Grand v. Nacchio

SUPREME COURT OF ARIZONA
En Banc

RICHARD GRAND and MARCIA GRAND, ) Arizona Supreme Court
co-trustees of the R.M. Grand ) No. CV-09-0317-PR
Revocable Living Trust, dated )
January 25, 1991, ) Court of Appeals
) Division Two
Plaintiffs/Appellants/Cross- ) No. 2 CA-CV 09-0014
Appellees, )
) Pima County
v. ) Superior Court
) No. C20025348
JOSEPH P. NACCHIO, a New Jersey )
resident; JOHN A. McMASTER, a )
New Jersey resident; QWEST )
COMMUNICATIONS INTERNATIONAL, ) O P I N I O N
INC., a Delaware corporation; )
and QWEST B.V. a foreign )
organization, )
)
Defendants/Appellees/Cross- )
Appellants. )
)
__________________________________)

Appeal from the Superior Court in Pima County
The Honorable Carmine Cornelio, Judge

AFFIRMED
________________________________________________________________

Opinion of the Court of Appeals, Division Two
222 Ariz. 498, 217 P.3d 1203 (App. 2009)

AFFIRMED
________________________________________________________________

TIFFANY & BOSCO, P.A. Phoenix
By Richard G. Himelrick

And

MUNGER CHADWICK PLC Tucson
By Michael J. Meehan
Attorneys for Richard Grand and Marcia Grand

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PERKINS COIE BROWN & BAIN P.A. Phoenix
By Joseph E. Mais
Brian C. Lake
Attorneys for John P. Nacchio

LEWIS AND ROCA LLP Tucson
By John N. Iurino
Sivan R. Korn
Attorneys for John A. McMaster

FENNEMORE CRAIG, P.C. Phoenix
By James D. Burgess
Timothy Berg

And

BOIES, SCHILLER & FLEXNER LLP Washington, DC
By Jonathan Sherman
Attorneys for Qwest Communications International, Inc.
and Qwest B.V.

PAUL G. ULRICH, P.C. Phoenix
By Paul G. Ulrich
Attorney for Amicus Curiae ML Liquidating Trust
________________________________________________________________

H U R W I T Z, Vice Chief Justice

¶1 The issue for decision is whether the defendants

“participated in” an allegedly unlawful sale of securities. The

courts below held that the defendants did not participate in the

sale. We agree.

I.

¶2 In 1999, Koninklijke KPN N.V. and Qwest Communications

International, Inc. (“Qwest”) formed a joint venture, KPNQwest

(“KPNQ”). Joseph P. Nacchio was Qwest’s CEO and chairman of

KPNQ’s supervisory board. John A. McMaster, Qwest’s former

executive vice president, was KPNQ’s CEO.

2
¶3 The R.M. Grand Revocable Living Trust (“the Trust”)

purchased 30,000 shares of stock from KPNQ in the initial public

offering (“IPO”). During the following six months, the Trust

purchased an additional 255,000 shares of KPNQ from other

sellers in the so-called aftermarket.

¶4 After KPNQ failed, the Trust commenced this action

against Qwest, Nacchio, and McMaster. As first amended, the

complaint alleged common law claims and violations of state and

federal securities laws.

¶5 After the superior court dismissed the majority of the

first amended complaint, the Trust filed a second amended

complaint, alleging violations of Arizona and federal securities

laws. The second amended complaint also asserted common law and

statutory consumer fraud claims. The Trust sought rescission of

the KPNQ stock purchases, and both compensatory and punitive

damages.

¶6 The superior court granted partial summary judgment to

the defendants, holding that the Trust could not seek either

rescission or damages with respect to shares it sold before

receiving notice of defendants’ allegedly illegal conduct. The

Trust then dismissed all claims relating to KPNQ stock it sold

after the alleged fraud was discovered. The court of appeals

reversed, affirming the superior court’s ruling on damages, but

3
reversing with respect to rescission. Grand v. Nacchio (Grand

I), 214 Ariz. 9, 13 ¶ 2, 147 P.3d 763, 767 (App. 2006).

¶7 After remand, the Trust filed a third amended

complaint, which alleged only state securities law claims and

sought only rescissory damages. The gravamen of the third

amended complaint was that the defendants had fraudulently

overstated Qwest’s earnings, and that the Trust would not have

purchased the KPNQ shares had the fraud been disclosed. In

response to the defendants’ motions to dismiss, the Trust

acknowledged that the third amended complaint had abandoned any

claims that the defendants had “induced” the aftermarket KPNQ

stock purchases. Instead, the Trust relied entirely on the

theory that the defendants were liable under A.R.S. § 44-2003(A)

(2003) because they had “participated in” the stock sales.

