Author: LegalEase Solutions 

Introduction

You have asked us to research, identify and summarize the key cases on the issue of what might be held to constitute reasonable reliance on representations made in a private placement memorandum offering interests in a fund.  These issues require discussion of:

1. New York, New Jersey, Delaware state and federal case law.

Relevant Cases

NEW YORK

1. First Lincoln Holdings, Inc. v. The Equitable Life Assurance Society of The United States, 43 Fed. Appx. 462

 Plaintiff corporation alleged breach of contract, common law fraud, and violations of the federal securities law, due to defendant society’s decision to terminate its ability to execute trades by telephone, fax, or other electronic means on its account. The United States District Court for the Southern District of New York denied the corporation’s preliminary injunction motion and granted the society’s motion to dismiss. The corporation appealed.

The corporation claimed that by restricting its trading, the society effectively prevented it from engaging in its preferred investment strategy, a form of arbitrage known as market timing. The instant court agreed with the district court that the annuity fund contract unambiguously granted the society the right to determine the terms on which investors in the fund could have traded on their accounts. Nor could the corporation have relied on its contention that the society’s agents assured it that it could have engaged in market timing or on indications of its intent to do so in its application materials. The fund application clearly stated that no agent had the authority to make or modify any contract, or to waive or alter any of the society’s rights and regulations. Furthermore, the prospectus made abundantly clear that market timing was forbidden. The corporation could not have relied on parol evidence to vary the express terms of the written contract. The fraud claims were properly dismissed because a sophisticated investor could not have reasonably relied on the alleged fraudulent representation of the society’s agents directly contradicted by the society’s documents.

The Court agreed with the district Court in that the plaintiff’s fraud claims were properly dismissed, because a sophisticated investor could not have reasonably relied on the alleged fraudulent representation of Equitable agents directly contradicted by Equitable’s documents.

The Court also noted the general rule that reasonable reliance must be proved as an element of a securities fraud claim. Id at 464.

2. Opher Pail v Precise Imports Corporation, 1999 U.S. Dist. LEXIS 13401

Plaintiff employee sued defendants employers who induced him to spend his own time inventing products for the defendant, in exchange for stock in an acquisition company. No shares were ever issued, and the acquisition company was dissolved. Plaintiff alleged common law fraud and securities law fraud under the Securities and Exchange Act, rule 10b-5, 15 U.S.C.S. § 78j(b). Defendants moved for dismissal, claiming plaintiff did not plead reasonable reliance, did not plead with sufficient particularity for fraud, and did not allege misrepresentations. The court denied the motion, finding that plaintiff plead reasonable reliance as an employee who relied upon the representations of his employer, so no heightened standard of diligence was applied. Plaintiff also pled with particularity, fraudulent statements made by defendant as to the stock exchange. Finally, plaintiff alleged misrepresentation of the value of the stock, which induced him to continue inventing products in exchange for it. Defendants’ motion to dismiss plaintiff’s claims was denied. Plaintiff pled common law and securities fraud with sufficient particularity for claims to survive motion to dismiss, pled reasonable reliance as to stock representations, and sufficiently claimed misrepresentation which induced him to purchase stock by inventing products for defendants.

The Court held that Reasonable reliance is an element of both common law fraud under New York law and securities fraud.

3. Igor Azrielli v. Zamaryonov, 21 F.3d 512

Plaintiff purchasers challenged the district court’s judgment inasmuch as it dismissed plaintiff’s complaint asserting claims of securities fraud in violation of 15 U.S.C.S. §  78j(b) and 17 C.F.R. §  240.10b-5 (1993) promulgated thereunder, claims of violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. § §  1961-1968, and various claims under state law. The court affirmed in part and vacated in part. The court held that evidence in the record revealed genuine issues of material fact with respect to plaintiffs’ claims against defendant attorney, other than the RICO claims against defendant attorney, and with respect to their federal claims against other defendants such as an adequate showing that the claimed misrepresentations were material and in connection with the purchase of the shares by plaintiffs and that a pattern of such misrepresentations could have been found by a jury, making summary judgment inappropriate. The court vacated so much of the judgment as dismissed plaintiffs’ federal claims, other than the RICO claims against defendant attorney, dismissal of which it affirmed and reinstated the state law claims.

