Court Opinion

ID: 8996253
Source: CourtListenerOpinion
Date Created: 2022-11-27 12:37:51.402098+00
Date Added: 2024-06-11T17:11:03.444484
License: Public Domain

NOONAN, Circuit Judge,
dissenting:
Investors, deluded by diamonds, were the victims of a fraud that played upon their gullibility. The defrauder is apparently unable to make good their losses, and so the investors have turned to the deep pockets of innocent bystanders as a way of recouping. The district court sensibly dismissed their suit. This court, relying on possible, and to my mind strained, interpretations of the complaint, reinstates it. But the court does so not taking into account the cardinal rule that when a complaint has documents annexed the documents qualify and control the allegations. Durning v. First Boston Corp., 815 F.2d 1265 (9th Cir.1987). Read together, complaint and attached documents establish that Levine’s complaint is groundless.
In his complaint, Levine’s first theory was that the confirmation issued by the depository of the diamonds was actually a security or a prospectus within the meaning of the Securities Act and that the Reserve Certificates issued by Investía were either a security or a prospectus. This theory borders on the fantastic and has not been pressed upon this court. The notice of receipt issued by Wilmington was neither a certificate of interest nor a participation in a profit-sharing arrangement nor an evidence of indebtedness nor a certificate of deposit. It was not a prospectus, and it was not a security. See Danner v. Himmelfarb, 858 F.2d 515, 518-20 (9th Cir.1988), cert. denied, 490 U.S. 1067, 109 S.Ct. 2067, 104 L.Ed.2d 632 (1989). A fortiori, Security Pacific is not liable for Investia’s issuance of the Reserve Certificate. The Certificate was not a security, and Security Pacific did not issue it.
A second theory on which Levine’s complaint predicated the duty of Wilmington was that it had a “fiduciary duty” to the investors, and that failure to disclose all “relevant facts” was a breach of the duty. Complaint 1146. Similarly Levine implied that Security Pacific had a trustee’s duty of disclosure to the investors. Complaint If 57. This theory suffers from a grave, indeed fatal flaw. What is actionable under Rule 10-b-5 must, as the majority acknowledge, occur before the investors purchase the securities. Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646, 651 (9th Cir.1988). Even if Wilmington and Security Pacific had been trustees for the investors, they would not have been trustees for the only class that could maintain a Rule 10-b-5 action, the vast unknown anonymous set of potential investors. There is no trust relation with unidentified beneficiaries. Scott on Trusts §§ 112 and 122 (4th ed. 1987).
The same conclusion must be reached if we apply the test set out in White v. Abrams, 495 F.2d 724 (9th Cir.1974) to determine whether a duty to disclose has been pleaded. Levine alleges that the acknowledgments put out by Wilmington were false and that the investors who received them, unaware of their falsity, “would confirm to potential investors” the representations of the trust company and that “through this device Investía used the acknowledgments” as a contrivance to deceive potential investors into believing that the trust company certified the value of the diamonds. There is no allegation that Wilmington was aware that current investors would have the role of shills, bringing in potential investors. There is no allegation that the trust company had any idea of who the potential investors were or that it knew its acknowledgments to existing investors were being used to decoy potential investors. Absent any allegation of any relationship whatsoever between the trust company and the potential investors there is no allegation of a duty on the part of the trust company to disclose. An element necessary to sustain an action under Rule 10-b-5 is missing. Chiarella v. United States, 445 U.S. 222, 232, 100 S.Ct. 1108, 1116, 63 L.Ed.2d 348 (1980).
The case alleged against Security Pacific is, if anything, even less actionable. Inves-tia’s promotional literature, according to the complaint, informed potential investors that the Reverse Account was a “trust *1490fund” for the benefit of all its customers. The literature, however, did not state that Security Pacific was the trustee. Anyone reading Investia’s literature would infer that Investía was establishing a trust, of which Investía was the trustee for the benefit of its clients. Neither in fact or in appearance was Security Pacific made out to be the trustee.
Qualifying and controlling Levine’s allegations as to what Security Pacific permitted, the Reserve Certificate issued by Investía clearly conveyed the fact that Security Pacific was not the trustee of the fund created by Investía. The certificate read:
CLIENT RESERVE CERTIFICATE
This certifies that American Investía, Inc. will forthwith place in account # 02-7-02401-0 at the Beverly Hills District Trust Office of Security Pacific Bank the sum of $_in behalf of_(“Client”). This account is denominated “American Investía Client Reserve.”
The funds in this account exclusive of interest and appreciation, if any, which shall remain the property of American Investía, are to be disbursed to Client on the occurrence of any of the following:
• American Investia’s insolvency as that term is commonly defined;
• The filing by American Investía of a petition in bankruptcy under any chapter of the federal bankruptcy laws;
• The commencement by any creditor of American Investía of involuntary bankruptcy proceedings;
• Direction in writing, by an officer of American Investía, authorized by corporate resolution, directing disbursement in which event Security Pacific National Bank shall disburse to such Client or Client’s beneficiaries only that portion of the principal which is attributable to him (them).
