Edward M. DUNN, Plaintiff-Appellant v. Ronald T. BORTA; Peter C. Linzmeyer; Leslie A. Davis, Defendants-Appellees, and Ronbotics Corporation, Defendant.
No. 03-1362
United States Court of Appeals, Fourth Circuit
May 19, 2004
Argued: Jan. 20, 2004.
The district court may also choose to consider whether, apart from the Plan language regarding Self-Reported Symptoms, Continental Casualty‘s denial of benefits was supported by substantial evidence. For example, the doctor engaged by Continental Casualty to review Smith‘s file concluded that because of his three back surgeries, Smith “would need to avoid sitting or standing for prolonged periods of time over 1-2 hours.” (J.A. at 253.) Continental Casualty relied on this statement in denying benefits as evidence that Smith could perform the material and substantial duties of his regular occupation. A review of Smith‘s job description and responsibilities reveals that he is vice president of sales for a territory that extends from Pennsylvania to South Carolina and that extensive automobile travel is required to visit suppliers and customers within this territory. Although Smith may have some control over his travel due to his position in upper management, he has no control over the length of time that it takes to drive from Pennsylvania to South Carolina—for example, a one-way trip from Harrisburg, PA to Columbia, SC covers over 600 miles and takes considerably longer than 1-2 hours.4
III.
For the foregoing reasons, we vacate the grant of summary judgment for Smith on the benefits issue and vacate the award of attorneys’ fees to Smith. We remand the case for proceedings consistent with this opinion.
VACATED AND REMANDED
Before NIEMEYER, KING, and DUNCAN, Circuit Judges.
Reversed and remanded by published opinion. Judge KING wrote the opinion, in which Judge DUNCAN joined. Judge NIEMEYER wrote a dissenting opinion.
OPINION
KING, Circuit Judge:
Plaintiff Edward Dunn appeals the decision of the Eastern District of Virginia, rendered in February 2003, dismissing his securities fraud claims against defendants Borta, Linzmeyer, and Davis for failure to state a claim upon which relief can be granted, see
I.
A.
Ronbotics Corporation is a privately held Virginia corporation founded to develop and manufacture electric motion platforms, used primarily in arcade games and training simulators. Ronbotics was operated, in part, by the individual defendants: Ronald Borta, its Chief Technology Officer and Chairman of the Board; Leslie Davis, its President and Chief Operating Officer; and Peter Linzmeyer, its Chief Executive Officer (collectively, the “Defendants“).1
In January 2001, Ronbotics approached Edward Dunn about investing in its business, providing him with a Confidential Information Memorandum (the “Memorandum“) describing Ronbotics‘s current and proposed product lines, business prospects, assets, and marketing strategy, and including financial reports and other information. The Memorandum asserted that “Ronbotics has developed proprietary motion control technology currently embodied in its patented electric motion platforms” and that “[t]he low cost of Ronbotics’ patented platforms is attributable to its proprietary mechanical and systems designs, proprietary software and trade secret manufacturing processes.”
In addition, the Memorandum made several representations concerning Ronbotics‘s business prospects. For example, it asserted that major manufacturers such as SEGA, Namco, and Gaelco were designing
During the third week of January 2001, Dunn met with Borta and Linzmeyer to discuss his possible investment in Ronbotics. At the meeting, which lasted several hours, Dunn was asked to invest $500,000 in the company by purchasing its stock at $3.00 per share. When he expressed doubt that Ronbotics‘s stock was worth that price, Linzmeyer and Borta suggested that Dunn instead purchase a convertible subordinated note issued by the company. Dunn then voiced concern that Ronbotics did not possess sufficient assets to satisfy such a note if the company went bankrupt. Linzmeyer and Borta responded that Ronbotics owned two patents, one for a motion pinball machine and one for the electric motion platform used in the CoasteRider; that the patents were “worth millions“; that an outside investment firm had valued the patents at between $2 million and $4 million; and that the patents were the company‘s primary assets. When Dunn inquired as to the protections Ronbotics had in place to ensure that competitors did not misappropriate its technology, Linzmeyer and Borta represented that the company‘s patents protected against such misappropriation.
