1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

5-2-1994

Kline, et al. v. First Western Government Securities,

Inc., et al.

Precedential or Non-Precedential:

Docket 92-1498

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Recommended Citation

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1 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

Nos. 92-1498; 92-1499 

 

ERNEST P. KLINE; 

EUGENE KNOPF; STEVEN R. WOJDAK 

 

v. 

FIRST WESTERN GOVERNMENT SECURITIES, INC.; 

SIDNEY P. SAMUELS; SAMUELS, KRAMER AND CO.; 

ARVEY, HODES, COSTELLO AND BURMAN 

Ernest P. Kline & Eugene F. Knops, Appellants, in 92-1498

Arvey, Hodes, Costello & Burman, Appellant in 92-1499

 

On Appeal From the United States District Court 

For the Eastern District of Pennsylvania 

(D.C. Civil Action No. 83-01076) 

 

Argued: January 25, 1993 

 Before: GREENBERG, ROTH and LEWIS, Circuit Judges

(Opinion Filed May 2, l994 ) 

 

Ronald F. Kidd, Esquire (Argued) 

Joseph D. Mancano, Esquire 

Teresa N. Cavenagh, Esquire 

Duane, Morris & Heckscher 

4200 One Liberty Place 

Philadelphia, PA 19103-7396 

 Attorneys for Appellants 
2 

First Western Government Securities, Inc. 

c/o Mr. Sidney P. Samuels 

3683 Sacramental Street 

P.O. Box 18211 

San Francisco. CA 94118 

 Attorney for Appellees: 

 First Western Government Securities, Inc. 

 Sidney P. Samuels 

 Samuels Kramer & Co. 

John E. McKeever, Esquire (Argued) 

Lori S. Cozen, Esquire 

Schnader, Harrison, Segal & Lewis 

1600 Market Street 

Suite 3600 

Philadelphia, PA 19103 

 Attorneys for Appellee Arvey, Hodes, Costello & Burman 

 

 

OPINION OF THE COURT 

 

ROTH, Circuit Judge: 

 This appeal arises from a suit alleging, among other 

things, violations of § 10(b) of the Securities and Exchange Act 

of 1934, 15 U.S.C. § 78j(b), in connection with plaintiffs' 

investment in forward contracts through defendant First Western 

Government Securities ("First Western"). Defendant Arvey, Hodes, 

Costello & Burman ("Arvey"), a Chicago law firm, issued three 

opinion letters concerning the tax consequences of these 

investments. Plaintiffs Ernest P. Kline and Eugene F. Knopf 

allege that Arvey's opinion letters contained both affirmative 

misrepresentations and material omissions in their treatment of 

these transactions. They further contend that they relied upon 
3 

these opinion letters in deciding to invest with First Western 

and that as a result they incurred substantial financial losses. 

The district court denied Arvey's motion for summary judgment on 

the misrepresentation claim but granted it on the omissions 

claim. We conclude that both the misrepresentation and omissions 

claims should be tried. We will therefore affirm in part and 

reverse in part, and we will remand the case to the district 

court for further proceedings consistent with this opinion. 

I. 

 It is important to emphasize at the outset that, 

because we are reviewing the partial grant of a motion for 

summary judgment, we must view the facts in the light most 

favorable to the non-moving party. Matsushita Elec. Indus. Co. 

v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Thus, "[t]he 

evidence of the non-movant is to be believed, and all justifiable 

inferences are to be drawn in his favor." Anderson v. Liberty 

Lobby, Inc., 477 U.S. 242, 255 (1986). 

 The central figure in this case is defendant Sidney 

Samuels, who founded First Western in 1978. Prior to that time 

Samuels was a general partner in Price & Company ("Price"). 

According to plaintiffs, First Western's trading program was 

substantially similar to Price's and indeed was modeled on it. 

Significantly, Arvey represented both Price and First Western. 

Arvey assisted Samuels and his partner, Larry Price, in the 

formation of Price, drafted Price's limited partnership agreement 

and its 1977 offering memorandum, and represented it in 

connection with IRS civil and criminal investigations. Arvey 
4 

began assisting Samuels in setting up First Western while he was 

still a general partner in Price. The firm became First 

Western's general counsel and assisted in the drafting of forms 

to be used by First Western, including the brochure describing 

the program. There is some suggestion in the record that Arvey 

helped design the straddle transactions used by First Western. 

(Joint Appendix ("JA") at 154.) At First Western's request, 

Arvey also provided it with three opinion letters addressing the 

federal income tax treatment of these transactions. These 

opinion letters were dated September 20, 1978, June 8, 1979, and 

November 12, 1980. 

 The transactions engaged in by First Western involved 

forward contracts to purchase and sell money market instruments, 

specifically Government National Mortgage Association securities 

("GNMA's") and Federal Home Loan Mortgage Corporation 

participation certificates ("FMAC's"). A "forward contract" is a 

contract to purchase or sell a specified security, at a 

designated interest rate, on a fixed future date. In a straddle 

transaction an investor enters into a pair of forward contracts, 

agreeing both to buy and sell securities in the future. The 

difference between the "buy" contract and the "sell" contract 

results in a "spread" position, resulting in gain or loss to the 

investor depending on whether interest rates rise or fall. 

Accordingly, before entering into a straddle an investor must 

decide how to "bias" the spread by predicting whether interest 

rates will rise or fall. 
5 

 First Western's agreements with its customers provided 

that a customer could arrange for the cancellation of his 

obligations under a forward contract prior to the settlement 

date. First Western would then "charge or credit the customer's 

account with an amount equal to the profit First Western or the 

customer, respectively, would be entitled to receive in the event 

delivery was effectuated pursuant to such contract as of the date 

of cancellation." (Arvey Opinion Letters, 9/20/78, JA at 138; 

6/8/79, JA at 562.) Typically investors would choose to cancel 

the losing side of their straddle. The tax treatment of the 

resulting loss was the subject of the Arvey opinion letters. 

 In the opinion letters Arvey concluded that, if First 

Western and a customer agreed "to cancel a forward contract prior 

to its settlement date, the consequent gain or loss realized by 

the customer should constitute ordinary gain or loss to be 

recognized by the customer in the year in which the contract is 

canceled." (Arvey Opinion Letter, 6/8/79, JA at 563.)0 The 

three letters also contained language advising First Western that 

the Internal Revenue Service and the courts might arrive at a 

contrary conclusion. 

 As the following excerpts show, each of the letters 

also provided that the opinions were based on facts as provided 

by First Western and were for the use of First Western only: 

September 20, 1978, letter:

 

0The September 20, 1978, and the November 12, 1980, letters 

contain essentially the same language. (JA at 139-40, 578.) 
6 

The following paragraphs contain a summary of 

such transactions as you [First Western] have 

described them to us. (JA at 135.) 

[T]his opinion is subject to the consummation 

of the transactions between First Western and 

its customers under the facts and conditions 

described above and is further expressly 

conditioned on your representation that the 

transactions entered into by First Western 

and its customers will be for the purpose, 

and with a reasonable expectation, of 

economic gain. (JA at 140.) 

 This letter is intended for your 

personal use only and is not intended to be, 

and should not be, relied upon by persons 

other than First Western. (JA at 149.) 

 June 8, 1979, letter:

You have advised us that the facts set forth 

below constitute an accurate and complete 

presentation of all relevant information with 

regard to such transactions. (JA at 558.) 

[T]his opinion is subject to the consummation 

of the transactions between First Western and 

its customers pursuant to the facts and 

conditions described above and is further 

expressly conditioned on your representation 

that such transactions will be consummated by 

the customers of First Western with a 

reasonable expectation of economic gain. (JA 

at 563.) 

 This letter is intended for your 

personal use only and is not intended to be, 

and should not be, relied upon by persons 

other than First Western. (JA at 574.) 

 November 12, 1980, letter:

 You have advised us that the facts set 

forth below constitute an accurate and 

complete presentation of all relevant 

information with regard to the transactions 

between First Western and its customers, and 

that no material fact necessary to make the 
7 

information herein not false or misleading 

has been omitted. (JA at 576.) 

[T]he conclusions set forth herein are based 

upon the facts and conditions described in 

this letter as you have represented them to 

us and we express no opinion as to the tax 

treatment of any transaction to the extent 

the facts may differ from those contained 

herein. 

 We express no opinion concerning any 

federal income tax consequence other than as 

specifically set forth in this letter, and no 

opinion is expressed with respect to state 

and local taxes, federal or state securities 

laws, or any other federal or state law not 

explicitly referenced herein. We also 

express no opinion as to the advisability of 

undertaking any transaction described in this 

letter, in that any such determination must 

take into account the individual facts and 

circumstances affecting the particular 

taxpayer. 

 This letter is intended solely for the 

internal use of First Western and, 

accordingly, it is not intended to be, and 

should not be, relied upon by any person 

other than First Western. Further, this 

letter is not to be quoted or otherwise 

referred to in any documents, including 

financial statements of First Western, nor is 

it to be filed with or furnished to any 

government agency or other person without the 

express prior written consent of this firm. 

Such consent has not been given, and will not 

be given, unless the person to whom this 

letter is to be furnished has previously 

agreed, in writing, that he will not rely 

upon the opinions and conclusions expressed 

herein, but will make his own independent 

evaluation of the federal income tax 

consequences of any transactions to be 

entered into with First Western. (JA at 

591.) 

