*1 7, Aрr. S091297. 2003.] [No. etc.,* Administrator, Plaintiff SMALL, as Public
MARIETTA Appellant, INC., al., COMPANIES, et Defendants Respondents.
FRITZ Greenfield, court, *Harvey superior pending this case was here. died while Small, Harvey for the Estate of granted the motion of Marietta the Public Administrator We Greenfield, appellant. to substitute as *3 Counsel
Stull, Braun, Godino, Burke, & Michael D. Marc L. J. Timothy Stull Brody, Jules and Mark Levine for Plaintiff and Brody Appellant.
Orrick, Sutcliffe, and Anne & William F. Alderman E. Hawkins Herrington for Defendants and Respondents. Rosati, Feldman,
Wilson Sonsini Goodrich & Boris J. Clark and Douglas *4 Inc., W. for Electronics for as Amicus Curiae on Cheryl Foung Imaging, behalf of Defendants and Respondents.
Skadden, Slate, Flom, & Garrett J. Kennedy, Raoul D. Arps, Meagher Waltzer, P. Ifilm David E. and Frances Kao for and SGW Springer Corp. Inc., as Amici Curiae on behalf of Defendants and Holding Respondents. Olson, & D. M. and Janice Siegal, Garvey Tolles Charles Munger, George as Curiae on behalf of M. Kroll for Securities Association Amicus Industry Defendants and Respondents. Hoffelt, Miller; Wilke, & Matthew
Richard I. Gould W. Fleury, Birney, Dorris, Baxter; Powell, A. Daniel L. Farr & Gallagher, Kelly Paul Willkie M. Hnatt and Daniel B. Rosenthal for American Institute of Certified Accountants as Amicus Curiae on behalf of Defendants and Respondents. Opinion that defendant
KENNARD, J. This isa stockholder’s action charging and its officers sent its stockholders a fraudulent quarterly corporation Plaintiff earnings profits. financial report grossly overreported discovered, stock corporate that when fraud was alleged The trial to stockholders like himself.1 causing dropped precipitously, injury a demurrer leave to amend and entered judgment court sustained without certify a class action. It responsibility the initial to this case as 1The trial court has whether certification is do not discuss whether class yet Consequently, has not ruled on the matter. we appropriate. defendants; We defendants’ granted petition the Court of reversed. Appeal for review. “Should the tort raised issue: only single for review petition be negligent misrepresentation) expanded
common law fraud (including defendants claim that misstatements suits those who permit the matter— This overstates induced them not to and sell securities?” buy do not own stock and does not claim who by persons this case involve does, however, the issue It present are induced not fraudulently buy. wrongfully should a cause of action recognize by persons whether California convenience, we shall refer to induced to hold stock instead of it. selling (For claiming action” to it from suits distinguish such a lawsuit as a “holder’s or sale purchase stock.) a holder’s action for fraud We conclude that California law should allow has that if acknowledged California negligent misrepresentation. long induce effect of a is to induce forbearance—to misrepresentation persons result, are have a cause to take action—and those as persons damaged action for fraud We are not or negligent misrepresentation. persuaded refrain from create an to this rule when the forbearance is to exception fraud, stock. This conclusion does not the tort of common law selling expand the factual setting but simply applies long-established legal principles to hold on to their stock. induce stockholders misrepresentations *5 can make a This cause of action should be limited to stockholders who bona fide of actual reliance Plaintiff showing upon misrepresentations. here failed to the element reliance sufficient has of actual with plead to that he can meet therefore reverse show We specificity requirement. court, the cause to that with of Court of and remand judgment Appeal demurrer but grant directions to have the trial court sustain defendants’ leave amend his complaint. I. Below Proceedings “In after a demurrer is sustained a of dismissal reviewing judgment amend, must the truth of all facts properly without leave we assume noticeable.” as well as those that are judicially pleaded plaintiffs, 809, La Habra 25 Cal.4th Jarvis Assn. v. (Howard Taxpayers City 369, in this case should not 23 P.3d Our 601].) opinion Cal.Rptr.2d defendants committed actually be construed as whether or not indicating fraud or negligent misrepresentation. Fritz against Greenfield filed this action Harvey
Stockholder Fritz, the Inc., Lynn a and three officers: against Companies, corporation, board, chairman of the and owner of 39 president, percent company stock; director; common John the chief financial officer and a and Johung, Mattessich, The controller and a director.2 action was Stephen corporate filed on behalf of all in Fritz “who owned and as class action shareholders 2, 24, 1996, held Fritz common stock as of at least April through July . reliance on defendants’ material and omissions . . misrepresentations for and who were The causes action damaged thereby.” complаint alleged common law fraud and and for violations negligent misrepresentation, Civil Code sections 1709 and which the common law actions codify for fraud and deceit.
