Court Opinion

ID: 6982071
Source: CourtListenerOpinion
Date Created: 2022-07-24 02:25:53.310206+00
Date Added: 2024-06-11T16:09:14.672323
License: Public Domain

REINHARDT, Circuit Judge,
dissenting in part:
Because the plaintiffs are entitled to a presumption of reliance under the doctrine of Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), I would reverse the district court’s decision to decertify the class of investors represented by Binder. I therefore respectfully dissent.1
In today’s decision, the majority decides that the Affiliated Ute presumption does not apply to cases involving both material misrepresentations and material omissions. In so holding, the majority resolves a question that we have previously, and explicitly, reserved: “whether Affiliated Ute Citizens applies equally to misrepresentations.” Kramas v. Security Gas & Oil, Inc., 672 F.2d 766, 769 n. 2 (9th Cir.1982). I believe that the logic behind the Affiliated Ute decision and the reasoning contained in our decisions implementing Affiliated Ute make it clear that it does.
As an initial matter, the majority is simply incorrect that the Affiliated Ute presumption does not, as a rule, apply to “mixed cases of alleged misstatements and omissions.” (Opinion at 2879). To understand why, we need look no further than Affiliated Ute itself which was, after all, a “mixed case[ ] of alleged misstatements and omissions.” In Affiliated Ute, the defendants made at least one significant misstatement; namely, “that the prevailing market price of the UDC shares was the figure at which their purchases were made.” 406 U.S. at 152, 92 S.Ct. 1456. To be sure, there were also significant material omissions made by the defendants, most notably their failure to disclose the existence of a secondary market in which the securities could be traded at a higher price. See id. at 152-53, 92 S.Ct. 1456. But the existence of the omissions, of course, does not change the fact that the case involved both omissions and misrepresentations. The Court’s holding makes it plain that the rule must apply to some mixed cases. As the Court wrote:
Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery.
Id. at 153, 92 S.Ct. 1456. The Affiliated Ute rule, established in a mixed case, quite clearly applies to some mixed cases.
Drawing on the passage from Affiliated Ute cited immediately above, the district court determined that the Affiliated Ute rule did not apply in this mixed case because, it determined, this case is not “primarily” an omissions case.2 In classifying the case as “primarily” a misrepresentations case the district court was, as the majority points out, following a procedure adopted by two other circuits. See Finkel v. Docutel/Olivetti Corp., 817 F.2d 356, 359 (5th Cir.1987); Cavalier Carpets, Inc. v. Caylor, 746 F.2d 749, 756 (11th Cir.1984). Those circuits have determined that, in mixed cases, it is necessary to “analytically characterize [the] action as either primarily a nondisclosure case ... or a positive misrepresentation case.” Finkel, 817 F.2d at 359. Because I believe the Affiliated Ute presumption applies equally to misrep-*658reservations, however, I find it irrelevant whether the ease is primarily a misrepresentations case or primarily an omissions case. In either event the plaintiff is entitled to a presumption of reliance.3
In Blackie v. Barrack, 524 F.2d 891, 908 (9th Cir.1975), on which the majority relies, we examined a material omissions case in which the plaintiff bought stock based in part on material omissions made by the defendant. We examined the Affiliated Ute rule and concluded that the Blackie plaintiffs did not need to prove reliance. We explained that such proof would require “proof of a speculative negative.” Id. In other words, to establish reliance, the plaintiff would have to prove the following proposition: “I would not have bought had I known.” Id. We rejected such a requirement because:
Direct proof would inevitably be somewhat pro-forma, and impose a difficult evidentiary burden, because addressed to a speculative possibility in an area where motivations are complex and difficult to determine.... Here, the requirement [of proving reliance] is redundant — the same causal nexus can be adequately established indirectly, by proof of materiality coupled with the common sense that a stock purchaser does not ordinarily seek to purchase a loss in the form of artificially inflated stock.
Id. Because Blackie was a pure omissions ease, we did not have occasion to determine whether the same reasoning would apply to material misrepresentations.
One year later, however, in Little v. First California Co., 532 F.2d 1302, 1305 n. 4 (9th Cir.1976), we stated the rather obvious proposition that “[t]he categories of ‘omission’ and ‘misrepresentation’ are not mutually exclusive.” As we wrote:
All misrepresentations are also nondis-closures, at least to the extent that there is a failure to disclose which facts in the representation are not true. Thus, the failure to report an expense item on an income statement, when such a failure is material in the Affiliated Ute sense, can be characterized as (a) an omission of a material expense item, (b) a misrepresentation of income, or (c) both.
Id. This observation, besides being binding upon us as a matter of law, is clearly correct as a matter of logic. Omissions and misrepresentations both deprive the investor of truthful information relevant to the investment decision, and both result in the artificial pricing of a stock.
Most important for our purposes here, it is equally difficult to establish reliance on a misrepresentation and on an omission. While a plaintiff in an omissions case— absent the Affiliated Ute presumption— would bear the daunting task of proving T would not have bought/sold had I known what you failed to tell me’ see Blackie, 524 F.2d at 908, the plaintiff in a misrepresentation case bears the equally daunting burden of proving ‘I would not have bought/ sold had I known what you failed to tell me; namely, the truth.’ In either case, the plaintiff must prove that he would have acted differently if he had known some*659thing that he did not actually know, i.e., the full truth.
In an omissions case, the plaintiff does not know the truth because the defendant said nothing; in a misrepresentations ease the plaintiff does not know the truth because the defendant lied. But, as far as the plaintiffs ability to demonstrate reliance, this is a distinction without a difference. In either case, the plaintiff must attempt to prove that he would have acted differently had he known the truth. The evidentiary burden is therefore equally difficult in either case, and there is no logical reason to afford the presumption of reliance to plaintiffs in omissions cases but not in misrepresentations cases. The rule we announced in Blackie, that the “causal nexus can be adequately established indirectly, by proof of materiality coupled with the common sense that a stock purchaser does not ordinarily seek to purchase a loss in the form of artificially inflated stock,” id, applies with equal force of logic to misrepresentations.
The Third Circuit made a similar observation in Sharp v. Coopers & Lybrand, 649 F.2d 175, 188 (3d Cir.1981). Sharp involved both material omissions and misrepresentations. The Sharp court noted that the reason for “shifting the burden on the reliance issue has been an assumption that the plaintiff is generally incapable of proving that he relied on a material omission.” Id. The court concluded, however, that “this observation does not justify a clear distinction between the treatment of misrepresentations and omissions.” Id. As the Third Circuit put it:
[T]he problem of speculation is not unique to situations in which omissions have occurred. In misrepresentation actions as well, proof of reliance requires a degree of speculation on the action that the plaintiff would have taken had no misrepresentation occurred.

