Opinion
No. 59054-5-I.
April 2, 2007.
Appeal from a judgment of the Superior Court for Island County, No. 01-2-00751-8, Alan R. Hancock, J., entered February 1, 2006.
Affirmed by unpublished opinion per Coleman, J., concurred in by Appelwick, C.J., and Baker, J.
The Holmes Harbor Sewer District issued $20 million worth of bonds for a local improvement district. Many parties were involved in preparing the bonds for issuance. Prudential was not involved, but purchased approximately $16 million worth of the bonds after relying on the preliminary official statement (POS) and the official statement (OS) used in marketing the bonds. Prudential then sold the bonds to its customers. Later, it was discovered that the entire utility local improvement district development plan, including the issuance of the bonds, was part of a conspiracy to defraud. The appellants, a class of investors that purchased the bonds, sued various parties, including Prudential. We affirm because the trial court correctly (1) instructed the jury that it could consider an investor's sophistication as one of seven nondispositive factors in deciding reasonable reliance, (2) refused to instruct the jury that it could hold Prudential strictly liable even if Prudential did not make any untrue statements or material omissions itself, and (3) refused to instruct the jury that it could find Prudential was a de facto underwriter. FACTS
The Bond Issuance
In August 1999, a developer approached the Holmes Harbor Sewer District about the prospect of providing public infrastructure, such as roads and sewers, for a new office complex in Everett. The District approved of the idea. It then passed a series of resolutions designating the site as a utility local improvement district and approving the issuance of bonds.
The District engaged IBIS Securities, LLC, a municipal bond underwriter, as sole underwriter for the issuance. IBIS, as underwriter, played a central role in the issuance of the bonds, including assisting the District in preparation of the POS and the OS, soliciting purchase orders for the bonds prior to closing, and purchasing the bonds from the District and then re-selling the bonds directly to investors and broker dealers.
IBIS and the District engaged a working group of professionals to assist them with the bond issuance, which included two law firms serving as co-bond counsel and disclosure counsel to the District (one of the firms also serving as special tax counsel), another law firm serving as underwriter's counsel, a fourth law firm serving as developer's counsel a bond trustee, and a project appraiser.
In the fall of 1999, the working group began to complete the due diligence and other tasks necessary for issuing the bonds in October 2000. At the end of September 2000, the working group published the POS. In early October, Wedbush Morgan Securities approved extending credit to IBIS after reviewing the POS. IBIS was one of Wedbush's correspondent broker firms. Wedbush extended a twenty million dollar "day loan" to IBIS to facilitate IBIS's purchase of the bonds from the District.
On October 19, 2000, IBIS executed the agreement by which it agreed to purchase the bonds from the District. In that agreement, the District certified that it had "full legal right, power and authority" to issue the bonds and to collect the assessments and that the information contained in the POS with respect to the District and the utility local improvement district was "correct in all material respects, and does not . . . contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances, under which they were made, not misleading." Brief of Respondent at 6 (quoting Exhibit 433 at 3-4).
Prior to the closing, IBIS premarketed the bonds to various broker-dealers by providing interested broker-dealers with certain information about the bonds, including the POS and a "snapshot" document summarizing basic information about the bonds. IBIS succeeded through its premarketing campaign in obtaining commitments from various broker-dealers and its own customers for purchase of the entire $20 million issuance.
The bond issuance closed on October 26, 2000, with the participation of all members of the working group, as well as the developer, developer's counsel, and the project lender. At that time, the OS was signed and sent to bond purchasers and brokers. The various counsel in the working group sent final opinion letters to the District, the trustee, and IBIS.
The POS
The POS made a variety of representations regarding the bonds. It stated that the bonds were issued pursuant to, and under the authority of, chapter 57.16 RCW. It identified the various members of the working group involved in the offering. The POS stated that IBIS would purchase the bonds pursuant to the terms and conditions of the bond purchase agreement. U.S. Trust Company, a respected national firm, was serving as trustee. The POS also stated that the District and the developer had each covenanted, for the benefit of bondholders, to certain disclosure obligations regarding financial information and operating data relating to the District, the bonds, the utility local improvement district, the developer, and the developed property.
Opinion letters of the two law firms that served as bond co-counsel were attached as appendices to the POS. The letters stated that (1) the District has "full power and authority under State law to adopt the Resolution [approving of the issuance], to execute, deliver and perform the Indenture and to issue the Bonds" and (2) "the District has lawful authority for the issuance of the Bonds under the laws of the State now in force and the Bonds in the amount aforesaid constitute the legal, valid and binding special, limited obligations of the District." Exhibit 983 at F-2, G-2.
