Klein v. Boyd

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
2-12-1998
Klein v. Boyd
Precedential or Non-Precedential:
Docket 97-1143,97-1261
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Recommended Citation
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Filed February 12, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 97-1143 and 97-1261
ELYSE S. KLEIN; RICHARD KASTNER; DORIS KASTNER;
WARREN KASTNER,
Appellants in No. 97-1143
v.
WILLIAM BALLANTINE BOYD, III; WILLIAM DISSTON
COLEMAN; THOMAS H. TARANTINO; LAWRENCE G.
STEVENS; GREGORY JAMGOCHIAN; DRINKER, BIDDLE
& REATH; MERCER SECURITIES, INC.; MERCER
SECURITIES, LTD.
ELYSE S. KLEIN; RICHARD KASTNER; DORIS KASTNER;
WARREN KASTNER,
Appellants in No. 97-1261
v.
WILLIAM BALLANTINE BOYD, III; WILLIAM DISSTON
COLEMAN; THOMAS H. TARANTINO; LAWRENCE G.
STEVENS; GREGORY JAMGOCHIAN; DRINKER, BIDDLE
& REATH; MERCER SECURITIES, INC.; MERCER
SECURITIES, LTD.
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civ. No. 95-cv-05410)
ARGUED
September 9, 1997
Before: MANSMANN and NYGAARD, Circuit Judges, and
BLOCH, District Judge.*
(Filed February 12, 1998)
Bruce S. Marks, Esquire (ARGUED)
Spector, Gadon & Rosen
1700 Market Street
29th Floor
Philadelphia, Pennsylvania 19103
COUNSEL FOR APPELLANTS
Jon A. Baughman, Esquire
(ARGUED)
Michael A. Freeman, Esquire
Pepper, Hamilton & Scheetz
18th & Arch Streets
3000 Two Logan Square
Philadelphia, Pennsylvania 19103-
2799
COUNSEL FOR APPELLEE
DRINKER, BIDDLE & REATH
OPINION OF THE COURT
MANSMANN, Circuit Judge.
After a limited partnership failed, four investors in the
partnership brought suit against the partnership, the
corporate general partner, officers of the general partner,
employees of the partnership, and the law firm that
represented the partnership. The investors asserted causes
of action under section 10(b) of the Securities Exchange Act
of 1934, 15 U.S.C. S 78j(b), and companion Rule 10b-5, 17
_________________________________________________________________
*Honorable Alan N. Bloch of the United States District Court for the
Western District of Pennsylvania, sitting by designation.
2
C.F.R. S 240.10b-5, section 1962 of the Racketeer
Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.
S 1962, and common law fraud. The investors later
attempted to amend their complaint to assert causes of
action for failure to disclose material information under the
Massachusetts Uniform Securities Act, Mass. Gen. Laws ch.
110A, S 101 et seq., and the Pennsylvania Securities Act of
1972, Pa. Stat. Ann. tit. 70, S 1-101 et seq., and for fraud
in violation of the Massachusetts Consumer Protection Act,
Mass. Gen. Laws ch. 93A, S 1 et seq., and the Pennsylvania
Unfair Trade Practices and Consumer Protection Law, Pa.
Stat. Ann. tit. 73, S 201-1 et seq.
The law firm and the other defendants opposed the
motion to amend, and they filed motions for summary
judgment. The district court denied the investors' motion to
amend as to the law firm, and it granted the firm's motion
for summary judgment in its entirety. Subsequently, the
remaining defendants settled with the investors.
The investors appealed from the district court'sfinal
order granting the law firm's motion for summary judgment
and denying the investors' motion for leave to amend. We
agree with the district court that the federal securities
claim of one of the investors is barred by the statute of
limitations. As to the remaining investors, however, we
disagree with the district court's disposition of the federal
securities claim and conclude that the investors have
proffered sufficient evidence to establish a genuine issue of
material fact as to (1) whether the law firm made a
statement containing a material omission upon which the
investors relied, and (2) whether the law firm acted with
scienter. In so concluding, we hold that a lawyer who can
fairly be characterized as an author or a co-author of a
client's fraudulent document may be held primarily liable to
a third-party investor under the federal securities laws for
the material misstatements or omissions contained in the
document, even when the lawyer did not sign or endorse
the document and the investor is therefore unaware of the
lawyer's role in the fraud.1 We will reverse the judgment of
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1. We later set forth the following specific requirements to hold such a
lawyer liable: (1) the lawyer knows (or is reckless in not knowing) that
3
the district court insofar as it granted the law firm's motion
for summary judgment on the federal securities claim as to
three of the four investors. Similarly, we will reverse the
judgment of the district court on the investors' common law
fraud claim, which claim was timely as to all four investors.
As to the investors' RICO claims, we conclude that the
law firm did not participate in the operation or management
of the purported enterprise and cannot, therefore, be liable
under 18 U.S.C. S 1962(c). Consequently, the law firm
cannot be liable, under 18 U.S.C. S 1962(d), for conspiracy
to violate section 1962(c). We hold that there is no private
cause of action for aiding and abetting a RICO violation. We
will, therefore, affirm the judgment of the district court
insofar as it granted the law firm's motion for summary
judgment on the investors' RICO claims, although we do so
for reasons different from those offered by the district court.
Finally, we will affirm the district court's order denying
the investors' motion for leave to further amend their
complaint, as the proposed amendments would not survive
a renewed motion to dismiss. The investors may not pursue
a claim against the law firm under the Pennsylvania Unfair
Trade Practices and Consumer Protection Law because
securities are not "goods" under that law. The investors
may not pursue a claim against the law firm under the
Massachusetts Consumer Protection Act because the
investors did not have a "business relationship" with the
firm. The investors may not pursue a claim against the law
firm under either the Pennsylvania Securities Act or the
Massachusetts Securities Act because the firm was not a
statutory "agent" of the limited partnership.
_________________________________________________________________
the statement will be relied upon by investors, (2) the lawyer is aware
(or
is reckless in not being aware) of the material misstatement or omission,
(3) the lawyer played such a substantial role in the creation of the
statement that the lawyer could fairly be said to be the "author" or "co-
author" of the statement, and (4) the other requirements of primary
liability are satisfied.
4
I.2
William Coleman has a long record of securities fraud,
regulatory sanction, and customer claims of fraudulent
conduct dating back to 1981. He was censured by the
Chicago Board of Options in 1987 for unauthorized trading.
He entered into a consent order with the states of Vermont
and Minnesota which barred him from certain broker-
dealer positions. He was prohibited from soliciting clients
pursuant to agreements with the National Association of
Securities Dealers ("NASD"). Numerous complaints were
brought against Coleman by investors, including claims of
fraud, unauthorized option trading, and churning; many of
these claims were settled at or near the full amount of the
claim.
Since 1990, Coleman had been the stock broker and
financial adviser for Pennsylvania resident Elyse Klein.
Richard and Doris Kastner, Elyse's parents and residents of
Pennsylvania, retained Coleman as their broker in 1990 or
1991. Warren Kastner, Richard's brother and a resident of
Massachusetts, also retained Coleman as his broker in
1990 or 1991.3 These investors were not aware of
Coleman's record.
In 1992, Coleman and Thomas Tarantino joined to
purchase the securities brokerage business of Edward C.
Rorer & Co. Tarantino recommended retaining Drinker
Biddle & Reath ("Drinker"), a Philadelphia law firm, to
provide legal advice and to assist in the formation of the
new business entity. Robert Strouse, a partner at Drinker,
assumed primary responsibility for the matter. Strouse
asked Paula Calhoun, a junior associate at Drinker, to
assist him.
_________________________________________________________________
2. Because we are reviewing the grant of the law firm's motion for
summary judgment, we must view the facts in the light most favorable
to the investors. Thus, the investors' evidence is to be believed, and all
justifiable inferences are to be drawn in their favor. Kline v. First W.
Gov't
Sec., Inc., 24 F.3d 480, 481-82 (3d Cir. 1994).
3. We will refer to Elyse Klein, Richard Kastner, Doris Kastner, and
Warren Kastner individually by first name or collectively as "the
investors."
5
In September 1992, Strouse met with Coleman and
Tarantino to discuss the transaction. Coleman and
Tarantino explained the concept of the new business they
were forming and the terms of the agreement they wanted
Drinker to prepare. They explained that Mercer Securities,
Ltd. ("Mercer LP") was to purchase Rorer's business. Mercer
LP was to be organized as a limited partnership with a
corporate general partner, Mercer Securities, Inc. ("Mercer,
Inc.").
Coleman and Tarantino explained that Mercer, Inc. was
already in existence, and that Coleman owned 60% of its
stock, Tarantino owned 30%, and William Boyd owned
10%. Boyd became president of Mercer, Inc. and would be
the "financial principal" of Mercer LP. Strouse also learned
that broker Steven Schappell was to join Mercer LP and
would play an important role in the firm's financial success.
Near the end of the September meeting, Coleman and
Tarantino set up a conference call with Richard and
Warren, whom Strouse was told were going to be investors
in Mercer LP, and discussed with them the terms of the
investment. After the meeting, Strouse learned that Elyse
was also going to invest in Mercer LP based on similar
representations made by Coleman.
After the meeting, Strouse learned from Tarantino that
Mercer LP, without waiting for Drinker to draft the
partnership and subscription agreement or the necessary
disclosure documents, had begun operations. Strouse
learned that Coleman had already solicited and received
$50,000 from Elyse, $100,000 from Richard and Doris, and
$100,000 from Warren. Coleman had told the investors that
they would face little risk and that they would receive a
25% annual return. When Strouse learned that Mercer LP
had received these investments without providing written
disclosures, he advised that the partnership agreement be
completed, that a disclosure letter be provided to the
investors, and that the investors be given an opportunity to
reaffirm or rescind their investments.
