Lead Opinion
This case is before the court on certification from the United States District Court for the District of Utah pursuant to rule 41 of the Utah Rules of Appellate Procedure. The district court’s certification order presents the following two issues of state law for our determination: (i) whether reliance upon an alleged untrue statement or misleading omission is an essential element of a private cause of action under sections 61-1-1(2) and -22 of the Utah Code, the antifraud provisions of the Utah Uniform Securities Act (“Utah Act”); and (ii) if reliance is an element, whether proving “fraud-on-the-market” satisfies that requirement.
The relevant facts, which we have extracted from the district court’s certification order, are as follows: Plaintiffs filed a class action complaint in federal district court against various defendants. Plaintiffs alleged that they had purchased common shares and convertible subordinated debentures in the now bankrupt Bonneville Pacific Corporation (“Bonneville”), that defendants intended to promote the myth that Bonneville was a company of sound financial condition by engaging in a series of sham transactions and issuing misleading press releases, financial records, and public-offering documents, and that defendants’ misrepresentations violated sections 61-1-1(2) and -22 of the Utah Aсt.
Certain defendants moved to dismiss plaintiffs’ claims under the Utah Act, arguing that plaintiffs had not pleaded that they actually relied on defendants’ alleged misrepresentations. Although plaintiffs had not pleaded actual reliance, they had pleaded that defendants’ actions constituted “fraud-on-the-market.” The district court certified the following questions of first impression to this court: (i) whether reliance is an element of a private cause of action under sections 61-1-1(2) and -22, and (ii) if reliance is аn element, whether proof of “fraud-on-the-market” can satisfy that requirement.
The dispositive issue in this ease, whether reliance is an element of a private cause of action under sections 61-1-1(2) and -22, presents a question of statutory construction. This court’s primary objective in construing enactments is to give effect to the legislature’s intent. West Jordan v. Morrison,
Section 61-1-1(2) makes it
unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly to:
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(2) make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading[.]
Utah Code Ann. § 61-1-1(2). Section 61-1-22(1) imposes civil liability upon those who violate section 61-1-1(2), while section 61-1-22(3) provides a defense to liability under certain circumstances. In relevant part, section 61-1-22 provides:
(l)(a) A person who ... offers, sells, or purchases a security in violation of Subsection 61-1-1(2) is liable to the person selling the security to or buying the security from him, who may sue either at law or in equity to recover the consideration paid for the security....
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(3) A person who offers or sells a security in violation of Subsection 61-1-1(2) is not liable under Subsection (l)(a) if the purchaser knew of the untruth or omission, or the seller did not know and in the exercise of reasonable care could not have known of the untrue statement or misleading omission.
Utah Code Ann. § 61-1-22(1), (3).
The terms of these provisions contain no requirement that a plаintiff prove reliance to recover. As applied to the facts alleged in this case, the plain language requires that (i) defendants, in connection with the offer or sale of a security, either made an untrue statement of a material fact or omitted to state a material fact, Utah Code Ann. §§ 61-1-1(2), -22(1); (ii) plaintiffs did not know of the untruth or omission, Utah Code Ann. § 61-1-22(3); and (iii) defendants knew or in the exercise of reasonable care could have learned of the untruth or omission. Id. The second element is the only one which relates to a plaintiffs state of mind, and it requires only that the plaintiff did not know of the untruth or omission; the statute says nothing about reliance. The fact that the legislature plainly articulated a plaintiffs required state of mind but was silent as to whether the plaintiff must have relied on the untruth or omission to recover clearly indicates that the legislature did not intend to adopt a reliance requirement.
Defendants, however, ask us to look beyond the plain language of sections 61 — 1—1(2) and -22 and to read a reliance requirement into the Utah Act. They argue (i) that in S & F Supply Co. v. Hunter,
Defendants first argue that the legislature should be presumed to have adopted S & F Supply’s interpretation of section 61-1-22 because the legislature amended that section in 1990 but did not alter its requirement that a purchaser did not know of the untruth or omission which, defendants contend, was the basis for S & F Supply’s imposition of a reliance requirement. See American Coal Co. v. Sandstrom,
[T]he statute cannot fairly be understood as meaning that a buyer can naively or blindly purchase stocks without concern for the truth or reasonableness of representations made, then if it later develops that it would serve his interest, assert a claim of falsity of a representation about which he previously had no concern, and upon which he placed no relianсe, as a basis for avoiding his contract. This is fairly deducible from the ... clause in the statute [exempting sellers from liability if the purchaser knew of the untruth or omission].
