Kline v. First Western Government Securities, Inc.

KLINE; Eugene Knopf; Ernest P. Wojdak R.

Steven SE- FIRST WESTERN GOVERNMENT INC.; Sidney Samuels; CURITIES, P. Co.; Arvey, Hodes, Samuels, Kramer and Burman, Costello and Eugene Knops, F. P. Kline & Ernest 92-1498, Appellants, Burman, Arvey, Hodes, Costello & Appellant in 92-1499. 92-1498, 92-1499. Nos. Appeals, Court of United States Third Circuit. Argued 1993. Jan. 2,May 1994. Decided Rehearing Petition for June Sur (argued), Joseph F. D.

Ronald Kidd Man- Duane, eano, Cavenagh, Teresa N. Morris & Heckseher, PA, Philadelphia, appellants. for Securities, Inc., First Western Government Samuels, Francisco, CA, Sidney P. San appellees: First Western Government Secu- rities, Inc., Samuels, Samuels, Sidney P. Kramer & Co. (argued),

John E. McKeever Lori S. Coz- en, Schnader, Harrison, Lewis, Segal & Phil- Hodes, PA, appellee: Arvey, adelphia, Costello & Burman. GREENBERG,

Before: ROTH and LEWIS, Judges. Circuit OPINION OF THE COURT ROTH, Judge: Circuit appeal alleging, arises from a suit § among things, other violations of Exchange Act of the Securities 78j(b), § U.S.C. connection through in forward de- investment contracts fendant First Western Government Securi- (“First Western”). Arvey, ties Defendant Hodes, (“Arvey”), a Costello & Burman Chi- firm, cago law issued three letters concerning consequences the tax of these P. investments. Plaintiffs Ernest Kline and Arvey’s opinion Eugene Knopf allege F. misrepre- contained both affirmative and material omissions sentations They fur- treatment of these transactions. upon contend that relied these ther deciding opinion letters in to invest with and that as a result incurred substantial financial losses. Arvey’s motion for sum- district court denied misrepresentation mary judgment on the claim. granted claim but it on the omissions misrepresentation We conclude both the omissions claims should be tried. We part reverse in will therefore affirm and. the ease to the part, and wе will remand consis- proceedings for further district court tent with

I. important emphasize

It is that, reviewing are outset because we summary judg- partial grant of a motion for rate, ment, light the facts in the terest on a fixed future date. we must view enters into a non-moving party. straddle transaction investor most favorable contracts, pair agreeing of forward both Co. v. Zenith Radio Elec. Indus. Matsushita buy 574, 587, 106 1348, 1356, and sell securities the future. The Corp., 475 S.Ct. U.S. “buy” contract and difference between the “[t]he 89 L.Ed.2d evidence “spread” posi- in a believed, the “sell” contract results to be and all of the non-movant is tion, resulting gain in to the or loss investor justifiable in inferences are to be drawn his depending on whether interest rates rise or Inc., Liberty Lobby, favor.” Anderson v. Accordingly, entering into a fall. before 2505, 2513-14, U.S. S.Ct. straddle an investor must decide how to L.Ed.2d spread by predicting in- “bias” the whether figure The central in this case is defendant will or fall. terest rates rise Samuels, Sidney who founded First Western agreements First its cus- Western’s with in Prior to that time Samuels was provided that a ar- tomers customer could general partner Company in Price & range obligations for the cancellation of his (“Price”). According plaintiffs, First prior under a forward contract to the settle- trading program substantially Western’s ment date. Western would then First similar to Price’s and indeed was modeled on “charge or credit the customer’s account with Significantly, represented it. both equal profit an amount First Western and Price First Western. assisted customer, respectively, or the would be enti- Price, рartner, Larry in Samuels and his in delivery tled to receive the event Price, formation of drafted Price’s limited pursuant effectuated to such contract as of agreement partnership offering and its 1977 (Arvey Opinion the date of cancellation.” memorandum, represented and it in connec- Letters, 9/20/78, 6/8/79, 138; JA at at JA investiga- tion IRS civil and criminal 562.) Typically investors would choose Arvey began assisting tions. Samuels set- losing cancel the side of their straddle. The ting up First Western while he was still a resulting tax treatment of the was the loss general partner in firm Price. The became subject Arvey opinion letters. general First Western’s counsel and assisted drafting by of forms to be used First letters concluded that, Western, including describing agreed if First the brochure Western and customer prior “to program. suggestion There is some cancel forward contract to its date, consequent Arvey helped design gain settlement or loss the record realized the customer should constitute straddle transactions used First Western. (Joint (“JA”) 154.) ordinary gain recognized by or loss to be Appendix at At First year customer which the contract is request, Arvey provided Western’s also Letter, 6/8/79, (Arvey Opinion canceled.” JA addressing with three the fed- 563.)1 at The three letters also contained eral income tax treatment of these transac- language advising First Western that Sep- tions. These letters were dated Internal Revenue Service and the courts 20,1978, 8,1979, tember June and November might contrary arrive at a conclusion. 12, 1980. show, following excerpts As the each of the engaged The transactions First provided opinions letters also that the pur- Western involved forward contracts to provided by based on facts as First Western instruments, money chase and sell market only: and were for the use of First Western specifically Mortgage Government National 20, 1978, September (“GNMA’s”) letter: Association securities and Fed- Mortgage Corporation par- following paragraphs eral Home Loan contain a sum- (“FMAC’s”). ticipation mary you certificates A “for- of such [First transactions as (JA purchase ward contract” is a contract to or Western] have described them to us. 135.) specified security, designated sell a at a in- at 20, 1978, 139-40, (JA 578.) September language.

1. The and the November 12, 1980, essentially letters contain the same taxes, or state secu- federal local state and consumma- subject to the [T]his state laws, federal or any other rities between the transactions tion herein. We referenced explicitly the facts law not under its customers and opinion as the advisabili- express is fur- no and also above described conditions de- repre- any transaction your undertaking ty conditioned expressly ther letter, into entered such in this transactions scribed sentation will be account take into and its customers must by First Western determination reasonable affect- with a circumstances purpose, facts individual 140.) (JA at gain. taxpayer. particular of economic expectation, personal your is intendеd letter This solely for the is intended be, and not intended only and is use and, accord- of First Western use internal persons oth- be, upon by relied not should be, should to and intended ingly, it is not 149.) (JA at First Western. er than other be, by any person upon relied not 1979, 8, letter: June Further, is this letter First Western. than set facts that us have advised You to referred otherwise quoted or to be not and accurate an constitute below forth documents, including financial state- any in infor- of all relevant presentation complete Western, filed nor is it to be of First ments transactions. such regard to mation with agen- any government to furnished or with 558.) (JA at express person without cy other or subject the consumma- to opinion is [TJhis firm. of this Such consent prior written First between transactions of the tion be given, and will not has not been consent to pursuant customers and its Western this let- whom person given, unless the to is and above described and conditions previously facts has furnished to be ter is your rep- conditioned expressly rely further will not writing, that he agreed, bewill transactions such that resentation ex- conclusions opinions and upon the of First by the customers consummated own inde- herein, his will make but pressed expectation a reasonable with Western federal income of the evaluation pendent 563.) (JA at gain. economic be any to transactions consequences tax (JA personal at your intended for First letter is into Western. with entered be, and to 591.) not intended only and is use oth- be, by persons upon relied not should emerge frоm these couple of themes A 574.) (JA at First Western. than er its view First, that Arvey stressed excerpts. letter: November hinged on wheth- validity transactions’ of the set the facts us that advised You have a reasonable into with entered were er and accurate an below constitute forth Second, profit. generating expectation infor- of all relevant complete presentation Arvey’s conclusions asserted the letters be- transactions regard with mation circumstances by facts and changed might be customers, its and First Western tween accounts. customers’ to unique individual to necessary material fact no and response to points these made also not false herein information make cus- First Western potential from inquiries 576.) (JA at omitted. misleading been has (JA 365- at opinion letters. its about tomers are herein set forth conclusions [T]he 77.) de- conditions facts upon based repre- statement you Despite as the letters’ letter scribed Western, opin- First no use of express and we for the exclusive us them to sented May early as any least as transac- at was aware treatment as to the tax ion reached differ from facts its to the extent tion 365.) (JA The record at investors. potential herein. contained those instances ten some us reflects any before concerning no express We con- investors Western First potential than consequence other income federal (JA at Arvey regarding letter, and tacted in this forth set specifically as excerpt from 365-78.) following As the respect expressed opinion is no 21, 1980, October letter to Arvey from an represented prices of First West- attorney representing investor ern’s contracts independently, moved clear, Arvey makes was put on notice that its subject thus risk, to market when fact efforts to dissuade always reliance were not First computer Western’s trading program successful: artificially prices set the to eliminate risk Surely you realize They of loss.2 allege misrepresentations using Government your Securities whether customers would required in an effort to obtain investors and is make margin deposits additional and as to furnishing copies of your letter with bro- how First Western calculated fees it indicating chures operation mechanical charged for cancellation of contracts. Final- program. result, As a ly, notwithstand- they allege letters mis- your made in statements October represented the fact that First Western’s 1980, letter, please my be advised that designed transactions were to obtain tax loss- client is awaiting my receipt of your opin- es and as structured could support ion letter making before a decision as to expectation reasonable gain. economic his investment with First Western Govern- As for omissions, material plaintiffs allege (JA 376.) ment Securities. made no prior reference IRS Plaintiffs Kline Knopf invested for- investigations of Price & Company Sidney ward contracts with First Western in Decem- Samuels’ connection to that firm.3 Further- 1980, ber after reading relying upon and mоre, a number investigations of into First Arvey’s June 1979 and opin- November 1980 trading Western’s program had commenced ion They letters. incurred losses on their by the time issued final investments, deducted these losses letter. The IRS had audited of number income filings, and had their deductions investors, First Western SEC start- by disallowed the IRS. ed an investigation requested numerous Kline Knopf allege that Arvey knew or Western, documents from First and the recklessly disregarded the truth about First Department Minnesota of Commerce in- was trading Western’s program. result, As a vestigating First only Western. The refer- they contend, Arvey in its letters ence ‍​‌‌​‌‌​‌‌​‌​​​​​​​​​‌‌​​‌‌‌‌​‌​​​​​​‌​​​​​‌​‌​​‌‍to these activities in 12, the November made material misrepresentations 1980, and omit- opinion letter “Further, was as follows: ted material facts concerning you the actual have informed us that customers of First structure of First Western transactions. Western being are by audited the Service Plaintiffs allege a number of misrepresenta- and that the questioned Service has the de- They tions. allege that letters ductibility of losses by realized customers on stated that under the First trading Western of theory basis by set forth program investors required would be (JA Service 588.) Rev.Rul. 77-185.” at accept make or delivery of the underlying The letter made no mention of the SEC or securities when fact no such requirement State of Minnesota investigations, or the IRS They allege existed. that the investigation into Price.

