
USCA1 Opinion

	




          December 30, 1992                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________        No. 92-1212                                VERSYSS INCORPORATED,                                Plaintiff, Appellant,                                          v.                          COOPERS AND LYBRAND, ETC., ET AL.,                                Defendants, Appellees.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                     [Hon. Robert E. Keeton, U.S. District Judge]                                             ___________________                                 ____________________                                        Before                              Torruella, Cyr and Boudin,                                   Circuit Judges.                                   ______________                                 ____________________            Patrick  J. Sharkey with  whom Henry  A. Sullivan,  John F. Sylvia            ___________________            __________________   ______________        and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,  P.C. were on brief            ___________________________________________________        for appellant.            Steven W. Phillips with whom Christian  M. Hoffman, Peter M. Casey            __________________           _____________________  ______________        and Foley, Hoag & Eliot were on brief for appellees.            ___________________                                 ____________________                                 ____________________                 BOUDIN,  Circuit Judge.    This case  presents a  common                          _____________            problem in statutory interpretation.   Congress drafted a law            that  clearly embraces  some  transactions, clearly  excludes            others,  and is  now brought  to bear  on a  transaction that            Congress probably did  not consider.  We  are left to  make a            judgment  based on  clues garnered  from statutory  language,            legislative history, purpose  and policy.   In our view,  the            transaction  at issue  does  not fit  comfortably within  the            statutory   language,  and  no   clear  policy  or  precedent            encourages courts  to extend that language  beyond its normal            bounds.                                          I.                 On May  17, 1985,  Continental Telecom,  Inc. ("Contel")            entered into  a merger agreement with  Northern Data Systems,            Inc.  ("NDS").   The  agreement provided  that  NDS would  be            merged  into a  newly created  subsidiary of  Contel  and, in            exchange, NDS stockholders would  receive Contel stock.  Both            Contel  and its merger subsidiary were Delaware corporations;            NDS  was a  Massachusetts corporation.   At  the time  of the            merger agreement, NDS stock was publicly traded.  Previously,            a registration statement under the Securities Act of 1933 had            been  filed with  the Securities  and Exchange  Commission in            connection with an August 1984  public offering of NDS stock.            See sections 5-6, 15 U.S.C.    77e-77p.                                         -2-                                         -2-                 The merger was approved by NDS stockholders, and NDS was            merged  into  the Contel  subsidiary on  July  16, 1985.   In            accordance with the merger agreement, Contel's subsidiary  as            the surviving corporation acquired effective ownership of the            assets, and responsibility for the  debts, of the former NDS.            The merger agreement provided that on the date of the merger,            the "separate  corporate existence  of NDS  shall terminate."            Thereafter,  in  accordance with  the  merger  agreement, the            former NDS stockholders sent  in their now defunct NDS  stock            certificates to  Contel's exchange agent  and received  their            Contel stock certificates.                 Subsequent to the merger,  Contel concluded that the NDS            registration  statement  had contained  materially misleading            financial information, including information certified by the            accounting  firm   of  Coopers  &  Lybrand.     Although  the            registration statement  had  been issued  before the  merger,            section 11 of  the Securities Act of  1933, 15 U.S.C.    77k,            imposes (subject to certain limitations) continuing liability            for  misstatements  or  material  omissions  in  registration            statements;   after   the   registration  statement   becomes            effective, a  federal damage action  may be brought,  by "any            person  acquiring such  security," against any  of a  list of            specific  responsible  persons,   including  the   certifying            accounting  firm.     Section  11(a),  5   U.S.C.     77k(a).            Accordingly, the  present  suit,  now  conducted  by  Versyss                                         -3-                                         -3-            Incorporated as Contel's  assignee, was  brought against  the            accounting firm of Coopers & Lybrand.                 In  the  district court,  Coopers  &  Lybrand moved  for            summary judgment on the ground that Contel did not qualify as            a section  11 plaintiff  because it  had not  "acquired [NDS]            securit[ies]."    