Opinion ID: 618229
Heading Depth: 3
Heading Rank: 2

Heading: Federal Securities Fraud Claim

Text: [6] To state a claim under § 10(b), a plaintiff must allege: (1) a material misrepresentation (or omission); (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). [7] As a preliminary matter, we are not convinced that Horton’s omission concerning his involvement in the Glenn STRATEGIC DIVERSITY v. ALCHEMIX CORP. 20627 litigation was material to Weiss’s investment decision. “An omitted fact is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” S.E.C. v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1092 (9th Cir. 2010). The standard of materiality is an objective one. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 445 (1976). An incomplete statement is not sufficient if the misrepresentation is not significant. See Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988). Other than a conclusory allegation that Horton’s omission was material, there is no reason to conclude that this affected the “total mix” of information available or that any reasonable investor would consider this material. Horton was the civil defendant in another securities fraud case involving a completely different company. The company was in no way related to Alchemix (except by Horton’s association), and it was not connected to the instant transaction. To the extent that any federal securities claim relies on this omission, summary judgment was proper. The central issue here is whether the district court erred when it granted summary judgment on Weiss’s § 10(b) claim on the ground that he failed to produce evidence of damages. Weiss argues that he need not have shown economic loss because he sought rescission and not damages. [8] Contrary to Weiss’s argument, we are not convinced that a suit under section 10(b) obviates the need for proving economic loss and loss causation. Under section 10(b), the Supreme Court has held that whether rescission or a rescissionary measure of damages is available is “an unsettled one.” Randall v. Loftsgaarden, 478 U.S. 647, 661 (1986). The statutory framework surrounding § 10(b)’s requirements is hard to square with Weiss’s argument that one seeking rescission need not demonstrate loss causation. See 15 U.S.C. § 78u- 4(b)(4) (requiring loss causation); 15 U.S.C. § 78bb(a) (prohibiting a plaintiff ’s recovery “in excess of his actual dam20628 STRATEGIC DIVERSITY v. ALCHEMIX CORP. ages on account of the act complained of”); see also Ryan v. Foster & Marshall, Inc., 556 F.2d 460, 464 (9th Cir. 1977) (“Actual damages mean some form of economic loss.”). At a minimum, these statutory requirements demonstrate that a § 10(b) plaintiff must present a showing of economic loss to warrant rescission. Even in Holdsworth v. Strong, the one case cited by Weiss on this point, the court held that it was “not engaging in the process merely to vindicate a principle” and that “the plaintiff must establish his injury” and “show that he is injured and aggrieved in order to move the court to grant rescission.” 545 F.2d 687, 697 (10th Cir. 1976). Thus, rescission does not alleviate the burden of producing evidence of economic loss. [9] Prior to addressing Weiss’s evidence of economic loss, we must determine whether rescission is warranted. Although rescission is a flexible remedy in equity, true rescission in this case is not entirely feasible. “Rescission reverses the fraudulent transaction and returns the parties to the position they occupied prior to the fraud.” Ambassador Hotel Co., Ltd. v. Wei-Chuan Inv., 189 F.3d 1017, 1031 (9th Cir. 1999). “Under true rescission, the plaintiff returns to the defendant the subject of the transaction, plus any other benefit received under the contract, and the defendant returns to the plaintiff the consideration furnished plus interest.” Id. Although Weiss stands ready to tender the 250,000 shares of Alchemix for the consideration he offered ($250,000), the passage of time has rendered the complete restoration of the parties to the status quo ante difficult if not impossible. The Note has long since expired, coming due in July 2006. We doubt that Weiss’s demand for his seat on the Alchemix Board is even possible when there does not appear at present to be an existing board. In addition, true rescission would also involve the unfurling of security interests that are currently held as collateral on other debts. Thus, we conclude that true rescission is neither feasible nor practical. [10] Yet even though true rescission is not warranted, the district court had the discretion to consider an approach under STRATEGIC DIVERSITY v. ALCHEMIX