 A couple of themes emerge from these excerpts. First, 

Arvey stressed that its view of the transactions' validity hinged 

on whether they were entered into with a reasonable expectation 
8 

of generating a profit. Second, the letters asserted that 

Arvey's conclusions might be changed by facts and circumstances 

unique to individual customers' accounts. Arvey also made these 

points in response to inquiries from potential First Western 

customers about its opinion letters. (JA at 365-77.) 

 Despite the letters' statement that they were for the 

exclusive use of First Western, Arvey was aware at least as early 

as May 31, 1979, that its opinion letters had reached potential 

investors. (JA at 365.) The record before us reflects some ten 

instances in which potential First Western investors contacted 

Arvey regarding its opinion. (JA at 365-78.) As the following 

excerpt from an October 21, 1980, letter to Arvey from an 

attorney representing a potential investor makes clear, Arvey was 

put on notice that its efforts to dissuade reliance were not 

always successful: 

 Surely you realize that First Western 

Government Securities is using your letter in 

an effort to obtain investors and is 

furnishing copies of your letter with 

brochures indicating the mechanical operation 

of the program. As a result, notwithstanding 

statements made in your October 16, 1980, 

letter, please be advised that my client is 

awaiting my receipt of your opinion letter 

before making a decision as to his investment 

with First Western Government Securities. (JA 

at 376.) 

 Plaintiffs Kline and Knopf invested in forward 

contracts with First Western in December 1980, after reading and 

relying upon Arvey's June 1979 and November 1980 opinion letters. 

They incurred losses on their investments, deducted these losses 
9 

in their income tax filings, and had their deductions disallowed 

by the IRS. 

 Kline and Knopf allege that Arvey knew or recklessly 

disregarded the truth about First Western's trading program. As 

a result, they contend, Arvey in its opinion letters made 

material misrepresentations and omitted material facts concerning 

the actual structure of First Western transactions. Plaintiffs 

allege a number of misrepresentations. They allege that the 

opinion letters stated that under the First Western trading 

program investors would be required to make or accept delivery of 

the underlying securities when in fact no such requirement 

existed. They allege that the opinion letters represented that 

the prices of First Western's contracts moved independently, and 

thus subject to market risk, when in fact First Western's 

computer trading program artificially set the prices to eliminate 

any risk of loss.0 They allege misrepresentations as to whether 

 

0Plaintiffs contend that the prices set by First Western's 

computer program bore virtually no relation to actual market 

prices. They point to a study of the First Western trading 

program undertaken by Professor E. Philip Jones of Harvard 

Business School. Following a thorough analysis of First 

Western's operations, including a review of the assumptions used 

in the computer pricing program, Professor Jones concluded as 

follows: 

First Western's portfolios were a sham. There 

was no independent movement of prices of 

different contracts. Most of the risk on one 

side of a portfolio was exactly cancelled by 

the risk on the other side of the portfolios. 

... This cancellation of risk was 

accomplished by ignoring market prices for 

GNMAs and FHLMCs, in favor of artificial 

pricing calculations that resulted in prices 

which were substantially different from 

market prices. 
10 

customers would be required to make additional margin deposits 

and as to how First Western calculated the fees it charged for 

cancellation of contracts. Finally, they allege that the opinion 

letters misrepresented the fact that First Western's transactions 

were designed to obtain tax losses and as structured could not 

support a reasonable expectation of economic gain. 

 As for material omissions, plaintiffs allege that Arvey 

made no reference to prior IRS investigations of Price & Company 

or Sidney Samuels' connection to that firm.0 Furthermore, a 

number of investigations into First Western's trading program had 

commenced by the time Arvey issued its final opinion letter. The 

IRS had audited a number of First Western investors, the SEC had 

started an investigation and requested numerous documents from 

First Western, and the Minnesota Department of Commerce was 

investigating First Western. The only reference to these 

activities in the November 12, 1980, opinion letter was as 

follows: "Further, you have informed us that customers of First 

Western are being audited by the Service and that the Service has 

questioned the deductibility of losses realized by customers on 

the basis of the theory set forth by the Service in Rev. Rul. 77-

185." (JA at 588.) The letter made no mention of the SEC or 

 

(JA at 527.) 

0As noted above, plaintiffs allege that First Western's trading 

program was modeled after Price's. Thus, plaintiffs allege that 

Arvey should have disclosed the fact that, before Arvey issued 

its 1979 opinion letter, the IRS had undertaken a criminal 

investigation into Price's operations. The IRS investigations 

ultimately led to a finding that Price's trades were sham 

transactions. Price v. Commissioner, 88 T.C. 860 (1987). 
11 

State of Minnesota investigations, or the IRS investigation into 

Price. 

 Arvey moved for summary judgment on the omissions 

claim, the misrepresentation claim, and tort and RICO claims not 

before us on this appeal. The district court denied summary 

judgment on all counts except those asserting liability for 

omissions of material fact. Because the district court believed 

that this case presents two "'controlling issues of law as to 

which there is a substantial ground for difference of opinion,'" 

Kline v. First Western Gov't Secs., 794 F.Supp. 542, 557 (E.D.Pa. 

1992) (quoting 28 U.S.C. § 1292(b)), it certified for immediate 

appeal the following two issues: first, whether an attorney may 

be held liable for alleged misrepresentations of fact in an 

opinion letter when those alleged factual statements have been 

specifically attributed to another individual; and, second, 

whether attorneys may be held liable for omissions of fact in an 

opinion letter absent a duty to disclose.0 The district court 

also ruled that Arvey did not meet its burden of proving that 

 

0Plaintiffs sued defendant Arvey under § 10(b) of the Securities 

Exchange Act of 1934, 15 U.S.C. § 78(j) and Rule 10(b)(5), 17 

C.F.R. 240.10b-5, both as an aider and abettor in Count I of the 

complaint and a primary violator in Counts IV and VI. We note 

that in Central Bank v. First Interstate Bank, the Supreme Court 

ruled that "a private plaintiff may not maintain an aiding and 

abetting suit under §10(b)." 62 U.S.L.W. 4237 (U.S. April 19, 

1994). This ruling would appear to bar plaintiffs' claims 

against Arvey in Count I, a point which we do not now decide. 

However, we do not believe it affects our analysis with respect 

to whether Arvey may be held liable for material 

misrepresentations or omissions as a primary violator under 

Counts IV and VI. 
12 

plaintiffs' reliance was unreasonable, id. at 552-54, but did not 

certify that issue for appeal. 

II. 

 The district court had subject matter jurisdiction over 

this case pursuant to 28 U.S.C. § 1331. This court has 

jurisdiction over this certified interlocutory appeal pursuant to 

28 U.S.C § 1292(b). This court granted both parties' petitions 

to appeal on June 8, 1992. 

 Our review of a district court's grant of summary 

judgment is plenary. Erie Telecommunications, Inc. v. City of 

Erie, 853 F.2d 1084, 1093 (3d Cir. 1988). "On review the 

appellate court is required to apply the same test the district 

court should have utilized initially." Goodman v. Mead Johnson & 

Co., 534 F.2d 566, 573 (3d Cir. 1976), cert. denied, 429 U.S. 

1038 (1977). 

 A court may grant summary judgment only when the 

submissions in the record "show that there is no genuine issue as 

to any material fact and that the moving party is entitled to 

judgment as a matter of law." Fed. R. Civ. P. 56(c). "The 

inquiry performed is the threshold inquiry of determining whether 

there is the need of a trial--whether, in other words, there are 

any genuine factual issues that properly can be resolved only by 

a finder of fact because they may reasonably be resolved in favor 

of either party." Anderson v. Liberty Lobby, 477 U.S. at 250. 

Stated differently, "a motion for summary judgment must be 

granted unless the party opposing the motion can produce evidence 

which, when considered in light of that party's burden of proof 
13 

at trial, could be the basis for a jury finding in that party's 

favor." J.E. Mamiye & Sons, Inc. v. Fidelity Bank, 813 F.2d 610, 

618 (3d Cir. 1987)(Becker, J., concurring). Thus, the party 

opposing summary judgment "must do more than simply show that 

there is some metaphysical doubt as to material facts." 

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 

586 (1986). 

III. 

 The district court in its resolution of Arvey's motion 

for summary judgment relied on the distinction between liability 

imposed under Rule 10b-5 for misrepresentations and that imposed 

for omissions. While this distinction is significant in some 

circumstances,0 we do not find it helpful to resolving the 

particular issues presented in this case. We conclude instead 

that attorneys may be liable for both misrepresentations and 

omissions where the result of either is to render an opinion 

letter materially inaccurate or incomplete. 

 A. The Misrepresentations Claim

 Arvey argues that the district court erred in denying 

summary judgment in its favor on plaintiffs' claims that Arvey is 

liable under the federal securities laws for affirmatively 

misrepresenting material facts concerning First Western's trading 

program. Arvey contends that it was entitled to summary judgment 

on this claim for the simple reason that its opinion letters did 

 

0For example, the Supreme Court has held that in cases "involving 

primarily a failure to disclose," i.e., omissions, reliance may 

be presumed. Affiliated Ute Citizens of Utah v. United States, 

406 U.S. 128, 153 (1972). 
14 

not contain any misrepresentations. That is, it asserts that as 

a matter of law it cannot be held liable for an opinion letter in 

which it made explicit that it was basing its opinion on an 

assumed set of facts represented to it by its client and that it 

had conducted no independent investigation into whether those 

represented facts accurately reflected reality. We are 

unpersuaded by this argument. 