On January 31, 2001, Linzmeyer, on behalf of Ronbotics, executed a convertible subordinated note (the “Note“),2 by which Ronbotics promised to pay Dunn the principal sum of $500,000 on January 31, 2004, plus ten percent interest per annum, payable on the first day of each calendar quarter. Ronbotics made the Note‘s first required interest payment to Dunn on April 1, 2001, but it failed to make any subsequent interest payments through October 1, 2002. Exercising his rights under the Note, Dunn then demanded immediate payment of all principal and interest due thereon. The Note was not paid, and Ronbotics subsequently filed for bankruptcy in the Eastern District of Virginia bankruptcy court.
B.
On June 28, 2002, Dunn filed a complaint in the Eastern District of Virginia against Ronbotics and the Defendants, alleging violations of federal and state securities laws, common law fraud, and breach of contract. Ronbotics did not enter an appearance in the action, but the Defendants filed motions to dismiss pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.3 On October 15, 2002, the court granted the motions to dismiss without prejudice, but authorized Dunn to amend his complaint.
On October 29, 2002, Dunn filed an amended complaint, naming the same defendants, which is the operative complaint in this appeal (the “Complaint“). The
Next, the Complaint alleged that the Memorandum contained false and misleading statements regarding the status of Ronbotics‘s business. Complaint Part G. In particular, the Complaint alleged that, contrary to the Memorandum, SEGA, Namco, and Gaelco were not in the process of designing products using Ronbotics‘s motion platform. Complaint ¶¶ 36-39. The Complaint further alleged that Ronbotics had never engaged in substantive discussions with General Electric and had never been in serious negotiations with any other major distributors. Complaint ¶¶ 40-43. Also, according to the Complaint, the Memorandum falsely asserted that Ronbotics had sold 225 CoasteRiders, when in fact the company had not sold anywhere near that number prior to January 2001. Complaint ¶¶ 46-47. In addition, the Complaint alleged that the Memorandum provided misleading and unrealistic financial information. Complaint ¶¶ 50-53.
Based on its factual allegations, the Complaint alleged eight separate causes of action. Counts III and IV are the only counts relevant here, as Dunn has appealed only the two claims arising under the Virginia Securities Act (the “Act“).4 Count III alleged violation of sections
On November 12, 2002, the Defendants again filed motions to dismiss pursuant to
II.
We review de novo a district court‘s dismissal of a complaint pursuant to
III.
In assessing whether the district court erred in dismissing Counts III and IV of the Complaint, we must first determine whether the Complaint sufficiently alleges material misrepresentations on the part of the Defendants, and we must then examine the Defendants’ contention that we should imply elements of reliance and causation into the Act. Finally, we must assess whether the allegations against Davis in Counts III and IV impermissibly relied on the group pleading presumption. As explained below, we reject the Defendants’ contentions and conclude that Counts III and IV were erroneously dismissed.13
A.
We first consider whether the district court correctly concluded that the alleged misrepresentations were not material. In so doing, we recall that “a fact stated or omitted is material if there is a substantial likelihood that a reasonable purchaser or seller of a security (1) would consider the fact important in deciding whether to buy or sell the security or (2) would have viewed the total mix of information made available to be significantly altered by disclosure of the fact.” Longman v. Food Lion, Inc., 197 F.3d 675, 683 (4th Cir.1999) (citing Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); Gasner v. Bd. of Supervisors, 103 F.3d 351, 356 (4th Cir.1996)); see also TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976) (setting forth “total mix” standard).
In applying this materiality standard, we must bear in mind that it does not require proof that an investor would not have invested had he known the truth; rather, the reasonable investor standard requires “a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable [investor].” TSC Indus., 426 U.S. at 449. In addition, we are mindful that, “[i]n general, the materiality of a statement or omission is a question of fact that should normally be left to a jury rather than resolved by the court on a motion to dismiss. Thus, we review the complaint only to determine that it pleads the existence of such statements and presents a plausible jury question of materiality.” Bielski v. Cabletron Sys., Inc. (In Re: Cabletron Sys., Inc. Secs. Litig.), 311 F.3d 11, 34 (1st Cir.2002) (internal citation omitted); see also Anderson v. Clow (In re Stac Elecs. Secs. Litig.), 89 F.3d 1399, 1405 (9th Cir.1996). As explained below, we conclude that Dunn has sufficiently pleaded misrepresentations that, if factually supported, would present a jury question as to their materiality.14
1.
a.
