Opinion ID: 895250
Heading Depth: 1
Heading Rank: 3

Heading: Holder claims

Text: Finally, we turn to the Funds' holder claims, in which they contend not that Grant Thornton's misrepresentations induced them to take action, but rather that they induced them to refrain from doing so: the Funds allege that, but for Grant Thornton's representations, they would have sold their bonds sooner, when doing so would have been more profitable, or they would have forced Epic into bankruptcy sooner, when it had more assets to liquidate. The Funds urge the Court to consider the propriety of such claims, citing a Texas appellate decision, later withdrawn, Shirvanian v. DeFrates, No. 14-02-00447-CV, 2004 WL 35987, 2004 Tex. App. LEXIS 182, at - (Tex.App.-Houston [14th Dist.] Jan. 8, 2004) (holding that forbearance from selling stock, in reliance on direct communications made for the purpose of preventing plaintiffs from selling their stock, could form the basis of a cause of action for fraud under Texas law), opinion withdrawn and substituted by Shirvanian v. DeFrates, 161 S.W.3d 102 (Tex.App.-Houston [14th Dist.] 2004, pet. denied). We have never before considered the issue. In a holder claim, the plaintiff alleges not that the defendant wrongfully induced the plaintiff to purchase or sell stock, but that the defendant wrongfully induced the plaintiff to continue holding his stock. As a result, the plaintiff seeks damages for the diminished value of the stock, or the value of a forfeited opportunity, allegedly caused by the defendant's misrepresentations. Newby v. Enron Corp. (In re Enron Corp. Sec., Derivative & ERISA Litig.), 490 F.Supp.2d 784, 787 n. 4 (S.D.Tex. 2007); Small v. Fritz Cos., Inc., 30 Cal.4th 167, 132 Cal.Rptr.2d 490, 65 P.3d 1255, 1262-63 (2003). The U.S. Supreme Court has refused to recognize holder claims under federal securities law, primarily due to their speculative nature and difficulties in proof. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 734-735, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). The Court observed that a putative plaintiff, who neither purchases nor sells securities but sues instead for intangible economic injury such as loss of a noncontractual opportunity to buy or sell, is more likely to be seeking a largely conjectural and speculative recovery.... Id. As the Court explained: The manner in which the defendant's violation caused the plaintiff to fail to act could be as a result of the reading of a prospectus, as respondent claims here, but it could just as easily come as a result of a claimed reading of information contained in the financial pages of a local newspaper. Plaintiff's proof would not be that he purchased or sold stock, a fact which would be capable of documentary verification in most situations, but instead that he decided not to purchase or sell stock. Plaintiff's entire testimony could be dependent upon uncorroborated oral evidence of many of the crucial elements of his claim, and still be sufficient to go to the jury. The jury would not even have the benefit of weighing the plaintiff's version against the defendant's version, since the elements to which the plaintiff would testify would be in many cases totally unknown and unknowable to the defendant. The very real risk in permitting those in respondent's position to sue under Rule 10b-5 is that the door will be open to recovery of substantial damages on the part of one who offers only his own testimony to prove that he ever consulted a prospectus of the issuer, that he paid any attention to it, or that the representations contained in it damaged him. Blue Chip Stamps, 421 U.S. at 746, 95 S.Ct. 1917. The Supreme Court concluded that holder claims were impermissible in federal Rule 10b-5 actions, recognizing that its holding might be viewed as an arbitrary restriction which unreasonably prevents some deserving plaintiffs from recovering damages which have in fact been caused by violations of Rule 10b-5. Id. at 738, 95 S.Ct. 1917. That disadvantage, however, was attenuated to the extent that remedies are available to nonpurchasers and nonsellers under state law. [19] Id. at 739 n. 9, 95 S.Ct. 1917. And yet, a number of courts have rejected such claims. See Crocker v. FDIC, 826 F.2d 347, 351 (5th Cir.1987) (finding that an alleged lost profit opportunity under Mississippi law was too speculative to state any injury ... apart from a diminution in the value of [] stock; claim could not, therefore, be brought as a nonderivative claim); Newby, 490 F.Supp.2d at 803 (guessing that this Court would not recognize holder claims or, if it did, would do so only if heightened pleading standards were satisfied); WM High Yield Fund v. O'Hanlon, No. 04-3423, 2005 WL 1017811, at -, 2005 U.S. Dist. LEXIS 33569, at - (E.D.Pa. Apr. 29, 2005) (predicting that the Pennsylvania Supreme Court would not recognize holder claims); Arnlund v. Deloitte & Touche LLP, 199 F.Supp.2d 461, 489-90 (E.D.Va.2002); Chanoff v. U.S. Surgical Corp., 857 F.Supp. 1011, 1019 (D.Conn.1994) (holding that state law claims for damages based on failure to sell or hedge stock are too speculative to be actionable), aff'd, 31 F.3d 66 (2d Cir.1994); Dloogatch v. Brincat, 396 Ill.App.3d 842, 336 Ill.Dec. 571, 920 N.E.2d 1161, 1168-69 (2009) (dismissing holder claim because plaintiffs failed to plead reliance with sufficient specificity and did not show that they suffered a compensable loss); cf. Holmes v. Grubman, 286 Ga. 636, 691 S.E.2d 196, 199 (2010) (In many of the decisions on which Appellees rely, holder claims were not categorically rejected, but the plaintiffs failed to allege or prove that they specifically desired to sell their stock at a certain time, or causation was not sufficiently alleged or proved.). Conversely, courts in several states (including California, [20] Massachusetts, [21] New Jersey, [22] and New York [23] ) have recognized holder claims. Those decisions generally observe that fraud does not cease being so when it induces a party to refrain from acting. See, e.g., Gutman v. Howard Sav. Bank, 748 F.Supp. 254, 264 (D.N.J. 1990) (Lies which deceive and injure do not become innocent merely because the deceived continue to do something rather than begin to do something else.). Because [i]nducement is the substance of reliance[,] the form of relianceaction or inactionis not critical to the