 This court has generally recognized securities fraud 

claims based on allegations of misrepresentations in opinion 

letters. We have held that "[a]n opinion or projection, like any 

other representation, will be deemed untrue for purposes of the 

federal securities laws if it is issued without reasonable 

genuine belief or if it has no basis." Herskowitz v. 

Nutri/System, Inc., 857 F.2d 179, 184 (3d Cir. 1988), cert. 

denied sub nom. Nutri/System, Inc. v. Herskowitz, 489 U.S. 1054 

(1989). Interpreting the Supreme Court's "scienter" or intent 

requirement as articulated in Ernst & Ernst v. Hochfelder, 425 

U.S. 185 (1976), we have explained that 

an opinion must not be made 'with reckless 

disregard for its truth or falsity,' or with 

a lack of 'genuine belief that the 

information disclosed was accurate and 

complete in all material respects.' 

Therefore, an opinion that has been issued 

without a genuine belief or reasonable basis 

is an 'untrue' statement which, if made 

knowingly or recklessly, is culpable conduct 

actionable under § 10(b) and Rule 10b-5. 

Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir. 1985) (citations 

omitted), cert. denied sub nom. Wasserstrom v. Eisenberg, 474 

U.S. 946 (1986). 
15 

 Eisenberg concerned litigation over a tax shelter 

involving the sale of coal rights. The defendant law firm had 

prepared a tax opinion letter, which was included in the offering 

memoranda, in which it opined that the IRS would allow certain 

deductions. Plaintiffs alleged that the law firm knew that there 

was no reasonable basis for its opinion. We held that the law 

firm and an accounting firm that issued an opinion letter 

verifying profit projections included in the offering memoranda 

"are liable if they recklessly expressed opinions which they had 

good reason to believe were baseless." Id. at 778. We explained 

that such liability is proper because of the greater information 

possessed by professionals who express opinions upon which third 

parties would rely. 

When a representation is made by 

professionals or 'those with greater access 

to information or having a special 

relationship to investors making use of the 

information,' there is an obligation to 

disclose data indicating that the opinion or 

forecast may be doubtful. When the opinion 

or forecast is based on underlying materials 

which on their face or under the 

circumstances suggest that they cannot be 

relied on without further inquiry, then the 

failure to investigate further may 'support 

an inference that when the defendant 

expressed the opinion it had no genuine 

belief that it had the information on which 

it could predicate that opinion.' 

Id. at 776 (citations omitted). 

 Herskowitz presented this court with a similar 

situation. In that case, we held that a securities fraud claim 

against a bank that had issued an opinion letter concerning the 

fairness of the transaction should be submitted to a jury when 
16 

the claim alleged that the bank knew that the assumptions on 

which it based its opinion were unfounded. Herskowitz, 857 F.2d 

at 184-85. See also Sharp v. Coopers & Lybrand, 649 F.2d 175, 

184 (3d Cir. 1981), cert. denied, 455 U.S. 938 (1982) 

(recognizing securities fraud claim against accounting firm based 

on materially false representations contained in opinion letter). 

 These cases leave no doubt concerning the existence of 

a cause of action for knowing or reckless misrepresentations in 

opinion letters. The question we must address, then, is whether 

Arvey's disclaimers, to the effect that the opinion was based 

only on facts provided to it by Samuels, should lead us to 

conclude otherwise than that this case should go to trial. The 

district court relied on Gilmore v. Berg, 761 F.Supp. 358 (D.N.J. 

1991), in concluding that the disclaimers should not have that 

effect. We agree with that analysis. 

 Gilmore involved a claim against an attorney who, in a 

tax opinion letter, represented that the purchase price of the 

real property involved in the tax shelter at issue was fair "as 

determined by the general partner." Id. at 370. Plaintiffs 

contended that the attorney knew that the property had been 

purchased out of bankruptcy for less than one-half the stated 

price. The court stated: 

The court agrees with plaintiffs that a jury 

could find [the attorney's] statement that 

"the purchase price of $5.3 million reflects 

the fair market value of the property as 

determined by the general partner" is so 

grossly misleading as to constitute 

actionable fraud in failing to disclose 

important facts underlying the determination 

of fair market value. [The attorney] seeks 
17 

to exculpate his misleading statement by 

pointing to the qualifying language, "as 

determined by the general partner.' However, 

plaintiffs have presented evidence that ... 

[he] knew that the fair market value of $5.3 

million was insupportable. 

Id. 

 The analysis in Gilmore, we believe, follows directly 

from Eisenberg and this court's other cases concerning liability 

for opinion letters. We held in Eisenberg that professionals and 

others with similar access to information must disclose data that 

calls into question the accuracy of an opinion. 766 F.2d at 776. 

This responsibility cannot be evaded by the inclusion of a 

statement that the opinion is based on facts provided by someone 

else. Thus, when a law firm knows or has good reason to know 

that the factual description of a transaction provided by another 

is materially different from the actual transaction, it cannot 

escape liability simply by including in an opinion letter a 

statement that its opinion is based on provided facts. 

 Plaintiffs here have alleged that Arvey had a long and 

close relationship with Samuels, which extended to assisting him 

in setting up First Western, designing the transactions in which 

First Western engaged, and acting as First Western's general 

counsel. Plaintiffs also point to Arvey's representation of 

Price, the firm on which First Western allegedly was modeled, in 

IRS audit proceedings. These allegations clearly permit the 

inference that Arvey knew or had good reason to know that the 

factual assertions contained in its opinion letters did not 

reflect the substance of actual First Western transactions. As 
18 

such, Arvey's opinions, despite their disclaimers, fall squarely 

within the category of opinion letters that we have held to be 

actionable. 

 That said, we feel it necessary to emphasize that there 

is a distinction between the issue we have just addressed--

whether the presence of disclaimers precludes an action for 

misrepresentations--and the question of whether plaintiffs 

reasonably relied on the opinion letters. As this court has 

noted, a plaintiff bringing suit under § 10(b) and Rule 10b-5 

must prove that the defendant (1) made misstatements or omissions 

of material fact; (2) with scienter; (3) in connection with the 

purchase or sale of securities; (4) upon which plaintiffs relied; 

and (5) that plaintiffs' reliance was the proximate cause of 

their injury. In re Phillips Petroleum Secs. Litig., 881 F.2d 

1236, 1244 (3d Cir. 1989). 

 Thus far we have been concerned with the first of these 

issues--whether Arvey is entitled to summary judgment based on 

its contention that its opinion letters did not contain 

misrepresentations because of the presence of the disclaimers. 

Whether plaintiffs' reliance on Arvey's opinion letters was 

reasonable pursuant to the standard we articulated in Straub v. 

Vaisman & Co., 540 F.2d 591, 598 (3d Cir. 1976), presents a 

separate issue. The presence and character of disclaimers has 

clear relevance to that determination. 

 The district court concluded that Arvey has not met its 

burden of showing that plaintiffs' reliance on the opinion 

letters was unreasonable, Kline v. First Western Gov't Secs., 794 
19 

F.Supp. at 552-54, and we believe that the record supports its 

conclusion. Although, as we have noted, the district court did 

not certify the reliance issue for our review, we nevertheless 

feel it necessary to address the issue briefly because under 

§1292(b) "it is the order that is appealable, and not the 

controlling question; and thus we may address any issue necessary 

to decide the appeal before us." Ivy Club v. Edwards, 943 F.2d 

270, 275 (3d Cir. 1991), cert. denied sub nom. Del Tufo v. Ivy 

Club, 112 S.Ct. 1282 (1992). See also United States v. Stanley, 

483 U.S. 669, 677 (1987). Thus we could reverse the denial of 

summary judgment if, like the dissent, we felt that plaintiffs' 

reliance was unreasonable as a matter of law. 

 In Straub we stated that a variety of factors should be 

considered in determining whether a plaintiffs' reliance was 

reasonable, including: (1) the existence of a fiduciary 

relationship; (2) plaintiffs' opportunity to detect the fraud; 

(3) the sophistication of the plaintiffs; (4) the existence of 

long-standing business or personal relationships; and, (5) access 

to the relevant information. 540 F.2d at 598. Consideration of 

the evidence before us in light of these factors, we believe, 

leads inexorably to the conclusion that there exists a genuine 

issue of material fact as to whether plaintiffs' reliance was 

reasonable so that the denial of summary judgment on this ground 

was proper. 