Before us is the second amended It validity plaintiffs complaint. that Fritz services for and Between alleged provides importers exporters. then May 1995 arid Fritz Intertrans and April acquired Corporation numerous other in the and businesses. Fritz en- companies import export countered difficulties with these and in with the acquisitions, particular Intertrans which it for much of its business. accounting system, adopted Nevertheless, on Fritz issued release April press reported million, million, $274.3 $10.3 third revenues of net income of quarter $29. share of The same in its third earnings figures per appeared quarter shareholders, 15, 1996, for the issued report April quarter ending 29, 1996. was incorrect for a February According plaintiff, report of reasons: the of the Intertrans and Fritz variety inadequate integration exist; Fritz led to revenue that did not failed to accounting systems recording receivable; Fritz reserves for uncollectible accounts provide adequate misstated the costs of its acquisitions. 24, 1996,
The that on Fritz its restated complaint July previously revenues and for the third Estimated third earnings reported quarter. quarter Further, $10.3 $3.1 were reduced from million to million. Fritz earnings $3.4 announced that it would incur a loss of million in the fourth quarter. then set forth in detail the reasons third complaint why original accounting merger was inaccurate: quarter report improper acquisi- *6 costs; tion classification of as ordinary merger improper operating expenses costs; revenue software improper recognition; improper capitalized develop- costs; It ment and failure to allow for uncollectible accounts receivable. that the individual knew or should have known that the defendants alleged third and releases false and When misleading. were quarter report press investors, statements, these intended that in- defendants made “defendants Class, and act on the basis of those and would cluding plaintiff rely upon to retain the Fritz shares.” deciding whether misrepresentations Inc., Fritz, indicated, Companies, Lynn its 2Unless otherwise Fritz refers to Fritz not president and chairman of the board. members re- and all class further asserted plaintiff complaint statement, statement, including “read this ceived Fritz’s third quarter revenue, income and earnings per net information related to reported Fritz stock share, through information in to hold deciding and relied on this [July 1996].” “In to defend- alleged: response
With respect damages, complaint 24, 1996, Fritz’s stock more than 55% ant’s disclosures on July plunged $15.25 $12.25 . . . Had defendants one to close at share . day, dropping per revenue, net income and share on earnings disclosed correct third quarter per 2, 1996, [generally accounting prac- as GAAP April required accepted 2, 1996, have declined on and tices], Fritz’s stock likely April of their shares at a above and the Class would have disposed $12.25 of share per closing price day.” Defendants second on two demurred amended plaintiff’s complaint not grounds: any “California law does (1) recognize [cause action] behalf of neither nor shares based shareholders who sold bought upon omission”; misstatement or failed to alleged complaint “plead with the the facts to constitute actual reliance.” alleged requisite specificity The trial court sustained the demurrer on the second and entered ground only judgment for defendants. Plaintiff appealed.
