author: NEALON, Chief Judge.

text:
    CAPITAL CITIES MEDIA, INC., t/d/b/a the Wilkes-Barre Times Leader and Robert Scheier, Assistant City Editor, Plaintiffs, v. James W. CHESTER, Regional Director, Northeast Region, Pennsylvania Dept. of Environmental Resources and Mark R. Carmon, Community Relations Coordinator, Northeast Region, Pennsylvania Dept. of Environmental Resources, Defendants.
    Civ. No. 84-1024.
    United States District Court, M.D. Pennsylvania.
    Feb. 1, 1985.

      Ralph E. Kates, III, Wilkes-Barre, Pa., for plaintiffs.
    John Embick, Philadelphia, Pa., Gregory R. Neuhauser, Deputy Atty. Gen., Harrisburg, Pa., for defendants.
   .MEMORANDUM AND ORDER

NEALON, Chief Judge.

Plaintiff Capital Cities Media, Inc. brought this civil action pursuant to 42 U.S.C. §§ 1983, 1985; 28 U.S.C. §§ 1331, 1343 and the First and Fourteenth Amendments of the United States Constitution. Pendent jurisdiction was invoked by plaintiff to allege state causes of action arising under Article 2, § 7 of the Pennsylvania Constitution and 65 Pa.Stat.Ann. § 66.1 [Right to Know Act]. Named as defendants are Pennsylvania Department of Environmental Resources (DER); Nicholas De-Benedictis, Administrative Head and Secretary of DER; James W. Chester, Regional Director of the Northeast Region of DER; and Mark R. Carmon, Community Relations Coordinator for the Northeast Region of DER.

I. FACTS

The essence of the complaint is that plaintiff has been denied access by DER to various documents pertaining to the giardiasis contamination in particular water sources in the surrounding areas of Northeast Pennsylvania. Plaintiff asserts a “right to inspect and copy DER documents and records it has requested from these defendants in their official capacity since these DER documents and records are the official records of the DER, the public agency for which the defendants work and are themselves public records.” Complaint, Document 3 of the Record at j[ 8. A Motion to Dismiss and a brief in support thereof was filed by defendants August 30, 1984. A brief in opposition dated December 11, 1984 was filed by plaintiff to which defendants replied December 21, 1984. The motion is now ripe for disposition. For the reasons set forth below, the defendants’ Motion to Dismiss will be granted.

Defendants assert that the complaint should be dismissed' for lack of jurisdiction and failure to state a claim upon which relief can be granted. The court agrees.

A. First Amendment

Plaintiff alleges “a right to that information which is part of the public record and the government has the burden of establishing the non-public nature of the information sought.” Plaintiff’s Memorandum of Law in Opposition to defendants’ Motion to Dismiss, Document 20 of the Record at 17 n. 9. Thus, while plaintiff maintains it is not claiming a general right of access to governmental information under the First Amendment, plaintiff alleges that the withholding of the information it seeks does violate the First Amendment. See id. The court fails to see the distinction. Alleging that the withholding of documents violates the First Amendment necessarily implies an allegation that plaintiff has a right to access to those documents. In support, plaintiff cites John Milton, James Madison, James Monroe and Thomas Jefferson for the proposition that a right of access ta governmental information is fundamental to our system of government. Plaintiff fails to cite, however, any opinion from the Supreme Court of the United States or our Third Circuit Court of Appeals which has held or implies that the First Amendment confers a right of access to governmental information in the context presented here.

In light of the absence of direct precedential support of plaintiffs position, a review of recent Supreme Court decisions is instructive on this issue. The issue of whether there is a First Amendment right of access to governmental information has been presented to the Supreme Court in a variety of contexts since the Court’s pronouncement that “news gathering is not without its First Amendment protections.” Branzburg v. Hayes, 408 U.S. 665, 707, 92 S.Ct. 2646, 2670, 33 L.Ed.2d 626 (1972).

In the prison setting, the Court has rejected the press’ contentions that journalists have a right to conduct face-to-face interviews with specific inmates. See Pell v. Procunier, 417 U.S. 817, 94 S.Ct. 2800, 41 L.Ed.2d 495 (1974) (Constitution does not require government to accord press special access to information not open to public generally); Saxbe v. Washington, 417 U.S. 843, 94 S.Ct. 2811, 41 L.Ed.2d 514 (1974) (prohibition of personal interviews with inmates does not abridge freedom of press that First Amendment guarantees).

Later, in Houchins v. KQED, 438 U.S. 1, 98 S.Ct. 2588, 57 L.Ed.2d 553 (1978), the Court, again in a prison context, denied the media’s challenge to a county prison’s decision to close its doors and deny access to an area of the prison in which an inmate had committed suicide. Indeed, in Houchins, the Chief Justice writing the plurality opinion stated: “Neither the First Amendment nor the Fourteenth Amendment mandates a right of access to governmental information or sources of information within the government’s control.” Id. at 15, 98 S.Ct. at 2597. Justice Stewart, concurring, wrote: “The First and Fourteenth Amendments do not guarantee the public a right of access to information generated or controlled by government, nor do they guarantee the press any basic right of access superior to that of the public generally.” Id. at 16, 98 S..Ct. at 2597.

In Gannett Co., Inc. v. DesPasquale, 443 U.S. 368, 99 S.Ct. 2898, 61 L.Ed.2d 608 (1979) the issue arose in the context of criminal trials. While upholding the trial judge’s decision to exclude press and public from a pretrial hearing on a motion to suppress alleged involuntary confessions of defendants charged with robbery and murder, the court found it unnecessary to decide whether the First Amendment conferred a right to attend criminal trials. This question was decided in Richmond Newspapers Inc. v. Virginia, 448 U.S. 555, 100 S.Ct. 2814, 65 L.Ed.2d 973 (1980) when a plurality of the Court held that the First and Fourteenth Amendments did confer a right, although not absolute, upon the press and public to attend criminal trials. Two years later, in Globe Newspaper Co. v. Superior Court, 457 U.S. 596, 102 S.Ct. 2613, 73 L.Ed.2d 248 (1982) the holding of Richmond Newspapers, supra, was re-affirmed when a majority of the court held that a Massachusetts statute, which required mandatory exclusion of press and public during the testimony of a minor sexually-abused victim, violated the First and Fourteenth Amendments. Justice Brennan wrote: Id. at 2619-20 (emphasis in original), (footnote omitted). Justice O’Connor, concurring separately, emphasized that she interpreted the Court’s decisions in Globe or Richmond Newspapers as having application only in the context of criminal trials. Id. at 2623.

Two features of the criminal justice system, emphasized in the various opinions in Richmond Newspapers, together serve to explain why a right of access to criminal trials in particular is properly afforded by the First Amendment. First, the criminal trial historically has been open to the press and general public____ Second, the right of access to criminal trials plays a particularly significant role in the functioning of the judicial process and the government as a whole. Public scrutiny of a criminal trial enhances the quality and safeguards the integrity of the fact finding process, with benefits to both the defendant and to society as a whole.

Most recently, the Supreme Court held that the guarantees of open public proceedings in criminal trials extended to proceedings for the voir dire examination of potential jurors. Press-Enterprise Co. v. Superior Court, 464 U.S. 501, 104 S.Ct. 819, 78 L.Ed.2d 629 (1984).

This court does not read these cases, separately or in the aggregate, to represent a consensus that the public or the media has a carte blanche right of access under the First Amendment to governmental information.

With the exception of Justice Stewart’s opinion for the Court in Gannett, Justice Brennan’s opinion for the Court in Globe, and the Chief Justice’s opinion for the Court in Press-Enterprise Co. v. Superior Court, none of the opinions on access to government information has enlisted the support of a majority of the Justices.

The cases that have enlisted the support of the majority of the Justices have been in the context of criminal trials and this court does not believe that these holdings extend to a factual setting, such as the instant case, in which a party challenges the withholding of documents in the hands of a state agency.

Plaintiff appears to be focusing on the language that the press is not entitled to a right of access to governmental information greater than that of the public generally. By alleging, in a conclusory manner, that the documents plaintiff seeks are “public,” plaintiff attempts to set forth a First Amendment violation. The court notes that plaintiff is not alleging a case of prior restraint, i.e., prohibiting the communication of information in plaintiff's possession nor is plaintiff alleging a case of sanction imposed for publishing information. Plaintiff’s cause of action is premised on the theory that it is being denied documents that it wants to publish and that is a violation of the First Amendment. This theory was expressly rejected in Houchins, supra.

