Court Opinion

ID: 8917092
Source: CourtListenerOpinion
Date Created: 2022-11-27 05:31:12.142543+00
Date Added: 2024-06-11T17:09:05.426389
License: Public Domain

HOLLOWAY, Circuit Judge,
concurring and dissenting:
I concur in the affirmance of the judgment based on the jury’s verdict in No. 82-1104. However, I must respectfully dissent from the opinion as to No. 82-1055. The majority opinion, while purporting not to overrule our opinion in Holdsworth v. Strong, 545 F.2d 687 (10th Cir.1976) (en banc), cert. denied, 430 U.S. 955, 97 S.Ct. 1600, 51 L.Ed.2d 805 (1977), in fact cannot be reconciled with that precedent. Moreover, the majority’s resolution of this issue defeats the main purpose of the securities law to protect from fraud and misrepresentation, unsoundly striking the balance in favor of the wrongdoers by penalizing a plaintiff for his neglect or recklessness in not discovering the defendants’ intentional wrongs. All this is done without questioning the jury’s well supported findings on the defendants’ knowing misrepresentations or omissions.
The majority opinion (pp. 1516-1517) agrees with the trial judge’s statement in his charge to the jury of the test for justifiable reliance, and I likewise accept that test. The majority also correctly notes that Holdsworth held that the plaintiff’s conduct in Rule 10b-5 cases will bar recovery only when it “rises to a level of culpable conduct comparable to that of the defendant .... ” (Ante at 1516; emphasis added.) To me, however, the majority opinion’s application of this rule is illogical. It observes that a defendant’s liability must be based on misbehavior rising (or sinking) at least to the level of recklessness. The opinion labels plaintiff Phil Rasmussen’s behavior “reckless” and hence denies recovery. What is wanting is recognition of the fact that in light of the jury’s unquestioned findings here, the defendants’ conduct cannot be sanitized so as to say it was merely comparable to the plaintiff’s conduct.
The jury specifically found otherwise and there is ample evidence in the record supporting the jury’s finding that the defendants were guilty of material misrepresentations or omissions. The jury found that each of the defendants made untrue statements or omissions of material facts or otherwise attempted to defraud the plaintiffs, and that these acts were done “knowingly.” 1 Furthermore, the jury found that *1521plaintiff Phil Rasmussen “justifiably and reasonably relied” thereon.2 The majority opinion (pp. 1517-1518) rejects the jury finding of justifiable reliance not by a process of showing a lack of credible testimony by plaintiff on knowing misrepresentations and omissions by the defendants; indeed the majority plainly base their reversal on the proposition that “the defendants did not conceal their fraud from Rasmussen, they provided him with information and warnings which exposed the representations as false.” (Ante at 1518; emphasis added.) The jury’s findings are overturned only by imputing to the plaintiff constructive knowledge of the Private Placement Memorandum. Thus the knowing misrepresentations or omissions are accepted as proven. The case then comes down to whether the important policies of the securities law and the regulation are served by imposing a loss on the plaintiff by imputing knowledge to him of the printed exculpatory statements and by exonerating the defendants who were found guilty of “knowing” wrongful conduct. (See concluding paragraph of note 1, supra.)
Holdsworth presented the occasion for this court to reevaluate the requirement of due diligence by the plaintiff in Rule 10b-5 actions in light of the Supreme Court’s holding in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), that proof of defendant’s scienter, an intent to defraud or deceive, is a necessary predicate to establish liability. In rejecting the argument for liability based on mere negligence, the Court there said the language of § 10(b) “clearly connotes intentional misconduct,” id. at 210, 96 S.Ct. at 1389 — the standard carefully followed by the trial judge in his charge here. (See note 1, supra.) The Holdsworth opinion concluded that if the plaintiff were required to prove both the defendant’s scien-ter and his own due diligence, the remedy would be undesirably restricted. Holds-worth decided that “[i]f contributory fault of plaintiff is to cancel out wanton or intentional fraud, it ought to be gross conduct somewhat comparable to that of defendant.” 545 F.2d at 693. The opinion went on to note that at common law a plaintiff’s contributory negligence was not a defense to intentional fraud. Holdsworth is thus in harmony with the antecedents to our present federal securities law.