 We acknowledge that the first and fourth factors weigh 

in favor of Arvey. The rest, however, favor plaintiffs. There 

is no evidence suggesting that plaintiffs had access to 
20 

information that would have allowed them to understand that which 

they allege was really taking place. Arvey, on the other hand, 

had an ongoing attorney-client relationship with First Western 

and Samuels. Nor is there a suggestion that plaintiffs had an 

opportunity to detect the alleged fraud even without the benefit 

of access to such information. And while Arvey argues that 

plaintiffs were sophisticated investors, the evidence does not 

compel the conclusion that they were so sophisticated in these 

matters that they should have recognized that the descriptions of 

the transactions in the opinion letters bore little relation to 

reality.0 A potential First Western investor, armed with Arvey 

opinion letters and the information about his own account that 

Arvey stressed might be important, could have obtained a tax 

opinion from his attorney that would have been wrong simply 

because of the misleading way in which the program allegedly was 

described in the opinion letters.0 Mere reliance on the legal 

 

0Unlike the dissent, we do not believe that the fact that "the 

transactions discussed in the opinion letters were meant for 

sophisticated investors," typescript at 15, means that plaintiffs 

were in fact sophisticated enough to unravel First Western's 

scheme. And while the "cutting edge" nature of these 

transactions perhaps should have put plaintiffs on notice of 

potential tax complications involving the transactions described 

in the opinion letters, id., it has no logical connection to 

whether plaintiffs should have suspected that Arvey knowingly 

misdescribed the transactions. 

0The dissent contends that "there is no way that another attorney 

could have confirmed from the letters themselves that the facts 

underlying the opinions were correct as they were solely within 

the knowledge of First Western." Typescript at 16-17. 

Plaintiffs' claim, however, is that Arvey also knew or should 

have known that the descriptions of the transactions in the 

opinion letters were inaccurate. We believe the record contains 

evidence sufficient to support the inference that Arvey had or 

should have had such knowledge, thereby creating a genuine issue 
21 

conclusions expressed in the opinion letters, without more, would 

have been unreasonable. But we cannot say as a matter of law 

that it was unreasonable to rely on the description of First 

Western's trading program. Indeed, such reliance would be 

consistent with the disclaimers insofar as an independent legal 

opinion was sought on the basis of the description of the 

program. 

 In addition to disputing our application of Straub to 

this case, the dissent feels that Arvey is entitled to summary 

judgment based on the "bespeaks caution" doctrine. Under that 

doctrine 

when an offering document's forecasts, 

opinions or projections are accompanied by 

meaningful cautionary statements, the 

forward-looking statements will not form the 

basis for a securities fraud claim if those 

statements did not affect the 'total mix' of 

information the document provided investors. 

In other words, cautionary language, if 

sufficient, renders the alleged omissions or 

misrepresentations immaterial as a matter of 

law. 

In re Donald J. Trump Secs. Litig., 7 F.3d 357, 371 (3d Cir. 

1993). See also Donald C. Langevoort, Disclosures that "Bespeak 

Caution", 49 Bus. Law. 481 (1994) (summarizing and analyzing 

"bespeaks caution" jurisprudence). Not just any cautionary 

language will trigger application of the doctrine. Instead, 

disclaimers must relate directly to that on which investors claim 

to have relied. As we noted in Trump, "a vague or blanket 

 

of material fact. Assuming Arvey possessed such knowledge, its 

recitations of the facts "as provided to it by First Western" 

were made without a genuine belief in their validity and thus 

actionable under the law as expounded in the body of our opinion. 
22 

(boilerplate) disclaimer which merely warns the reader that the 

investment has risks will ordinarily be inadequate to prevent 

misinformation. To suffice, the cautionary statements must be 

substantive and tailored to the specific future projections, 

estimates or opinions in the prospectus which the plaintiffs 

challenge." 7 F.3d at 371-72. 

 So conceived, the "bespeaks caution" doctrine clearly 

does not apply to this case except to the extent that plaintiffs 

relied solely and without further investigation or consideration 

on the opinion letters' conclusions as to the tax consequences of 

the First Western transactions. The cautionary statements in the 

opinion letters provided investors with information that should 

have suggested nothing more to them than the possibility that 

Arvey might have gotten the law wrong or incorrectly assessed the 

risk that the IRS would deny deductions. The opinion letters did 

not contain statements from which plaintiffs should have inferred 

the risk that Arvey was knowingly or recklessly misstating the 

structure of the entire First Western trading program. 

 In the only other case that we have found concerning a 

similar situation the court reached the same conclusion. The 

court in Griffin v. McNiff, 744 F.Supp. 1237 (S.D.N.Y. 1990), 

aff'd without op., 996 F.2d 303 (2d Cir. 1993), provided the 

following account of the case and its resolution: 

Plaintiffs ... challenge more than just the 

future forecasts and predictions in the 

offering materials. They argue that the 

underlying assumptions of the PPMs, tax 

opinions and projections were designed to 

mislead the investors into believing that the 

partnership investments offered them the 
23 

opportunity to achieve a profit and a tax 

benefit from their investment, when in 

reality defendants knew that these 

possibilities did not exist ... . Inasmuch 

as certain of these allegations go to the 

misleading nature of the statements when 

made, the existence of cautionary language 

regarding the general unpredictability of, 

inter alia, oil and gas operations, economic 

trends, and the interpretation of the tax 

laws, will not bar plaintiffs from 

maintaining their claims against the 

remaining defendants. 

Id. at 1253-54 (footnote omitted). 

 In order for there to be a plausible argument for 

application of the "bespeaks caution" doctrine in this case more 

than the simple assertion that the opinion is based on 

represented facts is required. Trump requires that the language 

bespeaking caution relate directly to that by which plaintiffs 

claim to have been misled. 7 F.3d at 371-72. Under the law 

regarding omissions, discussed in the next section, Arvey's 

statement that its opinion was based on facts represented to it 

by First Western also contained the implicit assertion that Arvey 

did not know the facts to be otherwise. It could not therefore 

have alerted plaintiffs to the possibility that Arvey did know 

otherwise. Thus, for the doctrine to even conceivably preclude 

plaintiffs' claims in this case it would be necessary for the 

letters to have included a disclaimer stating, in essence, that 

there was a possibility that Arvey did know otherwise and that 

the opinion letter was a sham commissioned to construct a facade 

of legitimacy for a trading program that both First Western and 
24 

Arvey knew was a farce.0 We find no such language and therefore 

conclude that Arvey was not entitled to summary judgment in its 

favor on the basis that plaintiffs' reliance was unreasonable as 

a matter of law. 

 B. The Omissions Claim

 The district court granted summary judgment for Arvey 

on all claims to the extent that they alleged liability for 

omissions of material fact. The court reasoned that attorneys 

cannot be held liable for omissions in an opinion letter unless 

plaintiffs can demonstrate that the attorneys had a duty to 

disclose to them the information that was omitted. Id. at 550-

51. Because it concluded that plaintiffs did not show the 

existence of a fiduciary or other relationship which would give 

rise to such a duty, the court held that plaintiffs could not 

proceed with their claims based on Arvey's alleged omissions. 

 

0We note, however, that we do not decide at this time whether 

such a disclaimer would be effective. One court has noted that 

"it would appear that the doctrine does not apply unless the 

projection at issue reflects an honestly held belief." Gurfein 

v. Sovereign Group, 826 F.Supp. 890, 908 (E.D.Pa. 1993) (Pollak, 

J.). Judge Pollak further remarked that if the rule were 

otherwise 

one could construct a completely inaccurate 

and fraudulent offering memorandum, yet be 

shielded from a fraud claim as long as there 

was language in the document cautioning 

investors of the specific risks. To the 

extent that such a rule would allow, if not 

encourage, fraud and non-disclosure on the 

part of corporate actors, it clearly is not a 

viable application of the "bespeaks caution" 

doctrine. 

Id. at 908 n.20. 
25 

 We believe the district court's analysis misapprehends 

the issues presented by this case. We are dealing here with a 

situation in which Arvey, by authoring its opinion letters, has 

elected to speak regarding the transactions at issue. Plaintiffs 

allege that this speech was misleading because Arvey failed to 

include in its opinion letters information that, if included, 

would have undermined the conclusions reached in those letters. 

In contrast, the cases cited by the district court, as well as 

those cited by Arvey, for the proposition that attorneys may not 

be held liable for omissions absent a duty to disclose concern 

the question of whether a law firm or similar entity has a duty 

to "blow the whistle" on its client. See Fortson v. Winstead, 

McGuire, Sechrest & Minick, 961 F.2d 469 (4th Cir. 1992); Abell 

v. Potomac Ins. Co., 858 F.2d 1104 (5th Cir. 1988), cert. denied 

sub nom. Abel v. Wright, Lindsey & Jennings, 492 U.S. 918 (1989); 

Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490 (7th 

Cir. 1986). That is, those cases concerned situations where the 

alleged omissions were unrelated to the validity of the law 

firm's opinion letter or similar communication. 

 Fortson, for example, concerned a suit against a law 

firm that had prepared a tax opinion letter that was included in 

the private placement memorandum used in the offering of 

interests in a real estate limited partnership. Plaintiffs 

"sought to recover from Winstead on the ground that the firm 

breached its duty under federal securities laws and state common 

law by failing to inquire into and ensure complete and accurate 

disclosure." Fortson, 961 F.2d at 471. Plaintiffs did not 
26 

allege that the tax opinion was inaccurate. "Instead, they 

challenge[d] the sufficiency of the information provided to them 

as potential investors and contend[ed] that Winstead had a 

responsibility to ensure full and accurate disclosure." Id. at 

472. The court refused to impose this obligation on law firms in 

the absence of a fiduciary relationship between the law firm and 

the plaintiffs. Id. at 472-74. To do so, the court remarked, 

would be to make attorneys "guarantors of integrity in all 

commercial transactions, whether the context be one of raising 

capital, marketing a product, or negotiating a contract. Lawyers, 

in short, would function in the business world as designated 

watchdogs." Id. at 475. See also Barker, 797 F.2d at 496 ("When 

the nature of the offense is a failure to 'blow the whistle', the 

defendant must have a duty to blow the whistle. And this duty 

does not come from § 10(b) or Rule 10b-5; if it did the inquiry 

would be circular. The duty must come from a fiduciary relation 

outside securities law."). 

