Court Opinion

ID: 3020728
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:23:24.577389+00
Date Added: 2024-06-11T11:47:24.637585
License: Public Domain

United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT
                                _____________

                                No. 97-2522MN
                                _____________

Richard J. Rodney, Jr.; Doug Shonka;  *
Carl Patrick Monahan; Jerry Hoehnen;  *
Rosemary Boris; Thomas W. Newcome,    *
III; Delvin D. Junker; Printing Mailing
                                      *
Trade District, affiliated with the   *
Newspaper Drivers' Division of the    *
International Brotherhood of the      *
Teamsters, on behalf of themselves and*
all others similarly situated; History*
Theater, Inc., a Minnesota non-profit * Appeal from the United States
corporation; Paul Gold; Bernard       * District Court for the District
Friedman, on behalf of themselves and * of Minnesota.
all others similarly situated,        *
                                      *
                  Appellants,         *
                                      *
      v.                              *
                                      *
KPMG Peat Marwick,                    *
                                      *
                  Appellee.           *
                                _____________

                          Submitted: February 12, 1998
                              Filed: May 12, 1998
                               _____________

Before FAGG, JOHN R. GIBSON, and MURPHY, Circuit Judges.
                           _____________

FAGG, Circuit Judge.
        This is a class action securities fraud case against KPMG Peat Marwick
(KPMG) as auditor of the Piper Funds Inc. Institutional Government Income Portfolio
(the Fund). The members of the plaintiff class (the Investors), approximately 8000
shareholders who invested in the Fund between September 30, 1991 and April 11, 1994
(the class period), appeal from the district court’s order granting summary judgment in
favor of KPMG. Although the Fund’s prospectuses discussed most of the Fund’s
investments and their risks, the Investors contend the Fund’s investments violated three
of its own self-imposed investment restrictions, and KPMG failed to meet its duty to
disclose these violations. We will call these investment restriction claims the
noncompliance claims. The Investors also brought a nondisclosure claim, contending
KPMG failed to reveal that the Fund’s portfolio had a longer average life, and thus was
riskier, than the Fund said it had. Without contesting any of these four claims, KPMG
argued anything it omitted to say would not have significantly altered the mix of
available information, so the claimed omissions were immaterial as a matter of law.
The district court agreed with KPMG, but we do not. We reverse and remand for
further proceedings.

       Some explanation of the Fund’s investments will help orient the reader to this
factually complex case. Unless otherwise noted, we rely on the Fund’s own
prospectuses for our information. During the class period, the Fund invested primarily
in mortgage-related securities. The Fund bought mortgage-backed securities familiarly
known under names like Fannie Mae and Freddie Mac. These securities are issued by
federal entities that assemble pools of mortgage loans, and the security entitles its
holder to receive a portion of the principal and interest payments on the underlying
loans. The Fund also traded heavily in a variety of mortgage-backed derivatives.
These included collateralized mortgage obligations (CMOs), which divide up principal
and interest flowing into a mortgage pool into shares of various classes or “tranches”
with different payment priorities. For a more detailed explanation of CMOs, see Banca
Cremi, S.A. v. Alex. Brown & Sons, Inc., 132 F.3d 1017, 1022-23 (4th Cir. 1997)
(Magill, J.). Some of the Fund’s CMOs were floating rate CMOs, with rates subject

                                          -2-
to periodic readjustment in step with a particular index, like an adjustable-rate
mortgage. Others were inverse or reverse floating CMOs, with adjustable rates that
move against the index. The Fund also bought interest-only and principal-only stripped
mortgage-backed securities (SMBSs). As their names suggest, these securities deliver
distributions from either interest or principal payments, but not both. The Fund’s
derivatives were highly sensitive to interest-rate change. According to the Investors,
when the Federal Reserve Board raised interest rates in 1994, the Fund was heavily
invested in principal-only SMBSs and inverse floating CMOs, both of which are
especially hard hit when interest rates go up.