There is no constitutional right to have access to particular government information, or to require openness from the bureaucracy____ The public interest in knowing about its government is protected by the guarantee of a Free Press, but the protection is indirect. The Constitution itself is neither a Freedom of Information Act nor an Official Secrets Act.

Houchins, supra, at 14-15, 98 S.Ct. at 2596 (citing Stewart, Or of the Press, 26 Hastings L.J. 631, 636 (1975)). Based upon the foregoing discussion and review of the Supreme Court cases, the court believes plaintiff has failed to allege a violation of a First Amendment right under the present state of the law.

B. Equal Protection

Plaintiff also alleges that the information it seeks has been released to others. This, plaintiff alleges, violates its right to equal protection under the laws and “[s]uch selectivity by the defendants is a sufficient ground, standing alone, to warrant jurisdiction in this court over this dispute.” Document 20 of the Record at 20. Plaintiff asserts that because the information it seeks has been withheld and other information, unspecified by plaintiff, has been released to other people, an equal protection issue arises. The court disagrees. First, plaintiff does not identify the particular, insular group which is receiving unfair or discriminatory treatment. The only groups that can be discerned from plaintiff’s averments are (1) those who have received the information they sought and (2) those who have not received the information they sought. Second, plaintiff does not even attempt to allege that the exact information was sought by all persons. Based upon these assertions, the Equal Protection Clause has not been implicated. The court, therefore, will grant defendants’ Motion to Dismiss on this issue.

C. State Law Claims

Plaintiff invokes the concept of pendent and ancillary jurisdiction to assert its state law claims against defendants. Pendent jurisdiction exists, as a matter of constitutional power, whenever the state and federal claims “derive from a common nucleus of operative facts” and are such that plaintiff “would ordinarily be expected to try them all in one judicial proceeding.” United States v. Gibbs, 383 U.S. 715, 718, 725, 86 S.Ct. 1130, 1135, 1138, 16 L.Ed.2d 218 (1966). If constitutional power exists, the court may, in its discretion, retain the state law claim. In this instance, however, the state law claims must be dismissed because the court is without jurisdiction to hear these claims. The Eleventh Amendment of the United States Constitution as interpreted by Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890), proscribes suits brought by citizens against a state in federal court if the state has not consented to be sued in federal court. Thus, unless the Commonwealth of Pennsylvania has consented to suit in federal court, an action may not be maintained. The Court in Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984) (Pennhurst II) considered the relationship between the Eleventh Amendment and pendent jurisdiction and concluded that the constitutional bar of the Eleventh Amendment also applies to pendent claims. 104 S.Ct. at 919. Plaintiff’s analysis misconstrues the meaning of Pennhurst II in attempting to persuade the court that its state law claims are cognizable. The Supreme Court in Pennhurst II concluded “that' a federal suit against state officials on the basis of state law contravenes the Eleventh Amendment when ... the relief sought and ordered has an impact directly on the state itself.” Id. at 917. Plaintiff is asking this court for injunctive relief and to “order the defendants to make all DER records avail-' able to plaintiffs for inspection and copying____” Document 1 of the Record at 4. Unquestionably, ordering defendant state officials or DER to release the documents plaintiff requests would operate as an order against the Commonwealth itself. Further, plaintiff does not allege and nothing in the record indicates that these officials were acting “without any authority whatever.” See Allegheny County Sanitary Auth v. United States Environmental Protection Agency, 732 F.2d 1167, 1174 (3d Cir.1984). Accordingly, the court finds that plaintiff’s state law claims are barred by the Eleventh Amendment and will be dismissed.

An appropriate Order will enter.

      . Plaintiff has not been denied access to DER files totally. Indeed, plaintiff received a number of files. The controversy centers around various, documents that were taken out of the files before plaintiff was given the opportunity to review them.

      . It was unnecessary to decide whether the factual setting of the case — trial as opposed to prison — was of any constitutional significance. The trial judge had appropriately concluded to close the pretrial hearing, even assuming arguendo, a First Amendment right of access. Gannett, supra at 392 & n. 24, 99 S.Ct. at 2912 & n. 24.

      . First Amend. Coalition v. Judicial Inquiry & Review Bd., 579 F.Supp. 192, 211 (E.D.Pa.1984).

      . Plaintiff maintains Houchins, supra, is "inapposite” because in Houchins the question presented was whether the media had a constitutional right of access to a penal institution over and above that of other persons. Houchins, supra, 438 U.S. at 3, 98 S.Ct. at 2590. The court does not agree. The media in Houchins argued a right of access to governmental information. Plaintiff argues that because it is seeking access to "public” records, and thus not claiming "special access,” a First Amendment violation has been stated. The court does not accept this analysis.

      . The court notes that the Freedom of Information Act is inapplicable to the instant action because it does not apply to state governments or officers.

      . Whether the documents plaintiff seeks are “public” documents would be more appropriately challenged under the Pennsylvania Right to Know Act. Because the court is without jurisdiction to hear that state claim, see infra at pp. 498-499, the court expresses no opinion on the merits of that issue.

      . Plaintiff relies upon the Affidavit of Robert Scheider, Assistant City Editor for the Wilkes-Barre Times Leader as establishing plaintiff’s Equal Protection claim. The affidavit, however, does nothing more than list other persons and groups known to the Times Leader to have been refused documents by DER. See Document 6 of the Record at 11-12. For example, it is averred that two environmental groups have had their requests for DER documents regarding various landfill sites denied. The affidavit does not demonstrate, as plaintiff infers in its brief, see Document 20 of the Record, that the same documents plaintiff seeks and has been denied, have been released to others.

      . The Commonwealth has specifically withheld consent to be sued in federal court. 42 Pa.Cons. Stat.Ann. § 8521(b) (Purdon 1982).

      . Plaintiff does allege in its amended complaint that the defendants withheld the documents sought "without authority from DER or the Executive Branch of the Commonwealth’s government to make such a refusal.” Document 3 of the Record at 4, 9. This allegation, however, stands alone. Documentation of DER’s refusal to release certain papers to plaintiff (submitted by plaintiff) clearly demonstrates that officials were relying on DER policy albeit a policy contested by plaintiff.


source: Caselaw Access Project

author: TENNEY, District Judge.

license: Public Domain

text:
    INDEX FUND, INC., Plaintiff, v. Robert R. HAGOPIAN, John Peter Galanis, Akiyoshi Yamada, Takara Partners, Louise Yamada, Louise Yamada, Inc., Armstrong Investors S.A., Armstrong Capital S.A., Pericles Constantinou, Provident Securities, Inc., First National City Trust Company (Bahamas) Ltd., First National City Bank, Defendants.
    No. 73 Civ. 2665 (CHT).
    United States District Court, S.D. New York.
    Feb. 6, 1985.

      Charles E. McGuinness, New York City, for plaintiff.
    Shearman & Sterling, New York City, for defendants Citibank, N.A., and Cititrust (Bahamas) Ltd.; Werner L. Polak, New York City, of counsel.
   OPINION

TENNEY, District Judge.

The plaintiff, Index Fund, Inc. (“Index Fund”), began this action in 1973 against various parties including First National City Trust Company (Bahamas) Limited (“Cititrust”) and First National City Bank (“Citibank”). The plaintiff alleges that Cititrust and Citibank violated the federal securities laws and common law principles of fraud and fiduciary duty by causing the plaintiff to purchase stocks that were worthless or were sold at inflated prices. The plaintiff is seeking damages of $1,010,-151.

Cititrust and Citibank (“defendants") now move for summary judgment pursuant to Federal Rule of Civil Procedure (“Rule”) 56, or alternatively, for judgment on the pleadings under Rule 12(c) for failure to state a claim. The plaintiff has made a cross-motion for summary judgment and has moved for leave to amend the complaint under Rule 15.

The plaintiffs motion for leave to amend the complaint is granted to the extent set forth below, but the plaintiffs cross-motion for summary judgment is denied. The defendant’s motion for summary judgment or to dismiss on the. pleadings is granted in part and denied in part. The motion is denied insofar as the plaintiff alleges that the defendants are secondarily liable under the securities laws and the common law, as will be discussed hereinafter. In all other respects, the motion is granted.

BACKGROUND

The history of this case is set forth at length in the Court’s previous Opinion, 417 F.Supp. 738 (S.D.N.Y.1976), and will not be repeated here. A brief recital of the facts will suffice.