Strouse did not learn that Coleman had a history of
securities violations and customer complaints until after
the September meeting. According to the investors, in
6
November or December 1992, Tarantino told Strouse that
Coleman had concealed the full extent of his compliance
history from Tarantino (and presumably from the investors
as well). Strouse also learned that Boyd had a history of
unemployment and was censured for permitting the
subordinated debt of a prior law firm which failed to exceed
the appropriate level in 1989.
By January 1993, the partnership agreement was still
not completed, the investors had not received any
disclosures, and the investors were not given an
opportunity to reaffirm or rescind their investments. Mercer
LP repaid the investors one quarter of their investment,
purportedly as interest. That month, Strouse reiterated the
need to complete the partnership and disclosure
documents.
In February 1993, Drinker finally completed the
partnership agreement and a subscription agreement, and
put together a disclosure package which included a
disclosure letter, U-4 Forms for Coleman and Boyd
reflecting their compliance history, and other documents
describing the various state supervisory orders and
judgments entered against Coleman. The disclosure letter
explained, inter alia, Coleman's compliance history and the
fact that the NASD had substantially restricted Coleman's
conduct as a broker. On February 5, 1993, Strouse and
Calhoun gave Coleman and Tarantino the "February
Disclosure Package" and instructed them that they needed
to deliver it to the investors and obtain necessary
signatures.
In May 1993, Boyd called a meeting of Mercer, Inc.'s
directors. Strouse participated by telephone. Boyd stated
that the February Disclosure Package had not been
delivered to the investors. Strouse advised that the package
should be delivered and that all necessary signatures
should be obtained. Coleman and Tarantino balked at
Strouse's suggestion. The February Disclosure Package was
never delivered to the investors. The evidence of record does
not contain any suggestion that Strouse ever had any
reason to believe otherwise.
From February 1993 through June 1993, numerous
orders and restrictions were entered against Coleman,
7
including Virginia and West Virginia orders imposing
supervisory restrictions on Coleman, a California order
barring Coleman from holding any position as a broker-
dealer or investment advisor for four years, a Minnesota
order barring Coleman from registration as a representative
for five years, and an Oregon order barring Coleman from
registration as an agent. During the same time period,
Maryland, West Virginia, Virginia, California, Minnesota,
and Oregon imposed supervisory restrictions on Mercer LP.
Strouse learned of these orders no later than August 1993.
In addition, Florida refused to register Mercer LP because
of Coleman's involvement. By August 1993, Strouse knew
that, although Mercer LP was not registered in Florida,
Mercer LP had transacted $1.8 million in that state. Also by
August 1993, Strouse was aware that Schappell had once
pled guilty to possession of cocaine.
On July 7, 1993, following a dispute with Coleman,
Tarantino was ousted as director and officer of Mercer, Inc.
In August 1993, Boyd asked Drinker to prepare a form
letter that Mercer LP could use to repurchase a limited
partnership interest. Calhoun drafted the letter and sent it
to Boyd, who adapted the letter and used it to repurchase
the 1992 investments of Richard, Doris and Warren.
In August 1993, Coleman persuaded Elyse, who may
have been in Massachusetts at the time, to invest an
additional $200,000 in Mercer LP on different terms.
Coleman assured Elyse that there would be no risk. At this
time, Coleman owned 60% of the shares of Mercer, Inc. and
a substantial portion of the limited partnership units of
Mercer LP.
Mercer LP came to understand that it would not be
permitted to register to do business as a broker-dealer in
certain states while Coleman was a part owner. In August
1993, Coleman sold his interest in Mercer LP to his mother.
In September 1993, Coleman solicited Richard and Doris
to reinvest their $100,000 on different terms. Coleman
owned 60% of the shares of Mercer, Inc. at this time.
Strouse advised Mercer LP that a new partnership
agreement, subscription agreement and disclosure letter
8
should be prepared to reflect recent changes. In September
1993, Drinker prepared an amended limited partnership
agreement reflecting the new 1993 investments. Drinker
gave the amended agreement to Coleman, who arranged to
have it signed by Elyse, Richard and Doris.
In October 1993, Coleman sold his 60% interest in
Mercer, Inc. to Mercer LP brokers Gregory Jamgochian and
Lawrence Stevens. Coleman divested his interest in Mercer,
Inc. because state securities regulators refused to give
Mercer LP permission to operate in Florida so long as
Coleman had an interest in the company.
In October or November 1993, Drinker prepared a
disclosure package for distribution to Elyse, Richard and
Doris. The so-called "November Disclosure Package" did not
contain any information about Coleman's checkered
compliance history and current restrictions. The package
did not contain any information about disciplinary actions
taken against Boyd. The package did not contain any
information about the significant restrictions placed on
Mercer LP or the partnership's precarious financial
position. The package did not contain any information
about Schappell's drug conviction.
Boyd forwarded the November Disclosure Package to
Elyse, Richard and Doris in November 1993, who confirmed
their 1993 investments and acknowledged that they had
received and reviewed the materials provided in the
package. After all the documents had been signed and
returned to Boyd, he sent them to Calhoun. Calhoun then
sent a complete set of the executed partnership documents
to the investors with a one-line cover memo stating,
"Enclosed for your records is an original set of partnership
documents." This is the only direct communication from
Drinker to the investors.
In late 1993 and early 1994, Mercer LP fell below its net
capital requirements. In an effort to keep the partnership
afloat, Mercer LP failed to pay its brokers their full
commissions.
In May 1994, Mercer LP repurchased Elyse's original
$50,000 investment. At about the same time, Mercer LP
offered Warren the opportunity to invest $100,000 in a
9
Mercer LP subordinate debenture. Warren received a
disclosure letter prepared with Strouse's assistance. The
"May Disclosure Letter" contained the same omissions as
the November Disclosure Package. The letter also failed to
disclose the partnership's recent financial problems relating
to the non-payment of commissions. Warren accepted the
offer by executing the loan agreement in Massachusetts;
the debenture was not, however, ever recorded in
Massachusetts.
In June 1994, Elyse, who by this time had become
concerned over her investments with Mercer LP, consulted
with attorney Barbara Podell in an attempt to recover her
funds. Podell contacted the NASD, who sent her
information on Coleman's compliance history. Elyse learned
of Coleman's compliance history no later than the fall of
1994.
In December 1994, Schappell was killed by a bus. It was
soon discovered that Schappell had severely and
fraudulently mishandled some of his customers' accounts.
Strouse was advised of the situation. At a meeting of the
board of directors of Mercer, Inc., Strouse advised that the
board not discuss the Schappell matter with anyone.
Subsequently, Boyd sent the investors letters stating that
Mercer LP faced problems because of Schappell's "untimely"
death; the letters did not reveal the fraudulent conduct in
which he engaged.
In February 1995, Mercer LP failed. The investors lost
their entire $400,000 investment ($200,000 from Elyse,
$100,000 from Richard and Doris, and $100,000 from
Warren).
On August 23, 1995, the investors sued Mercer, Inc.,
Mercer LP, Boyd and Coleman. During discovery, the
investors served subpoenas on Drinker and Tarantino.
Among the documents produced in response to these
subpoenas was the February Disclosure Package. This was
the first time the investors had ever been aware of the
package. On December 4, 1995, the investors filed their
first amended complaint which asserted claims against
Drinker, Tarantino, Jamgochian, and Stevens.
10
The investors' complaint against Drinker included claims
for securities fraud under section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5, violation of RICO,
and common law fraud, all arising from Drinker's
involvement in the preparation of the November Disclosure
Package and the May Disclosure Letter. The investors later
attempted to amend further their amended complaint to
assert claims against Drinker for failure to disclose material
information under the Massachusetts Securities Act and
the Pennsylvania Securities Act, and for fraud in violation
of the Massachusetts Consumer Protection Act and the
Pennsylvania Unfair Trade Practices and Consumer
Protection Law. The district court denied the investors'
motion to amend as futile.
The district court granted Drinker's motion for summary
judgment on all counts. Subsequently, the investors settled
with the remaining defendants. The investors appealed from
the final order of the district court granting Drinker's
motion for summary judgment on the securities act claim,
the RICO claim, and the common law fraud claim, and also
appealed from the district court's order denying the
investor's motion to amend.4
II.
Section 10(b) of the Securities Exchange Act of 1934, 15
U.S.C. S 78j(b), forbids "manipulative or deceptive acts in
connection with the purchase or sale of securities." Central
Bank of Denver, N.A. v. First Interstate Bank of Denver,
N.A., 511 U.S. 164, 173 (1994); Santa Fe Indus., Inc. v.
Green, 430 U.S. 462, 473-74 (1977). Rule 10b-5,
promulgated by the Securities and Exchange Commission
under section 10(b), makes it unlawful for "any person,
_________________________________________________________________
4. The district court had jurisdiction over the investors' federal
securities
claims pursuant to 15 U.S.C. S 78aa and 28 U.S.C. S 1331. The court
had jurisdiction over the investors' RICO claims pursuant to 18 U.S.C.
S 1964(c) and 28 U.S.C. S 1331. The court had supplemental jurisdiction
over the investors' state law claims pursuant to 28 U.S.C. S 1367.
Pursuant to 28 U.S.C. S 1291, we have jurisdiction over the consolidated
appeals from the final judgments of the district court entered on
February 21, 1997 and March 17, 1997.