actionability of fraud. Id. The Restatement (Second) of Torts is in accord. RESTATEMENT (SECOND) OF TORTS § 525 (One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation.) (emphasis added); see also id. §§ 531, 551. Most recently, the Georgia Supreme Court, on certified question from the Second Circuit Court of Appeals, held that holder claims were cognizable under Georgia law. Holmes, 691 S.E.2d at 200. But even those courts that have recognized holder claims in some form generally have demanded that plaintiffs meet heightened pleading and proof standards. See id. (holding that although we have determined that holder claims should be recognized under Georgia law, we further conclude that the limitations imposed in other jurisdictions are appropriate); see also Newby v. Enron Corp. (In re Enron Corp. Sec., Derivative & ERISA Litig.), No. MDL-1446, 2007 WL 789141 at , 2007 U.S. Dist. LEXIS 17374 at - (S.D.Tex. Mar. 12, 2007); Rogers v. Cisco Sys., 268 F.Supp.2d 1305, 1314 (N.D.Fla. 2003) (guessing that Florida courts would recognize holder claims but would require the specificity in allegations of reliance recently recognized by the Supreme Court of California's [ Small v. Fritz Cos . ] decision). Some require more exacting allegations and evidence of reliance, [24] while others require a showing that parties held onto securities as a result of information they received through some direct communication with the defendants. [25] The sole reported Texas case to permit a holder claim involved just such facts. See Shirvanian, 2004 WL 35987, 2004 Tex. App. LEXIS 182. In that case, the plaintiffs, after having expressed an intent to sell their majority stock, received numerous in-person and over-the-phone reassurances from defendants that the company was experiencing no problems, and was in fact on the verge of profit. Id., 2004 WL 35987, 2004 Tex.App. LEXIS 182 at -. Both the president and chief financial officer of the company insisted that it would be unwise for plaintiffs to sell their stock, and, in reliance on their statements, the plaintiffs refrained from doing so. Id. Immediately thereafter, the company issued several press releases reporting that it had not met its projected earnings, and the stock price plummeted. Id., 2004 WL 35987, 2004 Tex.App. LEXIS 182 at . The court held that plaintiffs' claims [were] qualitatively different than those in cases ... where the basis for the fraud claims are financial statements, annual reports, SEC filings or similar public communications. In those cases, in the absence of direct misrepresentations, plaintiffs often are not able to establish the requisite elements of their fraud claim. [26] Id., 2004 WL 35987, 2004 Tex. App. LEXIS at . This holding is consistent with decisions in other jurisdictions that have permitted holder claims only upon proof of direct communication. See, e.g., New York City Employees' Ret. Sys. v. Ebbers (In re WorldCom, Inc. Sec. Litig.), 382 F.Supp.2d 549, 559 (S.D.N.Y.2005) (holding that there must be a sufficiently direct communication from the defendant to the plaintiff to support a claim that the fraud induced inaction); Gutman, 748 F.Supp. at 266 (holding that a holder claim may proceed where plaintiffs allege that misrepresentations were directed at them to their injury). In line with Shirvanian, a federal district court sitting in Texas refused to acknowledge holder claims in which there were no allegations of any direct or personal communication between plaintiffs and defendants. Newby, 2007 WL 789141 at , 2007 U.S. Dist. LEXIS 17374 at . In Newby, institutional investors sued JPMorgan Chase for allegedly misrepresenting Enron's financial strength in analyst reports that were reiterated in financial news outlets, and for conspiring with Enron to produce fraudulent financial statements. Id. at , 2007 U.S. Dist. LEXIS 17374 at . Predicting that [this Court] would limit, if not totally exclude, holder claims under Texas common law fraud, the court rejected the investors' claims: Plaintiffs' Second Amended Complaint clearly indicates that the sources of information on which Plaintiffs relied were Enron's SEC financial statements, which JPMorgan's transactions allegedly helped make false, and which were issued to the public at large, as well as on analyst reports, financial information services and news, all disseminated to the public at large, but not on any direct or specifically targeted contact between Plaintiffs and JPMorgan. Plaintiffs also claim they relied on information created by Defendant and disseminated through various media outlets to Plaintiffs and other investors, again a public misrepresentation, not a direct communication. Furthermore none of these sources of information has been pleaded with specificity. Without particularity in the pleading of the misrepresentations or of actual and justifiable reliance based on direct communication, the Pandora's box of vexatious and meritless suits feared by the Blue Chip Stamps Court in affirming the Birnbaum rule would be realized in Texas state courts under common law fraud. Id. at , 2007 U.S. Dist. LEXIS at -. We agree with those courts that have concluded that holder claims, to the extent they are viable, must involve a direct communication between the plaintiff and the defendant. Those claims are less like holder claims and more like the ordinary case of deceit described by the U.S. Supreme Court. Blue Chip Stamps, 421 U.S. at 744, 95 S.Ct. 1917 (noting that a misrepresentation which leads to a refusal to purchase or to sell is actionable in just the same way as a misrepresentation which leads to the consummation of a purchase or sale). But this is not such a case. It is undisputed that the Funds had no direct communications with Grant Thornton. Rather, the alleged misrepresentations were in publicly available documents. In fact, Deadman testified that his review of the audit reports and financial statements would have been via an online source available to any member of the public. [27] We need not decide today whether a holder claim involving more specific and direct communications is actionable under Texas law because this is not such a claim; we merely decline to permit such a claim in the absence of any direct communication. We hold, therefore, that Grant Thornton was entitled to judgment as a matter of law on the Funds' holder claims.