Opinion ID: 318563
Heading Depth: 1
Heading Rank: 3

Heading: prior ninth circuit decisions

Text: 9 In attempting to define the broad duty imposed under the rule, the courts have traditionally focused upon the defendant's state of mind, generally utilizing the catchword 'scienter.' 3 The question of what state of mind should be required before a court will impose liability has been a source of controversy in federal securities law since the Second Circuit said in Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 786 (2d Cir. 1951), that 'proof of fraud is required in suits under 10(b) of the 1934 Act and Rule X-10 B-5 . . ..' Early in this controversy we rejected the notion that common law fraud or scienter must be proven in order to recover under rule 10b-5. In Ellis v. Carter, 291 F.2d 270, 274 (9th Cir. 1961), we were urged by the appellees to hold that genuine fraud, as opposed to 'a mere misstatement or omission,' must be alleged and proved on the ground that proscribing material mis-statements and half-truths without using fraud or scienter language would not be a permissible implementation of section 10(b). We disagreed and said: 10 Section 10(b) speaks in terms of the use of 'any manipulative device or contrivance . . ..' Had Congress intended to (proscribe) common-law fraud, it would probably have said so. We see no reason to go beyond the plain meaning of the word 'any', indicating that the use of manipulative or deceptive devices or contrivances of whatever kind may be forbidden, to construe the statute as if it read 'any fraudulent' devices. 11 In Ellis we were concerned primarily with whether rule 10b-5 gave a private remedy to a buyer as well as a seller of securities. We held on the pleadings that a buyer did have a private remedy under the rule and rejected the defendants' additional challenge that plaintiff must allege and ultimately prove genuine fraud. 4 12 Subsequently, in Royal Air Properties, Inc. v. Smith, 312 F.2d 210, 212 (9th Cir. 1962), we reaffirmed our position that common law fraud need not be alleged or proved to recover under rule 10b-5: 13 In an action brought under section 10(b), common law fraud need not be alleged or ultimately proved. After establishing the use of some means of interstate commerce, the mails, or any national stock exchange facility . . . Rule 10b-5(b), a proper implementation of section 10(b), only requires proof of a material misstatement or an omission of a material fact in connection with the purchase or sale of any security to make our a prima facie case. 14 After finding that the plaintiff had established a prima facie violation of section 10(b), we held that the trial court erred in not allowing the affirmative defenses of estoppel, waiver and laches. A prima facie case, as we used the term in Royal Air, consists of sufficient evidence in that type of case to get plaintiff past a motion for a directed verdict in a jury case or motion to dismiss pursuant to Fed.R.Civ.P. 41(b) in a nonjury case. It is the evidence necessary to require a defendant to proceed with his case. In rule 10b-5 cases, where much of the evidence needed by the plaintiff to prove his case is in the hands of the defendant, we require a lesser amount of evidence to avoid a directed verdict or dismissal at the end of the plaintiff's case than we require for a final judgment. In such cases where the evidence is fairly close, it is inadvisable to sustain a defendant's motion to dismiss midway through the trial, even though technically the plaintiff may not have yet developed sufficient evidence for a final judgment, since as the defendant proceeds with his case, the plaintiff may well on cross-examination be able to develop points that will strengthen his case. 5 J. Moore, Federal Practice P41.13(4), at 1159 (2d ed. 1971). For that reason, we have set a lesser standard in 10b-5 cases when ruling on motions at the end of plaintiff's case-in-chief. Thus in Royal Air the plaintiff presented sufficient evidence to require the defendants to proceed with their case. When Royal Air came before us on a second appeal, we affirmed the trial court's decision, which it made after hearing the affirmative defenses, that there was sufficient evidence to support a final judgment for the plaintiffs. Royal Air Properties, Inc. v. Smith, 333 F.2d 568, 569 (9th Cir. 1964). 15 As is obvious from this discussion, our statement as to what constitutes a prima facie case in Royal Air should not be misconstrued as the standard of liability for a rule 10b-5 case. This is adequately demonstrated by the fact that in Royal Air we considered more than the sterile fact that the defendants had made a material misrepresentation. In addition to that fact, we noted that the defendants had either knowledge of or ready access to the information which, when omitted, made the statements to the plaintiff misleading and that the defendants had initiated the stock transaction and had actively solicited a purchase of stock by the plaintiff. 312 F.2d at 211-212. In the second Royal Air, in affirming the trial court's ultimate finding of liability, we also noted that the plaintiff did not have knowledge of or reasonable access to the information that the defendant omitted and that the plaintiff's lack of business sophistication made him over trusting in the defendant and in the reliability of his statements. 333 F.2d at 570-573. The significance of this factual background will become even more important as we discuss later the liability test for a rule 10b-5 case.