated thereunder,

17 C.F.R. § 240.10b-5 1984), and Section

17(a) of the Securities Act of 1933, 15

U.S.C. $ 77q(a)(1982), by defendants

Medical and Business Facilities, which

allegedly controlled the issuing hospital;

Thomson McKinnon Securities, Inc., the

underwriter for the bond issue; and Peat,

Marwich & Mitchell Co., the accounting

firm that prepared the feasibility study

accompanying the Official Statement. For

the reasons stated in his opinion of

April 30, 1984, we affirm Judge Parker's

ruling that the complaint with respect to

these Counts did not satisfy the pleading

requirements of Fed. R. Civ. P. 8(a) and

9(b). See Segal v. Gordon, 467 £.2d 602,

606-08 (2d cir. 1972). In affirming, we

expressly do not decide whether a private

civil action for damages can be brought

under § 17(a).

Count III alleges that Thomson

McKinnon breached its common law duty as

an underwriter "to exercise care and

skill of their [sic] profession, and to

deal with customers with candor."

Complaint 4 42. As counsel for plaintiff

acknowledges, there is no basis for

federal jurisdiction over this claim if

it cannot be pended to the federal

securities law claims, and dismissal of

Counts I and II therefore compels dismissal

of Count III as well. See United Mine

Workers of America v. Gibbs, 383 U.S.

715, 726 (1966).

AFFIRMED.

Per Curiam

For The Court

George A. Fisher

Clerk

* Of the United States Court of Appeals

for the Federal Circuit, sitting by

designation pursuant to 28 U.S.C.

§ 291(a).

APPENDIX B

UNITED STATES DISTRICT COURT

POR THE DISTRICT OF COLUMBIA

JACK DEANE, et al.,

Plaintiffs,

v. Civil

Action No.

THOMSON MCKINNON SECURITIES, 83-1114

INC., et al.,

Defendants.

ee ee ee ee ee ee ee ee ee

MEMORANDUM OPINION

Barrington D. Parker, District Judge:

On April 18, 1983, Jack Deane and

Joseph Deane filed a complaint on behalf

of themselves and others similarly situated

charging the defenants with violations of

the federal securities laws--the Securities

Act of 1933 and the Securities Exchange

Act of 1934. Named as defendants were

Thomson McKinnon Securities, Inc.

("McKinnon"), a registered broker-dealer;

Peat, Marwick, Mitchell & Co. ("Peat,

Marwick"), an accounting firm; and the

= 2

New Orleans General Hospital Corporation

("Hospital"), an issuer of hospital

revenue bonds. The plaintiffs alleged

that they sustained losses and damages

after purchasing Hospital revenue bonds

through McKinnon, the underwriter of the

bonds. The complaint also alleged that

plaintiffs received "a preliminary official

statement dated June 15, 1981, which

included...a feasibility study prepared

by (Peat, Marwick]" for the Hospital

(Complaint ¢ 2). As relief the plaintiffs

demanded “judgment against the Defendants

oeetOF rescission of the offering...."

(Complaint p. 4).

Thereafter, the three defendants

moved to dismiss the complaint for failure

to state a claim upon whih releif could

be granted, rule 12(b)(6) Federal Rules

of Civil Procedure. On August 11, 1983,

an order of dismissal without prejudice

-3-

was entered. The complaint was dismissed

because the plaintiffs failed to state

a cognizable claim against the defendants

and failed to comply with the basic

pleading requirements of civil procedure,

Rule 8(a)(2), (e)(1) and Rule 9(b). More

specifically, the plaintiffs failed to

particularize in the complaint what

provisions, if any, of the 1933 and 1934

federal securities acts were relied upon

and they failed to note what actions or

conduct were taken by any defendant which

violated particular provisions of the two

statutes. In short, the loosely worded

complaint was fatally flawed and fell far

short of charging the defendants with any

breach of duties or violations of law

insofar as the plaintiffs were concerned.