Id. at 221.
Defendants characterize this passage as reading a reliance requirement into the earlier version of section 61-1-22. We disagree. While we acknowledge that the court’s reference to purchaser reliance is somewhat confusing, we must read that reference in the larger context of its surrounding paragraphs. The pаragraph from which this passage was taken provides the basis for the court’s later conclusion that one who unreasonably purchases securities without regard for the truth cannot recover under section 61-1-22. In reaching this conclusion, the court mentioned reliance, apparently not to affirmatively establish a reliance requirement, but simply to illustrate that one who purchases stock without concern for the truth cannot logically be said to have relied upon an untruth or omission. Nothing in the remainder of the opinion suggests that the court intended to affirmatively adopt a reliance requirement.
Our interpretation of S & F Supply is supported by the court’s recognition in that case that section 61-1-22’s materiality requirement “seems to import some objective standard of reliance.” Id. (emphasis added). The court explained that only misrepresentations which “a buyer or seller of ordinary intelligence and prudence would think to be of some importance in determining whether to buy or sell” may provide the basis for recovery under section 61-1-22. Id. In contrast, however, the court was silent as to whether a purchaser must have subjectively relied on such a misrepresentation to recover. We will not infer an intent to establish a reliance requirement from the court’s silence on that issue.
In the alternative, defendants argue that section 61-1-22 should be interpreted to include the judicially imposed reliance element of the federal implied private cause of action for violation of section 10(b) of the 1934 Act
Section 61-1-22 is fundamentally different from the federal private cause of action for violation of section 10(b) and rule 10b-5. The federal cause of action is implied. See Basic Inc. v. Levinson, 485 U.S. 224, 230-31,
Even if we were to expand upon the express elements contained in sections 61-1-1(2) and -22, we see no reason to establish a reliance requirement. In Basic Inc., the United States Supreme Court noted, “Reliance provides the requisite causal connection between a defendant’s misrepresentation and a plaintifPs injury.” Id. Hоwever, the Court also recognized, “There is ... more than one way to demonstrate the causal connection.” Id. Section 61-1-22 embraces one such alternative by providing a remedy only to plaintiffs who are in privity with the defendant. See Utah Code Ann. § 61-l-22(l)(a) (“A person who ... offers, sells, or purchases a security in violation of Subsection 61-1-1(2) is liable to the person selling the security to or buying the security from him_”). Privity, which is not an element of the feder
Finally, we note that our reading of these sections comports with the legislature’s suggestion that the Utah Act “may be so construed as to effectuate its general purpose to make uniform the law of those states which enact it and to coordinate the interpretation and administration of this chapter with the related federal regulation.” Utah Code Ann. § 61-1-27. First, our decision is in accord with a significant majority of other courts’ interpretations of statutes which, like section 61-1-22, were modeled after section 410(a)(2) of the Uniform Securities Act or section 605(a) of the Uniform Revised Securities Act. See, e.g., Arnold v. Dirrim,
For the foregoing reasons, we hold that reliance is not an element of a private cause of action under sections 61-1-1(2) and -22.
Notes
. “Succinctly put:
The fraud on the market theory 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. v. Levinson,
. The version of section 61-1-22 quoted in the text reflects a clarifying amendment made in 1990. See Utah Uniform Securities Act Amendments, ch. 133, § 15, 1990 Utah Laws 456, 470. Prior to 1990, section 61-1-22 read in relevant part as follows:
(1) Any person who ... offers, sells, or purchases a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, the buyer not knowing of the untruth or omission, and who does not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission, is hable to the person selling the security to or buying the security from him, who may sue either at law or in equity to recover the consideration paid for the security....
Utah Code Ann. § 61-1-22 (1989). The parties in the instant case agree that the 1990 amendment was intended to clarify, not to alter, their substantive rights under the earlier version of the statute. Because amendments which merely clarify existing law are applied retroactively, State, Department of Social Servs. v. Higgs,
. The dissent misunderstands S & F Supply's reference to an “objective standard of reliance” in concluding that "[i]t would be illogical for the court to require a plaintiff to prove she reasonably relied on the defendant's misrepresentations without also requiring that she actually relied on
. Section 10(b) provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate сommerce or of the mails, or of any facility of any national securities exchange—
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(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the рrotection of investors.
