PINTER v. DAHL
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
ORAL ARGUMENT OF BRADEN W. SPARKS, ESQ. ON BEHALF OF PETITIONERS
Chief Justice William H. Rehnquist: We will hear argument first this morning in No. 86-805, Billy J. B.J.> ["] Pinter v. Maurice Dahl.
Mr. Sparks, you may begin whenever you are ready.
Mr. Sparks: Mr. Chief Justice, and may it please the Court:
The case this morning is important because it bears upon the day to day regulation of the securities industry, and it has to do with two issues that concern Section 12(1) of the Securities Act of 1933 which provides for an express private right of action against any person who offers or sells an unregistered security through the use of the mails or the interstate commerce.
I would like to state the questions as follows.
First of all, whether the long established definition of a Section 12(1) seller under the Securities Act of 1933 and Section 12(1) specifically should be modified to incorporate a new threshold requirement that the seller must be motivated, and I would like to stress that word motivated, by a desire to receive a financial benefit for his efforts in order to be held responsible for his conduct.
And secondly, whether or not the common law in pari delicto defense, or perhaps I would prefer to refer to this as the regulatory purpose defense rather than strict in pari delicto defense, is available in a private action for the rescission of the sale of unregistered securities brought under Section 12(1).
Just briefly, the statute provides that any person who offers or sells a security in violation of Section 77(e) of this title shall be liable to the person purchasing such security from him, and it goes on to provide for rescission in the common law fashion.
To telegraph my position in this case, the Fifth Circuit's addition of a pecuniary benefits test to the settled definition of a seller of unregistered securities is damaging and threatening to the continued regulation of the securities industry in my opinion.
And the ruling by the Court of Appeals that the in pari delicto defense does not apply between co-violators of Section 12(1) is in direct conflict with this Court's ruling in the Bateman Eichler case.
I think that the facts in this case are extremely important, and I would like to spend a certain amount of time with regard to the facts.
Of course, in the trial court, Mr. Pinter was a Defendant, and Mr. Dahl was one of twelve Plaintiffs.
Mr. Dahl and the other eleven Plaintiffs sought to recover from Mr. Pinter for the sale of unregistered securities.
The complaint detailed a number of misrepresentations, and concealments, and non-disclosures on the part of Mr. Pinter doing business under the various names of his companies.
Mr. Dahl, the Trial Court found, was a California or Texas resident, a real estate broker, and a man whose personal wealth exceeded one million dollars, and whose income approached $250,000 on an annual basis.
And he detailed certain abortive efforts, and I am at paragraph 7 on page 31 of the petition, the appendix to the petition for writ of certiorari.
The Trial Court detailed certain abortive efforts by Mr. Dahl to become interested in the oil business.
I would like to quote from the record.
And I want to make it clear that everything that I quote from the record will be either from Mr. Dahl's testimony who I am in opposition to, or from the testimony of Mr. Gottsch who was called on behalf of Mr. Dahl.
I am not attempting to support my arguments by any statements made by my client in this case.
Mr. Dahl testified at the joint appendix, page 105, that he was interested in being in the drilling business, and that he did not have the money that he needed to become involved in the business, and that he hired Mr. Minor whose position was to "raise money", and that is quote.
And that it was his job, and this was Mr. Minor who was hired by Mr. Dahl to work for Puma Petroleum and Wrangle Oil & Gas, it was his job to bring investor money.
And Mr. Minor was fired by Mr. Dahl prior to his hiring of a Mr. Kirk when it became known to Mr. Dahl that he had spent $10,000 to obtain a legal prospective, and he was fired on that basis.
And then Mr. Dahl then hired another individual by the name of Mr. Kirk, who was in the Texas and Oklahoma area attempting to acquire leases for Mr. Dahl who was living in California.
Unidentified Justice: Mr. Sparks, was the legal prospectus the one that would have pertained to the transaction that gave rise to this suit?
Mr. Sparks: The record does not say, Your Honor.
Unidentified Justice: Do you contend that it was?
Mr. Sparks: Sir?
Unidentified Justice: Are we supposed to draw that inference from what you are telling us?
Mr. Sparks: The only inference that I would like the Court to draw is that Mr. Dahl was aware of the need to draw a prospectus in becoming involved in the oil and gas business, and had hired Mr. Minor for that purpose, and fired him when he discovered that he had spent $10,000 in that way.
The position of the government, the Attorney General, is that one must be a promoter if one is interested in becoming involved in the business, more a promoter than an investor, and one may be held in pari delicto.
And I want to point out that I am trying to isolate in my discussion of the facts those facts which would show that Mr. Dahl was desirous of getting into the oil and gas business, and that it was his intention to not be merely a investor at least initially.
I think that the inference that I have explained is all that needs to be drawn from that fact.
Mr. Kirk was hired after Mr. Minor was fired.
His job, and this is page 108 from the joint appendix, was to locate, acquire and sell leases.
And Mr. Kirk introduced Mr. Dahl to Mr. Pinter as a knowledgeable and capable oil man.
I would like to point out that Mr. Kirk, of course, was Mr. Dahl's agent in that introduction.
Unidentified Justice: You mean he introduced him to his former employee?
Mr. Sparks: Mr. Kirk, the new employee, introduced Mr. Dahl, his employer, to Mr. Pinter, an oil man, who was in the Oklahoma oil and gas business.
Unidentified Justice: Oh, I misunderstood you.
I thought that you were saying that Pinter had previously worked for Dahl.
Mr. Sparks: No, sir.
Unidentified Justice: I am sorry.
I did not follow your statement as well as I should have.
Mr. Sparks: Mr. Kirk was working for Mr. Dahl.
He found Mr. Pinter in Oklahoma, and introduced Mr. Pinter to Mr. Dahl as a knowledgeable oil and gas man who was working in Oklahoma.