2. Plaintiffs prices contend by that the set ignoring First prices market for GNMAs and computer Western’s program FHLMCs, virtually bore no in favor of pricing artifiсial calcula- relation to actual market prices. They point tions prices to a resulted in which were sub- study stantially of the trading program prices. different un- from market (JA 527.) dertaken at Philip E. Professor Jones of Harvard Following Business School. a thorough analysis above, As allege noted that First West- operations, of First Western's including a review trading program ern's was modeled after Price's. assumptions of computer used pricing Thus, plaintiffs allege should have program, Professor Jones concluded as follows: that, disclosed the fact before issued its portfolios First Western's were a sham. There letter, 1979 the IRS had undertaken a independent was no prices movement of investigation criminal operations. into Price's different contracts. Most risk on one investigations The IRS ultimately finding led to a portfolio side of a exactly cancelled that Price's trades were sham transactions. risk on the portfolios.... other side of the Commissioner, Price v. 88 T.C. 1987 WL accomplished cancellation of (1987). risk was 49303 denied, 97 S.Ct. 429 U.S. summary judgment on Arvey moved L.Ed.2d claim, misrepresentation the omissions claims not before claim, and tort RICO grant summary judgment may A court denied district court The appeal. us on only the submissions the record when except all counts judgment on genuine as to there is no issue “show that ma- liability omissions of asserting those moving party any material fact and court be- district Because the terial fact. judgment matter of law.” as a is entitled “ ‘control- presents two this case lieved 56(c). inquiry performed “The Fed.R.Civ.P. is a which there law as to ling issues of determining inquiry is the threshold opin- ground for difference substantial of a trial —wheth whether there is need ” Secs., 794 ion,’ Gov’t First Western Kline v. words, er, any genuine there are in other (E.D.Pa.1992) (quoting 28 F.Supp. can be resolved properly factual issues 1292(b)), for immediate § certified U.S.C. they may only by of fact because a finder first, following issues: wheth- two appeal in favor of either reasonably be resolved alleged may liable for attorney be held aner Liberty Lobby, 477 U.S. Anderson v. party.” opinion let- in an misrepresentations of fact differently, 250, 106 at 2511. Stated at S.Ct. alleged factual statements those when ter summary judgment must be “a motion for to another specifically attributed been opposing the motion party granted unless attorneys and, second, individual; whether which, considered when produce can evidence fact in an liable for omissions be held proof party’s burden light of that duty to disclose.4 absent opinion letter trial, jury finding the basis for a could be Arvey did not court also ruled district Sons, Mamiye & party’s favor.” J.E. proving its burden of meet (3d Bank, F.2d Fidelity Inc. v. 552-54, unreasonable, but id. at Cir.1987) (Becker, J., concurring). appeal. certify that issue did summary judgment “must do opposing party that there is some simply than show more II. to material facts.” metaphysical doubt as Zenith Radio Elec. Co. v. Matsushita Indus. juris- subject matter court had The district 586, 1348, 574, 106 S.Ct. Corp., U.S. 475 28 pursuant to U.S.C. over this case diction (1986). 1355-56, L.Ed.2d 538 89 jurisdiction over this court has § 1331. This pursuant to 28 interlocutory appeal certified 1292(b). granted bоth § court This III. U.S.C. 8, 1992. appeal to on June petitions