On September 6, 1983, the plainti‘fs

filed an amended complaint which was also

challenged by the defendants. This First

amended complaint, while somewhat of an

improvement over the original effort,

was nontheless dismissed on February 9,

1984, In dismission the plaintiffs'

second effort, without prejudice, the

Court noted at page 3 of the Order of

Dismissal that while the new complaint

was lenthier than the first, “the only

change of significance is that the Amended

Complaint now alleges violations of

specific subsections of the federal

securities acts. In other respects,

however, the Amended Complaint is as

deficient as the original, and does not

meet the requirements of specificity for

complaints alleging securities eraaai*

The Court then pointed to the unresolved

problems presented by the plaintffs'

second effort and noted the relevant and

controlling case law associated with

those problems.

The plaintiffs then filed a Second

Amended Complaint on March 1, 1984.

- 5 -

Meanwhile on January 31, 1984, the New

Orleans General Hospital Corporation

filed notice in this proceeding that on

January 13, 1984, it had filed a petition

for bankruptcy in the United States

Bankruptcy Court for the Eastern District

of Louisiana. The plaintiffs then named

the defendant Medical and Business

Pacilities ("Business Pacilities"), a

Louisiana limited partnership, in place

of the Hospital.

At this time the Court is again

called upon to decide motions to dismiss

filed by McKinnon ant Peat, Marwick. For

the reasons set owt below, it is determined

that the Second Amended Complaint does

not reflect any significant improvement

and should dismissed. This dismissal,

however, is with prejudice.

The plaintiffs’ third effort alleges:

that the Hospital was “controlled” by the

defendant, Business Facilities; that in

- 6 -

June and July 1981, the two defendants

prepared and caused to be issued an

Official Statement which was later

disseminated to prospective purchasers

in connection with the offer and sale

of the bonds; that McKinnon was the

underwriter for the bonds; and that on

August 8, 1981, the plaintiffs purchased

the Hospital's bonds through McKinnon.

the Second Amended Complaint then presents

and tracks in detail language from various

provisions of the Official Statement.

Attached to and included as part of that

document was a Feasibility Study prepared

by Peat, Marwich and a July 24, 1981,

transmittal letter from those accountants

to the Hospital. The Feasibility Study

presented an analysis of the Hospital's

financial forecast as set out in the

Official Statement.

The plaintiffs assert three causes

of action against the plaintiffs.

- 7 -

Count I of the complaint charges all

defendants with “violations of Section

17(a)(1) of the Securities Act [of 1933],

15 U.S.C. 77q(a)(1) and Section 10(b) of

the [Securities] Exchange Act [of 1934],

15 U.S.C. 783j(b) and Rule 10b-5 thereunder,

17 C.F.R. 240.10b-5." Count II, based on

the same allegations, charges all defendants

with “violations of Section 17(a)(2) and

(3) of the Securities Act [of 1933], 15

U.S.C. 77q(a)(2) and (3). Count III

charges only McKinnon with violation of

an underwriter's duty of care and skill

of his profession toward the plaintiffs.

and to deal with them in candor.

The plaintiffs' present effort, as

was true of the two earlier pleadings, is

still lacking and deficient. Most notably,

they fail to assert what portions, if

any, of the Official Statement are false

or misleading and in what manner. They

fail to particularize or specify what

E

- 8 -

statements are actionable as to a defendant

and fail to provide sufficient factual

predecate to support a securities fraud

Claim as to a defendant. They continue

to rely upon conclusory allegations and a

mere recitation of the language of the

two federal securities statutes in thier

pleading.

As to the Peat, Marwick Feasibility

Study, other than generalizations and

ambiguous references and statements as to

fraud, there is no claim that the

accountants’ Feasibility Study contained

false and misleading statements. Also

Peat, Marwick makes a timely and relevant

observations, namely, that nowhere in the

Second Amended Complaint do the plaintiffs

ever claim or allege tht they read and

relied upon the Feasibility Study.