Then Mr. Pinter came to Oklahoma and visited the properties, and looked at the geology, the well logs and the other materials which were assembled in the words of the Trial Court by Mr. Pinter.
And after conducting his own investigation of the circumstanced decided in the Trial Court's words that there
"no way that he could lose investing. "
Now there were two different groups of investments which were made by Mr. Dahl, and I would like to point this out and go into some detail here.
Because again it is important, because it deals with Mr. Dahl's involvement and the extent to which he may be considered to be actively involved in seeking oil and gas business opportunities.
After deciding that he wanted to invest with Mr. Pinter, he went up to Kansas where he found his friend, a Mr. Gottsch, who testified for him at the time of trial.
Mr. Gottsch was in the cattle feeding business, and was an independently wealthy individual.
He contacted Mr. Gottsch, in his own words, brought Mr. Gottsch to Oklahoma, and introduced Mr. Gottsch to Mr. Pinter in Oklahoma.
And as a result of that introduction, he caused Mr. Gottsch to loan him, Mr. Dahl, $250,000 and to put $250,000 of his own money into the initial three well project that the two men got involved in.
And they, Mr. Dahl and his friend, Mr. Gottsch from Kansas put up the entire $500,000 needed to fund the first three of five wells that will be discussed here.
They bought all of the available interest money in those three wells.
Mr. Dahl put not one penny of his own money into those three wells.
He caused Mr. Gottsch to loan him the money and solicited, I believe that it is very fair to say, Mr. Gottsch with regard to that transaction.
Mr. Gottsch and Mr. Dahl then went into business with Mr. Pinter in effect drilling the first three wells.
Sometime prior to that, Mr. Pinter had begun the process of drilling two additional wells.
In the words of Mr. Dahl, he decided that it would be appropriate for him to go to Mr. Pinter and to suggest to Mr. Pinter that he had certain friends and relatives in California who would be very interested in these other two wells, since they seemed like a sure deal as far as he was concerned.
And so he went to Mr. Pinter and suggested to Mr. Pinter that he would involve his friends in California.
Pinter gave him some investment contracts.
He took the investment contracts in hand, some of which were in blank and some of which were made out in the name of Maurice Dahl or assignee.
He then took these.
They had not been fractionalized.
They were simply blank investment contracts.
He took them to California, and went to eleven of his friends and sold them interests, and made all representations and all communications to each of the people in California.
Unidentified Justice: When you say blank investment contracts, Mr. Sparks, do you mean that the contracts were all written out but unsigned?
Mr. Sparks: No, sir.
They had blanks in them for the percentage of interest that the investor would buy.
They had a blank for the name of the investor.
Or in some cases, instead of a blank, they said Maurice Dahl or assignee.
So they were blank only in those respects.
As to the amount of money, as to the percentage of interest in the various wells, and as to the person who was acquiring the interest.
Unidentified Justice: While you are interrupted, Mr. Sparks.
Mr. Sparks: Yes, sir.
Unidentified Justice: This transaction with Mr. Gottsch, the first half that you described, was Gottsch one of the Plaintiffs?
Mr. Sparks: No, sir, he did not sue.
He testified on behalf of Mr. Dahl, but he was not a Plaintiff in the action.
He testified at trial that he was looking, to put it in his words, and this at 113 in the joint appendix,
"I was looking to Maurice. "
"Whoever he was in business with, that was not of merit to me. "
Unidentified Justice: What does that have to do with the claims of the eleven other people?
Mr. Sparks: The only importance that Mr. Gottsch has is that I believe that it is very fair to say that Mr. Dahl solicited Mr. Gottsch.
Unidentified Justice: Maybe he solicited a lot of people.
But if they are not the people that are involved in the lawsuit, how does that bear on the lawsuit?
Mr. Sparks: Well, to me, sir, it is circumstantial evidence of Mr. Dahl's solicitor type behavior.
And it seems to me that it is fundamental to Section 12(1) of the Securities Act of 1933, especially when understood on its face and also from the legislative history of that Act, and President Roosevelt's comments when he introduced the bill and asked that it be passed, that the whole idea was to shift the burden of responsibility on the person who made solicitive type of comments or representational activity in connection.
Unidentified Justice: Yes.
Maybe he did or did not solicit the eleven people involved, but would it prove solicitation of these eleven if he solicited Mr X, Y, Z?
I do not follow that.
Mr. Sparks: No, sir.
But in pari delicto, actually what I referred to as the regulatory purpose defense, the whole issue is to look at what Mr. Dahl did.
Unidentified Justice: Supposedly you proved that he committed an egregious violation with respect to Mr. Gottsch, would that be a defense that Mr. Pinter could assert in the claim?
Mr. Sparks: It would be evidentiary of his conduct in pari delicto; yes, sir.
I might point out, Justice Stevens, that at the Trial Court that Mr. Dahl bore down exceedingly hard in attempting to establish that all of these transactions were integrated.
Now on appeal, the position is that these are separate transactions.
And I might point out also that the Trial Court found that each of the sales involved from the Defendant to the various Plaintiffs including Mr. Dahl were related.
That was the word that the Trial Court used in describing the various oil wells and investments.
Now Mr. Gottsch's involvement is simply circumstantial evidence of Mr. Dahl's attempt to solicit others in the offer, sale and delivery of unregistered securities.
The statute being a strict liability statute, clearly Mr. Pinter is responsible under Section 12(1).
It was never contended otherwise.
His position is to allow the judgment to be affirmed with regard to the other eleven Plaintiffs.
And solely with respect to Mr. Dahl, he is asserting the defense that it would be inappropriate and would not further the statutory purpose of allow Mr. Dahl to recover against him, because Mr. Dahl was fundamentally responsible in the words of... yes, sir.
