Lead Opinion
ORDER
The majority opinion and dissent, reported at
The new majority opinion and dissent have been circulated to all active judges of the court, along with appellants’ petition for rehearing en banc, amicus curiae brief in support of rehearing en banc, and appel-lees’ briefs in opposition to rehearing en banc. No active judge has called for a vote en banc. Accordingly, the petition for rehearing en banc is DENIED.
OPINION
Albert Binder brought this action against Aqua Vie Beverage Corporation (AVBC), various AVBC officers and directors, and the accounting firm of De-loitte & Touche (Deloitte), asserting, on his own behalf and as a representative for a class of investors, that defendants violated federal and state securities laws. The district court decertified the class and declined to exercise supplemental jurisdiction over the related state law class claims. The court also granted summary judgment in favor of three AVBC officers and directors and for Deloitte on all of Binder’s individual claims. Final judgments were entered pursuant to Federal Rule of Civil Procedure 54(b). We affirm.
I.
Tom Gillespie and Marie Mullen Gillespie formed AVBC in 1991 by purchasing a publicly owned shell corporation and merging it with their Hawaii-based beverage company, KWC, Inc. They moved their operations to Sun Valley, Idaho. Shortly thereafter, Diane Karban joined the company as Chief Financial Officer and De- . loitte was hired as the compаny’s accounting firm. AVBC stock soon began trading publicly on the over-the-counter (OTC) market.
In the summer of 1991, Cottell Bottling agreed to manufacture, and Golden Brands agreed to distribute, AVBC’s product— “lightly flavored,” noncarbonated spring water. Industry publications touted AVBC as a promising, if speculative, investment, and AVBC stock sold for $2.75 per share by August. On September 24, 1991, Binder purchased 3000 shares at $4.00 per share. A month later, AVBC’s bid price reached its peak at $4.50 per share.
AVBC began production in 1992. Chief of quality control John Good, however, warned CEO Tom Gillespie and cоnsultant Gordon Sim that there was instability in the product formula. Sixty days after it was bottled, the water turned brown. AVBC adjusted the formula but continued to experience problems with the product’s shelf life. By the end of the year, AVBC was forced to repurchase the defective water from Golden Brands, which eventually resigned as AVBC’s distributor and sued for past-due debts.
In 1993, AVBC struggled to raise funds and to establish a distribution network for its product. On December 29, 1993, Binder sold his 3000 shares at less than one dollar per share. In 1994, AVBC suspended operations, and Binder filed this action. Default was entered against the Gillespies and, later, a default judgment for $5736.00. All remaining parties, except for defendants AVBC and the Gillespies, consented to proceedings before a magistrate judge. In February 1995, the action against AVBC was stayed pending Chapter 11 bankruptcy proceedings.
Chief Magistrate Judge Mikel H. Williams decertified the class of AVBC investors and dismissed all federal and state class claims. He also granted summary judgment on all of Binder’s individual federal and state claims against Deloitte and AVBC officers and directors Ian Wilson, Mark Stevens, and Cary Fitchey. The court entered final judgments pursuant to Rule 54(b). Meanwhile, Binder’s individual actions against the remaining defendants are pending in district court.
We begin our inquiry by examining whether we have jurisdiction to consider Binder’s appeal. A magistrate judge may conduct civil proceedings and order the entry of judgment if the parties consent. 28 U.S.C. § 636(c); FED. R. CIV. P. 73(b). If the parties fail to consent in writing, the magistrate judge does not have jurisdiction and any judgment entered is a nullity. See Aldrich v. Bowen,
III.
Judge Williams ruled that claims by the class—AVBC investors who purchased stock between August 1, 1991 and February 28, 1994—must be dismissed because the class could not, as a matter of law, satisfy all elements of a claim under section 10(b) of the Securities Exchange Act of 1934,15 U.S.C. § 78j(b), and Securities and Exchange Commission (SEC) Rule 10b-5(b), 17 C.F.R. § 240.10b-5. A successful securities fraud action requires proof of (1) a misrepresentation or omission (2) of material fact (3) made with scienter (4) on which the plaintiff justifiably relied (5) that proximately causes the alleged loss. See Gray v. First Winthrop Corp.,
The district court reasoned that the class would have to satisfy the reliance element through a presumption; otherwise individual questions of reliance would predominate over questions common to the class. See FED. R. CIV. P. 23(b)(3); Basic Inc. v. Levinson,
After that date, when AVBC stock began trading on the Boston Stock Exchange, Judge Williams acknowledged that the class might qualify for a presumption of reliance; however, he elected to decertify the class for the remaining period between December 1993 and February 28, 1994 on the ground that the class could not prove causation. That decision resulted in the dismissal of all class claims based on federal law and, because the court declined to exercise supplemental jurisdiction, it ended the state law class claims as well.
A.