11
directly or indirectly . . . [t]o 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." 17 C.F.R. S 240.10b-5(b). Although section
10(b) and Rule 10b-5 do not explicitly provide a private
right of action, the courts have inferred one. Scattergood v.
Perelman, 945 F.2d 618, 622 (3d Cir. 1991); see also
Central Bank of Denver, 511 U.S. at 166, 171.
To state a claim under section 10(b) and Rule 10b-5, a
private plaintiff must allege that the defendant (1) with
scienter (2) made misleading statements or omissions (3) of
material fact (4) in connection with the purchase or sale of
securities (5) upon which the plaintiff relied in entering the
transaction and (6) that the plaintiff suffered economic loss
as a proximate result. Scattergood, 945 F.2d at 622; In re
Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1244 (3d Cir.
1989).
A.
The district court dismissed Elyse's federal securities
fraud claim against Drinker because it found that the claim
was barred by the statute of limitations. An action under
section 10(b) and Rule 10b-5 "must be commenced within
one year after the discovery of facts constituting the
violation and within three years after such violation."
Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501
U.S. 350, 364 (1991).
The one-year limitation period begins to run when the
victim is placed on so-called "inquiry notice" -- when the
victim should have discovered the misrepresentation or
omission through the exercise of reasonable diligence. Great
Rivers Coop. of Southeastern Iowa v. Farmland Indus., Inc.,
120 F.3d 893, 896 (8th Cir. 1997). Inquiry notice exists
"when the victim is aware of facts that would lead a
reasonable person to investigate and consequently acquire
actual knowledge of the defendant's misrepresentations."
Id. The Court of Appeals for the Eighth Circuit recently
explained the proper standard for determining when a
person is on inquiry notice:
12
[A] court must determine: (1) the facts of which the
victim was aware; (2) whether a reasonable person with
knowledge of those facts would have investigated the
situation further; and (3) upon investigation, whether
the reasonable person would have acquired actual
notice of the defendant's misrepresentations. If a
reasonable person aware of the facts known to the
victim would have investigated, that is, exercised
reasonable diligence, and consequently discovered the
misrepresentations, the victim had inquiry notice.
Id. We agree with and adopt this definition of "inquiry
notice."
The following facts are not in dispute: (1) Elyse's claim
against Drinker is largely premised on Drinker's failure to
include information on Coleman's compliance history in the
November Disclosure Package; (2) Elyse learned about
Coleman's compliance history no later than the fall of 1994;
(3) Elyse knew that Drinker represented Mercer LP in the
fall of 1994; (4) Elyse did not file suit against Drinker until
December 4, 1995 -- more than one year after she had
notice of Coleman's history and Drinker's representation of
Mercer LP. The district court concluded that Elyse was on
inquiry notice of Drinker's alleged fraudulent conduct more
than one year prior to the initiation of the lawsuit against
Drinker, and it held that Elyse's federal securities claim
was therefore barred as to Drinker.
We agree with the district court. Elyse was placed on
inquiry notice in the fall of 1994 when she learned of both
Coleman's compliance history and Drinker's representation
of Mercer LP. At that time, a reasonable person would have
investigated and would have soon acquired actual
knowledge of Drinker's role in the alleged
misrepresentations.
Elyse contends that she had no basis to believe that
Drinker knew of Coleman's compliance history until after
she filed suit against the other defendants and obtained the
February Disclosure Package during discovery. We do not
dispute that Elyse might not have had actual knowledge
about Drinker's alleged role until receiving the February
Disclosure Package. At issue, however, is whether Elyse
13
should have investigated in the fall of 1994. We conclude
that a reasonable person in Elyse's position would have
investigated at that time. As a result, we will affirm the
judgment of the district court insofar as it dismissed Elyse's
federal securities claim against Drinker.5
B.
The district court also concluded that Drinker could not
be liable to any of the investors under section 10(b) and
Rule 10b-5 for the alleged omissions because Drinker never
signed the documents it prepared regarding the
investments and its name did not appear on any of the
relevant Mercer LP documents. Since the investors were not
aware of Drinker's involvement in the preparation of the
disclosure documents, the district court reasoned, Drinker
did not make any statements upon which the investors
relied.
The district court explained that a duty to disclose under
section 10(b) and Rule 10b-5 arises from the existence of a
fiduciary relationship. Klein v. Boyd, No. 95-5410, 1996 WL
675554, at *27 (E.D. Pa. November 19, 1996) (citing Dirks
v. SEC, 463 U.S. 646, 654 (1983)). Reasoning that the
investors were not in a fiduciary relationship with Drinker,
the district court concluded that Drinker did not have a
duty to disclose information to the investors. Absent a duty
to disclose, the court reasoned, there can be no liability for
failure to disclose a material fact.
In Central Bank of Denver, the Supreme Court held that
since the text of section 10(b) does not itself reach those
who aid and abet a section 10(b) violation, a private plaintiff
may not maintain an aiding and abetting action under
section 10(b). Central Bank of Denver, 511 U.S. at 177, 191.
According to the Court, section 10(b) "prohibits only the
making of a material misstatement (or omission) or the
commission of a manipulative act. . . . The proscription
does not include giving aid to a person who commits a
manipulative or deceptive act." Id. at 177.
_________________________________________________________________
5. The district court found a genuine issue of material fact on the
question of whether Richard and Doris were also placed on inquiry
notice more than one year before filing suit against Drinker.
14
Although refusing to recognize a private cause of action
for aiding and abetting liability, the Court acknowledged
that secondary actors in the securities markets may still be
liable under the securities acts:
The absence of S 10(b) aiding and abetting liability does
not mean that secondary actors in the securities
markets are always free from liability under the
securities Acts. Any person or entity, including a
lawyer, accountant, or bank, who employs a
manipulative device or makes a material misstatement
(or omission) on which a purchaser or seller of
securities relies may be liable as a primary violator
under 10b-5, assuming all the requirements for
primary liability under Rule 10b-5 are met.
Id. at 191 (emphasis omitted).
Several courts since Central Bank of Denver have
attempted to demarcate a boundary between actions that
would only amount to aiding and abetting and actions that
rise to the level of a primary violation of section 10(b). See,
e.g., Anixter v. Home-Stake Prod. Co., 77 F.3d 1215 (10th
Cir. 1996); In re Software Toolworks Inc. Sec. Litig., 50 F.3d
615 (9th Cir. 1994). Our inquiry requires us to investigate
what it means for a secondary actor to make a materially
misleading statement. In so doing, we hope to clarify
circumstances under which a statement may fairly be said
to have been "made" by a secondary actor.
After Central Bank of Denver, it is reasonably clear that
secondary actors such as lawyers can be held primarily
liable for the misrepresentations and omissions contained
in disclosure documents and other statements released to
investors under the secondary actors' own names,
assuming the other requirements for liability are met. For
example, in Kline v. First W. Gov't Sec., Inc., 24 F.3d 480(3d Cir. 1994), a law firm issued three opinion letters
concerning the tax consequences of an investment in
forward contracts through First Western. Although the
letters stated that they were for the exclusive use of First
Western, the law firm was aware that its opinion letters had
reached potential investors. Id. at 483. The investors
alleged that the opinion letters, upon which they relied in
15
deciding to invest, omitted material facts concerning the
structure of the First Western transactions.
The district court granted the law firm's motion for
summary judgment on the investors' claim. The court
reasoned that lawyers cannot be held liable for omissions in
an opinion letter unless the investors can demonstrate that
the lawyers had a duty to disclose the information that was
omitted. Finding no evidence of a fiduciary or other
relationship which would give rise to such a duty, the
district court held that the investors could not proceed with
their omissions claim. Id. at 490.
We reversed. We noted: "We are dealing here with a
situation in which [the law firm], by authoring its opinion
letters, has elected to speak regarding the transactions at
issue. Plaintiffs allege that this speech was misleading
because [the law firm] failed to include in its opinion letters
information that, if included, would have undermined the
conclusions reached in those letters." Id. We concluded that
once a law firm has chosen to speak, it may not omit facts
material to its non-confidential opinions. Id. at 490-91.
We reasoned that the law firm's duty to not omit material
facts did not arise from a fiduciary duty owed to the
investors; rather, the duty arose when the law firm
undertook the affirmative act of communicating with the
investors:
[W]hen a professional undertakes the affirmative act of
communicating or disseminating information, there is
a general obligation or `duty' to speak truthfully . . . .
And encompassed within that general obligation is also
an obligation or `duty' to communicate any additional
or qualifying information, then known, the absence of
which would render misleading that which was
communicated. . . . [This duty] is simply one facet of
the general obligation to speak truthfully, arising out of
and because of an affirmative act by the defendant in
communicating.
Id. at 491 (quotations omitted). Summary judgment was
inappropriate even though the law firm never
communicated directly with the investors, but merely
16
prepared opinion letters with knowledge that First Western
was distributing those letters to potential investors.
In Ackerman v. Schwartz, 947 F.2d 841 (7th Cir. 1991),
attorney Howard Schwartz wrote an opinion letter which
allegedly recited untrue "facts." The court of appeals held:
"Although the lack of duty to investors means that
Schwartz had no obligation to blow the whistle, and none
to correct a letter he had not authorized to be circulated in
the first place . . . , Schwartz cannot evade responsibility to
the extent he permitted the promoters to release his letter."
Id. at 848 (internal citations omitted). The court concluded
that, if Schwartz authorized the inclusion of his letter with
the offering documents, Schwartz could be liable as a
principal, and not merely as an aider and abettor. Id.
According to the court: "In order to recover from a
professional for a report rendered to his client, the third
party must establish that the professional was aware that
the report would be used for a particular purpose, in
furtherance of which a known person would rely, and the
professional must show an understanding of this
impending reliance." Id. at 846.