Unidentified Justice: May I ask, you are only claiming in pari delicto insofar as the claim by Dahl against Pinter?
Mr. Sparks: That is correct, Your Honor.
Unidentified Justice: You are not claiming that it has any bearing on the claims of the other eleven or right to contribution or anything like that?
Mr. Sparks: We did not appeal with regard to 12(1) violations as to the others.
We do contend that Mr. Dahl should be responsible in contribution along with Mr. Pinter to the other Plaintiffs.
Unidentified Justice: What is the statutory basis, or is a state law basis, for your contribution claim?
Mr. Sparks: The securities laws, Your Honor, Section 11, for example, provides for a right of contribution between joint tort feasors.
Unidentified Justice: That is because he is a seller?
Mr. Sparks: Yes, sir.
Unidentified Justice: You claim that he is a seller, and therefore a joint tort feasor with Pinter?
Mr. Sparks: That is correct; yes, Your Honor.
Equally responsible for the same statutory violation.
Unidentified Justice: And the Court of Appeals rejected your claim that he was a seller?
Mr. Sparks: Yes, sir.
They invoked a pecuniary benefit test to get around, from my position, in order to substantiate the decision that he was not a seller.
Unidentified Justice: And both issues are here?
Mr. Sparks: Yes, sir.
And the Court of Appeals found that his conduct was a substantial factor in the sale of unregistered securities.
Unidentified Justice: But what?
Mr. Sparks: But that he was not motivated by a desire for pecuniary benefit directly or indirectly, which seems to me to fall right in the face of the Dirks opinion which talks about representational benefit at the very least.
And which seems to me on the facts, even the facts as adduced by the Fifth Circuit, to be inappropriate as a conclusion, as a matter of factual conclusion, Your Honor.
This was a man who was trying to get into the business and who was also trying in the words of Judge Brown to capitalize his own investment, and thought that it was appropriate to do so by going to California and selling other investors in this very same project.
It seems to me to be inappropriate to conclude that he was acting merely gregariously which is what the Fifth Circuit said.
I do not believe that this was in the words of Judge Jones happy hour cocktail conversationalist type of advice.
This was not simply a comment.
And in the words of the government, they contend that strongly urging someone to become involved without being motivated by pecuniary benefit constitutes non-seller and non-solicitation conduct.
I would respectfully disagree with that position.
It seems to me that fundamental to the Securities Act of 1933 is this concept that the burden must be shifted.
And I am essentially quoting from the legislative history, House Report 85.
Every lawyer knows that all facts in control of the Defendant that it is practically impossible for a buyer to prove a state of knowledge or failure to exercise due care on the part of a Defendant.
How are you going to show what the motivation was in the mind of someone who is selling a security?
That it going to get from the trial lawyer's standpoint and from the litigation standpoint into a swearing match and I think unnecessarily, and it would protract litigation to have a test like that.
H.R. 85 in 1933,
"is to involve paper liability, it is necessary to throw the burden of disproving responsibility for reprehensible acts of omission or commission on those who purport to issue statements. "
It seems to me that the gravamen of the wrong, if you will, the statutory wrong, is to sell.
You cannot go to California with a bunch of investment contracts in your briefcase and sit down with your friends, including your banker, and a man who is in the contracting business with you, and your accountant, and your partner in a business deal, and your employer and employees, and these were the individuals from the record and from Mr. Dahl's testimony were the people purchased and none of whom knew each other in the admission of the Respondent prior to Mr. Dahl's selling them, you cannot go to those people, those kinds of people, sit there with an investment contract and fill out the blanks without assuming some fiduciary responsibility it seems to me to them to tell them the truth.
Now Mr. Dahl's position is I am not a seller, and that seems to me to be absurd.
He is a seller.
And the mere fact that he is not directly receiving some pecuniary benefit does not mean that he is not receiving some pecuniary benefit.
Certainly, he is, because he is capitalizing the investment that he is trying to become involved in.
Unidentified Justice: Mr. Sparks, I am sorry to interrupt you again.
But you told me that you are relying on Section 11 for the right of contribution.
Is this not a Section 12 suit?
Mr. Sparks: It is a Section 12 lawsuit from the standpoint of the Plaintiffs; yes, sir.
Unidentified Justice: Section 11 applies to misstatements in prospectuses, does it not?
Mr. Sparks: Section 12.2.
Unidentified Justice: Section 12 is where you have no registration at all, is it not?
Mr. Sparks: Yes, Your Honor.
Unidentified Justice: So the contribution right does not apply to this case, does it?
Mr. Sparks: I believe that it does, Your Honor.
And I have addressed that in my brief, and I do believe that there is a right of contribution under common law.
Unidentified Justice: Has any court so held in a Section 12 case?
Mr. Sparks: No, Your Honor, no court has so held in a Section 12 case.
And I might point out that I do believe that that issue has been perfected.
Because I attempted at the time of trial to have Mr. Dahl realigned as a Third Party Defendant from the outset, and the Trial Court refused to realign him as a Third Party Defendant.
And I was not able to assert the contribution defense at that time.
It was submitted to a magistrate.
And I appealed that, and it was overruled by operation of law.
Unidentified Justice: Of course, Mr. Sparks, I thought that both the District Court and the Fifth Circuit determined that Mr. Dahl lacked any sort of pecuniary gain motivation.
Mr. Sparks: No, Your Honor, that is not correct.
What the Trial Court found was that Mr. Dahl did not receive a commission from the sale of unregistered securities.
The Trial Court did not enter a finding with respect to direct or indirect pecuniary benefit.
And the Fifth Circuit decided that he was merely gregarious.
I would like to reserve the rest of my time, Your Honor.