Essentially, the complaint alleges that in 1970 — between June and October — the plaintiff purchased certain securities that were worthless or overvalued, and consequently suffered a loss of $1,010,151. According to the plaintiff, the defendants’ liability is based on the defendants’ relationship with the Armstrong Fund (“Armstrong”); Armstrong is an offshore mutual fund which, allegedly, caused the plaintiff’s loss by means of market manipulation and bribery. Cititrust, a wholly-owned subsidiary of Citibank, was Armstrong’s trustee.

The plaintiff claims that Cititrust and Citibank failed to exercise proper supervision and control over Armstrong and Armstrong’s investment adviser, Everest Management Corporation (“Everest”). The plaintiff alleges that Armstrong — acting through Everest — (1) manipulated the market, thereby causing certain securities purchased by the plaintiff to be worthless or overpriced, and (2) fraudulently induced the plaintiff to purchase the securities in question from Armstrong and others by giving the plaintiff’s employee, Robert R. Hagopian (“Hagopian”), a bribe of approximately $500,000.

The defendants have moved for summary judgment and for judgment on the pleadings. In response, the plaintiff has made a cross-motion for summary judgment and, pursuant to Rule 15(a), has moved for leave to amend the complaint to hold the defendants — Cititrust and Citibank — liable for the fraud perpetrated by Armstrong and Everest.

DISCUSSION

Amending the Complaint

Leave to amend a complaint should be freely given, absent bad faith, undue delay, or undue prejudice to the opposing party. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). The pleading rules should be applied liberally, rather than narrowly. Id. Leave to amend should be granted “if the plaintiff has at least colorable grounds for relief____” S.S. Silberblatt, Inc. v. East Harlem Pilot Block, 608 F.2d 28, 42 (2d Cir.1979). In determining whether an amendment is justified, the court “should normally focus on the resultant prejudice to [the] defendant.” Middle Atlantic Utilities Co. v. S.M.W. Dev. Corp., 392 F.2d 380, 384 (2d Cir.1968).

Despite the defendants’ argument that the plaintiff should not be permitted to amend the complaint in the case at bar, the defendants have made no showing that they would be unduly prejudiced by the proposed amendment. Essentially, the defendants had notice that they could be charged with secondary liability for the acts of Armstrong and Everest. The plaintiff’s claims concerning secondary liability are based on the same facts and circumstances as those outlined in the original complaint. See Rule 15(c); 6 C. Wright & A. Miller, Federal Practice and Procedure § 1497, at 490 (1983). All of the elements of secondary liability were effectively set forth in the original complaint, even though the plaintiff did not specifically denominate the theory or statutory basis of secondary liability. In addition, both the plaintiff and the defendants addressed the question of secondary liability at length and in detail in their briefs for the instant motion.

It appears from the record that the plaintiff’s claims against Cititrust and Citibank for secondary liability are at least colorable, and there is no suggestion that the plaintiff has acted in bad faith or is guilty of undue delay in seeking to amend the complaint.

The plaintiff’s request to amend the complaint is therefore granted. The plaintiff may amend the complaint to the extent necessary to allege that Cititrust and Citibank are secondarily liable under the doctrine of aiding and abetting, and the doctrine of controlling parties.

Moreover, for the purpose of the current motion, the Court will consider the complaint as though it were already amended. See 10A C. Wright and A. Miller, supra, § 2722 at 47-48 (1983) (“[W]hen plaintiff’s motion to amend the complaint and defendant’s motion for summary judgment are presented together, the court may consider the [summary judgment motion] as [being] addressed to the complaint in the form in which it is sought to be amended.”); accord Marbury Management, Inc. v. Kohn, 629 F.2d 705, 711-12 (2d Cir.), cert, denied sub nom. Wood Walker & Co. v. Marbury Management, Inc., 449 U.S. 1011, 101 5. Ct. 566, 66 L.Ed.2d 469 (1980). Because the parties have thoroughly briefed the question of secondary liability, the defendants will not be prejudiced as a result of the Court’s treating the complaint as though it were already amended. Judgment on the Pleadings

The defendants have moved for summary judgment under Rule 56, and for judgment on the pleadings — for failure to state a claim — under Rule 12(c). Where outside material is presented to the court on a motion to dismiss under Rule 12(c), the motion should be treated as one for summary judgment, and the court should proceed under Rule 56. See Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984); Slevin v. Pedersen Assoc., Inc., 540 F.Supp. 437, 438 n. 2 (S.D.N.Y.1982); 10 C. Wright and A. Miller, supra, § 2713 at 599-600 (1983).

In the case at bar, the parties have submitted affidavits, interrogatories, and substantiating documentation in support of the current motions. Because the Court has considered all of the material submitted, including the matter presented which is outside of the pleadings, the defendants’ entire motion will be treated as one for summary judgment.

Summary Judgment

Summary judgment, which cuts off the right to trial, may be granted only if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Rule 56(c); see generally 6 J. Moore, W. Taggart and J. Wicker, Moore’s Federal Practice ¶ 56.15 [1. — 0] (2d ed. 1983). The court will not try issues of fact on a motion for summary judgment, but, rather, will merely determine whether there are issues of fact that need to be tried. See Heyman v. Commerce and Indus. Ins. Co., 524 F.2d 1317, 1319-20 (2d Cir.1975).

It is well settled that summary judgment should not be granted unless the entire record shows a right to judgment with such clarity as to leave no room for controversy and establishes affirmatively that the adverse party cannot prevail under any circumstances. Neither should summary judgment be granted if the evidence is such that conflicting inferences may be drawn therefrom, or if reasonable men might reach different conclusions.

Phoenix Sav. and Loan, Inc. v. Aetna Casualty and Sur. Co., 381 F.2d 245, 249 (4th Cir.1967).

The party moving for summary judgment has the burden of showing that there are no material facts in dispute, see Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970), and the court will resolve all ambiguities and draw all reasonable inferences in favor of the party opposing the motion. Heyman v. Commerce, 524 F.2d at 1319-20. It should be noted that “[ijssues of motive and intent are usually inappropriate for disposition on summary judgment.” Wechsler v. Steinberg, 733 F.2d 1054, 1058 (2d Cir.1984). Summary judgment, however, will not be denied on the basis of mere conclusory allegations made without factual support. See Project Release v. Prevost, 722 F.2d 960, 968 (2d Cir.1983). Concrete particulars must be set forth in opposition to the motion. See SEC v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir.1978).

A. Primary Liability

The plaintiff’s complaint alleges that the defendants are liable as principals under §§ 10(b) and 15(c) of the Securities Exchange Act, §§ 12(2) and 17(a) of the Securities Act, and under the common law. The plaintiff, however, has failed to allege any facts that would give rise to an inference that either Cititrust or Citibank was a direct participant in manipulating the market or bribing Hagopian. In fact, plaintiff’s counsel stated in an affidavit that the plaintiff had “not charged ... Citibank or Cititrust with having sold any securities to plaintiff or having misrepresented any facts regarding the sale and purchase of those securities which were the subject of the securities manipulations of Galanis and Yamada.” Rebuttal Affidavit of Charles E. McGuinness, sworn to August 31, 1983, ¶44.

The record indicates that neither Cititrust, nor Citibank, engaged in any independent fraudulent conduct; thus, neither defendant can be held primarily liable for the plaintiff’s loss. See Savino v. E.F. Hutton & Co., 507 F.Supp. 1225, 1241-42 (S.D.N.Y.1981). At most, they may be found secondarily liable under the doctrine of aiding and abetting, or controlling parties. See Lanza v. Drexel & Co., 479 F.2d 1277, 1289 (2d Cir.1973) (en banc); Hackett v. Continental Can Co., 518 F.Supp. 1281, 1284 (E.D.N.Y.1981). Accordingly, summary judgment is granted in favor of Cititrust and Citibank on each of the plaintiff’s claims, insofar as the claims pertain to primary liability under the securities laws and the common law.

B. The Investment Advisers Act, and the Investment Company Act

The plaintiff asserts in its complaint that the defendants are liable under § 206 of the Investment Advisers Act. The Supreme Court, however, has ruled that there is no private cause of action under § 206. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 24, 100 S.Ct. 242, 249, 62 L.Ed.2d 146 (1979). The plaintiff’s claim under § 206 is therefore dismissed.

The plaintiff also claims that the defendants are liable under §§ 17(e)(1) and 36 of the Investment Company Act. Section 17(e)(1) makes it unlawful for a person acting as an agent for an investment company to accept a bribe. Although the plaintiff’s employee, Hagopian, accepted a bribe, he was not acting as an agent for either the defendants, or Everest, or Armstrong. Hagopian was acting on behalf of the plaintiff, Index Fund. Since Hagopian was not the defendants’ agent, Cititrust and Citibank cannot be held liable under § 17 for Hagopian’s acceptance of the bribe. Accordingly, the plaintiff’s cause of action under this section is hereby dismissed.