The Court observed that the fundamental purpose of the Securities Exchange Act 1934, 15 U.S.C.S. § §  77b-78kk (1988) is to implement a philosophy of full disclosure, in order to make sure that buyers of securities get what they think they are getting. 17 C.F.R. § 240.10b-5(1993) thus makes unlawful any misrepresentation that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation’s securities. Liability under rule 10b-5 may be imposed not only on persons who made fraudulent misrepresentations but also on those who had knowledge of the fraud and assisted in its perpetration. Id at 518

A fact is to be considered material if there is a substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares. A fraud claim may not properly be dismissed summarily on the ground that the alleged misstatements were not material unless they would have been so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance. Representations tending to indicate that the valuation of the shares to be purchased has been inflated may obviously be material. Id at 519

4. Harsco Corporation v. Rene Segui, 91 F.3d 337

The parties executed a purchase agreement for appellees’ company. In the agreement, appellees made express representations and appellant expressly waived reliance on outside representations. Appellant later sued appellees for federal securities fraud, under 17 C.F.R. §  240.10b-5, common law fraud, breach of contract, and other related allegations. The court dismissed appellant’s complaint under Fed. R. Civ. P. 12(b)(6). The appellate court held that since appellant specifically disclaimed reliance on representations made outside of the contract and the parties were sophisticated business entities, appellant could not claim reasonable reliance on appellees’ outside representations. Therefore, it affirmed the dismissal of the common law and federal securities fraud claims, pursuant to Fed. R. Civ. P. 12(b)(6). Because the federal claims were dismissed, the court held that state law claims were properly dismissed because supplemental jurisdiction could no longer be exercised, but noted that state claims could be brought in state court.

The Court held that Reasonable reliance must be proven as an element of a securities fraud claim. Rule 10b-5 makes unlawful any misrepresentation that would cause reasonable investors to rely thereon. Id at 344.

5. Adler v. Berg Harmon Assoc., 790 F. Supp. 1222

Defendant securities promoter filed a motion to dismiss plaintiff investors’ second amended complaint pursuant to Fed. R. Civ. P. 9(b), 12(b)(6). The investors’ complaint sought damages pursuant to the Racketeering and Corrupt Organizations Act (RICO), 18 U.S.C.S. § 1961 et seq, for fraud, negligence, and breach of fiduciary duty in connection with the sale of securities related to real estate limited partnerships.

The investors had purchased real estate limited partnerships based upon memorandums that were generated by the securities promoter. The investors claimed that the promoter was engaged in fraud in selling the partnerships through a complicated scheme of financing, mortgages, excessive fees and fees for non-existent services. The promoter filed a motion to dismiss the investors’ second amended complaint, which was granted by the court. The court held that 1) under Fed. R. Civ. P. 9(b), the investors had failed to sufficiently attribute the alleged wrongdoings to the promoters because of the broad allegations that had combined the acts of several promoters to create the impression that all of them had engaged in the fraud; 2) the investors had not alleged the necessary elements of a claim under 18 U.S.C.S. § 1962(a), having only alleged injury that resulted from the racketeering acts, as opposed to injury by reason of the use or investment of racketeering income; and 3) the investors had failed to allege that each of the promoters had acted with a fraudulent intent. The court dismissed the investors’ second amended complaint without prejudice.

The Private Placement Memorandums in the instant action were replete with warnings of the speculative nature of the investments and the risk that any investment may result in a loss.  The Court held that although plaintiffs argue that they were misled into believing that the respective projects could operate profitably, such an argument is untenable. One glance at the financial projections in the offering memoranda before the Court indicates that tax deductions, rather than profits, were the immediate benefit to be expected by an investor — the immediate prospects for the partnerships were for substantial losses. Although investors may have hoped for additional benefits from the ultimate sale or refinancing of the property, none was promised in the PPMs, which virtually abound with warnings of the risks and imponderables. Accordingly, the allegations in the Complaint suggesting that defendants misrepresented the extent of the economic benefits that would flow to the limited partners from an investment in the partnership and the allegations respecting the misleading nature of the financial projections and risk estimates must fail. Id at 1232