First, a reasonable jury could conclude that the Defendants’ misrepresentations concerning their ownership of the patents were material. The Complaint alleges that the Defendants “represented to Dunn that the patents were the most valuable and primary assets of Ronbotics.” Complaint ¶ 31. A reasonable investor would undoubtedly attach significance to whether the company in question actually owned what it deemed its “most valuable and primary assets,” as opposed to merely anticipating owning them in the future. The belief that a company currently possesses property that, in fact, it only hopes to possess would cause a reasonable investor to misassess the risk of his potential investment. Unbeknownst to Dunn, he faced a substantial risk that Ronbotics would never own its “most valuable and primary assets“; that is, the patent applications could well have been rejected.15
b.
i.
On the other hand, the Defendants contend that the total mix of information available to Dunn included the fact that Ronbotics‘s patents were pending at the time Dunn made his investment, because such information was publicly available and readily obtainable. The Act does not, however, impose any duty to investigate upon a purchaser, and the court thus impermissibly imposed a due diligence requirement upon Dunn.
Most importantly, the plain language of sections
Our construction of the Act is consistent with the manner in which other courts have construed similar statutes modeled on section 410(a) of the Uniform Securities Act. For example, in MidAmerica Federal Savings and Loan Ass‘n v. Shearson/American Express, Inc., 886 F.2d 1249 (10th Cir.1989), the Tenth Circuit had occasion to construe section 408(a)(2) of the Oklahoma Securities Act, Okla. Stat. Ann. tit. 71, § 408(a)(2) (West.Supp.1989), a nearly identical statute to section
Similarly instructive are judicial constructions of section 12(2) of the federal Securities Act of 1933,
ii.
The Defendants nonetheless maintain that our decision in Phillips v. LCI International, Inc., 190 F.3d 609 (4th Cir.1999), mandates a contrary result and that the ruling of the district court should be affirmed. In Phillips, we considered a situation in which the defendants had asserted that their company was not for sale when, allegedly, they were in ongoing negotiations to sell it. Our distinguished panel explained that, “[i]f what [the defendant] actually said here [that the company was not for sale] is examined in the context of all of the information publicly available, we believe that a reasonable factfinder could not conclude that the contested statement constitutes a material misrepresentation.” Id. at 615. Based on this observation, the Defendants maintain that Phillips requires us to charge Dunn with knowledge that the patent applications were pending.
A careful examination of the Phillips decision leads us to conclude otherwise. First, the Phillips plaintiffs did not assert state blue sky claims, but instead brought federal claims under section 10(b) of the
Second, the consideration of all publicly available information was logical in Phillips because there the plaintiffs were relying on a “fraud-on-the-market” theory. Id. at 617. That theory authorizes a plaintiff to demonstrate reliance (as required for the federal claims at issue in Phillips) based on a presumption that he relied on the integrity of the market, as reflected in the company‘s stock price. See Longman, 197 F.3d at 682 n. 1. In such a situation, the “reasonable investor” is the market itself; therefore, courts charge the market with knowledge of all publicly available information, because such information is
exactly what affects the market price. See Basic Inc., 485 U.S. at 243-48. This dispute differs significantly from Phillips in that we are obligated to examine materiality from the viewpoint of a reasonable purchaser, not the market, and thus we need not deviate from our previous conclusion that Dunn is not charged with knowledge of all publicly available information.19
2.
The Complaint also makes allegations that, if sufficiently proven, would present a jury question concerning the Defendants’ failure to inform Dunn that it had reassigned its patent rights to Borta. On May 28, 1998, unbeknownst to Dunn, Davis had executed an Agreement to Reassign on behalf of Ronbotics. In that Agreement, Ronbotics, which had been assigned the patent rights to Borta‘s electric motion platform and control system, agreed to reassign those rights to Borta upon the occurrence of any of a number of specified events. One such event was Ronbotics defaulting on its obligations and seeking bankruptcy protection. The Defendants failed to disclose to Dunn that, if Ronbotics were to file for bankruptcy, Borta would regain all patent rights in the electric motion platform and its control system. A jury could conclude that this omitted information would have been significant to a
3.