Prudential's Reliance on the POS
Prudential was not part of the working group for the bonds and did not participate in preparing the POS, the OS, or any other document relating to the issuance of the bonds by the District. Prudential's involvement was as one of several broker-dealers who received and reviewed the POS and decided to purchase the bonds for its inventory and make them available to its customers. Prudential purchased more than $16 million worth of the $20 million bond issuance from IBIS with various other broker-dealers purchasing the remaining bonds.
Prudential's decision to make the bonds available to its customers was made by Robert Rasmussen and Herbert Torres, municipal bond professionals who worked at Prudential's municipal bond desk in Los Angeles. Rasmussen testified that he had more than 30 years' experience in municipal bond trading and had been at Prudential for more than 7 years. Torres testified that had been with Prudential 22 years and had reviewed thousands of preliminary official statements, including ones for other Washington state municipal bond offerings.
IBIS's principal, Ken Martin, called Torres and Rasmussen in early October 2000 in the course of IBIS's marketing of the bonds. Both Torres and Rasmussen were familiar with IBIS and had dealt with Martin on previous municipal bond offerings. Martin told Torres that IBIS was going to send him the POS for Prudential to review.
Torres and Rasmussen testified that they reviewed the POS and relied upon the representations made in the POS in deciding whether to make the bonds available to Prudential customers. Torres reviewed the entire POS and read the parts that, based upon his experience, were important to his assessment. He reviewed the sections of the POS relating to legal opinions and the co-bond counsel opinion letters contained in the POS. Over the course of a day or two, Rasmussen reviewed the parts of the POS that were important to him. He testified that, in particular, he was relying upon the legal opinions as certifications by the co-bond counsel that the contents of the POS had been documented and investigated by them and that Prudential was entitled to rely upon that fact. Torres and Rasmussen discussed the offering with IBIS. At trial, one of the investors' expert witnesses testified that the OS and POS had 18 "red flags" that indicated potential problems with the bonds. Prudential's expert witness, however, testified that Torres's and Rasmussen's due diligence met or exceeded industry standards and that the working group was responsible for investigating the facts related to the bond issue and the preparation of the POS.
After both Torres and Rasmussen had completed their review of the POS, they were satisfied with the developer, the builder, and the location for the development. They then sent information concerning the bonds and excerpts of the POS to George Steiner, a Prudential financial advisor in Seattle. Steiner reviewed the parts of the POS he received and then discussed any questions he had with Rasmussen. In those conversations, Rasmussen stated what he had done to date, which was to review the POS, investigate the bond firm, and make some phone calls to follow up. Steiner told Rasmussen that he knew the development site, that his clients liked the site, that it was a good builder, and that he liked the bond issue. He said his clients would be interested in purchasing a substantial portion of the bonds.
Prudential entered the bonds into its electronic trading desk system. It later made information concerning the bonds available to its financial advisors who requested it. Steiner himself and approximately 80 of his clients, purchased $10 million to $11 million worth of the $20 million issuance.
On October 26, 2000, the bond closing occurred. The final bond documents were issued, including the OS, signed legal opinions and supplemental legal opinions from co-bond counsel, and the issuer certificate signed by the District. In the issuer certificate, the District again certified that the OS was correct and did not include any untrue statements of material fact or omissions of material fact.
The Lawsuit Against Prudential
Unfortunately, the entire utility local improvement district development plan, including the issuance of the bonds, was part of a conspiracy to defraud for which the developer, his attorney, the project financiers and the District's engineer, ultimately pleaded guilty to federal crimes. The bonds were then worth nothing.
Investors who bought the bonds, either from Prudential or another broker-dealer, filed a class action lawsuit in November 2001. The lawsuit named many defendants, including the District and each of its commissioners, IBIS, the co-bond counsel and their law firms, the appraiser, the trustee, the developer and his affiliated entities, and Prudential. In December 2002, the court certified the case as a class action.
By the time of trial in October 2005, the investors had resolved their claims against every defendant except Prudential. The case proceeded to trial on two claims against Prudential: (1) that Prudential violated Washington's Consumer Protection Act (CPA) and (2) that Prudential violated the Washington State Securities Act (WSSA).