Chief Justice William H. Rehnquist: Thank you, Mr. Sparks.
We will hear from you now, Mr. Taranto.
ORAL ARGUMENT OF RICHARD G. TARANTO, ESQ. AS AMICUS CURIAE SUPPORTING PETITIONERS
Mr. Taranto: Chief Justice Rehnquist, and may it please the Court:
On the in pari delicto question in this case, the Securities and Exchange Commission thinks that the Court of Appeals was wrong to the extent that it ruled that the in pari delicto defense is never available in an action brought under Section 12(1).
As I propose to explain in more detail in a moment, and I want to present our views in a manner slightly different from our presentation in our brief, we think that the in pari delicto should be available in certain narrowly defined circumstances.
On the second question in the case, we think that the Court of Appeals was right in ruling that a person who solicits a securities purchase may be liable under Section 12(1) along with the person who passed title, but only is the solicitor had some motivation in promoting the purchase other than a friendly desire to further the interests of the buyer.
Because only then can he fairly be aligned on the selling side of the transaction.
We do not take a position in this case on whether contribution may be available in a Section 12 action.
Unidentified Justice: Mr. Taranto, suppose the primary Defendant here, suppose Mr. Pinter, were a philanthropist, and it were shown that he really did not expect to make any profit from this stock, but just to benefit his friends and associates that he was selling their interests in the wells, would that be enough to exempt him from liability under 12(1)?
Mr. Taranto: No, I do not think so.
Not when the issuer is actually the person passing title to the security.
Unidentified Justice: No, but he comes under the same language.
I mean he sells or offers.
Why should that be a necessity for the in pari delicto but not a necessity for the substantive liability in the first place?
Mr. Taranto: Well, the financial interest test does not go to the in pari delicto defense, but it goes only to whether a person other than the person passing title can also be a seller, and therefore conceivably liable to the other people that he solicits.
Unidentified Justice: I understand that, but that is the first step to establishing the in pari delicto defense.
Why should it be that the issuer need not have that kind of motivation, but that someone else in order to be liable must?
Mr. Taranto: We think that Section 12 is firmly rooted in the common law remedy of rescission where financial interest does not play a role as to the person who passes title.
The history of the development of Section 12, and its amendment in 1954, and its judicial history prior to that seems to us to make it clear that liability can extend somewhat beyond the person who owned the security before the sale.
The question then is what kind of limits have to be placed on the extension of liability beyond the person who passed title.
Solicitation, we think, is part of the statute, but there is an important distinction which we think that the Court of Appeals rightly captured between somebody who simply urges somebody else to get in on a good deal and on the other hand somebody who because of his own interests is properly aligned on the selling side of the transaction.
We do not think that financial benefit is a... we do not mean by that something terribly precise or limited in that indirect financial interests can align the individual on the selling side of the transaction just as a commission can.
Unidentified Justice: But that it not necessary, you say, to align Pinter on the selling side?
Mr. Taranto: No.
It seems to me that there are always two people, one person on each of the two sides of a sale, the person who passed title and the person who then owns the security after that transaction.
And what we are trying to do is establish some limits on the extension of the seller class beyond the person who is unquestionably in that class, namely the person who passed title.
Unidentified Justice: That is the key then.
If you have title and pass it, it does not matter whether your motivation is beneficent or proper.
Whereas if you did not pass title and you are looking only at someone who participated in the offering somehow, you need the motivation.
Mr. Taranto: Yes, I think that is right.
Unidentified Justice: Even if you are an agent of somebody else?
Mr. Taranto: If you are an agent for the seller, there is very likely to be some kind of interest of your own, presumably a continuing relationship with the seller, if you are carrying on the activities for the seller.
Unidentified Justice: Supposing the person holding title is an agent of someone else just for the purpose of holding title, and he passes it when he is told to by his principal?
Mr. Taranto: It sounds to me as though... I am somewhat confused by who exactly is passing title in the course of that transaction.
Unidentified Justice: Whoever is holding title passes title, and supposing that the person holding title is an agent for that purpose for somebody else?
Mr. Taranto: I think that anybody who is the holder of title before--
Unidentified Justice: Who passes title is the seller.
Mr. Taranto: --is a seller, that is right.
Let me try to--
Unidentified Justice: If I can ask one other question about the seller.
Is it necessary to be a seller in order to... I mean is it not possible that Dahl could not be a seller and nevertheless the defense of in pari delicto would be available?
Mr. Taranto: --Oh, yes, absolutely.
Unidentified Justice: And is it also not possible that he could be a seller and nevertheless the claim of contribution would fail?
Mr. Taranto: Yes.
Unidentified Justice: So it may be true that we do not have to decide the seller issue?
Mr. Taranto: That is right.
The Court of Appeals did not decide the underlying legal question whether contribution can ever be available in Section 12.
It found it unnecessary to do that, because it thought contribution should not be available in this case even if it could be available in some other Section 12 case.
Unidentified Justice: Do you also think, Mr. Taranto, that the District Court and the Fifth Circuit did not make the necessary determination about the pecuniary interests that Dahl might have had?
Mr. Taranto: Yes, we do.
We think that the District Court did note that Dahl did not receive any commissions, but did not address whether there was some indirect financial interest.
In particular, whether Dahl would have needed these particular purchases in order to make his investment profitable, and whether there were other potential purchasers who might have taken the place of these.
Unidentified Justice: So you think that we need to remand on that?
Mr. Taranto: Yes, we do.
Unidentified Justice: And that means that we have to also address the merits of the contribution issue?
Mr. Taranto: Well, it seems to us that that issue has not been briefed.
And if on remanding to the Court of Appeals, the Court of Appeals were to address the contribution question and decide that contribution could not be available under Section 12 regardless of the particular financial interest or its absence, that issue would not have to be addressed.
