Fed. Sec. L. Rep. P 94,517 Margaret R. Bruschi v. Ken Brown, Elmco, Inc.

COX, Before VANCE and Circuit DYER, Judges, and Senior Circuit Judge.

VANCE, Judge: Circuit appeal summary judg- This is an ment for defendant entered after the dis- trict court elected to treat the defendant’s 12(b)(6) Fed.R.Civ.P. motion to dismiss as a summary judgment motion for under Fed. 56. At issue is the correctness R.Civ.P. respect the court’s decision with 10(b) plaintiff’s claim under section Exchange Act of 15 U.S.C. Securities 78j(b), promulgated and Rule 10b-5 § thereunder, 17 240.10b-5. We re- C.F.R. § verse.

I. FACTS alleges ap-

The amended pellant proof has offered following plain- the fall of 1981 facts. Bruschi, high tiff-appellant Margaret R. a graduate with minimal invest- school sought the services of a experience, ment firm to assist her reputable investment affairs of management of the financial eventually se- her and her husband. She brokerage firm of Dean Witter lected the Inc., highly-re- its Reynolds, because of management expertise. garded investment Brown, Defendant-appellee Ken an account Dean salesman at executive and securities Raton, in Baco Flor- branch office Witter’s invest- ida, Bruschi’s became broker ment advisor. present his met Bruschi to

Brown and to recommend analysis portfolio of her op- opportunities. One of these investment equipment sale computer portunities was Elmco arrangement known as the and lease strongly recommended investment. Brown it in and described the Elmco investment Hatch, Casey Mager, Casey, R. Bruschi that it Michael He also told positive terms. Lauderdale, Fla., plain- de- Beilly, significant Fort tax provide her with however, disclose, tiff-appellant. not Brown did ductions. in fact a was the Elmco investment Wallace, Allen, Engels, Pert- L. Richard unreg- involving risky venture complex and Miami, Fla., for Solowsky, noy, Martin & neither endorsed and was istered securities defendant-appellee. He also did nor Dean Witter. offered Elmco had entered that he and not disclose was to agreement in into an which ruling commission from Elmco for contest of the IRS’s receive sales was uncertain costly. and would be any securitiеs sold Brown. in Elmco and agreed to invest II. DISCUSSION home to close the