On November 3, 2005, the jury returned a unanimous verdict in favor of Prudential on both claims, finding that Prudential was not liable under the WSSA or the CPA either to those investors who purchased the bonds from Prudential or to those investors who purchased the bonds from broker-dealers other than Prudential. Appellants then filed a motion for a new trial. The court denied the motion, stating that it found "the jury's verdict to be supported by substantial evidence, and to in no way contravene the applicable law or substantial justice." The court entered judgment on the verdict, and the investors sought direct review in the Washington State Supreme Court. The Supreme Court transferred the appeal to this court. The investors' appeal involves only the WSSA claim.
Analysis
Reasonable Reliance
We first consider whether a finder of fact may consider an investor's sophistication as one of seven nondispositive factors in deciding if an investor reasonably relied on representations or omissions in connection with the sale of a security. The investors assign error to jury instruction 16, which allowed the jury to consider, in addition to six other factors, "the sophistication and expertise of the [investors] in financial and securities matters. . ." "[i]n determining whether [investors] reasonably relied on any alleged untrue statement or omission of Prudential[.]" The instruction concluded by stating that "the duty of due diligence owed by broker-dealers applies regardless of the sophistication or knowledge of the customers." The parties agree that the trial court relied on Stewart v. Estate of Steiner, 122 Wn. App. 258, 93 P.3d 919 (2004) in giving jury instruction 16. The investors argue that Stewart was wrongly decided and conflicts with other Court of Appeals cases. We conclude that the trial court did not err by giving this jury instruction because it correctly relied on Stewart.
Jury instructions are sufficient if they properly inform the jury of the law and allow each party to argue his or her case. State v. Riley, 137 Wn.2d 904, 909, 976 P.2d 624 (1999). Jury instructions constitute prejudicial error and, thus, grounds for reversal when they allow the jury to apply the wrong legal standard to a plaintiff's claim. Keller v. City of Spokane, 146 Wn.2d 237, 249-51, 44 P.3d 845 (2002). Jury instructions are "presumed to be prejudicial" when they contain "[a] clear misstatement of the law." Keller, 146 Wn.2d at 249-50 (citing State v. Wanrow, 88 Wn.2d 221, 239, 559 P.2d 548 (1977)).
The WSSA prohibits "any person, in connection with the offer, sale or purchase of any security, directly or indirectly" from making "any untrue statement of a material fact or to omit 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[.]" RCW 21.20.010. The purchaser of securities must show that it relied on the misrepresentations or omissions in Page 11 connection with the sale of the securities. Hines v. Data Line Sys., Inc., 114 Wn.2d 127, 134, 787 P.2d 8 (1990); Stewart, 122 Wn. App. at 261. Such reliance must be reasonable. Stewart, 122 Wn. App. at 265 n. 9.
In Stewart, the court considered whether an investor who had signed a nonreliance provision in a subscription agreement before purchasing securities could establish that he reasonably relied on oral misrepresentations or omissions. The nonreliance provision stated that the investor relied solely on specified written materials about the securities in making the purchase. The court first held that "the fact that one signs a nonreliance provision in a subscription agreement is not necessarily dispositive." Stewart, 122 Wn. App. at 274. The court then considered eight other factors "in making a determination whether one reasonably relies on representations or omissions in connection with the sale of a security." Stewart, 122 Wn. App. at 274. The eight factors were:
(1) the sophistication and expertise of the plaintiff in financial and securities matters, (2) the existence of longstanding business or personal relationships, (3) access to the relevant information, (4) the existence of a fiduciary relationship, (5) concealment of the fraud, (6) the opportunity to detect the fraud, (7) whether the plaintiff initiated the stock transaction or sought to expedite the transaction, and (8) the generality or specificity of the misrepresentations.
Stewart, 122 Wn. App. at 274 (emphasis added). The court adopted these factors from Jackvony v. Riht Fin. Corp., 873 F.2d 411 (1st Cir. 1989).
The investors contend that Stewart conflicts with two Washington decisions: Go2Net, Inc. v. FreeYellow.com, Inc., 158 Wn.2d 247, 143 P.3d 590 (2006) and Guarino v. Interactive Objects, Inc., 122 Wn. App. 95, 86 P.3d 1175 (2004). They argue that these cases stand for the proposition that an investor's right to recover under the WSSA is unaffected by his or her individual characteristics or conduct, thus conflicting with the test for reasonable reliance set forth in Stewart.