If Drinker had prepared signed opinion letters, or other
documents acknowledging Drinker's preparation and/or
endorsement of the documents, for distribution to the
investors that were materially misleading, we would have
little difficulty acknowledging Drinker's liability for a
primary violation of section 10(b) and Rule 10b-5, assuming
the other requirements of liability were met. With one
exception which we do not deem material to the outcome of
this case, however, Drinker did not sign any documents for
distribution to the investors.6 Indeed, the investors concede
that they did not know about Drinker's involvement with
Mercer LP until after they invested. We are thus faced with
a question far more difficult than the one we answered in
_________________________________________________________________
6. Calhoun sent a complete set of executed partnership documents to the
investors after Elyse, Richard and Doris confirmed their 1993
investments and acknowledged that they had received and reviewed the
materials provided in the November Disclosure Package. The investors do
not contend that they relied on Calhoun's cover letter as Drinker's
representation that the disclosure documents were accurate and
complete.
17
Kline: Whether a lawyer who participated in the drafting of
a client's fraudulent document may be held primarily liable
to a third-party investor under the federal securities laws
for the material misstatements or omissions contained in
the document, when the lawyer did not sign or endorse the
document and the investor is therefore unaware of the
lawyer's role in the fraud.
We conclude that lawyers and other secondary actors
who significantly participate in the creation of their client's
misrepresentations, to such a degree that they may fairly
be deemed authors or co-authors of those
misrepresentations, should be held accountable as primary
violators under section 10(b) and Rule 10b-5 even when the
lawyers or other secondary actors are not identified to the
investor, assuming the other requirements of primary
liability are met. To obtain relief under section 10(b) and
Rule 10b-5, a private plaintiff must show, inter alia, that he
or she relied on a misleading statement of the defendant
and suffered an economic loss as a proximate result.
Scattergood, 945 F.2d at 622. Section 10(b) and Rule 10b-5
require the plaintiff to demonstrate reliance on the
misleading statement; they do not require the plaintiff to
demonstrate that he or she relied on the defendant's role in
the preparation or dissemination of the statement. When an
investor reasonably relies on a materially misleading
statement in connection with the purchase or sale of a
security, the author of the statement should not be allowed
to escape liability under the federal securities laws merely
because the author is unknown to the investor.
In In re ZZZZ Best Sec. Litig., 864 F. Supp. 960 (C.D. Cal.
1994), investors alleged that ZZZZ Best perpetrated a fraud
in connection with the sale of ZZZZ Best securities. The
plaintiffs also alleged that Ernst & Young was liable for its
involvement in the creation, review and issuance of
approximately thirteen publicly released statements related
to the scheme. None of the statements attributed its
existence to Ernst & Young or even hinted that thefirm
might have been involved in the issuance of any of the
statements. Id. at 965. Ernst & Young argued that those
statements released to the public by ZZZZ Best and
attributable only to ZZZZ Best or others, even if reviewed,
18
edited or approved by Ernst & Young, were not actionable
against Ernst & Young as violations of section 10(b) and
Rule 10b-5.
The investors countered that if a "secondary actor" such
as Ernst & Young actively participates in the creation of a
materially misleading statement issued by a "primary actor"
such as ZZZZ Best, then the so-called secondary actor has
committed a primary violation of section 10(b). According to
the plaintiffs, since Ernst & Young was actively involved in
the writing and reviewing of the financial reports and press
releases provided to the public by ZZZZ Best, and since
Ernst & Young knowingly included information which was
misleading in the documents, Ernst & Young committed a
primary violation of section 10(b) and Rule 10b-5.
The court agreed with the investors. Id. at 970.
Acknowledging that the investors might not have been able
to attribute the misstatements and omissions directly to
Ernst & Young, the court reasoned that the investors still
relied on the statements. According to the court,"anyone
intricately involved in their creation and the resulting
deception should be liable under Section 10(b)/Rule 10b-5."
Id.
Ernst & Young specifically challenged the investors'
omissions-based claim on the ground that an alleged failure
to act cannot give rise to a section 10(b) claim unless the
investors establish a relationship with the defendant which
gives rise to a duty to disclose. While agreeing with this
general proposition, the court noted that "a general duty
does exist to communicate any additional information,
which in its absence would render misleading that which
was already communicated." Id. at 971. If Ernst & Young
was found to have sufficiently participated in the
preparation of the misrepresentations and omissions such
that they were attributable to the firm, the court reasoned,
then Ernst & Young would have a duty to disclose or
correct these previously released misrepresentations. Id. We
find the reasoning of the court in ZZZZ Best to be
persuasive.
Drinker contends that it did not have a duty to "blow the
whistle" on Mercer LP. It is reasonably clear that mere
19
silence, absent a duty to speak, is not actionable under
section 10(b) or Rule 10b-5. Chiarella v. United States, 445
U.S. 222, 235 (1980). Drinker also contends that it did not
owe a fiduciary duty to the investors. We do not disagree.
Our analysis does not end there, however. The investors
contend, and we agree, that a duty to disclose may arise
either from a fiduciary relationship or from affirmative
representations that omit a material fact such that the
representations made are misleading.
We need not address the issue of whether a lawyer has
an absolute duty to "blow the whistle" on his client.
Instead, we are convinced that, as with the facts alleged
here, when a lawyer elects to speak, the lawyer does have
a duty to speak truthfully. See 17 C.F.R.S 240.10b-5
(making it unlawful 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"); see also Kline, 24 F.3d at 491 (when law firm
elects to speak, it assumes the duty to communicate any
additional or qualifying information, then known, the
absence of which would render misleading that which was
communicated). The fact that the lawyer is speaking
"behind the scenes" does not absolve the lawyer of this
duty. When a lawyer prepares a document with knowledge
that the document will be distributed to investors, the
lawyer has elected to speak to the investors, even though
the document may not be facially attributed to the lawyer.
While Drinker did not owe a fiduciary duty to the investors
to "blow the whistle" on Mercer LP, Drinker did have a duty
to correct material omissions contained in its statements.
We do not suggest that a lawyer who merely provides
"substantial assistance" to a client may be liable under
section 10(b) and Rule 10b-5. Such a holding would be
inconsistent with the Supreme Court's rejection of a private
cause of action for aiding and abetting. See Central Bank of
Denver, 511 U.S. at 168 (listing "substantial assistance
given to primary violator" as one element of rejected aiding
and abetting cause of action). Rather, we believe that a
person may be liable for a primary violation of section 10(b)
and Rule 10b-5 when the person's participation in the
creation of a statement containing a misrepresentation or
20
omission of material fact is sufficiently significant that the
statement can properly be attributed to the person as its
author or co-author. At that point, the person has done
more than provide mere substantial assistance; the person
has become a primary violator of section 10(b) and Rule
10b-5, assuming that the other requirements of section
10(b) and Rule 10b-5 are satisfied. This is true even if the
investor is unable to attribute the statement to the person
at the time of the transaction.
We hold that when a person participates in the creation
of a statement for distribution to investors that is
misleading due to a material misstatement or omission, but
the person is not identified to the investors, the person may
still be liable as a primary violator of section 10(b) and Rule
10b-5 so long as (1) the person knows (or is reckless in not
knowing) that the statement will be relied upon by
investors, (2) the person is aware (or is reckless in not
being aware) of the material misstatement or omission, (3)
the person played such a substantial role in the creation of
the statement that the person could fairly be said to be the
"author" or "co-author" of the statement, and (4) the other
requirements of primary liability are satisfied.
Our holding is not without precedent. In In re Software
Toolworks Inc. Sec. Litig., 50 F.3d 615 (9th Cir. 1994), the
plaintiffs alleged that accountants violated section 10(b) by
participating in the drafting of two letters sent by their
client to the SEC. While the first letter specifically referred
to the accountants, the Court of Appeals for the Ninth
Circuit concluded that the second letter, which was not
attributed to the accountants, could also support section
10(b) liability. According to the court, those who"played a
significant role in drafting and editing" the second letter
may be primarily liable under section 10(b). Id. at 628 n.3.
The court determined that a reasonable factfinder could
conclude that the accountants, "as members of the drafting
group, . . . had access to all information that was available
and deliberately chose to conceal the truth." Id. at 629; see
also Cashman v. Coopers & Lybrand, 877 F. Supp. 425,
432 (N.D. Ill. 1995) (primary liability can be established by
showing an accountant's "central involvement" in the
preparation of material).
21
We believe that our holding is faithful to Central Bank of
Denver. As noted above, we do not consider mere
substantial assistance to be sufficient to establish primary
liability under section 10(b) and Rule 10b-5. Rather, we
conclude that when a person's participation in the creation
of a statement is significant enough that the person may be
considered the statement's "author" or "co-author," then
the statement upon which the plaintiff relies is "made" by
the person such that primary liability may attach under
section 10(b) and Rule 10b-5 so long as the other
requirements of primary liability are satisfied.