       In addition, the Fund engaged in “forward commitments.” In these transactions,
a security is bought or sold at a fixed price, but payment is delayed until a future date.
Meanwhile, the value of the security may fluctuate, resulting in a gain or loss when
payment day arrives. The Fund also entered into repurchase agreements, buying
securities subject to the seller’s agreement to repurchase them after a stated period of
time. Repurchase agreements can be characterized as loans, with the bought-and-
resold security functioning as collateral. See 15 U.S.C. § 80a-2(a)(23) (1994) (“‘Lend’
includes a purchase coupled with an agreement by the vendor to repurchase; ‘borrow’
includes a sale coupled with a similar agreement.”). All of these various investments
and transactions--CMOs, floating and inverse floating CMOs, SMBSs, forward
commitments, and repurchase agreements--were disclosed by the Fund, along with their
risks.

      In a letter to shareholders dated April 12, 1994, the Fund revealed for the first
time that it had also engaged in what it called a “sale forward program,” which
“involve[d] the sale of securities and a simultaneous agreement to repurchase them at
a later date.” As a result, the letter said, the Fund was “[c]urrently . . . 35% leveraged.”
Based in part on this letter, the Investors contend the Fund was on the borrowing as
well as the lending side of repurchase agreements. From the borrowing side, the
transaction is called a reverse repurchase agreement. See Securities Trading Practices

                                            -3-
of Registered Investment Companies, Investment Company Act Release No. 10,666,
6 Fed. Sec. L. Rep. (CCH) ¶ 48,525, at 37,553-4 & n.2 (Apr. 18, 1979). The Investors
claim the Fund’s reverse repurchase agreements took the form of dollar rolls, which
“can be thought of as a collateralized borrowing, where an institution pledges mortgage
pass-throughs to a dealer to obtain cash.” Steven J. Carlson & John F. Tierney,
Collateralized Borrowing via Dollar Rolls, in The Handbook of Mortgage-Backed
Securities 1019, 1020 (Frank J. Fabozzi ed., 3d ed. 1992). Based on internal KPMG
documents, the Investors contend KPMG knew of the Fund’s dollar rolls.

        We turn now to the Investors’ three noncompliance claims. The Fund’s
prospectuses stated that, among other prohibitions, the Fund could not borrow money,
issue senior securities, or invest in securities “which in the opinion of the Fund’s
investment adviser at the time of such investment are not readily marketable.” (This
last restriction was later changed to a nonfundamental policy, as disclosed in the Fund’s
prospectus dated February 1, 1994.) As fundamental investment policies, these three
restrictions could be changed only by the shareholders themselves. See 15 U.S.C.
§§ 80a-13(a)(2), (3) (1994).

        First, the Investors contend the Fund’s undisclosed dollar rolls violated the no-
borrowing rule. The Investors claim the Fund’s forward commitments also violated the
same restriction. Forward commitments generate leverage. See 6 Fed. Sec. L. Rep.
¶ 48,525, at 37,553-6. Creating leverage, the Investors say, is really the same as
borrowing because in either case the shareholders achieve a right to return on a capital
base that exceeds the sum of their contributions. See id. ¶ 48,525, at 37,553-5 n.5.
Second, the Investors claim some of the Fund’s investments in derivatives violated the
rule against buying illiquid or not readily marketable securities. The Investors base this
claim in part on the prospectuses of other funds managed by the Fund’s investment
adviser during the class period. According to the Investors, these documents describe
as illiquid the same kinds of securities the Fund was buying. The Investors contend
KPMG knew the Fund was buying illiquid securities, based on a 1992 document in

                                           -4-
which KPMG characterized a large number of the Fund’s holdings as “thinly traded”
and reported it was unable to obtain secondary price quotations for 52% of the Fund’s
portfolio. Third, the Investors claim the Fund’s forward commitments involved the
issuance of senior securities, see id. ¶ 48,525, at 37,553-6, because the Fund failed to
segregate sufficient liquid assets to cover these commitments, as the Securities and
Exchange Commission (SEC) requires, see id. ¶ 48,525, at 37,553-8.