In Go2Net, the court rejected the applicability of the equitable defenses of waiver and estoppel to WSSA claims. These defenses arose in the context of WSSA claims by the purchaser of all of the stock of a company. The purchaser closed the deal and proceeded to integrate the company into its own company even after learning of a third party's claims to the purchased company that were allegedly undisclosed at the time of the purchase. The purchaser sued the seller, seeking to rescind their agreement. The jury found that the seller had violated RCW 21.20.010 by making an untrue statement of fact and an omission. The seller argued that the purchaser either waived its right to rescind the merger agreement or was estopped from doing so. The court held that the equitable defenses of waiver and estoppel are not available under RCW 21.20.010. Go2Net does not apply here or conflict with Stewart because the Go2Net court did not discuss the factors for determining reasonable reliance or focus on whether the purchaser relied on presale misrepresentations or omissions.
Guarino also does not conflict with Stewart. The plaintiffs in Guarino were the founder and vice president of a technology company who, after leaving the company, entered into a settlement agreement calling for the company to buy back their stock shares at 50 cents per share. During negotiations, the company did not tell them that it had a pending merger agreement. The company argued that they did not have a duty to disclose inside information or abstain from purchases in stock through a settlement agreement in the context of settlement negotiations with former officers. The court rejected this argument and concluded that it was not unreasonable as a matter of law for a former insider to rely on the omissions of an adverse party in settlement negotiations.
The investors argue that Stewart is in conflict with the portion of Guarino where the court stated that the WSSA "does not specify a different level of duty owed to a former insider or anyone with more sophisticated knowledge of securities . . ." Guarino 122 Wn. App. at 113. The court's comment was in answer to the company's argument that it did not have a duty to disclose or abstain because the plaintiffs had left the company only six weeks before the company negotiated the merger. Under the circumstances, the court did not say that the sophistication of the plaintiff is not relevant to prove reliance, but rather that knowledge of inside corporate information could not be imputed based on sophistication. Guarino is also of limited applicability because it did not address the elements of reasonable reliance.
Federal case law supports Stewart. While we are not bound by federal law, we may consider it for its persuasive value. The investors argue that federal cases are not helpful because, when interpreting the WSSA, Washington courts frequently depart from federal securities case law. Here, however, there are no Washington cases that contradict federal law on the issue of reliance.
Federal courts have applied multi-factor tests for determining reasonable reliance in securities cases of alleged oral misrepresentations analogous to this case. See, e.g., Banca Cremi, S.A. v. Alex. Brown Sons, 132 F.3d 1017 (4th Cir. 1997) (court applies the eight-factor test to a Rule 10b-5 claim that rested on oral misrepresentations and omissions by a stockbroker to a bank client); Manela v. Garantia Banking, 5 F. Supp. 2d 165, 180 (S.D.N.Y. 1998) (court found the eight factors relevant to an investor's reasonable reliance on oral representations by the defendant concerning the market value of certain bonds where the evidence did not include any nonreliance agreement or written prospectus). The investors argue that these federal cases are distinguishable and not helpful because the purpose of the WSSA is to protect the investor, while the purpose of federal securities law is to maintain the integrity of the secondary securities markets. The investors, however, have not cited any Washington authority stating that a finder of fact cannot consider an investor's sophistication as one of many nondispositive factors in deciding reasonable reliance. In sum, the trial court did not err in basing its jury instruction on Stewart because it does not conflict with any Washington authority and is supported by federal authority.
Finally, the investors argue that Stewart is irrelevant to a WSSA claim based on omissions because in an omissions case, a WSSA plaintiff is entitled to "a rebuttable presumption that [he or she] relied upon the omission." Guarino, 122 Wn. App. at 119. The jury was told precisely that. Jury instruction 13 provided that "[w]ith regard to an omission to state a material fact, positive proof of reliance is not required. Rather, reliance is presumed[.]" The jury was properly instructed on this area of the law.
Strict Liability
The investors argue that Prudential should be held strictly liable under the WSSA for passing on misrepresentations or omissions made by others because finding Prudential strictly liable would be consistent with the purposes of the WSSA and Washington case law. They acknowledge that no Washington appellate court has held that a broker-dealer may be found strictly liable for passing on the misrepresentations or omissions of others. We conclude that the trial court did not err by refusing to instruct the jury that it could find Prudential strictly liable for passing on the misrepresentations or omissions of others because RCW 21.20.010(2) only imposes liability on a party that makes a misrepresentation or omission.