The Court of It stated causes of reversed. held that Appeal complaint action for fraud and actual reliance negligent misrepresentation with sufficient did not decide whether the case should be specificity. (It certified as a class We defendants’ for review. action.) granted petition
II. Induced Cause Action Stockholders Recognizes California
Fraud or Stock Negligent Misrepresentation Selling Refrain from
Defendants contend that a cause of recognize California should action for fraud or relies on when negligent misrepresentation stock, the false or it. We representation by retaining buying selling instead disagree.
“ fraud, ‘The which rise to the tort action for gives elements deceit, concealment, are non (a) (false misrepresentation representation, defraud, intent to disclosure); knowledge falsity (or “scienter”); (c) (b) ” i.e., reliance; reliance; damage.’ to induce (d) justifiable (e) resulting Court Cal.4th (Lazar Superior Cal.Rptr.2d *7 of does not 909 P.2d tort 981].) negligent misrepresentation 481, v. Bertran 43 Cal.2d scienter or intent to defraud. require (Gagne (1954) 174 assertion, fact,
487-488
P.2d
It
as a
of
15].)
encompasses
[275
“[t]he
true,
it to
which is not
one who has no reasonable
for
be
by
ground
believing
Code, 1710,
assertiоn, in
true”
subd.
a manner
(Civ.
2),
positive
§
“[t]he
it,
is
not warranted
the information of the
of
which
by
person making
1572,
2;
true,
Code,
he
it
subd.
see
not
believes
to be true”
though
(Civ.
§
954,
Fox v. Pollack
181
962
(1986)
Cal.App.3d
Cal.Rptr.
[226
532] [describ
elements of the
When such
have occurred
ing
tort]).
misrepresentations
stock,
the sale
the California courts
connection with
corporate
entertained common law actions for fraud or negligent misrepresentation.
958];
Hobart v. Hobart Estate Co.
175
176
Corporation (S.D.Cal. 1959)
California has nоt
F.Supp. 801.)
yet ap
this
to lawsuits
plied
principle
involving misrepresentations affecting corpo
stock, but,
rate
as we shall
we should not make an
explain,
exception
such cases. Most other states that have confronted this issue have concluded
that forbearance from
stock is
selling
sufficient reliance to
a cause of
support
action.
David v.
(See
Belmont
291 Mass.
(1935)
83];
450
N.E.
Fottler v.
[197
Moseley (1901)
Jersey said: “Lies which deceive and do not injure become innocent because merely the deceived continue to do rather than something begin do something else. Inducement reliance; is the substance of the form of reliance—action or inaction—is not critical to the actionability fraud.” (Fn. omitted.)
Indeed, defendants do not dispute forbearance is sufficient generally reliance to a permit cause of action for fraud or negligent misrepresentation. Neither do they dispute forbearance would be sufficient reliance if a stockholder were induced to refrain from his stock selling a face-to-face conversation with a officer or corporate director. Borrowing phrase the United States Supreme Court in Blue opinion Chip Stamps Manor Drug Stores U.S. S.Ct. 1929-1930, 44 L.Ed.2d 539] (Blue however, Chip Stamps), defendants argue that all such cases are “light years away” from the world of stock transactions on a national exchange.
