Opinion ID: 485239
Heading Depth: 1
Heading Rank: 3

Heading: Claim Under Section 10(b) of the Securities Exchange Act of 1934

Text: 27 Because this portion of the case is on review from the granting of a summary judgment motion, we begin our analysis by restating what should by now be indelibly etched in the minds of all parties who avail themselves of Rule 56 before this circuit:Federal Rule of Civil Procedure 56(c) provides that summary judgment shall be granted 28 if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. 29 The court must examine the record in the light most favorable to ... the party opposing the motion. Poller v. Columbia Broadcasting System, 368 U.S. 464, 473, 82 S.Ct. 486, 491, 7 L.Ed.2d 458 (1972). 30 Similarly the court must indulge all inferences favorable to the party opposing the motion. These rules must be applied with recognition of the fact that it is the function of summary judgment to pierce formal allegations of facts in the pleadings ..., and to determine whether further exploration of facts is necessary. 31 The language of Rule 56(c) sets forth a bifurcated standard which the party opposing summary judgment must meet to defeat the motion. He must establish the existence of an issue of fact which is both genuine and material. A material issue is one which affects the outcome of the litigation. 32 Hahn v. Sargent, 523 F.2d 461, 464 (1st Cir.1975) (citations omitted), cert. denied, 425 U.S. 904, 96 S.Ct. 1495, 47 L.Ed.2d 754 (1976). 33 As the Supreme Court has recently amplified, the existence of some alleged factual dispute will not defeat a summary judgment motion; the requirement is that there be no genuine issue of material fact. Anderson v. Liberty Lobby, Inc., --- U.S. ----, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (emphasis in original). Materiality is defined by the substantive law governing the case. Id. at 2510. To establish a claim under section 10(b) of the Securities Exchange Act, a plaintiff must prove, in connection with the purchase of a security, that the defendant, with scienter, falsely represented or omitted to disclose a material fact upon which the plaintiff justifiably relied. 34 To defeat this summary judgment motion, appellants must show that a reasonable trier of fact could conclude that, in connection with the purchase of the limited partnership units, Sinclair, with scienter, made false representations or omissions, that appellants relied upon these false representations or omissions in deciding to purchase the units, and that such reliance was justifiable. Viewing all allegations in the light most favorable to the appellants, we find that a reasonable trier of fact could conclude that in connection with the purchase of the limited partnership units, Sinclair, with scienter, did indeed make false representations and omissions, and that the appellants did rely on these false representations and omissions in deciding to purchase the securities. This is as far, however, as any reasonable trier of fact could go. 35 A number of factors have been used by courts in examining whether reliance on misrepresentations is justified. These include 36 (1) The sophistication and expertise of the plaintiff in financial and securities matters; (2) the existence of long standing business or personal relationships; (3) access to the relevant information; (4) the existence of a fiduciary relationship; (5) concealment of the fraud; (6) the opportunity to detect the fraud; (7) whether the plaintiff initiated the stock transaction or sought to expedite the transaction; and (8) the generality or specificity of the misrepresentations. 37 Zobrist v. Coal-X Inc., 708 F.2d 1511, 1516 (10th Cir.1983) (citations omitted). While no single factor is determinative, id. at 1516-17, the balancing of all relevant considerations in this case tips the scale in only one direction. 38 First, the court need not closely examine the sophistication of appellants in securities and finance, although it is plain from the record that the appellants are wealthy attorneys, wealthy enough to raise $20,000.00 in cash and bold enough to sign promissory notes of $180,000.00 on this single investment. Appellants invested these sums with the brokerage firm that they admit they have dealt with for some time. They are not neophytes. Second, although they had previously dealt with one particular Josephthal broker, on this investment appellants were introduced to a new member of the firm who advised them. There was no record of trust between appellants and Sinclair. Third, the advice Sinclair gave, however, consisted of oral misrepresentations completely at odds with the offering memorandum. This is precisely the relevant information that appellants needed: it exposed the possibility of fraud. Any fiduciary relationship here must therefore be considered suspect at this point. The continuing concealment of the fraud, the fifth factor to consider, was only possible because of appellants' blind faith in one set of statements concerning NRG. Further, that blind faith cannot vitiate their opportunity to detect the fraud. The specificity of the misrepresentations is exacting as well. The contradictions fairly lept from the pages of the offering memorandum when Sinclair spoke. For example, either this endeavor would or would not be profitable at the prevailing price of coal. Finally, it was appellants who sought out this unusual tax shelter, although appellees found for them the specific operation. 39 Taken together, these factors can lead to but one conclusion, that of the complete absence of justifiable reliance. No judge, no jury, in the faithful exercise of its fact-finding duty, could come to any other decision. Justifiable reliance cannot be satisfied by this reckless conduct. Compare Holmes v. Bateson, 583 F.2d 542, 551 (1st Cir.1978) (outlining traditional elements of section 10(b) claim), with Zobrist, 708 F.2d at 1516 (reckless conduct by defrauded party is unjustifiable as a matter of law). Justifiable reliance may be decided as a matter of law and we can think of no facts as egregious as these that would not fully support such a ruling. When they closed their eyes and passively accepted the contradictions between Sinclair's statements and the offering memorandum, appellants could not be said to have justifiably relied on the misrepresentations. Without this element, appellants' claim under section 10(b) must fail. 40 IV. Fraud Claim Under Massachusetts Common Law and Section 410 of the Massachusetts Securities Act 41 The articulated standard for the intentional tort of fraudulent misrepresentation under Massachusetts common law is that 42 the defendant made a false representation of a material fact with knowledge of its falsity for the purpose of inducing the plaintiff to act thereon, and that the plaintiff relied upon the representation as true and acted upon it to his damage. 43 Danca v. Taunton Savings Bank, 385 Mass. 1, 8, 429 N.E.2d 1129, 1133 (1982) (citations omitted). Although this oft-repeated standard does not explicitly incorporate the notion of justifiable reliance, the Supreme Judicial Court of Massachusetts has not allowed fraud claims to lie when reliance could not be reasonable as a matter of law. Saxon Theatre Corp. v. Sage, 347 Mass. 662, 666-67, 200 N.E.2d 241, 244-45 (1964). We feel that such a gloss is wholly appropriate when, as here, the Massachusetts common law of fraud is applied to securities. 44 Appellants' claim under section 410 of the Massachusetts Securities Act is an easier case. The statute itself contains a plain reasonable reliance requirement. Under the same analysis as section III, supra, we conclude that no trier of fact could find that appellants reasonably relied on the misrepresentation, and, therefore, we affirm the grant of summary judgment against both of appellants' pendent claims. 45