6. Luce v. Edelstein, 802 F.2d 49

Plaintiffs appealed the dismissal, without leave to amend, of their complaint alleging defendants’ violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), by the United States District Court for the Southern District of New York. Plaintiff limited partners sued defendant general partners, alleging defendants had violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), in the sale of partnership interests. The district court dismissed the complaint, finding fraud had not been pled with particularity as required by Fed. R. Civ. P. 9(b), and leave to amend was denied. The court reversed, finding several allegations were sufficiently based on specific facts. For example, defendants allegedly represented they would make capital contributions to the partnership in the amount of $ 385,000 when only $ 80,000 was actually contributed. In addition, the renovation of properties undertaken by the partnership had cost nearly $ 6 million more than plaintiffs had been led to believe, with the renovations still incomplete. These allegations also sufficiently stated Section 10(b) violations, and it was an abuse of discretion to dismiss the complaint without leave to amend. Dismissal of complaint alleging violation of the Securities and Exchange Act of 1934 was reversed. The court found that several allegations were sufficiently based on specific facts as required to plead fraud with particularity, and that the allegations also sufficiently stated claims under the Act.

Reference to the Offering Memorandum satisfies 9(b)’s requirements as to identification of the time, place, and content of the alleged misrepresentations. See, e.g., Klein v. Computer Devices, Inc., 591 F. Supp. 270, 279 (S.D.N.Y. 1984); Somerville v. Major Exploration, Inc., 576 F. Supp. 902, 911 (S.D.N.Y. 1983). Furthermore, no specific connection between fraudulent representations in the Offering Memorandum and particular defendants is necessary where, as here, defendants are insiders or affiliates participating in the offer of the securities in question. See, e.g., Somerville, 576 F. Supp. at 911; Pellman v. Cinerama, Inc., 503 F. Supp. 107, 111 (S.D.N.Y. 1980).

Many allegations grounded in the Offering Memorandum are based on specific facts. For example, plaintiffs assert that although the Offering Memorandum represented that the general partners would make capital contributions to the partnership of $385,000, the general partners actually contributed only approximately $80,000. Plaintiffs also claim that the  Offering memorandum falsely represented that the cost of the renovation would be $4.5 million, when in fact liabilities for the still incomplete project already exceed $10.2 million. Thus, some claims grounded in the Offering Memorandum are sufficiently pleaded to pass muster under Rule 9(b).

Those representations involved specific promises by the general partners to perform particular acts that they did not intend to carry out or knew could not be carried out. Id at 56
An examination of the complaint reveals some claims that fall within this category. Plaintiffs allege that the Offering Memorandum represented the following: that the general partners would make an initial capital contribution of $385,000 and guarantee the $4.5 million construction loan, that at least one of the general partners had maintained and would continue to maintain its net worth at a level sufficient to ensure the partnership’s profitability, n3 that the general partners would collect management fees from the partnership for only one year, and that no assignment or transfer of the general partners’ interest in the partnership could occur without notice to and consent of the limited partners. Plaintiffs also allege that these promises were not kept: the general partners contributed only approximately $80,000 and did not guarantee the loan; the general partners did not have and never had the net worth necessary to participate in the limited partnership; the general partners continued to collect management fees for well over one year; and the general partners entered into an agreement to transfer their partnership interests to F.M. Capital without the knowledge and consent of the limited partners. While the failure to carry out a promise made as consideration for a sale of securities may be an element of a Section 10(b) claim, that failure does not constitute fraud if the promise was made with a good faith expectation that it would be carried out. Cf. Ernst & Ernst, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375. However, in the instant case, plaintiffs also allege that these promises were known by defendants to be false when made. Plausible allegations that defendants made specific promises to induce a securities transaction while secretly intending not to carry them out or knowing they could not be carried out, and that they were not carried out, are sufficient under Pross to state a claim for relief under Section 10(b). Id at 57