        The Investors’ nondisclosure claim concerns the following statement: “The Fund
expects to maintain an average weighted life of its portfolio securities (other than
inverse floating CMOs) ranging from approximately three to five years.” According
to the Investors, this statement led them to believe the Fund was a short-term and thus
comparatively safe fixed-income investment, a belief the Investors say the Fund
reinforced by comparing its performance with that of the Merrill Lynch 3-5 Year
Treasury Bond Index and by advertising its first-place ranking among short-term
government funds. The Investors contend the actual average life of the Fund’s
portfolio, inverse floaters included, was at least fourteen years. Because risk increases
as the average life of a debt-securities portfolio lengthens, the Investors believe the
Fund’s three-to-five-year average life projection was materially misleading, and KPMG
should have shed light here as well.

       When the Federal Reserve Board tightened monetary policy early in 1994,
interest rates rose and the price of Fund shares fell sharply. The Investors filed suit
against the Fund and its investment adviser in May 1994. That lawsuit settled. The
Investors brought this action against KPMG in August 1994, asserting federal claims
under § 11 of the Securities Act of 1933, 15 U.S.C. § 77k (1994); § 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1994), and Rule 10b-5, 17
C.F.R. § 240.10b-5 (1994); and §§ 34(b) and 47(b) of the Investment Company Act of
1940, 15 U.S.C. §§ 80a-33(b), -46(b) (1994). The Investors also asserted supplemental
state-law claims of negligence and negligent misrepresentation. After extensive
discovery, KPMG filed a motion for partial summary judgment on the Investors’

                                          -5-
federal-law claims. Although KPMG now takes issue with the Investors’ factual
assertions, KPMG contested none of them in its summary judgment motion. That being
so, we must accept the facts asserted in the Investors’ complaint as true. See Kegel v.
Runnels, 793 F.2d 924, 927 (8th Cir. 1986). Neither did KPMG dispute the scope of
its potential liability under the federal securities laws. Instead, KPMG took the position
that the Investors were complaining solely about risks inherent in the Fund’s
investments. KPMG argued that because those risks were fully aired by the Fund and
in the media, anything KPMG may have omitted to disclose about what it calls
“subsidiary issues” was immaterial as a matter of law. KPMG also contended the
claims of class members who purchased Fund shares before August 1, 1993 were time
barred. The district court declined to rule on the statute of limitations issue, but granted
KPMG’s motion on the materiality ground for reasons we will explain below. After
the district court made its summary judgment ruling, the parties agreed to a dismissal
without prejudice of the remaining state-law claims, and the district court entered final
judgment in favor of KPMG. This appeal followed.

        We review de novo the district court’s order granting summary judgment. See
Moorhead v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 949 F.2d 243, 245 (8th Cir.
1991). We must affirm if the record, viewed in a light most favorable to the Investors
as the nonmoving party, shows there is no genuine issue as to any material fact and
KPMG is entitled to judgment as a matter of law. See id.; Fed. R. Civ. P. 56(c). To
be actionable under the federal securities laws, misrepresentations or omissions must
be material. See Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir. 1997). For
an omission to be material, there must be “‘a substantial likelihood that the disclosure
of the omitted fact would have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made available.’” Id. (quoting Basic
Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)). Although materiality may be decided
as a matter of law in appropriate cases, see id. at 546-48, courts should bear in mind
that “[t]he [materiality] determination requires delicate assessments of the inferences
a ‘reasonable shareholder’ would draw from a given set of facts and the significance

                                            -6-
of those inferences to [the shareholder],” TSC Indus., Inc. v. Northway, Inc., 426 U.S.
438, 450 (1976). For that reason, unless “a reasonable investor could not have been
swayed by an alleged misrepresentation” or omission, materiality “presents a factual
question for a jury to decide.” Parnes, 122 F.3d at 546.

