Opinion
01 Civ. 11448 (JGK) (HBP).
April 25, 2006
MEMORANDUM OPINION AND ORDER
This is a securities frauds action brought by a number of corporate plaintiffs. Plaintiffs' allegations are set forth in detail in two opinions of the Honorable John G. Koeltl, United States District Judge, AIG Global Sec. Lending Corp. v. Banc of America Sec. LLC, 01 Civ. 11448, 2005 WL 2385854 (S.D.N.Y. Sept. 26, 2005) and AIG Global Sec. Lending Corp. v. Banc of America Sec. LLC, 254 F. Supp.2d 373 (S.D.N.Y. 2003); familiarity with these decisions is assumed.
The parties' present dispute arises out of a discovery request. Banc of America Securities LLC ("BA") seeks (1) documents concerning all of plaintiffs' prior investments in Heilig-Meyers; (2) information relating to Heilig-Meyers known by or available to any of plaintiffs' employees from 1996 through 2001; and (3) documents concerning plaintiffs' investments in asset backed securities issued by retailers other than Heilig-Meyers. Plaintiffs seek to limit discovery concerning these matters to the information known to or in the actual possession of the specific individuals who made the investment decisions at issue in this action on the theory that the knowledge of other employees is not attributable to their corporate employers with respect to the investment decisions at issue here and is, therefore, irrelevant.
The parties cannot seriously dispute that the plaintiffs' financial sophistication and their knowledge concerning Heilig-Meyers has some relevance in this securities fraud action.See Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 195 (2d Cir. 2003); Bank of Am. Corp. v. Lemgruber, 385 F. Supp.2d 200, 230-31 (S.D.N.Y. 2005). The issue underlying the present dispute is how the financial sophistication and knowledge of a corporate plaintiff is determined in this context, i. e., is the inquiry limited to the individuals involved in the particular transaction in issue or is the knowledge of all corporate employees relevant?
Although neither the parties' research nor my own has located any authority precisely on point, the extant authorities strongly suggest that the inquiry is limited to the specific individual involved in the transaction in issue, including any employees who had an obligation to provide information to those individuals concerning the transaction in issue.
The general principal is set forth in Section 275 of the Restatement (Second) of Agency:
Except where the agent is acting adversely to the principal or where knowledge as distinguished from reason to know is important, the principal is affected by the knowledge which an agent has a duty to disclose to the principal or to another agent of the principal to the same extant as if the principal had the information.
Comment d to Section 275 provides that, in the absence of a duty to report, the knowledge of one agent derived from a particular transaction is not imputed to the principal when a different agent participates in a different transaction:
d. Apparently relevant knowledge. The principal is bound only by the agent's knowledge which appears to be important in view of the agent's duties and prior knowledge. The principal is not affected by information acquired by an agent which seems irrelevant to him because he does not know that the principal or another agent of the principal is transacting business in which such knowledge is relevant. The principle is the same as that applicable to situations in which the principal acquires information, not knowing that one of his agents is transacting business to which the information is relevant. . . .
Illustrations:
8. A, an agent of P for purchasing notes, learns that a note owned by B was obtained from T by fraud. A does not reveal this to P. Another agent of P, not knowing this, purchases the note for P. P is not bound by A's knowledge, if A had no reason to believe that the note would be purchased on P's account.
Thus, if employees of plaintiffs, other than those who participated in the securities purchases in issue, had previously investigated Heilig-Meyers or had previously purchased other Heilig-Meyers securities, any knowledge that those employees acquired in the course of those other transactions, unless actually communicated to the specific employees who made the investment decision that give rise to the this action, is not chargeable to the plaintiffs or the specific employees who made the investment decision at issue here.
