Opinion ID: 3009719
Heading Depth: 2
Heading Rank: 1

Heading: The Misrepresentations Claim

Text: 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 0 For 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). 13 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). 14 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 15 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 16 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 17 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 18 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 19 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 0 Unlike 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. 0 The 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 20 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. 21 (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 22 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 23 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.