parties’ Ar- of its resolution district court in The judgment relied on vey’s motion for grant court’s review of a district Our liability imposed un- the distinction between plenary. Erie Tele summary judgment is Erie, misrepresentations 10b-5 for communications, 853 der Rule City Inc. v. this dis- Cir.1988). While (3d imposed for omissions. 1084, “On review 1093 F.2d circumstances,5 significant in some tinction is required apply to court is appellate resolving the helpful it to not find uti we do court should have the district test same case. presented in this We issues particular v. Mead Johnson initially.” Goodman lized attorneys may liable (3d be Cir.1976), instead that Co., 566, conclude cert. F.2d 573 534 & However, believe it we do not decide. § not now under sued defendant Plaintiffs analysis respect whether Ar- to our affects 15 U.S.C. Exchange Act of the Securities misrepresen- 240.10b-5, may material vey held liable for be 10(b)(5), 17 C.F.R. § and Rule 78© primary violator under or omissions as tations I of the in Count as an aider and abettor both and VI. Counts IV primary Counts IV complaint violator in and a Bank v. First Central and VI. We note Bank, “a Supreme Court ruled that has held that example, Supreme Court Interstate 5. For aiding dis- “involving primarily to plaintiff may an a failure private not maintain in cases close,” i.e., -U.S.-, omissions, may pre- 10(b).” be abetting § suit under (U.S.1994). v. United Utah 1456, This Ute sumed. 128 L.Ed.2d Citizens S.Ct. Affiliated 128, 153, States, S.Ct. plaintiffs' 406 U.S. ruling appear bar claims would to (1972). I, point we do L.Ed.2d against Arvey which in Count misrepresentations for both and omissions nom. Wasserstrom Eisenberg, 474 U.S. where the result of either is to render 106 S.Ct. 88 L.Ed.2d 290 opinion materially inaccurate or incom- Eisenberg litigation concerned over a tax plete. involving shelter rights. the sale of coal The prepared defendant law firm had opin- taxa A. Misrepresentations Claim letter, ion which was offering included in the Arvey argues that the district court memoranda, in which opined IRS in denying summary erred judgment in its would allow certain deductions. Plaintiffs favor on claims is liable alleged that the law firm knew that there under the federal securities laws for affirma was no reasonable basis for its We tively misrepresenting material facts con held that law firm and an accounting firm cerning First trading program. Western’s opinion issued an letter verifying profit Arvey contends that it was entitled to sum projections included offering memo- mary judgment on this claim for simple randa they recklessly “are liable if expressed reason that its letters did not contain opinions good reason be- any misrepresentations. is, That it asserts lieve were baseless.” Id. at 778. We ex- that as a matter of law it cannot be held plained liability that such proper because liable for an letter in which it made greater possessed information by pro- explicit basing that it was its on an express fessionals opinions who upon which assumed represented set of facts to it parties rely. third client and that it indepen had conducted no representation When a by profes- is made investigation dent into whether repre those sionals or greater ‘those with access to accurately sented facts reality. reflected We or having special information relationship unpersuaded are argument. making investors use of the informa- tion,’ obligation is an there generally court has recognized disclose data securi indicating that the opinion ties or allegations fraud claims forecast based of mis be doubtful. representations When opinion letters. or forecast We have is based on underlying held that projection, “[a]n materials which on like their face or under representation, other sug- will be circumstances deemed untrue gest purposes of cannot relied federal on without securities laws if inquiry, further it is without then the failure genuine issued reasonable investi- belief gate or if ‘support it further has no an inference basis.” v. Nu- Herskomtz tri/System, Inc., that 179, (3d when the expressed 857 defendant F.2d 184 Cir. 1988), opinion genuine it had no cert. denied belief it Nutri/System, sub nom. that had Herskomtz, Inc. v. information on 1054, predicate 489 which could U.S. 109 S.Ct. 1315, opinion.’ that 103 L.Ed.2d Interpreting 584 Supreme Court’s “scienter” or intent re (citations omitted). Id. at 776 quirement as articulated in Ernst & Ernst v. presented Herskomtz this with court a Hochfelder, 185, U.S. 96 S.Ct. 47 similar case, situation. that we held that (1976), L.Ed.2d 668 we have explained that a fraud against securities claim a bank that opinion an must not be made “withreckless had opinion an issued letter concerning the disregard for its or falsity,’ truth or with a fairness of the transaction should be submit ‘genuine lack of belief that the information jury ted to a when the claim alleged that the was disclosed complete accurate and in all bank assumptions that the knew on which it respects.’ Therefore, material opinion opinion based its were unfounded. Herskow that been has genuine issued without a itz, 857 F.2d Sharp 184-85. See also v. belief or reasonable basis is an ‘untrue’ Coopers Lybrand, (3d & 649 F.2d which, statement knowingly if made or Cir.1981), denied, cert. 455 U.S. recklessly, culpable conduct actionable (1982) S.Ct. 71 L.Ed.2d 648 (recogniz 10(b) § under and Rule 10b-5. against securities fraud claim accounting (3d v. Eisenberg Gagnon, 766 F.2d firm materially representa based false Cir.1985) (citations omitted), cert. letter). denied sub tions in opinion contained transaction, liability simply escape it cannot concerning the no doubt leave These cases by including opinion in an letter a statement knowing or of action for of a cause existence provided opinion its is based on facts. opinion let- misrepresentations reckless address, then, is question we must ters. alleged here Plaintiffs have disclaimers, to the effect Arvey’s whether Samuels, long relationship and close with only on facts based assisting setting up him in which extended to Samuels, us to should lead to it provided Western, designing First the transactions should than that this case otherwise conclude engaged, acting which First Western as court relied on Gil- go trial. The district general First Western’s counsel. Plaintiffs (D.N.J.1991), F.Supp. 358 Berg, more Price, point representation also disclaimers should concluding that the allegedly firm on which analy- agree with that that effect. We modeled, proceedings. audit IRS sis. allegations clearly permit the infer- These against a claim an attor- involved Gilmore good knew or had reason to ence letter, who, represented ney in a tax know that the factual assertions contained property purchase price of the real letters did not reflect the sub- at issue was fair in the tax shelter involved of actual First Western transactions. stance general partner.” Id. “as determined such, Arvey’s opinions, despite their dis- As that the attor- contended at 370. Plaintiffs claimers, squarely category of fall within the pur- property had been ney knew that the that we have held to be ac- bankruptcy than one- for less out of chased tionable. stated: price. The court half the stated jury agrees plaintiffs that The court with said, necessary That we feel it attorney’s] find statement [the could a distinction between emphasize that there is price of million reflects purchase “the $5.3 just addresses —whether the issue we have property as the fair market value precludes an ac presence of disclaimers general partner” is so by the determined misrepresentations ques tion for —and misleading to constitute action- grossly reasonably relied on tion of whether important failing disclose able fraud noted, As court has letters. fair underlying the determination of facts bringing § plaintiff suit under attorney] to ex- seeks market value. [The (1) prove that the defendant Rule 10b-5 must by point- misleading culpate statement his or omissions of material made misstatements language, “as deter- qualifying ing to the (3) (2) scienter; fact; with in connection However, general partner.” mined (4) securities; upon purchase or sale of ... presented evidence that plaintiffs have (5) relied; value of the fair market knew [he] proximate cause of their reliance was insupportable. million was $5.3 Li injury. Phillips In re Petroleum Secs. Cir.1989). (3d Id. 1236, 1244 tig., F.2d 881 Gilmore, believe, fol- analysis in we The concerned far we have been court’s Thus directly Eisenberg and this

lows from Arvey opinion the first of these issues—whether concerning liability for cases other summary judgment on its based profes- is entitled to Eisenberg that We held letters. opinion did not that its letters to in- contention with similar access sionals and others misrepresentations because of that calls into contain must disclose data formation plain the disclaimers. Whether presence accuracy of an question the Arvey’s opinion was letters tiffs’ reliance on responsibility cannot be at 776. This F.2d ar we pursuant to the standard reasonable of a statement the inclusion evaded Co., 540 & in Straub v. Vaisman provided ticulated opinion on facts is based (3d Cir.1976), sepa 591, presents a firm knows F.2d when law someone else. presence and character issue. The the factual rate good to know that or has reason to that deter has relevance by an- disclaimers clear provided description of a transaction mination. materially from the actual other is different court concluded acknowledge

The district We that the first and fourth showing plain has not its burden of weigh rest, met factors Arvey. favor of however, tiffs’ on the reliance letters was un plaintiffs. favor There is no evi- reasonable, Kline v. First Western Gov’t suggesting plaintiffs dence had access to Secs., 552-54, F.Supp. and we believe information that would have allowed them to supports the record conclusion. Al they understand that allege really was noted, though, as we have the district court taking place. hand, Arvey, on the other certify did not the reliance issue for our ongoing attorney-client relationship with review, necessary we nevertheless feel it to First Western and Samuels. Nor is there a briefly address the issue because ‍​‌‌​‌‌​‌‌​‌​​​​​​​​​‌‌​​‌‌‌‌​‌​​​​​​‌​​​​​‌​‌​​‌‍under suggestion opportunity had an § “it appealable, is the order that is alleged to detect the fraud even without the controlling question; and not the and thus benefit of access to such information. And necessary we address issue to de Arvey argues while were so- appeal Ivy cide the before us.” Club v. investors, phisticated the evidence does not Edwards, (3d Cir.1991), 943 F.2d compel they the conclusion that were so so- Club, cert. Ivy denied sub nom. Del Tufo phisticated in these matters that should - U.S.-, 112 S.Ct. 117 L.Ed.2d recognized descriptions of the (1992). See also United States v. Stan transactions in the letters bore little 669, 677, ley, 483 U.S. 107 S.Ct. reality.6 relation to A First West- 97 L.Ed.2d 550 Thus we could re investor, ern Arvey opinion armed with let- if, judgment verse the denial of like ters and the information about his own ac- dissent, plaintiffs’ felt that we count that might impor- stressed was unreasonable as a matter of law. tant, could have obtained a tax from attorney his that would wrong have been ,In variety Straub we that a stated of fac- simply misleading way because of the tors should be considered in determining program allegedly which the was described reasonable, whether reliance was letters.7 Mere reliance on the (1) including: fiduciary existence legal expressed conclusions (2) relationship; plaintiffs’ opportunity to de- letters, more, without would have been un- (3) fraud; sophistication tect the of the say reasonable. But we cannot as a matter (4) plaintiffs; long-standing the existence of of law that it was rely unreasonable to on the (5) personal and, relationships; business or description of First trading pro- Western’s access to the relevant information. 540 F.2d Indeed, gram. such reliance would be con- at 598. Consideration of the evidence before sistent with the disclaimers insofar as an factors, light believe, us in of these we leads independent legal opinion sought inexorably to the conclusion that there exists description basis of program. genuine issue of material fact as to whether plaintiffs’ reliance was reasonable so that the summary judgment