Brown visited her at The elements of a Rule 10b-5 cause the Elmco invest- transaction. Because (1) of action are: the defendant made a private offering, securities he ment was a false statement or omission of material fact disclosure documents1 de- brought several (2) (3) upon with scienter which the bring the signed to transaction within ‍​​​​‌‌​​​​​‌​‌‌‌‌‌‌​‌​‌‌‌​‌‌​​​‌‌​‌‌​‌​​​‌‌​‌‌‌​‍the justifiably (4) proximately relied exemption provision of Rule 146 of the Dia plaintiff’s damаges. caused the Exchange and Commission.2 Securities Lamotte, mond v. approximately The documents consisted of (11th Cir.1983); Huddleston v. Herman & pages of text and exhibits. Brown MacLean, Cir. Unit agreed repre- “offeree to act as Bruschi’s 1981), part part in and rev’d in A on aff'd and advise her as to the tax sentative” grounds, other 459 U.S. 103 S.Ct. ramifications and economic merits and (1983). Summary judgment L.Ed.2d 548 risks of the Elmco investment.3 Bruschi improper for the defendant is unless the signed reading the documents without genuine record reveals that there are no being by them4 assured after Brown that supporting issues as to material fact signature process was a mere formali- plaintiff’s claim and the defendant is ty. judgment entitled to as a matter of law. $84,000 approximately invested 56(e). In applying Fed.R.Civ.P. this stan April in the Elmco securities. In 1985 the dard we must resolve all reasonable doubts Internal Revenue Service disallowed sever- Bruschi, in nonmoving favor of party. al deductions taken Bruschi and her Dothan, v. City Williams 745 F.2d 1406 joint husband on their tax returns for the (11th Cir.1984). parties agree The years 1981, 1982, nego- and 1983. Bruschi dispute there are material facts in toas tiated a settlement after her accountants first two elements of Bruschi’s Rule 10b-5 attorneys that a and advised her successful claim. We conclude that there also are (ii) parties copies person of several The filed of these That the offeree is a who is able investment; prior documents with the district court to bear the economic risk of the grant summary judgment. following and The (2) sale, Immediately prior making any to documents are contained in the record: “Offer- Memorandum," making inquiry, after ing "Subscription Agreement, reasonable either: (i) knowledge Questionnaire,” That the offeree has such and “Designation "Subscriber of Of- experience in financial and business matters Representative," Representatives feree "Offeree capable evaluating that he is the merits and Disclosure,” Representa- Written and “Offeree investment, prospective risks of the or Questionnaire.” tive (ii) repre- That the offeree and his offeree sentative(s) together knowledge have such 2. Rule entitled “Transactions an issuer experience in financial and business mat- any public offering,” pre- deemed not to involve they capable evaluating ters that are viously was at 17 C.F.R. § codified 230.146 prospective merits and risks of the investment (1982). The rule was effective removed June and that the offeree is able to bear the eco- 30, 1982, but was in effect at the time of the nomic risk of the investment. 11,261 alleged Fed.Reg. transaction. See 47 230.146(d) (1982) (emphasis orig- 17 C.F.R. § (1982). part provided following: The rule in inal). (d) Nature The issuer and of offerees. offer, person acting on its behalf who offer to agreement 3. Brown’s to act as Bruschi’s offeree sell, offer for sale or sell the securities shall representative Rep- is confirmed in the "Offeree grounds to believe and have reasonable shall resentatives Written Disclosure." believe: offer, (1) Immеdiately prior making any 4. The amended to explicitly does not either: allege that Bruschi did not read the disclosure (i) knowledge has such signing reply That the offeree documents before her them. court, however, experience in financial and business matters brief to this Bruschi concedes capable evaluating that he is the merits and that she did not read the documents before investment, prospective signing risks of the them. Dempsey-Tegeler & to third and dispute as facts material (9th Cir.), denied, claim; cert. 429 U.S. conse- of Bruschi’s fourth elements (1976)). 259, 50 L.Ed.2d 180 granting court erred quently, district single dispositive; all must be factor No to Brown. summary judgment determining considered and balanced Reliance A. Justifiable Zobrist, justified. reliance was whether 708 F.2d at 1516-17. no that there first contends Brown dispute facts material may argued It the most be Bruschi’s element reliance justifiable prudent for Bruschi to taken course have repre- points to 10b-5 claim. Rule to read the disclosure been disclosure documents sentatiоns deciding to in whether documents before misrepresen- alleged oral conflict with circumstances, vest in Elmco. Under law, that, of as a matter argues and tations however, thereby to do so—and her failure on relying justified not in investor is an the inconsistencies between discover the with