 This case, in contrast, presents the question of 

whether, once a law firm has chosen to speak, it may omit facts 

material to its non-confidential opinions. Here, unlike Fortson, 

the allegedly omitted facts bear directly on the accuracy of the 

tax opinion. Thus, this situation closely resembles that before 

the Seventh Circuit in Ackerman v. Schwartz, 947 F.2d 841 (7th 

Cir. 1991). In Ackerman investors brought suit against a law 

firm that wrote an opinion letter concluding that the investors 

were entitled to certain deductions for their investments in a 

tax shelter. The opinion letter recited facts that made the 
27 

transaction seem legitimate, but were fictitious. The letter 

cautioned that the firm had "relied on unnamed persons for 

unspecified facts," id. at 843, and added that "'[w]e have not 

made an attempt to independently verify the various 

representations.'" Id. The court held that the district court's 

grant of summary judgment in favor of the law firm was improper. 

Under Rule 10b-5 ... the lack of an 

independent duty does not excuse a material 

lie. A subject of a tender offer or merger 

bid has no duty to issue a press release, but 

if it chooses to speak it must tell the truth 

about material issues. Although the lack of 

duty to investors means that Schwartz had no 

obligation to blow the whistle, and none to 

correct a letter he had not authorized to be 

circulated in the first place ... Schwartz 

cannot evade responsibility to the extent he 

permitted the promoters to release his 

letter. 

Id. at 848 (citations omitted). 

 This analysis flows naturally from Eisenberg. There we 

held that an opinion is actionable if issued "with a lack of a 

genuine belief that the information disclosed was accurate and 

complete in all material respects." 766 F.2d at 776. Indeed, 

when the foundations of an opinion "suggest that they cannot be 

relied on without further inquiry, then the failure to 

investigate further may 'support an inference that when the 

defendant expressed the opinion it had no genuine belief that it 

had the information on which it could predicate that opinion.'" 

Id. (citations omitted). Thus, this court has adopted a limited 

duty to investigate and disclose when, by the drafter's omission, 

a public opinion could mislead third parties. 
28 

 This limited duty not to omit was particularly wellarticulated in Rose v. Arkansas Valley Envtl. & Util. Auth., 562 

F.Supp. 1180, 1206-08 (W.D.Mo. 1983). The Rose court, in holding 

that an attorney's failure to disclose material facts in a bond 

opinion letter formed the basis of an actionable securities fraud 

claim, explained that when a professional "undertakes the 

affirmative act of communicating or disseminating information," 

there is 

a general obligation or "duty" to speak 

truthfully; or, alternatively stated, a 

"duty" not to communicate something which is 

known to be untrue (or, perhaps, in which the 

defendant has so little basis for honest 

belief that the requisite degree of 

"recklessness" is involved). And encompassed 

within that general obligation is also an 

obligation or "duty" to communicate any 

additional or qualifying information, then 

known, the absence of which would render 

misleading that which was communicated. While 

this latter "duty" might loosely be described 

as a "duty to disclose," I would prefer, for 

purposes of distinguishing it from a true 

"duty to disclose," ... to label it as a 

"duty not to omit." In reality, it is simply 

one facet of the general obligation to speak 

truthfully, arising out of and because of an 

affirmative act by the defendant in 

communicating. 

Id. at 1207 (citations omitted). 

 The record contains evidence sufficient to preclude 

summary judgment on the omissions claim. Arvey received 

inquiries concerning its opinion letter from potential investors 

prior to issuing its second letter and was explicitly told prior 

to issuing its third letter that First Western was distributing 

copies of its letters along with brochures describing the 
29 

program. Plaintiffs have alleged that Arvey failed to disclose 

the SEC and State of Minnesota investigations as well as the IRS 

investigation into the analogous Price trading program. This 

evidence creates genuine issues of material fact sufficient to 

defeat Arvey's motion for summary judgment. 

 Finally, we must address Arvey's argument that a duty 

not to omit runs against the ethical standards of attorney 

conduct. This argument is unpersuasive. Privileges and ethical 

rules cannot be relied on to perpetrate fraud. See Clark v. 

United States, 289 U.S. 1, 15 (1933) ("The privilege takes flight 

if the relation is abused. A client who consults an attorney for 

advice that will save him in the commission of a fraud will have 

no help from the law. He must let the truth be told."). 

IV. 

 For the foregoing reasons, we will reverse the district 

court's decision granting summary judgment for Arvey on 

plaintiffs' claim that Arvey's tax opinion letters contained 

material omissions upon which plaintiffs relied. We will affirm 

the district court's opinion in all other respects, and will 

remand for proceedings consistent with this opinion. 

 
30 

Kline v. First Western Government Securities

Nos. 92-1498, 92-1499 

GREENBERG, Circuit Judge, dissenting. 

 This case raises the issue of when a law firm may be 

liable to third parties for misrepresentations and omissions in 

opinion letters written by the firm to its client. I am unable 

to join in the majority's opinion because the explicit 

disclaimers in the opinion letters, portions of which the 

majority quotes, made the plaintiffs' reliance on these letters 

unreasonable as a matter of law. Therefore, I would reverse the 

order of the district court to the extent that it denied the firm 

summary judgment, would affirm the order to the extent that it 

granted the firm summary judgment, and would remand the matter 

for entry of summary judgment in favor of the firm against the 

plaintiffs on the claims involved on this appeal. My dissent 

addresses only the reasonable reliance issue as described on 

pages 18 through 24 of the typescript of the majority opinion and 

the accompanying footnotes, as in my view that issue is 

dispositive. 

 As germane on this appeal, the plaintiffs alleged that 

the law firm, Arvey, violated section 10(b) of the Securities 

Exchange Act of 1934, 15 U.S.C. § 78(j), and Rule 10b-5, 17 

C.F.R. § 240.10b-5. The plaintiffs focus their attack on Arvey 

on the factual descriptions of First Western's program contained 

in Arvey's opinion letters. The plaintiffs contend that these 
3 

descriptions are inaccurate as a result of both 

misrepresentations and omissions. They further allege that as a 

consequence of Arvey's misrepresentations and omissions, they 

suffered adverse tax consequences upon the cancellation of losing 

forward contracts because the Internal Revenue Service disallowed 

the deductions they claimed based on these losses. Indeed, the 

relationship of the plaintiffs' claims to the tax portions of 

Arvey's opinions is demonstrated by the district court's holding 

of this case on its suspense calendar pending the outcome of 

litigation in the Tax Court regarding deductions for losses upon 

the cancellation of losing forward contracts arranged by First 

Western. The district court activated this case after the 

taxpayers were unsuccessful in that forum. See Freytag v. 

Comm'r, 89 T.C. 849 (1987), aff'd, 904 F.2d 1011 (5th Cir. 1990), 

aff'd, 111 S.Ct. 2631 (1991).0 The plaintiffs, however, were not 

parties to that Tax Court case. Instead, they settled their 

cases with the Internal Revenue Service. 

 Arvey responds to the plaintiffs' charges by urging 

that the plaintiffs could not have relied justifiably on the 

opinion letters, as the letters: (1) explicitly addressed assumed

facts; (2) stated that these facts had been provided by the 

client; and (3) stated that the firm furnished the opinion to 

First Western and it should not be relied upon by persons other 

than First Western. Thus, Arvey argues that the district court 

 

0The Supreme Court did not deal with the merits of the 

controversy. The opinion of the Court of Appeals contains a 

succinct description of the First Western program. 904 F.2d at 

1013-14. 
4 

erred in concluding that the qualifying language in the opinion 

letters did not shield it from liability as a matter of law. I 

agree. 

 I recognize that it is well settled that projections, 

forecasts, and opinions may be actionable under Rule 10b-5 if the 

declarant makes them without a genuine belief in their validity 

or a reasonable basis to believe in their accuracy. In re Donald 

J. Trump Casino Sec. Litig., 7 F.3d 357, 368, (3d Cir. 1993), 

cert. denied, 114 S.Ct. 1219 (1994); Herskowitz v. Nutri/System, 

Inc., 857 F.2d 179, 184 (3d Cir. 1988), cert. denied, 489 U.S. 

1054, 109 S.Ct. 1315 (1989); Eisenberg v. Gagnon, 766 F.2d 770, 

775-76 (3d Cir.), cert. denied, 474 U.S. 946, 106 S.Ct. 342 

(1985). As we explained in Eisenberg, "[a]n opinion must not be 

made 'with reckless disregard for its truth or falsity' or with a 

lack of a 'genuine belief that the information disclosed was 

accurate and complete in all material respects.'" 766 F.2d at 

776 (citation omitted). Attorneys and other professionals are 

not exempt from this requirement, and courts have permitted the 

imposition of liability for securities fraud on professionals who 

knowingly or recklessly have issued false or misleading opinions. 