        We find the district court’s reasons for rejecting the Investors’ noncompliance
claims unconvincing. The district court explained its ruling this way: “No reasonable
person reading the prospectuses and the financial reports could conclude that the
investment restriction was meant to prohibit investment in derivatives, because these
documents all clearly stated that the Fund could and did invest in derivatives.” This
analysis has several flaws. First, it distorts the Investors’ position. The Investors do
not argue that all derivatives would violate the Fund’s restrictions, merely that some of
them did. Second, it fails to dispose of the Investors’ borrowing claim, which turns on
the structure of Fund transactions, not on the type of securities purchased. Forward
commitments and dollar rolls are not derivatives. Also, the Fund’s prospectuses never
revealed the dollar rolls, which are reverse repurchase agreements and thus borrowing
in the context of 15 U.S.C. § 80a-2(a)(23) and the SEC's interpretative release, see 6
Fed. Sec. L. Rep. ¶ 48,525, at 37,553-4. Third, and more generally, the district court
could not resolve the conflict between the Fund’s rules and its investment practices by
reading the restrictions out of existence. The record creates a genuine dispute whether
some of the Fund’s investments did in fact break its rules because a reasonable jury
could conclude the rules were broken. See Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 248 (1986). Further on, the district court characterized the restrictions as general
statements trumped by the Fund’s more specific investment disclosures. See Banca
Cremi, 132 F.3d at 1031 (“[A] general statement creates less justifiable reliance than
would a specific statement.”) (emphasis omitted). We disagree. The Fund specifically
said it could not buy illiquid securities, borrow money, or issue senior securities. These
rules have nothing in common with the sort of puffing statements this court and others
have held too general to be material. See Parnes, 122 F.3d at 547 (discussing cases
from other circuits).

                                           -7-
        The district court offered a second explanation for its ruling. According to the
court, any failure to reveal risks created by the Fund’s claimed rule-breaking made no
difference because the Investors’ losses were caused by rising interest rates, a risk the
Fund did disclose. “When the total mix of information included in a prospectus clearly
identifies the very risks that come to pass,” the district court said, “there is no genuine
issue of fact that misrepresentations or omissions are material.” But materiality is not
assessed after the fact. If it were, materiality would never present a jury question,
hindsight being 20/20. Rather, a court must ask “whether the ‘reasonable investor’
would have considered the omitted information significant at the time.” Basic Inc., 485
U.S. at 232. Otherwise, companies subject to federal securities laws could fraudulently
induce investments by concealing significant risks and escape liability so long as only
disclosed risks came to pass. Just because a hidden risk does not materialize doesn’t
mean its concealment cannot hurt investors. The totality of available information about
a particular security affects its price. See id. at 241-42, 247. Had KPMG revealed the
Fund’s violations (assuming rules were broken), the Investors might have bought in at
a lower price and thus lost less. Some might have shied away from the Fund entirely.

       In sum, we disagree with the district court’s ruling on the Investors’
noncompliance claims. Reasonable investors reading the Fund’s prospectuses and
KPMG’s reports would conclude that, whatever risks they were accepting by investing
in a mutual fund that traded in derivatives and engaged in forward commitments, they
were not encountering the enhanced risks created by violations of the Fund’s own basic
investment policies. See 6 Fed. Sec. L. Rep. ¶ 48,525, at 37,553-5 (borrowing and
issuance of senior securities increase speculative nature of a fund’s portfolio). The
Investors were assured there were lines the Fund could not and would not cross. The
Investors contend the Fund crossed some of those lines. If they are right, and viewing
the record in their favor we have to assume they are, we cannot say KPMG’s silence
on these matters did not deprive them of information that would have made a difference
to a reasonable investor. A jury might decide otherwise, but it is their call. The few
related cases we have found are in step with our conclusion. See Krouner v. American

                                           -8-
Heritage Fund, Inc., No. 94 Civ. 7213 (WK), 1996 WL 393584, at *3 (S.D.N.Y. July
15, 1996) (claimed violation of basic policy limiting purchases of illiquid securities is
material); In re TCW/DW North American Gov’t Income Trust Sec. Litig., 941 F. Supp.
326, 339 (S.D.N.Y. 1996) (claimed failure to disclose inherent illiquidity of CMO
market not immaterial as a matter of law).