¶8 The superior court granted the motions to dismiss with

respect to all aftermarket purchases. After moving

unsuccessfully for reconsideration, the Trust dismissed with

prejudice its claims concerning shares purchased in the IPO.

¶9 The court of appeals affirmed the trial court’s

dismissal of the aftermarket claims, finding that no defendant

had “participated in” aftermarket sales of KPNQ stock. Grand v.

Nacchio (Grand II), 222 Ariz. 498, 501 ¶ 10, 217 P.3d 1203, 1206

(2009). The court declined to decide whether the third amended

complaint stated a claim for relief under § 44-2003(A) for

4
inducing the aftermarket sales because the Trust had expressly

forsworn such a theory both in the superior court and on appeal.

Id. at 502 ¶¶ 12-13 & n.5, 217 P.3d at 1207 & n.5.

¶10 We granted the Trust’s petition for review because

interpretation of the Arizona Securities Act (“ASA”), A.R.S.

§§ 44-1801 to 44-2126, is an issue of statewide importance. We

have jurisdiction pursuant to Article 6, Section 5(3) of the

Arizona Constitution and A.R.S. § 12-120.24 (2003).

II.

A.

¶11 This case involves the intersection of three

provisions of the ASA: A.R.S. §§ 44-1991(A) (2003), 44-2001(A)

(2003), and 44-2003(A). The first, § 44-1991(A), provides in

relevant part that

[i]t is a fraudulent practice and unlawful for a
person, in connection with a transaction or
transactions within or from this state involving an
offer to sell or buy securities, or a sale or purchase
of securities . . . [to] directly or indirectly
. . . [e]ngage in any transaction, practice or course
of business which operates or would operate as a
fraud.

Section 44-1991(A) is “almost identical to the antifraud

provisions of the 1933 Securities Act, 15 U.S.C. § 77q.” State

v. Superior Court (Davis), 123 Ariz. 324, 331, 599 P.2d 777, 784

(1979), overruled on other grounds by State v. Gunnison, 127

Ariz. 110, 618 P.2d 604 (1980).

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¶12 Section 17(a) of the 1933 Securities Act, however,

contains no express private cause of action. See Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 734 n.6 (1975)

(pretermitting whether a private cause of action for violations

of § 17(a) of the 1933 Act can be implied). In contrast, the

ASA explicitly provides for a private cause of action for

violations of § 44-1991 in § 44-2001(A), which states that a

sale of securities in violation of article 13 of title 44 is

“voidable at the election of the purchaser,” who may “recover

the consideration paid for the securities.” “[W]hen rescission,

though appropriate, is impossible or infeasible (as when the

buyer has sold the property to a third party) courts may

substitute rescissory damages,” which are the financial

equivalent of rescission. Standard Chartered PLC v. Price

Waterhouse, 190 Ariz. 6, 34, 945 P.2d 317, 345 (1997); accord

Davis, 123 Ariz. at 331, 599 P.2d at 784; Trump v. Badet, 84

Ariz. 319, 322, 327 P.2d 1001, 1004 (1958).

¶13 The private right of action recognized in § 44-2001(A)

may be pursued against “any person, including any dealer,

salesman or agent, who made, participated in or induced the

unlawful sale or purchase.” A.R.S. § 44-2003(A). Section 44-

2003(A) thus applies the § 44-2001 rescissory remedy to those

other than the seller of the securities. The statute has but

one exception, added in 1996, which provides that “[no] person

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shall be deemed to have participated in any sale or purchase

solely by reason of having acted in the ordinary course of that

person’s professional capacity in connection with that sale or

purchase.” 1996 Ariz. Sess. Laws, ch. 197, § 6 (2nd Reg. Sess.)

(amending A.R.S. § 44-2003(A)).

B.

1.

¶14 In reviewing a dismissal for failure to state a claim

under Arizona Rule of Civil Procedure 12(b)(6), we “assume the

truth of the well-pled factual allegations and indulge in all

reasonable inferences therefrom.” Cullen v. Auto-Owners Ins.

Co., 218 Ariz. 417, 419 ¶ 7, 189 P.3d 344, 346 (2008).

