Opinion ID: 799254
Heading Depth: 1
Heading Rank: 4

Heading: The Materiality of Oral Misrepresentations Conflicting With Morgan Keegan's Written Disclosures Is an Issue for the Trier of Fact

Text: Having decided that these alleged oral misrepresentations by the four Morgan Keegan brokers must be considered for purposes of materiality, we next determine whether Morgan Keegan's written disclosures nonetheless rendered its brokers' oral misrepresentations immaterial as a matter of law. The way information is disclosed can be as important as its content. Thus, in evaluating the effect of Morgan Keegan's written disclosures, we must consider not only the content of the written disclosures but also the way in which the disclosures were made. After record review, we conclude that, even if a brokerage company's written disclosures might render its individual brokers' oral misstatements immaterial in some cases, Morgan Keegan's manner of distribution of its written disclosures in this particular case was insufficient to warrant summary judgment for Morgan Keegan. In this regard, the main securities cases the parties cite from our circuit addressing the interplay of written disclosures and oral misrepresentations are Bruschi v. Brown, 876 F.2d 1526 (11th Cir.1989), and First Union Discount Brokerage Servs., Inc. v. Milos, 997 F.2d 835 (11th Cir.1993). Because these two cases involve justifiable reliance rather than materiality, they are not on point. Yet these cases show that the effect of oral misrepresentations conflicting with written disclosureswhether measured by a private plaintiff's reliance or by the significance to a hypothetical reasonable investordepends heavily on the facts of each case. In Bruschi, the defendant-broker gave the written disclosures directly to the plaintiff-investor, but we concluded they did not warrant judgment as a matter of law for the defendant in the plaintiff's private action alleging oral misrepresentations. The Bruschi plaintiff, an unsophisticated investor, hired the defendant Brown as her broker and investment advisor. Id. at 1527. Employed at Dean Witter Reynolds, Inc., defendant Brown recommended the Elmco investment, which he described in positive terms, and stated it would provide the plaintiff with significant tax deductions. Id. Brown did not disclose that the Elmco investment was a complex and risky venture involving unregistered securities and was neither endorsed nor offered by Dean Witter, or that Elmco was paying Brown a commission for any securities he sold. Brown visited the plaintiff's home to close the transaction and gave her 160 pages of documents describing the merits and risks of the Elmco investment. Id. at 1527-28. After Brown assured that her signature was a mere formality, the plaintiff signed the documents without reading them. Id. at 1528. Defendant Brown argued that the extensive disclosure documents conflicted with the alleged oral misrepresentations and that, as a matter of law, an investor is not justified in relying on oral misrepresentations that conflict with contemporaneous written representations. Id. at 1529. This Court noted that it had never held that, regardless of the circumstances, an investor is always precluded from recovering under Rule 10b-5 if the misrepresentations upon which the investor relied were oral and conflict in some way with contemporaneous written representations available to the investor. Id. [22] In Bruschi, this Court then listed several factors for determining whether an investor's reliance is justified. [23] This Court concluded that, [w]hen all factors are considered, it cannot be held as a matter of law that [plaintiff] Bruschi's reliance on the alleged oral misrepresentations was not justified. Id. at 1530. Even in Bruschi, where the plaintiff bore the additional burden to show justifiable reliance, this Court did not allow the written disclosures to trump oral misrepresentations as a matter of law. [24] Subsequently, in First Union v. Milos , this Court distinguished Bruschi in holding that sophisticated investors could not have justifiably relied on a broker's oral representations that predated and conflicted with the clear language of two contracts directly given to and signed by the investors. 997 F.2d at 846. The First Union Court stated that [i]n Bruschi, we explained that circumstances may warrant departure from the usual presumption that reliance on an oral representation that a written representation contradicts is not justified. Id. at 846 n. 22. This Court compared the factual circumstances in Bruschi and First Union and concluded that the facts did not warrant departure in First Union : Factually, Bruschi involved (1) an offering memorandum; (2) an investor who was unsophisticated and inexperienced in financial matters and told not to read the disclosure documents; (3) a security purchase initiated by the defendant-broker; and (4) some statements in the disclosure documents [that] confirmed some of the alleged oral misrepresentations. Id. (quotation marks omitted). By comparison, in First Union : (1) the disclosures were in two written contracts