Sanders v. John Nuveen & Co., Inc.

619 F.2d 1222 (1980)

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Sanders v. John Nuveen & Co., Inc.

United States Court of Appeals for the Seventh Circuit
619 F.2d 1222 (1980)

Facts

Winter & Hirsch, Inc. (W&H) sold securities in the form of promissory notes to the public through underwriter John Nuveen & Co. (Nuveen) (defendant). W&H eventually defaulted on the notes. The default was the product of W&H’s fraud. Specifically, W&H had falsified its financial statements for more than 10 years. Nuveen did not know about W&H’s fraud and believed that W&H’s financial statements were correct. Certain purchasers of W&H’s notes (purchasers) (plaintiffs) brought a class-action suit against Nuveen, alleging that it violated § 12(a)(2) of the Securities Act of 1933 by selling the notes and issuing commercial paper reports regarding the notes that reflected W&H’s false financial statements. The district court issued judgment in favor of the purchasers. Nuveen appealed, arguing it was not liable because it established the § 12 affirmative defense that, in the exercise of reasonable care, it could not have known about W&H’s fraud. Nuveen further argued that § 12’s reasonable-care defense was easier to prove than the reasonable-investigation defense recognized by § 11 of the act. The district court issued judgment in favor of the purchasers. Nuveen appealed.

Rule of Law

Issue

Holding and Reasoning (Tone, J.)

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