7. Friedman v. Arizona World Nurseries Ltd. Partnership, 730 F. Supp. 521  

Defendants, limited partnership, accountants, attorneys, former owners and/or managers of partnership (owners), promoters, and individual corporation, filed motions to dismiss plaintiff investors’ consolidated complaint for violations of federal securities laws and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. § 1961 et seq., and claims of fraud, negligence, conspiracy, and breach of fiduciary responsibility. Investors in limited partnership sought relief arising out of the “scheme” to sell an unsuccessful business to limited partnership. The motions to dismiss were filed under Fed. R. Civ. P. 9(b), 12(b)(6), and the court held that (1) investors did not adequately plead scienter under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b) or show attributable statements, as to accountants and attorneys, regarding the tax opinion and offering memorandum that they drafted. (2) The § 10(b) claims against individual corporation were inadequate. (3) The § 10(b) claims were adequately pled against owners and promoters because they were insiders, and specific facts were alleged as to their actions and motive. (4) There was no liability under § 10(b), as to accountants and attorneys, due to the financial documents’ cautionary language. (5) No claim, under § 12(2) of the Securities Act of 1933, 15 U.S.C.S. § 771(2), was stated against accountants, attorneys, or individual corporation because they were not statutory sellers. And (6) the securities fraud predicates for RICO claims, against limited partnership, owners, and promoters, were adequately pled.

The court granted the motions to dismiss by accountants, attorneys, and individual corporation. The court denied the motions to dismiss by owners, limited partnership, and promoters for the claims pursuant to § 12(2) and 18 U.S.C.S. § 1962(c), granted their motions as to the claims under § 17(a) of the Securities Act of 1933 and 18 U.S.C.S. § 1962(a) and (d), and granted in part and denied in part their motions as to 15 U.S.C.S. § 78j(b).

In this case,the projections in issue make clear that they “are based upon assumptions made by Arizona World Nurseries Limited Partnership of the income and expenses and cash flow from the operations of the nursery.” Offering Memorandum, Ex. F: “Notes and Assumptions” section of the Financial Projections at 1. Furthermore, the projections expressly cautioned that they were based upon these assumptions and appraisals, and that some of the assumptions may not materialize, and thus, that the actual results achieved could then vary from the projections substantially. In addition, the cover letter which accompanied the projections made clear the limited role that the Andersen defendants assumed with reference to the projections (that they did not perform an audit and that they did not verify the assumptions provided by the general partner), and once again,explicitly warned, as set out above, as to the accuracy and achievability of the projections. Certainly, then, no misrepresentation claim can be predicated upon the fact that the projections did not bear out.

Furthermore, as can be seen from the warnings in the front of the offering memorandum also quoted above, as well as the “Tax Risks” section of the Memorandum, and as stated on page two of the tax opinion letter,  Andersen relied on the factual information provided to it by the management of the partnership. Tax Opinion Letter at 2 (Andersen “relied on management and their legal counsel for business and  legal matters”); Offering Memorandum at 22 (“INVESTORS ARE CAUTIONED THAT THE CONCLUSIONS IN THE TAX OPINION ARE BASED UPON CERTAIN REPRESENTATIONS TO ARTHUR ANDERSEN BY THE GENERAL PARTNER”). The Court concluded that, given all of the cautionary language, Andersen’s tax opinion cannot be read to mean that Andersen undertook to make representations of any kind regarding the value of the nursery stock. Id at 541

NEW JERSEY

1. In re Milestone Sci. Sec. Litig., 103 F. Supp. 2d 425  

 Defendant corporation and officers moved to dismiss, pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6), the amended complaint of plaintiff securities purchasers in a class action for securities fraud pursuant to § 10(b) and § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C.S. §§ 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

Plaintiff securities purchasers brought an securities fraud action against defendant corporation and officers for alleged violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C.S. §§ 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiffs filed an amended complaint, alleging that defendants, in an effort to increase and maintain an artificially high market price for securities, failed to promptly disseminate accurate and truthful information in connection with its operations, business, products, earnings, and present and future business prospects. Plaintiffs argued that published reports, news articles, and filings with the Securities and Exchange Commission were misleading. The court noted that plaintiffs were required to satisfy the heightened pleading requirements of Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act, 15 U.S.C.S. § 78u-4 et seq. Motion to dismiss was granted. The Court held that the  plaintiffs failed to meet the heightened pleading requirements for a securities fraud complaint absent credible, particularized allegations that defendants knowingly or recklessly provided misleading or fraudulent statements or omissions in connection with its operations.

The Court observed that to establish a claim under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, a plaintiff must plead (1) a false representation, or omission, of a material fact, (2) knowledge or reckless disregard of its falsity by a defendant and the intention that a plaintiff rely on the falsity, (3) reasonable reliance thereon by a plaintiff, and (4) a resultant loss. Id at 66.

