was not sufficiently available to the offerees. Thus, § 4(2) does not apply.
The FDIC has not demonstrated that there is a genuine issue of material fact as to either of these exemptions. Thus, the court concludes that the WBC commercial paper did have to be registered under § 5.
D. Loss Causation.
The individual defendants claim that summary judgment is precluded by the plaintiff's failure to prove loss causation, that is, that NBW's failure to register actually caused AFSCME's losses. However, loss causation is not an element of the prima facie case under § 12(1); thus, absence of proof on this element is irrelevant.
To prove their point, the individual defendants rely on several cases dealing with § 12(2) of the 1933 Act. Although terms in the two provisions are often accorded similar interpretations by the courts, see e.g., Pinter, 486 U.S. at 642, the two causes of action are not identical. In fact, contrary to § 12(2), § 12(1) imposes strict liability:
The registration requirements are the heart of the Act, and § 12(1) imposes strict liability for violating those requirements. Liability under § 12(1) is a particularly important enforcement tool, because in many instances a private suit is the only effective means of detecting and deterring a seller's wrongful failure to register securities before offering them for sale.
Pinter, 486 U.S. at 638. Even the FDIC, in their response to the SEC brief, acknowledges that § 12(1) gives the investor the "unconditional right to rescind, regardless of the cause of loss, adequacy of disclosure, or knowledge of the buyer." FDIC SEC Response at 5. See also FDIC Motion at 43 ("Section 12(1) imposes liability without fault on the part of the seller.").
In light of the strict liability nature of the cause of action, therefore, loss causation is not a necessary element of AFSCME's prima facie case.
The FDIC raises several defenses which, it claims, should prevent this court from granting summary judgment in favor of AFSCME. The court finds none of these defenses availing.
A. Statutory Defenses.
The FDIC's statutory argument has two prongs: first, that a bank, like NBW, may not solicit sales of securities from its customers under the Glass-Steagall Act, 12 U.S.C. 24 (Seventh);
and second, that NBW's alleged solicitation of securities precludes recovery under § 12(1). Under the second prong, the FDIC claims that AFSCME's cause of action is precluded for three reasons: first, that recovery is precluded by the D'Oench doctrine; second, that the FDIC cannot be held liable for NBW's ultra vires acts; and third, that AFSCME may not recover due to statutory and legal non-recourse provisions. None of these survives scrutiny.
1. The D'Oench doctrine.
The FDIC asserts that the D'Oench doctrine prevents recovery by AFSCME in this case because NBW sent confirmation slips to AFSCME which stated that all sales were non-recourse. Because no other provisions are in the record of the bank, the FDIC asserts that AFSCME is bound by these statements.
This court has already dealt extensively with the effect of the D'Oench doctrine on this case. See Mem. Op., Mar. 10, 1992. D'Oench protects the FDIC from secret side agreements or any arrangement in which plaintiff takes part that would tend to deceive bank examiners; it applies when the gravamen of the FDIC's assertion is the failure to get an agreement in writing. See FDIC v. State Bank of Virden, 893 F.2d 139, 144 (7th Cir. 1990). However, as the court determined in its previous opinion, Mem. 0p. at 42-46, when the act being sued upon has no connection to an agreement, but rather involves an independent basis for liability, D'Oench is not implicated. See Patterson v. FDIC, 918 F.2d 540, 543 (5th Cir. 1990) (holding that Homestead right under Texas state constitution exists independent of any agreement by parties); In Re Howard, 65 Bankr. 498 (Bankr. W.D. Tex. 1986) (same); but see Union Fed. Bank v. Minyard, 919 F.2d 335, 336 (5th Cir. 1990) (holding that appeal to usury laws did not bar bank's D'Oench defense).
Here AFSCME's § 12(1) claim is not based on an "agreement" of any kind; rather, NBW's liability results from the sale of unregistered securities. The illegality of the commercial paper is the fact that creates the liability, not any act or agreement between the parties. No facts or law have changed since the court issued its opinion in March,
and the court is not persuaded that there is any reason for the court to modify its previous holding today.
2. Ultra vires actions.
Section 16 of Glass-Steagall provides, in relevant part:
The business of dealing in securities and stock by [a national banking] association shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock.
12 U.S.C. § 24 (Seventh). The FDIC claims that this provision trumps AFSCME's § 12(1) cause of action. AFSCME, for its part, asserts that § 16 might preclude recovery on ultra vires contracts, but claims that § 16 does not bar recovery under statutory causes of action. However, neither party is able to cite the court to any cases which deal with the interrelation of § 16 and § 12(1),
and the court has also found none.