Although they arise in other factual contexts, a number of decisions confirm this principle. Sawyer v. Mid-Continent Petroleum Corp., 236 F.2d 518, 520 (10th Cir. 1956) ("`Knowledge acquired by one agent of a principal will not be imputed to the principal in a subsequent transaction negotiated by another agent unless it was the duty of the agent to transmit the knowledge to his principal.'"), quoting Burke v. United States, 67 F. Supp. 827, 829 (Ct. Ct. 1946); Midfirst Bank, SSB v. C.W. Haynes Co., 893 F. Supp. 1304, 1316 (D.S.C. 1994) ("The fact that an employee in one department of a bank has knowledge of the facts does not cause that knowledge to be imputed to another department where there was no evidence that there was a pattern or duty of communicating between the different departments."), aff'd, 87 F.3d 1304 (4th Cir. 1996); Evanston Bank v. ContiCommodity Servs., Inc., 623 F. Supp. 1014, 1035 (N.D. Ill. 1985) ("[F]or knowledge to be imputed [to the principal], the agent must have not just a duty in relation to the subject matter, but a duty to speak to his principal about the specific item of knowledge."); Sutton Mut. Ins. Co. v. Notre Dame Arena, Inc., 108 N.H. 437, 441, 237 A.2d 676, 679 (1968) (knowledge received by corporate president outside the scope of his official duties is not notice to the corporation); Kuhn v. P.J. Carlin Constr. Co., 274 N.Y. 118, 133-34, 8 N.E.2d 300, 306 (1937) (notice to a general superintendent of construction received in the course of his employment but relating to matters outside the scope of his duties is not attributable to principal); see also United States v. Currency Totaling $48,318.08, 609 F.2d 210, 214-15 (5th Cir. 1980) ("A principal is not bound by a notification directed toward an agent whose duties or apparent duties are connected with the subject matter to which the notification relates unless the notification is `given to one who has, or appears to have, authority in connection to it, either to receive it, to take action upon it, or to inform the principal or some other agent who has duties in regard to it.'"), quoting Restatement (Second) of Agency § 268 cmt. c.
In addition, limiting the inquiry concerning knowledge and sophistication to the particular individuals involved in the transaction is consistent with the manner in which the scienter of a corporate defendant is determined in a securities fraud action. BA points out that in a assessing a corporate defendant's scienter, courts have rejected a "collective scienter" theory.See Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004) (collecting cases). Thus, in assessing the scienter of a corporate seller of securities, a fact finder does not consider the knowledge or intent of employees not connected to the sale. I respectfully submit that it would be bizarre to recognize a rule that charged a corporate purchaser of securities with the knowledge of all of its employees acquired in the course of their official duties, whether or not the employee has a connection to the purchase of securities in issue, but did not charge a corporate seller of securities with the same knowledge.
Finally, the cases cited by BA suggesting a different result are distinguishable. For example, although the First Circuit inUnited States v. Bank of New England, N.A., 821 F.2d 844, 855-56 (1st Cir. 1987), endorsed a collective knowledge instruction, it did so in the context of a criminal prosecution and expressly limited its holding to such cases. The decision cited by defendants in Indiana Gas Co. v. Aetna Cas. Sur. Co., 951 F. Supp. 790 (N.D. Ill. 1996), was vacated on appeal,Indiana Gas Co. v. Home Ins. Co., 141 F.3d 314 (7th Cir. 1998), and, in any event, did not involve any issue concerning whether knowledge acquired by an agent in one transaction was attributable to a different agent participating in a different transaction. Similarly, neither Syntex Corp. v. Lowsley-Williams Cos., 67 Cal. App.4th 871, 79 Cal. Rptr. 2d 371 (1st Dist. 1998) nor FMC Corp. v. Plaisted Cos., 61 Cal. App.4th 1132, 72 Cal. Rptr.2d 467 (6th Dist. 1998), appear to have involved any issue concerning whether knowledge acquired by agents in one transaction is chargeable to other agents in other transactions.
Accordingly, for all the foregoing reasons, defendants' application to compel production of (1) documents concerning all of plaintiffs' prior investments in Heilig-Meyers; (2) information relating to Heilig-Meyers known by or available to any of plaintiffs' employees from 1996 through 2001; and (3) documents concerning plaintiffs' investments in asset backed securities issued by retailers other than Heilig-Meyers, is denied to the extent that BA seeks documents or information that was not prepared by or sent to the individuals who decided to purchase the securities that are the subject matter of this action. It is my understanding that plaintiffs are voluntarily producing documents and information prepared by or sent to the individuals who participated in the transactions that form the bases for this action.
SO ORDERED