Defendants first assert that in the context of stock sold on a national exchange, corporation cannot be found to have knowingly intended to defraud “an anonymous shareholder Greenfield,” like because no officer or corporate director had a face-to-face or communication personal Nevertheless, with him. although fraud many cases involve personal com- munications, that has never bеen an element of the cause action. (See Television, Committee on Children’s Inc. v. General Foods Corp. (1983) Cal.3d 218-219 Cal.Rptr. 673 P.2d perpetrated by 660] [fraud misleading advertisements on nationally broadcast television Fraud shows].) can be perpetrated by any means of communication intended to reach and influence the recipient. *9 involving
But defendants’
is that in a case such as this
argument
principal
held,
stock,
traded
are
consider
widely
a
there
nationally
compelling policy
that
a
cause of action. In
argue
recognizing
particular,
ations
holder’s
against
of non-
filing
contend that
a holder’s action will
the
they
allowing
permit
meritorious
suits
coerce settlements
Blue
designed
Chip
“strike”
(see
at
Mirkin
1927-1929];
A. Federal Law federal in the early enacted the first laws securities
Congress regulating Ratner, 68 (See in to the stock market crash of 1929. response supra, 1930’s at Act U.S.C. U. Chi. L.Rev. The Securities of 1934 1042.) Exchange (15 p. against 78a et “was investors seq.) designed protect manipulation § that end extensive stock established disclosure prices” requirements. 978, 982-983, Inc. v. 485 U.S. S.Ct. 99 Levinson (Basic [108 act, L.Ed.2d Under the the Securities 194].) authority granted by in it “unlaw- Commission Exchange promulgated regulation making device, ... or artifice to any any ful for ... scheme person employ [U] defraud, omit . . . make untrue of a material fact or to any statement [t]o [f] in made . . . to state a material fact order to make statements necessary act, . . . or course misleading, any practice or engage [t]o ft[] which or would as a fraud or deceit upon business operates operate with the C.F.R. purchase any security.” (17 connection or sale person, 240.10b-5 Rule Lower federal courts implied (2002) (hereafter 10b-5).) § 10b-5, Supreme of action to enforce Rule United States right private Levinson, this view Inc. v. eventually supra, Court endorsed in 1988. (Basic at S.Ct. at 982-983].) 485 U.S. 230-231 pр. pp. [108 461, the F.2d In Birnbaum v. Steel Cir. (2d Newport Corp. Rule 10b-5 States for the Second Circuit interpreted United Court of Appeals “ or seller’ aimed at ‘a fraud only perpetrated upon purchaser as relation of fiduciary duty by corpo- and as no to breaches having securities in fraud those who were not upon purchasers rate insiders resulting barred Rule 10b-5 463.) at This (Birnbaum, interpretation sellers.” actions that rule. holder’s under
In the United States Court Supreme agreed Rule 10b-5 did not (Blue holder’s permit actions. 421 U.S. at Chip Stamps, supra, pp. S.Ct. at Its decision based pp. 1931-1932].) was on two largely [95 policy considerations: The of vexatious and danger meritless suits filed to extort a settlement simply 739-740 S.Ct. at (id. pp. 1927-1928]) pp. and the difficulties of that arise proof when crucial issues may depend on oral entirely from stockholder testimony (id. 743-747 S.Ct. pp. at pp. 1929-1931]).
But then the court high addressed the argument complete nonrecog- nition of holder’s actions would result in relief to injustice by denying victims of fraud. That occur, observed, would not injustice court because its decision was 10b-5; limited to actions under Rule defrauded stockholders still have might a in state remedy court. The court said: “A high great of the majority commentators on many the issue before us have taken the view the Birnbaum limitation on the class in a Rule 10b-5 action for is an damages restriction arbitrary which unreasonably prevents some deserving plaintiffs from recovering which have in fact been caused by violations of Rule 10b-5. . . . We have no doubt that this is a indeed rule, of the Birnbaum disadvantage and if it had no countervailing it advantages would be undesirable aas matter of . . . .” policy (Blue Chip Stamps, supra, U.S. at 738-739 S.Ct. at pp. fn. pp. 1926-1927], Then omitted.) footnote, in a the court observed: this “Obviously disadvan- tage attenuated to the extent that remedies are available to nonpurchasers and nonsellers under Thus, state law. for in Birnbaum example, [Citations.] itself, while the found plaintiffs themselves without federal remedies, the conduct as the gravamen federal later complaint provided basis for in recovery a cause of action based on state law. And in [Citation.] case, the immediate respondent has filed a state-court class action held in abeyance pending outcome of 739, this suit. fn. (Id. [Citation.]” short, S.Ct. at In p. 1927].) court’s high decision in Blue Chip Stamps, while recognizing policy considerations similar to those defendants herе, advance did not view those considerations as justification for a total denial of relief to holders; defrauded it reasoned that the only courts federal could a deny forum to wronged stockholders who are not sellers or buyers without unjust because consequences these stockholders retained a remedy in state courts.