Under the WSSA,
[i]t is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly. . . [t]o make any untrue statement of a material fact or to omit 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[.]
RCW 21.20.010. This plain language imposes liability only when a person makes a material statement or a statement that is misleading absent a material fact. Nothing in the statute imposes liability for a false or misleading statement made by someone else. The investors acknowledge that Prudential "may not have made certain misrepresentations or omissions directly themselves[.]" Brief of Appellant, at 32. Under the plain language of the WSSA, Prudential is not liable.
Moreover, Washington cases clearly require that the party sought to be held liable must make a misrepresentation or omission. See, e.g., Shinn v. Thrust IV, Inc., 56 Wn. App. 827, 851, 786 P.2d 285 (1990) (In order to prevail, "the Shinns had to show that Thrust was a `seller' or `offeror' of the security . . . and that Thrust made an untrue statement of material fact or omitted a material fact in connection with the transaction."); Hines, 114 Wn.2d at 134-35 ("RCW 21.20.010 makes it unlawful for a seller to make a material misrepresentation or omission in connection with the sale of a security."). In Burgess v. Premier Corp., 727 F.2d 826 (9th Cir. 1984), the plaintiff sought to hold defendants Darby and Schrock liable under the WSSA for misrepresentations by another defendant, Premier. The court rejected that theory, holding that, under the WSSA, "some liability-producing action by Darby and Schrock themselves is required." Burgess, 727 F.2d at 833. Similarly, some misrepresentation or omission by Prudential is required for it to be liable.
Federal Rule 10b-5(2) contains language identical to RCW 21.20.010(2). The United States Supreme Court and lower federal courts have interpreted it to preclude liability for misstatements by others. See, e.g., Cent. Bank of Denver v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177, 114 S. Ct. 1439, 128 L. Ed. 2d 119 (1994) (Rule 10(b) "prohibits only the making of a material misstatement (or omission). . . ."); Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld Sorkin, 135 F.3d 837, 843 (2d Cir. 1998) (plaintiff must have relied on misstatements or omissions "by the defendant being sued."); Raab v. Gen. Physics Corp., 4 F.3d 286, 288-89 (4th Cir. 1993) (rejecting issuers liability for statements attributed to it by a third party securities analyst and holding that it could only be liable for its own misrepresentations, not those of an independent third party).
Additionally, "Washington courts will not construe a statute to impose strict liability absent a clear indication that the Legislature intended to do so." Wright v. Engum, 124 Wn.2d 343, 349, 878 P.2d 1198 (1994). Investors fail to provide the necessary evidence of legislative intent to create strict liability.
The investors argue that Hines supports imposition of strict liability because the Hines court found "controlling persons" liable and, according to the investors, a seller is more culpable than a controlling person. In Hines, the court concluded that certain outside directors of a seller were controlling persons and, thus, were liable under RCW 21.20.430(3). The court was persuaded by the fact that these directors "participated in the omission of material facts" from a memorandum used to sell shares. Hines, 114 Wn.2d at 141. Hines does not support the investors' argument because it was interpreting a different statute in its controlling persons discussion (RCW 21.20.430, not RCW 21.20.010) and it involved directors of a company who participated in the omission of material facts. Here, the investors admit that Prudential did not participate in making or omitting material facts.
De Facto Underwriter
The investors contend that the trial court erred when it ruled that Prudential was not a de facto underwriter of the bond offering and refused to so instruct the jury. They acknowledge that no Washington court has held that a securities broker-dealer can be considered a de facto underwriter. Prudential argues that the undisputed facts showed that it was not an underwriter and that the SEC defines underwriter to exclude brokers and dealers. We conclude that the trial court did not err in determining that Prudential was not a de facto underwriter and refusing to so instruct the jury.
Washington courts interpret the WSSA with industry custom and usage in mind, and "to effectuate its general purpose to make uniform the law of those states which enact it and to coordinate the interpretation and administration of this chapter with the related federal regulation." RCW 21.20.900. Accordingly, the trial court relied on an SEC rule defining "underwriter" with regard to municipal securities transactions.
Any person who has purchased from an issuer of municipal securities with a view to, or offer or sells for an issuer of municipal securities in connection with, the offering of any municipal security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; except, that such term shall not include a person whose interest is limited to a commission, concession or allowance from an underwriter, broker, dealer, or municipal securities dealer not in excess of the usual and customary distributors' or sellers' commission, concession, or allowance.
