The opinion of the court was delivered by: SMITH
Plaintiffs, Mr. and Ms. Grinsell, filed this securities fraud action against their investment broker, Laura Kent, and her employer, Kidder, Peabody, & Company. The complaint alleges eleven causes of action, including violation of §§ 17(a) and 12(2) of the Securities Act of 1933. Defendants move to (1) strike allegations regarding violation of § 17(a) from the tenth cause of action and (2) dismiss the eleventh cause of action, alleging violation of § 12(2), for failure to state a claim. Having carefully considered the submitted materials and heard argument on these motions, the Court grants the motions for the reasons set forth.
Motion to Strike Portions of the Tenth Cause of Action
Plaintiffs' tenth cause of action, entitled "Damages -- Violation of Federal Securities Law," asserts that defendants violated § 17(a) of the Securities Act of 1933 and § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.
Defendants move to strike all references to § 17(a) from the complaint on the grounds that no private cause of action exists under that statute.
Ninth Circuit precedent on this issue is clear. In 1987, a Ninth Circuit en banc panel reversed two earlier rulings and held that no private remedy exists for violations of § 17(a) of the Securities Act of 1933. See In re Washington Public Power Supply System Securities Litigation, 823 F.2d 1349 (9th Cir. 1987).
Rule 12 of the Federal Rules of Civil Procedure allows courts to order stricken from any pleading any "redundant, immaterial, impertinent, or scandalous matter." Because allegations concerning violation of § 17(a) are immaterial and impertinent, the motion to strike is GRANTED.
Motion to Dismiss the Eleventh Cause of Action
This motion presents a clear question of law: Does § 12(2) of the Securities Act of 1933 apply only to initial offerings of stock, or does it also protect those who purchase stock on the secondary market?
There is a split of opinion on this issue, but no Ninth Circuit or Northern District of California cases on point.
Section 12(2) of the 1933 Act provides as follows:
15 U.S.C. § 77l(2) (emphasis added).
Both sets of parties base their arguments on the meaning of the phrase "by means of a prospectus or oral communication." Defendants argue that, in light of the 1933 Act's legislative history, the words "prospectus or oral communication" clearly limit application of § 12(2) to communications connected with an initial stock offering, and exclude statements made pursuant to subsequent secondary market transactions. Plaintiffs, relying on the same statutory language, argue that all oral communications of the type proscribed by the statute are actionable, whether or not made in conjunction with an initial stock offering.
Plaintiffs rely primarily on a recent New Jersey District Court case. The defendants in Elysian Federal Savings Bank v. First Interregional Equity Corp., 713 F. Supp. 737 (D.N.J. 1989), like defendants here, argued that the Securities Act of 1933 explicitly addressed itself only to initial offerings of stock and that, in light of that intent, the words "oral communication" in § 12(2) must refer to oral statements made pursuant to an initial stock offering. The Elysian court disagreed, noting that another portion of the 1933 Act, § 17(a) (discussed in the previous section of this Order), does apply in the secondary market context. The ...