Patently,  Contel "acquired"  something  in                                                            _________            exchange  for the many Contel shares it issued in the merger,            so  the focus  of the  dispute is  upon the  term "security."            Pointing  to the  transfer of  the NDS  certificates, Versyss            claimed that  NDS securities were acquired  by Contel through            the  merger.  The district court, adopting Cooper & Lybrand's            view of the matter, held that the NDS stock certificates were            an  empty shell not qualifying  as a "security"  and that the            essence  of   what  Contel   received  was  the   assets  and            liabilities  of the  former  NDS.   The  district court  then            granted summary judgment for Coopers & Lybrand on the section            11 claim, dismissing pendant state claims without  prejudice.            This appeal followed.                                         II.                 Statutory construction begins  with statutory  language.            The language in  this case is straightforward:  section 11 of            the Securities Act of 1933, so far as pertinent here, creates            a  federal cause of action in favor of a purchaser "acquiring            a  security"   after  a  false   or  misleading  registration            statement  for that security has  gone into effect unless the                                         -4-                                         -4-            defendant  makes  out  a  statutory  defense  comprising,  in            general terms,  reasonable  inquiry and  good  faith  belief.            Sections 11(a)(4), (b), 15 U.S.C.    77k(a)(4), (b).                 The term  "security" is  defined in both  the Securities            Act of 1933  and Securities Exchange Act  of 1934, provisions            which despite  differences in  language are  construed alike.            Landreth Timber  Co.  v.  Landreth, 471  U.S.  681,  686  n.1            ___________________       ________            (1985).  Nothing in the language of the definitions precisely            resolves the present issue  except so far as the  variety and            breadth of  the definitions encourage  a broad construction.1            But  terms, even  broadly construed,  have outer  limits, and            those  limits are  strained badly  by describing  what Contel            acquired through the merger as a "security."                 On  the date  of the  merger, and  before any  NDS stock            certificates  were  to be  transferred  to  Contel's exchange                                            ____________________                 1The  1933 Act  definition,  section 2(1),  15 U.S.C.               77b(1), provides:                 "The  term   "security"  means  any   note,  stock,                 treasury  stock,  bond,   debenture,  evidence   of                 indebtedness,    certificate    of   interest    or                 participation  in   any  profit-sharing  agreement,                 collateral-trust    certificate,    preorganization                 certificate  or  subscription, transferable  share,                 investment   contract,  voting-trust   certificate,                 certificate  of deposit for  a security, fractional                 undivided  interest in  oil, gas, or  other mineral                 rights, or, in general, any  interest or instrument                 commonly known  as a "security," or any certificate                 of  interest  or  participation  in,  temporary  or                 interim certificate for, receipt for, guarantee of,                 or warrant  or right  to subscribe to  or purchase,                 any of the foregoing."                                           -5-                                         -5-            agent,  NDS  ceased  to exist  as  a  corporation.   This  is            ordinary  merger-law  jurisprudence   (Frandsen  v.   Jensen-                                                   ________       _______            Sundquist Agency,  Inc., 802  F.2d 941,  944 (7th  Cir. 1986)            ______________________            ("in a merger the shares of the acquired firm are not bought,            they  are  extinguished"))  and accords  with  the Contel-NDS            agreement already quoted.   Delaware's merger statute follows            this  pattern,  providing  that  in a  merger  "the  separate            existence . . . of  all such constituent corporations  except            the one into which the other or others . . . have been merged            . . . shall  cease . . . . [and] all property  . . . shall be            vested in  the corporation surviving . . . ."  Del. Code Ann.            tit. 8,   259(a).  Accord,  Mass. Gen. Laws Ann. ch. 156B,                                  ______            80(a)(1),  (5).   Under  the  same  statutes and  the  merger            agreement, upon the merger the  assets and liabilities of NDS            became those of the surviving Contel subsidiary.                 It follows  that, when the merger  became effective, NDS            stock  underwent  a  considerable  transformation.    At that            point,  the NDS  stock  certificates ceased  to represent  an            investment interest in the  separate assets of NDS  (since it            no  longer existed), ceased  to reflect voting  rights in the            management of  NDS (since NDS  ceased to have  a management),            and ceased to comprise a claim to dividends declared from NDS            earnings  (since no such dividends could be issued).  