¶15 The relevant allegations of the third amended

complaint were described at length below, Grand II, 222 Ariz. at

501-02 ¶¶ 9-12, 217 P.3d at 1206-07, and can be readily

summarized. That complaint alleges that Nacchio visited Arizona

in 1999 and urged Richard Grand, co-trustee of the Trust, to

purchase aftermarket shares without disclosing the Qwest

accounting fraud. The pleading alleges similar conduct in 1999

in California by McMaster. It also alleges that KPNQ and Qwest

sent various communications to Grand and the investing public,

falsely describing the financial health of the joint venture.

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 2.

¶16 The legislature intended the ASA “as a remedial

measure” for the “protection of the public” and therefore

specified that the act be “liberally construed.” 1951 Ariz.

Sess. Laws, ch. 18, § 20 (1st Reg. Sess.). The language of the

Act confirms a broad intent to sanction wrongdoing in connection

with the purchase or sale of securities.

¶17 Section 44-1991(A)(3), for example, makes it illegal

for any person “directly or indirectly” to “[e]ngage in any

transaction, practice or course of business which operates or

would operate as a fraud or deceit.” Section 44-2001(A), in

turn, provides a sweeping rescissory remedy for violations of

§ 44-1991. Section 44-2003(A) speaks in similarly broad terms,

authorizing an action, with but one narrow exception, against

“any person . . . who made, participated in or induced the

unlawful sale or purchase.”

¶18 This is sweeping language of inclusion. Thus, courts

are not ordinarily required to parse whether a person violating

§ 44-1991(A)(3) should be separately characterized under § 44-

2003(A) as having “made,” “participated in,” or “induced” the

unlawful purchase or sale. Nor need complaints asserting claims

under § 44-2003(A) ordinarily engage in such an analysis. The

Trust argues that anyone who violates § 44-1991(A)(3) is

necessarily a person who “made, participated in or induced the

8
unlawful sale or purchase,” and thus within the scope of § 44-

2003(A). We assume, without today deciding, that such is the

case.

¶19 The defendants do not contest that the third amended

complaint alleges conduct violating § 44-1991(A). Nor do they

contest that the third amended complaint stated a claim for

relief under § 44-2003(A) for inducement. We agree. See Davis,

123 Ariz. at 331, 599 P.2d at 784 (holding Corporation

Commission liable for rescission damages for misleading

statements regarding regulation of insolvent corporation, which

“induced” investors to purchase securities); cf. Standard

Chartered, 190 Ariz. at 21-22, 945 P.2d at 332-33 (describing

inducement as overcoming “indifference, hesitation, or

opposition” by explaining the “persuasive advantages or gains”

of stock ownership) (internal quotation marks omitted).

¶20 This, however, is an unusual case. Represented by

able counsel, the Trust made a conscious decision, years after

filing the initial complaint and after the case had once been on

appeal and remanded, to forswear a § 44-2003(A) inducement

theory. Instead, in its opposition to the motions to dismiss

the third amended complaint, the Trust relied entirely on the

contention that the defendants had “participated in” the sale of

the aftermarket shares. Our task, therefore, is to determine

9
whether the third amended complaint sufficiently alleges such

participation.1

3.

a.

¶21 In Standard Chartered, the court of appeals defined

“participate” as “to take part in something (an enterprise or

activity) . . . in common with others,” or “to have a share or

part in something.” 190 Ariz. at 21, 945 P.2d at 332 (quoting

Webster’s Third New International Dictionary 1646 (1969)); see

also A.R.S. § 1-213 (2002) (“Words and phrases shall be

construed according to the common and approved use of the

language.”); State v. Wise, 137 Ariz. 468, 470 n.3, 671 P.2d

909, 911 n.3 (1983) (referring to an “established, widely

respected dictionary for the ordinary meaning” of a statutory

term). Applying that definition, Standard Chartered held that a

certified public accounting firm that had issued allegedly

1
In evaluating motions to dismiss, Arizona courts consider
only the “well-pled facts,” not legal conclusions. Cullen, 218
Ariz. at 419 ¶ 7, 189 P.3d at 346. Thus, it is not sufficient
that a pleading alleges “participation” if the facts alleged do
not support that theory.

Although the third amended complaint in this case alleges
that the defendants “made” the sale of the KPNQ stock, the Trust
has never advanced this argument, nor do the well-pled
allegations of the third amended complaint support such an
inference. It is uncontested that the Trust purchased the
aftermarket stock from sellers other than the defendants. The
Trust does not contend that the brokers who made the sales were
liable under § 44-2003(A), presumably in light of the exception
in the second sentence.
10
misleading audited financial statements and made them available

to a plaintiff who bought stock in the audited firm had not

“participated” in a sale. 190 Ariz. at 21, 945 P.2d at 332.

