Court Opinion

ID: 8974015
Source: CourtListenerOpinion
Date Created: 2022-11-27 10:46:15.371091+00
Date Added: 2024-06-11T17:10:30.395371
License: Public Domain

CLARK, Circuit Judge,
dissenting:
I agree that the issue in this case is whether the : defendants “engaged in a fraudulent scheme to issue the tax-exempt bonds, which would be unmarketable absent the fraud.” I further agree that the defendants had to have reason to know that the bonds were unmarketable in order to be liable to the plaintiffs. I therefore find the majority opinion’s legal analysis is generally correct although I disagree on one legal point.1
I part with the majority in its conclusion that the defendants had no reason to know that the bonds would most likely go into default. The majority gives only a slight recognition to the symbiotic relationship between the marketability of the bonds and the marketability of the units of the Mount Royal Towers continuing care facility. The majority’s analysis of the economic factors that affected the marketability of those units, and therefore the bonds, is thus insufficient and unrealistic. There is no recognition of the economic climate of the late 1970s and early 1980s when the Federal Reserve Bank Open Market Committee, led by Chairman Paul Volcker, constricted the money supply and the prime interest rate rose to twenty-one percent. Finally, the majority fails to grasp the importance of the type of facts that professionals in the underwriting process must collect and analyze in determining whether a bond issue is likely to be successful. Among those facts is that the project was of a specialty type — a convalescent/retirement home with nursing facilities but with considerable more amenities than the typical nursing home.
As will be described in detail, the initial Mount Royal Towers project, from which the original underwriters withdrew, proposed a sale of about $19,000,000 in bonds for the construction of a 250 residential unit continuing care facility for the elderly. The project was repeatedly cancelled because of an insufficient demand for the residential units and the adverse economic conditions in the bond market. The defendants nonetheless raised the bond issue to $29,500,000 and more than doubled the cost of acquiring and occupying a unit. Yet, they had no assurance that there were any bona fide purchasers for the bonds or the units. In fact, most prospective residents cancelled their agreements shortly after the bonds were issued in September 1981 and before the project opened its doors in July 1983. The bonds defaulted and the facility was sold in bankruptcy for approximately $18,000,000 in 1984.
As judges we are ill-equipped to assess whether the project the defendants promoted was marketable. The facts, as expanded in this dissent, lead me to believe that it may well not have been. It is not the function of judges, however, to make such a decision. There is a genuine issue of fact as to whether a reasonable developer and underwriter would have known that this project would fail. For justice to be done in this case, this factual issue must be submitted to a jury. The reasons I believe this to be true are set forth below.
I. Legal Analysis
A. Rule 10b-5 and the Shores Test
In 1934, Congress enacted the Securities Exchange Act to remedy abusive practices in the investment industry which had led to reduced investor confidence in the integrity of securities markets. The Act’s central *748purpose is the protection of investors and the promotion of free and honest security markets. The Supreme Court has stated that the securities acts are designed to “protect investors against fraud and ... to promote ethical standards of honesty and fair dealing.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195, 96 S.Ct. 1375, 1382, 47 L.Ed.2d 668 (1976).
The 1934 Act’s key antifraud provisions are section 10(b)2 and Rule 10(b)-5, which the Security Exchange Commission promulgated in 1942. The basic purpose of “section 10(b) and Rule 10b-5 and indeed, the Exchange Act, is to protect investors and instill confidence in the securities markets by penalizing unfair dealings.” Sargent v. Genesco, Inc., 492 F.2d 750, 760 (5th Cir.1974); see Wolfe v. E.F. Hutton & Co., Inc., 800 F.2d 1032, 1036 (11th Cir.1986) (en banc) (act and rule designed to encompass the “infinite varieties of devices that are alien to the ‘climate of fair dealing’ ” Congress sought to create and maintain). The principal means of investor protection are disclosure requirements and civil remedies for fraudulent conduct.
Undoubtedly, a principal purpose of the securities laws is to promote the full disclosure of information that furthers informed investment decision-making. This purpose is manifest in Rule 10b-5(b) which makes it unlawful to “make any untrue statement of a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b). If information disclosure was all that was necessary to ensure Congress’ goal of honest securities markets, the story would end here because 10b-5(b) would be the panacea Congress sought to solve all abuses in the securities industry.
The securities acts, however, have a much broader reach prohibiting complex fraudulent schemes as well as uncomplicated misrepresentations and omissions. Under Rule 10b-5 it is also unlawful to (a) “employ any device, scheme or artifice to defraud”; ... and (c) “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” 17 C.F.R. § 240.10b-5(a) & (c) (emphasis added). In contrast to subsection (b), these subsections contain broad and prophylactic language designed to remedy and prevent any fraudulent conduct that harms investors or investors’ confidence in securities markets. Courts have refrained from interpreting the broad language of Rule 10b-5 to create limitless liability. Instead, they have constructed “workable limits” to liability which accommodate the interests of investors, the business community, and the public generally. Herpich v. Wallace, 430 F.2d 792, 804-05 (5th Cir.1970).
B. Shores’ “Fraud on the Market” Theory
A primary example of this judicial accommodation is the “fraud on the market” theory this court enunciated in Shores v. Sklar, 647 F.2d 462 (5th Cir.1981), cert. denied, 459 U.S. 1102, 103 S.Ct. 722, 74 L.Ed.2d 949 (1983), and upon which the plaintiffs in this action rely. Under Shores, an investor who purchases a security without reading the relevant disclosure documents may still maintain an action under Rule 10b-5 provided he presents evidence of a fraudulent scheme to defraud investors through the sale of unmarketable securities. Shores simply recognizes a legitimate theory for protecting investors from fraudulently marketed securities that supplements the disclosure/non-disclosure theories. Security issuers must therefore consider not only whether their disclosures are accurate and complete but whether the securities they issue are unmarketable.3
*749The foundation of a Shores cause of action rests upon the proposition that fraud underlying the issuance of a public offering may be the only reason that the securities were offered on the market at all. In Shores, the plaintiff had purchased industrial bonds without reading the disclosure documents. The bonds later defaulted and the plaintiff alleged under rule 10b-5 that the defendants had fraudulently marketed the bonds through the issuance of a misleading offering circular, erroneous financial statements, and other fraudulent acts. The trial court held that the plaintiff failed to establish reliance because of his failure to read the documents. The Fifth Circuit, en banc, affirmed the district court’s analysis under 10b-5(b) but held that the plaintiffs stated a cause of action under the broader protections of 10b-5(a) and (c). 647 F.2d at 469.
