Gustafson v. Alloyd Company, Inc.

PETITIONER: Gustafson et al.
RESPONDENT: Alloyd Co., Inc., Fka Alloyd Holdings, Inc., et al.
LOCATION: Georgia General Assembly

DOCKET NO.: 93-404
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 513 US 561 (1995)
ARGUED: Nov 02, 1994
DECIDED: Feb 28, 1995

ADVOCATES:
Donald W. Jenkins - on behalf of the Petitioners
Michael R. Dreeben - on behalf of the United States, as amicus curiae, supporting the Respondents
Robert J. Kopecky - on behalf of the respondents

Facts of the case

Question

Media for Gustafson v. Alloyd Company, Inc.

Audio Transcription for Oral Argument - November 02, 1994 in Gustafson v. Alloyd Company, Inc.

Audio Transcription for Opinion Announcement - February 28, 1995 in Gustafson v. Alloyd Company, Inc.

William H. Rehnquist:

The opinion of the Court in number 93-404 Gustafson against Alloyd Company will be announced by Justice Kennedy.

Anthony M. Kennedy:

Now, this case arises under the Securities Act of 1933.

That Act regulates the sale and the issuance of new securities that provides a registration of the securities.

It also provides a number of different remedies for persons who are injured by violation of the Act, and whether remedies has the right to rescind, the right to undo a transaction after it has been completed and that’s contained in section 12(2) of the Act, and the question here is whether or not this rescission remedy applies to a private secondary transaction as well as to publicly traded issues and public transactions.

The right of rescission as provided in the statute is a very sweeping remedy.

It provides that a purchaser may rescind, if the purchaser finds that the prospectus that a company, the sale of the securities contain a misstatement or an omission.

It’s a sweeping remedy because fraud on the part of the seller need not be shown; no need the purchaser show reliance.

The right of rescission applies even though a purchaser did not rely on the particular misstatement, even though he did not rely on the perspectives.

This case involved the sale of securities in a secondary private transaction in an Illinois transaction.

The private company sold its stock the purchaser’s were called the Alloyd Company that was actually the name of the old company and was also the name of the new purchasing company.

The sellers were called Gustafson.

The parties had a contract which contains certain recitals with reference to the financial condition of the company.

After the contract was closed and the shares had been transferred, it was alleged that one of these recitals was a misstatement and the question is whether or not the right of rescission applies to this private transaction.

There are two different views in the Circuits.

The Third Circuit and the Seventh Circuit disagree; we took this case from the Seventh Circuit.

In an opinion filed today, we reverse the opinion of the Second Circuit which held that this was a prospectus.

We find that section 12(2) applies only where the seller has made material misstatements by means of prospectus and conclude that the word prospectus is a term of art referring to a document that describes a public offering of securities by an issuer or a controlling shareholder.

The parties agreed that prospectus has this meaning under section 10 of the Act which governs the information required to be contain in a prospectus.

In our view the term has the same meaning throughout the Act, and so we find that the definition is controlling under section 12(2).

All over the term prospectus is defined to include a written communication that offers a security for sale.

We read in context the term communication as referring to a public offer.

The contract of sale here and its recitations were not held out to the public and were not a prospectus as determine as used in the 1933 Act.

Justice Thomas has filed a dissenting opinion in which Justice Scalia, Ginsburg, and Breyer joined.

Justice Ginsburg has field a dissenting opinion in which Justice Breyer joins.