The district court also decided that the Defendants’ representations concerning Ronbotics‘s business prospects constituted mere “puffery” and were therefore insufficient to support an allegation of fraud. As the court observed, the judiciary has long distinguished between mere puffing statements utilizing opinion and exaggeration to pitch a sale, on the one hand, and factual statements that constitute fraudulent misrepresentations, on the other. The Supreme Court has explained that “when a proposed seller goes beyond [mere exaggeration of the qualities which an article has], assigns to the article qualities which it does not possess, does not simply magnify in opinion the advantages which it has but invents advantages and falsely asserts their existence, he transcends the limits of ‘puffing’ and engages in false representations and pretenses.” United States v. New S. Farm & Home Co., 241 U.S. 64, 71 (1916) (reversing dismissal of indictment for fraudulent sales of swamp land in Florida because misrepresentations did not constitute mere puffery); see also Miller v. Premier Corp., 608 F.2d 973, 981 (4th Cir.1979) (observing that “an unspecific and false statement of opinion such as occurs in puffing generally cannot constitute fraud“).
In his Complaint, Dunn does not allege mere exaggeration and opinion, nor does he assert that the Defendants promised him a great investment or an amazing return on his money. Instead, Dunn alleges very specific misrepresentations on the part of the Defendants: that Ronbotics had sold 225 CoasteRider units, Complaint ¶ 46; that SEGA, Namco, and Gaelco were designing products using Ronbotics‘s technology, Complaint ¶ 36; that Ronbotics was in negotiations with General Electric, Betson, Atlas, State Sales, and other major companies, Complaint ¶¶ 40-43; that Ronbotics planned to introduce in early 2001 a product simulating gravitational forces with two degrees of freedom, and would feature its motion theater with three degrees of freedom, Complaint ¶¶ 44-45; and that Ronbotics was negotiating with a particular manufacturing facility in Oklahoma to handle overflow production, Complaint ¶ 48. These specific factual allegations regarding Ronbotics‘s business dealings and prospects are not simply sales pitches but rather can be proven true or false and, if properly supported, could be found material by a reasonable jury. See generally Raab v. Gen. Physics Corp., 4 F.3d 286, 289 & n. 1 (4th Cir.1993) (declaring as inactionable puffery statements that company expected certain growth rate and was poised to carry that rate into future and distinguishing Cooke v. Manufactured Homes, Inc., 998 F.2d 1256, 1259 (4th Cir.1993), in which we held that representations of specific business projects, including negotiations with insurance company that would act as guarantor, were actionable). Counts III and IV are therefore sufficient to state claims against the Defendants under the Act.20
The Defendants also maintain on appeal that, even if the Complaint alleges material misrepresentations, the Act should be construed as requiring both reliance and causation, which the Complaint does not allege. As explained below, we are unable to construe the Act as requiring these elements.
The necessary starting point for determining the elements of a claim under section
Furthermore, as the Seventh Circuit has correctly explained, “[a]lthough the ‘by means of’ language in the statute requires some causal connection,” the statute in question (section 12(2)) “imposes liability without regard to whether the buyer relied on the misrepresentation or omission.” Sanders, 619 F.2d at 1225. According to the Supreme Court, “[t]here is, however, more than one way to demonstrate the causal connection.” Basic Inc., 485 U.S. at 243. In this situation, the connection is created through the privity required by section
Indeed, the Defendants do not contend on appeal that the statute explicitly contains these elements; rather, they urge that these elements should be implied by the judiciary, asserting, “[i]n the absence of legal precedent, Appellees submit that both of these requirements should be implied into the Virginia Securities Act.”21 Because the Act fails to mention reliance or causation, however, it would be inappropriate for a court to imply them. See Schmidt v. Goddin, 224 Va. 474, 297 S.E.2d 701, 704 (1982) (declining to read additional requirements into a statute because the court is “not permitted to add words to a statute or to accomplish the same result by judicial interpretation“).22
In addition, we have rejected similar contentions that the elements of reliance and causation should be implied into section 12(2) claims, which are practically identical to section
C.