The court held that the fraudulent scheme on the part of the developer, bond counsel, underwriter, accountant and indenture trustee constituted an actionable securities law violation despite the plaintiffs’ admitted non-reliance on the disclosure documents. The court announced a three-part test which requires the plaintiffs to prove that:
(1) the defendants knowingly conspired to bring securities onto the market which were not entitled to be marketed, intending to defraud purchasers;
(2) the purchasers reasonably relied on the security’s availability in the market as an indication of its apparent genuineness; and
(3) the purchaser suffered a loss as a result of the scheme to defraud.
Shores, 647 F.2d at 469-70. The first element requires proof of a fraudulent scheme in which participants knowingly or recklessly disregarded the fact that the securities they marketed were unmarketable.4 The participants must have the requisite degree of scienter. The second element is the “fraud on the market” reliance requirement as applied to initial issuance markets.5 Because this element incorporates a version of the “fraud on the market” reliance theory that the Supreme Court recently upheld,6 courts and commentators generally refer to the entire Shores theory of liability as a “fraud on the market” theory.7 Finally, the third element simply establishes damages.
*750The majority finds that the plaintiffs’ burden to prove the first element in a Shores action is a “substantial one.” Maj. op. at 729. To satisfy their burden under the first element of the Shores test, the plaintiffs must establish three facts: the existence of a scheme to defraud, the defendants’ knowing participation in the scheme (scienter), and the securities’ unmarketability. The majority, however, holds that the plaintiffs have not met their burden because they haye “failed to generate a genuine issue of fact as to marketability.” Maj. op. at 730. Thus, the majority does not address whether a scheme to defraud existed or whether the defendants’ knowingly participated in the scheme. Instead, the majority concludes that evidence of previous failures to raise project financing and the project’s unsuccessful marketing program fail to raise a genuine factual issue. As discussed infra, the majority opinion unjustifiably eliminates these crucial forms of evidence which determine a security’s unmarketability-
The concept of unmarketability in Shores requires a factual inquiry into the proposed entity’s projected financial viability. Un-marketability under the Shores test does not require that the plaintiffs demonstrate the securities they purchased are totally worthless. The plaintiffs in Shores, for example, received thirty-seven percent of their initial investment. Shores v. Sklar, 844 F.2d 1485, 1488 (11th Cir.1988). Instead, the plaintiffs must prove only that the securities were unmarketable. An unmarketable security is one which would not have been issued absent some type of fraudulent conduct by the issuer. Shores, 647 F.2d at 464 n. 2; Lipton v. Documation, Inc., 734 F.2d 740, 745 (11th Cir.1984) (extending fraud-on-the-market reliance theory to open market), cert, denied sub nom., Peat Marwick Mitchell & Co. v. Lipton, 469 U.S. 1132, 105 S.Ct. 814, 83 L.Ed.2d 807 (1985). The fraudulent marketing scheme must be “so pervasive that without it the issue would not have issued, the dealer could not have dealt in, and the buyer could not have bought [the bonds], because they would not have been offered on the market at any price.” Shores, 647 F.2d at 464 n. 2. The phrase “[the bonds] would not have been offered on the market at any price” is imprecise and could lead to the erroneous conclusion, for example, that the bonds in Shores would have been marketable at 37 cents on the dollar (the nominal return investors received), rather than face value. The relevant inquiry is whether there is any combination of price and interest rate at which the bonds would have been marketable but for the fraud.
Thus, marketability requires a factual showing that the security would not have been issued but for the defendants’ knowingly fraudulent conduct. This factual inquiry may be relatively simple in cases where a fraudulent scheme’s sole purpose from its inception was to swindle investors. The inquiry, however, becomes more arduous when a project’s promoters fraudulently portray an otherwise infeasible project as financially viable in order to issue unmarketable bonds. This latter inquiry is critically dependent upon a thorough review of all the evidence relevant to the project’s feasibility and the bonds' marketability. For this reason, the standard of review on summary judgment has increased importance under the Shores test.
II. Standard of Review on Summary Judgment
A number of standards determine the scope of review of the district court’s order *751granting summary judgment. First, review of the district court’s order is plenary and is conducted using the same legal standards as those used in the district court. Carlin Communications v. Southern Bell, 802 F.2d 1352, 1356 (11th Cir.1986); Mercantile Bank & Trust v. Fidelity & Deposit Co., 750 F.2d 838, 841 (11th Cir.1985). A de novo review of the voluminous evidentiary record in this action, therefore, is required.
Second, the fact that substantial discovery has occurred and that the plaintiffs bear the burden of proving the relevant issues at trial affects the review of the district court’s order. A court should grant summary judgment if the plaintiffs fail to make a showing sufficient to establish the existence of an element essential to their case. Celotex v. Catrett, 477 U.S. 317, 321-22, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). This showing, which need not be in the form of admissible evidence, can be made by reference to affidavits, depositions, and answers to interrogatories. 477 U.S. at 323, 106 S.Ct. at 2553-54. In determining whether the moving party has met his burden, the evidence and inferences drawn from the evidence are viewed in the light most favorable to the nonmoving party, and all justifiable inferences are resolved in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 253-54, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986); Carlin, 802 F.2d at 1356. A court may not weigh conflicting evidence to resolve disputed factual issues. Instead, if a genuine issue of material fact is found, the court must deny summary judgment. Carlin, 802 F.2d at 1356.
Finally, the complex factual inquiries inherent in a Shores cause of action necessitate a restrained approach towards granting summary judgment in favor of defendants. The Shores plaintiffs must prove that (1) each defendant acted with scienter; (2) participated in a scheme to defraud the investing public; and (3) that the bonds could not have been marketed but for the defendants’ fraudulent scheme.8 Each of these fact-bound elements are generally ill-suited for summary review. Levinson v. Basic Inc., 786 F.2d 741, 749 (6th Cir.1986) (summary judgment inappropriate in section 10(b) security cases), reversed on other grounds, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); Vol. 10A, Wright, Miller, & Kane, Federal Practice and Procedure, Civ.2d § 2732, 309-10 (1983).