misrepresentations that conflict oral and the alleged misrepresentations oral representations. written contemporaneous make representations not written —does disagreе. We matter of law. unjustified reliance as a her first note while some statements that We that, regardless held have never We with the disclosure documents conflicted in circumstances, always an investor of the misrepresenta alleged oral some Rule recovering under from precluded tions, in statements these documents other upon which misrepresentations if 10b-5 the alleged misrep some the oral confirmed oral and conflict relied were the investor alleges Brown rеsentations. Bruschi that written contemporaneous way some with misrepresentations the eco oral made investor. to the available representations of the Elmco invest and tax risks nomic investor’s whether an Determinations misrepresenta These ment were minimal. requires consider justified the reliance was in the dis conflicted statements tions with (1) factors, including: all ation of relevant and that the economic closure documents expertise of the and sophisticаtion the The disclosure tax risks were substantial. matters; security and plaintiff financial however, documents, were consistent long standing business (2) the existence misrepresentations alleged oral Brown’s plain relationships between personal or relation (1) no material there were defendant; (3) plaintiff's tiff and (2) and and Elmco ships between himself information; (4) the ex to access relevant receiving not be that he had not and relationship by fiduciary owed istence of Elmco. The “Of аny compensation (5) conceal plaintiff, the defendant Disclosure” Written Representative’s feree defendant; (6) wheth by the ment of fraud following: states transac initiated the stock plaintiff er the document, [(Brown)] I transaction; By copy of this expedite the sought to tion or pro- the above named hereby to disclose (8) specificity of generality or and any ma- [(Bruschi)] spective subscriber Kennedy v. Jose misrepresentations. See myself and relationships between (1st Cir. teriаl Co., 814 F.2d phthal & [(Elmco)] or its affiliates Inc., the Issuer Coal-X, 1987); v. Zobrist exist, mutually under- now Cir.1983) ‍​​​​‌‌​​​​​‌​‌‌‌‌‌‌​‌​‌‌‌​‌‌​​​‌‌​‌‌​‌​​​‌‌​‌‌‌​‍(citing which (10th G.A. 1511, 1516 contemplated or which stood to be F.2d Partridge, v. Thompson & Co. during previous any time existed at Cir.1981); Blyth East (5th Nye v. compensation received any years two Co., 588 F.2d Dillon man & of such as a result received or to be Cir.1978); (8th v. & Vaisman Straub (blank) relationship: (3d Cir.1976); Hughes ]5 [ F.2d doc- edges not read the disclosure that she did argue, do not mean and we not 5. Bruschi does uments; relied consequently, could not have she states imply, the amended to misrepresentations contained misrep- on written based on written Rule 10b-5 claim Sklar, Shores those documents. acknowl- Brown. Bruschi resentations made Thus, if even Bruschi had read the disclo- Cir.1988). 1329 & n. 2 To establish documents, causation, sure she would have transaction plaintiff received need conflicting signals reliability only as to the show that the defendant’s misrepre- alleged misrepresentations oral plaintiff rather sentations caused the to make the than the obvious indication оf investment. unreliability Id. at 1329 n. 2. To establish argued causation, however, loss Brown. “[t]he prove that, must not had he known the The fact that some information truth, acted, he would not have but disclosure documents would have indicated addition that the untruth was some rea- alleged misrep- some of oral Brown’s direct, sonably proximate, way respon- resentations were is a factor unreliable sible for his loss.” Huddleston v. Herman consider, dispos- but this alone is not factor MacLean, 640 F.2d at cited in itive; all of the relevant factors must be Rousseff, 843 F.2d at 1329 n. 2.6 Zobrist, balanced. 708 F.2d at 1516- 17. We also consider the following must Prosser describes the distinction unsophisticated factors: Bruschi was between transaction causation and loss cau inexperienced matters; in financial sation as follows: was her investment advisor and was more false statements are made in [I]f connec- knowledgeable as to economic and tax tion with corporate stock, sale investment; risks of the as Bruschi’s offer- losses subsequent due tо a decline of the representative ee undertook a fidu- market, insolvency or corporation, of the ciary obligation to act Bruschi’s best brought by about business or conditions interests, 230.146(a)(l)(iv) see 17 C.F.R. § other factors way in no related to the (1982); note 3 Bruschi did not read the representations, will not afford basis disclosure documents because Brown ad- for recovery. It is where the fact so; vised her not to do Brown knew the misstated was aof nature calculated to false; misrеpresentations were and Brown bring about such a result that damages initiated the Thomp- transaction. See G.A. for it can be recovered. 945, Partridge,