Binder argues that the class is eligible for a presumption of reliance pursuant to Affiliated Ute Citizens v. United States,
We have applied the Affiliated Ute presumption to cases that “are, or can be, cast in omission or non-disclosure terms.” Blackie v. Barrack,
Most circuits have limited the presumption accordingly. See generally Tim A. Thomas, Annotation, When is it unnecessary to show direct reliance on misrepresentation or omission in civil securities fraud action under § 10(b) of Security Exchange Act of 1934. (15 U.S.C.A. § 78j(b)) and SEC Rule 10b-5 (17 C.F.R. § 240.10b-5),
We agree with these circuits that the Affiliated Ute presumption should not be applied to cases that allege both misstatements and omissions unless the case can be characterized as one that primarily alleges omissions. Thus, Judge Williams’ decision not to apply the presumption was sound and supported by the weight of authority. Accordingly, we agree with the district court that Binder’s plaintiff class is not entitled to the Affiliated Ute presumption of reliance.
B.
Binder also contends that the court erred by rejecting his contention that the class was entitled to a “fraud-on-the-market” presumption of reliance. The fraud-on-the-market presumption 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.... ” Basic Inc.,
Judge Williams ruled that the class was ineligible for this presumption because the market for AVBC stock—which traded exclusively on the OTC market until December 1993—was not efficient. Acknowledging “an absence of Ninth Circuit case law defining an efficient market,” Judge Williams employed the five factors from Cammer v. Bloom,
During the relevant time period, AVBC’s stock traded exclusively in the OTC market. Stocks in that market are listed on “pink sheets” that circulate daily and contain “bid” and “ask” prices, but do not include trading information, such as the volume of sales or the prices investors are actually paying. The question is whether such a market is efficient — meaning simply whether the stock prices reflect public information. See Cammer,
The Cammer factors are designed to help make the central determination of efficiency in a particular market. They address five characteristics of the company and its stock: first, whether the stock trades at a high weekly volume; second, whether securities analysts follow and report on the stock; third, whether the stock has market makers and arbitrageurs; fоurth, whether the company is eligible to file SEC registration form S-3, as opposed to form S-l or S — 2; and fifth, whether there are “empirical facts showing a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price.” Cammer,
C.
After December 1993, AVBC stock began trading on the Boston Stock Exchange (BSE). The district court concluded that there was no showing that BSE was an inefficient market. The court nonetheless decertified the class for the remaining period from December 1993 to February 28, 1994 on the ground that Binder could not prove causation. The court concluded that during this time no false statements or omissions were made that could have causеd Binder’s loss. Rather, the court reasoned that “some other factor or factors other than corporate information and disclosures” caused the value of AVBC stock to decline.
The causation requirement in Rule 10b-5 securities fraud cases includes “both transaction causation, that the violations in question caused the plaintiff to engage in the transaction, and loss causation, that the misrepresentations or omissions caused the harm.” McGonigle v. Combs,
Treatment of the loss causation requirement in this circuit and others has been less than clear. This results in part from the amorphous “touches upon” requirement. See id. at 359-65. It also results from confusion between loss causation as a sub-element of the causation requirement, and loss causation as a calculation of damages. See Robbins v. Roger Properties, Inc.,
IV.
After decertifying the class, Judge Williams declined to exercise supplemental jurisdiction and, accordingly, dismissed the state class claims. Under 28 U.S.C. § 1367(c)(3), a district court may elect, in its discretion, not to exercise supplemental jurisdiction over state claims if it has dismissed the original jurisdiction federal claims. See Fang v. United States,
V. ’
After dismissing the federal and state class claims against all defendants, only Binder’s individual federal and state claims remained. The magistrate judge granted summary judgment in favor of Wilson, Stevens, and Fitchey, as well as Deloitte on the federal causes of action. The court again declined to exercise jurisdiction over the pendent state law claims.
We agree with the district court that summary judgment was. appropriate for Wilson, Stevens, and Fitchey. None of these defеndants had any role in. AVBC prior to Binder’s purchase of stock on September 24, 1991. Specifically, Wilson joined the board of directors in September or October 1992; Fitchey served as a consultant beginning in June 1992; and Stevens joined the board in July 1993. A cause of action under section 10(b) applies only to misrepresentations or omissions made “in connection with the purchase or sale of any security.” 15 U.S.C. § 78j(b). Only a purchaser or seller of securities has standing to bring an action under section 10(b) and Rule 10b-5. See Blue Chip Stamps v. Manor Drug Stores,
Binder contends that summary judgment was inappropriate for Deloitte because Deloitte prepared financial statements filed with the SEC before he purchased his stock. The complaint alleges misrepresentations made prior to Binder’s purchase, but only two implicate Deloitte. Those involve quarterly financial reports issued by AVBC, marked “unaudited,” which Binder nevertheless maintains were prepared with Deloitte’s assistance.
Binder offers, as evidence of Deloitte’s participation, a reference in the first quarter statement to AVBC’s “certified public accountants, Deloitte & Touche.” He also relies upon deposition testimony by a De-loitte emplоyee who stated, “We did comment on their 10-Q’s.” He neglects to include, however, the rest of the employee’s testimony: “I would like to make one point clear, ... that we never reviewed or had a business relationship with Aqua Vie that we were engaged to review their 10-Q’s.” In addition, the top of each section of the 10-Q forms was clearly marked “(unaudited),” and the completed forms were signed by Thomas Gillespie, with no mention (except the one reference) of Deloitte.