In particular, factual questions regarding whether bonds would be marketable absent the defendants’ fraud are generally not susceptible to determination as a matter of law. Judicial review of the marketability of the bonds at issue requires the examination of complicated financial documents, feasibility studies, and testimony by financial professionals all of which stretch the judicial ability to conclude with certainty that no genuine issues of fact exist. “The question whether a security was ‘entitled to be marketed,’ i.e., whether the security, absent the fraud, could have been marketed at some price, and the question whether the scale of fraud was broad enough are both presumably questions of fact, not readily disposed of by summary judgment”. Shores, 647 F.2d at 486-87 (Randall, J., dissenting). With these standards in mind, we review the plaintiffs’ evidence in a light most favorable to their position.
III. Evidence of Marketability of Bond Issue
The plaintiffs’ central claim is that the defendants marketed the Mount Royal bonds even though they knew or recklessly disregarded the fact that the project could not generate sufficient revenue to repay the debt. The plaintiffs support their claim with numerous facts regarding the defendants’ conduct which indicates their knowledge of the project’s likelihood of failure.
*752First, the defendant Rice’s previous attempts to acquire financing were unsuccessful because the project was financially infeasible in view of the adverse conditions in the bond market. This fact was known to the other defendants. Second, the defendants ignored the warnings of the original underwriter and feasibility consultant that the project would not generate sufficient revenues to repay the bonds at marketable interest rates. Instead, they agreed to modify the project by increasing both apartment unit prices and bond interest rates to make the project appear feasible although they knew that the changes would render the apartments too expensive to be sold in the relevant geographic market. Third, the defendants allegedly knew that Rice’s sham pre-sale agreements made the project appear feasible. Fourth, the defendants were aware that long delays in construction of the facility “burned” the sales territory irreparably damaging consumers’ interest in purchasing Mount Royal units. Finally, the defendants were able to market the bonds only because they failed to expose the project’s inauspicious background which would have seriously undermined the conclusion in the Official Statement that the project was feasible.
The district court reviewed the evidence presented and concluded that there was no evidence from which a jury could reasonably infer a scheme to bring securities into the market which were not entitled to be marketed. In affirming the district court, the majority concludes that the plaintiffs provided only two categories of evidence to satisfy their burden of proof under Shores: (1) the fact that past financing attempts failed; and (2) the unsuccessful pre-market-ing program and lack of legitimate pre-sales. The majority concludes that the former is irrelevant and that the latter does not create an inference that the bonds were unmarketable. The majority however simply ignores the permissible alternative inferences that a court must afford this evidence on summary judgment. Viewed in a light most favorable to the plaintiffs, the plaintiffs’ evidence collectively supports the plaintiffs’ contention that the bonds were unmarketable due to the defendants’ fraudulent scheme.
A. Past Financing Attempts Failed [W]e have been plagued all year with the most unfavorable bond market in recent years which, unfortunately, has continued to deteriorate over the last several weeks to the point where investor interest in non-rated, long term tax-exempt bonds is virtually nonexistent.9
Rice made a number of attempts to acquire traditional financing for the Mount Royal Towers project as a for-profit or non-profit venture each of which ended in failure. The plaintiffs claim that Rice and the other defendants knew of these previous failures to attain sufficient financing yet continued to promote the ill-fated project. The plaintiffs assert that the defendants contributed to the project’s infeasibility by doubling occupancy fees despite cautions from the previous underwriter and feasibility consultant that existing fees were as high as the market would bear.
The majority concludes that the new project was so dissimilar to the previous projects that the opinions of the underwriter and experts regarding the previous projects’ feasibility are irrelevant in establishing the plaintiffs’ burden of proof under a Shores cause of action. Maj. op. at 730. The majority states that “the caution against increasing the occupancy fee, which was in the context of the previous deal, could not logically apply to the feasibility of the deal under the new pricing structure.” Id.
The illogic, however, is the majority’s holding that the restructured project made the residential units more financially attractive and that past failures to obtain financing, therefore, provided no basis for inferring that the defendants knew that the Mount Royal Towers project would fail. *753The majority’s reasoning is structured as follows:
(1) Assume Project 1 is infeasible;
(2) Project 2 differs from Project 1 because Project 2 has a more lenient refund policy;
(3) Project 2’s more lenient refund policy makes Project 2 similar to ownership versus renting;
(4) Because of its more lenient refund policy and similarity to ownership, Project 2 is more financially attractive to prospective residents than Project 1; Therefore, evidence that Project 1 is infeasible is irrelevant on the issue of whether Project 2 is infeasible because Project 2 differs from and is preferable to Project 1.
Plaintiffs present the alternative and factually supportable theory that Project 2’s differences make it less desirable than Project 1. Therefore, because Project 1 is infeasible, Project 2, which is less desirable, is also infeasible.
The majority’s syllogism is fatally flawed for a number of reasons. First, the two projects had significant differences such as the amount of occupancy fees, the refund policy (which subordinated refunds to bondholders), the number of residential units, the dollar amount and interest rate of the bond issues, and the contingent nature of the defendants’ fees.10 All of these differences are relevant in determining whether the restructured project was financially feasible. The majority, however, focuses solely on one of these differences (the refund policy) rather than analyzing the collective impact of all the differences. Further, the majority’s prepaid rent versus ownership analogy masks the simple fact that the second plan required significantly higher up-front and monthly payments and that residents were essentially investing in the capitalization of the Mount Royal project.11
Next, the majority reaches the unwarranted and erroneous conclusion that the restructured project was more “financially attractive” because of the second project’s assertedly more lenient refund policy and similarity to ownership. There is no basis, however, for the conclusion that this refund policy is “lenient” nor is there support in the record for a finding that prospective residents preferred ownership over renting. Instead, the record and simple economic sense establish that the refund policy actually increased residents’ risk of financial loss and adversely affected the feasibility of the project’s marketing plan. The majority’s conclusions regarding the economic effects of the second project’s refund policy are simply unsupported by either economic logic or the evidence in the record.