son & Co. Inc. v. 636 F.2d Marbury Management, Kohn, ‍​​​​‌‌​​​​​‌​‌‌‌‌‌‌​‌​‌‌‌​‌‌​​​‌‌​‌‌​‌​​​‌‌​‌‌‌​‍Inc. v. 629 (5th Cir.1981); Zobrist, 955 708 F.2d at 705, (2d Cir.) F.2d (Meskill, J., 718 dissent considered, 1516. When all factors are it ing) (quoting Prosser, p Law Torts 110 of cannot be held as a matter of law that (4th ed.) (footnotes at 732 omitted)), cert. alleged Bruschi’s reliance on the oral mis- denied, 449 U.S. 101 S.Ct. representations justified. was not (1980). Thus, L.Ed.2d 469 even though the defendant’s misconduct plain induces the B. Cаusation investment, tiff to make the if particu the Brown next contends that complained there lar loss of is caused super dispute are no material facts in vening general which market forces or other allegation would the that his ac factors unrelated to the defendant’s mis proximate tions were the cause of Brus operate conduct that to reduce the of value satisfy chi’s loss. To the causation plaintiff’s securities, element the plaintiff the pre action, aof Rule 10b-5 plain cause cluded from recovery under Rule 10b-5. prove causation, tiff must both actual hand, or On the other plaintiff may recov causation,” proximate “transaction er if misrepresentation the defendant’s causation, or “loss causation.” See Rous upon “touches the reasons for the invest v. E.F. Hutton ment’s decline in Huddleston, value.” seff (in (5th Cir.1981) banc), denied, parties cert. actually govern the See, the courts’ decisions. (1983). U.S. 103 S.Ct. L.Ed.2d 949 Huddleston, e.g., (“Absent 640 F.2d at 549 causation, requiremеnt of [loss] Rule 10b-5 proximate 6. While courts often define cause in plan would become an insurance for the cost of terms of the how "direct" connection is every security purchased upon in reliance a between the defendant’s misconduct and the omission.’’) (citations material misstatement loss, plaintiffs foreseeability or in of the terms omitted). loss, plaintiffs appears policy of the it con- siderations external to the transaction between however, follоw, proof that the Bruschi has requirement This is satisfied at 549. F.2d does'not'support recovery representations offefed defendant makes when a damages. previously form of We inherently related to the losses /concluded that Bruschi has created a subsequently suffers. This oc- factu purchaser whether, curs, misre- al issue as to because Brown’s example, when a defendant misrepresentations, paid Bruschi more for intrinsic worth at presents a stock’s recover, they than were actual To the Elmco securities misrepresentation. time of ly purchase. worth at the time of Proof of not show that the defen- plaintiff need would and exclusive cause overvaluation establish act was the sole dant’s losses, suffered; out-of-pocket need Bruschi has suffered injury he has “he i.e., ‘substantial,’ damages in a Rule 10b-5 case. a the usual only show that it was v. Barnett Bank Fort Lauder contributing cause.” v. Woods significant Wilson (11th Cir.1985). dale, Corp., 648 Telecommunications Comtech (citation omitted). (2d Cir.1981) Out-of-pocket losses are measured difference between the fair value what encompasses the situation which This plaintiff and the fair value of plaintiff to enter into a received induces a defendant plaintiff have received had by misrepresenting it as what the risky transaction result- suffers a loss there been no fraudulent conduct. See safe and Af States, of the invest- ing risky from the nature Ute v. United Citizens filiated 128, 155, 1456, 1473, 31 L.Ed. ment. U.S. (1972), Woods, 765 F.2d at 2d 741 cited in Bruschi has created In this case misrepre Brown’s fact issue as to whether for the related to the reason sentations re also contends Bruschi in value of her investment. decline remedy in the scission is an available misrepre Brown’s has offered evidence of recog present Other circuits have case. to the risks of the invest sentations as availability as a rem nized the of rescission summary opposing In her affidavit ment. appropriate cases under edy in Rule 10b-5 a di Bruschi asserts that judgment, Huddleston, See, “[a]s е.g., 640 circumstances. practices of of the acts rect result Barrack, 554; 524 F.2d Blackie v. F.2d at Elmco, Plaintiff has suffered Cir.1975), denied, 891, (9th 429 cert. money, including substantial losses (1976); 57, L.Ed.2d 75 97 S.Ct. U.S. substantially her initial invest all Smith, 438 F.2d Barney & Chasins added). allegation This (emphasis ment.” (2d Cir.1970). Supreme The interrogato to supported by her answers recognized “there is authori has that Court thus created a fact issue ries. Bruschi has 10(b)plaintiff, least allowing the at ty for § her losses Brown caused as to whether circumstances, choose betweеn to in some worth of the misrepresenting the intrinsic (when bargain events since ‘undoing the the time of the mis securities as of Elmco not made rescission the transaction have judgment thus Summary representations. to the holding the defendant impossible) or inappropriate. was pay him to bargain by requiring [out-of- ” damages,’ Loftsgaar pocket] Randall Damages Compensable C. 3143, 3153, 662, 106 den, S.Ct. 478 U.S. omitted) (citation (1986) no 92 L.Ed.2d that there are

