Court Opinion

ID: 8956536
Source: CourtListenerOpinion
Date Created: 2022-11-27 09:21:25.295509+00
Date Added: 2024-06-11T17:10:06.504060
License: Public Domain

ALLGOOD, Senior District Judge,
concurring in part and dissenting in part:
I.
Recent precedent dictates that I concur with the majority's opinion affirming the *1005District Court decision to certify the class.1 It is not without some reluctance, however, that I join in the affirmance on this issue, as it again minimizes the need for individual reliance in securities fraud cases and thereby reduces the efficacy of disclosure statements in general.
Reliance has historically been an essential element of a fraud case under § 10(b) of the Securities and Exchange Act of 1934.2 Though proof of reliance has varied according to the type of securities fraud alleged,3 the basic requirement has remained.4
The reason for the reliance requirement has been explained in various ways by numerous courts, but it always revolves around the issue of causation, i.e., proving that the damaged party was induced to act by the defendant’s conduct thereby establishing the causal link between the defendant’s misconduct and the plaintiff’s decision to buy or sell securities. Huddleston v. Herman and Maclean, 640 F.2d 534 (5th Cir.1981), affirmed in part and reversed in part, 459 U.S. 375, 102 S.Ct. 683, 74 L.Ed.2d 548 (1983). Dupuy v. Dupuy, 551 F.2d 1005 (5th Cir.), cert. denied 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977). It has also been said that proof of reliance “confirms the rather universal notion that one damaged ought not to be rewarded for one’s own deficient conduct.” Finkel v. Docutel Olivetti Corp., 817 F.2d 356, 359 (5th Cir.1987).
Beyond the rather practical underpinnings for the reliance rule is perhaps a more theoretical, but nonetheless necessary, reason: the requirement of reliance services the general policies of the Securities Act in promoting full disclosure to investors so that they can make informed investment decisions. As Judge Randall stated in her dissent in Shores v. Sklar, 647 F.2d 462 (5th Cir.1981):
The reliance requirement promotes the objectives of the 1934 Act by precluding recovery to a plaintiff who has made an investment decision by his own lights and without reference to the information promulgated under the disclosure requirements of the federal securities laws. Whether disclosure is viewed as a goal or a mechanism to achieve a goal, it is crucial to the way in which the federal securities laws function. Just as the threat of litigation and massive liability under rule 10(b)-5 is intended to defer fraudulent conduct connected with the purchase or sale of a security, the reliance requirement is intended to encourage investors to base their investment decisions on information required by the securities laws to be disclosed. In short, the federal securities laws are intended to put investors into a position from which they can help themselves by relying upon disclosures that others are obligated to make. This system is not furthered by allowing monetary recovery to those who refuse to look out for them*1006selves. If we say that a plaintiff may recover in some circumstances even though he did not read and rely on the defendant’s public disclosures, then no one need pay attention to those disclosures and the method employed by Congress to achieve the objective of the 193j Act is defeated. Id. at page 483 (emphasis added).
Although the majority has paid lip service to this fundamental purpose of the reliance requirement,5 the facts sub judice present a scenario illustrative of how this purpose can be undermined. Admittedly, neither of the plaintiffs, Ross nor Miller, relied upon the official statement issued in conjunction with the sale of the bonds in making their investment decisions. Moreover, both individuals indicated that they would not have made the purchase of the Mount Royal Towers bonds if they had seen the information actually disclosed in the official statement.6
The result is that the “market makers” judgment is now completely substituted for that of the plaintiffs, thereby rendering the disclosure statements superfluous. This result does not serve the articulated purposes of the 1934 Securities Act. Furthermore, the majority’s statement that the ends of the disclosure policy are still served because the investor must still look at the disclosure statements to insure the value of the securities is of little solace when, as is the case here, had the plaintiffs looked at the disclosure statements which were actually provided in conjunction with the bonds, they would not have purchased the securities at issue and sustained the loss for which they seek redress. There is no escaping the conclusion that in this instance, the plaintiffs are able to maintain their action despite their negligence in looking after their own affairs chiefly because attention to their own affairs is no longer required.