In addition, nothing in the standard we adopt today is
inconsistent with Anixter v. Home-Stake Prod. Co., 77 F.3d
1215 (10th Cir. 1996). In Anixter, the Court of Appeals for
the Tenth Circuit stated that the "critical element
separating primary from aiding and abetting violations is
the existence of a representation, either by statement or
omission, made by the defendant, that is relied upon by the
plaintiff." Id. at 1225. We do not disagree with the Anixter
standard; we agree that primarily liability under section
10(b) and Rule 10b-5 will only attach to a secondary actor
when that actor makes a false or misleading statement. Our
holding today is meant only to clarify the circumstances
under which a statement may fairly be said to have been
"made" by a secondary actor.7
Viewing the facts of this case in a manner most favorable
to the investors, we conclude that plaintiffs have adduced
sufficient evidence to create an issue of material fact as to
whether (1) Drinker was an author or co-author of the
disclosure documents; (2) Drinker knew that those
documents would be relied upon by the investors; and (3)
_________________________________________________________________
7. The Anixter court notes that to the extent cases like ZZZZ Best and
Software Toolworks "allow liability to attach without requiring a
representation to be made by defendant" they do not comport with
Central Bank of Denver. Anixter, 77 F.3d at 1226 n.10. We do not,
however, read these cases as allowing liability absent a statement made
by the secondary actor. Rather, these cases articulate circumstances in
which a secondary actor's participation in the creation of the fraudulent
statement is so significant that the secondary actor can fairly be said to
have made the statement. We therefore find that both ZZZZ Best and
Software Toolworks faithfully adhere to Central Bank of Denver.
22
Drinker knew that material information was omitted from
those documents. As a result, Drinker had a duty to ensure
that the statements it made in the November Disclosure
Package and May Disclosure Letter did not contain
misstatements or omissions of material fact.8 The investors
have proffered sufficient evidence at this stage to
demonstrate that Drinker did not fulfill its duty.
C.
The district court also concluded that the investors failed
to demonstrate a genuine issue of material fact on the issue
of scienter. Scienter is a necessary element of a cause of
action under section 10(b) and Rule 10b-5. In re Phillips
Petroleum Sec. Litig., 881 F.2d 1236, 1242 (3d Cir. 1989).
Scienter is defined as "a mental state embracing intent to
deceive, manipulate, or defraud." Id. at 1244 (quotations
omitted); accord Ernst & Ernst v. Hochfelder, 425 U.S. 185,
194 n.12 (1976). Scienter may be found "only where there
is intentional or willful conduct designed to deceive or
defraud investors by controlling or artificially affecting the
price of securities." Phillips Petroleum, 881 F.2d at 1244
(quotations omitted). It is insufficient to show mere
negligent conduct. Eisenberg v. Gagnon, 766 F.2d 770, 776
_________________________________________________________________
8. In order for an omission or misstatement to be actionable under
section 10(b) or Rule 10b-5, the omission or misstatement must be
material; that is, it must alter the total mix of relevant information for
a
reasonable investor making an investment decision. In re Burlington Coat
Factory Sec. Litig, 114 F.3d 1410, 1425-26 (3d Cir. 1997); cf. TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (omitted fact is material
if there is substantial likelihood that omitted fact would have assumed
actual significance in deliberation of reasonable investor). Questions of
materiality have traditionally been viewed as particularly appropriate for
the trier of fact. Burlington Coat Factory, 114 F.3d at 1426. Where
alleged misrepresentations or omissions are obviously unimportant,
however, courts may rule them immaterial as a matter of law. Id.
The parties do not address the materiality question on appeal. It is
reasonably clear to us that the omitted facts regarding Coleman's
compliance history and restrictions and Mercer LP's restrictions were
material. The omitted facts regarding Boyd and Schappell might also be
material under the circumstances. It is appropriate in this case to leave
the question of materiality to the trier of fact.
23
(3d Cir. 1985). Scienter must be proven by showing that
"the defendant lacked a genuine belief that the information
disclosed was accurate and complete in all material
respects." Phillips Petroleum, 881 F.2d at 1244 (quotations
omitted).
A showing of recklessness on the part of the defendant is
sufficient to establish scienter for a claim under section
10(b) and Rule 10b-5. Id. Recklessness is defined as "an
extreme departure from the standards of ordinary care . . .
which presents a danger of misleading . . . that is either
known to the defendant or is so obvious that the actor
must be aware of it." Id. (quotation omitted). We have long
recognized that circumstantial evidence may often be the
principal, if not the only, means of proving scienter. Id. at
1248; McLean v. Alexander, 599 F.2d 1190, 1198 (3d Cir.
1979).
We conclude that the investors have demonstrated the
existence of a genuine issue of material fact on the issue of
scienter. Viewing the facts in the light most favorable to the
investors, a trier of fact could reasonably find the following:
(1) Strouse knew that Mercer LP, through Coleman,
improperly solicited the investors' original investments
without making the necessary disclosures; (2) Strouse knew
in May 1993 that the investors never received the February
Disclosure Package and therefore never had an opportunity
to rescind their original investments; (3) although Strouse
encouraged Mercer LP to distribute the package in May
1993, he never attempted to determine whether the
package was subsequently delivered; (4) Strouse knew that
Mercer LP and Coleman faced numerous regulatory
difficulties throughout 1993 that presented severe
difficulties for Mercer LP's financial future; (5) in September
or October 1993, Strouse knew that Mercer LP, possibly
through Coleman, had once again solicited substantial
investments from the investors without distributing
necessary disclosures; and (6) Strouse prepared the
November Disclosure Package and May Disclosure Letter
without including the material information that was
contained in the undelivered February Disclosure Package
and without including material information about his
client's 1993 difficulties.
24
From the above facts, it would be reasonable for a trier of
fact to infer that Strouse, who knew that Mercer LP and the
investors' investments were in serious trouble, was
concerned about his representation of Mercer LP and the
behavior of his client. Although Strouse was not necessarily
in a position to prevent Mercer LP from engaging in various
misdeeds throughout its existence, a trier of fact could
reasonably infer that Strouse did not do all that he should
have done to ensure that his clients complied with the law
and distributed the February Disclosure Package. A trier of
fact might infer that Strouse was concerned that disclosure
of the Coleman and Mercer LP information would lead to
the investor's decision to rescind their investments, thus
causing the downfall of Mercer LP and the exposure of
possible oversights in Strouse's representation of Mercer
LP. A trier of fact might reasonably infer that Strouse
concealed this information in an effort to avoid rescission in
the hope that Mercer LP would remain solvent and possible
oversights would never be discovered. In sum, a trier of fact
might reasonably infer that Drinker intentionally concealed
material information from the November and May
disclosure documents, and that it was motivated by a
desire to avoid the financial and reputational repercussions
that could follow from the investors' anticipated decision to
rescind their investments. In other words, a trier of fact
might reasonably conclude that Drinker acted with
scienter.
Or it might not. Drinker offers several explanations for its
decision not to include the information about Coleman and
Mercer LP in the November Disclosure Package and the
May Disclosure Letter. We need not decide whether Drinker
in fact acted with scienter when it decided to exclude
certain information from the November and May disclosure
documents. It is sufficient that we decide that a trier of fact
could so conclude.
D.
On appeal, the investors contend that they submitted
evidence that Drinker engaged in a conspiracy to violate
section 10(b) and Rule 10b-5. Drinker counters that the
Supreme Court's rationale in support of its decision
25
refusing to recognize a private cause of action for aiding
and abetting in Central Bank of Denver also precludes
recognition of a private cause of action for conspiracy.9 As
the district court found, however, the investors did not
plead a conspiracy claim in their amended complaint. A
complaint must provide "fair notice of what the plaintiff's
claim is and the grounds upon which it rests." Krouse v.
American Sterilizer Co., 126 F.3d 494, 500 n.1 (3d Cir.
1997) (quotation omitted). Drinker was not placed on fair
notice that the investors intended to pursue a conspiracy
claim.10 Since the investors did not pursue a conspiracy
claim in their amended complaint, we need not decide
whether such a claim would be viable in the wake of
Central Bank of Denver.
III.
The investors also pled a cause of action for common law
fraud. In Pennsylvania, a cause of action for common law
fraud, or intentional misrepresentation, contains the
following elements:
(1) a representation; (2) which is material to the
transaction at hand; (3) made falsely, with knowledge
_________________________________________________________________
9. Compare Central Bank of Denver, 511 U.S. at 200 n.12 (Stevens, J.,
dissenting) ("The Court's rationale would sweep away the decisions
recognizing that a defendant may be found liable in a private action for
conspiring to violate S 10(b) and Rule 10b-5."), In re GlenFed, Inc. Sec.
Litig., 60 F.3d 591, 592 (9th Cir. 1995) (holding that Supreme Court's
rationale in Central Bank of Denver precludes private right of action for
conspiracy liability), and In re MTC Elec. Techs. Shareholders Litig., 898
F. Supp. 974, 981-82 (E.D.N.Y. 1995) (same), with In re Towers Fin.
Corp. Noteholders Litig., 936 F. Supp. 126, 129-30 (S.D.N.Y. 1996)
(holding that Central Bank of Denver does not preclude private cause of
action for conspiracy liability), and Dinsmore v. Squadron, Ellenoff,
Plesent, Sheinfeld & Sorkin, 945 F. Supp. 84, 85-86 (S.D.N.Y. 1996)
(same).
10. A vague comment in paragraph 113 of the amended complaint's
background section that the defendants "acted in concert together to aid
and abet one another in order to obtain investments from Elyse, Richard
& Doris, and Warren" is insufficient to place Drinker on fair notice that
the investors intended to pursue a conspiracy claim. See Krouse, 126
F.3d at 499-500 n.1.
26
of its falsity or recklessness as to whether it is true or
false; (4) with the intent of misleading another into
relying on it; (5) justifiable reliance on the
misrepresentation; and (6) the resulting injury was
proximately caused by the reliance.
Gibbs v. Ernst, 647 A.2d 882, 889 (Pa. 1994). The
companion tort of fraudulent concealment or non-
disclosure has the same elements as the tort of intentional
misrepresentation except that in a case of intentional non-
disclosure the party, with intent to deceive, intentionally
conceals a material fact rather than making an affirmative
misrepresentation. Id. at 889 n.12.
