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No.
ARTHUR L. GUSTAFSON, et al., PETITION ERS v.
on writ of certiorari to the united states court of appeals for the seventh circuit
[
Justice
As Justice Thomas persuasively demonstrates, the statute's language does not support the Court's reading. Section 12(2) contains no terms expressly confining the provision to public offerings, and the statutory definition of "prospectus"--"any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security," §2(10), 15 U.S.C. § 77b(10)--is capacious.
The Court presents impressive policy reasons for its construction, but drafting history and the longstanding scholarly and judicial understanding of §12(2) caution against judicial resistance to the statute's defining text. I would leave any alteration to Congress.
To construe a legislatively defined term, courts usually start with the defining section. Section 2(10) defines prospectus capaciously as "any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security," 15 U.S.C. § 77b(10). The items listed in the defining provision, notably "letters" and "communications," are common in private and secondary sales, as well as in public offerings. The §2(10) definition thus does not confine the §12(2) term "prospectus" to public offerings.
The Court bypasses §2(10), and the solid support it gives the Court of Appeals' disposition. Instead of beginning at the beginning, by first attending to the definition section, the Court starts with §10, 15 U.S.C. § 77j a substantive provision. See ante, at 5-6. The Court correctly observes that the term "prospectus" has a circumscribed meaning in that context. A prospectus within the contemplation of §10 is a formal document, typically a document composing part of a registration statement; a §10 prospectus, all agree, appears only in public offerings. The Court then proceeds backward; it reads into the literally and logically prior definition section, §2(10), the meaning "prospectus" has in §10.
To justify its backward reading--proceeding from §10 to §2(10) and not the other way round--the Court states that it "cannot accept the conclusion that [the operative word prospectus] means one thing in one section of the Act and something quite different in another." See ante, at 10. Our decisions, however, constantly recognize that "a characterization fitting in certain contexts may be unsuitable in others." NationsBank of N. C., N. A. v. Variable Annuity Life Ins. Co., 513 U. S. ___ (1995) (slip op., at 10):
"Undoubtedly, there is a natural presumption that identical words used in different parts of the same act are intended to have the same meaning. . . . But the presumption is not rigid and readily yields whenever there is such variation in the connection in which the words are used as reasonably to warrant the conclusion that they were employed in different parts of the act with different intent. . . .
"It is not unusual for the same word to be used with different meanings in the same act, and there is no rule of statutory construction which precludes the courts from giving to the word the meaning which the legislature intended it should have in each instance." Atlantic Cleaners & Dyers, Inc. v. United States, 286 U.S. 427, 433 (1932) (word "trade" has a more encompassing meaning in §3 than in §1 of the Sherman Act).
See also Cook, "Substance" and "Procedure" in the Conflict of Laws, 42 Yale L. J. 333, 337 (1933) ("The tendency to assume that a word which appears in two or more legal rules, and so in connection with more than one purpose, has and should have precisely the same scope in all of them, runs all through legal discussions. It has all the tenacity of original sin and must constantly be guarded against.").
According "prospectus" discrete meanings in §10 and §12(2) is consistent with Congress' specific instruction in §2 that definitions apply "unless the context otherwise requires," 15 U.S.C. § 77b. As the Court of Appeals construed the Act, §2(10)'s definition of "prospectus" governs §12(2), which accommodates without strain the definition's broad reach; by contrast, the specific context of §10 requires a correspondingly specific reading of "prospectus."