II.
Regarding the merits of the fraud on the market claim, the majority has held that “[Bjecause a reasonable jury could find that the bonds may have been unmarketable absent the fraud, however, summary judgment as to the existence of a fraud on the market was inappropriate.” This holding was based upon the fact that the plaintiffs adduced “enough evidence from which a reasonable jury could find that the Mount Royal project was destined to default, that some of the defendants knew this, and that these defendants fraudulently placed the bonds on the market.”
The gist of the fraud-on-the-market finding is that the defendants marketed a project that they knew would fail. The “facts” upon which this conclusion is based are: that the defendants had unsuccessfully attempted to bring the project to market once before the ill-fated attempt made the basis of this suit;7 that certain pre-sale agreements were obtained without deposits, thus creating the appearance that the majority of the units had been pre-sold;8 that the bonds were referred to as being tax-free, when plaintiffs claim they were not.9
I disagree with the majority’s opinion that these “facts” provide an inference of fraudulent behavior on the defendant’s part because: (1) the “facts” which consti*1007tuted the fraud were fully and fairly disclosed and hence were not fraudulently misrepresented; (2) the alleged fraud practiced upon the plaintiffs was not as pervasive as that which is required in Shores; and (3) the “fraud”, if anything, was an error in business judgment which does not rise to the level of deceit sufficient to support a fraud-on-the-market claim.
I agree with the District Court when it said that “although this is not a misrepresentation or omissions case, per se, surely the fact that the circumstances alleged to evidence the fraudulent scheme were not misrepresented in or omitted from the official statement, has a bearing on whether there is a reasonable inference of fraud.”10 This is particularly true in this case where the sole medium through which the misrepresentations and/or omissions that were communicated and/or omitted in perpetrating the alleged fraud upon the market was the official statement and feasibility study incorporated therein.
Unlike the Shores decision where the offering circular itself contained materially misleading representations, the Mount Royals Towers official statement was replete with warnings to the investor which fully and fairly disclosed all risks, many of which struck at the core of the alleged fraud in this case, i.e., the projected success of the venture.11
Notwithstanding the disclosures made in the Mount Royal Towers official statement, the majority has stated that the extent of the disclosure in the official statement was not sufficient to bar a claim of fraud because “to warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.” Quoting from Huddleston v. Herman and Maclean, 640 F.2d at 643-44.
In Huddleston, however, the prospectus warned that the construction costs of a race track which was the subject of a bond issue may have been underestimated when, in fact, the persons who prepared the prospectus knew the construction costs to be underestimated.12 In short, the thing upon which the success of the project was based — the cost of construction of the project — was known and deliberately misrepresented. Here, the alleged fraud was the creation of an image that projected the success of a project. This image was created by the same document which disclosed the project’s chances of failure, the official statement and feasibility study. Surely the disclosure of risks in an area of expectation opposed to existing fact is qualitatively different and should be given more weight in judging the merit of the disclosures and the inferences of fraud to be drawn therefrom. At the very least, the disclosures should rebut the inference that they were part of a pervasive scheme to defraud.
In addition to discounting the value of the disclosure in the Mount Royal Towers official statement, the majority analyzed the facts of the “fraud” in juxtaposition to those of the Shores case and reached a conclusion that the Shores “fraud on a broader scale” is measured by its effect on the marketability of the bond and not by the extent of the deception. Such a conclusion is an unnecessary and unjustified expansion of the fraud on the market doctrine which effectively scuttles the need for proof of the “pervasive fraud” heretofore required in such cases.13 The result will *1008inevitably lead to an increase in fraud-on-the-market claims of which we have previously been forewarned.14