Finally, the majority completes its unrealistic syllogism with the conclusion that because the second project is preferable to the first project (a false assumption), evidence of prior financing failures are irrelevant in determining whether the second project is feasible. In short, the majority’s premise (that the projects are dissimilar) does not support its conclusion (that the prior project’s financial infeasibility is irrelevant). A more reasonable conclusion is that the differences between the old and new projects actually favor the plaintiffs’ theory that the second project was infeasible and the bonds unmarketable.12 Rather *754than permitting a trier of fact to decide which inferences are to be drawn from the projects’ differences, the majority simply presents its own subjective and erroneous view that the restructured project was preferable to the new one. These types of inferences are for the trier of fact, not a court on summary judgment.
1. Refund Policy
The majority is correct in stating that there were differences in the marketing and occupancy fee structures between the first Mount Royal project and the one that ultimately failed. The majority, however, focuses on only one different factor: the refundability of the occupancy fees differed under the two plans. The majority then makes an enormous leap in its analysis by concluding that because there was a difference in occupancy fee refund policy, none of the evidence of the project’s past failures is relevant to prove unmarketability. A closer look at the facts reveals a different picture.
The original plan allowed a partial refund of occupancy fees based upon the length of time a resident occupied a unit. The amount of refund equaled the occupancy fee less an application fee of $1,500 less 2 percent per month for up to four years of occupancy. Thus, a resident who paid $27,-880 for a one bedroom residential unit and who later decides to terminate the occupancy contract after two years would receive a $12,956 refund. After four years of occupation, none of the occupancy fee was refundable.
The plan developed by defendants provided that a prospective resident purchase a “nontransferable” right to lifetime occupancy in the facility. If the resident dies, decides to leave, or is transferred to the project’s health care unit, the occupancy contract terminates and the company can enter into a contract with a new resident. The prior resident (or his estate) would then receive an amount equal to the original occupancy fee paid or the amount of the initial occupancy fee received by the company from the new resident, whichever is less. The refund, however, is given only after the prior resident dies or vacates the entire project (both residential and health care units). More importantly, residents have no right to a refund if the Mount Royal Towers project goes into default (a factor not incorporated into the defendant Laventhol & Horvath’s feasibility study). Official Statement, at 35. Residents’ rights to refunds are therefore contingent on a number of factors which hinge on the success of the project itself.
For example, under the second plan a prospective resident who pays a $72,500 occupancy fee for a one-bedroom unit and who later decides to terminate the occupancy contract after two years might receive a refund if a number of conditions are met. First, the Mount Royal Towers bond issue must not be in default (because purchasers take subject to the bond indebtedness). The resident’s entire occupancy fee would be non-refundable resulting in a $72,500 loss if the project were foreclosed. Second, assuming the project remained financially viable, the resident would receive her entire occupancy fee only if a new resident pays an occupancy fee equal to or greater than the original resident’s occupancy fee. Thus, if the market rate for a one-bedroom unit falls to $50,000, the former resident incurs a loss of $22,500 on her unit (assuming a new resident pays $50,000 for the use of the unit).
2. Increased Occupancy Fees
The majority reaches the startling conclusion that the new refund policy under the second plan makes “the package more financially attractive” obviously warranting “a substantial increase in occupancy fees.” Maj. op. at 730. This conclusion, however, is based on a deficient analysis of the restructured project and the improper application of basic economic principles. A brief review of the occupancy fee rate structures, the feasibility study assumptions, and pre-sale marketing data demonstrates the infirmity of the majority’s position.
The Mount Royal Towers project originally was based on the schedule of occupancy fees and monthly service and mainte*755nance fees contained in Table 1. These are the fees upon which the Peat, Marwick & Mitchell feasibility study relied.
Table 1
Initial Average Average Monthly Occupancy Service Number Type of Unit Fee Fee of Units
Studio.$21,700 $290 78
One-bedroom.27,880 390 117
Two-bedroom.43,300 490 45
Penthouse.51,800 590 16
250
Additional Fee for Double Occupancy = $2,500
Additional Monthly Fee for Double Occupancy = $175 (does not include studio)
Peat, Marwick, Mitchell & Co., Feasibility Study, Nov. 16, 1979, at A-40.13
The proposed occupancy and monthly service and maintenance fees increased substantially following the decision to increase the bonds’ interest rates (Table 2).
Table 2
Initial Occupancy Fees
Monthly Service Fee
Number Occupancy Of Type of Unit Fee Single Double Units
Studio.$ 54,900 $ 631 — 18
One-bedroom .72,500 755 $1087 90
Two-bedroom
900 sq.ft.107,500 940 1272 45
1000 sq.ft.119,500 1010 1342 9
1200 sq.ft.148,500 1210 1542 18
Three-bedroom.178,000 1535 1867 9
Penthouse
1050 sq.ft.126,600 1055 1387 10
1400 sq.ft.172,400 1515 1847 6
205
Source: Official Statement, at 16; Laventhol & Horvath, Feasibility Study, at 53.
The Peat, Marwick study assumed a 63% occupancy rate for five months in 1981 increasing to 90% in subsequent years.14 The Laventhol & Horvath feasibility study, which relied upon the new fee schedule, continued to adhere to occupancy rate assumption that were similar, if not more favorable, than those contained in the Peat, Marwick feasibility study. The Laventhol & Horvath study simply stated “[t]he occupancy rate for the Residential Living Units is projected to be 98 percent after the first full year of operation and 42 percent during the first year of operation.” Laventhol & Horvath, Feasibility Study, at 45. The study provided no market study based information for these assumptions.15
First, the majority erroneously concludes that the new refund policy is more lenient (i.e. favorable towards residents). The majority simply neglects the fact that the new refund policy sharply limits a resident’s right to receive a refund based on the project’s continued financial stability and the availability of prospective residents willing to pay the higher occupancy fee. Prospective residents would find these limitations undesirable thus making the package less financially attractive. Under the majority’s logic, for instance, prospective residents would be willing to pay $72,500 (representing a $44,620 premium over the $27,880 original occupancy fee) for a one bedroom unit solely for the opportunity to receive a refund which is wholly dependent upon the project’s financial success. This result makes no economic sense.
Second, the majority’s conclusion that a more lenient refund policy “obviously warrants” a “substantial increase in occupancy fees” is insupportable under any economic theory or the record in this case. A more *756lenient refund policy might have the effect of marginally increasing the demand for Mount Royal residential units. Counterbalancing this possible increased demand, however, are the strict limitations placed on the availability of refunds (i.e. subordinated to bondholders and refundable only from a new resident’s occupancy fee). These limitations would have the effect of reducing the market demand for residential units. The net effect on the demand due to the new limited refund policy might be either to raise or lower the market price for the residential units.16 An unfounded conclusion, however, is that prospective residents would find a "substantial increase in occupancy fees” “obviously warranted.” In fact, the record indicates that rather than warranting a doubling of occupancy fees, the demand for the Mount Royal units declined under the restructured deal.17 An alternative and more reasonable conclusion is that the new refund policy and the higher occupancy fees made the residential units less desirable because of their higher price and higher risk of loss.