denial of ground on this disputing appli addition to our proper. case, cation of Straub to this the dissent feels dissent, 6. Unlike the we do not believe that the underlying themselves that the facts opinions fact opin- solely that “the transactions were correct as discussed in the were within knowledge of First sophisticated ion Western.” Dissent at letters were meant for inves- claim, however, tors," 498. Plaintiffs’ is that Dissent at means that also knew or should have known that the de- sophisticated enough in fact to unravel First scriptions opinion of the transactions in the let- "cutting edge” Western's scheme. And while the ters were inaccurate. We believe the record perhaps nature of these transactions should have support contains evidence sufficient to the infer- put plaintiffs complica- on notice of tax Arvey ence that had or should have had such involving tions the transactions described in the knowledge, thereby creating genuine a issue of id., letters, logical it has no connection Assuming Arvey possessed material fact. such plaintiffs suspected to whether should have that knowledge, provid- its recitations of the facts "as Arvey knowingly misdescribed the transactions. ed to it First Western” were made without a genuine validity belief in their and thus action- 7. The dissent way contends that “there is no expounded able under body the law as in the attorney another could have confirmed from the our judgment same conclusion. The court in reached the Arvey is entitled to F.Supp. “bespeaks caution” doctrine. based Griffin McNiffi (S.D.N.Y.1990), op., that doctrine without 996 F.2d Under aff'd (2d Cir.1993), forecasts, provided following the ac offering document’s when an accompanied by projections are count of the case and its resolution: opinions or statements, cautionary the for- meaningful challenge just ... than Plaintiffs more the form the ward-looking will not statements predictions forecasts and in the of- future if those fraud claim basis for a securities fering They argue materials. that the un- mix’ of not affect the ‘total statements did PPMs, derlying assumptions of the provided document information the inves- projections designed to opinions and words, cautionary language, In tors. other believing the investors into mislead sufficient, alleged omissions renders the if partnership offered them investments a misrepresentations immaterial as mat- or profit and a opportunity to achieve a ter of law. investment, tax benefit from their when Trump Litig., 7 F.3d Secs. In re Donald J. possi- reality that these defendants knew (3d Cir.1993). Donald C. See also exist_ bilities did not Inasmuch cer- “Bespeak Cau- Langevoort, Disclosures that allegations go tain of these to the mislead- (1994) tion”, (summarizing Bus.Law. 481 made, ing nature of the statements when jurispru- analyzing “bespeaks caution” cautionary language the existence of re- dence). any cautionary language just Not of, garding general unpredictability in- In- trigger application of the doctrine. will alia, gas operations, oil and economic ter stead, directly to that disclaimers must relate trends, interpretation and the of the tax have relied. As investors claim to on which laws, maintain- will not bar from vague Trump, “a or blanket we noted against remaining claims de- merely warns (boilerplate) disclaimer which fendants. will that the investment has risks the reader prevent misinfor- ordinarily inadequate be (footnote omitted). Id. at 1253-54 suffice, cautionary state- mation. To argu- plausible fоr there to a order be and tailored to ments must be substantive application “bespeaks cau- ment for or specific projections, future estimates case more than the tion” doctrine plain- opinions prospectus which simple assertion that the is based challenge.” 7 F.3d at 371-72. tiffs Trump required. represented facts is re- conceived, “bespeaks caution” doc- So language bespeaking caution quires that the clearly apply does not to this case ex- trine directly to that relate solely cept to the extent that relied at 371-72. have been misled. 7 F.3d claim to investigation further or consider- and without omissions, dis- regarding the law Under as to ation on the letters’ conclusions section, Arvey’s statement in the next cussed consequences of the First Western the tax represent- on facts was based cautionary The statements transactions. also contained provided investors with to it First Westérn opinion letters ed suggested noth- did not know implicit information that should assertion that possibility than the ing more to them It could not there- facts to be otherwise. gotten wrong law Arvey might have possibility plaintiffs to the fore have alerted incorrectly the IRS assessed the risk Arvey did know otherwise. deny

would deductions. conceivably preclude the doctrine to even plain- from which did not contain statements claims in this case the risk that tiffs should have inferred have included necessary for the letters to recklessly misstating the knowingly or essence, stating, in that there disclaimеr trading structure of the entire First Western know otherwise possibility that did program. com- opinion letter was sham and that the legitimacy a to construct facade missioned only that we have found In the other case First West- trading program that both court for a concerning a similar situation the Holt, (7th Cir.1986). Arvey ern a was farce.8 We find knew Starnes & 797 F.2d 490 language is, no such therefore conclude that That those cases concerned situations summary judgment was not to entitled alleged where the omissions were unrelated in its favor on reli- basis validity the law firm’s letter ance was unreasonable as a matter of law. or similar communication. Fortson, example, concerned a suit B. The Claim Omissions against prepared a law firm that had a tax granted summary The district court pri- letter included in was judgment on all to claims placement vate memorandum used in the they alleged liability extent that for omis offering of interests in a real estate limited sions of material The court reasoned fact. partnership. “sought to Plaintiffs recover attorneys cannot be held liable for omis ground from Winstead on the that the firm sions in an unless can duty breached its federal under securities attorneys duty demonstrate that the had a to by failing laws and state common law disclose to them the information that was inquire complete into and ensure and accu- omitted. Id. at 550-51. it Because conclud Fortson, rate disclosure.” 961 F.2d at 471. ed that did not show the existence allege Plaintiffs not did that the tax fiduciary of a relationship or other which “Instead, they was inaccurate. challenged] give duty, would rise to such a the court held sufficiency provided of the information proceed could not with their them as investors and contended] claims Arvey’s alleged based on omissions. responsibility that Winstead had a to ensure analysis We believe the district court’s full and accurate disclosure.” Id. at 472. misapprehends presented by the issues this impose The court refused to obligation this case. We are here with dealing a situation in fiduciary law firms the absence of a Arvey, by authoring opinion letters, relationship between the law firm and the speak regarding has elected to the transac plaintiffs. so, Id. at 472-74. To do the court tions at issue. allege Plaintiffs this remarked, attorneys would be to make speech misleading because failed “guarantors integrity in all commercial include in its letters information transactions, whether the context be one of that, included, if would have undermined the raising capital, marketing product, a nego- conclusions reached in those letters. In con tiating Lawyers, short, a contract. would trast, court, the cases cited the district as function in the designated world as business vyell Arvey, those cited by proposi for the watchdogs.” Barker, Id. at 475. See also attorneys may tion that not be held liable for (“When 797 F.2d at 496 the nature of the duty omissions absent a to disclose concern whistle’, a offense is failure to ‘blow the question of whether a law firm or similar duty defendant must have a to blow the entity duty has a to “blow the whistle” on its whistle. And this duty does not come from Winstead, McGuire, client. See Fortson v. 5; § or Rule if it inquiry did the 10b— Minick, (4th