But the question of whether Section 12 in any circumstance permits contribution has not been presented or briefed in this case.
So that issue would have to be decided on a remand.
Unidentified Justice: Mr. Taranto, would you do one more thing because your time is short.
Would you be sure to explain to me the difference between the position that you now advocate and the one that you set forth in your brief, because I want to be sure that I get that.
Mr. Taranto: The difference I think is really one of emphasis.
To the extent that we suggested in the brief that the first part of our test for the in pari delicto defense was that the buyer had to be more a promoter than an investor, the main thing that I wanted to do was to dispel any misimpression that what we meant by that was a simple comparison, how much did the buyer solicit and how much did he purchase, and that that would somehow automatically answer the question.
By promoter, we mean something broader than that.
We mean simply what role did this buyer play in the offering as a whole.
To be a promoter, he might have played an active role in any number of respects, not just soliciting purchases.
He might have prepared offering material, and he might have been the instigator.
Unidentified Justice: You mean on the whole and not necessarily to these particular Plaintiffs?
Mr. Taranto: That is right.
What we mean by the promoter part of the test is something that focuses on the buyer's role and the offer as a whole, and we then move on.
Unidentified Justice: But you would not say in the colloquy that was going between counsel and Justice Stevens that the offering to someone who was not one of the Plaintiffs here is merely confirmatory or circumstantial evidence of the necessary qualification?
Mr. Taranto: We think that that could be evidence of--
Unidentified Justice: Direct evidence.
Mr. Taranto: --Direct evidence of a promoter role.
Unidentified Justice: May I ask one more question.
If I agree with you that this matter was not found, that is the financial motivation by the District Court, but I think that it was found by the Court of Appeals, would we still have to remand?
Your brief says that the Court of Appeals did not find it either, and I happen to disagree with that.
What if I think that the Court of Appeals did find no financial motivation, but the District Court did not?
Mr. Taranto: I think that without factual findings by the District Court made in the light of a broad enough understanding of what kinds of financial interests can qualify for this test to align him on the selling side of the transaction that further findings should be made.
In particular, there seems to be some disagreement between the majority and the dissent in the Court of Appeals about certain kinds of indirect financial interests and whether they would quality.
Unidentified Justice: Mr. Taranto, I do take it that you disagree with the Court of Appeals on the standard to be applied in determining the in pari delicto defense?
Mr. Taranto: Yes.
We read the Court of Appeals to have said that because 12(1) is a strict liability statute that the in pari delicto is never available.
Unidentified Justice: Thank you.
Chief Justice William H. Rehnquist: Thank you, Mr. Taranto.
We will hear now from you, Mr. Spinuzzi.
ORAL ARGUMENT OF JOHN A. SPINUZZI, ESQ. ON BEHALF OF RESPONDENTS
Mr. Spinuzzi: Mr. Chief Justice, and may it please the Court:
We have a delicate problem here in dealing with the securities laws.
Congress set them up, and this Court has interpreted them, and now we are juggling with those laws and taking them out of balance again.
And the premise on which we are trying to take these delicate mechanisms out of balance is that this Court made a ruling in the Bateman Eichler case that under certain circumstances that the defense of in pari delicto may be asserted in a 10(b)(5) fraud case.
It is sought here to extend that beyond the fraud activity to an unregistered security activity.
Frankly, my first impression was similar, that on a strict liability statute that you could never bring in pari delicto.
I do not agree with that now, because equitably it has always been permitted in not only fraudulent conduct but also in illegal conduct.
And if there is a illegal act in selling unregistered securities, then I agree with the SEC that in pari delicto should be applicable.
However, it is a rare exception, as stated by this court, that you will permit that defense, because the normal and general rule is that it will not be permitted.
Now we have a special problem here.
Section 12(1) specifically says that the seller will be liable to his purchaser for selling unregistered securities.
There is no defense to that statement.
It is absolute liability.
In this particular case, Mr. Pinter was the seller of securities, and he admitted it.
And the court found that they were not registered, and the court found him liable not only to Mr. Dahl but to Mr. Dahl's friends and associates who also invested.
The critical nature of this problem is can an illegal seller of unregistered securities avoid his liability by raising a theory that one of the buyers indirectly or directly assisted him in bringing other investors into the ventures.
To me, that is a critical question.
It is not quite a tippee-tipper situation.
As the Fifth Circuit stated, it was a gregarious act intended to benefit his friends.
I am talking about Mr. Dahl's friends.
And to show how he tried to benefit, it is critical for this Court to be aware that Mr. Dahl invested a total of $351,000 roughly in three different ventures.
His ten or eleven friends that he brought in invested a total of $82,000 in two ventures.
And more importantly, the other Plaintiffs... we will call them the California investors, because that is essentially what they are except for one person who was Mr. Dahl's fiancee... the California investors invested in two wells, and those wells and leases had already been fractionated by Mr. Pinter months and months before.
He had already drilled two wells on one lease with other investors, and he had already drilled one well on another lease with other investors.
He was trying to drill two more wells, and we call them the Doss 3-B and the Doss 2-C well.
He had some of his investors drop out.
When they dropped out, he approached Mr. Dahl.
And he said, Mr. Dahl, some of my investors have fallen out, and I have got room for some more.
Dahl said fine, I have some close friends who probably will be interested, let me check, and he did.
In the Doss 3-B, there were three investors from these Plaintiffs.
One was Mr. Dahl himself, one was his fiancee, and one was his CPA.
Those three investors invested little.
The CPA invested $7400, and his fiancee invested $3500, and Mr. Dahl invested about $28,000.
But the remainder, the several hundred thousand dollars that was raised, was raised by people unknown to Mr. Dahl.