The Deanes seek to bolster their

latest effort by including and quoting

From portions of a later prepared audit

- 9 -

report undertaker by Aucoin, Sanchez and

Paul, an independent Louisiana accounting

firm. The audit was performed at the

request of a Louisiana bank serving as

the indenture trustee for the bond issue

(Complaint ¥¥ 13-16) and covered the

Hospital's financial statements and

operations over an 11-months period,

through December 31, 1981.

The audit report did not discuss,

comment, or criticize Peat, Marwick's

Feasibility Study or the Hospital's

projections referenced therein. Also the

report disclaimed any opinions on the

Hospital's financial statements for the

1i-month period ending December 31, 1981.

"We are not in a position to, nor was the

scope of our work sufficient to enadle us

to express, and we do not express, an

Opinion on the financial statements

referred to above." (Complaint ¢ 15).

- 10 =-

Count I charges all defendants with

a violation of Section 17(a) of the 1933

Securities Act. The plaintiff's reliance

upon that section as to Peat, Marwick is

premised upon the theory of an implied

private damage remedy. The weight of

case authority suggests, however, that an

implied private right of action is doubtful

and unavialable. The Supreme Court

decision, Aaron v. SEC, 446 U.S. 680, 689

(1980) left open the question as to

whether 17(a) gives rise to a private

right of action. Subsequent to Aaron

various courts have held that Section

17(a) providges no implied right of action

for damages. See, Keys v. Wolfe, 709 F.2d

413, 416 (Sth cir. 1982); Landry v. All

American Insurance Company, 688 F.2d

381, 384-91 (5th Cir. 1982); Summer v.

Land & Leisure, Inc., 571 F. Supp. .380,

386-87 (SD Fla. 1983); Kimmel v. Peterson,

ne.

- 11 -

565 F. Supp. 476, 482-88 (ED Pa. 1983).

Section 17(a) proscribes unlawful

conduct “in the offer or sale of any

securities.” The plaintiffs do not content

that Peat, Marwick offered or sold any

hospital bonds to them and thus the

theory of liability as to the accountants

is presumable that of secondary liability

as an aider or abetter. The criteria for

; deteriming Section 17(a) liability of the

aider or abetter are well settled and

Clear. Senior Judge David Bazelon of our

worrarerws STs a

Circuit Court noted that the following

elements must be established: "1) another

party has committed a securities law

Ge Bae Ree We

violation; 2) the accused aider and

abetter had a general awareness that his

role was part of an overall activity that

was improper; and 3) the accused aider

Neen ee ee ne Se ee a SE es

and abetter knowing and substantially

assisted the principal violation."

= 12 <

Investors Research, et al. v. S.E.C.,

628 F.2d 168, 178 (D.C. Cir.) (citing

Woodward v. Metro Bank of Dallas,

522 F.2d 84 (Sth Cir. 1975)), cert.

denied, 499 U.S. 919 (1980). The same

view was announced even more recently,

Dirks v. SEC, 681 F.2d 824, 844 (D.C.

Cir. 1982); rev'd on other grounds,

103 S.Ct 3255 (1983). In view of this it

is clear that as to Peat, Marwick, the

present amended complaint must be dismissed

for none of the requisite elements of

aiding and abetting liability have been

alleged in any manner.

Under Section 10(b) of the 1934 Act

and rule 10(b)5 spon which the plaintiffs

also rely, scienter is a basic element of

a securities fraud claim. Ernst & Ernst

v. Hockfelder, 425 U.C. 185 (1976); Ross

cert. denied, 446 U.S. 946 (1980). After

three efforts, the plaintiffs have not

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provided sufficient factual support

demonstrating scienter as to McKinnon and

. Peat, Marwick. In count I the plaintiffs

allege that the "Defendants knew, should

have known or recklessly disregarded the

managerial and acocunting difficulties of

the [Hospital] and disseminated an Official

Statement which painted the management

and accounting systems in glowing terms”

(Complaint ¢ 33). Other than this innocous

and meaningless statement the plaintiffs

have failed to satisfy the particularity

requirements of rule 9(b) F. R. Civ. P.