The plaintiff’s claims against Cititrust and Citibank under § 36 of the Investment Company Act must also be dismissed; the plaintiff is not within the group of investors that § 36 is intended to benefit. Congress enacted the Investment Company Act, generally, and § 36 specifically, in order to regulate transactions between investment companies — such as mutual funds — and their investment advisers. See Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 104 S.Ct. 831, 838-42, 78 L.Ed.2d 645 (1984). A mutual fund is generally only a shell; it is “a pool of assets consisting mostly of portfolio securities that belong to the individual investors holding shares in the fund.” Tannenbaum v. Zeller, 552 F.2d 402, 405 (2d Cir.), cert, denied sub nom. Eberstadt & Co. v. Tannenbaum, 434 U.S. 934, 98 S.Ct. 421, 54 L.Ed.2d 293 (1977). Typically, the mutual fund is managed and supervised by its investment adviser. In the instant case, for example, Everest was acting as the investment adviser for Armstrong. Section 36 was intended to address problems that arise out of the unique relationship between an investment company and its investment adviser, and to “correct abuses of self-dealing which produced injury to the stockholders of investment companies.” United States v. Deutsch, 451 F.2d 98, 108 (2d Cir.1971), cert, denied, 404 U.S. 1019, 92 S.Ct. 682, 30 L.Ed.2d 667 (1972).

In the case at bar, the plaintiff was not among the group of investors that § 36 was intended to protect. The plaintiff was not a security holder of Armstrong and did not have the unique relationship with Everest or Armstrong that was contemplated by the statute. The plaintiff was not managed or supervised by Everest. Consequently, the plaintiff does not have standing to bring an action against Cititrust or Citibank under § 36, and the plaintiffs claim under this section is therefore dismissed.

C. Secondary Liability

The basic elements of secondary liability — under the doctrine of aiding and abetting or the statutory doctrine of control — are well established in this circuit. See, e.g., Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir.1983); Marbury Management v. Kohn, 629 F.2d at 712-16; IIT, An Int’l Inv. Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir.1980); Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 47-48 (2d Cir.), cert, denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978); Lanza v. Drexel, 479 F.2d at 1299-1304.

Three elements must be established in order to impose liability on a defendant as either an aider and abettor or a controlling party. The first two elements are the same under both theories of liability: (1) there must have been a violation of the securities laws by a primary party, and (2) the defendant must have had actual knowledge of the violation, or the defendant must have had a fiduciary relationship with the plaintiff and have acted recklessly.

Under the controlling person doctrine, the plaintiff must also show that the defendant had the power to exercise control over the primary violator, based on a special relationship such as agency or stock ownership.

To establish aider and abetter liability, the plaintiff must show — as a third element — that the defendant rendered substantial assistance to the principal actor in effecting the primary violation.

1. Securities Law Violation

The plaintiff must first establish the existence of a securities law violation by a primary party. There is little doubt that the plaintiffs allegations, if true, would be sufficient to prove a primary violation in the instant case.

The plaintiff alleges that Everest — acting in its capacity as investment adviser for Armstrong — was the primary violator, and that Everest violated the securities laws by fraudulently inducing the plaintiff to purchase certain securities that were worthless or overpriced. The complaint alleges, first, that the plaintiffs employee, Hagopian, purchased the securities for the plaintiff because of a substantial bribe given to him by Everest. Second, the plaintiff claims that the securities in question were worthless or overpriced because Armstrong and Everest had fraudulently manipulated the market.

(a) In Pari Delicto Defense

Fraudulent inducement to buy worthless or overpriced securities, if proven, would constitute a primary violation. The defendants, however, claim that because Hagopian accepted a bribe — and Hagopian was an employee and agent of the plaintiff — the plaintiff itself took part in the venture. The defendants argue that Index Fund is therefore barred from bringing suit on the fraudulent inducement claim.

This type of defense — an in pari delicto defense — is generally inappropriate in securities cases, and will not be recognized in the case at bar. See Mallis v. Bankers Trust, 615 F.2d 68, 75 (2d Cir.1980), cert, denied, 449 U.S. 1123, 101 S.Ct. 938, 67 L.Ed.2d 109 (1981); Berner v. Lazzaro, 730 F.2d 1319, 1321-24 (9th Cir.1984), cert, granted sub nom. Bateman Eichler, Hill Richards, Inc. v. Berner, — U.S. —, 105 S.Ct. 776, 83 L.Ed.2d 772 (1985) (citing cases and commentaries).

The major objective of the securities laws is to prevent deceptive practices in the securities field, protect investors, and provide a means of redress if investors are deceived. See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275, 280, 11 L.Ed.2d 237 (1963); Feit v. Leasco Data Processing Equipment Corp., 332 F.Supp. 544, 563-67 (E.D.N.Y. 1971). Permitting an in pari delicto defense in cases involving securities fraud would frustrate the objectives of the securities laws.

The in pari delicto defense should be permitted only if the alleged facts show that (1) the plaintiffs conduct was as reprehensible as the defendant’s, and (2) the defendant was injured by the plaintiff’s actions. See Mallis v. Bankers Trust, 615 F.2d at 75; Savino v. E.F. Hutton & Co., 507 F.Supp. at 1234, n. 6; accord Berner v. Lazzaro, 730 F.2d at 1324 (The defense is only appropriate where the plaintiff had equal responsibility for the injury it suffered.); Nathanson v. Weis, Voisin, Cannon, Inc., 325 F.Supp. 50, 57 (S.D.N.Y. 1971) (“In pari delicto generally contemplates that both parties are ‘in equal fault.’ ”) (citations omitted).

Thus, the Court rejects the defendants’ argument that Index Fund should be barred from asserting a claim under the securities laws. If the plaintiff suffered a loss as a result of dishonest dealings or deceptive practices, the plaintiff is entitled to the full protection of the securities laws.

(b) Fraud on the Market

The plaintiff alleges that Everest and Armstrong violated the securities laws by manipulating the market in such a manner that certain stocks appeared to be valuable, when in fact they were practically worthless. The plaintiff claims that Everest and Armstrong created an artificial price and an artificial market for the securities in question. The evidence presented supports an inference that Everest and Armstrong did manipulate the market. Fraud on the market, if proven, would constitute a securities law violation. See Panzirer v. Wolf, 663 F.2d 365, 367-68 (2d Cir.1981), vacated as moot sub nom. Price Waterhouse v. Panzirer, 459 U.S. 1027, 103 S.Ct. 434, 74 L.Ed.2d 594 (1982); Lipton v. Documation, Inc., 734 F.2d 740, 743 (11th Cir.1984), cert, denied sub nom. Peat, Marwick, Mitchell & Co. v. Lipton, — U.S. —, 105 S.Ct. 814, 83 L.Ed.2d 807 (1985); Minpeco, S.A. v. Conticommodity Services, Inc., 552 F.Supp. 332, 337 (S.D.N. Y.1982); Schlanger v. Four-Phase Systems, Inc., 555 F.Supp. 535, 538 (S.D.N.Y. 1982) (“[I]t is hard to imagine that there ever is a buyer or seller who does not rely on market integrity. Who would knowingly roll the dice in a crooked crap game?”).

In refuting the plaintiff’s allegations concerning market manipulation, the defendants again raise the issue of Hagopian’s conduct. The defendants contend that when Hagopian took the bribe and purchased the securities, he knew the securities were worthless or overpriced. The defendants argue that because Hagopian was the plaintiff's employee, Hagopian’s knowledge must be imputed to the plaintiff. The defendants assert, therefore, that the plaintiff has no cause of action under the securities laws because — when Index Fund purchased the securities in question — Index Fund knew that the securities were worthless or overpriced. Thus, the defendants claim that summary judgment should be granted in their favor.

The basic laws of agency require that the defendants’ argument be rejected. Ordinarily, of course, an agent’s knowledge is imputed to his principal. This is based on the presumption that an agent will give his principal any relevant information he has acquired. This presumption breaks down, however, where an agent is acting in his own interest, in a manner that is obviously hostile to the principal’s best interests. If, for example, an employee is stealing from his employer, the employer is apt to be the last one to whom the employee will give that information.