See, e.g., Id.; Duke v. Touche Ross & Co., 765 F. Supp. 69 

(S.D.N.Y. 1991); Stevens v. Equidyne Extractive Indus., 694 F. 

Supp. 1057 (S.D.N.Y. 1988). 

 To state a violation of section 10(b) and Rule 10b-5, a 

plaintiff must allege that the defendant made (1) a misstatement 

or an omission (2) of material fact (3) with scienter (4) on 

which the plaintiff relied (5) and which proximately caused the 
5 

plaintiff's injury. See, e.g., Hayes v. Gross, 982 F.2d 104, 106 

(3d Cir. 1992); Shapiro v. UJB Fin. Corp., 964 F.2d 272, 280 (3d 

Cir.), cert. denied, 113 S.Ct. 365 (1992); Lewis v. Chrysler 

Corp., 949 F.2d 644, 649 (3d Cir. 1991); Straub v. Vaisman & Co., 

540 F.2d 591, 598 (3d Cir. 1976). Moreover, the plaintiff's 

reliance on the alleged misstatement or omission must be 

reasonable, even though the defendant has the burden of proof to 

show it was not reasonable. Straub, 540 F.2d at 598. 

Consequently we have stated that to recover under section 10(b) 

and Rule 10b-5, "the plaintiff [must] act reasonably" and that "a 

sophisticated investor is not barred by reliance upon the honesty 

of those with whom he deals in the absence of knowledge that the 

trust is misplaced." Id. (emphasis added). Thus, "an investor 

cannot close his eyes to a known risk" and if he is "cognizant of 

the risk, then there is no liability." Teamsters Local 282 

Pension Trust Fund v. Angelos, 762 F.2d 522, 530 (7th Cir. 1985). 

Accordingly, a securities action defendant may obtain summary 

judgment by demonstrating that the plaintiff's reliance on the 

defendant's statements was unreasonable as a matter of law. 

 It stands to reason that where opinion letters 

regarding a potential investment -- even those prepared with 

scienter -- "bespeak caution," reasonable investors should not 

rely on the representations in them. See Luce v. Edelstein, 802 

F.2d 49, 56 (2d Cir. 1986). The majority concedes that "[m]ere 

reliance on the legal conclusions expressed in the opinion 

letters, without more, would have been unreasonable," but states 

that it was not unreasonable for plaintiffs to rely on Arvey's 
6 

descriptions of First Western's trading program although Arvey 

specifically attributed them to First Western and did not purport 

to have verified them. Typescript at 20-21. Thus, the majority 

holds that the "bespeaks caution" doctrine applies only "to the 

extent that plaintiffs relied solely and without further 

investigation or consideration on the opinion letters' 

conclusions as to the tax consequences of the First Western 

transactions" because the language in the letters would not have 

alerted plaintiffs that Arvey knew or had reason to know that the 

descriptions were inaccurate. Id. at 22-24. The majority's 

suggestion that the plaintiffs could reasonably rely on Arvey's 

opinion letter because "Arvey's statement that its opinion was 

based on facts represented to it by First Western . . . contained 

the implicit assertion that Arvey did not know the facts to be 

otherwise" improperly equates scienter with reasonable reliance. 

Id. at 23. These requirements are two independent elements which 

must be alleged to state a primary violation of section 10(b) and 

Rule 106-5. 

 Consequently, warnings and disclaimers -- by limiting 

the extent to which an investor can rely on the offering 

documents -- will preclude recovery for securities fraud even 

when the defendant's scienter has been established. "Dismissal of 

securities fraud claims may be appropriate where the offering 

documents specifically warn plaintiffs not to rely on the alleged 

misrepresentations made by defendants, thus making any subsequent 

reliance unjustified." Griffin v. McNiff, 744 F. Supp. 1237, 

1253 (S.D.N.Y. 1990), aff'd, 996 F.2d 303 (2d Cir. 1993) (table). 
7 

For this reason, several courts have dismissed cases similar to 

this one on the ground that it was unreasonable for the investor 

to have relied on representations in the challenged opinion 

letter in the face of the letter's broad disclaimers or its 

attribution of the facts it recites to a third party. 

 For example in Buford White Lumber Co. v. Octagon 

Properties, Ltd., 740 F. Supp. 1553 (W.D. Okla. 1989), the 

plaintiffs brought a securities fraud suit against the law firm 

that had prepared the offering memorandum for the limited 

partnerships in which they had invested. The memorandum stated 

that the principals of the limited partnership and not the law 

firm had prepared the historical and financial statements and 

that the firm had not audited these statements. 740 F. Supp. at 

1561. Accordingly, the court held that 

[i]n the face of these disclaimers and 

disclosure of the limited undertaking of 

defendant with respect to information or 

matters disclosed in the offering memorandum, 

it would be unforeseeable as a matter of law 

to a prudent law firm in Defendant's position 

that potential purchasers, including 

Plaintiffs, would rely upon Defendant's 

nondisclosure of any misrepresentations or 

omissions in the financial statements of [the 

limited partnership] as a representation by 

Defendant that the statements were accurate 

by reason of which Plaintiffs might be 

harmed. . . . The Offering memorandum states 

that the financial statements were prepared 

by and were the sole responsibility of [the 

limited partnership]. In short, Defendant did 

not undertake to prepare, evaluate the 

accuracy of, or opine upon the accuracy of 

financial statements by [the limited 

partnership] and said so. 
8 

740 F. Supp. at 1563. The court then went on to explain: 

[i]n the face of the statements in the 

Offering Memorandum that the financial 

statements were the sole responsibility of 

[the limited partnership] and were unaudited, 

and disclosures concerning the limited role 

of Defendant in preparing or evaluating 

statements made in the Offering Memorandum, 

the Court agrees with Defendant that any 

reliance by Plaintiffs on Defendant's duty to 

disclose inaccuracies, misrepresentation or 

omissions of [the limited partnership] in 

information it supplied is unreasonable as a 

matter of law. 

Id. at 1666. 

 Numerous other courts have reached similar decisions. 

See, e.g., Moorhead v. Merrill, Lynch, Pierce, Fenner & Smith, 

Inc., 949 F.2d 243 (8th Cir. 1991) (holding that bond purchasers 

could not maintain securities fraud action against consultant 

that filed a feasibility study despite alleged 

misrepresentations, where study contained detailed cautionary 

language and specific warnings of risk factors, along with 

underlying factual assumptions); Luce v. Edelstein, 802 F.2d at 

56 ("we are not inclined to impose liability on the basis of 

statements that clearly 'bespeak caution'" where offering 

memorandum warned investors that projections of potential cash 

and tax benefits were "'necessarily speculative'") (citation 

omitted); Friedman v. Arizona World Nurseries Ltd. Partnership, 

730 F. Supp. 521, 541 (S.D.N.Y. 1990) (dismissing section 10(b) 

claims on ground that plaintiffs' reliance was unreasonable, 

where accountant's tax opinion stated that the projections 

contained therein were based on representations which were made 
9 

to the accountants by the promoter of the limited partnership), 

aff'd, 927 F.2d 594 (2d Cir. 1991) (table); O'Brien v. National 

Property Analysts Partners, 719 F. Supp. 222, 227-29 (S.D.N.Y. 

1989) (holding that no liability attaches where accountant 

specifically attributes its financial assumptions to documents 

given to it by representatives of the limited partnership); 

Stevens v. Equidyne Extractive Indus. 1980, 694 F. Supp. at 1063-

64 (dismissing securities fraud suit against accountant, because 

statements in accountant's opinion letter "set forth that they 

[were] based on supplied facts, [and] additionally state[d] that 

there is no implication that the results predicted can or will be 

achieved"); Feinman v. Shulman Berlin & Davis, 677 F. Supp. 168, 

170-71 (S.D.N.Y. 1988) (holding that where "offering memorandum 

warned plaintiffs not to rely on the misrepresentations which the 

defendants allegedly made [,] plaintiffs' reliance on those 

misrepresentations, if made was unjustified and dismissal is 

appropriate")0; Andreo v. Friedlander, Gaines, Cohen, Rosenthal & 

Rosenberg, 651 F. Supp. 877, 881 (D. Conn. 1986) (dismissing 

section 10(b) claims because the cautionary "language of the 

document in question limited the degree to which investors should 

rely on it" as it told investors that defendant accounting firm 

did not verify the data upon which its projections were based); 

Devaney v. Chester, Fed. Sec. L. Rep. (CCH) ¶ 92,747, at 93,649 

(S.D.N.Y. 1986), rev'd on other grounds, 813 F.2d 566, 569 (2d 

 

0In my view, Friedman and Feinman are particularly significant 

because they dealt with caveats concerning the tax consequences 

of the transactions and, as here, warned that the IRS might 

challenge the tax assumptions underlying the investments. 
10 

Cir. 1987) (dismissing securities fraud claim against investment 

bank because the confidential memorandum it prepared "with its 

broad disclaimers as to the source of information contained 

therein, does not support an allegation of reliance. Investors 

would not be likely to rely on memoranda which so definitely 

stated their dependency on another source").0 

 Like the law firm in Buford White Lumber Co., Arvey 

made it clear that it did not undertake to guarantee to potential 

investors the accuracy of the factual information contained in 

its letters. Arvey also made it clear that it was not offering 

advice to such investors. Each of the opinion letters is 

addressed to Sidney Samuels as president of First Western, and is 

stated to be for the exclusive use of Samuels or First Western. 