In sum,            for the NDS stock the essential characteristics of securities            ceased to pertain.  "[A]t the moment a stock for stock merger                                         -6-                                         -6-            is effective,  the stock in a  constituent corporation (other            than the  surviving  corporation) ceases  to exist  legally."            Shields  v. Shields,  498 A.2d  161, 168  (Del. Ch.),  appeal            _______     _______                                    ______            refused, 497 A.2d 791 (Del. 1985).            _______                 If  this  view  is  taken,  then--when  the  former  NDS            stockholders  turned  in  their NDS  certificates  after  the                                                               _____            merger--what Contel received was not "securities."  At worst,            the certificates were  wall-paper; at best, they  represented            evidence  that the parties  who surrendered  the certificates            were prior owners  of NDS  stock, entitled by  virtue of  the            merger  agreement to  be paid  the  Contel stock  promised as            consideration.   Nor  does Contel's  position improve  if one            views the situation  at the time  after the merger  agreement            was signed but before the merger  was consummated.  It may be                           ______            that  for some purposes a contract  to acquire securities can            be treated as  an acquisition.  Cf. Sections 3(u)(13)-(14) of                                            __            the  1934 Act,  15 U.S.C.     78c(a)(13)-(14).   But,  as the            trial judge  pointed out, the  merger agreement in  this case            between Contel and NDS was not a step on the road to Contel's            acquiring  of NDS securities  but rather was  an agreement to            merge NDS out of existence.                 There  is a  second piece of  evidence, culled  from the            statutory language, that hinders  Versyss' claim.  Section 11            provides a damage formula for the cause of action it creates.            Simplifying  somewhat,  Section   11(e)  provides  that   the                                         -7-                                         -7-            recovery is  to be the difference  between the (presumptively            higher)  price paid  for the  security  when acquired  by the            plaintiff-buyer  and either  of  three (presumptively  lower)            numbers: "(1) the value  thereof [of the security] as  of the            time such suit  was brought, or (2)  the price at  which such            security shall  have been disposed  of in  the market  before            suit, or (3) the price at which such security shall have been            disposed of after  suit but before judgment  .  .   .  ."  15            U.S.C.   77k(e).2                 This language assumes a  buyer of securities who  pays a            price  for and receives  securities.  Then,  finding that the            securities  are worth  less than  the price  paid, the  buyer            brings  suit either  for the loss  of value or,  if the buyer            sells before suit  or before judgment, for  the loss suffered            on account of the reduced sale price received by the buyer on            resale.  In  sum, the continuation of the acquired securities            in  the  hands of  the plaintiff-buyer  is  a premise  of the            damage calculation.   Yet  in this  case  the NDS  securities            ceased to exist at the time of merger because the corporation            ceased to  exist.  It would  be fantasy to speak  of the non-                                            ____________________                 2Subsection  (e)  provides a  rule for  choosing between            alternatives (2) and (3) if the security has been disposed of            after suit but  before judgment, and  it has several  further            limitations and provisos  dealing with special circumstances.            None  of these provisions  alters the basic  structure of the            damage formula.                                         -8-                                         -8-            existent NDS securities as suffering a post-merger decline in            value or being resold for less than the purchase price.3                   Doubtless some formula could be jury-rigged to replicate            the substance of section 11(e), were the merger to be treated            as an acquisition of NDS securities by Contel.  After all, if            Contel acquired all of  the NDS securities in a  tender offer            and then  merged the company into  its subsidiary, securities            would have been "acquired" and an arguable  claim would exist            under section  11.  But  the statutory damage  provision does            limn the transactions toward which Congress directed  section            11;  and, as  we  have  just  seen,  the  extinction  of  NDS            securities incident to the merger conflicts with section 11's            premise of continuity.  Viewing the case from the  standpoint            of damages may itself underscore  the nature of Contel's real            complaint:  that  effective upon  the  merger  it acquired  a                                                                        _            package of assets and  liabilities formerly pertaining to NDS            __________________________________            that was worth less than Contel had been led to believe.                                         