¶22 The Trust argues that because the defendants induced

its purchase of KPNQ stock, they must also have participated in

the sale. It is clear that one may simultaneously induce and

participate in an illegal sale. For example, when a seller

persuades a purchaser to buy securities through

misrepresentations, he has undoubtedly not only induced the

illegal sale, but also participated in it, and, indeed, made it.

See, e.g., Trump, 84 Ariz. at 321-23, 327 P.2d at 1003-04; Strom

v. Black, 22 Ariz. App. 102, 103-04, 523 P.2d 1339, 1340-41

(1974). But we reject the argument that the three phrases in

§ 44-2003(A) are necessarily coterminous. As Standard Chartered

correctly observed, participation and inducement are commonly

understood to involve separate factors. Compare 190 Ariz. at

21-22, 945 P.2d at 332-33 (defining inducement) with id. at 21,

945 P.2d at 332 (defining participation). Despite the

possibility of overlap, if all inducers were thereby also

automatically participants, use of the term “induces” in § 44-

2003(A) would be unnecessary. We ordinarily do not construe

statutes so as to render portions of them superfluous. Williams

v. Thude, 188 Ariz. 257, 259, 934 P.2d 1349, 1351 (1997).

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¶23 The interpretation of § 44-2003(A) offered by the

Trust also conflicts with the second sentence of the statute,

which provides that a person does not “participate” in an

illegal purchase or sale “solely by reason of having acted in

the ordinary course of that person’s professional capacity in

connection with that sale.” Had the legislature also intended

to exempt such persons from inducement liability, it surely

would have said so. See Champlin v. Sargeant, 192 Ariz. 371,

374 ¶ 16, 965 P.2d 763, 766 (1998) (“[T]he expression of one or

more items in a class indicates the intent to exclude omitted

items of the same class.”).

¶24 Like the courts below, we conclude that the conduct

alleged in the third amended complaint does not describe

participation in the illegal sales. Rather, that pleading

alleges that, through their acts and omissions, the defendants

encouraged the Trust to buy stock from others in the

aftermarket. This is classic inducement. See Standard

Chartered, 190 Ariz. at 21-22, 945 P.2d at 332-33 (defining

inducement). The complaint alleges no relationship whatsoever

between the sellers of the KPNQ aftermarket shares and the

defendants. Nor does it allege that the defendants played any

role in the transactions between the Trust and the sellers after

persuading the Trust to purchase the stock. In contrast, in

Strom, a case relied upon by the Trust, the defendants not only

12
persuaded the plaintiffs to buy stock, but then also drafted the

sales agreement, received funds from the plaintiffs, and took a

commission from the sales. 22 Ariz. App. at 103-04, 523 P.2d at

1340-41.

¶25 The third amended complaint alleges that the

defendants referred the Trust to an unidentified broker. But

that pleading did not assert that the broker was involved in the

aftermarket sales or that the Trust ever communicated with the

broker. Nor did it allege that the broker was aware of the

fraudulent scheme to inflate Qwest’s earnings. The court of

appeals thus correctly concluded that these allegations do not

constitute participation under § 44-2003(A). Grand II, 222

Ariz. at 502 ¶ 12, 217 P.3d at 1207.

¶26 The Trust also claims that the defendants had a

financial interest in the aftermarket sales, which purportedly

buoyed the price of Qwest stock. The Trust thus argues that,

unlike the accounting firm in Standard Chartered, the defendants

had a “stake” in these sales. See 190 Ariz. at 21, 945 P.2d at

332 (noting absence of auditor’s stake in stock sales). But

even if the defendants benefitted substantially from the

aftermarket stock purchases, it does not necessarily follow that

they also participated in the sales. Indeed, others also

undoubtedly benefitted from the rising market, but that alone

13
would not establish that they participated in the aftermarket

sales to the Trust.

¶27 The Trust also argues that if there is no

participation liability here, innocent stock purchasers will

have no effective remedy under the ASA. To the contrary,

inducement liability under § 44-2003(A) covers the precise

situation alleged by the Trust. We therefore see no warrant to

stretch the definition of “participated in” beyond normal

understanding.

b.

¶28 The Trust also asserts that McMaster and Nacchio are

liable under A.R.S. § 44-1999(B) (2003) because they

“controlled” KPNQ. This statute imposes joint and several

liability on anyone who, “directly or indirectly, controls any

person liable for a violation of section 44-1991.”