The 1980 opinion letter emphasizes this point most strongly. It 

warns that it "supersedes our letter of June 8, 1979, upon which, 

as you were previously informed, you should no longer rely," App. 

at 576, and contains an even more forceful cautionary statement 

than the earlier letters that: 

[t]his letter is intended solely for the 

internal use of First Western and, 

accordingly, it is not intended to be, and 

should not be, relied upon by any person 

other than First Western. Further, this 

letter is not to be quoted or otherwise 

referred to in any documents, including 

 

0The Court of Appeals for the Second Circuit reversed the 

district court's judgment on the ground that the court should 

have permitted the plaintiffs to file an amended complaint. This 

holding, however, did not cast doubt on the district court's 

determination that reliance is unjustified where the document at 

issue contains cautionary language and represents that the source 

of the information contained therein came from a third party. 
11 

financial statements of First Western, nor is 

it to be filed with or furnished to any 

governmental agency or other person without 

the express prior written consent of this 

firm. 

 

Id. at 590-91. 

 Furthermore, the opinion letters were replete with 

cautionary language. All three warned that the IRS and the 

courts might "take a strong stance contrary to the opinion 

expressed herein." Id. at 147 (1978 letter), 574 (1979 letter), 

591 (1980 letter).0 Indeed, the 1980 opinion letter disclosed 

that the IRS was investigating First Western's customers for 

engaging in tax avoidance transactions and that the IRS generally 

viewed the simultaneous holding and selling of forward contracts 

with suspicion. The letter stated that: 

Rev. Rul. 77-185 is part of a concerted 

effort by the Service to curb what it 

considers the abusive use of offsetting 

positions in securities and commodities to 

minimize or defer tax liability. In addition 

to promulgating Rev. Rul. 77-185, the Service 

has added Chapter 700 ('Commodity Options and 

Futures') to its Tax Shelters Examination 

Handbook, in which it identifies, among other 

transactions, 'the simultaneous buying and 

selling of futures contracts in . . . GNMA 

Certificates' as a 'basic tax shelter 

arrangement.' The Service has also announced 

a policy of identifying for audit returns 

which contain significant securities and 

commodities transactions, and is presently 

litigating various cases involving 

transactions similar to those involved in 

Rev. Rul. 77-185. Due to the Service's 

concern with transactions similar to those 

 

0The plaintiffs made their investments in December 1980 after

they read Arvey's 1979 and 1980 letters. 
12 

entered into between First Western and its 

customers, persons who enter into 

transactions with First Western may 

substantially increase their chances of being 

audited by the Service. Further, you have 

informed us that customers of First Western 

are being audited by the Service and that the 

Service has questioned the deductibility of 

losses realized by such customers on the 

basis of the theory set forth by the Service 

in Rev. Rul. 77-185. 

App. at 588 (emphasis added). This warning, in no uncertain 

terms, put potential investors who read Arvey's letters, 

including the plaintiffs, on notice of the strong possibility 

that the IRS would disallow deductions by investors of any losses 

resulting from the cancellation of First Western contracts on the 

ground that the transactions were really only a tax avoidance 

scheme. Of course, that is exactly what happened. Furthermore, 

the 1980 letter disclosed First Western's troubled past by 

discussing the IRS's audits of prior First Western transactions 

identical to those analyzed in the opinion letters. Thus, the 

plaintiffs cannot state a claim of misrepresentation because the 

facts upon which their claim is premised were disclosed clearly. 

"[T]he naked assertion of concealment of material facts which is 

contradicted by published documents which expressly set forth the 

very facts allegedly concealed is insufficient to constitute 

actionable fraud." Spiegler v. Wills, 60 F.R.D. 681, 683 

(S.D.N.Y. 1973).0 Furthermore, in the face of this disclosure, 

 

0The cases I have cited do not always distinguish among the 

related concepts that a statement may be so conditioned that: (1) 

it cannot be regarded as misleading; (2) the representations it 

contains may not be material; and (3) reliance on the statement 

may be unreasonable. Nevertheless all support the conclusion 

that the plaintiffs' reliance in this case was unreasonable. 
13 

it was unreasonable for the plaintiffs to rely on the Arvey 

letters as support for the validity of deductions for ordinary 

losses upon the cancellation of a losing forward contract. 

 In addition to warning of the possible nondeductibility of losses resulting from the purchase of First 

Western's forward contracts, the opinion letters clearly 

indicated that they depended on assumed facts. In this regard, 

the letters prefaced their factual description of First Western's 

trading programs with the following introductory remarks, 

attributing the descriptions to Samuels: "the following 

paragraphs contain a summary of such transactions as you have 

described them to us," App. at 135 (1978 letter); "you have 

advised us that the facts set forth below constitute an accurate 

and complete presentation of all relevant information with regard 

to such transactions," Id. at 558 (1979 letter); and "you have 

advised us that the facts set forth below constitute an accurate 

and complete presentation of all relevant information with regard 

to the transactions between First Western and its customers, and 

that no material fact necessary to make the information herein 

not false or misleading has been omitted," Id. at 576 (1980 

letter). 

 Furthermore, almost every specific factual description 

of how the First Western trading program functioned began with 

the phrase "you have represented to us. . ." or the equivalent. 

For example, both the 1979 and 1980 letters included the 

following statements: 
14 

you have represented to us that the various 

combinations of forward contracts obligating 

the customer to deliver and take delivery of 

money market instruments will, as described 

above, have sufficiently different stated 

interest rates and delivery dates so as to 

produce independent price movement among such 

contracts and cause the customer to have a 

reasonable opportunity of realizing economic 

gain (and a corresponding risk of loss) with

respect to his various positions.

0 

Id. at 560-61, 577 (1979 and 1980 letters). 

You have represented to us that the 

transactions entered into by First Western 

and its customers will reflect the customer's 

market strategy and interest rate forecast, 

will have economic validity independent of 

their respective tax consequences, and will 

produce a reasonable opportunity for economic 

gain and risk of economic loss. 

Id. at 573 (emphasis added) (1979 letter). 

In addition, this opinion is subject to the 

consummation of the transactions between 

First Western and its customers pursuant to 

the facts and conditions described above and 

is further expressly conditioned on your 

representation that such transactions will be 

consummated by the customers of First Western 

with a reasonable expectation of economic 

gain. 

Id. at 563 (emphasis added) (1979 letter). 

 Thus, Arvey's opinion letters, like those in the above 

cited cases, expressly noted that Samuels and First Western, not 

Arvey, supplied the facts, that even under those facts there was 

no guarantee that the results predicted would be achieved, and 

that the letters should not be relied upon by the investors. 

 

0The words which I have underscored read as follows in the 1980 

letter: "with respect to his overall position." 
15 

Given all of this cautionary language, the plaintiffs should not 

have understood the opinion letters to mean that Arvey had made 

factual representations regarding First Western's programs. I 

would therefore hold that the plaintiffs' could not have relied 

reasonably on the opinion letters as to the accuracy of the 

factual descriptions they contain, or indeed anything else, and 

thus no liability may be imposed on Arvey. 

 I have demonstrated already that the plaintiffs' 

reliance on the opinion letters was unreasonable. But there is 

even more evidence to support this conclusion, as the 1980 letter 

also includes a veritable bugle blast of an announcement 

cautioning investors not to rely on Arvey's opinion: 

 [h]owever, as discussed in more detail 

below, the deductibility of any particular 

customer's losses may depend upon certain 

facts and circumstances related to such 

customer's account with First Western at the 

time the loss is incurred. Accordingly, it 

is impossible for us to express an opinion as 

to the deductibility of any particular loss 

incurred by a customer of First Western. 

Id. at 586 (emphasis added). In view of the foregoing statement, 

the plaintiffs' reliance on Arvey's letters was not simply 

unreasonable. It was reckless. I believe that it is absolutely 

clear that the plaintiffs could not have relied reasonably on an 

opinion letter to justify tax deductions when the letter 

indicates that "it is impossible for us to express an opinion as 

to the deductibility of any particular loss incurred by a 

customer of First Western." 
16 

 An examination of the factors which we said in Straub

should be considered when determining whether a plaintiff 

justifiably relied on the defendant's misrepresentations 

reinforces my conclusion, though I hasten to add that it is so 

obvious that the plaintiffs' reliance on Arvey's letters was 

unreasonable that I could stop my dissent at this point. 540 

F.2d at 598. But I will go on. There are five Straub factors: 

(1) the existence of a fiduciary relationship; (2) the 

plaintiffs' opportunity to detect the fraud; (3) the 

sophistication of the plaintiffs; (4) the existence of a longstanding business or personal relationship; and (5) access to the 

relevant information. Id. In regard to the first and fourth 

factors, Arvey clearly had no special relationship with the 

plaintiffs that would give the plaintiffs any grounds to trust 

Arvey's representations or that would impose on Arvey any duty to 

inform the plaintiffs of possible inaccuracies. Indeed, the 

majority acknowledges this point. See typescript at 20. 

 As to the other factors, we must remember that we are 

not dealing with plaintiffs who made conventional investments. 