And Mr. Pinter, he raised that capital.
So the act of selling unregistered securities was already in process by Mr. Pinter, and all he did was get Mr. Dahl to help fill in the void for the last three interests.
As to the Antwine 2-C, the same basic idea except a total of nine of Mr. Dahl's friends invested approximately $7500 in those wells, and the remainder of the funds were raised by other investors by Mr. Pinter in his other efforts.
Now the record shows that Mr. Pinter--
Unidentified Justice: What did the Court of Appeals find on this point?
Mr. Spinuzzi: --It made no finding whatsoever on that.
Unidentified Justice: Did not its opinion assume, it seems to me, did it not appear to assume that he was a substantial factor?
Mr. Spinuzzi: Yes, sir, it did.
And that substantial factor came up under the idea of how do you determine who and what is a seller.
The statute does not define a seller.
Unidentified Justice: I understand that.
So you are challenging the Court of Appeals?
Mr. Spinuzzi: No, I am not challenging the Court of Appeals, but I am challenging their precedent, yes.
Because the majority refused to follow that precedent.
They added the other financial benefit test as a threshold requirement.
And frankly, I think rightly so, either that one or some other.
And let me explain why, sir.
We already have a complicated securities law.
We now in a strict liability section statute where there is no defense, Section 12(1), we suddenly throw in tort negligence law.
And we not only throw in tort negligence law, but we throw in one of the most complicated concepts that they have under that law.
That is proximate cause, legal liability.
And to determine proximate cause, they now say you must be a substantial factor.
And I have cited in my brief what some of the authorities thing of substantial factor.
They think that it is good for trying to determine causation and fact.
But it has no bearing and it has no relevance, and in fact is a hindrance to determining actual legal liability.
That is a policy decision of this Court and of Congress.
It is not a decision for the court to be making at this trial level saying that if it is a substantial cause or substantial factor in causing it that then he is liable.
It is sort of the old idea of but for you introducing me to him that I never would have met him and I never would have sold him, and therefore you are the substantial cause of my selling him.
That is not a good standard.
It is already a confusing issue in tort law, and here we are going to try to make it more confusing in the securities law.
Unidentified Justice: I do not understand what you are saying.
Are you saying that he is liable even if he is not a substantial factor, or that even if he is a substantial factor that he is not liable?
Mr. Spinuzzi: Mr. Dahl is not liable.
Both the Trial Court and the Fifth Circuit found that he was not.
Mr. Pinter was, because he was the issuer of the securities.
Unidentified Justice: What would make Dahl liable in your view, does he have to be the actual seller who transfers title?
Mr. Spinuzzi: That would be one.
Because by being the actual seller, that would do it.
Unidentified Justice: I am sure that would, but what else?
Mr. Spinuzzi: I think that there are other situations.
Let me use an example.
If Mr. Dahl knew that these were unregistered securities, which he did, and he knew that there was a private offering exemption being sought to be proven and Mr. Dahl himself knew that he could avoid and ruin the private offering exemption by his own wrongful conduct, then I think that he could be liable.
A person who wants to meet the private offering exemption or the non-public offering exemption as it is technically called has certain restrictions.
Section 4.2 is the exemption provided by Congress to say all right, if you do not want to sell registered securities, you can sell unregistered securities on condition that you make the proper disclosures.
Unidentified Justice: And that is the only thing that the language, offers or sells, that the word offers brings in beyond the transfer of title?
Mr. Spinuzzi: It does not really quite say that either.
Section 12 says,
"Whoever offers or sells a security in violation of Section 5 shall be liable to his purchaser. "
The seller is liable to the purchaser, but it does not say whoever violates the statute.
Unidentified Justice: And the offerer is liable to nobody?
Mr. Spinuzzi: It does not say that specifically in the statute, no.
It would be construed, and I think that in many instances that it can.
Because the consummation of the sale appears to be the actual damage and not necessarily just the offerer.
It is an interesting point.
Because at one time the statute in the definition included sale to include an offer.
It was later amended about 1958 and removed that provision.
But logically speaking, a person who really actively participates in a sale, and I think that a pecuniary benefit test is applicable.
Because very frankly, in the Trial Court, the defense was raised that Mr. Dahl agreed to sell in exchange for a commission.
That is pecuniary benefit.
It was disproved.
It was finally admitted by Mr. Pinter that he was wrong, that he did not pay a commission or agree to pay a commission.
So that would be one sense.
Another sense would be the way that the SEC has taken the position.
That if he were a promoter of the enterprise, that if he had a financial interest in the actual business himself, that would be different.
We have taken the position that where the purchaser of a security has only an interest in a venture as an investor himself that he cannot be a seller to someone else merely by saying, hey, I have got a good deal, I have checked it out and I think that it is great, you ought to get into it.
And that is basically what happened here.
Now there was not even any negotiation by Mr. Dahl with these other people.
The subscription agreement prepared by Mr. Pinter and given to Mr. Dahl had all of the terms and the conditions of the sale.
The only thing that it lacked was the name of the investor, his Social Security number, and his address.
And at the very end, it has a form of schedule which says that if you buy a one-sixteenth interest that it costs you X dollars and if you buy three-sixty-fourths that it costs you X dollars, and all you do--
Unidentified Justice: Mr. Spinuzzi, what is Mr. Dahl's account of why he did all of this, just to get his friends in on this good deal?
Mr. Spinuzzi: --Yes, sir, it really was.
As a matter of fact, to understand why he did, these were all people that he had known for some time.
They were his business partners and his banker.
He used to be in the construction business.
His banker, his insurance man, his fiancee, his own brother.
There was not any stranger to him that he was not a close associate with that he did not say, hey, you ought to be in on this.
He received nothing, but perhaps except hopefully the friendship was increased.