       We turn now to the Investors’ nondisclosure claim. In the Fund’s prospectuses
dated January 1993 and February 1994, the statement the Investors complain of reads:
“The Fund expects to maintain an average weighted life of its portfolio securities (other
than inverse floating CMOs) ranging from approximately three to five years.” The
prospectus dated January 1992 uses the phrase “average weighted maturity” instead of
“average weighted life.” The Investors prefer “effective duration.” The significance
of these differences the parties do not explain, but neither do they treat them as
important for present purposes. Without meaning to endorse any one of these formulas,
we will use the term “average life.”

       As noted above, the Investors contend the average life of the Fund’s portfolio,
including inverse floating CMOs, was at least fourteen years, making the Fund a good
deal riskier than its announced three-to-five-year average life led the Investors to
believe. The Investors do not claim the statement itself, which excluded inverse
floaters, was a misrepresentation. Rather, they argue the Fund had to say something
more to put the exclusion in context and make the projection not misleading. Quoting
two statements from the prospectuses, the district court concluded the Fund had said
enough. The first statement reads: “Principal prepayments on collateral underlying a
CMO may cause it to be retired substantially earlier than the stated maturities or final
distribution dates.” This statement points out the risk of shortened maturities, not the
opposite risk the Investors are talking about. See Banca Cremi, 132 F.3d at 1022
(“Extension risk is the opposite of prepayment risk.”). If anything, the quoted language
suggests the portfolio’s average life might be shorter if inverse floating CMOs were
taken into account.

                                          -9-
        The second statement reads: “Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized yield or
average life of a particular issue of pass-through certificates.” This statement explains
why the Fund hedged its average life projection with words like “expects,” “ranging,”
and “approximately,” but it does not alert the reader to the level of portfolio maturity
risk the Investors claim existed. The statement also fails to call attention to the
heightened extension risk posed by inverse floating CMOs, and thus to shed light on the
inverse floater exclusion, because the prospectuses never say that inverse floaters are
pass-through certificates. See Parnes, 122 F.3d at 548 (“[C]autionary language must
relate directly to that by which plaintiffs claim to have been misled.” (internal quotations
omitted)). This is not a case where reasonable minds would have to agree that the
prospectuses included enough cautionary language or risk disclosure to render the
challenged statements not misleading. See id. (citing Fecht v. Price Co., 70 F.3d 1078,
1082 (9th Cir. 1995)). Accordingly, the warnings on which the district court relied are
insufficient to render the claimed omission immaterial as a matter of law. This question
as well must be left to a jury.

       We reverse the district court’s ruling on both the Investors’ noncompliance
claims and their nondisclosure claim, and we remand to the district court for further
proceedings not inconsistent with this opinion. We express no views one way or the
other on KPMG’s statute of limitations defense, leaving that issue for the district court
to rule on in the first instance.

JOHN R. GIBSON, Circuit Judge, dissenting.

       I respectfully dissent. The district court's careful analysis of the issue of
reasonable reliance is based on an accurate and perceptive reading of the record before
us, and should be affirmed.

                                           -10-
        To put this case in perspective, a few statements from the first amended
complaint should be considered. The investors alleged that the extraordinary decline
in the Fund's net asset value occurred after the decision of the Federal Reserve Board
to tighten monetary policy. This decision resulted in an interest rate increase on fixed
income securities with three-to five-year maturities. As interest rates increased, the
price of such securities fell, a slow-down in mortgage refinancing occurred, the duration
of mortgage securities in the Fund's portfolio lengthened, and their value decreased. As
the price of mortgage securities fell, some investors incurred large losses and sold their
holdings. This caused brokerage firms to decrease the value of these types of securities.
The investors alleged that these actions affected the Fund more than other funds because
of the Fund's investments in derivatives, such as collateralized mortgage obligations,
including floating rate CMO's, inverse or reverse floating CMO's, and stripped
mortgage-backed securities of two classes, interest only and principal only. The
investors alleged that the Fund's net asset value declined more than other similar type
funds because many short and intermediate term United States government funds did
not use a sale forward program and did not have as much exposure to mortgage-backed
derivatives.