Straddle transactions are not designed for the proverbial "person 

on the street." To the contrary, the transactions discussed in 

the opinion letters involved very complex financial arrangements 

meant for sophisticated investors looking for tax advantages. The 

mere fact that these transactions were on the cutting edge of 

strategic tax planning should have put any reasonable investor on 

notice that there was a substantial risk of tax complications. 

Furthermore, the various disclosures in the letters should have 
17 

provided the plaintiffs with the incentive and opportunity to 

detect possible fraud. As I explain above, the letters not only 

made it clear that they were predicated on facts provided by 

Samuels, and not verified by Arvey, but they also disclosed past 

instances in which the IRS questioned the validity of 

transactions identical to those discussed in the letters, and 

indicated that it was likely there would be future trouble as 

well. Thus, the letters gave the plaintiffs every incentive to 

make further inquiries into the legitimacy of the First Western 

program and should have caused them to withhold their investments 

until they had the information necessary to make informed 

decisions. In sum, the application of the Straub factors 

dictates the conclusion that an investor could not justifiably 

rely on the representations contained in Arvey's opinion letters. 

In rejecting this conclusion, the majority writes that 

there is no evidence that these plaintiffs had any particular 

knowledge or sophistication which would enable them to notice any 

irregularities in First Western's programs. Id. at 20. The 

majority notes further that reliance on the letters might be 

justified because an investor could take the letters to an 

attorney and, predicated on the facts in them, obtain an 

erroneous opinion. Id. at 20-21. 

 But the opinion letters made it clear that the facts 

they contained originated from First Western, not Arvey. Although 

another attorney might have agreed with the legal analysis in the 

opinion letters, there is no way that another attorney could have 

confirmed from the letters themselves that the facts underlying 
18 

the opinions were correct as they were solely within the 

knowledge of First Western. Any reasonable person reading the 

letters would have realized this and questioned the reliability 

of the factual descriptions of First Western's trading practices 

and, in particular, the statements regarding the independent 

economic validity of the transactions. Furthermore, as I noted 

above, the 1980 opinion letter states that investors are not to 

make an investment decision based on the letter, but if they do, 

they should at least obtain written permission from Arvey. This 

admonishment should have pounded home to the plaintiffs the risk 

that they were taking. 

 I emphasize that it is critically important to focus on 

the precise nature of the plaintiffs' claims, because the 

reasonableness of the plaintiffs' reliance cannot be considered 

in the abstract. The precise issue is whether the plaintiffs 

could rely reasonably on the letters in considering the tax 

consequences of canceling a forward contract. As the plaintiffs 

explain in their opening brief at 5, "[t]he focus of each opinion 

letter was the federal income tax treatment of a loss sustained 

by a First Western customer upon the cancellation of a losing 

forward contract (a 'loss contract') prior to the contract's 

settlement date." In particular, the plaintiffs claim that Arvey 

mislead them because its opinion letters said that they would 

have ordinary losses when canceling losing forward contracts.0

 

0Actually, it never has been established that this advice was 

wrong. While the Tax Court ruled against other investors in the 

First Western program, and its decisions were affirmed on the 

merits by the Court of Appeals for the Fifth Circuit, the 
19 

 In the face of this claim, I ask the rhetorical 

question: how can an investor reasonably rely on opinion letters 

to anticipate favorable tax treatment when they: (1) are 

addressed to someone else; (2) are by their terms only for the 

use of someone else; (3) by their terms cannot be shown to the 

investor; (4) are predicated on facts not supplied by the author 

of the letters; (5) warn that the IRS likely will challenge the 

claim for favorable treatment as it has in similar situations; 

(6) explain the basis for the challenge; (7) state that the 

courts might take a strong stance contrary to the opinion; and 

(8) flatly announce that it is "impossible" for the author of the 

letter "to express an opinion as to the deductibility of any 

particular loss incurred by" an investor? The answer is obvious. 

The investors could not rely reasonably on such letters, and thus 

Arvey is entitled to summary judgment on the Section 10(b) 

claims.0 In my view, nothing could be clearer. 

 Surely if there ever was any doubt as to Arvey's right 

to a summary judgment, it did not survive our recent opinion in 

 

plaintiffs were not parties to that case. For all that we know, 

it is possible that if the plaintiffs had not chosen to settle 

with the IRS, they might have prevailed in litigation in either 

the Tax Court or in a different court of appeals. Courts of 

appeals, after all, do not always view identical tax issues 

similarly. See Pleasant Summit Land Corp. v. Comm'r., 863 F.2d 

263, 265 n.2. (3d Cir. 1988), cert. denied, 493 U.S. 901, 110 

S.Ct. 260 (1989). I acknowledge, however, that probably the 

plaintiffs would have lost and I further recognize that the 

Freytag case was a "test case." Freytag, 904 F.2d at 1014. Of 

course, my opinion is not dependent on whether Arvey's opinion 

was right or wrong. 

0Of course, there is no dispute of fact precluding summary 

judgment, as the plaintiffs do not contend that the opinion 

letters do not contain the provisions I have quoted. 
20 

In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357. In Trump, 

as in this case, the plaintiffs asserted a Section 10(b) action.0 

The action arose from the sale of bonds by the defendants to 

acquire, complete the construction of, and open a gigantic casino 

in Atlantic City, New Jersey. The plaintiffs were purchasers of 

the bonds who claimed that in making their purchases they relied 

on false statements in the prospectus. The plaintiffs also 

asserted that material matters were omitted from the prospectus. 

The defendants successfully moved to dismiss under Fed. R. Civ. 

P. 12(b)(6), as the complaint failed to state a claim on which 

relief could be granted. 

 On appeal we affirmed on the basis of the "bespeaks 

caution" doctrine. We pointed out that the prospectus was so 

filled with cautionary language that the allegedly misleading 

statements became immaterial as a matter of law. Trump, 7 F.3d 

at 371-73. I will not set forth the representations and 

cautionary language in Trump, for I see no need to do so. Rather, 

I indicate only that it seems obvious that the facts in Trump

gave the investors a stronger claim for recovery than the facts 

in this case give the plaintiffs here. Yet in Trump we affirmed 

the order of the district court granting the defendants judgment 

under Rule 12(b)(6). 

 I acknowledge that in Trump we held that the cautionary 

language rendered the alleged misrepresentation immaterial as a 

matter of law while here we are concerned with whether the 

 

0Trump also involved other counts which we need not describe. 
21 

plaintiffs reasonably relied on Arvey's opinion letters. But 

this distinction makes no difference. The point is that the 

cautionary language in the Trump prospectus should have hammered 

home to the investors the risk they were taking. Precisely the 

same thing is true here. The plaintiffs here could not rely 

reasonably on documents which by their terms were not for their 

view and which were conditioned so thoroughly. While it is true, 

as the majority points out, that Arvey may have known that 

investors would see the letters, that knowledge is immaterial to 

the question of reasonable reliance, a determination that must be 

predicated on what should be the investor's state of mind. Thus, 

I do not urge that we hold that Arvey did not misrepresent.0

Rather, I would hold Arvey has demonstrated that the plaintiffs 

unreasonably relied on its opinion letters. 

 By its holding that there is a triable issue as to 

whether the plaintiffs' reliance on the Arvey letters was 

reasonable, the majority effectively holds that no matter how 

thoroughly a law firm conditions its opinion, it may be liable to 

the investors in a Section 10(b) action for misrepresentation and 

omissions. In this circuit there now will be no safe harbor for 

attorneys in the sea of Section 10(b) cases. The majority's 

holding thus cannot be reconciled with the warnings, recently 

made by the Court of Appeals for the Fourth Circuit, that where, 

as here, a law firm has "unequivocally informed potential 

 

0Of course, on the basis of Trump and the other opinions I have 

cited, we could hold that there were no misrepresentations, but 

even if there were, they were not material. But I am not taking 

that approach. 
22 

investors that the law firm had not verified the financial data 

provided to it by the client[,] . . . [t]o find a duty in the 

face of this express disclaimer of verification would render law 

firms powerless to define the scope of their involvement in 

commercial transactions." See Fortson v. Winstead, McGuire, 

Sechrest, & Minick, 961 F.2d 469, 475 (4th Cir. 1992). I cannot 

conceive of more explicit disclaimers than Arvey's. If such 

disclaimers cannot permit a law firm to foreclose the possibility 

of imposition of liability on it to outside parties for issuing a 

written opinion to a client, then nothing will. The result of 

the majority's position is therefore "a rigid rule charging all 

attorneys who involve themselves in any narrow corner of a 

commercial transaction with responsibility for the whole 

transaction" even when they expressly disclaim any such 

involvement. Id. 

 Furthermore, as a practical matter, the majority 

opinion has eliminated the justifiable reliance element of 

Section 10(b) actions which hereafter in this circuit will exist 

only in theory. The opinion will have far-reaching consequences 

in this circuit and perhaps beyond because in our national 

economy attorneys anywhere may recognize that in some securities 

transactions litigation in this circuit may materialize. The 

opinion should lead knowledgeable commercial attorneys in 

situations in which the Securities Exchange Act may become 

implicated to be reluctant to advise anyone about anything which 

could affect the rights of investors or the value of the 

securities. Indeed, I see no principled way to limit the 
23 

majority's decision to opinions given by attorneys. Accordingly, 

I dissent.