Brown contends (brackets Circuit original). Eleventh re dispute issues of fact material strongly that suggested also has damages case law because gard compensable to remedy in Rule an rescission is available is not com- anticipated tax benefits loss of under certain circumstances. 10b-5 cases action. At oral pensable in a Rule 10b-5 Webber, Paine, Jackson Silverberg v. loss that the See argument, Bruschi conceded n. 15 Curtis, Inc., compensa- is not anticipated tax benefits Cir.1983). Silverberg, we took (11th In therefore action. We in a Rule 10b-5 ble Blaсk’s admonition Justice special note of It does not this issue.7 do not address of law. validity proposition as a rule express opinion no as 7. We Hood, 678, 684, pendant Bell v. U.S. also asserts state against claims 773, 777, (1946) 90 L.Ed. 939 that: defendant, we must vacate portion federally protected rights where court’s summary judgment order invaded, relating the rule been it has been to those claims. The court’s order beginning that courts will be alert to findings makes no of fact or conclusions of adjust grant their remediеs so as to law; nec- presume we therefore must that the essary relief. And it is also well settled court dismissed the state claims without legal rights that where have been invad- prejudice declining after pendant to retain ed, provides and a federal statute for a jurisdiction over the claims once the sole general right invasion, to sue for such present federal claim in the case had been may federal courts use available disposed the court. See Pharo v. remedies good to make the harm done. Smith, (5th Cir.) aff'd part, remanded part on Silverberg, 710 F.2d at 687 other (quot- n. 15 grounds, ing Borak, Cir.1980). 625 F.2d 1226 J.I. Case v. 377 U.S. We 433- express 1555, 1560-61, ‍​​​​‌‌​​​​​‌​‌‌‌‌‌‌​‌​‌‌‌​‌‌​​​‌‌​‌‌​‌​​​‌‌​‌‌‌​‍opinion no whether summary judg S.Ct. 12 L.Ed.2d 423 (1964) ment Bell)). as to the (quoting We see state claims no reason would have why proper been causes of action under or whether juris Rule 10b-5 retention of therefore, diction any exception; should be over the proper we con- claims will upon be clude that rescission is an return of this remedy available case to the district court.8 apрropriate under Rule 10b-5 in cases. part REVERSED in and VACATED in We also conclude that rescission is an part. appropriate remedy under the circumstanc- present es of the case. we Silverberg, COX, Circuit Judge, specially held that proper remedy rescission was a concurring: though case even the defendant was I agree summary judgment was not not the seller of the securities: appropriate in this case. I separately write Though recognize we the harshness of express my disagreement with the ma- given this result the defendants jority’s conclusion “that rescission is an were not the actual sellers of the stock appropriate remedy under the circumstanc- and therefore by paying must “rescind” present es of the case.” an they received, amount in fact never played by the substantial role the defen- The traditional damages measure of in a provides adequate justification dants suit under Rule alleging 10b-5 fraud on the the award. part of the seller of securities is out-of- loss, pocket see Pelletier v. Stuart-James Id. at 687. Silverberg We decided on state Co., Inc., 1550, (11th 863 F.2d 1558 Cir. grounds, law but the allowing rationale for 1989) (citation omitted); Blackie v. Bar rescission in applies that case to the Rule rack, 891, (9th 524 Cir.1975), F.2d and 10b-5 presently case with which we our most recent decisions have left faced. unre question solved the of whether and under III. STATE LAW CLAIMS what circumstances rescission is an avail remedy. able Pelletier, We have concluded that the district 863 F.2d at 19; court in granting summary judgment erred 1558 n. v. E.F. Hutton Rousseff Inc., plaintiffs 1326, defendant as to (11th the Rule 843 F.2d 1329 n. 1 Cir. 1988). 10b-5 claim judgment and we reverse the Accord Loftsgaarden, Randall v. of the respect court 3143, 3152, to that claim. 478 U.S. 92 L.Ed. plaintiffs Because the (1986) (“The amended 2d 525 issue of whether and argues 8. Bruschi in her brief that when this case forum in which the federal and state is weigh returned to the district court it should together. argu- claims could be heard These following deciding factors in whether to ments should be made to the district court rath- jurisdiction retain ovеr the state claims: wheth- Accordingly, express er than to this court. we er the state law claims will be time-barred if opinion no as to their merit. dismissed and whether the district court is the Frank, (5th Cir.1973), a 477 F.2d it rescission or circumstances under what significant it is because indicates that the damages is avail rescissionary measure of 10(b) district court has never had an opportunity an unsettled is under section able remedy consider whether the is event, appropri- on to one.”)- jurisprudence In the circumstаnces propo ate under of this case. unanimously supports the issue Indeed, judge, insufficiency evidentiary of the for the district is sition “[i]t effectively precluded would have nature record becoming aware after case, example, measure such a determination. For appropriate to determine record does not evidence whether Arring first instance.” damages in the securities, Pierce, possession Merrill, Fenner is still of the Lynch, & v. ton (9th Cir.1981) promptly whether she demanded rescission Smith, 620-21 omitted). learning alleged misrepresenta- after (citation determining whether omissions, and or whether the decline the district court tions appropriate, is rescission the relation the value of the Elmco investment was the nature of must consider forces, supervening related to market and plaintiff-buyer and ship between the defendant-seller, Her not to act or omission of Brown. Such Huddleston v. see (5th MacLean, a record cannot this court’s conclu- man & (“Thе rescissory or a measure 1981) of the re- sion that rescission A use Cir. Unit appropriate damages limited to of would be an reme- usually is measure scissional dy in this case. privity between involving either cases specific or some and defendant plaintiff unnecessary I it is conclude that reach to their fiduciary duty owed brokers the issue of whether rescission or a rescis- customers.”); nexus specific causal be damages sory appropriate measure of and the defеn plaintiffs loss tween the only question properly case. The be- conduct, see In re Fortune wrongful dant’s genuine issue of mate- fore us is whether F.Supp. Litigation, 680 Systems Securities summary precludes rial fact exists which (N.D.Cal.1987); whether judgment. presented Bruschi never purchased the securi plaintiff would have court, claim for rescission the district any misrepresenta ties the absence ruling the district court’s did not ad- and Advest, omissions, see tions Additionally, Kronfeld the issue. the eviden- dress (S.D.N.Y. Inc., F.Supp. permit tiary rеcord is too skeletal to an 1987), opinion; in that the cases cited as to whether re- informed conclusion promptly demanded whether the appropriate remedy in this scission is an rescission, Phelps, see Jordan particular case. Duff Cir.1987); Inc., plaintiff is to return whether the able Jacobs, generally