The majority also postulates that the original occupancy fee structure is analogous to a form of rent and that the second is analogous to an ownership interest in the unit. The majority states that “the occupancy fee in the original version was in the nature of a lump sum prepayment of rent for the right to live there until death.” Id. In contrast, the “occupancy fee under the final version was more in the nature of a purchase price for a fee simple interest” subject to various conditions. Id. Assuming the majority is correct in its characterizations of the occupancy fees, a brief example illustrates that the majority’s distinction favors the plaintiffs’ claim that the second project was infeasible.
Under the first plan, a resident who purchases a one-bedroom unit for $27,880 and lives in the unit four years effectively pays $6,970 a year in “rent.”18 Of course, the longer the resident stays in the unit, the lower the average yearly “rent” will be.19 Under the restructured plan, a resident who pays the $72,500 occupancy fee for a one-bedroom unit and lives in the unit four years pays no “rent” and may get the entire $72,500 refunded.20 However, the resident forgoes interest on the $72,500 fee for the four years. Assuming an interest rate of 10%, the resident could have earned $7,250 interest per year.21 This foregone interest income constitutes a form of “rent” similar to that the majority identifies under the first plan. In addition to this foregone interest income, the resident pays significantly higher monthly maintenance fees under the restructured plan. See Tables 1 & 2. Finally, the resident risks *757losing all or part of the $72,500 occupancy fee should the project fail or the number of prospective purchasers dwindle.
Under the second plan, it appears that prospective residents were essentially being asked to become Mount Royal investors by providing large interest-free loans that were subordinate to the rights of the bondholders. In fact, the initial residents were permitted to pay occupancy fees with any combination of cash or short term Mount Royal bonds. Official Statement at 15. Thus, the expected return on their investment came, in part, from their right to reside at Mount Royal Towers without paying monthly rent (although they paid higher maintenance fees). The substantial part of their return, however, was based on a gamble that the project would flourish and that upon the termination of their occupancy agreements the project would not be in default and a queue of prospective (and affluent) residents existed. The restructured residency agreement, therefore, transformed the former relatively risk-free “rental” agreement into a riskier capital investment in the project. This transformation required the residents to shoulder an increased risk of loss (of a significantly higher investment) and presumably would make residency at Mount Royal Towers less desirable and the project therefore less feasible. Residents who balked at “renting” would likely reject “ownership” particularly when they could possibly lose their entire “ownership” investment.
Yet the majority totally ignores the impact the restructured deal would have on the units', and thus the project’s, financial feasibility. Rather than rendering irrelevant the evidentiary significance that previous financing attempts had failed, the differences between the projects such as the refundability of occupancy fees increases the evidentiary significance of the previous failures. Rice’s struggle to obtain financing, conventional or otherwise, relates directly to the marketability of the bonds and his knowledge of the project’s anticipated success.
Further, the majority neglects the fact that the first project anticipated revenues from a 250 unit facility to pay off an $18,-755,000 bond issue at a 9*/2% interest rate; the second project anticipated revenues from a 205 unit facility to pay off a $29,-950,000 bond issue at interest rates between 15V2% and 17%. The second project, therefore, would have to generate more revenue from fewer units to pay off higher interest debt on a larger bond issue. The restructured deal was also formed at a time when prospective residents could not sell their homes because of the escalating mortgage interest rates. It requires only a meager understanding of economic principles to reasonably conclude that these differences in the restructured deal adversely affected the project’s feasibility and the bonds’ marketability. Because the initial bond issue was unmarketable, a permissible inference is that the restructured bond issue adversely affected the projects’s financial feasibility and, thus, was also unmarketable.
In summary, these differences, rather than supporting the assertion that evidence of prior failures is irrelevant, directly support the plaintiffs’ theory that the ill-fated project was infeasible and that the defendants knew it. The majority’s “apples and oranges” approach to determining marketability is simply untenable and places an unjustified evidentiary burden on the plaintiffs by excluding the precise evidence necessary to support a Shores cause of action.
B. Number of Pre-Sales Fraudulently Inflated
That a lie which is half a truth is ever the blackest of lies, That a lie which is all a lie may be met and fought with outright, But a lie which is part a truth is a harder matter to fight.22
The plaintiffs allege that Rice fraudulently inflated the number of pre-sale agreements to make the project appear financially feasible. In particular, they claim he eliminated the deposit requirement as a last ditch attempt to boost the percentage of “pre-sales” and his friends, employ*758ees, and family applied for units to increase the “pre-sale” level. The defendants’ claim that the Official Statement fully disclosed that many of the applications were with reduced or no deposits.23 The Official Statement, however, only offers part of the truth in its disclosure of the number of “pre-sales.”
The Official Statement disclosed that the project had 103 residency applications which accounted for 50.2% of the 205 units. Most prospective residents were required to complete an application form and submit a $1,000 deposit.24 Fifteen of the applicants, however, who had previously submitted $100 deposits were not required to increase their deposits. Further, “thirty three other persons were not required to make any deposit with their application.” Official Statement, at 15. Total application fees received amounted to $63,250. Id. at iii.
What the Official Statement failed to state was that most of the applications which required no deposits resulted because Rice dropped the deposit requirement to zero in order to meet the 50% level. Forty-eight applications without deposits were ultimately accepted and all forty-eight withdrew shortly after the bonds issued. Thus, the plaintiffs claim the declining deposit requirement indicates a desperate but successful attempt to reach the minimum 50% threshold necessary to make the bonds appear marketable. The fact Rice’s friend, relatives, and employees submitted applications buttresses the plaintiffs’ claim that Rice and the other defendants knew that the 50% threshold would make or break the deal.