Finally, we turn to the district court‘s dismissal of Counts III and IV against Davis on the basis of Rule 9(b). The court concluded that Dunn‘s allegations failed to meet the specificity requirements of Rule 9(b) with respect to Davis because, “[i]n his 114-paragraph Amended Complaint, Mr. Dunn fails to plead how Ms. Davis, individually, contributed to the alleged fraud,” relying instead on “impermissible group pleading.” Dunn v. Ronbotics Corp., No. 02-952, at 28-29 (E.D.Va. Feb. 20, 2003). On the contrary, the group pleading presumption (sometimes known as the “group-published information” presumption) is not a prohibition on forms of pleading; rather, it serves as a presumption that may be invoked in favor of a plaintiff. As the Fifth Circuit has explained, “‘group pleading’ allows a plaintiff to rely on a presumption that statements in company generated documents represent the collective work of those individuals directly involved in the company‘s daily management.” Schiller v. Physicians Res. Group Inc., 342 F.3d 563, 569 n. 4 (5th Cir.2003); see also Decker v. Glen-Fed, Inc. (In re GlenFed, Inc., Secs. Litig.), 60 F.3d 591, 593 (9th Cir.1995).
We have never addressed the issue of whether the group pleading presumption should be recognized in this Circuit,24 and, because Counts III and IV satisfy the pleading requirements as to Davis without reliance on the presumption, we need not decide that issue today. This approach was taken by the First Circuit in Bielski, 311 F.3d at 11. There the court of appeals declined to address the question of whether the group pleading presumption should be applied because the complaint alleged that the officers and directors had access to information contrary to the company‘s public statements, that they had participated in making the fraudulent statements and stock sales, and that they had signed certain forms. Id. at 40-41.
Similarly, Counts III and IV assert claims against Davis, not solely because of her position as an officer of Ronbotics, but because she was directly involved in making material misrepresentations to Dunn. Although Dunn refers to Borta, Linzmeyer, and Davis in short-hand form (naming them the “Individual Defendants“), he clearly explains, “[e]xcept where otherwise specified, ‘Individual Defendants’ is to include each or all of these individuals.” Complaint ¶ 16. As a result, each allegation made concerning the Individual Defendants is a specific allegation against Davis. And Dunn explicitly alleges that the Individual Defendants “participated in the drafting, preparation, and/or approval of the written and oral statements complained of herein,” such as the Memorandum. Complaint ¶ 18. Like the officers in Bielski, Davis is alleged to have had access to contrary information and to have personally participated in making the misrepresentations. The Complaint therefore provides Davis with fair notice under Rule 9(b) of the claims made against her in Counts III and IV, and they should not have been dismissed on this basis.
IV.
Pursuant to the foregoing, we reverse the dismissal of Counts III and IV of the Complaint and remand for such other and
REVERSED AND REMANDED
NIEMEYER, Circuit Judge, dissenting:
Because the misrepresentations on which Edward Dunn allegedly relied in investing $500,000 in Ronbotics Corporation were not material and, in any event, did not cause Dunn‘s loss, I would affirm the district court‘s dismissal of Dunn‘s complaint under Federal Rules of Civil Procedure 9(b) and 12(b)(6).
Ronbotics was a small corporation formed to manufacture and develop electric motion platforms for arcade video games and training simulators. In January 2001, Ronbotics approached Dunn about investing in Ronbotics, giving him a “Confidential Information Memorandum” about Ronbotics’ business. The memorandum was a business plan for Ronbotics that expressed its hopes and projections for profit, but it contained no traditional financial data, such as a balance sheet, income statement, or cash flow statement. Moreover, the document stated on its face:
Neither the Company nor any of its respective affiliates, employees or representatives makes any representation or warranty, express or implied, as to the accuracy or completeness of any of the information contained in this Memorandum or any other information (whether communicated in written or oral form) transmitted or made available to prospective investors, and each of such persons expressly disclaims any and all liability relating to or resulting from the use of this Memorandum or such other information by a prospective investor or any of their affiliates or representatives.