To be liable for material non-disclosure in Pennsylvania,
a party must first have a duty to speak. Duquesne Light Co.
v. Westinghouse Elec. Corp., 66 F.3d 604, 611-12 (3d Cir.
1995). That duty may arise when disclosure is necessary to
prevent an ambiguous or partial statement from being
misleading; it may also arise in certain circumstances when
the undisclosed fact is basic to the transaction.
Restatement (Second) of Torts S 551. For the reasons
discussed above in connection with the federal securities
claim, we conclude that a trier of fact could reasonably
conclude that Drinker had a duty to speak when it
prepared the disclosure documents.11 We therefore conclude
that the district court improperly granted Drinker's motion
for summary judgment on the investors' common law fraud
claim.12
_________________________________________________________________
11. We have noted an uncertainty regarding the extent to which
Pennsylvania law includes the Restatement's discrete criteria for when a
duty to speak arises. Duquesne Light, 66 F.3d at 612. Given the
significance of the omitted facts concerning Coleman and Mercer LP, the
nature of the transaction, and Drinker's role in the transaction, however,
we predict that the Pennsylvania Supreme Court wouldfind a duty to
speak in this case.
12. Focusing exclusively on Pennsylvania law, the district court did not
consider whether Warren's or Elyse's common law fraud claims should
be decided under Massachusetts law. On remand, the district court
should consider this issue in the first instance. See, e.g., Greenery
Rehabilitation Group, Inc. v. Antaramian, 628 N.E.2d 1291, 1294 (Mass.
App. Ct. 1994) (discussing duty to disclose, citing Restatement (Second)
27
IV.
The investors contend that Drinker is liable for
conspiracy and aiding and abetting under RICO. Reasoning
that Drinker did not owe the investors a duty to disclose
material information and that the investors failed to adduce
evidence of fraudulent intent, the district court granted
Drinker's motion for summary judgment on these claims.
Although, for reasons stated elsewhere in this opinion, we
disagree with the district court's reasoning, we will
nonetheless affirm the judgment of the district court
because the investors' RICO claims fail as a matter of law.
A.
Section 1962(c) makes it unlawful "for any person
employed by or associated with any enterprise . . . to
conduct or participate, directly or indirectly, in the conduct
of such enterprise's affairs through a pattern of
racketeering activity." 18 U.S.C. S 1962(c). In Reves v. Ernst
& Young, 507 U.S. 170 (1993), the Supreme Court limited
the class of persons subject to liability under this section.
The Court held that "one is not liable under[section
1962(c)] unless one has participated in the operation or
management of the enterprise itself." Id. at 183. In order to
"participate" in the conduct of the enterprise's affairs, the
Court held, "one must have some part in directing those
affairs." Id. at 179.
According to the Court, "[a]n enterprise also might be
`operated' or `managed' by others `associated with' the
enterprise who exert control over it as, for example, by
bribery." Id. at 184. Thus, "outsiders" may be liable under
_________________________________________________________________
of Torts S 551); see also Royal Bus. Group, Inc. v. Realist, Inc., 933
F.2d
1056, 1065 (1st Cir. 1991) (under Massachusetts law, one who "chooses
to make a disclosure shoulders certain responsibilities of completeness
and accuracy").
Under either Pennsylvania or Massachusetts law, Elyse's common law
fraud claim is not time barred. See 42 Pa. Cons. Stat. Ann. S 5524(7)
(two-year limitations period in Pennsylvania); Mass. Gen. Laws ch. 260,
S 2A (three-year limitations period in Massachusetts).
28
section 1962(c) if they participate in the operation or
management of the enterprise itself. Id. at 185.
The investors have proffered evidence suggesting that
Drinker, with scienter, concealed material information from
documents it knew would be given to the investors by its
client. This is insufficient to support a rational inference,
much less a finding, that Drinker participated in the
"operation or management" of the Mercer RICO enterprise.
Drinker may have assisted Mercer LP, and Drinker's legal
services may have benefitted the Mercer enterprise. As a
matter of law, however, there is no evidence suggesting that
Drinker directed, operated or managed the Mercer
enterprise's affairs. See, e.g., Hayden v. Paul, Weiss,
Rifkind, Wharton & Garrison, 955 F. Supp. 248, 254
(S.D.N.Y. 1997) ("the provision of professional services by
outsiders, such as accountants, to a racketeering
enterprise, is insufficient to satisfy the participation
requirement of RICO, since participation requires some part
in directing the affairs of the enterprise itself "); see also
Reves, 507 U.S. at 185-86 (allegation that accountant's
audit reports concealed cooperative's insolvency insufficient
to establish participation in "operation and management" of
RICO enterprise); University of Md. at Baltimore v. Peat,
Marwick, Main & Co., 996 F.2d 1534, 1539 (3d Cir. 1993)
(policyholders failed to state RICO claim against insurer's
independent auditor where claim was based solely on
alleged preparation of false and misleading financial
statements for insurer); In re American Honda Motor Co.
Dealerships Relations Litig., 941 F. Supp. 528, 560 (D. Md.
1996) ("Th[e] cases reveal an underlying distinction between
acting in an advisory professional capacity (even if in a
knowingly fraudulent way) and acting as a direct
participant in [an enterprise's] affairs."); cf. Handeen v.
Lemaire, 112 F.3d 1339, 1347-51 (8th Cir. 1997) (where
debtor allegedly relinquished considerable control over
Chapter 13 estate to lawyer, who took lead in making
important decisions concerning operation of RICO
enterprise, factfinder could conclude that lawyer
participated in conduct of alleged RICO enterprise under
section 1962(c)). Indeed, the investors do not contend on
29
appeal that Drinker committed a primary violation of
section 1962(c).13
B.
The investors do contend that Drinker is liable as a
conspirator under section 1962(d) for conspiracy to violate
section 1962(c). Section 1962(d) provides that it is unlawful
for any person to conspire to violate section 1962(a), (b), or
(c). 18 U.S.C. S 1962(d).
In United States v. Antar, 53 F.3d 568 (3d Cir. 1995), we
recognized that "a number of courts have held that even if
a person may not be held directly liable for violating section
1962(c), he or she still may be liable [under section 1962(d)]
for conspiring to violate section 1962(c)." Id. at 580
(collecting cases). We disagreed with this broad proposition.
We held that while Reves still permits a RICO conspiracy
claim to be brought against a defendant who conspired to
operate or manage an enterprise, no cause of action will lie
against a defendant for conspiring with someone who is
operating or managing the enterprise. Id. at 581. We
justified the distinction between "conspiring to operate" and
"conspiring with someone who is operating" as follows:
[I]n the former situation, the defendant is conspiring to
do something for which, if the act was completed
successfully, he or she would be liable under section
1962(c). But in the latter scenario, the defendant is not
_________________________________________________________________
13. On appeal, the investors contend that Mercer LP was the relevant
RICO enterprise. Since Drinker did not operate, manage or direct Mercer
LP as a matter of law, it cannot be liable under section 1962(c). In their
amended complaint, the investors also alleged that the association
between all the defendants, including Drinker, "constituted an
`association-in-fact,' which also constituted an enterprise under RICO."
Am. Compl. P 141. Since the investors did not pursue this argument on
appeal, we need not decide whether the association between Drinker and
the Mercer defendants could constitute a separate enterprise under
RICO. In any event, we have serious doubts that this purported
association-in-fact would be considered a RICO enterprise since it does
not appear to be separate and apart from the pattern of racketeering
activity in which it allegedly engaged. See United States v. Pelullo, 964
F.2d 193, 211 (3d Cir. 1992).
30
conspiring to do something for which he or she could
be held liable under the substantive clause of the
statute. Therefore, liability should not attach.
Id. (footnote omitted). In other words, it is not sufficient
that Drinker conspired with Coleman in Coleman's alleged
violation or attempted violation of section 1962(c). Rather,
Drinker could only be liable under section 1962(d) for
conspiring to do something for which, if the act was
completed successfully, Drinker itself would be liable under
section 1962(c). Since Drinker, who did not participate in
the "operation or management" of the Mercer RICO
enterprise, did not conspire to do something for which, if
the act was completed successfully, it would be liable under
section 1962(c), Drinker cannot be liable for conspiring to
violate section 1962(c) as a matter of law. Accordingly, the
investors' section 1962(d) conspiracy claim against Drinker
cannot stand.14
C.
Finally, the investors contend that Drinker is liable for
aiding and abetting a RICO violation. In Jaguar Cars, Inc.
v. Royal Oaks Motor Car Co., 46 F.3d 258 (3d Cir. 1995), we
observed that in prior cases "[w]e have held that a
defendant may be liable under RICO if he aided or abetted
the commission of at least two predicate acts." Id. at 270.
Without further considering the existence of a private cause
of action for aiding and abetting under RICO, we held that
in order to find a defendant liable for aiding and abetting
_________________________________________________________________
14. In their briefs, the investors repeatedly note that in Antar, we
recognized that other courts have held that liability attaches against a
conspirator under section 1962(d) even if section 1962(c) liability is
unavailable. The investors fail to disclose, however, that we specifically
rejected this line of authority and concluded that no cause of action will
lie against a defendant for conspiring with someone who is operating or
managing an enterprise. Antar, 53 F.3d at 581. We call to the investors'
attention Third Circuit Local Appellate Rule 28.3(b) which provides that
for each legal proposition supported by citations in the argument,
"counsel shall cite to any opposing authority if such authority is binding
on this Court, e.g., . . . published decisions of this Court." 3d Cir. R.