Indeed, in the Investment Company Act of 1940, Congress explicitly recognized that the Securities Act uses "prospectus" in two different senses--one in §10, and another in the rest of the Act:
" `Prospectus,' as used in [§22 of the Investment Company Act], means a written prospectus intended to meet the requirements of section 10(a) of the Securities Act of 1933 . . . and currently in use. As used elsewhere, `prospectus' means a prospectus as defined in the Securities Act of 1933." §2(31), 54 Stat. 794, as amended, 15 U.S.C. § 80a-2(31). [n.2]
Most provisions of the Securities Act govern only public offerings, and the legislative history pertaining to the Act as a whole shares this orientation. See ante, at 18 (citing H. R. Rep. No. 85, 73d Cong., 1st Sess. 1, 5 (1933)). Section §17(a) of the Act, 15 U.S.C. § 77q(a), however, is not limited to public offerings; that enforcement provision, this Court has recognized, also covers secondary trading. See United States v. Naftalin, 441 U.S. 768 (1979). The drafting history is at least consistent with the conclusion that §12(2), like §17(a), is not limited to public offerings.
The drafters of the Securities Act modeled this federal legislation on the British Companies Act, 19 & 20Geo. 5, ch. 23 (1929). See Landis, The Legislative History of the Securities Act of 1933, 28 Geo. Wash. L. Rev. 29, 34 (1959) (Landis and the other drafters "determined to take as the base of [their] work the English Companies Act"); see also SEC v. Ralston Purina Co., 346 U.S. 119, 123 (1953) (characterizing the Companies Act as a "statutory anteceden[t]" of federal securities laws). The Companies Act defined "prospectus" as "any prospectus, notice, circular, advertisement, or other invitation, offering to the public for subscription or purchase any shares or debentures of a company," 19 & 20 Geo. 5, ch. 23, §380(1) (1929) (emphasis added). Though the drafters of the Securities Act borrowed the first four terms of this definition, they did not import from the British legislation the language limiting prospectuses to communications "offering [securities] to the public." This conspicuous omission suggests that the drafters intended the defined term "prospectus" to reach beyond communications used in public offerings. [n.3]
The House Conference Report, which explains the Act in its final form, describes §12(2) in broad terms, and nowhere suggests that the provision is limited to public offerings:
"The House bill (sec. 12) imposes civil liability for using the mails or the facilities of interstate commerce to sell securities (including securities exempt,under section 3, from other provisions of the bill) by means of representations which are untrue or are misleading by reason of omissions of material facts." H. R. Conf. Rep. No. 152, 73d Cong., 1st Sess. 1, 26-27 (1933) (emphasis added).
Nor does the Report mention the word "prospectus," even though one would expect that word to figure prominently if it were the significant limitation the Court describes. See also Rapp, The Proper Role of Securities Act Section 12(2) as an Aftermarket Remedy for Disclosure Violations, 47 Bus. Law. 711, 719-724 (1992) (offering detailed analysis of legislative history). [n.4]
Commentators writing shortly after passage of the Act understood §12(2) to cover resales and private sales, as well as public offerings. Felix Frankfurter, organizer of the team that drafted the statute, firmly stated this view. See Frankfurter, The Federal Securities Act: II, 8 Fortune 53, 108 (1933) (Act "seeks to terminate the facilities of the mails and of interstate commerce for dishonest or unfair dealings in the sale of all private or foreign government securities, new or old") (emphasis added). William O. Douglas expressed the same understanding. See Douglas & Bates, The Federal Securities Act of 1933, 43 Yale L. J. 171, 183 (1933) (noting that, except for transactions involving securities exempt under §3(a)(2), 15 U.S.C. § 77c(a)(2), no securities or transactions are exempt from §12(2)).
Most subsequent commentators have agreed that §12(2), like §17(a), is not confined to public offerings. See, e.g., H. Bloomenthal, Securities Law Handbook §14.05, pp. 14-13, 14-38 (1991); 2 A. Bromberg & L. Lowenfels, Securities Fraud and Commodities Fraud §5.2(600) (1993); 1 T. Hazen, Law of Securities Regulation §7.5, p. 318 (2d ed. 1990); 17A J. Hicks, Civil Liabilities: Enforcement and Litigation under the 1933 Act §6.01[3], pp. 6-12 to 6-39 (1994); 9 L. Loss & J. Seligman, Securities Regulation 4217-4222 (3d ed. 1992); Maynard, Section 12(2) of the Securities Act of 1933: A Remedy for Fraudulent Postdistribution Trading?, 20 Sec. Reg. L. J. 152 (1992); Rapp, supra, at 711; Comment, Applying Section 12(2) of the 1933 Securities Act to the Aftermarket, 57 U. Chi. L. Rev. 955 (1990). But see Weiss, The Courts Have It Right: Securities Act Section 12(2) Applies Only to Public Offerings, 48 Bus. Law. 1 (1992).