Id.

Affiliated Ute recognized the inherent difficulty of proving reliance in securities fraud cases, and accordingly announced a rule of presumed reliance in a mixed omissions and misrepresentations case. As suggested by our opinion in Little and by the Third Circuit in Sharp, plaintiffs face the same difficulty in proving reliance on misrepresentations. I would therefore hold that plaintiffs in mixed cases are entitled to the Affiliated Ute presumption of reliance whether the case is primarily an omissions case or primarily a misrepresentations case. Accordingly, whether this case is properly classified simply as a mixed omissions and misrepresentations case, or as “primarily” a misrepresentations case, I would hold that the Binder class was entitled to a presumption of reliance, and would therefore reverse the de-certification of the class.4

. I agree, however, with Part V of the opinion that summary judgment was appropriate for Binder's individual claims against Wilson, Stevens, Fitchey and Deloitte, and with the majority’s conclusion in Part VI with respect to the evidentiary issues.

. The majority's decision may rest on similar reasoning, although it is not entirely clear. For example, at the outset of Section III, the majority writes that it "agree[s] with the district court’s characterization of Binder’s action.” (Opinion at 652).

. To be sure, plaintiffs in any 10b action must have actually relied on the material omission or misrepresentation in order to recover damages. See 15 U.S.C. § 78j(b). I do not dispute this. As discussed below, I believe only that plaintiffs in mixed cases are entitled to a presumption of reliance whether the case is primarily an omissions case or primarily a misstatements case. None of our other 10b cases is to the contrary. It is true that in Paracor Finance, Inc. v. General Elec. Capital Corp., 96 F.3d 1151, 1159 (9th Cir.1996), and Smolen v. Deloitte, Haskins, & Sells, 921 F.2d 959, 963-64 (9th Cir.1990), we recited the general rule that investors must demonstrate reliance on an alleged misrepresentation. Neither Paracor nor Smolen was a mixed case, however, and in neither case were we called on to determine whether the investors might be entitled to a presumption of reliance under the Affiliated Ute doctrine. Our holding in both cases was merely that the investors did not, in fact, rely on the misstatements.

. A different question, one not presented here, is whether plaintiffs are entitled to a presumption of reliance in pure misrepresentation cases. Dicta in Paracor, 96 F.3d at 1159, and Smolen, 921 F.2d at 963-64, might be read to suggest that plaintiffs in pure misrepresentation cases are required to demonstrate reliance affirmatively. Especially given the fact that we did not consider, in either case, whether a presumption of reliance would have been appropriate, and that our holding in neither case resolved the question, see supra n. 3, I would not read the dicta in such a way. In light of the logic of Affiliated Ute, and for the reasons I have outlined above, I would hold (were I called on to reach the question) that plaintiffs are entitled to a presumption of reliance even in pure misrepresentation cases.