Opinion ID: 400168
Heading Depth: 1
Heading Rank: 1

Heading: Materiality and Reliance

Text: 3 Kramas argues that the trial judge erred in instructing the jury on the elements of an action under Rule 10b-5, issued pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). 4 The trial judge began by instructing that a material fact is one that a reasonable person in the circumstances of the Plaintiff would attach importance to in determining his choice of action in this kind of transaction. This means, explained the court, one that a reasonable person and in the plaintiff's position, would deem important in deciding whether or not to purchase a limited partnership interest in an oil and gas drilling project. R.T. 702. Kramas does not appear to contest the correctness of this formulation; indeed, the authorities he cites state the rule in the same way. See, e.g., Marx v. Computer Sciences Corp., 507 F.2d 485, 489 (9th Cir. 1974). However, the trial judge then elaborated: 5 A fact omitted to be stated is the kind of thing that a reasonable person would have changed his mind about had he known the true fact. 6 In the case of the matter stated, is it the sort of thing that, if stated correctly, would have dissuaded the investor from making the investment(?) 7 R.T. 703. 8 At the conclusion of the court's instructions, counsel for Kramas made the following objection:COUNSEL: Your Honor, I would only object to the language stated by the Court concerning the reliance being that it would have dissuaded the plaintiff from investing. I didn't believe that to be the law. 9 I think, as I understand the law, to be sufficient so that he would have considered it; but that the law does not say, requirement of dissuading him from investing. 10 THE COURT: I think I put it in the alternative, didn't I? 11 COUNSEL: I didn't understand it that way. 12 SEGO argues that the objection went only to the instructions concerning misrepresentations and not to those regarding omissions, and, as applied to misrepresentations, the court's definition of materiality was correct. The argument is without merit. 13 Although Kramas' objection was somewhat ambiguous, it was sufficient to alert the court to error and thus satisfied Fed.R.Civ.P. 51. Brown v. Avemco Inv. Corp., 603 F.2d 1367, 1372-74 (9th Cir. 1979). The judge's response, I think I put it in the alternative, could only refer to one sentence in the instructions, and this sentence immediately preceded the court's erroneous instruction that the burden was on the plaintiff to show he would have acted differently had he been aware of the fact omitted. 1 The instruction was erroneous because it implied plaintiff must prove reliance upon alleged omissions by showing actual influence upon behavior. Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972), establishes that reliance upon alleged omissions is to be presumed from materiality. 2 14 Even if the objection were directed solely to the instructions as to misrepresentations rather than omissions, the materiality instructions were wrong. The definition of materiality is the same whether misrepresentations or omissions are involved, and as the Supreme Court said in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976), this standard does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. 3 See also Affiliated Ute Citizens, supra, 406 U.S. at 153-54, 92 S.Ct. at 1472; Marx, supra, 507 F.2d at 489 & n.6. 15