I do not know what else.
Unidentified Justice: Maybe not.
Mr. Spinuzzi: You may be right.
Now what really bothers me is the attempt here to shift the burden of what I consider to the statute's main function of the disclose of all material information in connection with an investment opportunity.
Mr. Pinter says, hey, you should have told him the truth.
Now the critical thing that came up in the testimony that really is shocking is Mr. Pinter says that he gave nothing to Mr. Dahl to explain this offering or the three offerings, nothing.
He gave him one thing as a kind of geological report, but it has nothing to do with the particular well.
He just said that it was to give him an idea of where approximately the wells were located.
Well, that does not even meet, of course, the registration requirements, and it certainly does not meet the exemption requirements.
And in this regard, Mr. Pinter specifically said in the subscription agreement that these securities are not registered under the Securities Act of 1933.
But then it goes on, 146> ["].
And Rule 146 is a specific SEC rule providing a safe haven for an offering which is exempt from registration under the non-public offering exemption of Section 4(2).
Now if you are going to put the burden on Mr. Dahl and say equitably he is estopped and he is in pari delicto because he knew that the securities were unregistered, then so did everyone else who invested in those wells, because they all signed the subscription agreement and the subscription agreement is very specific that these are not registered.
But if you are going to charge him with that burden, then we should always charge him with the other burden it says, 146> ["], meaning that Mr. Pinter must have complied with Rule 146.
But the testimony was just the opposite.
And this was interesting.
Mr. Dahl received a financial statement.
Unidentified Justice: But the others are not responsible for its having failed to be a private offering, and the contention here is that Dahl is in part, because he was one of those who promoted the entire scheme, whether he did it for purposes of friendship or for purposes of profit.
Mr. Spinuzzi: I disagree for this reason.
The scheme, as you call it, had already been laid, and in existence, and in operation.
This is basically what the SEC wants to find out, was Dahl personally involved in the scheme as a promoter.
It was already in operation.
They were selling the interests to other people.
He only needed a few more people to fill out and finalize his subscriptions.
Unidentified Justice: So you say if someone else has already approached enough other people that the private offering exemption is lost, has already been lost, then someone who comes in at that stage and assists in selling to even more of the public, he is okay, because after all the violation has occurred?
Mr. Spinuzzi: No, sir.
Unidentified Justice: Is that your theory?
Mr. Spinuzzi: No, sir.
If that person comes in as an agent for the seller, and I am talking about the issuer as a seller, he should be liable also.
But that is basically held by the courts anyway.
Or if he is the agent selling on behalf of the issuer.
There is another one that goes that if he is in a control relationship with the issuer, Section 15 I believe it is.
There is a specific liability which they can take up.
Why do we have to go to in pari delicto?
Unidentified Justice: But not if he is doing it for his own financial gain.
Mr. Spinuzzi: He is not.
Unidentified Justice: But what if he is doing it for his own financial gain?
Mr. Spinuzzi: In that case, I would say that he is going to come under the three categories of either an issuer, or an underwriter, or a dealer in securities.
Those definitions are broad enough to catch a person in that position.
As a matter of fact, one of the exemptions from registration specifically says if you are not an issuer, and if you are an underwriter, and if you are not a dealer, than you may sell the security.
Now normally, that is a secondary trading type exemption, but it could also count for a normal issue.
So in those three categories, I think that it would almost always lump them in.
And interestingly enough, that came up after the trial in a proposed finding of fact, but it was two weeks after the trial.
And it was not ruled on by the court, and I can understand.
And there is something else about the Trial Court.
I have put in my brief that as far as I am concerned these issues are not even properly before this Court.
We do not think that the in pari delicto defense, or the estoppel defense, or the right of contribution were ever raised in the Trial Court in the form in which they are brought here.
And the form in which they are brought here is with reference to the sale of unregistered securities.
The manner in which it was raised in the Trial Court was under a 10(b)(5) fraud theory.
Well, excuse me, I will take it back.
It was under a common law fraud theory.
That Mr. Dahl made material misrepresentations and omissions of fact that caused Mr. Pinter to engage in this wrongful conduct.
Unidentified Justice: The Fifth Circuit passed upon the in pari delicto.
Mr. Spinuzzi: The Fifth Circuit apparently decided that it was of significant enough importance that they would go ahead and rule on it.
Unidentified Justice: And estoppel?
Mr. Spinuzzi: And estoppel.
As a matter of fact, estoppel was the main point of Judge Hill.
Judge Hill kept saying... estoppel, of course, here was he knew or did not know that securities were unregistered.
Judge Hill said so what, the old case from the Fifth Circuit, Henderson v. Hayden, that they have always applied the standard that you cannot waive your rights under the statute and you cannot be estopped from your rights under the statute even if you have knowledge that they are unregistered.
Because in this instance, the great white father, Congress, says we are going to protect you, public, from your own ignorance unless the issuer gives you a complete disclosure of all material information.
If he gives you disclosure, then Mr. Investor, it is your tough luck, you take care of yourself.
And that is the way that it has been, and really the way that it should be, because the law imparts the fairness of disclosing the investment opportunity.
Unidentified Justice: Well, Mr. Spinuzzi, it seems to me that under that approach that it would further Congress' objectives to provide a in pari delicto defense to someone who is a promoter and who gets other people to buy these unregistered securities as a promoter, and I think that is what the SEC is arguing.
Mr. Spinuzzi: I think that they are trying to... well, the SEC has policy decisions too, and I agree.
And their policy decision here is that they would like to enlarge it to cover a promoter in that sense, and I cannot disagree.
Unidentified Justice: And it would seem to further Congress' purposes here?
Mr. Spinuzzi: Yes.
Unidentified Justice: So the question is whether Mr. Dahl is indeed a promoter in that sense.