While Courts of Appeals have divided on §12(2)'s application to secondary transactions, [n.5] every Court of Appeals to consider the issue has ruled that private placements are subject to §12(2). See Metromedia Co. v.Fugazy, 983 F. 2d 350, 360-361 (CA2 1992), cert. denied, 508 U. S. ___ (1993); Haralson v. E. F. Hutton Group, Inc., 919 F. 2d 1014, 1032 (CA5 1990); Nor Tex Agencies, Inc. v. Jones, 482 F. 2d 1093, 1099 (CA5 1973); Pacific Dunlop Holdings Inc. v. Allen & Co. Inc., 993 F. 2d 578, 587 (CA7 1993) (exemptions in §4, 15 U.S.C. § 77d do not limit §12(2)'s reach); see also Adalman v. Baker, Watts & Co., 807 F. 2d 359 (CA4 1986) (applying §12(2) to private sale). "[L]ongstanding acceptance by the courts [of a judicial interpretation], coupled with Congress's failure to reject" that interpretation, "argues significantly in favor of accept[ing]" it. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 733 (1975).
The drafters of the Uniform Securities Act, in 1956, modeled §410(a)(2) of that Act [n.6] on §12(2) of the federal Securities Act. Notably, the Uniform Act drafters did not read §12(2) as limited to public offerings. Accordingly, they did not so limit §410(a)(2). Bloomenthal, supra, §14.05, at 14-38 to 14-39; see also §410(a)(2) comment, 7B U. L. A. 644 (1985) (describing as comparable scope of §410(a)(2) and scope of Uniform Securities Act §101, the Uniform Act's analog to Securities Act §17(a)). [n.7] Section 410, it is true, does not contain the-prospectus or oral communication" language, perhaps because "prospectus" is not a defined term in the Uniform Securities Act. See §401, 7B U. L. A. 578-581 (1985) (listing definitions). There is scant doubt, however, that the drafters of Uniform Act §410(a)(2) intended the provision to have the same meaning as Securities Act §12(2). See §410(a)(2) comment, 7B U. L. A. 644 ("This clause is almost identical with §12(2) of the Securities Act of 1933 . . . ."); L. Loss, Commentary on the Uniform Securities Act 147 (1976) ("The resemblance [of §410(a)(2) of the Uniform Act] to §12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2), will once more make for an interchangeability of federal and state judicial preceden[ts] in this very important area.").
* * *
In light of the text, drafting history, and longstanding scholarly and judicial understanding of §12(2), I conclude that §12(2) applies to a private resale of securities. If adjustment is in order, as the Court's opinion powerfully suggests it is, [n.8] Congress is equipped to undertake the alteration. Accordingly, I dissent from the Court's opinion and judgment.
Notes
1 I understand the Court's definition of a public offering to encompass both transactions that must be registered under §5, 15 U.S.C. § 77e and transactions that would have been registered had the securities involved not qualified for exemption under §3, 15 U.S.C. § 77c.
2 Although the Court finds our reading of §2(10) redundant, see ante, at 12, the Court recognizes that Congress built redundancy into the definition by defining a "prospectus" as a "prospectus." See ante, at 13.