Sechrest & 961 F.2d 469 Cir. duty would be circular. The must come from 1992); Co., Abell v. Potomac Ins. 858 F.2d fiduciary law.”). a relation outside securities (5th Cir.1988), cert. denied sub nom. v. Wright, Lindsey Abel Jennings, case, contrast, & presents ques- U.S. whether, 109 S.Ct. 106 L.Ed.2d 589 tion of once law firm has chosen (1989); Henderson, Franklin, Barker v. speak, may it omit facts material to its note, however, 8. We we do not decide at long shielded from fraud claim as as there time whether such a disclaimer be effec- would language cautioning in the document in- tive. One appear court has that "it noted specific vestors of the To the risks. extent that apply pro- doctrine does unless the allow, such encourage, a rule would if not jection at honestly issue reflects held belief." part corpo- fraud and non-disclosure on the SovereignGroup, F.Supp. Gurfein (E.D.Pa.1993) actors, clearly rate application not a viable J.). (Poliak, Judge Poliak further "bespeaks caution" doctrine. remarked that if the rule otherwise Id. at 908 n. 20. one could completely construct inaccurate memorandum, offering yet fraudulent Here, duty particu- not to opinions. unlike Fort- This limited omit was non-eonfidential larly son, directly well-articulated Rose v. Arkansas allegedly omitted facts bear Auth., Thus, Valley F.Supp. Envtl. & Util. accuracy (W.D.Mo.1983). 1180, 1206-08 The Rose closely resembles before this situation court, holding attorney’s that an failure to in Ackerman Circuit Seventh in a opinion disclose material facts bond let- (7th Cir.1991). Schwartz, In F.2d 841 ter formеd the basis of an actionable securi- brought against suit a Ackerman investors claim, explained pro- ties fraud a when opinion an letter conclud- law firm that wrote fessional “undertakes the affirmative act of investors were entitled to certain communicating disseminating or informa- investments in a tax deductions tion,” there is letter recited facts that shelter. general obligation “duty” speak a or to legitimate, but made the transaction seem or, stated, truthfully; alternatively a cautioned that the fictitious. The letter “duty” something to communicate persons for firm had “relied on unnamed (or, perhaps, which is known to be untrue facts,” and added that unspecified id. “ in which the defendant has so little basis attempt indepen- have not made an to ‘[w]e requisite degree for honest belief that the representations.’” dently verify the various involved). is “recklessness” And encom- The court held that the district court’s Id. passed general obligation within that is summary judgment in grant of favor of the obligation “duty” to also communi- improper. firm was law qualifying cate additional or informa- ... lack of an inde- Rule 10b-5 Under tion, known, then the absence of which duty not excuse a material pendent does misleading would render that which was subject merger A offer or lie. tender “duty” communicated. While this latter release, duty press to issue a bid has no might loosely “duty be described as a to speak it must if it chooses to tell the but disclose,” I prefer, purposes Although material issues. truth about “duty distinguishing it from a true to dis- duty investors means that laсk of to close,” “duty ... to label it as a not to obligation had to blow the Schwartz no reality, simply omit.” it is one facet of whistle, a letter he had and none to correct truthfully, general obligation speak to to circulated the first not authorized arising out of and because of an affirmative responsi- place ... Schwartz cannot evade communicating. act the defendant permitted pro- bility to the extent he omitted). (citations Id. at 1207 moters to release his letter. evidence sufficient to The record contains (citations omitted). at 848 Id. preclude summary judgment on the omis- inquiries sions claim. received con- naturally analysis from Ei flows cerning from in- senberg. that an There we held prior issuing vestors its second letter genuine actionable if issued “with a lack of a issuing explicitly prior told its third that the information disclosed was ac belief distributing letter that First respects.” complete curate and all material copies along with brochures its letters Indeed, F.2d at 776. when the founda describing program. Plaintiffs have al- opinion “suggest cannot tions of an leged that failed disclose SEC inquiry, be relied on without further then the investigations of Minnesota as well and State investigate may ‘support an failure to further analogous investigation into the IRS expressed inference that when the defendant cre- trading program. Price This evidence genuine that it it had no belief genuine of material fact sufficient ates issues predi the information on which it could Arvey’s summary judg- motion for to defeat (citаtions omitted). opinion.’” cate that Id. ment. adopted duty this court has limited when, Finally, address ar investigate we must and disclose omission, duty against gument that a not to omit runs public drafter’s could mis attorney conduct. parties. the ethical standards lead third 492 program unpersuasive. Privileges tions of First Western’s contained ‍​‌‌​‌‌​‌‌​‌​​​​​​​​​‌‌​​‌‌‌‌​‌​​​​​​‌​​​​​‌​‌​​‌‍argument Arvey’s opinion plaintiffs cannot be relied on to in