If an agent’s interests are adverse to those of the principal, therefore, the agent’s knowledge will not be imputed to the principal. See Mallis v. Bankers Trust, 717 F.2d 683, 689 (2d Cir.1983). Notice to an agent “is notice to the principal, unless the person giving notice has reason to know that the agent ... will not transmit the message to the principal.” Corporacion de Mercadeo Agricola v. Mellon Bank Int’l, 608 F.2d 43, 46 (2d Cir.1979).

In the instant case, Hagopian’s interests were adverse to the plaintiff’s, and Everest knew that it was unlikely that Hagopian would tell the plaintiff that the securities were worthless, or that he had accepted a bribe. Thus, even if Hagopian knew that the securities were worthless or overpriced, that knowledge cannot be imputed to the plaintiff.

In sum, the facts alleged by the plaintiff, together with the affidavits and documents presented, are sufficient to support an inference that there may have been a primary violation of the securities laws. In this instance, the question is a factual one and, therefore, must be determined by the trier of fact.

2. Scienter

Scienter is the second element that must be established in order to impose aider and abetter liability or statutory liability. The Court finds that the evidence presented raises factual questions concerning the defendants’ state of mind and the duty owed to the plaintiff. Summary judgment on this issue, therefore, is inappropriate.

The plaintiff claims that the defendants knew or were reckless in failing to know that Everest and Armstrong were engaged in a broad-based fraudulent scheme. The plaintiff also claims that because Cititrust was the trustee for Armstrong, Cititrust owed the plaintiff a fiduciary duty. The defendants deny having knowledge of any fraudulent scheme, and deny having acted recklessly. The defendants also argue that they did not owe the plaintiff a fiduciary duty.

The Supreme Court has not yet determined whether recklessness constitutes scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 n. 12, 96 S.Ct. 1375, 1380-81 n. 12, 47 L.Ed.2d 668 (1976). In considering the scienter requirement for secondary liability, however, the second circuit has held that recklessness does constitute scienter, but only if the defendant owes a fiduciary duty to the plaintiff. See Armstrong v. McAlpin, 699 F.2d at 91; Rolf v. Blyth, Eastman, 570 F.2d at 47. If the defendant is charged with failing to act, the plaintiff must show that the defendant was reckless in failing to carry out his fiduciary duty. Recklessness involves conduct which is highly unreasonable and constitutes an extreme departure from the standards of ordinary care. See Rolf v. Blyth, Eastman, 570 F.2d at 47.

Absent a fiduciary duty, the scienter requirement is scaled upwards. See Edwards & Hanly v. Wells Fargo Securities Clearance Corp., 602 F.2d 478, 484 (2d Cir.1979), cert, denied, 444 U.S. 1045, 100 S.Ct. 734, 62 L.Ed.2d 731 (1980). The plaintiff must show that the defendant had actual knowledge of the primary violation. Id. Where liability is predicated on the defendant’s failure to act, the plaintiff must show that the defendant had “a conscious and specific motivation for not acting____” IIT v. Cornfeld, 619 F.2d at 927. The defendant must have intentionally failed to act in order to facilitate the fraudulent scheme.

In support of its claims, the plaintiff points to Cititrust’s position as Armstrong’s trustee and the fiduciary nature of that role. As trustee, Cititrust agreed to act as transfer agent, registrar and corporate domiciliary for Armstrong. Cititrust was paid $30,000 a year for its services. The plaintiff contends that because Cititrust is a wholly-owned subsidiary of Citibank, both defendants are liable for Cititrust’s alleged breach of fiduciary duty and its failure to supervise Armstrong.

The plaintiff alleges that Cititrust provided all but one of Armstrong’s officers and directors, and that the directors were Cititrust employees. The plaintiff argues that Cititrust not only failed to supervise Armstrong, but also breached its duty to ensure that the directors and officers supervised Armstrong.

The plaintiff further contends that the Investment Management Agreement between Everest and Armstrong explicitly imposed a fiduciary duty on Armstrong’s board of directors, and, therefore, vicariously imposed a fiduciary duty on Cititrust. The agreement provided that all investments made by Everest — on behalf of Armstrong — were subject to the control of Armstrong’s board of directors. The plaintiff alleges that Armstrong’s directors, along with Cititrust, intentionally or recklessly, failed to provide the supervision and control required by the Investment Management Agreement.

The plaintiff claims that, in light of the type of investments being made by Everest, Cititrust must have known or was reckless in not knowing that Everest was manipulating the market. The plaintiff points to Cititrust’s responsibility for reviewing Armstrong’s financial records, and alleges that a large number of the securities purchased by Everest were unlisted or were “junk” securities, and that acquiring such securities violated Armstrong’s internal purchasing goals. In addition, the plaintiff points to a letter written by Cititrust in May 1970 which noted that Armstrong’s portfolio was being “churned over.” The plaintiff claims that the letter shows that Cititrust was aware of Everest’s improper investment activities.

The defendants deny all of the plaintiff’s allegations concerning knowledge, intent and recklessness. They argue that Cititrust’s role as trustee imposed very limited duties — which they contend Cititrust fulfilled — and they argue that neither Cititrust nor Citibank owed the plaintiff a fiduciary duty.

It is clear that more than one inference can be drawn from the evidence presented and there is significant controversy concerning the material facts. Resolution of the issue of scienter in this case, therefore, must be resolved by the trier of fact at trial, rather than by the Court on summary judgment.

3. Aiding and Abetting: Substantial Assistance

Substantial assistance is the third and final element that must be established in order to find a defendant liable under the doctrine of aiding and abetting. The plaintiff must show that the defendant rendered substantial assistance to the principal party in effecting the primary violation. See Rolf v. Blyth, Eastman, 570 F.2d at 4 (The defendant rendered substantial assistance to the primary violator by advising the plaintiff that he had nothing to worry about with respect to his portfolio, thereby effectively preventing the plaintiff from discovering the fraud.).

The question on this motion, of course, is not whether the evidence presented by the plaintiff is conclusory, but whether — drawing all reasonable inferences in favor of the plaintiff — the evidence raises an issue of fact for trial. The Court concludes that it does. Thus, for the reasons previously discussed, and the reasons set forth below, the defendants’ motion for summary judgmerit on the issue of aiding and abetting is denied.

To constitute substantial assistance, a defendant’s action — or inaction — must be a causal factor of the primary violation and the resulting loss by the plaintiff. See Armstrong v. McAlpin, 699 F.2d at 92. In other words, the defendant’s conduct must actually cause the plaintiff’s loss. See Edwards v. Wells Fargo, 602 F.2d at 484. The defendant must have associated himself with the venture and participated in it as something that he wished to make succeed. See IIT v. Cornfeld, 619 F.2d at 922; Klein v. Computer Devices, Inc., 591 F.Supp. 270, 281 (S.D.N.Y.1984).

In the instant case, the plaintiff claims that the defendants gave substantial assistance to Everest in its fraudulent scheme. The plaintiff rests this claim primarily on the allegation that the defendants “permitted and authorized [Everest] to deal in and dispose of the securities and funds of the Armstrong Fund without proper supervision or direction.” See Plaintiff’s Complaint, at 28.

In addition, the plaintiff alleges — although without providing supporting documentation — that between 1969 and 1971 Cititrust or Citibank provided “banking credits” to various parties who had ties to Armstrong. According to the plaintiff, the banking credits amounted to $19.4 million, and were generally uncollateralized. The defendants deny these allegations, and claim that the named parties simply had commercial checking accounts. Citibank admits to having made certain loans to Galanis, one of Everest’s officers.

Moreover, in July 1970, Cititrust transferred an overdraft of $400,000 from the Bahamas to Armstrong’s Citibank account in New York. Everest promptly withdrew the money. The defendants claim that this overdraft was a clerical error, but the plaintiff argues that it was done intentionally or at least recklessly.

The plaintiff also asserts that Cititrust was responsible for determining Armstrong’s net asset value, based on a monthly review of Armstrong’s books and records. After reviewing the records, Cititrust issued monthly valuation reports stating Armstrong’s net asset value. The plaintiff claims that all of the reports issued by Cititrust were false, and that Cititrust knew, or was reckless in not knowing, that the reports were false.

In denying the defendant’s motion for summary judgment, the Court expresses no view on the ultimate viability of the plaintiff’s claims. Although the odds against recovery may be great, the plaintiff is entitled to have the trier of fact decide the material issues of fact that exist.