In addition to the memorandum, Dunn had a single, four-hour meeting in late January 2001 with the principals of Ronbotics, during which the principals expressed enthusiasm about their patented technology, which they said was worth millions of dollars and would justify Dunn‘s investment. They also expressed enthusiasm for the future of the company. Based on the memorandum and the single meeting, Dunn invested $500,000 in Ronbotics. He has alleged that in doing so, he relied principally on the value of the patented technology. His complaint asserts, “Dunn‘s primary interest in Ronbotics related to Ronbotics’ patented technology, as represented by defendants.” Skeptical even about this value, Dunn demanded a “convertible subordinated note” from Ronbotics in the face amount of $500,000.
After Ronbotics failed as a company, Dunn commenced this action and alleged his reliance on five misrepresentations made by Ronbotics in the Confidential Information Memorandum and at the January 2001 meeting, characterized as follows:
First, Linzmeyer and Borta confirmed the existence [of] the patents and described them as two patents, one for a motion pinball machine, and the other for the electronic motion platform used in Ronbotics’ principal product, the CoasterRider. Second, Linzmeyer and
Dunn then alleged that these representations were false in the following respects. First, he alleged that no patents had issued at the time the representations were made in January 2001; one patent was not issued until April 16, 2002, and the other was not issued until September 3, 2002. When they did issue, Borta was listed as the inventor and Ronbotics as the assignee. Second, Dunn alleges that the valuations conducted about the patents were overstated because they were based “on unrealistic three-year projections in which sales were projected to exceed $843 million and operating profits were projected in the range of 55 percent of sales.” Finally, the patents were misrepresented because Borta retained a security interest in the patents which would permit the patents to be reassigned to Borta on the occurrence of certain contingencies.
The district court reviewed the complaint in the context of all the arguments presented to it by counsel and concluded in part that the representations on which Dunn relied were not material. As the court explained:
[A] reasonable investor would have considered the total mix of information which included the publicly available information that the patents were pending before the PTO. The court also finds that, although the valuation of the patents by an outside firm may have seemed high, Mr. Linzmeyer‘s and Mr. Borta‘s statements about the value of the patents were based on this independent valuation and were not misrepresentations.
I would add to what the district court observed a fact most important to the proper disposition of the issue: Despite the fact that the patents had not yet issued, Ronbotics and its principals nonetheless owned the technology when the representations were made, and patent applications protecting the technology were pending. Thus, Dunn‘s case hinges on the distinction he draws between pending patent applications and patents. Although this distinction would have been material had the patent applications been denied, the applications were granted, confirming patentability and the right to exclude the world from use of the technology. No competitor used the technology, nor could it have used the technology at the time of the misrepresentations. As a consequence, the procedural status of the patent applications could not and did not significantly alter the total mix of information made available to Dunn. Ronbotics’ business was presented on the basis that
The fact that Ronbotics did not disclose that Borta, one of the principals of Ronbotics, retained a security interest in Ronbotics’ patent rights through a right of assignment upon the event of bankruptcy or other contingencies, was also not material. Dunn expressly subordinated his interest in Ronbotics to “all existing and future secured indebtedness of the Company.” Moreover, Dunn made no inquiry about the company‘s secured debt, and its nature and amount are not alleged as misrepresentations in Dunn‘s complaint.
It is also apparent from Dunn‘s complaint that Ronbotics’ misrepresentations as enumerated above did not cause Dunn‘s loss in the way required by Virginia Code Annotated
Under the circumstances of this case, where the patents eventually issued and the technology was fully and continuously protected, the misrepresentations about them were truly insignificant. Allowing Dunn to recover his entire investment because of a misrepresentation that could not have played a role in his loss obliterates causation entirely. It was a business risk known to Dunn that caused the failure of the company, not any misrepresentation about the procedural posture of the patent applications.
For these reasons and the other reasons more fully described by the district court in its February 20, 2003 order, I would affirm.