The fraud on the market theory allows recovery to a plaintiff who has purchased securities which would not have been available for purchase but for some fraud perpetrated in bringing the securities to market. The fraud envisioned in such a case is a fraudulent scheme “so pervasive, that without it, the issuer would not have issued, the dealer would not have dealt in, and the buyer could not have bought these bonds, because they would not have been offered on the market at any price.” Shores v. Sklar, 647 F.2d 462, 464 n. 2 (1981) (emphasis added).
The pervasiveness of the fraud in the Shores case was clear, as it infected virtually every act taken by the promoters in bringing the issues to market.
In Shores, the bond issue involved was revenue issued by an industrial development board of a municipality in order to fund the construction of a mobile home manufacturing plant. The revenues generated by the lease of the plant were to be used to pay the principal and interest on the bonds. The then existing financial solvency and integrity of the lessee was of paramount importance to the success of the project.
The offering circular issued in conjunction with the bond issue misrepresented the financial condition of the lessee in numerous ways.15 In short, the defendants in the Shores case intentionally misrepresented existing facts concerning the financial condition of the lessee, which again, was the foundation for the success of the project.
In the instant case, the plaintiffs have alleged that the Mount Royal Towers project was feasible when in fact it was not. As a factual basis for this contention, it is submitted that the defendants had tried to market a “similar project” before the Mount Royal Towers project and this project had to be abandoned due to financing problems, construction delays and poor sales. Notwithstanding the failure to bring the predecessor project to market, the Mount Royal Towers project was revived and marketed at a substantial increase in price per unit of the apartments. The inference is that because the prior project had failed when the unit prices of the apartments was less, the new project at the higher unit price was doomed to failure. This inference does not follow logically much less support a claim of fraudulent intent to market the bonds. In short, the facts adduced by plaintiffs do not infer that the bond issue was so lacking in basic requirements that the bonds would not have been issued but for the conspiracy of the defendants to intentionally perpetrate a fraud. Shores, 647 F.2d at 468.16
Lastly, it is my opinion that the majority’s focus on the “feasibility” of the sale of the apartment units unnecessarily equates the marketability of the bonds with that of the marketability of the apartments. The prospect of the sale of the apartment units themselves is nothing more than a projection of a future event, not a misrepresentation of an actual existing fact. As long as the projections and their bearing on the success of the project were fairly disclosed, the bonds may have been marketable notwithstanding the risk that the units would not sell. The representations made *1009concerning these prospects amount to salesmen’s “puffing” which is not akin to misrepresentation. Pell City Wood, Inc. v. Forke Brothers Auctioneers, Inc., 474 So.2d 694 (Ala.1985). The fact that they did not sell is not evidence of fraud. To hold otherwise would make the market an insurer of the success of a venture and convert the proverbial “business deal gone bad” to actionable fraud and the courts to arbiters of competing financial projections and feasibility studies.
For the reasons that I find no evidence of a pervasive scheme of fraud on the market as is required by Shores, I respectfully dissent from the majority’s opinion that the District Court’s opinion regarding this issue was error.
III.
As I find no evidence of a “fraud-on-the-market”, I find that there is no evidence to infer that any of the defendants knowingly conspired to perpetuate a fraud-on-the-market as is required in Shores.17
IV.
The majority opinion leaves several issues decided by the District Court and raised on appeal unaddressed, most notably, the validity of the plaintiff’s RICO, § 17(a) and state law claims. I, however, agree with the District Court’s decision that dismissal of the civil RICO claims was correct on the basis of a lack of a pattern. See Sheftelman v. Jones, 636 F.Supp. 263, (N.D.Georgia 1986); Bank of America National Trust and Savings Association v. Touche Ross and Company, 782 F.2d 966 (11th Cir.1986).
In addition, I agree with the District Court’s conclusion that the plaintiffs have no implied private right of action under § 17(a). See Scharp v. Cralin & Co., 617 F.Supp. 476 (S.D.Florida 1985); Zelman v. Cook, 616 F.Supp. 1121 (S.D.Florida 1985); Currie v. Cayman Resources Corp., 595 F.Supp. 1364 (N.D.Georgia 1984). Finally, the District Court’s dismissal of the state court claims are for essentially the same reasons as addressed in Kirkpatrick v. Bradford, 827 F.2d 718 (11th Cir.1987), rehearing en banc denied, 832 F.2d 1267 (11th Cir.1987). For these reasons, I would affirm the District Court’s dismissal of these claims also.

