Opinion ID: 160012
Heading Depth: 3
Heading Rank: 1

Heading: Affiliated Ute Presumption

Text: Mr. Joseph first asserts he is entitled to a presumption of reliance under -15- Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), based on allegations in the complaint that defendants failed to disclose material facts. Requiring a plaintiff to show a speculative state of facts, i.e., how he would have behaved if omitted material information had been disclosed, places an unrealistic evidentiary burden on the 10(b) plaintiff. Consequently, the Supreme Court has allowed the trier of fact to presume reliance where the defendant fails to disclose material information. See id. at 153-54. The defendants in Affiliated Ute were two officers of the bank which was the transfer agent for a tribal corporation that managed and distributed assets to members of the Ute Native American Tribe. The bank officers induced tribal members to sell their stock at below-market rates. Unbeknownst to the Utes, the officers purchased a significant number of shares themselves and arranged sales to non-Native American investors, for which they received gratuities and commissions. The Court found the Utes had the right to know that the bank officers were in a position to gain financially from sales of the stock and that the stock was selling at a higher price in the market the officers had developed. The duty to disclose and the withholding of these material facts established the requisite element of causation. See id. at 154. Affiliated Ute’s holding is limited to omissions as opposed to affirmative misrepresentations. Defendants correctly point out that Mr. Joseph’s complaint alleges at most a combination of misrepresentations and omissions. In such -16- “mixed” cases, “[a] strict application of the omissions-misrepresentations dichotomy would require the trial judge to instruct the jury to presume reliance with regard to the omitted facts, [but] not to presume reliance with regard to the misrepresented facts.” Sharp v. Coopers & Lybrand, 649 F.2d 175, 188 (3d Cir. 1981). Rather than subject the jury to such a confounding exercise, “a unitary burden of proof on the reliance issue should be set according to a context-specific determination of where that burden more appropriately lies.” Hoxworth v. Blinder, Robinson & Co., Inc., 903 F.2d 186, 202 (3d Cir. 1990). See also Binder v. Gillespie, 184 F.3d 1059, 1064 (9th Cir. 1999); Austin v. Loftsgaarden, 675 F.2d 168, 178 n.21 (8th Cir. 1982); Sharp, 649 F.2d at 188. We must therefore analyze the complaint to determine whether the offenses it alleges can be characterized primarily as omissions or misrepresentations in order to determine whether the Affiliated Ute presumption should apply. This analysis is easier to describe than to carry out because every misstatement both advances false information and omits truthful information. Statements which are technically true may be so incomplete as to be misleading (e.g., half-truths or distortions). In an attempt to take advantage of the Affiliated Ute presumption, an artfully-pleaded complaint can recharacterize as an omission conduct which more closely resembles a misrepresentation. “The labels by themselves, therefore, are of little help.” Wilson v. Comtech Telecomm. Corp., -17- 648 F.2d 88, 93 (2d Cir. 1981). Instead we look to the nature of the allegations contained in the complaint, bearing in mind that the Affiliated Ute presumption of reliance exists in the first place to aid plaintiffs when reliance on a negative would be practically impossible to prove. See Wilson, 648 F.2d at 93. Mr. Joseph’s complaint essentially alleges that MiniScribe engaged in a pattern of deception which involved manipulating financial data, disseminating false information about the company, concealing the truth about the company’s true financial outlook, and hiding the existence of the fraudulent scheme itself. The claims are pled in such a manner as to intertwine affirmative acts with omissions in a strained attempt to recharacterize the alleged wrongdoing. The following allegations, typical of those contained in Mr. Joseph’s complaint, are illustrative: [MiniScribe] consistently omitted to disclose that its financial statements had been falsified and that its sales, revenues, assets and shareholders’ equity had been artificially inflated. Defendants concealed the existence of the unlawful scheme and the acts of manipulation committed pursuant thereto. In furtherance of this campaign of concealment, [MiniScribe] continually reported in its public statements that it had achieved, and would continue to achieve, substantial growth in revenue and profits. These statements . . . were materially false and misleading in that they failed to disclose the existence of the fraudulent scheme . . . . Rec., vol. II at 692 (emphasis added). Statements such as these, while struggling valiantly to bring the alleged conduct within the definition of “omission,” indicate that what Mr. Joseph really protests are the affirmative misrepresentations -18- allegedly made by defendants. Any fraudulent scheme requires some degree of concealment, both of the truth and of the scheme itself. We cannot allow the mere fact of this concealment to transform the alleged malfeasance into an omission rather than an affirmative act. To do otherwise would permit the Affiliated Ute presumption to swallow the reliance requirement almost completely. Moreover, it would fail to serve the Affiliated Ute presumption’s purpose since this is not a case where reliance would be difficult to prove because it was based on a negative. We therefore hold the Affiliated Ute presumption of reliance inapplicable here. See Abell v. Potomic Ins. Co., 858 F.2d 1104, 1119 (5th Cir. 1988) (applying the presumption in nondisclosure cases, but not in falsehood or distortion cases), judgment vacated on other grounds, 492 U.S. 914 (1989).