III.                                         III.                 Words  normally  have  some  elastic  in  their  makeup.            Courts in  other cases  have stretched language  further than            Versyss asks us to  do in this case.   If legislative history            or purpose encouraged that result, the question here might be                                            ____________________                 3The section 11 damage remedy was  added by amendment in            1934,  48 Stat.  908,  but the  original section  11 remedy--            rescission  of the  sale--also  assumes continuation  of  the            securities.                                         -9-                                         -9-            a close one.  The difficulty is that an  inquiry into history            and purpose, if  instructive at all, favors the  more literal            reading of the statute adopted by the district court.                 The  background of  the  1933 Act  is familiar  history.            During  the  stock  market   boom  that  preceded  the  Great            Depression,  a  wave  of  speculation drove  up  the  largely            unregulated market in securities.   When the market collapsed            in 1929, "[f]ully half . . . of the securities floated during            this period . . . proved to be worthless.  These cold figures            spell[ed] tragedy  in the  lives of thousands  of individuals            who invested  their life savings, accumulated  after years of            effort, in  these worthless  securities."   H.R. Rep.  No 85,            73rd Cong., 1st Sess.  2 (1933).  The most  notorious example            was Samuel Insull's sale of several million shares of utility            stock to  the public.  The stock,  sold to family members and            friends of Insull at $12 or less, opened at $30 in the market            and climbed  to  $149 a  share, before  it collapsed--to  the            detriment of a million stock and bondholders.  Joel Seligman,            The Transformation of Wall Street 21-23 (1982).            _________________________________                 One  of the "foremost" causes of such losses was, in the            view  of   Congress,  "the   failure  to   furnish  essential            information to prospective  investors when they were  invited            to buy securities."  I Louis Loss & Joel Seligman, Securities                                                               __________            Regulation 25 (3d ed. 1989).   The broad purpose of  the 1933            __________            Act was to  require full disclosure to investors, and section                                         -10-                                         -10-            11  was "designed  to assure  compliance with  the disclosure            provisions of  the Act  by imposing a  stringent standard  of            liability  on the  parties  who  play  a  direct  role  in  a            registered offering."   Herman  & Maclean v.  Huddleston, 459                                    _________________     __________            U.S. 375,  381-82 (1983).   Contemporaneous writings  confirm            that the main target of section 11 was the sale of registered            securities  to the  public.   See 77  Cong. Rec.  2918 (1933)            (Rep. Rayburn);  Douglas & Bates, The  Federal Securities Act                                              ___________________________            of 1933, 43 Yale L.J. 171, 174-77 (1933).            _______                 Needless  to say,  there  is little  resemblance between            this  scene of ill-informed small investors buying investment            securities on original issue or  later through the market and            the triangular "forward merger" by which Contel acquired NDS,            doubtless after  careful study  of information that  went far            beyond the registration  statement issued  some years  before            incident to a public  NDS offering.  This mismatch  ought not            deprive  Contel  of a  section 11  remedy  in any  case where            section  11's  "acquiring such  security"  language fits  the            transaction  (for example,  a  tender  offer  acquisition  by            Contel of  the  NDS shares).    The mismatch  does,  however,            create  doubt that  stretching the  language to  fit Contel's            circumstances can be justified as serving Congress' purpose.                 As  the  Supreme  Court  has reminded  us,  the  federal            securities laws were not designed to provide "a broad federal            remedy for all fraud,"  Marine Bank v. Weaver, 455  U.S. 551,                                    ___________    ______                                         -11-                                         -11-            556  (1982),  let alone  for all  negligence.   If  Coopers &            Lybrand has  been  careless in  certifying  the  registration            statement and Contel relied on  that statement in setting the            terms  of the  merger,  then state  law  might or  might  not            provide a remedy, depending on how the state court approached            issues of negligence, foreseeability,  and standing.  