4. Controlling Persons Doctrine: Control

The plaintiff claims that Cititrust and Citibank are controlling persons under Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t, and Section 15 of the Securities Act, 15 U.S.C. § 77o. The Court finds that summary judgment on the question of control is inappropriate.

Section 20(a) provides in pertinent part:

(a) Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

Section 15 of the Securities Act is substantially the same.

As previously indicated, three elements must be proved in order to establish statutory liability: (1) a primary violation, (2) scienter, and (3) control of the primary violator by the defendant. The first two elements have been discussed above, which leaves only the element of control to be considered.

Congress enacted the control provisions in order to impose liability on parties “who are in some meaningful sense culpable participants in the fraud perpetrated by controlled persons.” Lanza v. Drexel, 479 F.2d at 1299. Congress wanted to ensure that a guilty party could not hide behind another person who was in reality being controlled. Congress did not want a controlling party to be able to benefit from another person’s fraudulent conduct, while at the same time being insulated from liability. The standard for determining control is provided by Regulation:

The term “control” ... means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

17 C.F.R. § 230.405 (1984).

The plaintiff alleges that, as trustee, Cititrust had the power to influence and control the policies and activities of both Armstrong and Everest. The plaintiff also asserts that Citibank controlled Armstrong through stock ownership. The plaintiff alleges that Citibank owned a company called Securities Management Co., Ltd., which owned all of the voting shares of the Chase Selection Fund, Ltd. (“Chase”); according to the plaintiff, Chase owned 42% of Armstrong. Based on this chain of stock ownership, the plaintiff claims that Citibank controlled Armstrong.

There is disagreement, however, over what stock is in fact owned or controlled by whom. The defendants deny, for example, that Citibank controls Chase, arguing that Citibank has no equity position in Chase. These are questions of fact, however, and must-therefore be resolved at trial.

Because conflicting inferences can be drawn from the information presented, it must be left to the trier of fact to determine whether or not the defendants had the power to control- Armstrong and were culpable participants in the alleged fraud.

D. Pendant Claims

The plaintiff claims that the defendants are liable — for the acts committed by Everest and Armstrong — under the common law theory of fraud, and under the doctrine of respondeat superior. The defendants’ motion for summary judgment on both causes of action is denied, since the allegations previously recited indicate that there are genuine issues of fact to be resolved concerning the defendants’ conduct, state of mind, and duty.

E. Plaintiffs Cross-Motion for .Summary Judgment

In response to the defendants’ motion for summary judgment, the plaintiff has cross-moved for summary judgment. As previously indicated, summary judgment is not appropriate where material facts are in issue and the evidence is such that conflicting inferences can be drawn. Summary judgment should be granted only if the record makes it clear that the adverse party cannot prevail on the record presented. See Phoenix Savings v. Aetna, 381 F.2d at 249.

That is not the situation here. There is sharp disagreement concerning the inferences to be drawn from the facts and circumstances set forth in the pleadings, affidavits and supporting documents. Although the plaintiff’s claims concerning secondary liability are sufficient to withstand the defendants’ motion for summary judgment, it is far from clear that the plaintiff .can actually prevail on those claims. Accordingly, the plaintiff’s cross-motion for summary judgment is denied.

CONCLUSION

The plaintiff’s motion for leave to amend the complaint to assert claims concerning secondary liability is granted. The defendants’ motion for summary judgment is denied insofar as it .pertains to secondary liability, and is granted in all other respects. The plaintiff’s cross-motion for summary judgment is denied.

So ordered.

      . Specifically, the complaint alleges liability under Sections 17(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a) (1982); Sections 10 and 15 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j, 78o (1982); Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1984); Sections 17(e)(1) and 36 of the Investment Company Act ("Investment Company Act”), 15 U.S.C. §§ 80a-17(e)(1), 80a-35 (1982); Section 206 of the Investment Advisers Act ("Investment Advisers Act”), 15 U.S.C. § 80b-6 (1982); and the common law.
      In addition, the plaintiff has made a motion for leave to amend the complaint to allege liability under Sections 12(2) and 15 of the Securities Act, 15 U.S.C. §§ 77l 77o (1982); and Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t (1982).

      . Armstrong, which was comprised of Armstrong Capital, S.A. and Armstrong Investors, S.A., invested in United States securities on behalf of foreign investors. Armstrong Capital, S.A. served as the conduit for investments in the United States. The Armstrong Fund was formed in 1969.

      . As investment adviser to Armstrong, Everest managed, and had complete control of Armstrong’s investment portfolio. The key figures at Everest were John Peter Galanis ("Galanis”) and Akiyoshi Yantada ("Yantada”). Both were officers of Everest and had been the principal promoters of Armstrong.

      . Hagopian was the president of Index Fund at the time, and he was the president and chairman of the plaintiffs investment adviser. Meridian Management Corporation.

      . Accordingly, the plaintiff may file an amended complaint within 30 days of the date of this Opinion. The defendants may file an amended answer within 30 days after the filing of the amended complaint.
      The plaintiff may amend the complaint to allege that Cititrust and Citibank are secondarily liable under Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b) (1982) and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1984); Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t (1982); Sections 12(2), 15 and 17(a) of the Securities Act, 15 U.S.C. §§ 77l, 77o, 77q (1982); and under the common law. See Plaintiffs Notice of Cross-Motion, dated July 14, 1983, at 1.

      . The defendants moved for judgment on the pleadings with respect to all causes of action asserted by the plaintiff in the complaint, except for the plaintiff's cause of action for common law fraud.

        The defendants also moved for summary judgment on all of the plaintiff's claims, except for the three claims that concern the Investment Advisers Act and the Investment Company Act. On those three claims, the defendants moved only for judgment on the pleadings. As discussed hereinafter, however, the plaintiff has no standing to bring an action against Cititrust or Citibank under either the Investment Company Act or the Investment Advisers Act. Therefore, it does not matter whether the motion to dismiss those three claims is treated as a motion for summary judgment or a motion for judgment on the pleadings; those claims must be dismissed as a matter of law under either Rule 12 or Rule 56.

      . See infra note 1.

      . It should be noted that in the complaint the plaintiff asserted claims against all of the defendants named in the action. Allegations concerning primary liability were not specifically or solely asserted against Cititrust and Citibank.

      . Here again, the plaintiff has simply alleged in its complaint that "the defendants” are liable under § 36. The plaintiff did not specify which of the named defendants it is seeking to hold liable under this section. In terms of the current motion, the plaintiff did not specifically argue its claims under the Investment Company Act against Cititrust or Citibank.

      . See Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t (1982) ("Section 20(a)”), and Section 15 of the Securities Act, 15 U.S.C. § 77o (1982) ("Section 15”).

      . Even if the plaintiff is able to prove that the defendants failed to provide adequate supervision, it may ultimately be determined at trial that the defendants’ failure to supervise constituted negligence, but did not constitute reckless or intentional conduct, which, of course, is necessary to satisfy the scienter requirement. See Marbury Management v. Kohn, 629 F.2d at 710-11 (The court held that the defendants had not acted intentionally or recklessly even though the circumstances indicated that there had been inadequate supervision and lax control by the defendants.); see also Armstrong v. McAlpin, 699 F.2d at 91 (The court noted that “[i]naction on the part of the alleged aider and abetter ordinarily should not be treated as substantial assistance, except when it was designed intentionally to aid the primary fraud or it was in conscious or reckless violation of a duty to act.”).
      Since, however, it cannot be said as a matter of law that the defendants did not act intentionally or recklessly, resolution of the issue must be reserved for the trier of fact.

      . Section 15 provides:
      Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77/ of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.

      . The plaintiff may assert claims under both Section 20(a) and the doctrine of respondeat superior. The second circuit has held that Section 20(a) was not intended to supplant the doctrine of respondeat superior. See Marbury Management v. Kohn, 629 F.2d at 712-16.


author: FISH, District Judge.

text:
    George Gary YOUNG and Joyce Marion Young, wife, Plaintiffs, v. UNITED STATES of America and the Internal Revenue Service by and Through its Commissioner, Defendants.
    Civ. A. No. CA 3-83-0843-G.
    United States District Court, N.D. Texas, Dallas Division.
    Feb. 11, 1985.

      Mark H. How and Michael Keeley, Rhode, Chapman, Ford & How, Dallas, Tex., for plaintiffs.
    William W. Guild and Joe A. Pitzinger, III, Tax Div., Dept, of Justice, Dallas, Tex., for defendants.
   MEMORANDUM ORDER

FISH, District Judge.