and ethical rules letters. The Clark v. United perpetrate descriptions fraud. See that these are inaccu- contend States, 1, 15, 465, 469-70, 53 S.Ct. misrepresentations 289 U.S. rate as a result of both (1933) (“The privilege takes 77 L.Ed. 993 They allege that and omissions. further as A client who flight if the relation is abused. Arvey’s consequence misrepresentations of attorney advice that will save consults an for omissions, they suffered adverse tax con- have no him in commission of a fraud will the losing sequences upon the cancellation of for- truth help He must let the be from law. ward contracts because the Internal Revenue told.”). Service disallowed the deductions Indeed, on claimed based these losses. IV. relationship plaintiffs’ of tax claims to the reasons, foregoing we will reverse For the portions Arvey’s opinions of is demonstrated granting the district court’s decision sum- holding the district court’s of this case on mary judgment plaintiffs’ on claim suspense pending calendar the outcome of opinion contained litigation regarding in Tax Court deduc- upon plaintiffs re- material omissions upon tions for losses the cancellation of los- оpin- will affirm the district court’s lied. We arranged by forward contracts respects, ion in all other and will remand for The court Western. district activated this proceedings consistent with this taxpayers in case after the were unsuccessful Comm’r, Freytag that forum. See v. 89 T.C. GREENBERG, Judge, dissenting. Circuit 849, (1987), aff'd, 1987 45307 904 F.2d WL (5th Cir.1990), 868, aff'd, the issue of when a law This case raises 1011 501 U.S. 111 (1991).1 parties third for mis- firm liable to be S.Ct. 115 L.Ed.2d 764 The opinion however, in representations and omissions let- plaintiffs, parties were not to that Instead, the firm to its client. I am ters written Tax Court case. settled their join majority’s opinion unable to be- cases with the Internal Revenue Service. opinion explicit disclaimers in the cause Arvey responds plaintiffs’ charges letters, portions majority which the of by urging plaintiffs could not have quotes, on made the these letters, justifiably opinion relied on the as the a matter of law. letters unreasonable as (1) explicitly letters: addressed assumed Therefore, I would reverse the order of the (2) facts; stated that these facts had been district court to the extent that it denied the (3) client; provided by the stated summary judgment, firm would affirm the the firm furnished the to First West- granted order to the extent that it the firm upon by ern and it should not relied be summary judgment, and would remand the persons other than First Western. entry judgment of matter Arvey argues that court the district erred against of firm favor concluding qualifying language My appeal. claims involved on this dissent letters did not shield it from only addresses the reasonable reliance issue liability agree. as a matter of I law. through pages as 19 of the described majority typescript and the recognize I is well settled footnotes, accompanying my view forecasts, projections, opinions may dispositive., issue is if actionable under Rule 10b-5 the declarant germane appeal, genuine As on this makes them without a belief their firm, alleged Arvey, validity the law violated reasonable basis to believe Exchange accuracy. Trump Act In re section of the Securities Donald J. Ca Cir.1993), (3d 10b-5,17 357, 368, 1934,15 78(j), Litig., § and Rule sino 7 F.3d U.S.C. Sec. - denied, U.S.-, § C.F.R. The focus rt. 240.10b-5. S.Ct. ce (1994); descrip- their attack on on the factual 127 L.Ed.2d 565 Herskowitz v. description Supreme Appeals 1. The Court did not deal with the mer- contains a succinct controversy. program. its of the the Court First Western 904 F.2d at 1013-14. (3d Inc., Nutri/System, 857 F.2d tiffs reliance on the defendant’s statements denied, Cir.1988), cert. U.S. was unreasonable as a matter of law. (1989); 1315, 103 L.Ed.2d 584 Eisen S.Ct. It stands reason that where (3d berg Gagnon, 766 F.2d 775-76 regarding investment— denied, 946, Cir.), 474 U.S. 106 S.Ct. cert. prepared “bespeak even those scienter — 342, explained As we 88 L.Ed.2d 290 caution,” rely reasonable investors should not Eisenberg, opinion must not be made “[a]n representations in on the them. See Luce v. disregard for truth or falsit “withreckless (2d Edelstein, 49, Cir.1986). 802 F.2d 56 ‘genuine y1 or with a lack of a belief majority concedes that reliance on “[m]ere and com information disclosed was accurate ” legal expressed conclusions plete respects.’ in all material 766 F.2d at letters, more, (citation omitted). without un- have been Attorneys and other 776 reasonable,” but states that it not unrea- prоfessionals exempt are not from this re plaintiffs rely Arvey’s sonable for on permitted the de- quirement, and courts have scriptions imposition liability trading pro- for securities fraud on of First Western’s recklessly professionals knowingly gram although Arvey specifically who attributed misleading opinions. have issued false or purport them to First Western and did not See, Id.; Co., e.g., v. Ross & Duke Touche Maj. op. have verified them. at 488-89. (S.D.N.Y.1991); F.Supp. 765 69 Stevens v. Thus, majority “bespeaks holds that the Indus., Equidyne F.Supp. 694 Extractive applies only caution” doctrine “to the extent (S.D.N.Y.1988). 1057 solely plaintiffs relied without fur- investigation or ther consideration on the 10(b) To state a violation of section opinion letters’ conclusions as to the tax con- 10b-5, plaintiff allege must that the Rule sequences of the First Western (1) transactions” made a misstatement or an defendant language because the (2) (3) the letters would not omission of material fact with scienter (5) (4) plaintiffs have alerted knew or plaintiff and which on which the relied descriptions had reason to know that injury. proximately plaintiffs caused the See, Gross, 104, majori- e.g., Hayes were inaccurate. Id. at 489-90. The v. 982 F.2d 106 (3d Cir.1992); Shapiro Corp., ty’s suggestion plaintiffs v. Fin. could UJB rea- - (3d Cir.), denied, rely cert. sonably 964 F.2d 280 letter be- on -, 365, 121 U.S. 113 S.Ct. L.Ed.2d 278 “Arvey’s cause statement that its (1992); Chrysler Corp., v. 949 F.2d Lewis represented based on facts to it (3d Cir.1991); 649 Straub v. Vaisman & implicit Western ... contained the assertion (3d Cir.1976). Co., 540 598 More F.2d did not know the facts to be over, alleged reliance on the improperly equates otherwise” scienter with be reason misstatement or omission must reasonable reliance. Id. at 489-90. These able, though even the defendant has the bur requirements independent two elements are proof den of to show it was not reasonable. alleged primary to state a which must be Straub, Consequently we 540 F.2d 10(b) and Rule 10b-5. violation section have stated that to recover under section warnings Consequently, and disclaimers— 10b-5, plaintiff and Rule “the [must] an investor by limiting the extent to which reasonably” in sophisticated act and that “a rely offering pre can documents —will upon vestor is not barred recovery fraud even when clude for securities honesty of those with whom he deals in the scienter has been estab defendant’s knowledge absence that the trust is mis fraud claims added). lished. “Dismissal of securities placed.” (emphasis Id. “an offering may appropriate docu where eyes investor cannot close his to a known specifically rely not to risk, ments warn “cognizant risk” and if is then he alleged misrepresentations made on liability.” is Local 282 there no Teamsters defendants, making any subsequent reli thus Angelos, v. Pension Trust Fund 762 F.2d (7th Cir.1985). McNiff, unjustified.” v. 744 ance Accordingly, 530 a secu Griffin (S.D.N.Y.1990), aff'd, F.Supp. rities action obtain defendant Cir.1993) (2d (table). For this rea- judgment by demonstrating plain- F.2d 303 representation limited son, [the cases sim- or omissions courts have dismissed several supplied ground partnership] that it was information it one on the ilar to this relied as a matter of law. for the investor unreasonable unreasonable challenged opinion representations in the at 1566. Id. broad dis- in the face of letter’s facts it attribution of the claimers or its simi- Numerous other courts have reached party. to a third See, Merrill, recites e.g., lar decisions. Moorhead v. Inc., Pierce, Smith, Lynch, Fenner & White Lumber Co. example For Buford (8th Cir.1991) (holding that bond F.2d 243 Ltd., F.Supp. Octagon Properties, purchasers could not maintain securities (W.D.Okla.1989), brought a .se- against fraud action consultant that filed firm against the law curities fraud suit feasibility study alleged misrepresen- despite offering memorandum for prepared the had tations, study cau- where contained detailed partnerships in which the limited warnings tionary language specific and of memorandum stated that the invested. The factors, along underlying factual risk with partnership not principals of the limited Edelstein, assumptions); Luce v. 802 F.2d at prepared the historical and the law firm had (“we liability impose the firm had 56 are not inclined to on financial statements and F.Supp. clearly ‘bespeak statements. 740 not audited these the basis of statements that ” Accordingly, at 1561. the court held that offering memorandum caution’ where projections warned investors that dis- the face of these disclaimers and [i]n “ ‘necessarily cash and tax benefits were undertaking of de- closure of the limited (citation omitted); speculative’”) Friedman respect fendant with to information or offering memoran- v. Arizona Ltd. Partner- matters disclosed World Nurseries (S.D.N.Y.1990) dum, ship, F.Supp. be unforeseeable as a matter would 730 541 10(b) prudent firm in ground of law to a law Defendant’s (dismissing section claims on position potential purchasers, unreasonable, includ- reliance was Plaintiffs, rely upon Defendant’s accountant’s tax stated that where any misrepresentations or nondisclosure projections contained therein were based omissions in the financial statements of representations which were made to the partnership] representa- as a [the limited by promoter accountants of the limited by tion statements Defendant (2d Cir.1991) partnership), affd, 927 F.2d 594 accurate reason of which Plaintiffs were (table); Property O’Brien v. National Ana- harmed_The Offering might be memo- Partners, lysts F.Supp. 227-29 719 financial randum states that state- (S.D.N.Y.1989) liability (holding that no at- prepared by ments were and were the sole specifically taches accountant attrib- where responsibility partnership]. limited [the assumptions utes its financial to documents short, Defendant did undertake given by representatives to it of the limited of, accuracy opine prepare, evaluate the or partnership); Equidyne Stevens v. Extrac- accuracy upon the of financial statements Indus., (dismiss- F.Supp. tive 694 at 1063-64 partnership] and said so. [the limited accountant, against ing securities fraud suit F.Supp. 740 at 1563. The court then went on because statements in accountant’s explain: letter “set forth that based on [were] facts, additionally supplied [and] state[d] in the Offer- [i]n the face of the statements implication pre- there is no that the results ing Memorandum that the financial state- achieved”); dicted can or will be Feinman v. responsibility ments were the sole of [the Davis, F.Supp. Berlin & 677 unaudited, Shulman partnership] were limited (S.D.N.Y.1988) (holding that where 170-71 concerning and disclosures the limited role “offering plaintiffs not memorandum warned preparing evaluating of Defendant rely misrepresentations which the Offering statements made in the Memo- [,] randum, allegedly plaintiffs’ reli- defendants ‍​‌‌​‌‌​‌‌​‌​​​​​​​​​‌‌​​‌‌‌‌​‌​​​​​​‌​​​​​‌​‌​​‌‍made agrees with Defendant Court misrepresentations, ance on those if made Plaintiffs on Defen- inaccuracies, unjustified duty appropri- and dismissal is dant’s to disclose mis- Friedlander, Gaines, ate”)2; documents, including Andreo v. Co financial statements hen, Western, Rosenberg, F.Supp. of First Rosenthal & nor is it to be filed with (D.Conn.1986) (dismissing any governmental section or furnished to agency cautionary “lan person express claims because or other without prior question guage of the document limited written consent of this firm. degree rely should which investors on Id. at 590-91. it” as it told investors that defendant ac Furthermore, letters were re- verify counting upon firm did not the data plete cautionary language. All three based); projections Devaney

which its warned that might the IRS and the courts ¶ (CCH) Chester, 92,747, Fed.Sec.L.Rep. strong contrary “take a stance 93,649 (S.D.N.Y.1986), rev’d on other (1978 expressed letter), herein.” Id. at 147 (2d Cir.1987) grounds, 813 F.2d (1979 (1980 letter), letter).4 Indeed, (dismissing against securities fraud claim in the 1980 letter disclosed that the IRS bank the confidential vestment because mem investigating First Western’s customers prepared orandum it “with broad dis engaging in tax avoidance transactions as to claimers the source information con generally and that the IRS viewed the simul- therein, support allegation tained does not holding selling taneous con- forward likely of reliance. Investors would not be to suspicion. tracts with The letter stated that: rely definitely on memoranda which so stated Rev.Rul. part 77-185 is of a concerted source”).3 dependency on another their by effort the Service to curb what it con- firm in Like the law White Lumber siders the offsetting posi- abusive use of Buford Co., Arvey it clear that it not made did tions in securities and commodities to mini- guarantee undertake investors liability. mize or defer tax In addition to accuracy of the factual information con- 77-185, promulgating Rev.Rul. the Service in its also tained letters. made Chapter (‘Commodity has added Op- offering clear that it advice to such Futures’) tions and to its Tax Shelters investors. Each of the letters is Handbook, Examination in which it identi- Sidney president addressed to Samuels as of fies, transactions, among other ‘the simul- Western, First and is stated to be for the buying selling taneous and of futures con- use of or exclusive Samuels First Western. tracts in ... GNMA Certificates’ as a ‘ba- emphasizes point The 1980 letter arrangement.’ sic shelter The Service strongly. “supersedes most It warns that it policy has also identifying announced a of 8,1979, which, upon you our letter of June as significant for audit returns which contain informed, previously you were should no transactions, securities and commodities longer rely,” App. at and contains an presently litigating and is various cases cautionary even more forceful statement than involving transactions similar to those in- the earlier letters that: volved Rev.Rul. 77-185. Due to the solely

