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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_0611%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1985
- **Citation:** 474 U.S. 903

## Text

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

+o A. 2 tee Ser Cee eeEen BIS eon 7

<< Sie a -; - pS OS
ae soo re ei rw :
= ee ey -——— —-
: ~ i et ee = ————e nana
- -— ~~ ‘ ee sd ~ a ona iae - - ————
= i + 4 Bi . 1) +
7 _ — rs
—_
- .
~] - - a) ’ - a re cy a
: = 4 d Core ae Se *
. = 4 : bis _ ——
we D
.
: - TL
———— - — — ——=
}
-
| ee
=~
ame
;
‘

— ————a al
: 7 7 = =
ee — —————————_——=
i —
:
7
a
7
. ~
q . "
a ~

>
a os eee

’ 7 u >
\ -_ Me ow

ie 3 5 a eee ee

- 13 -
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

al

'

‘sane! S25 os

Sobderseoc =

atif2
z ao OF
- 7
os
7 ae | 7
P
‘

- 14 -
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

ie tee

ies sa wey oOr pheed .
2A Faeyder os 7

= be ; al et : {Oo s7eOR9I250 °°

Poy Pe meth

- - ——+ —— a —-% & A yng Reape A Se eee Se i
7 7 ‘
¥ . cs 4 A hake x)
7 3 1" 4 7 - A (- as os Dp ot eer
<"@

oi

aa |

ae ! =e

¢ OF Soutbhtive sorgen 3.

- 16 -
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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_0611%3A1. Public record. Not legal advice.