This tax refund suit is before the court on cross-motions for summary judgment. After considering the record in this case, the court is of the opinion that the government’s motion for partial summary judgment should be granted in part and denied in part but that the plaintiffs’ cross-motion should be denied in its entirety.

I. Legal Standard

Under Rule 56, Fed.R.Civ.P., summary judgment is appropriate only when the pleadings, depositions, affidavits, answers to interrogatories, and exhibits establish that there is no genuine issue as to any material fact, and that the movant is entitled to a judgment as a matter of law. In determining whether to grant a motion for summary judgment, the court must view the evidence in the light most favorable to the opposing party. Howard v. United States, 711 F.2d 729, 733 (5th Cir.1983).

II. Undisputed Facts

The parties are not in dispute over the relevant facts. G.G. Young Construction Company, Inc. (“the corporation”) was incorporated in 1976. At all times material here, George Gary Young (“G.G. Young”) and Joyce Marion Young (“J.M. Young”) owned all but a small percentage of the corporation’s stock. G.G. Young was the president of the corporation, and prior to his stroke on July 14, 1978, conducted almost all of its affairs. As a result of his stroke, G.G. Young was unable to participate in the management of the corporation for the remainder of 1978.

J.M. Young was vice president and secretary of the corporation. Between 1976 and 1979, Anita Davis (“Davis”) was a part-time bookkeeper and office manager of the corporation. Davis determined which obligations were to be paid, determined the date of payment (generally subject to G.G. Young’s approval), and prepared the checks for payment of those obligations. G.G. Young and J.M. Young were the only authorized signatories on the corporation’s bank accounts.

J.M. Young maintained a full-time position with Texas Oil and Gas Company prior to and during all of 1979. J.M. Young also worked part-time as needed for the corporation, performing duties such as signing documents on behalf of the corporation. After G.G. Young’s stroke, J.M. Young signed all corporate checks and documents, including the Employer’s Quarterly Federal Tax Return Forms 941, from the second quarter of 1978 through the second quarter of 1979.

The corporation failed to pay the federal employment taxes withheld from its employees’ wages for all four quarters of 1979, except for $167.76 and $198.78 paid personally by G.G. Young and by J.M. Young, respectively, on behalf of two corporate employees. On November 20, 1979, an internal revenue officer contacted G.G. Young and discussed with him the corporation’s failure to pay over to the government these delinquent employment taxes.

The corporation ceased doing business in December, 1979. On or about December 29, 1981, the Secretary of the Treasury (or his duly authorized .delegate), acting under authority of 26 U.S.C. § 6672, assessed against each of the Youngs 100% of the employment taxes owed by the corporation (“100% penalty”). This assessment has remained unpaid despite proper notice and demand for its payment.

Subsequent to the assessment, the attorney for the Youngs informed the government that funds were available to satisfy a portion of the corporation’s tax liability because the City of Cedar Hill, Texas owed the corporation for construction work the corporation had previously performed. The government made demand on Cedar Hill for payment, gave it notice of assessment, and thereafter levied for the funds. Cedar Hill interplead the monies into the registry of a state district court. After removing the suit to federal court, however, the government notified the Youngs’ attorney that the government intended to disclaim any rights it might have to the interplead fund, which it did subsequently by filing a notice of disclaimer with the court.

On July 2, 1981, the Youngs, through their counsel, sent a letter to the Justice Department stating that if the government disclaimed its rights to the interplead fund, they would take the position that such acts constituted a waiver or estoppel of the government’s right to claim said monies from them. The attorney for the Youngs repeated this position in subsequent oral conversations with government representatives.

On March 27, 1982, G.G. Young and J.M. Young each filed a Form 843 Claim for refund of the sums they had paid ($167.76 and $198.78, respectively) as employment taxes on behalf of two employees of the corporation. Each claim asserted as the sole ground for refund that the 100% penalty assessed against the claimant under 26 U.S.C. § 6672 was wrongfully assessed because “[t]he willfulness required for the imposition of the penalty was not present.”

The Internal Revenue Service (“IRS”) refused to refund these amounts. Consequently, the Youngs instituted this action in order to recover the refund claimed and to obtain declaratory relief excusing them from liability for the corporation’s 1979 employment tax obligation. In addition to having raised several defenses, the government has filed a counterclaim for recovery of the corporation’s tax liability from the Youngs personally.

III. The Jurisdictional Issue

With respect to the Youngs’ claim for a refund of amounts paid by each of them for federal employment taxes on behalf of the corporation’s employees, the government contends that the court is without jurisdiction to adjudicate these claims because the Youngs failed to file proper refund claims with the IRS.

In order to maintain a tax refund suit in federal court, the taxpayer first must have filed a proper refund claim with the Internal Revenue Service. 26 U.S.C. § 7422(a) (“Section 7422(a)”) ; Furst v. United States, 678 F.2d 147, 151, 230 Ct.Cl. 375, 379 (1982). A claim is not a proper refund claim unless it sets forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis for the claim. Fearis v. Commissioner of Internal Revenue, 548 F.Supp. 408, 409 (N.D. Tex.1982). An informal notice expressing the basis for the taxpayer’s claim is sufficient so long as the notice is reduced to a writing. Furst, 678 F.2d at 151, 230 Ct.Cl. at 379; Disabled American Veterans v. United States, 650 F.2d 1178, 1180, 227 Ct.Cl. 474, 477 (1981), affd, 704 F.2d 1570 (Fed.Cir.1983).

In determining whether a proper refund claim has been filed, the court must consider all the surrounding facts and circumstances. Furst, 678 F.2d at 151, 230 Ct.Cl. at 379. The burden rests upon the taxpayer, however, to show that the information constituting the basis for the claim was communicated to the IRS. Disabled American Veterans, 650 F.2d at 1179, 227 Ct.Cl. at 475.

The first component of the Youngs’ refund claim consisted of the Form 843’s filed by each of them on March 27, 1982, through which they claimed that they lacked the “willfulness” required for the IRS to impose the 100% penalty upon them. No other basis for a refund was stated. Subsequently, the Youngs’ attorney wrote a letter addressed to the Justice Department informing the agency that should the government disclaim any right to the inter-plead fund, the Youngs would consider such act as a waiver or an estoppel of the government’s right to collect from them that portion of the tax liability which could have been satisfied from the fund. Thereafter, the Youngs’ attorney had several oral conversations with government agents wherein he reiterated the Youngs’ position as asserted in his letter.

The claim forms submitted by the Youngs do not constitute proper refund claims since they do not apprise the IRS of the Young’s position concerning waiver or estoppel as a basis for a refund. Moreover, oral claims expressed to IRS agents fail to satisfy the statutory requirements. Disabled American Veterans, 650 F.2d at 1180, 227 Ct.Cl. at 477. The only remaining component of the Youngs’ refund claims consists of their attorney’s letter. The letter, however, was addressed to the Justice Department. Notice to the Justice Department does not necessarily constitute notice to the IRS as required by Section 7422(a) and Treasury Regulation § 301.-6402-2(b)(l). The claim information must be communicated to the IRS, and the burden in that regard rests on the taxpayer. Furst, 678 at 153, 230 Ct.Cl. at 383; Disabled American Veterans, 650 F.2d at 1179, 227 Ct.Cl. at 475.

Since the Youngs have not established that such information was communicated to the IRS, they have not fulfilled their burden of showing that a proper claim for refund was communicated to the IRS. Consequently, this court lacks jurisdiction to adjudicate the controversy over these two refund claims.

IY. The Youngs’ Liability Under 26 U.S.C. § 6672

A. Waiver and Estoppel

Various issues are raised by the parties concerning the government’s counterclaim against the Youngs under- 26 U.S.C. § 6672(a) (“Section 6672(a)”). To begin with, the Youngs contend that the government waived its right to a portion of the taxes at issue or, alternatively, is estopped from proceeding against the Youngs in the amount of the interplead fund because, after levying on the fund, the government disclaimed any rights it may have had in the fund.

This argument is without merit. The liability under Section 6672(a) of a person responsible for collecting and paying over federal employment taxes (“responsible person”) is independent of the corporation’s obligation to pay over the employee withholdings to the government. Hornsby v. I.R.S., 588 F.2d 952, 954 (5th Cir.1979). Thus, the IRS need not first attempt to collect the tax from the corporation or its creditors, or join other responsible persons, prior to seeking recovery from one particular responsible person. Howard v. United States, 711 F.2d 729, 736 (5th Cir.1983); Hornsby, 588 F.2d at 954; see Newsome v. United States, 431 F.2d 742, 746 (5th Cir.1970).