The funds in this account are to be disbursed to American Investía on the occurrence of any of the following:
• Presentation by American Investía to Security Pacific National Bank of requests for disbursement accompanied by resale invoices and liquidation requests from Client. In this event, only such funds are attributable to the Client named in the subject resale invoices are to be disbursed.
Signed AMERICAN INVESTIA, INC. by
9300 Wilshire Blvd. 2nd Floor
Beverly Hills, CA 90212
By this document Investía declared that money in its account would be held payable, in the event of certain contingencies, to its customers. Whether or not this declaration was sufficient to establish a trust and protect the money in the account from the claims of other creditors of Investía is arguable. But not a word in the certificate casts Security Pacific in the role of a trustee. The plaintiffs say that Security Pacific knew from its own contract with Investía that Investía was not a trustee. But nothing prevents a depositor in a bank from turning his deposit into a trust by contract with a third party, even though as far as the bank is concerned he is merely a depositor. When Investía told its investors that it was their trustee, nothing Security Pacific knew undermined the truth of Investia’s declaration.
Where, then, does the complaint allege a legal duty on the part of Security Pacific to prospective investors in Investía? Security Pacific had no duty to advise potential purchasers that the trust account set up by Investía was open to legal attack. Security Pacific had no duty to advise such purchasers of its own role, for it had no role except that of a bank maintaining a customer’s account. Security Pacific had no duty to say it was not a trustee when nothing put out by it or by Investía said or implied that Security Pacific was a trustee. Of course the standard by which fraud is measured is that of a reasonable person. Gilbert v. Nixon, 429 F.2d 348, 355-357 (10th Cir.1970). Loss, Fundamentals of Securities Regulation (2d ed. 1988) p. 890. The public is not to be assumed to be children or devoid of common sense and innocent of *1491American life; they can be presumed “to have a general understanding of the business world.” A. Jacobs, Litigation and Practice Under Rule 10-b-5 (1990) § 61.-01(b) at 3-20.
The other allegations as to Security Pacific do not help the plaintiffs. Officers of Security Pacific are alleged to have said to prospective investors that they knew no reason not to invest in Investía; the officers are not alleged to have possessed any information that would have made such statements false and, moreover, there was no reason for prospective investors to rely on Security Pacific for investment advice. An officer of the bank is said to have attended one Investía sales meeting; he is not alleged to have recommended its diamonds. Security Pacific is said to have received “minutes of meetings” of Inves-tia’s board; no information showing fraud is said to have been revealed by these minutes. Security Pacific is said to have provided trade financing, international banking services, and corporate banking advice. These are routine banking services not sufficient to make Security Pacific a participant in securities fraud. See In re Financial Corp. of America Shareholder Litigation, 796 F.2d 1126, 1130 (9th Cir.1986) (provision of routine accounting services does not make accounting firm responsible for fraud).
Aiding and Abetting. To state a claim of aiding and abetting securities fraud, one must charge the abettor with “actual knowledge” both of the fraud and of the abettor’s role in furthering it. Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646 at 652. Here, all that the complaint charges is that the fraud must have been “readily apparent” to Wilmington, not that Wilmington’s role in the fraud was “readily apparent” to it. The Roberts standard was not met.
Moreover, the ambiguous allegation appears to charge only notice of the fraud, not actual knowledge. Plaintiff’s brief clarifies the ambiguity by speaking only of notice. The allegation is, therefore, legally insufficient; it does not charge Wilmington with actual knowledge of Wilmington’s own role in the fraud. Id. at 652. Finally, as the earlier discussion of the trust company’s relation to potential investors showed, there was no allegation that the trust company knew that it was furthering the fraud on prospective purchasers and therefore there was no duty to disclose. Id. at 653.
The allegations as to Security Pacific are these: that “with knowledge such representations were false,” Security Pacific “permitted” Investía to issue a prospective “in the form of the Investía promotional materials and/or the Client Reserve Certificate,” which were materially misleading “under circumstances designed to lead the investor to believe that Security Pacific was acting as a trustee for the investor’s benefit.”
The difficulty with these allegations is that they are undermined by the attached documents. Neither the promotional literature nor the Reserve Certificate say that Security Pacific is acting as a trustee for the client’s benefit. The pleading attempts to bridge this gap by the ambiguous phrase “under circumstances designed to lead.” But no circumstances are alleged that amplify the limited and specific language of the certificate itself. The pleading fails to state that Security Pacific did anything except perform routine banking services and not object to Investía issuing the certificates; and the certificates on their face do not assign Security Pacific the role the plaintiffs claim it had.
The claims that Wilmington and Security Pacific were principals fall even flatter than the aiding and abetting claim. These defendants issued no security and no prospectus. Wilmington is not alleged to have made representations to potential investors. Wilmington’s only alleged representations were in a notice of receipt given actual investors. Security Pacific’s only alleged representations were that it knew of no reason not to invest in Investía. So far as Levine’s allegations go, these representations were true. As has already been demonstrated, the Reserve Certificates were an agreement between Investía and its investors; the certificates were not inconsistent with the bank’s position as the *1492depository of Investia’s account. No reasonable person could have believed that Security Pacific was acting as the trustee of Investia’s customers.
It is unlikely that Levine’s case will survive summary judgment. It should have ended with the inspection of its allegations and the accompanying documents.