We conclude that Binder’s meager evidence of Deloittе’s participation in the reports is insufficient to preclude summary judgment. A party opposing summary judgment must offer more than a mere scintilla of evidence; indeed, “[s]ummary judgment may be granted if the evidence is merely colorable ... or is not significantly probative.” Summers v. A Teichert & Son, Inc.,
VI.
Finally, Binder takes issue with various evidentiary rulings during the сourse of the proceedings in district court. Specifically, he contends that the court erred by denying his request to depose one of Deloitte’s experts; by considering Deloitte’s experts’ reports over Binder’s objections; and by refusing to consider portions of Binder’s “Tollefson Declarations.” We reject Binder’s contentions. He has not demonstrated how additional discovery would have precluded summary judgment. See Natural Resources Defense Council v. Houston,
AFFIRMED.
Dissenting Opinion
dissenting in part:
Because the plaintiffs are entitled to a presumption of reliance under the doctrine of Affiliated Ute Citizens v. United States,
In Blackie v. Barrack,
Direct proof would inevitably be somewhat pro-forma, and impose a difficult evidentiary burden, because addressed to a speculative pоssibility in an area where motivations are complex and difficult to determine.... Here, the requirement [of proving reliance] is redundant — the same causal nexus can be adequately established indirectly, by proof of materiality coupled with the common sense that a stock purchaser does not ordinarily seek to purchase a loss in the form of artificially inflated stock.
Id. Because Blackie was a pure omissions case, we did not have occasion to determine whether the same reasoning would apply to material misrepresentations.
One year later, however, in Little v. First California Co.,
All misrepresentations are also nondis-closures, at least to the extent that there is a failure to disclose which facts in the representation are not true. .Thus, the failure to report an expense item on an income statement, when such a failure is material in the Affiliated Ute sense, can be characterized as (a) an omission of a material expense item, (b) a misrepresentation of. income, or (c) both.
Most important for our purposes here, it is equally difficult to establish reliance on a misrepresentation and on an omission. While a plaintiff in an omissions case— absent the Affiliated Ute presumption— would bear the daunting task of proving T would not have bought/sold had I known what you failed to tell me’ see Blackie,
In an omissions ease, the plaintiff does not know the truth because the defendant said nothing; in a misrepresentations case the plaintiff does not know the truth because the defendant lied. But, as far as the plaintiffs ability to demonstrate reliance, this is a distinction without a difference. In either case, the plaintiff must attempt to prove that he would have acted differently had he known the truth. The evidentiary burden is therefore equally difficult in either case, and there is no logical reason to afford the presumption of reliance to plaintiffs in omissions cases but not in misrepresentations cases. The rule we announced in Blackie, that the “causal nexus can be adequately established indirectly, by proof of materiality coupled with the common sense that a stock purchaser does not ordinarily seek to purchase a loss in thе form of artificially inflated stock,” id., applies with equal force of logic to misrepresentations.
The Third Circuit made a similar observation in Sharp v. Coopers & Lybrand,
[T]he problem of speculation is not unique to situations in which omissions have occurred. In misrepresentation actions as well, proof of reliance requires a degree of speculation on the action that the plaintiff would have taken had no misrepresentation occurred.
Id.
Affiliated Ute recognized the inherent difficulty of proving reliance in securities fraud cases, and accordingly announced a rule of presumed reliance in a mixed omissions and misrepresentations case. As suggested by our opinion in Little and by the Third Circuit in Sharp, plaintiffs face the same difficulty in proving reliance on misrepresentations. I would therefore hold that plaintiffs in mixed cases are entitled to the Affiliated Ute presumption of reliance whether the case is primarily an omissions case or primarily a misrepresentations case. Accordingly, whether this case is properly classified simply as a mixed omissions and misrepresentations case, or as “primarily” a misrepresentations case, I would hold that the Binder class was entitled to a presumption of reliance, and would therefore reverse the de-certification of the class.
Notes
. I agree, however, with Part V of the opinion that summary judgment was appropriate for Binder's individual claims against Wilson, Stevens, Fitchey and Deloitte, and with the majority's conclusion in Part VI with respect to the evidentiary issues.
. To be sure, plaintiffs in any 10b action must have actually relied on the material omission or misrepresentation in order to recover damages. See 15 U.S.C. § 78j(b). I do not dispute this. As discussed below, I believe only that plaintiffs in mixed cases are entitled to a presumption of reliance whether the case is primarily an omissions case or primarily a misstatements case. None of our other 10b cases is to the contrary. It is true that in Paracor Finance, Inc. v. General Elec. Capital Corp.,
. A different question, one not presented here, is whether plaintiffs are entitled to a presumption of reliance in pure misrepresentation cases. Dicta in Paracor,