Opinion ID: 366985
Heading Depth: 2
Heading Rank: 1

Heading: Commonality of Purpose

Text: 14 Modeled after Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), Rule 10b-5 was promulgated by the Securities and Exchange Commission in the public interest or for the protection of investors. 15 U.S.C. § 78j(a). Rule 10b-5 defines and has been held to afford a remedy for fraudulent misrepresentations or omissions of material fact in connection with the purchase or sale of securities. See St. Louis Union Trust Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 562 F.2d 1040, 1048 (8th Cir. 1977), Cert. denied, 435 U.S. 925, 98 S.Ct. 1490, 55 L.Ed.2d 519 (1978). Rule 10b-5 provides: 15 It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, 16 (a) To employ any device, scheme, or artifice to defraud, 17 (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading or 18 (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 19 Section 409.411, in its pertinent part, states:(a) Any person who 20 (2) offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading (the buyer not knowing of the untruth or omission), and who does not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission, is liable to the person buying the security from him . . . . 21 As a result of the additional first and third clauses of Rule 10b-5, the added burden on plaintiffs to prove an intentional misrepresentation, and the fact that relief is available to both the purchasers and sellers in a 10b-5 action, section 409.411 is not coextensive with Rule 10b-5 or section 10(b). Both the underlying federal and state statutes, however, deal expressly with the sale of securities; and both proscribe misrepresentations or omissions to state material facts in connection therewith. Moreover, the Missouri blue sky statute evinces the same fundamental purpose as the federal securities acts of implementing a 'philosophy of full disclosure'. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477-78, 97 S.Ct. 1292, 1303, 51 L.Ed.2d 480 (1977). These are the critical concerns in ascertaining a commonality of purpose. See In re Alodex Corporation Securities Litigation, 533 F.2d at 373; Vanderboom v. Sexton, 422 F.2d at 1237. 22 The appellants, relying on IDS Progressive Fund, Inc. v. First of Michigan Corp., 533 F.2d 340, 342-43 (6th Cir. 1976), argue that since section 409.411 by its terms protects only purchasers of securities whereas Rule 10b-5 protects purchasers and sellers there is no commonality of purpose between the two. Further, appellants contend that Ernst & Ernst has altered the scope of Rule 10b-5 actions since a cause of action for damages under the Rule must now be predicated on a showing of intentional misrepresentation. This change has resulted in a commonality of purpose between common law fraud and section 10(b), appellants conclude, because common law fraud in Missouri is said to require scienter, unlike actions brought under 409.411. 10 We have some question as to appellants' premise that Missouri common law fraud requires scienter as defined by the Supreme Court in Ernst & Ernst, 425 U.S. at 194 n. 12, 96 S.Ct. 1375. A significant body of Missouri case law indicates that, contrary to the Arkansas law at issue in Vanderboom, 422 F.2d at 1239, a plaintiff need not establish an intentional misrepresentation as an element of common law fraud. As the Missouri Court of Appeals stated in Wilson v. Murch, 354 S.W.2d 332, 338-39 (Mo.App.1962): 23 To recover for fraudulent representations, it is not necessary that it be shown that defendant had actual knowledge of the falsity of the facts stated by him. It is sufficient that he made the representations with the consciousness that he was without knowledge as to their truth or falsity, when, in fact, they were false. Luikart v. Miller, Mo., 48 S.W.2d 867; Gadberry v. Bolton, Mo.App., 242 S.W. 688; Peters v. Lohman, 171 Mo.App. 465, 156 S.W. 783. 24 See State of Missouri v. Independence Dodge, Inc., 494 S.W.2d 362, 368 (Mo.1973); Ackmann v. Keeney-Toelle Real Estate Co., 401 S.W.2d 483, 489 (Mo.1966). It seems therefore that reckless, and arguably some species of negligent conduct can under certain circumstances be fraudulent in Missouri. In any event, we agree with the district court that section 10(b)'s purpose is more closely akin to that of section 409.411. Though section 10(b) and Rule 10b-5 are in some respects variously broader and narrower substantively than section 409.411, the conduct regulated by each relates to particular types of transactions regarding which the common law of fraud was not alone a sufficient remedy. Further, Ernst & Ernst has not changed our conclusion in Vanderboom and Alodex that ordinarily there is a distinct commonality shared by section 10(b) and a state's blue sky statute. See A. Bromberg, Securities Law: Fraud, § 8.4(210), at 204.1; 6 L. Loss, Securities Regulation 3902 (2d ed. 1961); Martin, Statute of Limitations in 10b-5 Actions: Which State Statute is Applicable?, 29 Bus.Law 443, 459 (1974). See also Garnatz v. Stifel, Nicolaus & Co., 559 F.2d 1357, 1363 (8th Cir. 1977), Cert. denied, 435 U.S. 951, 98 S.Ct. 1578, 55 L.Ed.2d 801 (1978). State and federal securities laws focused on achieving substantially the same end share a distinct purpose much more narrow than the broad law of fraud and much more congruent. See Bailey v. Piper, Jaffray & Hopwood, 414 F.Supp. at 482-83.