The reliance of a plaintiff on alleged misstatements or omissions must be reasonable; the burden of proof is upon the defendant to show reliance was not reasonable. See Kline, 24 F.3d at 493 (citing Straub v. Vaisman & Co., 540 F.2d 591, 598 (1976)). Where the security involved is traded in an open and efficient market, a plaintiff need not show individual and specific reliance on the misrepresentation of a defendant. A plaintiff may instead rely upon the fraud on the market theory and claim only that he or she suffered injury in the capacity as a purchaser or seller of a security in such a market. Id at 67.

1. Kaufman v. I-Stat Corp., 324 N.J. Super. 344 

Plaintiff, an individual, purchased 100 shares of defendant corporation’s common stock. She subsequently filed a fraud action, alleging that defendant issued various materially misleading statements concerning the company’s sales and acceptance of its products in the medical community. The trial court held that to maintain a fraud action based upon a corporation’s deliberate false statements about its financial condition, a plaintiff must allege that he or she was aware of and directly relied upon those statements. Because plaintiff did not allege such direct reliance, the trial court dismissed her complaint. This court reversed, holding that plaintiff could satisfy the reliance element of a cause of action for fraud by showing reliance upon the integrity of the market price for a corporate security which had been artificially inflated by defendant’s deliberate false statements.

The Court reversed the Dismissal of plaintiff’s fraud claim and held that the plaintiff could satisfy the reliance element of a cause of action for fraud by showing reliance upon the integrity of the market price for a corporate security which had been artificially inflated by defendant’s deliberate false statements. Id at 350.

1. P. Schoenfeld Asset Mgmt. L.L.C. v. Cendant Corp., 47 F. Supp. 2d 546  

Plaintiff arbitrageurs purchased shares of a company’s stock after defendant corporation announced that it would purchase the company. Plaintiffs argued that the financial statements contained in defendant’s original and amended 14D-1 schedules and the offer to purchase were materially false and misleading, that they purchased the stock in reliance on the information, that the false and misleading statements caused the artificial inflation of the stock price, and that the true value of the securities was substantially lower than the prices they paid. Plaintiffs claimed that defendants, the corporation and its officers, violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, as well as § 14(e) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78n(e), and § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78t.

The court granted the motions to dismiss. The court held that plaintiff arbitrageurs did not state a cause of action under securities laws because they did not adequately plead connection, reliance, or causation. The court denied plaintiffs’ motion to amend their complaints and held they could not satisfy the causation requirement because there was no causal connection between defendant corporation’s misrepresentations and their losses.

1. Weiner v. Quaker Oats Co., 129 F.3d 310  

Plaintiff stockholders bought shares in defendant corporation while it was negotiating a leveraged purchase of another company. Six weeks before the purchase closed, defendant issued an annual report setting forth its debt to capitalization ratio (ratio) and its projected earnings over time. After closing, the ratio changed, which caused plaintiffs’ stock to decrease in value. Plaintiffs sued the corporation and its chairman under §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C.S. §§ 78j(b) and 78t(a), and SEC rule 10b-5, 17 C.F.R. § 240.10b5, and the trial court granted defendants’ motion to dismiss. On appeal, the court held that the annual report, when considered with other reports containing the same ratio, could lead a reasonable investor to believe that the ratio would not change. Thus, the ratio was material and plaintiffs stated a cause of action under rule 10b-5 on that issue. However, because the projected earnings were qualified by the phrase “over time,” they were not material. The court affirmed the judgment on the claim based on projected earnings reversed it on the claim based on the ratio, and remanded the case for further proceedings.

The Court observed that in general, Section 10(b) and Rule 10b-5 do not impose a duty on defendants to correct prior statements — particularly statements of intent — so long as those statements were true when made. The Court referred to In re Phillips Petroleum, 881 F.2d at 1245, in this context. However, the Court also observed that “there can be no doubt that a duty exists to correct prior statements, if the prior statements were true when made but misleading if left unrevised.” Id. To avoid liability in such circumstances, “notice of a change of intent be disseminated in a timely fashion.” Id. at 1246. Whether an amendment is sufficiently prompt is a question that “must be determined in each case based upon the particular facts and circumstances.” Id.