given directly to a sophisticated investor; (2) the investors had full control over their investments; (3) the written agreements violently contradicted the oral representations; and (4) First Union did not tell the investors not to read the written agreements. Id. While Bruschi and First Union involve justifiable reliance, they nonetheless show that, in securities cases, whether written disclosures should trump oral misrepresentations is highly fact-specific and therefore is not amenable to bright-line rules. Cf. Matrixx, 131 S.Ct. at 1318-19; Basic, 485 U.S. at 236, 108 S.Ct. at 986; TSC Indus., 426 U.S. at 450, 96 S.Ct. at 2133. Here, after considering the entire record, we conclude that Morgan Keegan's written disclosures do not warrant summary judgment for Morgan Keegan on the materiality issue. The oral misrepresentations at issue here were made directly to customer-investors who aver they never received or knew about the written disclosures at the time of their purchases. Importantly too, the oral misstatements must be considered in the factual context of a weak, or non-existent, distribution of the written disclosures. For example, although Morgan Keegan produced adequate written disclosures in the ARS Manual and the ARS Brochure and gave the ARS Manual directly to customers in 2006, there is no evidence that, during late 2007 and early 2008, Morgan Keegan directly gave customers these written disclosures before or after customers purchased ARS. At most, the record shows that the ARS Brochure was available at some of Morgan Keegan's branch offices, but the ARS Brochure was given to customers only upon a customer's request. The only written documents that were directly given to ARS purchasers were the trade confirmations. But the trade confirmations say absolutely nothing about liquidity risk. The trade confirmations do refer customers to the website for information regarding the auction procedures, but the trade confirmations list only the Morgan Keegan home page (despite the cease-and-desist order's explicit instruction [25] that the trade confirmations notify customers that a written description of Morgan Keegan's auction practices is available on a specified webpage of [Morgan Keegan's] website). While the evidence contains a copy of an archived ARS web page on Morgan Keegan's website, there is no evidence that brokers directed customers interested in ARS to the ARS web page. [26] We recognize that the back of the trade confirmations state that securities involve investment risks, including the loss of principal. But given Morgan Keegan's knowledge of the increasing rate of auction failures in late 2007 and early 2008, this general cautionary language is insufficient to render its brokers' oral misrepresentations during that period immaterial as a matter of law. See Merch. Capital, 483 F.3d at 768 (holding that a defendant's performance projections were materially misleading despite general cautionary language because the defendant failed to disclose past performance information that would be useful to a reasonable investor in assessing those [optimistic performance projections]). Moreover, the trade confirmations were provided only after the ARS purchase and after the alleged oral misrepresentations. And because nothing in the trade confirmations discloses the liquidity risk of ARS, customers would have no reason to investigate whether to use the ten-day provision to rescind the transaction. Accordingly, the ten-day-rescission remedy is insufficient to support a finding, as a matter of law, that the brokers' oral misstatements were immaterial. Despite failing to provide its written disclosures directly to customers, Morgan Keegan argues that the written disclosures were available to any  reasonably diligent investor.  But due diligence is a distinct and subjective element of a private action under Rule 10b-5, unrelated to the objective materiality test. Thompson v. Smith Barney, Harris Upham & Co., 709 F.2d 1413, 1418 (11th Cir.1983) (`[D]ue diligence' [is] a separate element in 10b-5 cases, apart from questions of materiality, reliance, or defendants' duties.). And, because due diligence focuses on whether the carelessness of a plaintiff should preclude his recovery, it is properly considered only in a private action brought by an investor, not an SEC enforcement action. See id. at 1418 n. 7. In sum, the materiality inquiry in this SEC enforcement action must account for the oral misrepresentations of Morgan Keegan's brokers. Because Morgan Keegan's written disclosures were not given directly to customers but were distributed only in the weak or non-effective manner outlined above, we conclude that the brokers' misleading statements and failure to disclose the known liquidity risk of ARS could have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available. See Basic, 485 U.S. at 231-32, 108 S.Ct. at 983 (quotation marks omitted). Indeed, as noted above, the materiality test requires delicate assessments of the inferences a `reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact. TSC Indus., 426 U.S. at 450, 96 S.Ct. at 2133.