Opinion ID: 2176586
Heading Depth: 2
Heading Rank: 2

Heading: Hibbard Brown's Market Maker Status

Text: The Court of Chancery held that Hibbard Brown violated section 7303(2) by failing to make a sufficient disclosure regarding its status as a market maker in the stocks they recommended for purchase. On the purchase confirmation slips sent to Delaware investors, Hibbard Brown stated WE MAKE A MKT IN THIS SECURITY. [7] While observing that such disclosure [may be] sufficient in some cases under Federal Securities laws, and that this statement may suffice for sophisticated investors, the Court of Chancery concluded: However, in the present case, the investors were unsophisticated and relied upon the information provided to them by HB and its agents. A one-line disclosure statement to such clients does not meet the adequacy requirements imposed on HB by 6 Del.C. § 7303(2). Hibbard Brown & Co. v. Hubbard, Del.Ch., C.A. No. 12451, 1992 WL 389927, , slip op. at 12, Chandler, V.C. (Dec. 21, 1992) (emphasis in original). Whether disclosures are adequate is a mixed question of law and fact. Zirn v. VLI Corp., Del.Supr., 621 A.2d 773, 777 (1993). Therefore, the findings of the Court of Chancery with respect to the adequacy of disclosures will be upheld if they are sufficiently supported by the record and are the product of an orderly and logical deductive process. Shell Petroleum, Inc. v. Smith, Del.Supr., 606 A.2d 112, 114 (1992); Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972). Nevertheless, this Court's review of the legal standards formulated and applied by the Court of Chancery is de novo. See Zirn, 621 A.2d at 777. The Court of Chancery erred as a matter of law by relying on the lack of sophistication of Messrs. Krieger and Flynn in holding that Hibbard Brown's disclosure was inadequate. The adequacy of disclosure is determined by focusing upon a reasonable investor, and not by considering the attributes of the particular investor at issue. In the context of a director's duty of disclosure, this Court has held that the materiality of omitted information is determined using the standards enunciated in TSC Industries v. Northway, 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). [8] Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 944 (1985) (adopting the TSC standard for determining compliance with the duty of disclosure); Stroud v. Grace, Del.Supr., 606 A.2d 75, 84 (1992) (reaffirming Rosenblatt's holding regarding the TSC materiality standard). This Court recently stressed that [t]he TSC materiality standard is an objective one, measured from the point of view of the reasonable investor. Zirn v. VLI Corp., Del. Supr., 621 A.2d 773, 779 (1993) (emphasis in original). The United States Supreme Court has held that the materiality of misrepresentations and omissions in the Rule 10b-5 context is governed by the objective reasonable investor standard set forth in TSC Industries. Basic v. Levinson, 485 U.S. 224, 230-32, 108 S.Ct. 978, 982-84, 99 L.Ed.2d 194 (1988). In light of the fact that section 7303(2) and Rule 10b-5 are identically worded and have a similar purpose in protecting investors from fraudulent conduct in securities transactions, there is no reason why they should have different standards for materiality. Accordingly, the sophistication of the particular investor involved is not an appropriate consideration in assessing the adequacy of disclosure under either Rule 10b-5 or section 7303(2). [9] Furthermore, the Court of Chancery's holding on the adequacy of the phrase WE MAKE A MKT IN THIS SECURITY is inconsistent with federal case law under Rule 10b-5 (as the Vice Chancellor recognized). In Pross v. Baird, Patrick & Co., 585 F.Supp. 1456 (S.D.N.Y.1984), the Southern District of New York held that the identical phrase used by Hibbard Brown was a sufficient disclosure of market maker status for purposes of Rule 10b-5. Id. at 1459. The Court of Chancery's holding that the disclosure used by Hibbard Brown violated section 7303(2), even though the same language satisfies Rule 10b-5, creates the risk of uncertainty and confusion. We therefore reverse the finding of the Commissioner and the Court of Chancery that Hibbard Brown violated section 7303(2) by failing to disclose its status as a market maker. Because the Court of Chancery based its four-month suspension of Hibbard Brown on the four statutory violations it found, our reversal of the two nondisclosure violations reduces the suspension to two months. [10]