Defendants here also refer 1995, to later federal In legislation. Congress, veto, over presidential the Private passed Securities Reform Act of Litigation 1995 (hereafter sometimes referred to as No. 104-67 PSLRA) (Pub.L. (Dec. 22, Stat. 1995) 109 The PSLRA 737). arose from concern congressional the “current system private liability under the federal securities laws d[id] between meritorious and claims.” (Sen. frivolous adequately distinguish Affairs, on and Urban Subcom. on Securities and Banking,
Com. Housing, Investment, 13, Staff Private Litigation 1994) p. Securities Rep. (May Perino, cited in Securities as Fraud Federalism: Private State Preempting Causes Fraud Action Stan. L.Rev. enacted 290.) “Congress the PSLRA to deter abusive opportunistic filing private plaintiffs claims, fraud in securities standards part, raising pleading private fraud re Inc. plaintiffs.” (In Litigation securities Silicon Securities Graphics end, Cir. this 183 F.3d To PSLRA (9th 973.) imposed in Rule 10b-5 cases to heightened pleading requirement, plaintiffs requiring Inference with facts rise to a that the particularity strong “state giving acted of mind.” (15 78u-4(b)(2).) defendants with state U.S.C. required § Later, filing concerned that were PSLRA state plaintiffs evading court, Act, the Uniform Standards which Congress 1998 passed preempts class in connec state court actions based on untrue statements omissions tion with the or sale of U.S.C. recent purchase security. (15 77p(b).) § Act of which numerous restrictions on Oxley imposes Sarbanes *11 action, but does not restrict causes of accounting practices, private corporate filing instead extends the for suit. U.S.C. 7201 et (15 seq.) period § The the PSLRA and the Uniform rely, two statutes on which defendants Act, actions; do state governs Standards not affect court holder’s the PSLRA court, actions in and its by federal the Uniform Standards Act terms only the of or sale stock. As defendants only involving purchase suits applies note, that in in both acts demonstrate 1995 and 1998 viewed Congress class with considerable Yet did not Congress stockholder actions suspicion. actions Rule 10b-5: specific abolish stockholder class under by requiring it to bar abusive while meritorious suits. attempted permitting suits pleading, Sarbanеs Act of 2002 recent concern reduce Congress’s The shows Oxley barriers to meritorious suits. procedural
B. Decisions California through the the California electorate Legislature
Neither California nor actions. In limiting initiative has enacted measures stockholder power its at one would two initiatives were defeated competing polls; suits, stockholder such deterred other would have suits. encouraged 201, pp. Ballot Elec. text of Primary 1996) Prop. (Compare Pamp., (Mar. 68-70; (Nov. 5, pp. with Ballot Gen. Elec. text of 1996) Prop. Pamp., 95-96.)
Defendants, however, on two of this court have cited decisions rely 3 Cal.4th liability concerns in to stockholders: limiting Bily, supra, policy Mirlan, 5 Cal.4th and 1082. supra, In this court that an firm not liable accounting of held was Bily, majority who relied on its audit to stock. negligence persons purchase corporate The such decision and weighed advantages disadvantages recognizing action at and cause of Cal.4th concluded (Bily, supra, pp. 396-407), for may lenders and investors not recover at but negligence (id. 407) p. (id. recover for fraud and p. negligent (id. misrepresentation for mis- p. 413). majority explained: “By allowing recovery negligent to mere representation (as emphasize we opposed negligence), indispens- justifiable reliance on the statements contained in the . . . ability report. general negligence charge directs attention to defendant’s level care [A] with standards compliance testimony, established professional expert as reliance on a false statement made opposed plaintiffs materially contrast, defendant. ... In an instruction based on of negli- elements gent misrepresentation focuses the attention necessarily properly jury’s on the or truth audit falsity report’s representations plaintiffs actual and justifiable reliance them. Because the audit not the report, itself, claim, audit is the foundation of the third person’s negligent misrep- resentation more gravamen of the cause . . .” precisely captures (Ibid., . fn. omitted.) Bily supports thus our conclusion here that California recog- nizes a holder’s action based on fraud negligent misrepresentation.