The majority misses the mark in concluding that the marketing program’s failure to attain 50% legitimate pre-sales does not support an inference of unmarketability. The majority claims that the plaintiffs’ evidence establishing the 50% threshold only provides “satisfactory evidence of the feasibility of the project.” At 731 n. 13. The basis for the majority’s conclusion is its own interpretation of the deposition testimony of Thomas Kelley, the underwriter with Henderson, Few, who worked on the Mount Royal project.
Kelley stated that a viable project required a substantial number of legitimate pre-sale commitments. Kelley Deposition, at 85. A legitimate pre-sale commitment would require the potential buyer to pay a forfeitable cash deposit. Lack of such a deposit “would not be worth very much” and would be “useless as a way of evidencing the agreement to purchase” a unit. Id. at 88-89. Kelley also explained that issuers rely on the financial feasibility consultant who in turn relies upon the existence of pre-sale agreements and deposits as evidence of a project’s marketability. He concluded that a 50% pre-sale level and about $100,000 in deposits are a basic requirement for underwriting this bond issue. Id. at 92, 146. He testified that he had never been associated with a bond issue which had legitimate pre-sales less than 50%. Id. at 192-94.
Thus, Kelley’s testimony establishes that the 50% level was the dividing line between marketable and unmarketable bonds. This evidence also establishes that a crucial step in determining the project’s feasibility is the number of legitimate pre-sale agreements and the dollar amount of forfeitable pre-sale deposits. These two factors provide the foundation upon which the feasibility of the entire project rests. The underwriting process relies heavily upon the investigations and conclusions of the financial feasibility consultants. Thus, financial projections built upon inaccurate or fraudulent measures of pre-sale commitments crumble like a house of cards.
The majority states that the plaintiffs presented no other evidence of unmarketa-bility (other than the unsuccessful marketing program) and that the Laventhol & *759Horvath feasibility study contains “substantial evidence that sale of the units was feasible and that the bonds were marketable.” At 731 n. 14. The majority’s reliance on the Laventhol & Horvath feasibility study as evidence of the project’s marketability is curious because the feasibility study directly relies upon the pre-sale data Rice provided as evidence of the project’s feasibility. The feasibility study also concluded that the project would break-even (i.e. be feasible) only at an 88-90% occupancy rate — a far cry from the percentage of legitimate pre-sales established prior to the bonds’ issuance.
Further, because Rice provided the information regarding the number and amount of pre-sale agreements upon which the feasibility consultants relied in making projections, he was in a position to control the project’s apparent feasibility. For example, Peat, Marwick stated in its earlier feasibility study that its “projections are based on the assumptions by the Developer of Mount Royal Towers concerning future events and circumstances.” Peat, Marwick & Mitchell, Feasibility Study, at A-3. Rice could therefore have provided false information that ultimately forms the basis for a favorable feasibility study upon which all other underwriting participants rely. The record, therefore, simply does not support the majority’s conclusion that the unsuccessful marketing program does not support an inference of unmarketability.
The majority concedes that the marketing program was not successful in obtaining 50% legitimate pre-sales with deposits but states that the plaintiffs would “have to prove that the pre-offering marketing program sufficiently predicted the failure of the project so as to render the bonds unmarketable at any price.” A thorough review of the record establishes that the plaintiffs have met their burden.
First, defendant Laventhol & Horvath’s feasibility study specifically states that:
As of July 8, 1981 approximately 32 percent of the residential units had been reserved; the underwriter intends that the series 1981 Bonds will be issued when approximately 50 percent of the residential units have been reserved.
Laventhol & Horvath, Feasibility Study, at 45. (emphasis added) The feasibility study therefore indicates that the 50% pre-sale threshold separated marketable from unmarketable bonds. In addition, Kelley’s deposition testimony repeatedly affirms that 50% legitimate pre-sales were a minimum marketability standard. It is difficult to imagine more probative evidence of a bond issue’s unmarketability than statements by a project’s developer, underwriter, or feasibility consultant that 50% legitimate pre-sales were a marketability litmus test.
Further, the majority’s statement that the bonds “sold” despite disclosure of “most of the facts” about the pre-market-ing program is circular. Had all the facts been disclosed, the project’s already precarious financial outlook would be further weakened and the bonds may not have issued. In particular, the fact that the applications without deposits occurred shortly before the bond issued closed provides particularly persuasive evidence that the defendants’ attempt to reach the 50% marketability threshold raises a jury issue of fraud.
The majority distinguishes this case from Shores because the misrepresentations in Shores “went to the concealment of existing factors vital to the viability of the project.” At 731. In contrast, the alleged fraud here “centers on projections of an uncertain future occurrence, i.e. the sale of the apartments.” Id. The majority’s distinction, however, simply does not apply in this case because the number of legitimate pre-sales is an existing fact upon which the feasibility of the entire project hinged. Kelley’s deposition testimony established the fact that issuers and financial feasibility consultants rely upon the existence of legitimate pre-sale agreements and deposits as evidence of a project’s marketability. Thus, the number of legitimate pre-sales is certainly “vital to the viability of the project” in addition to being current measures of the market demand for the units.
*760For all these reasons, the plaintiffs’ assertion that Rice engaged in sham pre-sale agreements to make the project appear feasible and the bonds appear marketable creates a genuine issue of fact under Shores.
CONCLUSION
The majority commences its wayward path by failing to follow the appropriate standard of review for fraud cases. To determine the truth in this case, it is necessary to look into the defendant’s minds to ascertain whether they honestly believed the Mount Royal Towers units could be sold in sufficient number to support the issuance of the bonds or whether they were counting on a miracle. The plaintiffs’ documentary and deposition evidence submitted in response to the defendants' motion for summary judgment creates a genuine issue of fact as to whether the apartment units, and thus the bonds, were marketable.
The defendants knew of the past cancellations of a similar project where the bond issue was $10,500,000 less than the final project, the occupancy fees and maintenance fees were fifty percent less, and the number of “presales” were greater and accompanied with larger deposits. This evidence, coupled with evidence of fraud in the “presales” the defendant Rice obtained, evidence of financial motives to market the unmarketable bonds, and finally evidence of the failure of the project, suffice to make a jury issue of whether the defendants knew the bonds were unmarketable. Thus, I respectfully dissent.