I am convinced that the resolution in Holdsworth of the competing policy consid*1522erations was correct in light of Ernst v. Ernst and the common law underpinning of the securities law protections. One of the principal policies behind the Acts is to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing. Ernst v. Ernst, supra, 425 U.S. at 195, 96 S.Ct. at 1382; Dupuy v. Dupuy, 551 F.2d 1005, 1019 (5th Cir.), cert. denied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197. The majority here is understandably concerned about aiding a plaintiff who has failed to read material furnished him concerning the investment. There are two responses to that concern.. First, the policy of prevention of fraud is' the core of the securities laws and must not be overlooked simply because other conflicting policies are also implicated. Indeed, not only in the area of securities but generally the policy of deterring intentional misconduct outweighs that of deterring negligent or reckless conduct. Precisely for this reason Holdsworth has been influential when other courts have reexamined these issues. See, e.g., Dupuy v. Dupuy, supra, 551 F.2d at 1018.3 “[T]he federal policy of deterring intentional misconduct in securities dealings outweighs the policy of deterring negligent behavior by investors.” Dupuy v. Dupuy, supra, 551 F.2d at 1019. Secondly, the jury here found for the plaintiff under a charge that clearly required the plaintiff to prove that he justifiably relied on the misrepresentations, “that he did not intentionally close his eyes and refuse to investigate, concerning the circumstances in disregard of a risk known to him, or so. obvious that he must be taken to have been aware of it, and so great as to make it highly probable that harm would follow.” (I J.A. 288).
To satisfy the requirement of showing that defendants were guilty of intentional misconduct here, there was evidence before the jury of an extended period of discussions for 30 days or more by the defendants, repeatedly extolling the investments. For example, in comparing the Coal-X issue to other investment opportunities that Phil Rasmussen had been offered by Baker and his company, Baker said that the Coal-X venture was “one of their best, probably the best.” (II J.A. 374, 377). Rasmussen also testified that he raised all his doubts and questions in discussions with defendants on two occasions and that defendants repeatedly assured him that the deal was as good as it was presented to be, if not better. (II J.A. 375-77). Rasmussen testified that the project was described as “a sure thing,” a deal on which “you can’t miss,” and that the presentations made the offer appear “so good that there was just no way that I should let it go by me.” (II J.A. 374, 376). When the plaintiff said he would have to borrow the money, the defendants said they would “guarantee” the investment. (II J.A. 376-78). In fact, one of defendants’ salesmen, Mr. Bleazard, testified that defendant Baker had said to Phil and Neil Rasmussen that they “should get in on this. It is a good deal. I have enough stock so that you don’t have to worry about losing your money.” (II J.A. 418).
Using the projected profit figures supplied by the defendants, Phil Rasmussen figured that within eighteen months the cash flow would be sufficient for him to repay the money he borrowed to purchase the securities. (II J.A. 378). He further testified that, “I was promised and guaranteed by Mr. Baker that would be a reality and I could do that.” (Id.). And there was evidence that defendant Baker made only the slightest effort to encourage plaintiff Phil Rasmussen to read the prospectus. Plaintiff testified as follows (II J.A. 381):
I asked him, I said, “Am I supposed to read this?” And he said, “well, yes, you should.” I said, “That is an all-night reading and I don’t think I have the time or expertise.” I said, “Tell me what I really ought to know about it.” He said, “Well, I have really told you in the projections,” and so forth.
*1523Q. What about risks? Did he point out that document discusses risks involved in this venture?
A. No, he didn’t point that out. (Emphasis added).
The projections referred to were two or three pages that painted a “rosy picture” of the tax advantages and return that the defendants told Phil Rasmussen he could expect to receive from his investment. (II J.A. 373-74). Thus there was ample evidence before the jury to support its critical findings against the defendants.
The cases relied on by the majority do not actually concern a plaintiff’s recklessness. These cases, Broad and Santa Fe Industries,' do hold that not all misdeeds are actionable under Rule 10b-5. They are cited to support the proposition that although the defendants may have breached a promise to guarantee plaintiff’s investment, such would be the basis for a state law claim only, not a 10b-5 claim. I cannot agree that these cases support setting aside the verdict and judgment here. First, the “guarantee” allegedly made here is, unlike the conduct at issue in Broad and in Santa Fe Industries, squarely within the range of fraudulent conduct addressed by Rule 10b-5. And second, the “guarantee” expressed is relevant to the issue of the reasonableness of the plaintiff’s reliance here and was a proper part of the proof supporting the 10b-5 claim.
In sum, the majority denies recovery to the plaintiff who was found to have justifiably relied on the defendants’ knowingly made misrepresentations or omissions. The evidence supporting these findings is not challenged. The defendants are instead exonerated by a theory of constructive knowledge imputed to the plaintiff of the defendants’ exculpatory boilerplate. Fashioning such a rule favoring those found guilty of knowing misconduct frustrates the important policy of the securities law and the Rule.
I concur in No. 82-1104. For the reasons stated I must respectfully dissent in No. 82-1055.4