        The district court recognized that the prospectuses specifically described many
of the risks enumerated in the complaint. The court concluded that the investors failed
to raise a genuine issue that the total mix of information approved by Peat Marwick was
materially misleading.

       A statement or omission is considered material if it is one which a reasonable
shareholder would, in substantial likelihood, consider important in making an investment
decision. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Austin v.
Loftsgaarden, 675 F.2d 168, 177 (8th Cir. 1982). Whether the misrepresented or
omitted fact is material depends on whether a reasonable investor would regard it as
significantly altering the "total mix" of information made available. Id.

                                          -11-
       Claims of misrepresentation do not lie where defendants adequately warned
investors of the specific risks that came to pass. We recognized in Moorhead v. Merrill
Lynch, Pierce, Fenner and Smith, Inc., 949 F.2d 243 (8th Cir. 1991), that "plaintiffs
could not base a federal securities fraud claim on any misrepresentation or omission in
the feasibility study which was addressed by the repeated, specific warnings of
significant risk factors and the disclosures of underlying factual assumptions." Id. at
245. When the total mix of information included in a prospectus clearly identifies the
very risks that come to pass, courts have held that there is no genuine issue of fact that
misrepresentations or omissions are material. See id. Accord Parnes v. Gateway 2000,
Inc., 122 F.3d 539, 548 (8th Cir. 1997) (discussing "bespeaks caution doctrine").

       In determining reasonable reliance, we have considered the sophistication of the
investor. Here, purchases in the Fund required a minimum investment of $25,000. Nine
individual plaintiffs alleged they made investments of $100,000, $30,000, $50,000,
$102,000, $40,000, $147,000, $300,000, $200,000, and $50,000, and a non-profit fund
of a union and a non-profit history theater alleged each made investments of $100,000.

      The district court carefully analyzed the issue of reasonable reliance:

                    Examination of the prospectuses of the Fund reveals
             that they addressed all of the alleged nondisclosures.
             Plaintiffs contend defendant failed to warn of: (1) the fact
             that the Fund's investment practices were wholly inconsistent
             with its investment objectives of preservation of principal
             and sacrificed safety for yield; (2) the duration or maturity of
             a substantial portion of the Fund's portfolio (because the risk
             involved exceeded that associated with the low average
             durations disclosed); (3) the risks presented by the Fund's
             extensive investment in derivatives; (4) the Funds's use of
             leverage and the attendant risks; and (5) the

                                          -12-
Fund's prohibition from investing in illiquid derivatives and
using leverage.

       In fact, the prospectuses and the annual reports clearly
communicated that the Fund was investing heavily in
derivatives. The prospectuses warned that this could risk
loss of principal. With regard to maturity, the prospectuses
stated that inverse floating CMO's were not included in the
projected average maturity weight of the Fund's securities.
The prospectuses also warned that "[p]rincipal prepayments
on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final
distribution dates," and that "it is not possible to predict
accurately the realized yield or average life of a particular
issue of pass-through certificates." Any misconception that
the average maturity weight assured a low risk investment
could have been corrected by reading the prospectuses.

        Plaintiffs argue that certain practices of the Fund are
the equivalent of borrowing money, which was prohibited by
the Fund's restrictions. The problem with this theory is that
the prospectuses specifically disclosed these practices and
their attendant risks. Most importantly, the prospectuses and
reports informed the investor of precisely the kinds of
securities in which the Fund invested.