Bily’s holding a cause action denying rested on the negligence auditors, premise because contract only with owe corporation, no care duty of to the stockholdеrs. 3 Cal.4th at That (Bily, supra, 376.) cannot be A reasoning this case. has a applied corporation statutory duty *12 to furnish with Code, 1501, stockholders an annual subd. report (Corp. § false, a that is (a)); furnishing or a report misleading, improperly prepared breach of duty. Officers and owe a directors to stockholders. fiduciary duty (Tenzer v. 18, 130, Inc. Superscope, (1985) 39 Cal.3d 31 702 Cal.Rptr. [216 P.2d Jones v. H. 212]; 93, F. Ahmanson & Co. 1 Cal.3d (1969) 109-110 [81 592, 460 v. Cal.Rptr. 464]; P.2d Fisher Co. Pennsylvania 69 Life 506, stockholder, 513 A Cal.App.3d Cal.Rptr. 181].) controlling such [138 here, as defendant Lynn Fritz also to minority owes duties stock fiduciary Co., holders. v. H. F. Ahmanson (Jones & at the supra, Thus pp. 109-110.) alleges breach of are complaint already duties that well established in California law. Mirkin,
In a of this court the “fraud on the market” majority rejected doctrine used in federal cases Rule under 10b-5. That doctrine makes it for unnecessary or sellers of relied defend- buyers they stock on a prove ant’s on the that or not the misrepresentations, whether relied theory they the influenced market at which later or misrepresentation they bought Levinson, sold. Basic Inc. (See 485 U.S. supra, 224.) By rejecting 180 doctrine, held for fraud or plaintiff suing
“fraud on the market” Mirkin that law must actual reliance. under California negligent misrepresentation prove that its carefully 5 at The court noted pp. 1090-1098.) Cal.4th (Mirkin, supra, did not actually rely decision did who deprive plaintiffs fraud, for retained remedies under remedy they of a misrepresentation that on material both state and federal securities laws reliance presumed Code, 1090, 10b-5, federal Rule p. citing misrepresentations. (Id. Corp. 25400, 705, 25000, & Bowden v. Robinson Cal.App.3d §§ Cal.Rptr. 871].) of But Mirkin by impliedly Mirkin involved a suit a seller securities. also action California law that holders have a cause of under recognized doctrine, it when noted that if it had the fraud on market adopted persons that to sell could sue on the missed a favorable ground they opportunity was that stock “because market affected negligent misrepresentations never heard.” 5 Cal.4th at italics they supra, p. added.) (Mirkin, a cause action if can they italicized holders retain of language implies instead of fraud on the market. actual reliance on prove misrepresentation Mirkin, In before us contrast Cal.4th supra, complaint And, asserts financial and relied on it. read false statement plaintiff Mirkin, unlike the sued in who hold stock persons securities who buyers arе for redress totally dependent upon reliance upon misrepresentations law no under either remedy state common causes action. have They federal 10b-5 Code sections because Rule Corporations all of are to suits or sellers securities. buyers these limited provisions sum, In the federal and state decisions and actions we examined and nonmerito- danger bring that shareholders abusive recognize officers, to force a settlement from the and its corporation rious suits as denial all share- they outright bút do not view danger justifying to the deny To the when courts relief contrary, holders’ causes action. redress them, affirm that the could seek before 421 U.S. at fn. 9 supra, in another forum (Blue Chip Stamps, Mirkin, Cal.4th court]; could in state [plaintiff supra, S.Ct. sue p. 1927] *13 or could court]; could sue in federal that p. [plaintiff of for or negligent misrepresentation a cause action fraud by bringing prevail 3 Cal.4th ordinary negligence (Bily, supra, pp. instead of one 407). ’ Policy Arguments