Section            11, by  contrast, is  remarkably stringent where  it applies,            readily  imposing  liability  on  ancillary  parties  to  the            registration  statement (like  accountants)  for the  benefit            even of purchasers  after the  original offering.   Its  very            stringency suggests  that,  whatever  the  usual  rule  about            construing remedial securities legislation broadly (e.g., SEC                                                                ___   ___            v.  Capital Gains  Research Bureau, Inc.,  375 U.S.  180, 195                ___________________________________            (1963)),  some care  should  be taken  before  section 11  is            extended beyond its normal reading.                   This  is  apparently a  case  of  first impression,  and            virtually none  of the precedents  provides much  assistance.            Versyss' best  case is SEC  v. National Securities,  393 U.S.                                   ___     ___________________            453, 466 (1969), which it offers for the proposition that the            transfer of  stock  in a  merger  is a  purchase or  sale  of            securities under section 10(b)  of the 1934 Act, 15  U.S.C.              78j(b).  It is surely true under National Securities that the                                             ___________________            NDS  stockholders would  be treated  for purposes  of section            10(b) as having "sold" their NDS stock and "purchased" Contel            stock in  return.   Nothing in National  Securities suggests,                                           ____________________                                         -12-                                         -12-            however, that Contel  is to be  treated as "acquir[ing]"  the            NDS  securities.   The  key to  the  anomaly--that a  sale of            securities may  occur without a  purchaser of  securities--is            that the securities, although  relinquished by the seller are            never  acquired by  anyone  because they  cease  to exist  as            securities (by operation of  merger law) at the same  time as            they are relinquished.4                 The  lack of precedent  for applying  section 11  to our            facts  may mean only that  the acquiring company  in a merger            transaction  rarely  relies  upon  statements  in  an earlier            registration statement  of the acquired corporation.   On the            other  hand, it may be  that such reliance  has occurred from            time  to time  but,  when the  registration statement  proved            false and the reliance misplaced, no one thought that section            11  applied.    Even  so,  applying  section  11   to  merger            acquisitions might not  unfairly upset settled  expectations;            under section 11, accountants are held to demanding standards            when they  certify registration statements and  are liable to                                            ____________________                 4The  same reasoning  disposes of  Junker v.  Crory, 650                                                    ______     _____            F.2d 1349  (5th Cir. 1981),  in which  the court held  that a            merger may  involve a  purchase or  sale of securities  under            section 12(2) of the 1933 Act, 15 U.S.C.   77l(2) (condemning                                                         _            material misstatements or omissions in connection with such a            transaction).  The court there was concerned with whether the            plaintiff   who   surrendered   securities  in   the   merged            corporation  and  received  new securities  in  the surviving            corporation was a  purchaser or  seller (the  court said  the            plaintiff was both).   Once again, this case would  treat the            NDS  stockholders as  possible  plaintiffs but  says  nothing            about the status of Contel.                                         -13-                                         -13-            remote  purchasers  well beyond  more predictable  common law            limits.  But section  11 does not make accountants  liable to            everyone  for  any harm  remotely  flowing  from a  false  or            inaccurate statement.  See  Abbey v. Computer Memories, Inc.,                                   ___  _____    ______________________            634 F. Supp.  870, 875 (N.D. Cal. 1986).  The problem, simply            put, is to determine where Congress drew the line.                 Many  statutes,  notably  statutes  of  limitation,  set            limits  that create arbitrary  stopping-points for liability.            Here, it has been assumed that Contel might well have a claim            under section 11 if it had acquired the NDS stock in a tender            offer and  later merged it out of existence.  It is even more            clear  that it would have no claim whatever if the Contel-NDS            transaction had  been framed  as  a pure  acquisition of  NDS            assets.   Faced with  a merger  transaction that  fits neatly            ______            into neither  category, any construction of  the statute will            leave  discontinuities and a sense  of lingering unease.  For            us, there is greater conformity  to language and less  unease            in concluding  that a security in  a non-existent corporation            is not a "security" within the meaning of section 11.                                         -14-                                         -14-                    TORRUELLA, Circuit  Judge (Dissenting).  Section  11 of                               ______________          the Securities Act  of 1933,  15 U.S.C.    77k(a), provides  that          "any person acquiring [a] security"  whose registration statement                      _________          "contained an  untrue statement  of material  fact or omitted  to          state  a  material fact  required to  be  stated" may  sue "every          accountant  . . . who has with  his consent been  named as having          prepared  or certified  any part  of the  registration statement"          (emphasis  added).    This  section should  impose  liability  on          Coopers & Lybrand in this case.                    I arrive at my conclusion by reading the plain language          of   11 and deferring  to the ordinary and common meaning  of its          words.  See Aaron v. SEC,  446 U.S. 680, 685 (1980) (construing                    ___ _____    ___          17 of Securities Act of 1933 in  light of plain meaning).  In its          plain meaning, "acquire" means "to come into possession, control,          or  power of disposal of  often by some  uncertain or unspecified          means."  Webster's Third  New International Dictionary 18 (1981);                   _____________________________________________          see also  Black's  Law Dictionary  41  (4th ed.  1951)  (defining          ________  _______________________          "acquire"  similarly).   "Security"  is defined  by the  statute,          Securities  Act of 1933,   2(1), 15  U.S.C.   77b(1), and the NDS          stock, prior to the merger, was covered by this definition.                    The issue in this case, as I see it, is whether Versyss          ever gained  possession, control  or power  of disposal over  NDS          stock.   In this regard, section 2.2 of the Agreement and Plan of          Reorganization, setting  forth the  terms of the  merger, plainly          states that  "each share of  NDS Stock  . .  . by  virtue of  the          Merger  and without any action on the part of the holder thereof,                                         -15-                                         -15-          [shall]  be  converted  into  and  exchanged  for"  Contel  Stock                   ________________________________________          (emphasis added). The words "be converted into and exchanged for"          indicate an acquisition  of NDS  stock by Contel  in that  Contel          gained possession, control,  or power of disposal pursuant to the          merger.   That is, by  virtue of  the merger, Contel  sold Contel          securities  which were  issued in  the merger to  stockholders of          NDS, and bought all shares  owned by NDS stockholders.   That the          NDS stock  ceased  to exist  following  the consummation  of  the          merger is  of no  consequence because  Contel acquired  the stock          prior to such extinction.   Indeed, Contel gained its  ability to          extinguish NDS stock as a result of its acquisition.                    Moreover,    11, like all securities  statutes, must be          construed "flexibly to  effectuate its remedial purpose."  SEC v.                                                                     ___          Capital Gains Research Bureau, 375 U.S. 180, 195 (1963); see also          _____________________________                            ________          Affiliated Ute Citizens of  Utah v. United States, 406  U.S. 128,          ________________________________    _____________          151 (1972).   In this  regard, the  Supreme Court has  found that          Congress  passed   11  to "assure compliance  with the disclosure          provisions  of  the  Act  by imposing  a  stringent  standard  of          liability on the  parties who play a direct role  in a registered          offering."   Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82                       ________________    __________          (1983) (citations omitted).  Thus,  Congress imposed  essentially          fiduciary standards upon those  who sign registration statements,          including ethical and competence  standards meant to ensure sound          and honest business practices.  H.R. Rep. No. 152, 73d Cong., 1st          Sess.  23 (1933).   Accountants such as Coopers  & Lybrand have a                                         -16-                                         -16-          particularly heavy  responsibility to the public.   H.R. Rep. No.          85, 73d Cong., 1st Sess. 9 (1933).                    Interpreting "acquire" to  include mergers  consummated          by  stock exchange, such as the one which occurred here, furthers          these goals.  In passing    11 Congress wished to control unsound          and fraudulent business practices.  Whether an acquisition occurs          pursuant to a simple sale or a complex merger, the threat of such          practices exists, and   11 should protect all innocent purchasers          against them.                    The holding of the majority, on the contrary, precludes          the application of    11  to any  merger like  the one  presented          here, and thus allows parties to structure their  transactions in          the form of such a merger to circumvent the application  of   11.          Such an end-run around   11 hardly effectuates its broad remedial          purpose.  As such, I dissent.                                         -17-                                         -17-