. In the Special Verdict the jury first replied to the following question in the affirmative as to each plaintiff and each defendant:
1. In connection with any plaintiffs purchase of limited partnership interests in Coal-X, Ltd./’76, did any of the defendants (1) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading or (2) employ any device, scheme or artifice to defraud any plaintiff or engage in any act, practice, or course of business which operated as a fraud or deceit upon any plaintiff.
Answer for each plaintiff as against each defendant “Yes” or “No.”
The second question put to the jury in the Special Verdict, also answered affirmatively as to each defendant, was:
Do you find that such acts, practices or misrepresentations or omissions of material *1521fact, if any you have found in answer to question No. 1, were made by any defendant “knowingly” in connection with the purchase of limited partnership interests in Coal-X, Ltd./’76 by any plaintiff? Yes No
I J.A. 290-91.
The instructions had given the following guidance as to the meaning of the term “knowingly”:
The third element that each plaintiff must establish under Rule 10b-5 is that each defendant acted “knowingly” and that word is defined as follows as used in these instructions. It is not enough to show that the defendants acted accidentally, negligently or that they made a-mistake. Rather, “knowingly” requires that the defendants acted with a mental state embracing intent to deceive, manipulate or defraud; that they stated material facts which they knew to be false; or stated untrue facts with reckless disregard for their truth or falsity; or knew of the existence of material facts which were not disclosed although they knew that knowledge of those facts would be necessary to make their other statements not misleading.
I J.A. 287 (Emphasis added).

. The instructions guided the jury in its determination that the reliance was reasonable and justifiable. Instruction No. 15 stated, in pertinent part (I J.A. 287-88):
The fourth element of the plaintiffs’ claim under Rule 10b-5 is the requirement of proof that each plaintiff “relied” upon the alleged misrepresentations or omissions and that he was “justified” in doing so.
In the case of misrepresentations it must be proved that each plaintiff in fact relied upon the false statements. In other words, if you find that the plaintiffs would have engaged in the transaction anyway, and that the misrepresentation had no effect upon their decision, then there was no reliance and there can be no recovery....
Further, each plaintiff must prove that his reliance was justified; that he did not intentionally dose his eyes and refuse to investigate, concerning the circumstances in disregard of a risk known to him, or so obvious that he must be taken to have been aware of it, and so great as to make it highly probable that harm would follow. (Emphasis added).

. See also Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1048 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 225, 54 L.Ed.2d 155 (1977); other cases are collected in Dupuy and in G. Baranko, Due Care: Still A Limitation On 10b-5 Recovery? 61 Marquette L.Rev. 122 (1977).

. The majority opinion in No. 82-1055 does not reach several other issues argued as grounds for reversal. Therefore my dissent likewise treats only the issues covered by the majority opinion.