C. Defendants also of defendants’ contentions policy Our of the specifics examination action a cause of that holder’s they may justify limiting the conclusion yields of of but do not total denial of the cause action. Each defendants’ justify shares the same Defendants do that a argue contentions defect. policy instead, claim that some of unjust; holder’s suit for fraud is intrinsically nonmeritorious, frivolous, be filed those suits will be or or will solely settlement, coerce a or will raise of or And instead problems pleading proof. chaff, of a the wheat from the defendants offering separate proposal contend that cause thus deny entirely, we should holders a of action rejecting the just unjust and the alike. Yet defendants’ own authorities confirm the of state court holder’s and that to limit validity suggest any proposal actions them should be than outright more denial cause of discriminating action. concern,
With defendants’ a first holder’s action respect allowing suits, will lead to the of “strike” filing nonmeritorious commentators distin- guish between two undesirable outcomes: opposite allowing plaintiff to (a) occurred, obtain a large settlement when no fraud and judgment (b) fraud denying redress when occurred. refer to these actually (They outcomes as error,” Painter, I error” and II “type “type respectively.) (See Responding to a False Alarm: Fedеral State Fraud Preemption Securities Causes of Error, 71; Error, Stout, Action 84 Cornell L.Rev. I II Type Type and the Private Securities Act Litigation 38 Ariz. L.Rev. Reform (hereafter Stout).)
When enacted the Congress Private Securities Reform Act Litigation 1995 and the Uniform Standards Act of it was almost con- entirely cerned with suits. 38 Ariz. preventing (Stout, nonmeritorious L.Rev. supra, But 711.) events since 1998 The changed last few perspective. have seen years of false financial repeated reports statements accounting fraud, demonstrating many fraud were neither charges corporate speculative nor to extort attempts settlement but were based on money, actual misconduct. “To open today is to receive dose newspaper daily scandal, to Enron and each of Adelphia beyond. us knows Sadly, that these newly instances securities fraud publicized accounting-related are no out of longer ordinary, save scale alone.” et perhaps (Schulman al., The Act: The Sarbanes-Oxley Litigation Civil under the Impact Federal Securities Laws from the Plaintiffs’ (2002 ALI-ABA Perspective frauds, Cont. moreover, Legal Ed.) 1.) victims of are reported often who were induced to persons by rosy hold stock but false corporate financial while others knew the true affairs reports, who state of exercised stock Purcell, at inflated options (See sold The Enron prices. Bankruptcy Plans, Research Employer Stock Retirement Service Congressional (Mar. to actual Eliminating deny barriers redress victims of 2002).) fraud now an deterring assumes to that of nonmeritorious importance equal *14 suits. that an entire theory
Defendants under s universe argue poten- a tial investors could state a class action for fraud time stock price that had up, allege they fluctuated. If stock went investors could prices not elected to based on a company’s inadequately optimistic shares purchase that decided forecasts. If stock investors could prices dropped, allege they to sell to disclo- unduly optimistic not based (or buy “put options”) case, the however. are here concerned sures. This overstates We argument decide Fritz’s not with the universe of investors who potential might buy stock, actually but with the more limited of owners of that stock who group file relied on false owner can suit when representations. Although any of a a must stock tо survive demurrer to owner price drops, complaint Court, 12 Cal.4th at allege (Lazar fraud with v. specificity. Superior supra, A that stock a decline in the market 635.) merely alleges pleading obviously does not state a cause action. further that if a reli- argue
Defendants even plaintiff adequately pleads ance, of reliance often on oral stockholder proof depend testimony: will that he read the financial but there be no written testify may will statement so; stock, and record that he did he that he decided not to sell the testify will broker, friend, decision, a but that he told his or of his spouse, perhaps Thus, con- there be no to evidence this fact. defendants are may writing will no false claims of reliance. way cerned rebut they to read on it. rely A financial invites shareholders and corporation’s report will so. The commit undoubtedly possibility Some do a shareholder will not differ and claim to have read and relied on the does perjury falsely report in kind issues resolved triers many routinely other credibility fact in civil It cannot a blanket rule of litigation. nonliability. justify moreover, are, favor of countervailing