securities. Id. See Rule 10b-5 Damages “The Measure of Cases,” 1093, 1109-1120 65 Geo. L.J. Note, Damages in

(1977); Measure of “The Actively Trad Involving ‍​​​​‌‌​​​​​‌​‌‌‌‌‌‌​‌​‌‌‌​‌‌​​​‌‌​‌‌​‌​​​‌‌​‌‌‌​‍10b-5 Rule Cases America, STATES UNITED Securities,” 26 ed Stan.L.Rev. Plaintiff-Appellee, (1974). these A consideration of all of necessary to a prerequisite is a factors HOLLAND, Daniel whether rescission determination Defendant-Appellant. rescissory damages appropri measure of case. ate No. 87-5716. pray in her Bruschi did not rescission Appeals, Court of United States complaint, nor did she assert it as

amended Eleventh Circuit. remedy in her memorandum potential July summary motions for opposition to the Although this failure does not judgment. considering re-

preclude the court remedy, see possible scission as a Wolf

Case Details

Case Name: Fed. Sec. L. Rep. P 94,517 Margaret R. Bruschi v. Ken Brown, Elmco, Inc.

Court Name: Court of Appeals for the Eleventh Circuit

Date Published: Jul 12, 1989

Citation: 876 F.2d 1526

Docket Number: 88-5574

Court Abbreviation: 11th Cir.