¶29 The third amended complaint alleges that McMaster and

Nacchio controlled KPNQ. Section 44-1991(B), however, by its

terms imposes only secondary liability; a “control” person is

not liable under that statute unless the controlled entity is

itself also liable. Because KPNQ did not participate in any of

the allegedly illegal aftermarket stock purchases, control

person liability is not available against the two individual

defendants.

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 c.

¶30 The Trust also claims Nacchio, McMaster, and Qwest

aided and abetted KPNQ’s violations of § 44-1991(A)(3). In

Davis, we stated that such a claim has three prerequisites:

(1) a primary violation has occurred; (2) knowledge of
or a duty of inquiry with regard to the primary
violation by the person charged; and (3) a necessary
contribution to the underlying scheme by the person
charged.

123 Ariz. at 331, 599 P.2d at 784; see also Wojutnik v. Kealy,

394 F. Supp. 2d 1149, 1170 (D. Ariz. 2005) (recognizing aiding

and abetting liability under the ASA). After our opinion in

Davis, however, the legislature expressly left open whether

aiding and abetting liability exists under the ASA. 1996 Ariz.

Sess. Laws, ch. 197, § 11(B) (“Nothing in this act . . .

determines whether or in what circumstances aiding and abetting

liability exists under Title 44, chapter 12, Arizona Revised

Statutes.”).

¶31 The defendants urge us to hold that there is no cause

of action for aiding and abetting a violation of the ASA. Cf.

Central Bank v. First Interstate Bank, 511 U.S. 164 (1994)

(holding that no cause of action exists for aiding and abetting

violations of § 10(b) of the Securities Exchange Act of 1934).

We need not, however, confront this issue today. As Davis

recognizes, aiding and abetting liability is premised on the

finding of a “primary violation.” 123 Ariz. at 331, 599 P.2d at

15
784. The only basis for recovery offered by the third amended

complaint is that the defendants participated in the illegal

aftermarket sales. If no defendant participated in an unlawful

sale, there can be no aiding and abetting liability.

d.

¶32 Arizona Rule of Civil Procedure 15(a)(1) provides that

“[l]eave to amend shall be freely granted when justice

requires.” The Trust argues that, if we affirm the dismissal of

the third amended complaint, we should instruct the superior

court to allow the filing of a fourth amended complaint alleging

that the defendants induced the Trust’s aftermarket stock

purchases.

¶33 We decline to do so. The Trust expressly chose to

eschew an inducement theory in its third amended complaint. The

Trust then sought leave to amend the third amended complaint in

response to the defendants’ motions to dismiss. The trial

court, however, denied leave to amend because the Trust had not

submitted a proposed fourth amended complaint. See Ariz. R.

Civ. P. 15(a)(2) (requiring submission of proposed amended

complaint with motion to amend). The Trust did not challenge

this ruling in the court of appeals or in its petition for

review, instead raising the suggestion that further amendment

should be allowed for the first time in a passing statement in

the final paragraph of its supplemental brief. See State Farm

16
Mut. Auto. Ins. Co. v. Tarantino, 114 Ariz. 420, 422, 561 P.2d

744, 746 (1977) (treating issue raised before trial court but

not on appeal as abandoned); Ariz. R. Civ. App. P. 23(c)(1)

(requiring petition for review to set forth the “issues which

were decided by the Court of Appeals and that the petitioner

wishes to present to the Supreme Court for review”).

¶34 In any event, we cannot conclude that the superior

court abused its discretion in refusing to allow a fourth

amended complaint, given the long history of this case and the

Trust’s considered decision to abandon any inducement theory

after years of litigation. On the facts before us, the

interests of justice would not be served by beginning anew.

III.

¶35 For the reasons above, we affirm the judgment of the

superior court and the opinion of the court of appeals.

_____________________________________
Andrew D. Hurwitz, Vice Chief Justice

CONCURRING:

_____________________________________
Rebecca White Berch, Chief Justice

_____________________________________
Michael D. Ryan, Justice

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_____________________________________
A. John Pelander, Justice

_____________________________________
Peter B. Swann, Judge∗

∗
Justice W. Scott Bales has recused himself from this case.

Pursuant to Article 6, Section 3 of the Arizona Constitution,
the Honorable Peter B. Swann, Judge of the Arizona Court of
Appeals, Division One, was designated to sit in this matter.
18