The Court held that , therefore, defendants have failed to establish that plaintiffs can prove no set of facts in support of their claim, which would entitle them to relief. The complaint alleges facts on the basis of which a reasonable fact finder could determine that Quaker’s statements regarding its total debt-to-total capitalization ratio guideline would have been material to a reasonable investor, and hence that Quaker had a duty to update such statements when they became unreliable. Id at 318

1. EP Medsystems, Inc.v. Echocath, Inc., 235 F.3d 865

 Plaintiff filed suit against defendant alleging that the chief executive officer of defendant enticed plaintiff into investing $ 1,400,000 in defendant by assuring plaintiff that lengthy negotiations had already taken place with four prominent companies to market certain new defendant products, and that contracts with these companies were “imminent.” Relying on cautionary language contained in public documents filed by defendant with the Securities Exchange Commission, the district court held that these representations were immaterial as a matter of law under the “bespeaks caution” doctrine and the general test for materiality. It also held that plaintiff failed to adequately plead scienter, reasonable reliance, and loss causation. The complaint was dismissed and plaintiff appealed. The court reversed the decision of the district court, finding that there was a statement of fact in the context presented by plaintiff’s complaint that could be found to meet the requirement of materiality. Moreover, a trier of fact could find that reliance was reasonable and that there was the requisite causal connection between the assurances and plaintiff’s loss, i.e., its investment. The court reversed the order dismissing the complaint and remanded for further proceedings in accordance with this opinion; there was a statement of fact in the context presented by plaintiff’s complaint that could be found to meet the requirement of materiality

6. William Kozin & Kurt Kozin v. Richard J. Dunn, Kevin R. Dunn, 2005 U.S. Dist. LEXIS 18156

Plaintiffs, a father and his son, sued defendants, a corporation, its president, and its secretary, alleging, inter alia, common law fraud and securities fraud under Rule 10b-5, 17 C.F.R. §  240.10b-5, and §  10(b) (15 U.S.C.S. §  78j(b)) of the Securities Exchange Act of 1934, 15 U.S.C.S. §  78a et seq. Defendants moved to dismiss the common law fraud and federal securities fraud claims for failure to state a claim.

Plaintiffs alleged that defendants approached them seeking investments and made various fraudulent misrepresentations concerning the corporation’s sources of financing and specific targets for imminent acquisition. In reliance on these statements, the father lent the corporation $ 150,000, and the son entered into an employment agreement with the corporation. The corporation defaulted under the terms of the promissory note and never paid the son under the employment agreement. The court determined that plaintiffs adequately alleged common law fraud under Fed. R. Civ. P. 9(b) based upon, inter alia, defendants’ fraudulent misrepresentations that were supported by certain documents and their detrimental reliance. However, the federal securities fraud claims were dismissed under the Private Securities Litigation Reform Act because (1) plaintiffs failed to show scienter based upon motive and opportunity due to the individual defendants’ shareholder status and based upon recklessness and (2) the complaint did not plead falsity adequately since plaintiffs did not show why the statements were misrepresentations.

The court granted defendants’ motion to dismiss with respect to the federal securities fraud claims and dismissed those claims without prejudice. The court denied the motion to dismiss with respect to the common law fraud claims.

7. Grace Cowit, v. Roberts Pharmaceutical Corp., 1996 U.S. Dist. LEXIS 22506

Plaintiff stock purchaser, on behalf of herself and all others similarly situated, filed a claim alleging misrepresentation and fraud in connection with the purchase of stock in defendant corporation. Defendants, three principal financial offers, were also named as parties. Defendants filed a motion for dismissal of the purchaser’s amended complaint under Fed. R. Civ. P. 12(b)(6) and for partial dismissal under Fed. R. Civ. P. 9(b).

Defendants sought dismissal of the purchaser’s claims on the basis that: (1) the complaint failed to allege an actionable misrepresentation or omission; (2) the purchaser failed to set forth any ground for alleging scienter for the alleged fraud; (3) the purchaser’s claims lacked the specificity required under Fed. R. Civ. P. 9(b). The court was reluctant to characterize many of the statements and omissions as misleading at this stage of the case. Many of the statements, required additional facts and a wider context to determine whether they were actionable as a matter of law. The court could not find that defendants’ alleged statements and/or omissions were not actionable as a matter of law. Although several of the statements could constitute mere “puffing,” others were not “so obviously unimportant” to a reasonable investor that they could not violate the securities laws. The court was not persuaded that the complaint suffered from a lack of particularity under Fed. R. Civ. P. 9(b). As to whether statements by Wall Street analysts were actionable under Rule 9(b), the court found in favor of defendants and should grant the motion to dismiss based on these allegations.