. “We conclude ... that where, as here, a complaint alleges that a security not traded on the open market could not have been issued but for the fraud of the defendant, class action treatment is not precluded by the possibility that some purchasers, including the named plaintiffs, might have relied on factors other than the integrity of the market....
"A Shores fraud-on-the-market claim thus is especially suited for class action treatment as it makes virtually irrelevant the possibility that the various purchasers may have relied on different representations regarding the desirability of the particular security in question: all have relied on the integrity of the market in the but-for sense required by Shores.” Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718 (11th Cir.1987), rehearing en banc denied, 832 F.2d 1267 (11th Cir.1987) (emphasis added).

. Dupuy v. Dupuy, 551 F.2d 1005 (5th Cir.1977).

. Huddleston v. Herman and Maclean, 640 F.2d 534 (5th Cir.1981), affirmed in part, reversed in part, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). (Proof of actual reliance is necessary in a 10(b)-5 misrepresentation case); Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). (Proof of reliance will be presumed in a 10(b) — 5 omissions case where the defendant was under a duty to disclose and failed to disclose a material fact to an investor); Shores v. Sklar, 647 F.2d 462 (5th Cir.1981). (Reliance will be presumed in a fraud-on-the-market case.).

. See Finkel v. Docutel/Olivetti Corp., 817 F.2d 356 (5th Cir.1987). "The issue [in 10(b)-5 cases] is not whether reliance is an element of Rule 10(b)-5 but how it may be proved, and who must prove it.” Id. at page 359.

. "This rule of law accommodates the two main purposes of Rule 10(b)-5. On the one hand, it fosters full disclosure by retaining the purchaser’s incentive to read disclosure statements to insure he gets full value for his investment....”

. The majority does not dispute these facts but maintains that “an inquiry into what plaintiff would have done if he had read the disclosure statement is not relevant to the reliance issue".

. There were significant differences between the first project and the latter one, so much so that the District Court held that the prior project’s lack of success was not relevant to the prospects for the latter project’s success. Notwithstanding the relevance of the facts concerning the prior project, I agree with the District Court that this is no basis to infer that the defendants knew that the Mount Royal Towers project would fail.

. The status of these agreements was fully disclosed in the official statement.

. This claim though argued has never been supported by evidence in the record and as the majority has stated, plaintiffs’ loss has not resulted from any IRS ruling revoking the bonds tax exempt status.

. District Court memorandum opinion, August 19, 1986, page 19.

. The official statement and feasibility study fully disclosed that the marketing results were made on the basis of assumption, that the project's success depended upon the successful marketing of the units as priced.

. Evidence in this case indicated that the prospectus misrepresented costs of construction which did not reflect the cost of work for which construction bids had already been accepted. Huddleston, 640 F.2d 534, 544 n. 13 (1981).

.See Blackie v. Barrack, 524 F.2d 891 (9th Cir.1975). The gravaman of the fraud-on-the-market claim was the intentional misrepresentation by the repeated publication of false annual and interim reports, press releases and SEC financial filings; T.J. Raney and Sons v. Ft. Cobb, Oklahoma Irrigation Fuel Authority, 717 F.2d 1330 (10th Cir.1983). Where the fraud-on-the market claim was predicated upon the misrepresentations contained in the offering circular, the bond counsel’s opinion, the misuse of bond funds and that the fact that the issue was not legally qualified to be issued.

. See Judge Randall’s dissent. Shores v. Sklar, 647 F.2d at page 478.

. The Shores prospectus misrepresented the extent and value of the lessee’s assets, the business experience of the lessee in mobile home manufacturing, the past accomplishments of the lessee and the non-pendency of SEC investigations and civil actions against the lessee and principals respectively.

. The District Court had decided that the previous attempt to market the bonds was so dissimilar factually as to not be relevant to the decision to market the new bonds. The failure to bring the initial offering to market could be explained for numerous reasons, none of which constitute fraud. The interest rate phenomenon of the late 1970's had a great deal to do with the delay of the project, and this delay obviously had an impact on prior purchasers. The fact that the initial project failed to lure enough conventional investors (with taxable interest), is not indicative that a plan to attract tax-free investors is fraudulent. Prior underwriting opinions have merely stated that the market was bad for safe and speculative bonds.

. Plaintiffs’ burden of proof is to show that: "the defendants knowingly conspired to bring securities onto the market which were not entitled to be marketed, intending to defraud pur-chasers_” Shores v. Sklar, 647 F.2d at page 469.