[t]his letter is intended for the inter- Service’s concern with transactions similar and, nal use of accordingly, First Western to those entered into between First West- be, be, customers, it is not persons intended and should not ern and its who enter upon by any person relied other than First into transactions with First Western Further, substantially Western. this letter is not to be increase chances be- of quoted Further, any by you or otherwise referred to in audited the Service. view, however, my partic- holding, Friedman and Feinman are did not cast doubt on the significant ularly because dealt with caveats district court's determination that reliance is un- concerning consequences the tax of the transac- justified where the at document issue contains and, here, might tions warned that the IRS cautionary language represents and challenge assumptions underlying the tax the in- source of the information contained therein vestments. party. came from a third Appeals 3. The Court of for the Second Circuit 4. The made their investments in De- judgment reversed district court's Arvey's cember 1980 read 1979 and ground permitted that the court should have after 1980 letters. complaint. to file an amended This that the facts set forth below constitute First us us that customers have informed of complete presentation of all being the Service audited accurate are questioned the regard has to such the Servicе information with and that relevant (1979 letter); such deductibility transactions,” losses realized Id. at 558 theory set the basis customers on that the facts set forth “you have advised us in Rev.Rul. 77-185. by the complete forth Service an accurate and below constitute presentation all relevant information with added). warning, App. (emphasis at 588 regard the transactions between terms, put potential investors in no uncertain customers, that no ma- and its letters, including plain Western read who necessary the information terial fact to make tiffs, strong possibility that on notice of the misleading has been omit- deductions inves herein not false IRS would disallow (1980 letter). ted,” resulting from the cancella losses Id. tors contracts on the of First Western tion Furthermore, every specific almost factual really only ground that the transactions trading description of how the First Western course, that is scheme. Of a tax avoidance phrase began with the program functioned Furthermore, exactly happened. what ...” “you represented to us or the have trou First Western’s disclosed example, the 1979 and equivalent. For both by discussing the IRS’s audits of past bled following included the state- 1980 letters transactions identical to prior First Western ments: analyzed in the letters. those you represented to us that the vari misrep plaintiffs cannot state a claim of forward contracts obli ous combinations of upon the facts resentation because gating customer to deliver and take premised were disclosed clear their claim is will, delivery money market instruments ly. naked assertion of concealment “[T]he above, sufficiently differ as described by pub contradicted material facts which is delivery stated interest rates and dates ent expressly set forth lished documents which produce independent price move so as to allegedly is insuffi very facts concealed the among such contracts and cause the ment Spie- constitute actionable fraud.” cient to opportunity customer to have a reasonable (S.D.N.Y.1 Wills, gler F.R.D. (and realizing gain a corre economic 973).5 Furthermore, in the face of this dis loss) respect sponding risk of with to his closure, plaintiffs for the it was unreasonable positions6 various support for rely on the letters as validity ordinary losses of deductions for the letters). (1979 560-61, Id. at and 1980 losing upon the cancellation of a forward represented to that the trans- You have us contract. into First Western and actions entered possible warning non- In addition its customers will reflect the customer’s pur- deductibility resulting from the of losses forecast, strategy interest rate market contracts, First forward chase of Western’s validity independent will have economic clearly opinion the letters indicated consequences, and will respective regard, facts. In this depended on assumed opportunity eco- produce a reasonable description prefaced their factual the gain risk economic loss. nomic trading programs the with of First Western’s letter). added) (1979 (emphasis at 573 Id. remarks, introductory attributing following addition, subject to the In this following descriptions to “the the Samuels: of the transactions between consummation of such trans- paragraphs contain a us,” pursuant First and its customers you them to actions as have described (1978 letter); facts and conditions described above “you have advised App. at 135 support always all conclusion that the distin- Nevertheless cases I have cited do not plaintiffs' unreasonable. in this case was among concepts guish that a state- the related (1) may cannot be so conditioned that: ment (2) regarded misleading; representa- underscored read as be 6. The words which I have material; (3) respect may to his in the 1980 letter: “with tions it contains not be follows position.” may be unreasonable. overall reliance on the statement expressly and is further conditioned on An examination of the factors which we your representation that such transactions said in Straub should be considered when determining will be consummated the customers of plaintiff whether a justifiably re- expecta- with a First Western reasonable lied on the misrepresentations defendant’s conclusion, gain. my tion of economic though reinforces I hasten to add that it is so obvious that plaintiffs’ added) (1979 letter). (emphasis Id. reliance on letters was unreasonable letters, Arvey’s opinion like those that I stop my could point. dissent at this cases, expressly the above cited noted that go 540 F.2d at 598. But I will on. There are Western, Arvey, sup- Samuels and First (1) five Straub factors: the existence of a facts, plied the that even under those facts (2) fiduciary relationship; plaintiffs’ op- guarantee pre- there was no that the results (8) portunity fraud; to detect the sophist- achieved, dicted would be and that the letters (4) plaintiffs; ication of the the existence of a upon by should not be relied the investors. longstanding personal business or relation- cautionary language, Given all of this (5) ship; and access to the relevant informa- plaintiffs should not have understood the regard tion. Id. to the first and fourth letters to mean that had made factors, Arvey clearly special had no relation- representations regarding factual ship with give that would programs. I Western’s would therefore hold plaintiffs any grounds Arvey’s repre- to trust plaintiffs’ could not have relied rea- impose sentations or that on sonably letters as to the accu- any duty to inform the possible racy contain, descriptions they factual Indeed, majority inaccuracies. acknowl- else, anything liability or indeed and thus no edges point. maj. op. this See at 488. Arvey. imposed factors, As to the other we must remember already I have demonstrated dealing that we are not who reliance on the letters was made conventional investments. Straddle unreasonable. But there is even more evi- designed prover- transactions are not for the conclusion, support dence to as the 1980 “person contrary, bial on the street.” To the bugle letter also includes a veritable blast of the transactions discussed let- cautioning an announcement investors not to very complex ters involved arrange- financial rely Arvey’s opinion: on sophisticated ments meant for investors look- [h]owever, in as discussed more detail ing advantages. for tax The mere fact that below, deductibility any particular the of cutting edge these transactions on were the may depend upon customer’s losses certain strategic planning of tax put any should have facts and circumstances related to such reasonable investor on notice that there account customer’s with First Western at complications. a substantial risk of tax Fur- the Accordingly, time the loss is incurred. thermore, the various disclosures the let- impossible express it is opin- us to an for provided plaintiffs ters should have the deductibility any ion particu- as to the of opportunity possi- the incentive and to detect lar loss incurred a customer First above, explain I ble fraud. As the not letters Western. only they predicated made it clear that added). (emphasis Samuels, Id. at provided by In view of the on facts and not veri- statement, foregoing plaintiffs’ by Arvey, they past the reliance fied but also disclosed simply on questioned letters was not unreason- instances which the TRS the It validity able. was reckless. I that it believe of transactions identical to those dis- letters, absolutely clear that the could not cussed in the and indicated that it reasonably likely have relied on an letter there would be future trouble as justify tax gave deductions when the letter indi- well. the letters the impossible express every cates that “it is us to inquiries incentive to make further into an deductibility legitimacy program as to the the of the First Western particular loss incurred a customer and should have caused them to withhold they First Western.” their investments until informa- the claims, the reasonableness tiffs’ because make informed decisions. necessary to tion cannot be considered sum, the factors the application of Straub In the is whether precise could in issue that an investor the abstract. The the conclusion dictates representations rely reasonably on the rely the justifiably on the could not consequences of Arvey’s opinion considering letters. the tax letters in contained plain- contract. As the canceling a forward conclusion, majority rejecting the In opening at explain “[t]he in their brief tiffs these evidence that that there is no writes was the focus of each federal knowledge or any particular plaintiffs had by a of a loss sustained income treatment them to enable sophistication which,would upon the cancella- First Western customer any irregularities in First Western’s notice (a losing contract ‘loss tion of a forward majority notes Id. at 488. The programs. contract’) prior to the contract’s settlement might the letters that reliance on further plaintiffs claim particular, date.” could take the justified becаuse an investor opinion let- mislead them because its and, attorney predicated on the to an letters ordinary they have ters said loss- would them, obtain erroneous an facts canceling losing contracts.7 es when forward Id. claim, I ask the rhetori- In the face of this it opinion letters made clear But the reasonably question: how an investor cal can originated from they facts contained rely anticipate favorable Western, letters Arvey. Although another not (1) they: are addressed tax treatment when legal attorney might agreed with the (2) else; only by their terms letters, to someone are there is no analysis (3) else; by their for the use of someone attorney have con- way that another could (4) investor; terms cannot be shown to from the themselves firmed letters predicated supplied not are on facts as underlying opinions were correct facts (5) letters; that the IRS author of the warn solely knowledge of facts were within the likely challenge will the claim for favorable Any person read- First Western. reasonable (6) situations; treatment as has similar this and ing have realized (7) challenge; explain the basis state reliability of the factual de- questioned the strong might the courts take stance trading practic- scriptions of First Western’s (8) flatly an- contrary opinion; and, regard- statements particular, es “impossible” nounce that it is for the author validity of the independent economic express opinion as to Furthermore, of the letter “to I noted transactions. deductibility any particular incurred loss above, opinion letter states the 1980 by” an answer is investor? The obvious. an investment are not to make investors rely reasonably on letter, do, The investors could but if based on decision letters, such is entitled permis- thus at least written should obtain summary judgment on the Section Arvey. should from This admonishment sion view, my nothing claims.8 In could be clear- plaintiffs the risk pounded home to the have er. taking. they were critically Surely any if doubt as to important it there was emphasize I is ever summary judgment, plain- Arvey’s right to a it did precise nature of the focus on the denied, (3d Cir.1988), cert. Actually, that this F.2d 265 n. 2. it never has been established 7. 260, 107 L.Ed.2d 493 U.S. wrong. the Tax Court ruled S.Ct. advice was While however, acknowledge, probably pro- I against the First Western other investors in plaintiffs recog lost and I further the have gram, and its were affirmed decisions Preytag that the case was a "test nize case.” Appeals by for the Fifth merits the Court course, my Preytag, opin 904 F.2d at 1014. Of Circuit, plaintiffs parties were not to that the dependent Arvey's opinion on whether ion is not know, possible it is that if case. For all that we right wrong. the plaintiffs had not to settle with the chosen IRS, litigation they might prevailed in course, a court of dispute precluding the Tax Court or in different either there is no of fact 8. Of all, appeals. judgment, plaintiffs not appeals, after do do not con- Courts as similarly. always do not contain the view identical issues See tend that the letters Comm'r., provisions quoted. Corp. I have Pleasant Summit Land lettеrs, opinion in not our recent In re Don- would see the that knowledge survive im- is Trump Litig., 7 question ald J. Casino Sec. F.3d material to the of reasonable reli- ease, Trump, plaintiffs ance, in this as- as predicat- determination that must be 10(b) a Section action.9 The action serted ed on what should be the investor’s state of arose from the sale of bonds the defen- mind. I urge do not that we hold that acquire, complete the construction dants misrepresent.10 Rather, did not I of, open gigantic casino in Atlantic would hold has demonstrated that the City, Jersey. plaintiffs pur- New The were plaintiffs unreasonably relied on its chasers of the bonds who claimed letters. making purchases relied on false By holding that there is a triable issue prospectus. statements The as to whether the reliance on the that material also asserted matters were reasonable, majority prospectus. omitted from the The defen- effectively holds that no matter how thor- successfully dants moved to dismiss under oughly a firm opinion, law conditions its 12(b)(6), complaint as the failed Fed.R.Civ.P. may be liable to the investors in a Section a claim on which to state relief could be 10(b) misrepresentation action for and omis- granted. sions. In this circuit there now will be no appeal affirmed on the On we basis attorneys safe harbor for in the sea of Sec- pointed “bespeaks caution” doctrine. We out tion majority’s holding The cases. thus prospectus that the was so filled with cau- cannot warnings, be reconciled with the re- tionary language allegedly mislead- cently Appeals made the Court of for the ing statements became immaterial as a mat- Circuit, where, here, Fourth a law Trump, 7 I ter of law. F.3d 371-73. will “unequivocally firm has informed representations forth the and caution- set investors that the law firm had not verified ary language Trump, for I see no need to provided the financial data to it Rather, only I do so. indicate that it seems client[,] duty ... find a [t]o the face of this Trump gave obvious the facts express disclaimer of verification would ren- stronger recovery investors a claim for than powerless der law firms scope define the give facts in this ease here. of their involvement in commercial transac- Trump inYet we affirmed the order of the Winstead, McGuire, tions.” See Fortson v. granting judg- district court the defendants Sechrest, Minick, (4th & 961 F.2d 12(b)(6). ment under Rule Cir.1992). explicit I cannot conceive of more acknowledge I Trump that in we held that Arvey’s. disclaimers than If such disclaim- cautionary language alleged rendered the permit ers cannot a law firm to foreclose the misrepresentation immaterial as a matter of possibility imposition liability on it to law while here we are concerned with wheth- parties issuing outside a written plaintiffs reasonably er the relied on client, nothing to a then will. The result of opinion letters. But this distinction makes majority’s position rigid is therefore “a point no difference. the caution- charging attorneys rule all who involve them- ary language Trump prospectus any selves in narrow corner of commercial should have home to the hammered investors responsibility transaction with for the whole taking. Precisely the risk they expressly transaction” even when dis- thing same is true here. The here claim such involvement. Id. rely reasonably could not on documents Furthermore, matter, practical their terms were not for their view majority justifi- thoroughly. and which were conditioned has so eliminated the true, out, majority points While it is as the able reliance element oí actions Section Arvey may only have known that investors which in circuit hereafter this will exist Trump misrepresentations, also involved other counts which we there were no but even if were, need not describe. there were not material. But I am taking approach. course, Trump 10. Of on the basis of and the cited, opinions other I have we could hold that far-reaching theory. opinion will in The perhaps be- circuit and