. See infra note 7.

. Section 10(b) makes it unlawful for any person to:
use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j (1981).

. Stated differently, the disclosure requirements of the securities act are based on the principle *749that "[p]eople who are forced to undress in public will presumably pay some attention to their figures.” L. Loss, Fundamentals of Securities Regulation, 33 (1988). Shores simply recognizes that there are some figures no amount of reconstructive surgery can salvage.

. In this circuit, "severe recklessness” satisfies the scienter requirement and is actionable under § 10(b). Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1010 (11th Cir.1985); Broad v. Rockwell Intern. Corp., 642 F.2d 929, 961-62 (5th Cir.1981) (en banc). In Broad, the court defined severe recklessness as "those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.” 642 F.2d at 961-62. “Although the Broad court used the modifier ‘severe’ in its characterization of what kind of reckless conduct can satisfy 10b-5 scienter requirement, its definition of severe recklessness is identical to that used by other courts to describe what conduct they considered reckless.” Woods, 765 F.2d at 1010 n. 9.

. The "fraud on the market” theory:
is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business ... Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.... The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.
Basic v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 988-89, 99 L.Ed.2d 194 (1988) (quoting Peil v. Speiser, 806 F.2d 1154, 1160-61 (3d Cir.1986).

. The Levinson Court upheld the application of the fraud on the market reliance theory in an action based on a material misrepresentation action under Rule 10b-5. The Court held that the theory supports a rebuttable presumption of reliance. 485 U.S. at -, 108 S.Ct. at 988-91.

