## Facts

- Winter & Hirsch, Inc. (W&H), a consumer finance company, issued short-term promissory notes (commercial paper) that were sold to investors through John Nuveen & Co. (Nuveen).
- Between June 30, 1969 and February 10, 1970, a class of 42 purchasers bought approximately $1.6 million (face value) of W&H notes from Nuveen.
- Nuveen entered the commercial paper business in 1968 and became the dominant purchaser and reseller of W&H’s discount notes during the relevant period.
- Nuveen prepared and distributed written “commercial paper reports” about issuers, including W&H, to support sales; the reports presented W&H as financially sound.
- W&H’s audited financial statements were materially false due to a fraud involving company officers and its auditors; reported profits concealed substantial losses.
- Nuveen relied largely on W&H’s certified financial statements and limited external checks, without conducting an independent investigation commensurate with its underwriting and sales role.
- In February 1970, W&H defaulted; noteholders ultimately recovered about 65% of principal.

## Issues

1. Whether purchasers established seller liability under Securities Act § 12(2) based on material misstatements or omissions in written/oral communications used by Nuveen to sell W&H notes.
2. Whether Nuveen carried its statutory burden to prove the § 12(2) affirmative defense that it did not know, and exercising reasonable care could not have known, of the untruths or omissions.
3. Whether the district court abused its discretion by allowing a supplemental evidentiary hearing on remand and permitting an amendment adding a § 12(1) claim.

## Decision

- The Seventh Circuit affirmed judgment for the plaintiff class under § 12(2).
- The court held that the sales communications contained material misstatements or omissions and that Nuveen failed to sustain the burden of proving the § 12(2) reasonable-care defense.
- The court concluded the district court did not abuse its discretion in conducting a supplemental evidentiary hearing; the judgment could be affirmed even without relying on the new evidence.
- Because § 12(2) provided a sufficient basis for recovery, the court did not reach the § 12(1) claim or the propriety of allowing that amendment.

## Legal Principles

- Under Securities Act § 12(2), a seller is liable for offering or selling a security by means of a prospectus or oral communication containing a material misstatement or omission, unless the seller proves it did not know and, with reasonable care, could not have known of the falsity.
- Once material falsity or misleading omission in a sales communication is shown, the burden shifts to the seller to establish the reasonable-care defense.
- Scienter is not required for § 12(2) liability; the defense turns on whether the seller exercised reasonable care under the circumstances.
- For an underwriter or dealer using written reports to market securities, reliance on audited financial statements and limited checks may be insufficient; reasonable care can require independent investigation proportionate to the seller’s role and representations.

## Conclusion

The court held that Nuveen’s written sales materials for W&H commercial paper were materially misleading and that Nuveen, as the seller, failed to prove it could not have discovered the falsity through reasonable care, warranting § 12(2) liability and affirmance of judgment for the purchaser class.


Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980)