The court ordered that the motion of defendants for dismissal under Fed. R. Civ. P. 9(b) of that portion of the complaint based upon statements allegedly made to a Wall Street analysts be granted. The court further ordered that the motion of defendants for dismissal under Fed. R. Civ. P. 12(b)(6) be denied.

8. Morton I. Thomas, Edco Surgical Supply Co., Inc. V. Duralite Company, Inc., 524 F.2d 577

 Defendants, former business partners of plaintiff, appealed an order of the United States District Court for the District of New Jersey, assessing damages against defendants, a corporation and individuals, under § §  10(b), 20 and 29(b) of the Securities Exchange Act of 1934, 15 U.S.C.S.§ §  78j, 78t, and 78cc(b), and S.E.C. Rule 10b-5.

Plaintiff and individual defendants were partners in Defendant Corporation. After some time, plaintiff withdrew. To discuss the sale of plaintiff’s stock, plaintiff met a defendant partner, who indicated to plaintiff that the stock was valueless and that defendant corporation had little chance of continuing. Defendants were meanwhile discussing a merger with another company. Plaintiff agreed to transfer the stock in exchange for cancellation of indebtedness. When plaintiff discovered that the corporation had become a subsidiary of another, he sued for damages based on misrepresentation under § §  10(b), 20 and 29(b) of the Securities Exchange Act of 1934, 15 U.S.C.S.§ §  78j, 78t, and 78cc(b), and S.E.C. Rule 10b-5. The lower court awarded damages to plaintiff. On appeal, the court affirmed. The court held that the lower court did not err in finding that defendants were culpable because they knew that the corporation’s prospects were improving, the knowledge was material, and that defendants misrepresented plaintiff, and plaintiff relied on the misrepresentation.

The court affirmed the order except as to defendant corporation. That portion of the order was reversed and remanded for further consideration of damages. The Court held that  the elements of a plaintiff’s case on liability for securities fraud include knowledge by the defendants, intent to defraud, or scienter, failure to disclose to the plaintiff, materiality of the facts, and, in some instances, reliance by the plaintiff.

DELAWARE

1. AES Corp.V. The Dow Chemical Company; Dynegy Power Corporation., 325 F.3d 174

 Plaintiff purchaser sued defendants, a parent company and a subsidiary, alleging securities law violations in connection with a transaction in which the purchaser bought the stock of the subsidiary’s subsidiary. After the subsidiary settled, the United States District Court for the District of Delaware granted summary judgment in favor of the parent company. The purchaser appealed.

The purchaser alleged that defendants violated the Securities Exchange Act of 1934 by conspiring to sell the purchased company at an artificially inflated price by making misrepresentations material to an evaluation of the purchased company. The district court determined that non-reliance clauses in the transaction documents rendered the purchaser’s reliance on the alleged misrepresentations unreasonable as a matter of law. The appellate court disagreed and determined that enforcement of the non-reliance clauses to bar the purchaser’s fraud claims as a matter of law would be inconsistent with §  29(a) (15 U.S.C.S. §  78cc(a)) of the Securities Exchange Act of 1934, which forecloses anticipatory waivers of compliance with the duties imposed by Rule 10b-5, 17 C.F.R. §  240.10b-5. The appellate court rejected the parent company’s argument that it would be impossible for a buyer to show reasonable reliance in any case where there is a non-reliance clause. Rather, the existence of the non-reliance clauses should have been treated as one of the circumstances to be taken into account in determining whether the purchaser’s reliance was reasonable.The appellate court reversed the judgment of the district court.

2. Harry Lewis v. The Dow Chemical Company, 1992 U.S. Dist. LEXIS 15792

Plaintiff investor instituted the class action against defendant corporation that asserted that the company engaged in fraudulent practices to reduce the redemption value of securities issued as part of a merger of a subsidiary with another company in violation of Section 10(b) of the Securities Exchange Act of 1934 and its implementing regulation, Rule 10b-5.  17 C.F.R. §  240.10b-5 (1991). The company filed a motion to dismiss.