28.3(b) (emphasis supplied).
31
under RICO, a plaintiff must prove "(1) that the substantive
act has been committed, and (2) that the defendant alleged
to have aided and abetted the act knew of the commission
of the act and acted with intent to facilitate it." Id. For
reasons discussed elsewhere in this opinion, we believe that
the investors have offered sufficient evidence to establish a
genuine issue of material fact on both elements.
Nonetheless, we will still affirm the judgment of the
district court insofar as it dismissed the investors' RICO
aiding and abetting claim against Drinker because we are
convinced that a private cause of action for aiding and
abetting a RICO violation cannot survive the Supreme
Court's decision in Central Bank of Denver. There the
Supreme Court held that a private plaintiff may not
maintain an aiding and abetting suit under section 10(b).
Central Bank of Denver, 511 U.S. at 191. According to the
Court, "the text of the statute controls" the scope of the
conduct prohibited by section 10(b). Id. at 173. Reasoning
that the text of section 10(b) does not reach those who aid
and abet a section 10(b) violation, the Court concluded that
"the statute itself resolves the case." Id. at 177-78.15
Following the rationale of Central Bank of Denver, we are
constrained to conclude that there is not a private cause of
action for aiding and abetting a RICO violation. Just as the
text of section 10(b) did not address aiding and abetting
liability, the text of section 1962 does not contain any
indication that Congress intended to impose private civil
aiding and abetting liability under RICO. This silence
"bodes ill" for the investors. Central Bank of Denver, 511
U.S. at 175.
Under the reasoning of Central Bank of Denver, our
obligation is to "interpret and apply the law as Congress
has written it, and not to imply private causes of action
_________________________________________________________________
15. Although Congress has enacted a general aiding and abetting statute
applicable to all federal criminal offenses, 18 U.S.C. S 2, it has not
enacted a general civil aiding and abetting statute. See Central Bank of
Denver, 511 U.S. at 181-82. Thus, the enactment of a statute creating
private civil liability for a primary violation of a statute does not give
rise
to a general presumption that such liability extends to aiders and
abettors. Id. at 182.
32
merely to effectuate the purported purposes of the statute."
In re Lake States Commodities, Inc., 936 F. Supp. 1461,
1475 (N.D. Ill. 1996). "The issue," the Supreme Court said,
"is not whether imposing private civil liability on aiders and
abettors is good policy but whether aiding and abetting is
covered by the statute." Central Bank of Denver, 511 U.S.
at 177. Thus, even though "[c]ivil RICO liability for aiding
and abetting advances RICO's goal of permitting recovery
from anyone who has committed the predicate offenses,
regardless of how he committed them," Jaguar Cars, 46
F.3d at 270 (quotation omitted), we conclude that it is for
Congress, not the courts, to fix the scope of the RICO
statute. The text of the RICO statute controls its scope; the
text does not permit us to recognize a private cause of
action of aiding and abetting a RICO violation. See Hayden,
955 F. Supp. at 255-56 (holding that claim of aiding and
abetting RICO violation must be dismissed "in accordance
with the policies articulated in Central Bank of Denver");
Lake States Commodities, 936 F. Supp. at 1475-76 (same);
Department of Econ. Dev. v. Arthur Anderson & Co., 924 F.
Supp. 449, 475-77 (S.D.N.Y. 1996) (same).
We reach this result despite our discussion of aiding and
abetting liability in Jaguar Cars, a case that was decided
after Central Bank of Denver. In Jaguar Cars, we did not
consider the impact of Central Bank of Denver on earlier
cases which had permitted a private cause of action for
aiding and abetting under RICO. The only aiding and
abetting issue before us in Jaguar Cars was whether the
evidence at trial was sufficient to find one liable for aiding
and abetting; the existence of the cause of action was
presumed by the parties, and we did not raise the issue sua
sponte. Notwithstanding the fact that a panel of this court
is bound by, and lacks authority to overrule, a published
decision of a prior panel, 3d Cir. I.O.P. 9.1, we conclude
that the panel's discussion of a private cause of action for
aiding and abetting a RICO violation in Jaguar Cars is not
conclusive here because the Supreme Court's opinion in
Central Bank of Denver was not called to the panel's
attention, and the opinion did not explicitly or implicitly
decide the impact of Central Bank of Denver on the issues
raised in that appeal. Cf. Jaguar Cars, 46 F.3d at 266 n.6.
33
V.
We review the district court's denial of the investors'
motion for leave to amend their complaint for abuse of
discretion. In re Burlington Coat Factory Sec. Litig, 114 F.3d
1410, 1434 (3d Cir. 1997). Leave to file an amended
complaint is to be "freely given when justice so requires."
Fed. R. Civ. P. 15(a). When, however, the proposed
amendments are futile (e.g., when they would not withstand
a motion to dismiss), the district court should decline to
allow the amendment. Schuylkill Energy Resources, Inc. v.
Pennsylvania Power & Light Co., 113 F.3d 405, 419 (3d Cir.
1997). In assessing futility, the district court should apply
the same standard of legal sufficiency applied under Rule
12(b)(6). Burlington Coat Factory, 114 F.3d at 1434.
A.
We will affirm the judgment of the district court insofar
as it denied the investors' motion for leave to amend their
complaint to state a cause of action under section 9.2(a) of
the Pennsylvania Unfair Trade Practices and Consumer
Protection Law ("UTP/CPL"), Pa. Stat. Ann. tit. 73, S 201-
9.2(a), which creates a private right of action for consumers
injured in the purchase or lease of goods or services. The
investors claim that they were injured in the purchase of
goods. In Algrant v. Evergreen Valley Nurseries Ltd.
Partnership, 126 F.3d 178 (3d Cir. 1997), however, we held
that investment securities are not "goods" under the
UTP/CPL. Id. at 187-88. But see id. at 191-92 (Mansmann,
J., dissenting) (concluding that investment securities are
"goods" when they are purchased primarily for personal,
family or household purposes).
Unlike the Pennsylvania UTP/CPL, the Massachusetts
Consumer Protection Act applies to securities transactions.
See Mass. Gen. Laws, ch. 93A, S 2(a) ("Unfair methods of
competition and unfair or deceptive acts or practices in the
conduct of any trade or commerce are hereby declared
unlawful."); id. S 1(b) (sale of securities is "trade" or
"commerce"). Nonetheless, we will affirm the judgment of
the district court insofar as it denied the investors' motion
for leave to amend their complaint to add a cause of action
34
for violation of the Massachusetts consumer protection law.
Privity is not required to maintain a fraud-based action
under chapter 93A "so long as the parties are engaged in
more than a minor or insignificant business relationship."
Standard Register Co. v. Bolton-Emerson, Inc., 649 N.E.2d
791, 795 (Mass. App. Ct. 1995). Here, the investors did not
have any contractual or business relationship with Drinker.
Accordingly, the investors may not pursue a chapter 93A
claim against Drinker. Cf. Nei v. Boston Survey Consultants,
Inc., 446 N.E.2d 681, 683 (Mass. 1983) (land surveyor,
hired by seller of property, was not liable to buyer for
failure to disclose high water table which increased cost of
constructing septic tank).
B.
The investors also attempted to amend their complaint to
add a cause of action under the Pennsylvania Securities
Act, Pa. Stat. Ann. tit. 70, S 1-101 et seq. Section 401 of the
Pennsylvania Act closely parallels section 10(b) of the 1934
federal securities act.16 Unlike courts interpreting the
federal securities act, however, courts interpreting the
Pennsylvania Securities Act have not implied a private
cause of action for violations of section 401. See, e.g., In re
Catanella & E.F. Hutton & Co. Sec. Litig., 583 F. Supp.
1388, 1439 (E.D. Pa. 1984). Rather, courts look to section
501 of the act, which expressly provides, inter alia, that
"[a]ny person who . . . offers or sells a security in violation
of [section] 401 . . . shall be liable to the person purchasing
the security from him." Pa. Stat. Ann. tit. 70,S 1-501(a).
_________________________________________________________________
16. Section 401 provides:
It is unlawful for any person, in connection with the offer, sale
or
purchase of any security in this State, directly or indirectly:
(a) To employ any device, scheme or artifice to defraud;
(b) To make any untrue statement of 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 are 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.
Pa. Stat. Ann. tit. 70, S 1-401.
35
The investors concede that Drinker was not a seller of
securities and that they cannot, therefore, pursue a cause
of action under the relevant portions of section 501.
The investors contend, however, that a private cause of
action exists against Drinker pursuant to section 503.
Section 503(a) states in pertinent part:
Every affiliate of a person liable under section 501 or
502, . . . and every broker-dealer or agent who
materially aids in the act or transaction constituting
the violation, are also liable jointly and severally with
and to the same extent as such person . . . .
Id. S 1-503(a). The plain language of section 503 dictates
that an agent of a person who is liable under section 501
to an investor who purchased a security is jointly and
severally liable to the investor, when the agent materially
aids in the acts or transactions constituting the violation.
In Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d
605 (3d Cir. 1980), we stated in dicta that the "sole source
of liability for any acts in violation of sections 401, 403 and
404 of the Pennsylvania Securities Act . . . is found in
section 501." Id. at 609 (emphasis omitted). Relying in part
on Biggans, some district courts have held that an investor
may not rely on section 503 to support a direct action
against an agent; rather, the courts have held that section
503 "only establishes a cause of action in favor of a party
who has been held liable to a private party under section
501." Penturelli v. Spector Cohen Gadon & Rosen, 640 F.