To establish Section 10(b) and rule 10(b)5

violations under the civil procedure rule

the complaint must allege specific facts,

sources that support the alleged specific

facts and a basis from which an inference

of fraud may fairly be drawn. Crystal

v. Foy, 562 F. Supp. 423-425 (S.D.N.Y.

1983). The general broadside allegations

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set out in the plaintiff's amended

applications fall short.

The plaintiffs have characterized

the Third Count asserted against the

udnerwriter, McKinnon, as a common law

claim -- breach of duty. McKinnon rejects

that characterization and contends that

it is a fraud claim and thus is subject

to the more stringent requirements of

pleading. Whatever label is utilized,

the Count suffers from the same malady as

found generally with the plaintiffs'

several efforts. It is written loosely

and does not provide sufficient information

to frame a meaningful response. It does

not define or set out the nature and scope

of the duty owed or breached and thus

McKinnon does not have a fair and adequate

notice of the cliams asserted by

the plaintiffs. Rule 8(a) F. R. Civ. P.

provides in part that a claim shall

include "(1) a short and plain statement

- 15 -

of the grounds upon which the court's

jurisdiction depends, unless the court

already has jurisdiciton and the claim

needs no new grounds of jurisdiction

to support it, (2) a short and plain

statement of the claim showing that the

pleader is entitled to relief,..."

Even a generous reading of Count III

would not support the plaintiffs' last

pleading effort charging breach of

McKinnon's common law duty owed by an

underwriter to a purchaser of securities.

The Deanes have been advised more

than once what is required to state a

securities fraud claim and have had ample

Opportunity to comply. Their continual

difficulties and inability to satisfy a

cause of action perhaps suggest that they

do not have a viable cause of action.

Finally, nowhere in the Second

Amended Complaint do the plaintiffs allege

a cause of action sufficient to support a

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claim of securities fraud against Business

Pacilities. And thus the court on its

own initiative dismisses the Complaint

against that defendant.

On the basis of the entire record

in this proceeding, this action is

dismissed with prejudice.

Entered: April 30, 1984

/s/ Barrington D. Parker

Barrington D. Parker

United States District Judge

4

»

- alll

EXHIBIT C

FRAUDULENT INTERSTATE TRANSACTIONS

Section 17. (a) It shall be unlaw-

ful for any person in the offer or sale

of any securities by the use of any means

or instruments of transportation or

communication in interstate commerce or

by the use of the mails, directly or

indirectly --

(1) to employ any device, scheme,

or artifice to defraud, or

{2) to obtain money or property by

means OY any untrue statement of a

material fact or any omission to

state a material fact necessary in

order to make the statements made, in

the light of the circumstances under

which they were made, not misleading,

or

(3) to engage in any transaction,

practice, or course of business which

operates or would operate as a fraud

or deceit upon the purchaser.

(b) It shall be unlawful for any

person, by the use of any means or

instruments of transportation or

communication in interstate commerce or

by the use of the mails, to publish, give

publicity to, or circulate any notice,

circular, advertisement, newspaper,

article, letter, investment service, or

communication which, through not pur_

por ting to offer a security for sale,

describes such security for a considera_

tion received or to be received, directly

or indirectly, from an issuer, underwriter,

or dealer, without fully disclosing the

receipt, whether past or prospective, of

such consideration and the amount thereof.

(c) The exemptions provided in

section 3 shall not apply to the provisions

of this section.

EMPLOYMENT OF MANIPULATIVE

AND DECEPTIVE DEVICES

It shall be unlawful for any person,

directly or indirectly, by the use of any

means or instrumentality of interstate |

commerce, or of the mails or of any

facility of any national securities exchange,

(a) To employ any device, scheme,

or artifice to defraud,

(b) To make any untrue statement

of a material fact or to omit to state a

material fact necessary in order to make

the statements made, in the light of the

circumstances under which they were made,

not misleading, or |

(c) To engage in any act, practice,

or course of business which operates or

would operate as a fraud or deceit upon

any person, in connection with the purchase

or sale of any security.