The securities that were involved were contingent value rights, which had been issued to shareholders of an acquired company as part of the acquisition and were redeemable on call by the company. The company asserted that the investor did not have standing to sue under Rule 10b-5 since he was not a purchaser or seller of securities because the contingent value rights were issued and redeemed and that he failed to show reliance, an element of causation, since the contingent value rights were issued and redeemed without representations that could be considered inducements to a purchase or sale. The court granted the motion to dismiss because it determined that the investor lack standing to bring the action. The court found that the investor had failed to assert that there was reliance on a fraudulent representation, which was a necessary element of a Rule 10b-5 cause of action. The court further found that the invocation of the forced sale doctrine did not relieve the investor of the requirement of establishing reliance for the cause of action.

The court granted the company’s motion to dismiss the investor’s securities fraud claims.

3.Raymond K. Peil v. Marvin M. Speiser, 806 F.2d 1154

Plaintiffs appealed a jury verdict and an order for a directed verdict from the United States District Court for the Eastern District of Pennsylvania for defendants in a class action suit based on alleged violations of the federal Securities Acts and the common law. Plaintiffs in a class action suit claimed that misrepresentations by defendants violated 17 C.F.R. § 240.10b-5, § 11 of the Securities Act of 1933, 15 U.S.C.S. § 77k, and the common law. The court affirmed the judgment below, finding that the directed verdict as to the common law and § 11 claims were proper as plaintiffs did not directly rely on the misrepresentations of defendants. The court found that the directed verdict as to the claim based on 17 C.F.R. § 240.10b-5(b) was an error by the court below, because the claim in, addition to the § 240.10b-5(a) and (c) claims, could be supported by the “fraud on the market” theory. However, as the harmless error did not exclude any of the evidence presented by plaintiffs, the jury instructions and verdict precluded a new trial. The order for a directed verdict and jury verdicts was affirmed because the order was appropriate for the common law claims, and while the order was in error for the securities law claim, the effect of the jury verdict, given the jury instructions presented, precluded the need for a new trial and was harmless error.

To prevail in a common law action for deceit, a plaintiff had to establish six elements: 1) a false representation of 2) a material 3) fact; 4) defendant’s knowledge of its falsity and his intention that plaintiff rely on it; 5) the plaintiff’s reasonable reliance thereon; and 6) his resultant loss. There is little dispute that plaintiffs in 17 C.F.R. § 240.10b-5 claims must generally satisfy all of these requirements as well.  Id at 1161.

1. In re Ramada Inns Sec. Litigation, 550 F. Supp. 1127  

 Shareholders claimed that a corporation and directors fraudulently inflated the price of common stock. The alleged fraud caused an artificial inflation of the corporation’s stock during the period when the shareholders were purchasing stock. The court denied the motion to dismiss and held that the shareholders could be able to introduce sufficient evidence of a causal connection between the management’s misleading information and the stock price. They also could show that they relied on the pricing of stock in the market to permit an inference that management’s misconduct was responsible for their unfortunate investment decision. The shareholders’ attorneys, even if relying solely on information from the Wall Street Journal to support the shareholders’ claims, satisfied their obligation under Fed. R. Civ. P. 11. The claims were not dismissed for failure to state a claim.

1. Jacobs v. Hanson, 464 F. Supp. 777  

Plaintiffs alleged that majority stockholders and officers unlawfully transferred assets to other defendants for lucrative consulting agreements. Defendants allegedly made misrepresentations to minority shareholders to induce them to vote for the sale of assets and to permit liquidation of the corporation. The court denied a motion to dismiss, which was treated as a summary judgment motion, holding that: (1) the evidence supported a causal connection between the alleged misrepresentation and the transactions giving rise to the loss of assets and was sufficient to preclude summary judgment; (2) the alleged fraud and misrepresentations were made in connection with the forced sale of securities, which, thus, stated a claim under § 10(b) of the Act and under S.E.C. Rule 10b-5; (3) the filing of the certificate of dissolution in Delaware was an integral and essential part of the scheme so as to establish venue under § 27 of the Act, 15 U.S.C.S. § 78aa; and (4) transfer was denied where the degree of inconvenience was not substantial so as to overcome the presumption in favor of plaintiffs’ choice of venue. The court denied defendants’ motion to dismiss the action alleging securities violations. The court also denied defendants’ alternative motion to transfer the action.