. The majority misinterprets the Shores fraud on the market theory by asserting:
Shores is based on the understanding that although it is reasonable to rely on the market to screen out securities that are so tainted by fraud as to be totally unmarketable, investors *750cannot be presumed to rely on the primary market to set a price consistent with the appropriate risk. Thus, the Shores court defined fraudulently marketed bonds as those that could ‘not have been offered on the market at any price.’
Maj. op. at 729 (emphasis added. Citations omitted). This interpretation of Shores’ fraud on the market approach to reliance is inconsistent with Shores and Levinson. It is precisely because investors rely upon the integrity of the primary market underwriting process to set a non-fraudulent price that Shores adopted the "fraud on the market” reliance theory. Thus, there is no support for the majority’s novel interpretation of the fraud on the market theory, particularly since the Supreme Court has specifically stated that the theory is derived from the efficient market hypothesis whose principal tenet is that markets set prices based on all currently available information. Levinson, 485 U.S. at -, 108 S.Ct. at 988-92.

. It is well-established that summary judgment is inappropriate to decide questions of scienter, knowledge and intent. See, e.g., Poller v. Columbia Broadcasting System, 368 U.S. 464, 473, 82 S.Ct. 486, 491, 7 L.Ed.2d 458 (1962) ("summary procedures should be used sparingly in complex antitrust litigation where motive and intent play leading roles, the proof is largely in the hands of the alleged conspirators, and hostile witnesses thicken the plot”).

. Kelley Deposition, Exh. 109. Thomas Kelley, an underwriter with Henderson, Few who worked on the Mount Royal project, was explaining why Henderson, Few made the decision not to market the Mount Royal Towers bond issue only one month prior to Rice’s decision to go forward with the project.

.Unlike the previous projects. Rice and other defendants had an undisclosed financial interest in marketing the bonds. Rice stood to lose a substantial personal investment in the project if the bonds were not issued because he had invested almost $500,000 of his own money (he ultimately received $667,000 from the proceeds of the project). Further, the other defendants were on contingency contracts from which they would receive payment for their services only if the bonds were ultimately marketed. The defendants also increased so-called “soft costs” and other expenses payable to themselves under the new bond issue. See Sirmans, Real Estate Finance 316 (1985) (soft costs include legal, architectural, and other development fees). The majority makes no mention of these facts.

. It must be remembered that there was no stock in the corporation. The only source of funding was the sale of bonds.

. The plaintiffs’ theory is that the first project was financially infeasible and the bonds were unmarketable; because the restructured program decreased the project’s financial feasibility, the issued bonds were also unmarketable.

.The Peat, Marwick feasibility study included specific analysis of the demographic characteristics of the Jefferson County, Alabama market (which includes Birmingham). The study considered such factors as population trends in the county including age, race and sex composition, financial status of the elderly population in the Birmingham area, income distribution in the county, mortality data, economic activity data for the county, and the experience of other retirement centers across the country. See generally Rabinowitz, Land Investment and the Pre-development Process, 64-89 (1988) (identifying various demographic and income-related factors relevant in determining feasibility).

. The estimates were based on "historical utilization figures for retirement centers nationwide and for local Jefferson County nursing homes.” Peat, Marwick, Feasibility Study, at A-38.

. The Laventhol & Horvath occupancy rate assumptions would require projected sales to elderly individuals at the new higher prices to have occurred in a short period of time following the project’s construction. Because it was uncertain whether there would be sufficient sales under the older, lower prices, it became even more suspect to assume that the occupancy rate would remain basically the same under the higher fees.

. The demand for Mount Royal Towers residential units was uncertain because the continuing care facility was a relatively new concept and had a number of competing facilities located in the surrounding geographic area. The competing facilities included one continuing care facility (Kirkwood-by-the-River) and nine nursing homes. Laventhol & Horvath, Feasibility Study, at 40-41. The Kirkwood facility had 80 residential units. Its nonrefundable entrance fees ranged from $12,000 — $40,000 and its monthly maintenance fees from $253 — $731. Rice considered Kirkwood only "secondarily competitive" because of its location and facilities offered. Id. at 40.

. The pre-marketing plan for the first project was much more successful than the pre-market-ing plans for the second. During 1980, Rice presold more than 130(63%) of the 205 units. This number, however, declined to 107(52%) by September, 1980, and dwindled to zero by December, 1980, allegedly due to the long delays in constructing the facility and obtaining financing. In contrast, after adopting the new refund policy and increasing occupancy fees only 33 of the 205 units (17%) were presold by April 1, 1981. Two months later, 47 units (24%) had been presold. Rice then reduced the required deposit from $1,000 to zero and acquired the remaining number of “agreements” to pass the 50% threshold of 103 units.

. This figure is calculated by dividing $27,880 by 4.

. After ten years, for example, the average "rent” attributable to the occupancy fee would be $2,788 (i.e. $27,880/10).

. Assuming the Mount Royal Towers project does not default and the availability of a prospective resident willing and able to purchase the open unit.

. A 10% interest rate is conservative given that the prime rate peaked at about 21% during the early 1980s when the Mount Royal Towers project was being promoted.

. Tennyson, The Grandmother, stanza (1864) 8.

. The Official Statement does not use the term pre-sales but instead refers to residents’ "applications for reservations.”

. The Official Statement is somewhat disingenuous in stating “[u]nder current arrangements, persons desiring to become residents” must submit an application "together with a $1,000 deposit” when in fact the deposit requirement had been totally waived. Official Statement, at 15.