CORP. 20629 a rescissionary measure of damages. “If true rescission is no longer possible . . . , the court may order its monetary equivalent.” Id. It is within the discretion of a district judge in “ap- propriate circumstances” to apply a rescissionary measure of damages. Blackie v. Barrack, 524 F.2d 891, 909 (9th Cir. 1975). “This remedy entitles the plaintiff to the return of the consideration paid less any value received on the investment.” Ambassador Hotel Co., 189 F.3d at 1031. “There are two standard measures of damages in securities law.” Jordan v. Duff & Phelps Inc., 815 F.2d 429, 441 (7th Cir. 1987) (citing Randall, and Affiliated Ute Citizens v. United States, 406 U.S. 128, 154-55 (1972)). The generally employed “out-of-pocket” or “market” measure is the difference between the fair value of what was received and the fair value of what one would have received had there been no fraudulent conduct. Affiliated Ute Citizens, 406 U.S. at 155. By contrast, rescissionary damages are to be measured so as to result in the substantial equivalent of rescission. Loftsgaarden, 478 U.S. at 656. One court effectively distinguished the two measures of damages in the following manner: When comparing out-of-pocket and rescissory damages, the fundamental distinctions are these: (1) outof-pocket damages accept the transaction as com- pleted, whereas rescissory damages attempt to undo it; and (2) out-of-pocket damages are measured by reference to the value of the property on the date of the transaction, while rescissory damages, in order to approximate the undoing of the transaction, take account of the value of the property, and any income produced by it, after the date of the transaction. Standard Chtd. PLC v. Price Waterhouse, 190 Ariz. 6, 35 (Ct. App. 1996) (emphasis in original); see also Jordan, 815 F.2d at 442 (noting the rescissionary measure “often value[s] the transaction as it turned out”). For the victim of fraudulent inducement, the economic loss in a rescissionary approach exists in the present retention of a depressed investment 20630 STRATEGIC DIVERSITY v. ALCHEMIX CORP. minus any benefits received in the retention of the investment, e.g., dividends, rents, profits. Here, the district court did not consider whether the rescissionary measure of damages was appropriate. Applying an out-of-pocket measure, it found no evidence of damages and rejected Weiss’s claim. The specific question with respect to rescissionary damages will be what monetary equivalent is necessary to return Weiss to the status quo ante. Unlike true rescission, Weiss need not tender his shares; however, any rescissionary damage award should be offset by the value of the stock as well as any other benefits incurred after the transaction.1 Also, to place Weiss in the true status quo ante, Weiss’s damage award should be offset by the received benefit of the interest and prepayment penalty paid by Alchemix. In addition, we note that Weiss’s rescissionary approach does not relieve him of demonstrating loss causation. See 15 U.S.C. § 78bb (limiting recovery to damages “on account of the act complained of”). The misrepresentation here is that Horton claimed that a decision to invest $36 million had been made. To establish causation, Weiss must demonstrate that had he known of the truth, Weiss would not have taken the action he did i.e., relinquishing the Note to purchase Alchemix stock. This is a question of fact. The finder of fact will determine whether Weiss would have acted or not. Weiss faces challenges in light of the evidence that he stood ready to make the same concessions and purchase the same if not more Alchemix stock on the basis of an AFG investment of only $3 million. On the other hand, Horton testified that the loss of the substantial investment from Western was a “game 1 We decline to assess the value of the stock at present. If necessary, the value should be assessed on the date of judgment. See Nelson v. Serwold, 576 F.2d 1332, 1339 (9th Cir. 1978) (“To adhere to the model of rescission the monetary equivalent should be determined as of the date the purchaser was under a present duty to return the stock, viz. the day of judgment.” (quoting Green v. Occidental Petroleum Corp., 541 F.2d 1335, 1342 (9th Cir. 1976) (Sneed, J., concurring))). STRATEGIC DIVERSITY v. ALCHEMIX CORP. 20631 changer,” suggesting that a reasonable person might have behaved differently had he known that only a $3 million investment was being made. In any event, Weiss must carry his burden on causation. [11] Thus, we remand for consideration of the claim under a rescissionary measure of damages and loss causation.