3 Though the Court cites legislative history to show Congress' intent to follow, rather than depart from, the British statute, these sources suggest an intention to afford at least as much protection from fraud as the British statute provides. See ante, at 20-21 (quoting H. R. Rep. No. 85, 73d Cong., 1st Sess. 1, 9 (1933)) ("What is deemed necessary for sound financing in conservative England ought not to be unnecessary for the more feverish pace which American finance has developed."). Congress' provision for liability beyond "offering[s] to the public," however, suggests a legislative conclusion that the "feverish pace" of American finance called for greater protection from fraud than the British Act supplied.
4 Though House Report No. 85 affords support for the reading advanced by the Court, it predates the Conference Report. Moreover, I do not share the Court's view that Report No. 85 speaks with clarity and specificity to the question at hand--§12(2)'s scope. See ante, at 19. In suggesting that registration statements and prospectuses are "the basic information by which the public is solicited," and that the Act's liability provisions penalize the "originators of securities," see H. R. Rep. No. 85, 73d Cong., 1st Sess. 1, 9 (1933), the Report does not focus on §12(2), but on "[s]ections 11 and 12" in general. Ibid. The Report's broad address thus takes in §11, 15 U.S.C. § 77k which is directed at misstatements in registration statements, and §12(1), 15 U.S.C. § 77l(1), which targets sales and offers to sell securities in violation of the Act's registration provisions. There is no dispute that the latter two provisions apply only to public offerings--or, to be precise, to transactions subject to registration. The dominant point made by the Report, moreover, is that the civil liability sections are exacting.
5 Compare Pacific Dunlop Holdings Inc. v. Allen & Co. Inc., 993 F. 2d 578 (CA7 1993) (applying §12(2) to secondary transactions), cert. granted, 510 U. S. ___, cert. dismissed, 510 U. S. ___ (1994), with First Union Discount Brokerage Services, Inc. v. Milos, 997 F. 2d 835, 842-844 (CA11 1993) (holding §12(2) inapplicable to secondary transactions); Ballay v. Legg Mason Wood Walker, Inc., 925 F. 2d 682 (CA3), cert. denied, 502 U.S. 820 (1991) (same).
6 Section 410(a)(2) imposes liability on "[a]ny person who"
"(2) offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading (the buyer not knowing of the untruth or omission), and who does not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission . . . ." 7B U. L. A. 643 (1985).
7 State adaptations of §410(a)(2) have been applied consistently beyond public offerings; they have been read to cover secondary transactions, see, e.g., Banton v. Hackney, 557 So. 2d 807 (Ala. 1989); Bradley v. Hullander, 272 S. C. 6, 249 S. E. 2d 486 (1978);S & F Supply Co. v. Hunter, 527 P. 2d 217 (Utah 1974), as well as private transactions, see, e.g., Towery v. Lucas, 128 Ore. App. 555, 876 P. 2d 814 (1994); Jenkins v. Jacobs, 748 P. 2d 1318 (Colo. App. 1987); Gaudina v. Haberman, 644 P. 2d 159 (Wyo. 1982); Foelker v. Kwake, 279 Ore. 379, 568 P. 2d 1369 (1977).
8 Section 12(2) did not become prominent in Securities Act litigation until this Court held in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), that an action for civil damages under §10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 CFR § 240.10b-5 (1975), requires proof of scienter. See Loss, The Assault on Securities Act Section 12(2), 105 Harv. L. Rev. 908, 910 (1992). Though the Court of Appeals' reading of §12(2) shows fidelity to the statute Congress passed, this Court's opinion makes noteworthy practical and policy points. As the Court observes, ante, at 16, under the Court of Appeals' reading, §12(2) would equip buyers with a rescission remedy for a negligent misstatement or omission even if the slip did not cause the buyer's disenchantment with the investment. And, in light of the "free writing" provision of §2(10)(a), 15 U.S.C. § 77b(10)(a) (a communication will not be deemed a "prospectus" if its recipient was previously sent a prospectus meeting the requirements of §10), the Court of Appeals' reading, ironically, would leave a seller more vulnerable in private transactions than in public ones.