Supp. 868, 871 (E.D. Pa. 1986); accord In re Phar-Mor, Inc.
Sec. Litig., 892 F. Supp. 676, 688 (W.D. Pa. 1995). The
district court followed this line of cases and concluded that
the investors could not pursue a Pennsylvania Securities
Act claim against Drinker under section 503.
In 1982, the Superior Court of Pennsylvania called into
question our assumption in Biggans that the Pennsylvania
Securities Act only provides causes of action against buyers
and sellers. In Brennan v. Reed, Smith, Shaw & McClay,
450 A.2d 740 (Pa. Super. Ct. 1982), the court reasoned that
the act "provides for joint and several liability among those
primarily and/or secondarily liable under the act, and for
the right of contribution between them." Id. at 747. The
36
court concluded that a lawyer "can be held liable to an
investor as a violator of the Securities Act." Id. Although the
underlying theory of liability asserted in Brennan was legal
malpractice and not securities fraud, id., we believe that
the court's reasoning is consistent with the plain language
of section 503 and that an investor may bring a cause of
action under the Pennsylvania Securities Act against an
agent pursuant to section 503.
In assuming in Biggans that section 501 provides the
exclusive avenue for private recovery for a violation of
sections 401, 403 and 404, we did not consider the impact
of section 503 in our analysis. McCarter v. Mitcham, 883
F.2d 196, 204 (3d Cir. 1989); accord Bull v. American Bank
& Trust Co., 641 F. Supp. 62, 67 n.5 (E.D. Pa. 1986)
(Biggans did not discuss "the scope of civil liability
stemming from the interrelationship of SS 501 and 503").
After considering the plain language of section 503, and
after reviewing the intervening decision of a Pennsylvania
intermediate appellate court, we conclude that our dicta in
Biggans was incorrect and we predict that the Pennsylvania
Supreme Court would conclude that an investor may bring
an action directly against an agent pursuant to section 503
of the Pennsylvania Securities Act.
The investors have proffered sufficient evidence to permit
a factfinder to conclude that (1) Mercer LP is a"person
liable under section 501," and (2) Drinker materially aided
Mercer LP in the sale of securities to the investors. That
does not completely answer the question, however, for we
must also determine whether Drinker was an "agent" of
Mercer LP. As defined by the Pennsylvania Securities Act,
the term "agent" means "any individual, other than a
broker-dealer, who represents a broker-dealer or issuer in
effecting or attempting to effect purchases or sales of
securities." Pa. Stat. Ann. tit. 70, S 1-102(c).
The provisions of the Pennsylvania Securities Act quoted
here are based substantially upon the Uniform Securities
Act. The comment to section 401 of the Uniform Act notes
that whether a particular individual who represents an
issuer is an "agent" depends "upon much the same factors
which create an agency relationship at common law." Unif.
Sec. Act S 401, 7B U.L.A. 581 (1985). Under Pennsylvania
37
common law, the attorney-client relationship is generally
one of agency. See Weiner v. Lee, 669 A.2d 424, 428 (Pa.
Commw. Ct. 1995), app. denied, 689 A.2d 237 (Pa. 1997).
The statutory definition of "agent" in section 102, however,
represents a deviation from the traditional common-law
definition. We must, therefore, construe the meaning of the
term "agent" as defined in the Pennsylvania Securities Act.
Our research did not reveal any Pennsylvania cases
resolving the question of whether and when a lawyer may
be considered an "agent" for purposes of the Pennsylvania
Securities Act. We look, therefore, to see how other courts
have dealt with this issue in states that have adopted the
Uniform Securities Act definition of "agent."
The Court of Appeals of Wisconsin discussed the liability
of lawyers who, the plaintiff alleged, had materially aided in
the creation of a false and misleading prospectus in a
limited partnership offering. Rendler v. Markos, 453 N.W.2d
202 (Wis. Ct. App. 1990). The court interpreted a statutory
definition of "agent" that parallels the one at issue here,
and it concluded:
The definition of "agent" . . . does not include attorneys
who merely render legal advice or draft documents for
use in securities transactions. The definition covers
persons who assist directly in offering securities for
sale, soliciting offers to buy, or performing the sale, but
who do not fit the definition of broker-dealer. It is not
intended to cover professionals such as attorneys
engaging in their traditional advisory functions.
Id. at 206; accord CFT Seaside Inv. Ltd. Partnership v.
Hammet, 868 F. Supp. 836, 844 (D.S.C. 1994) (predicting
South Carolina securities law containing parallel"agent"
definition).
In Baker, Watts & Co. v. Miles & Stockbridge, 620 A.2d
356 (Md. Ct. Spec. App. 1993), the court construed a
parallel definition of "agent" under the Maryland Securities
Act. After conducting a thorough review of the
interpretation of the term "agent" under similar laws in
other states, the court concluded that the state securities
laws "do not impose liability upon an attorney who merely
provides legal services or prepares documents for his or her
38
client. To impose liability, the attorney must do something
more than act as legal counsel." Id. at 368. The court held:
[A]n attorney could conceivably be considered an agent
if he or she "represents a broker-dealer or issuer in
effecting or attempting to effect the purchase or sale of
securities." In order to be considered an "agent," an
attorney must act in a manner that goes beyond legal
representation. The definition of "agent" . . . does not
include attorneys who merely provide legal services,
draft documents for use in the purchase or sale of
securities, or engage in their profession's traditional
advisory functions. To rise to the level of "effecting" the
purchase or sale of securities, the attorney must
actively assist in offering securities for sale, solicit
offers to buy, or actually perform the sale.
Id. (emphasis omitted); see also Ackerman v. Schwartz, 733
F. Supp. 1231, 1252 (N.D. Ind. 1989) (lawyer who did not
"personally and actively" employ opinion letter to solicit
investors was not "agent," even where investors may have
relied on opinion letter in making their investment decision;
"[l]iability under the Indiana Securities Act requires
something more than the mere drafting of an opinion
letter"); accord Johnson v. Colip, 658 N.E.2d 575, 577-79
(Ind. 1995) (reviewing cases and following reasoning in
Ackerman); cf. Excalibur Oil, Inc. v. Sullivan, 616 F. Supp.
458, 467 (N.D. Ill. 1985) (purchaser could pursue West
Virginia securities action against seller's lawyer as seller's
"agent" because lawyer played direct role in sale, including
making "face-to-face and direct telephonic representations"
to purchaser).
We are persuaded by this consistent interpretation of the
term "agent" in this type of case. Under the Pennsylvania
Securities Act, an individual is not an "agent" unless the
individual "represents a broker-dealer or issuer in effecting
or attempting to effect purchases or sales of securities." Pa.
Stat. Ann. tit. 70, S 1-102(c). We hold that, although a
lawyer or other professional could be considered an agent of
their client under this definition, the person seeking to
establish that the professional is an agent of the client
must show more than a common-law agency relationship.
As used in the Pennsylvania Securities Act, the term
39
"agent" does not include lawyers who merely render legal
advice or draft documents for use in securities
transactions. In order to be considered an "agent," a lawyer
must act in a manner that goes beyond legal
representation. The term covers individuals who actively
assist in offering securities for sale, soliciting offers to buy,
or performing the sale, but who do not fit the definition of
broker-dealer.
Drinker does not meet this definition as a matter of law.17
Since Drinker is not Mercer LP's agent for purposes of the
Pennsylvania Securities Act, the investors may not sue
Drinker under section 503. We will, therefore, affirm the
judgment of the district court insofar as it denied the
investors' motion to amend their complaint to add a cause
of action under the Pennsylvania Securities Act.
We will also affirm the judgment of the district court
insofar as it denied the investors' motion to amend their
complaint to add a cause of action under the
Massachusetts Uniform Securities Act, Mass. Gen. Laws ch.
110A, S 101 et seq. Like the Pennsylvania law, the
Massachusetts law imposes liability on those who offer or
sell securities. Id. S 410(a). In addition to the seller of the
security, "every broker-dealer or agent who materially aids
in the sale are also liable jointly and severally with and to
the same extent as the seller." Id. S 410(b). Also like the
Pennsylvania Securities Act, the Massachusetts Act defines
"agent" as "any individual other than a broker-dealer who
represents a broker-dealer or issuer in effecting or
attempting to effect purchases or sales of securities." Id.
S 401(b). As discussed above, courts in other jurisdictions
have consistently refused to hold a lawyer liable as an
_________________________________________________________________
17. Our conclusion is supported by reference to the registration
provisions of the Pennsylvania Securities Act: "It is unlawful for any
person to transact business in this State as a broker-dealer or agent
unless he is registered under this act." Pa. Stat. Ann. tit. 70, S 1-
301(a).
Nowhere does the act require lawyers who merely advise persons
involved in securities transactions to be registered as agents before
providing that advice. The investors do not suggest that Drinker was
required to register as an agent, and under the facts of this case, we
conclude that it was not required to so register. Hence, Drinker cannot
be considered an "agent" under the Pennsylvania Securities Act.
40
agent under parallel definitions of "agent." The investors do
not point us to any Massachusetts case law that would
suggest that the Massachusetts Supreme Judicial Court
would deviate from this line of cases, and our research has
not uncovered any. For the reasons discussed above,
Drinker is not an agent as a matter of law.
VI.
We will reverse the judgment of the district court insofar
as it granted Drinker's motion for summary judgment on
the federal securities claims brought by Richard, Doris and
Warren. We will reverse the judgment of the district court
insofar as it granted Drinker's motion for summary
judgment on the common law fraud claims brought by all
of the investors. We will affirm the judgment of the district
court in all other respects. We will remand for further
proceedings consistent with this opinion.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
41