15 U.S.C. § 78j.
. Rule 10b-5 provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
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(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, ... in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
. The dissent rejects this argument, noting that subsection 61-l-22(4)(a) imposes liability upon certain individuals with whom the plaintiff was not in privity. That subsection, however, simply incorporates well-established principles of agency law. See, e.g., Mecham v. Benson,
. Section 12(2) provides in pertinent part:
Any person who—
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(2) offers or sells a security ... by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact neсessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him, who may sue either at law or in equity....
15 U.S.C. § 111 (2).
Dissenting Opinion
dissenting:
I respectfully dissent. The majority opinion mistakenly concludes that S & F Supply Co. v. Hunter,
In S & F Supply, we rejected the argument, now proffered by the majority, that because the plain language of the Utah Act does not contain a reliance requirement, this court should not impose one:
[I]t has also been said that this statute does not require the buyer to prove the element of his own reliance on the false representation. It is true that the statute does not expressly so state. But all of the law cannot be written in one sentence or one statute. This, and any other statute, must be considered in its relationship to the total fabric of the law and be so interpreted and applied as to be consistent with common sense, and with elemental principles of justice.
Id. at 221 (footnote omitted) (emphasis added). The court then went on to hold that the Utah Act does require reliance:
It follows that the statute cannot fairly be understood as meaning that a buyer can naively or blindly purchase stocks without concern for the truth or reasonableness of representations made, then if it later develops that it would serve his interest, assert a claim of falsity of a representation about which he previously had no concern, and upon which he placed no reliance, as a basis for avoiding his contract.
Id. (emphasis added). The court continued, “This is fairly deducible from the parenthetical clause in the statute quoted above (the buyer not knowing of the untruth or omission).” Id. In 1990, the Utah legislature amended the statute interpreted by the S & F Supply court and, in doing so, rеtained the requirement that the buyer not know of the untruth or omission to recover — language cited by the S &F Supply court to support the imposition of a reliance requirement. Therefore, the legislature endorsed the S & F Supply court’s interpretation of this language. See American Coal Co. v. Sandstrom,
In addition, as acknowledged by the majority, the S & F Supply court held that the Utah Act contains an “objective standard of reliance” in connection with the materiality requirement of former section 61-1-22. Id. The materiality element of former section 61-1-22 is now found in section 61-1-1(2). Pursuant to section 61-1-1(2), it is unlawful for any person to “make any untrue statement of a material fact or to omit to state a material fact nеcessary in order to make the statements made ... not misleading_” (Emphasis added.) We stated in S & F Supply:
[This language] seems to import some objective standard of reliance, because the determination of whether a fact is “material” can only be made in the frame of reference of the definition of what a material fact is: that is, it must be something which a buyer or seller of ordinary intelligence and prudence would think to be of some importance in determining whether to buy or sell.
S & F Supply,
Finally, although the majority opinion implicitly acknowledges the need for a causal connection between the plaintiffs injury and the defendant’s misrepresentations, it mistakenly concludes that the privity requirement under section 61-l-22(l)(a) satisfies the need for a causal connection. However, this argument ignores the fact that a plaintiff may also bring a cause of action against a defendant with whom there was no privity. Section 61-l-22(4)(a) provides:
Every person who directly or indirectly controls a seller or buyer liable under Subsection (1), every partner, officer, or director of such a seller or buyer, every person occupying a similar status or performing similar functions, every employee of such a seller or buyer who materially aids in the sale or purchase, and every broker-dealer or agent who materially aids in the sale are also liable jointly and severally with and to the same extent as the seller or purchaser, unless the nonseller or nonpurchaser who is so liable sustains thе burden of proof that he did not know, and in exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.
(Emphasis added.) Thus, the privity requirement of section 61-l-22(l)(a) alone does not satisfy the need for a causal connection between the plaintiffs injury and the defendant’s misrepresentations.
Not only is the need for a causal connection satisfied by the reliance requirement, but additionally, the Utah Act explicitly requires that the alleged misrepresentations be made “in connection with” the offer, sale or purchase of a security. Utah Code Ann. § 61-1-1. As acknowledged by the Utah Court of Appeals, federal courts have broadly interpreted the “in connection with” requirement, “determining that it encompasses any sale of a security where fraud ‘touches’ the transaction.” State v. Harry,
On the basis of the plain language of sections 61-1-1 and 61-1-22 and Utah case law interpreting these statutes, one can conclude only that a plaintiff who brings a cause of action under the Utah Act must establish (1) that the alleged misrepresentations were made in connection with the offer, sale, or purchase of securities, and (2) that she actually and reasonably relied on such misrepresentations.