Mr. Spinuzzi: I agree.
Unidentified Justice: And perhaps the courts below did not have a chance to focus on that, because at least the First Circuit thought that defense was not available at all.
Mr. Spinuzzi: I do not think that is the reason that they did not focus.
The reason is that it was never made an issue in the Trial Court.
But more importantly, even if it had been, the record in the Trial Court shows absolutely no evidence to support such a theory.
So assuming a remand as an example, there is nothing there in the record for the Court to make a ruling on.
There is nothing, absolutely zero, to indicate the Mr. Dahl was a promoter of this, evidentiary-wise or otherwise.
That would mean then that we start a trial all over again on issues that in my opinion were never raised.
Unidentified Justice: I do not think that you accept the SEC's definition of the in pari delicto defense.
Mr. Spinuzzi: No.
Unidentified Justice: Do you think that it requires Dahl to be a promoter?
Mr. Spinuzzi: I think that it would.
You see, I am afraid to say.
Unidentified Justice: Well, that is something different than what we said in the Eichler case.
Mr. Spinuzzi: Yes, sir.
Unidentified Justice: That is an additional element that is not present in Eichler.
Mr. Spinuzzi: That is correct.
Unidentified Justice: But Eichler referred to another section, is that it?
Mr. Spinuzzi: Eichler was basically talked on the 1934 Act which was a 10(b)(5) fraud action, and we are not talking about fraud here.
I can understand the exception that this Court made in the Eichler case, and it makes good sense.
But in that case, even the Court here did not permit the in pari delicto defense to be used.
Unidentified Justice: Exactly.
Why do you need any more in this case?
Mr. Spinuzzi: I do not think that we need any more.
You see, the wrongful conduct that they are claiming with Mr. Dahl is that he was also a seller to his friends by giving them a tip.
Unidentified Justice: If we say that the in pari delicto defense is available in some circumstances contrary to the Court of Appeals, must we not remand and say, look, here is the right rule, now decide whether it is available on the facts.
If there are not enough facts, maybe you have to send it back to the Trial Court.
Mr. Spinuzzi: I do disagree with the SEC on that part.
I do not believe that the Fifth Circuit said that the in pari delicto was never permissible in a Section 12(1) strict liability situation.
Unidentified Justice: Well, it said that it was not available here.
Mr. Spinuzzi: Yes, sir, it did.
And the reason that it did is that it said that Dahl was a buyer of all of these securities, and as a buyer you are talking about so-called seller activity which is a matter not related to his own purchases.
That is basically what the Court said.
That if you are going to use the equitable defense of in pari delicto, it must relate to the same identical matter of which you complain.
Mr. Dahl was not complaining about the wrongful sales to his friends.
He was complaining about the wrongful sales to him.
Unidentified Justice: Absent a showing a Dahl's conduct was offensive to the dictates of natural justice, the unclean hands, the in pari delicto unclean hands are not available.
Mr. Spinuzzi: I agree.
And the only thing that I can figure is that he is going back to the historical call it transition of the equitable doctrine.
Unidentified Justice: But did not the Court of Appeals hold in discussing estoppel that to allow the estoppel defense would frustrate the purposes of the Act?
Mr. Spinuzzi: Yes, sir.
Unidentified Justice: And that is one of the requirements also of in pari delicto indirectly, is that not right?
Mr. Spinuzzi: They have a slightly different wording, sir, and if I may read my note here on it.
Under the Eichler case it says,
"Preclusion of a suit would not significantly interfere with effective enforcement or protection of the public. "
The Henderson standards says,
"It would further the goals of securities. "
To me, they are basically the same, but they are slightly different wording.
And apparently, Judge Brown in his dissent put some emphasis on that difference.
Unidentified Justice: Yes.
But the opinion says that it would frustrate the purposes of the Securities Act.
Mr. Spinuzzi: That is correct.
Unidentified Justice: Is that not Eichler, too?
Mr. Spinuzzi: In my opinion, yes.
The wording is slightly different, but I see nothing different whatsoever in substance.
And in addition, the Henderson case was really primarily directed in its application by the Fifth Circuit at the estoppel theory, that his knowledge that the securities were unregistered.
The court said that in its opinion that the Eichler case still applies to the estoppel theory as to knowledge of unregistered securities.
But that in any event, in the majority's view, that even if you applied the Eichler standard that it still would not bar or preclude recovery by Mr. Dahl.
I have nothing further, Your Honor.
Thank you very much, Justices.
Chief Justice William H. Rehnquist: Thank you, Mr. Spinuzzi.
Mr. Sparks, you have one minute remaining.
ORAL ARGUMENT OF BRADEN M. SPARKS, ESQ. ON BEHALF OF PETITIONERS -- REBUTTAL
Mr. Sparks: May it please the Court:
I would like to address a couple of questions very quickly.
As to the disclosure issue, counsel has argued I submit outside of the record that there were omissions.
The Trial Court found that there were no violations of 10(b)(5), no omissions, and that there were no acts that constituted a violation of Section 10(b)(5) in paragraph 25 of the court's findings.
Secondly, I would like to point out in response to the questions of Justices Scalia and White that with regard to the in pari delicto test suggested by the government that they suggest that one ought to be a promoter and somehow be involved in the decision not to register, or involved in the conduct that results in the loss of the exemption.
And I submit that in a 12(1) context, a strict liability context, that this puts again the burden on establishing a state of mind that a decision was made not to register, and that a decision was made to take the transaction outside the exemptions.
I submit that that again flies in the face of the basis of the statute.
Secondly, in response to Justice Scalia's questioning concerning the substantial factor test, there is some confusion.
Chief Justice William H. Rehnquist: Thank you, Mr. Sparks.
The case is submitted.