In fact, the manner in which the IRS seeks to resolve a tax deficiency is legally irrelevant to the issue of a responsible person’s liability, absent an abuse of discretion. Howard, 711 F.2d at 736; Hornsby, 588 F.2d at 954. The courts have generally found an abuse of discretion where it was the government’s active conduct with respect to the corporation that led to the government’s inability to collect the taxes. Compare McCarty v. United States, 437 F.2d 961, 194 Ct.Cl. 42 (1971) (IRS abused its discretion in failing to collect taxes from corporation prior to its takeover by the Navy, where corporation had sufficient assets to pay taxes prior to takeover arid Navy failed to pay over the taxes in accordance with agreement between government and corporation) and Tozier v. United States, 65-2 U.S.T.C. (W.D.Wash.1965) (responsible persons held not personally liable where government acquiesced in corporation’s continued operation although corporation then had sufficient assets to cover taxes had government agreed to corporation’s liquidation as suggested by responsible persons) with Howard, 711 F.2d at 736 (IRS did not abuse its discretion by seeking recovery of tax deficiency against responsible person even though IRS had made no attempt to collect tax deficiency until over two years after that same responsible person,had notified IRS of corporation’s failure to pay over employment taxes) and Hornsby, 588 F.2d at 954 (IRS did not abuse its discretion where it merely failed to seek recovery of corporate tax deficiency from corporation or other responsible persons prior to or simultaneously with IRS’s attempt to collect taxes from defendant as a responsible person).

On the basis of these authorities, the court finds no abuse of discretion by the government in disclaiming whatever rights it may have had to the interplead fund in favor of seeking relief against the Youngs personally. Therefore, the Youngs’ theories of waiver or estoppel are not applicable to release them from personal liability for the employment taxes due the government in this case.

B. Willfulness and Responsible Persons

The Youngs next contend that, even if the government did not waive its rights to claim a portion of the taxes from the Youngs, neither one of them is liable under Section 6672(a). In this connection, there are two prerequisites to liability under Section 6672: (1) the defendant must be a responsible person under the section; and (2) the defendant’s failure to collect, account for and pay the taxes must have been willful and without reasonable cause. Howard, 711 F.2d at 733; Newsome, 431 F.2d at 745-47.

The courts have broadly construed the meaning of the term “responsible person.” Howard, 711 F.2d at 734. Responsibility for employment taxes is a matter of status, duty, and authority, not merely a matter of knowledge concerning the existence of a corporate tax liability, Id.; Mazo v. United States, 591 F.2d 1151, 1156 (5th Cir.), cert, denied sub nom. Lattimore v. United States, 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979), although merely holding a corporate office is not enough to make the officer a responsible person. Liddon v. United States, 448 F.2d 509, 512 (5th Cir.1971), cert, denied, 406 U.S. 918, 92 S.Ct. 1769, 32 L.Ed.2d 117 (1972).

“Authority” refers to effective authority to pay the taxes. Howard, 711 F.2d- at 734. In other words, a court must determine whether the defendant was a person who could have seen to it that the taxes were paid, i.e., a person with the ultimate authority over which corporate obligations were paid who can fairly be considered responsible for the corporation’s failure to pay its taxes. Liddon, 448 F.2d at 512-13 (citing Annot., 22 A.L.R.3d 8, 50). The fact that more than one person can fairly be considered responsible is no defense. Howard, 711 F.2d at 735.

Viewing the facts here in the light most favorable to the Youngs, a serious question arises as to whether G.G. Young was a responsible person in 1979. The dégree to which his illness affected his ability to understand and participate in the affairs of the corporation during 1979 is a factor which this court is unable to resolve on the basis of the summary judgment evidence. The reason for G.G. Young’s presence at the corporate offices throughout 1979 is also unclear. Moreover, although G.G. Young may have signed some documents during that year, including a loan guarantee, in his capacity as corporate president, the court notes that he signed only by making an “X” rather than by actually signing his name.

In contrast, the court concludes that the broad judicial construction given to the term “responsible person” would include one in J.M. Young’s position in 1979. J.M. Young was an officer of the corporation with authority to sign checks on behalf of the corporation. During 1979, J.M. Young signed almost all of the checks against the corporation bank accounts and additionally signed the Form 843’s for the first two quarters of 1979; thus, she was at least aware of a corporate liability for employment taxes. Since J.M. Young had check-signing authority and knew of the tax liability, she could have verified that the employment taxes had been paid regardless of the fact that Davis, the bookkeeper, usually decided which obligations were to be paid and the dates of such payments. Thus, J.M. Young was a “responsible person” in 1979.

Once a defendant is found to be a responsible person, the burden is on the defendant to prove that the failure to remit the taxes was not willful. Mazo, 591 F.2d at 1155; Hornsby, 588 F.2d at 953. The issue of willfulness under Section 6672 is directed towards the defendant’s state of mind and is necessarily a subjective question which, if sufficiently controverted, would preclude summary judgment. Mazo, 591 F.2d at 1157.

“Willfulness” in the context of Section 6672 means voluntary, conscious or intentional, and without reasonable cause. Howard, 711 F.2d at 736; Newsome, 431 F.2d at 746. The willfulness requirement is also satisfied if the responsible person acts with reckless disregard of a known or obvious risk that the taxes may not have been paid, such as by failing to investigate or correct mismanagement after receiving notice that the taxes were not paid. Mazo, 591 F.2d at 1154. Conduct amounting to no more than mere negligence, on the other hand, is insufficient to create personal liability under Section 6672. Kalb v. United States, 505 F.2d 506, 511 (2d Cir.1974), cert, denied, 421 U.S. 979, 95 S.Ct. 1981, 44 L.Ed.2d 471 (1975).

In this case, the government has acknowledged that even if G.G. Young was a responsible person during 1979, he did not know before November 20, 1979 that the tax liability was due and owing. Due to the court’s conclusion that summary judgment is inappropriate on the issue of G.G. Young’s status as a responsible person, the court also reserves any decision on the issue of his willfulness, if any, until the time of trial.

Furthermore, J.M. Young has presented sufficient facts to raise an issue as to her state of mind with respect to the corporation’s failure to remit the employment taxes. Thus, the court concludes that summary judgment is inappropriate as to the issue of J.M. Youngs’ willfulness in this matter.

V. Miscellaneous Legal Issues

With respect to the following miscellaneous issues raised in the government’s motion, the court concludes as follows:

1. Under the provisions of 26 U.S.C. § 7422(f)(1), the Commissioner should be dismissed as a party because the United States is the only proper defendant in a tax refund suit;

2. This court lacks jurisdiction under 28 U.S.C. § 2201 to award the declaratory relief sought by the Youngs in paragraphs C and D of their prayer; and

3. The federal income tax and F.I.C.A. taxes withheld by an employer are held in trust by the employer for the benefit of the United States. 26 U.S.C. § 7501(a); Howard, 711 F.2d at 733.

VI. Conclusion

In conclusion, the Youngs’ motion for summary judgment is DENIED in its entirety. The government’s motion for partial summary judgment is GRANTED except with respect to the following issues:

(1) whether G.G. Young was a responsible person under Section 6672 during all four quarters of 1979;

(2) whether G.G. Young willfully failed to collect, account for and pay over the employment taxes for the fourth quarter of 1979; and

(3) whether J.M. Young willfully failed to collect, account for and pay over the employment taxes for 1979.

SO ORDERED.

      . 26 U.S.C. § 7422(a) provides that:
      No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary or his delegate, according to the provisions of law in that regard, and the regulations ... established in pursuance thereof.

      . Treasury Regulations on Procedure and Administration § 301.6402-2(b)(l), promulgated pursuant to Section 7422(a), provides in part that:
      No refund or credit will be allowed ... except upon one or more of the grounds set forth in a claim ____ The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof____ A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.

      . Although plaintiffs’ complaint, naming the IRS as a defendant, raised the issue of estoppel or waiver as a ground for a refund, the complaint itself does not constitute a satisfactory refund claim. See Disabled American Veterans, 650 F.2d at 1179, 227 Ct.Cl. at 475.

      . 26 U.S.C. § 6672(a) provides in pertinent part that:
      Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax ... shall ... be liable to a penalty equal to the total amount of the tax ... not collected, or not accounted for and paid over.

      . 26 U.S.C. § 6671(b) defines a "person,” for purposes of Section 6672(a), to include “an officer or employee of a corporation ... who as such officer [or] employee ... is under a duty to perform the act in respect of which the violation occurs."