In examining the cases addressing these two statutory provisions and the policy interests behind them, the court determines that § 16 is not designed to prevent a wronged purchaser of securities from utilizing § 12(1). As mentioned above, § 12(1) is a powerful, strict liability cause of action designed to ensure that a purchaser may rescind a purchase or recover losses whatever the cause. See Pinter, 486 U.S. at 638. See also FDIC SEC Response at 5 (§ 12(1) provides "unconditional right to rescind, regardless of the cause of loss, adequacy of disclosure, or knowledge of the buyer."). There is nothing in the statutory language, the legislative history, or the later interpretation of § 16 which limits this view. Thus, the court holds that AFSCME's § 12 right of recovery is not precluded by NBW's alleged violation of § 16.
3. Non-recourse provisions.
Lastly, the FDIC argues that AFSCME may not recover because the sales agreement between NBW and AFSCME and § 16 of the Glass-Steagall Act provide that all sales of securities are non-recourse. However, the definition of "non-recourse" urged by the FDIC, encompassing as it does any possible liability -- whether derived from contract, tort, or statute -- of a bank to a purchaser of security, is significantly too broad. As the Court of Appeals for the Second Circuit has stated, § 16 prevents a bank from entering into contracts which obligate the bank to assume its brokerage customers' risks. Securities Industry Ass'n v. Board of Governors, 716 F.2d 92, 100 n.4 (2d Cir. 1983), aff'd, 468 U.S. 207, 82 L. Ed. 2d 158, 104 S. Ct. 3003 (1984). Authority in this circuit agrees. See Securities Industry Ass'n v. Board of Governors, 627 F. Supp. 695, 701 (D.D.C.), order rev'd on other grounds, 257 U.S. App. D.C. 137, 807 F.2d 1052 (D.C. Cir. 1986). No such contract was made in this case. Rather, NBW's liability is predicated on a federal statute and is therefore not precluded by § 16's non-recourse provision.
Thus, none of the defenses raised by the FDIC either under the Glass-Steagall Act or the D'Oench doctrine protect the FDIC from § 12(1) liability.
The final issue the court must address is whether equity should prevent AFSCME's recovery. The FDIC makes two arguments: first, that AFSCME was a sophisticated investor which should not reap a windfall for a risky investment; and second, that federal law precludes punitive damages against the FDIC in its receiver capacity. Neither argument is successful.
1. Case law.
In its first argument, the FDIC asserts that cases such as Pinter and D'Oench indicate that any modicum of fault on the part of the securities purchaser should preclude recovery under § 12(1). By not allowing AFSCME to recover, the FDIC argues, the court would be preventing a sophisticated investor from reaping a windfall at the hands of innocent investors and the federal insurance fund.
However, contrary to the FDIC's suggestions, Pinter advises that equitable limitation on § 12(1) recovery should occur in very limited contexts: only those in which the seller can demonstrate both significant fault on the part of the purchaser and that denial of recovery would not impede the purposes of the Securities Act. 486 U.S. at 633. In this case, however, NBW sold WBC commercial paper in a situation where a clear conflict of interest exists, particularly since both NBW and WBC were in dire economic straits (a fact of which NBW and WBC directors were well aware). AFSCME's alleged sophistication does not rise to such a level as to outweigh NBW's fault. Moreover, the purpose of the securities laws will be achieved only if § 12(1) liability is found whenever an entity sells unregistered, non-prime quality commercial paper to the public. Regardless of who the seller is, bank or individual, Congress' goals are achieved only if the law is enforced (even if, in this case, the FDIC must foot the bill).
2. Statutory law.
The FDIC's final argument is that federal statutory laws prevent the imposition of punitive damages against the FDIC in its receiver status. Although the FDIC contends that a § 12(1) remedy is purely punitive and serves no deterrent effect, it is clear that § 12(1) provides only for actual damages suffered by the security purchaser. This argument must therefore fail.
For the reasons set forth herein, AFSCME's motion for summary judgment on Count I will be GRANTED. AFSCME shall be entitled to entry of summary judgment against defendant for $ 1,800,000 plus interest and the costs of this action. The FDIC's counter-motion for summary judgment will be DENIED.
A separate order shall issue.
Royce C. Lamberth
United States District Judge
EDITOR'S NOTE: The following court-provided text does not appear at this cite in 813 F. Supp. 7.
ORDER - December 11, 1992, Filed
This case comes before the court on AFSCME's Motion for Summary Judgment on Count I and the FDIC's Cross-motion for Summary Judgment on Count I.
Upon consideration of the representations made by counsel in their briefs, and for the reasons stated in the accompanying memorandum opinion, the court finds that AFSCME has satisfied the criteria necessary for summary judgment on Count I of its complaint. Thus, it is hereby ORDERED that:
1. AFSCME's Renewed Motion for Summary Judgment on Count I of its Complaint shall be GRANTED.
2. The FDIC's Cross-motion for Summary Judgment on Count I shall be DENIED.
3. AFSCME shall file, by December 18, 1992, its proposed schedule for addressing the remaining counts in this case, along with its proposed judgment order.
4. A status conference will be held for all participants in In re Commercial Paper Litigation, Master File No. 90-1755, at 2:00 p.m. on December 22, 1992.
Royce C. Lamberth
United States District Judge