Opinion ID: 1579057
Heading Depth: 2
Heading Rank: 2

Heading: Reason to Expect

Text: Pacific offered affidavits from an employee and two experts to show that Ernst & Young had reason to expect that Pacific would rely on the RepublicBank audit opinion when deciding to purchase the InterFirst notes. Victor Moore, a certified public accountant, testified that Ernst & Young knew that investors in all securities backed by First Republic, the merged entity, would rely upon the information in the audit report. Larry Card, a Pacific executive vice-president, testified that it was known and expected by public accounting firms like Ernst & Young that documents like the prospectuses and proxy materials at issue here are widely disseminated throughout the investment community and investors rely upon information from these materials when evaluating investments in securities the subject entity backs. Finally, Alan Coleman, former dean of Southern Methodist University's Edwin L. Cox School of Business, testified that investors like Pacific commonly rely on representations made in SEC-filed documents in evaluating securities backed by an entity. He also testified that Ernst & Young's contention that it did not intend Pacific to rely on the audit report in buying the InterFirst notes was contrary to commonly accepted and firmly established practices in the investment community. The court of appeals concluded that this evidence raised a fact issue on whether Ernst & Young had reason to expect Pacific's reliance on the audit report in deciding to buy the InterFirst notes. 10 S.W.3d at 806. We disagree. Pacific's affidavits speak in terms of what is commonly known or expected in the investment community. But even an obvious risk that a third person will rely on a representation is not enough to impose liability. See RESTATEMENT (SECOND) OF TORTS § 531 cmt. d (1977). General industry practice or knowledge may establish a basis for foreseeability to show negligence, but it is not probative of fraudulent intent. To prove that an alleged fraudfeasor had reason to expect reliance, [t]he maker of the misrepresentation must have information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct. There must be something in the situation known to the maker that would lead a reasonable man to govern his conduct on the assumption that this will occur. If he has the information, the maker is subject to liability under the rule stated here. Id. (emphasis added). The generalized industry practice or understanding the affidavits describe is insufficient to show that Ernst & Young possessed information of an especial likelihood that investors like Pacific would rely on Ernst & Young's statements in the merger-related prospectuses in purchasing securities InterFirst had issued years earlier. Pacific argues that, even without the affidavits, the SEC documents were filed under statutes designed to protect investors like Pacific; accordingly, Restatement section 536 affords a presumption that Ernst & Young had reason to expect Pacific's reliance on the filed documents. RESTATEMENT (SECOND) OF TORTS § 536 (1977). Section 536 provides: If a statute requires information to be... filed ... for the protection of a particular class of persons, one who makes a fraudulent misrepresentation in so doing is subject to liability to the persons for pecuniary loss suffered through their justifiable reliance upon the misrepresentation in a transaction of the kind in which the statute is intended to protect them. Id. Under this section, one who complies with a statutory filing requirement is presumed to have reason to expect that the information will reach and influence the class of persons the statute is designed to protect. Id. cmt. c. In determining the protected class, the focus is on the statute's purpose rather than the person furnishing the information. Id. cmt. d. Pacific claims that it relied on all publicly available information about Republic-Bank, including its Form S-3 registrations and Form 10-K. A Form S-3 is filed under regulations issued pursuant to the Securities Act of 1933, 15 U.S.C. 77a et seq., which mandates delivery of a prospectus to an investor upon the distribution of securities. 17 C.F.R. § 239.13 (prescribing Form S-3 for registration by certain issuers under Securities Act of 1933). A Form 10-K is filed pursuant to the Securities Exchange Act of 1934, 15 U.S.C. 78a et seq., which mandates periodic filing of disclosure documents. 17 C.F.R. § 249.310. These and other federal securities regulations emerged in the aftermath of the 1929 market crash and were generally designed to protect investors. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194-95, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Pacific points to the federal securities acts' enforcement mechanism, Rule 10b-5, and claims that it is a member of the investing public these regulations were designed to protect; therefore, Restatement section 536 presumes Ernst & Young had reason to expect Pacific's reliance on the SEC-filed documents. But section 536 cannot be applied so broadly. According to the Restatement, the general purpose behind a statute requiring a corporation to publicly report its financial condition is to make the information available to all those who consider it important in determining their course of action in any type of transaction with the corporation in question. RESTATEMENT (SECOND) OF TORTS § 536 cmt. e (1977). But Pacific's purchase of the InterFirst notes was not a transaction with RepublicBank or with the proposed merger entity described in the offerings that incorporated the SEC filings. While section 536's presumption might apply to purchasers of securities in the merged entity or to RepublicBank shareholders who relied on the filed information in voting to approve the merger, which we do not decide, we cannot say its reach extends to open-market purchases of unrelated securities. Moreover, unlike section 531, which is compatible with Texas fraud jurisprudence, section 536 has no counterpart in Texas common law and other courts have rarely applied it. See Handy v. Beck, 282 Or. 653, 581 P.2d 68, 73-75 (1978) (applying Restatement § 536 to statute regulating water wells); Woodward v. Dietrich, 378 Pa.Super. 111, 548 A.2d 301, 310-11 (1988) (applying § 536 to representations to county's municipal authority regarding sewage connection). Because section 536 effectively alleviates a claimant's burden to show intent to induce reliance in fraud actions, it should be applied narrowly if at all. Investors already have remedies for securities violations under Rule 10b-5 and other federal and state securities laws. Indeed, this case was originally filed in federal court as a Rule 10b-5 action, but was dismissed because the statute of limitations had run. Pacific Mut. Life Ins. Co. v. First RepublicBank Corp., 53 F.3d 1409, 1410 (5th Cir.1995). Because these and other remedies are available to protect investors, we are reluctant to apply section 536's presumption and subject market participants to liability for fraud damages to an almost limitless class of potential plaintiffs. In sum, we hold that, because Ernst & Young negated the intent-to-induce-reliance element of Pacific's fraud claim, the trial court properly granted summary judgment in Ernst & Young's favor. And because summary judgment was proper on this basis, we need not consider Ernst & Young's alternative argument that Pacific's reliance was not justifiable. But Pacific contends that, even if summary judgment on its fraud claim was proper, the trial court erred in granting summary judgment on its conspiracy and aiding and abetting claims, which were not the subject of Ernst & Young's summary-judgment motion. We now turn to that issue.