17 C.F.R. §§ 240.15c2-12(f) (8) (emphasis added). Under this definition, Prudential was not an underwriter because it did not purchase the bonds from their issuer — the District — and its interest in the bonds was limited to a commission that was not in excess of the usual and customary amount. The investors cite no Washington authority that states that a broker-dealer can be considered a de facto underwriter.
The investors argue that the SEC rule the trial court relied on does not apply to Prudential because another SEC rule, Rule 141(c), states that a "usual and customary distributors' or sellers' commission" "shall not include amounts paid to any person whose function is the management of the distribution of all or a substantial part of the particular issue, or who performs the functions normally performed by an underwriter or underwriting syndicate." 17 C.F.R. §§ 230.141(c) (2006) (emphasis added). They argue that this rule shows Prudential is not exempt from the definition of underwriter because it distributed a substantial part of the bond issue. The investor's argument is not persuasive. IBIS, not Prudential, managed the distribution of the entire bond issue, including participating in the working group that prepared the offering materials. Also, as the cases discussed below illustrate, Rule 141(c) presupposes a nexus between the underwriter and the issuer. Here, there was no nexus between Prudential and the District.
The investors rely on Sec. Exch. Comm'n v. N. Am. Research Dev. Corp., 280 F. Supp. 106 (S.D.N.Y. 1968), rev'd in part on other grounds, 424 F.2d 63 (2d Cir. 1970) to support their Rule 141(c) argument. In that case, a broker-dealer that received the usual and customary seller's concession was nonetheless an underwriter under the Securities Act of 1933 because it had sold over 70 percent of the shares sold by the company's control persons. Critical to the court's determination was not the number of shares sold, as Bondholders suggest, but the defendant's close relationship with, and purchase from, the issuer's control group — a specific element included in the statutory definition of "underwriter." The defendants had a direct relationship to those who controlled the issuer's distribution and, thus, fell within the ambit of Rule 141(c). Here, Prudential had no relationship with the District and it purchased bonds from an underwriter that was never alleged to have controlled the District.
The investors also cite SEC v. Culpepper, 270 F.2d 241 (2d Cir. 1959) in connection with Rule 141(c). Again, the critical facts were the defendant's purchases directly from and close relationship with the issuer control group. Culpepper is inapplicable here because Prudential did not purchase bonds from and had no connection with the District.
The investors rely on two more federal cases for their argument. First, they quote the definition of an underwriter from Ingenito v. Bermec Corp., 441 F. Supp. 525, 536 (S.D.N.Y. 1977): "An underwriter buys securities directly or indirectly from the issuer and resells them to the public, or he performs some act (or acts) that facilitates an issuer's distribution. He participates in the transmission process between the issuer and the public." In Ingenito, the plaintiff argued that a lender who played no role in the purchase or sale of securities from the issuer was nonetheless an underwriter. The court rejected this argument. Ingenito does not support the investors' argument because the Ingenito court did not even consider whether a broker-dealer could be considered an underwriter and here IBIS was clearly the underwriter for the bond issue.
The investors also rely on Sec. Exch. Comm'n v. Chinese Consol. Benev. Ass'n., 120 F.2d 738 (2d Cir. 1941). In that case, an association of Chinese-Americans solicited the purchase of Chinese war bonds. The association collected funds from purchasers and facilitated China's transfer of the bonds to them. It earned no money for its efforts and had no contractual relationship with China. The court held that the association was an underwriter. Unlike the association's role in that case, however, Prudential had no connection whatsoever to the issuer and did not initiate the distribution of the bonds. And like the Ingenito court, the Chinese Cons. Benev. Ass'n. court did not consider whether a municipal bond dealer's involvement in the transmission process from underwriter to investors for a standard selling concession could transform the dealer into an underwriter.
Finally, the investors argue the court should conclude that Prudential was a de facto underwriter for public policy reasons because "[i]t is incongruous that Prudential could act like an underwriter, yet not be subject to an underwriter's heightened duties of due diligence." Brief of Appellant, at 45. As argued above, however, Prudential did not act like an underwriter. Central to the investors' argument is their theory that the bond offering would not have occurred if Prudential had not purchased a majority of the bonds. Even if this were true, however, the legislature has not enacted laws that allow the courts to find broker-dealers liable as defacto underwriters. Additionally, under the investors' theory, any large dealer that purchased a majority of an offering and received a selling concession could be an "underwriter." This would disregard existing precedent and create administrative challenges for regulators and dealers alike.
For the foregoing reasons, we affirm