consequences Won, Guang in this YI, Bong Yang Yee Li You economy attor- in our national yond because Su, Lin, Yong Feng, Pin Chen Chu in some may recognize that neys anywhere Wing Chun, Zhong Pu So Gee Pan a/k/a in cir- litigation transactions securities Chang Lu, Zhang Dong, Xin-Fei Chun opinion should may The cuit materialize. Zarang, Tong Xin-Fuei Wai a/k/a attorneys in knowledgeable commercial lead Lu, Zheng, Zhang, Dai Min Chun Shi Exchange in which Securities situations Lin, Zing, Hua Chen Shuidi Chun implicated to be reluctant Act become A-72-761-974, Zheng, Xie, Li Zhen Guo anything which could anyone about advise Ming Long, Yun-You, Lin or the value rights of investors affect Indeed, рrincipled I no see the securities. v. opin- majority’s decision to limit the way Accordingly, I attorneys. dis- given by ions George MAUGANS, Counsel of District sent. Immigration Nat- States United District; Service, Baltimore

uralization Milhollen, Ex- L. Director of the David Immigration Review ecutive Office for FOR REHEARING PETITION SUR Immigra- and Chairman of the Board of Sharkey, Appeals; Richard J. Dis- tion 2, 1994 June Immi- trict Counsel of the United States SLOVITER, BECKER, Before: Service, gration and Naturalization MANSMANN, STAPLETON, District; Philadelphia J. Scott Black HUTCHINSON, SCIRICA, GREENBERG, man, District Director of United NYGAARD, ALITO, ROTH, COWEN, Immigration and Naturalization States LEWIS, Judges. Circuit Service, Philadelphia District; United rehearing appel- petition for filed Immigration and Naturalization States having case been in the above-entitled lees Service; for Immi- and Executive Office judges participated who submitted to the Review; Reno, Attorney gration Janet and to all the other the decision of this Court States; Doris of the United General regu- judges of the circuit available circuit Meissner, Commission of United service, judge who con- and no lar active Immigration and Naturalization States having asked for re- curred the decision Service majority judges circuit hearing, and a regular active service not of the circuit rehearing by court

having voted banc, rehearing is denied. petition Yong Zhong PAN Pu a/k/a Greenberg and Cowen Judges ‍​‌‌​‌‌​‌‌​‌​​​​​​​​​‌‌​​‌‌‌‌​‌​​​​​​‌​​​​​‌​‌​​‌‍Stapleton, Wing Chun, Appellant, like to have noted on the record rehearing banc. voted for

George MAUGANS, District Counsel of Immigration and Nat- United States District; Service, Baltimore uralization Sharkey, Richard J. District Counsel Immigration and Nat- the United States Service, Philadelphia Dis- uralization

Case Details

Case Name: Kline v. First Western Government Securities, Inc.

Court Name: Court of Appeals for the Third Circuit

Date Published: May 2, 1994

Citation: 24 F.3d 480

Docket Number: 92-1498, 92-1499

Court Abbreviation: 3rd Cir.