Opinion ID: 1923758
Heading Depth: 1
Heading Rank: 3

Heading: Reliance under the Blue Sky Law

Text: In challenging the judgment for damages against Daniel Price and the corporate defendant, predicated upon a representations violation of the District Blue Sky Law, appellants argue that plaintiff below was a sophisticated investor, not only familiar with the Burnelli patent, but experienced in a prior venture to apply its principles to airframe design. Possessed of such special knowledge, appellee, they contend, could not possibly have relied upon any of appellants' alleged misrepresentations. This raises a question of first impression in this jurisdiction  the necessity of proving reliance in a suit under the local act  an issue which has provoked comment [7] in law reviews and litigation under corresponding provisions of the Federal Securities Act of 1933 and regulations of the Securities & Exchange Commission. [8] The leading case for the proposition that proof of reliance is a necessary element to recover under the statutory cause of action is List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir. 1965), cert. denied, sub nom. List v. Lerner, 382 U.S. 933, 86 S.Ct. 305, 15 L.Ed.2d 344 (1965). This was a 10b-5 action brought by a stockholder who sold his shares in Fashion Park at a considerable profit, but later discovered that at the time of the sale the board of that corporation was negotiating a merger which, when consummated, resulted in a higher price for the outstanding shares than the figure plaintiff had realized. One of the directors of Fashion Park purchased some of plaintiff's stock, reaping a windfall when the merger went through, and the suit alleged a scheme to defraud for failure to disclose the pending merger and its terms. The Second Circuit affirmed a dismissal of the action on the ground that the plaintiff had failed to prove that in selling his stock he relied on the material omission charged. The opinion states: This interpretation of Rule 10b-5 is a reasonable one, for the aim of the rule in cases such as this is to qualify, as between insiders and outsiders, the doctrine of caveat emptor  not to establish a scheme of investors' insurance. Assuredly, to abandon the requirement of reliance would be to facilitate outsiders' proof of insiders' fraud, and to that extent the interpretation for which the plaintiff contends might advance the purposes of Rule 10b-5. But this strikes us as the rule so basic an element of tort law as the principle of causation in fact. [340 F.2d at 463.] The actual holding in List, viz, that positive proof of reliance is not required where an insider fails to disclose a material fact, seems to have been disapproved by the Supreme Court in Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). That decision left untouched the basic doctrine of the List case, viz, that the supposedly false representation must be the probable cause of plaintiff's injury. [9] List v. Fashion Park interprets SEC Rule 10b-5 in light of the common law action for fraud or deceit, requiring evidence of reliance on the defendant's misrepresentation. See Isen v. Calvert Corp., 126 U. S.App.D.C. 349, 379 F.2d 126 (1967). The thesis is that the plaintiff's damage must actually be caused by the defendant's wrongdoing: The false representation must have played a material and substantial part in leading the plaintiff to adopt his particular course. W. Prosser, Law of Torts, § 108 at 714 (4th ed. 1971). While we recognize that the actual holding in List v. Fashion Park, supra , has been questioned [10] and may not be appropriate in all cases, as a general proposition, recovery should not be allowed on a mere showing that a representation made by a seller of securities was inaccurate if the sale was made under circumstances [11] showing that such misrepresentation was not one which caused the investor to enter into the transaction. Accordingly, we have concluded that in an action under the local Blue Sky Law, D.C.Code 1973, § 2-2401, where the complaint alleges certain misstatements, in contradistinction to a failure to disclose a material fact, some element of reliance must be shown to demonstrate that such statements caused the injury complained of. Applying this rule to the case before us, we find insufficient evidence in the record to conclude that the plaintiff in delivering a check payable to the foreign corporation did so in reliance on the representations enumerated and described as untrue in the complaint. In the complaint, it was alleged that Occidental had not acquired rights to the Burnelli or Custer Wing concepts or patents. Had this allegation been proved, plaintiff would have presented the court with another case of the typical stock swindle. But as this allegation was disproved by documents in pretrial discovery, plaintiff dropped this particular charge before the case was submitted to the jury. His own direct testimony, when considered with his disclaimers on cross-examination and his prior experience with the difficulties of financing another experimental aircraft manufacturing company, falls short of evidence upon which a jury could have inferred that he made his investment because he was told that, if he bought stock, his money would double or triple, that the public offering would be approved by the Belgian authorities, that the success of the venture was certain, or that appellant Daniel Price's problems with the Securities & Exchange Commission had been cleared up. In only one respect can the jury verdict for compensatory damages in plaintiff's favor be sustained. This is because the jury did have testimony before it concerning one alleged misrepresentation which it might have believed, although contradicted by the witness to whom it was attributed. Appellee Griffin testified that, prior to drawing his check, he got Daniel Price to agree that any money Griffin invested in Occidental Aircraft International would be held in escrow pending approval of the public offering abroad of the stock issue and such money would be returned to him if the stock was not issued. This testimony was corroborated in part by a notation on the face of the instrument and also by testimony from another witness that at least one other local investor had his money returned to him when the stock issue failed to secure official clearance. Griffin testified that he would not have made the investment had he not received this assurance. It should be noted, however, that this version of the transaction is inconsistent with any theory of reliance on the other challenged representations, for plaintiff would scarcely have imposed this condition if he had been taken in by the glib assurances ascribed to Daniel Price. The plaintiff is therefore entitled to relief under D. C.Code 1973, §§ 2-2402 and 2413, and we affirm the award of $10,000 in compensatory damages, plus costs and attorney's fees. [12]