       Perhaps plaintiffs' best argument pertains to the issue
of liquidity. Piper Jaffray had other funds which classified
derivatives as illiquid investments. The prospectuses of the
Fund stated that it would not purchase investments which
were not readily marketable. Peat Marwick's audits raised
questions about the degree to which derivatives were readily
marketable. However, the restriction must be considered as
part of the total mix of information provided to the investor.
No reasonable person reading the prospectuses and the
financial reports could conclude that the investment
restriction was meant to prohibit investment in derivatives,

                            -13-
             because these documents all clearly stated that the Fund
             could and did invest in derivatives.

       In analyzing the district court's order, the court today parses the investors'
arguments in a fashion that simply does not accord with the district court's conclusions
or the nature of the arguments asserted. The court takes issue with the district court's
characterization of "restrictions as general statements trumped by the Fund's more
specific investment disclosures."

       The court, however, refers only to part of the district court order when it states
that the district court dealt only with the derivative claim and did not dispose of the
borrowing claim. The court states: "[f]orward commitments and dollar rolls are not
derivatives. . . .[M]ore generally, the district court could not resolve the conflict
between the Fund's rules and its investment practices by reading the restrictions out of
existence." It is significant, however, that the prospectus specifically referred to the
purchase and sale of securities on a forward commitment basis, and explained the nature
of such a transaction. The prospectus specifically disclosed that if the fund "chooses
to dispose of the right to acquire a when-issued security prior to its acquisition or
dispose of its right to deliver or receive against a forward commitment, it can incur a
gain or loss." The district court examined this specific language and concluded that the
prospectus "specifically disclosed these practices and their attendant risk."1 The court
today limits the reasonable reliance issue to deciding whether there is "a genuine dispute
whether some of the Fund's investments did in fact break its rules." The appropriate
issue, however, is whether the prospectus plainly informed the investors, in the total mix
of information, about the practices of the Fund and their attendant risks, and whether the
investors were informed of "precisely the kinds of

      1
       This conclusion of the district court applies to the dollar rolls, which the court
today characterizes as borrowing.

                                          -14-
securities in which the Fund invested." This is the critical issue in the case, and not the
substitute issue that the court today proposes.

       The court then proceeds to reason that materiality is not assessed after the fact,
and that a company subject to the federal securities law could fraudulently induce
investments by concealing significant risks and escape liability so long as the disclosed
risks come to pass, and that because a hidden risk does not materialize does not mean
its concealment cannot hurt investors. The court's reasoning simply looks beyond the
claims asserted in the case before us. The significant risks disclosed in the prospectus
did indeed come to pass and cause the investors' losses.

       The district court's position is similar to that articulated by our brother, Judge
Frank J. Magill sitting by designation with the Fourth Circuit, in Banca Cremi S. A. v.
Alex. Brown and Sons, Inc., 132 F.3d 1017 (4th Cir. 1997). In that case, the Fourth
Circuit considered warnings in a prospectus quite similar to those here and concluded
that the investors did not justifiably rely on a broker's alleged omission or misstatement.
Id. at 1031. Like the investors in this case, the investors in Banca Cremi were
specifically told of the investment practices of the Fund, the specific risks resulting from
those practices, and the inherently risky nature of the investment. See id. at 1028-31.
Accord Olkey v. Hyperian, 1999 Term Trust, Inc., 98 F.2d 2, 5 (2d. Cir. 1996)
(prospectuses for investment in mortgage-backed securities specifically warned
investors of risk of rising interest rates). Here, the district court determined that the
prospectuses warned investors of exactly the risk that the investors now claim was not
disclosed. A reasonable investor could not have read the prospectuses without realizing
that despite the use of balancing, a significant increase in interest rates could decrease
the value of the trust and decrease earnings. The prospectuses specifically warned
about the consequences of a rise in interest rates. The district court did not err in
holding that there was no reasonable reliance.

       I would affirm the district court's grant of summary judgment.

                                           -15-
A true copy.

      Attest:

               CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

                              -16-