There in strong policy arguments of action. “California . . . has allowing legitimate a holder’s cause climate free of fraud interest a business compelling preserving Court Systems, Multimedia Inc. deceptive (Diamond Superior practices.” P.2d When 539].) Cal.4th Cal.Rptr.2d are to be or misleading, financial statements revealed false corporate receive investors who beyond harm done extend well may particular hesitate to loan money corpo- those statements. Financial institutions will books, if cannot and the refusal of lenders corporate rations trust creditors, stockholders, its harming advance funds can doom a corporation, investors, fraud, will fear of one Potential learning corporate and employees. unrevealed, may discount yet there be others the bare financial other below what corporations) corporation (and possibly conse- economy-wide can have resulting data would warrant. The losses and failure of investor confidence in terms of loss of employment quences *15 Stout, 713-714; the stock market. 38 Ariz. L.Rev. House (See supra, pp. Services, Com. on Fin. The Enron on Investors and Finan- Collapse: Impact Markets, 12, cial Cong., 107th 1st Sess. (Dec. 2001).) Civil Code section 3274 declares that in California are money damages “for the violation of but also only prescribed remedy private rights” “the means of their observance.” Because of the limited resources securing available for and Commission’s enforcing Security mandatory Exchange disclosure has been as system, litigation “private frequently recognized deterrent, a useful performing augmentative as well as a role.” compensatory 438, The Merits Do Matter (Seligman, 108 Harv. L.Rev. “The (1994) 456.) SEC has noted that repeatedly government alone is not sufficient regulation markets honest. It keep has stated that the civil consistently private is a element in remedy key trusted market in which individuals establishing funds could pension safely invest.” Intended (Labaton, Consequences, Unintended, Securities Law 29 Stetson L.Rev. of Reform a cause of 401.) Denying action to who hold stock in reliance persons upon reduces corporate misrepresentations the number of substantially persons who can enforce corporate honesty. as this court said in
Finally, 45 Cal.2d Emery Emery (1955) P.2d 218], Code, to the general “[e]xceptions principle liability (Civ. there every wrong ... are not to be remedy.’]) lightly § [‘For created . . . .” We have some recognized in cases exceptions, notably where it would conflict with the need to protect finality adjudication Cedars-Sinai (see Medical Center v. Court 18 Cal.4th Superior 10-11 954 P.2d or in which the Cal.Rptr.2d defendant owed 511]), no to the duty person injured (e.g., Bily, Cal.4th But the supra, 370). reasons for those that, do not exceptions here. Persons for apply claiming reasons of should policy, they be immune from for intentional fraud liability bear a very burden of heavy one that defendants here have not persuasion, however, sustained. We that the risk of recognize, nonmerito- encouraging rious suits justifies using limits requirement specific pleading place Cedars-Sinai, on the cause of action. (See 18 Cal.4th at supra, pp. 13-14.) We those limits in the next explain part.
III. Reliance Adequacy Pleading of Plaintiff’s Defendants here attack indirectly. Instead plaintiffs pleading arguing reliance, does not plaintiffs complaint defend adequately plead ants’ brief argues that this court should a holder’s cause of action reject because it raises troublesome reliance. For questions proving pleading the reasons stated in II. of this defendants’ are part opinion, arguments *16 action. For the
insufficient an absolute denial of a holder’s cause of justify however, the and future we discuss litigants, will guidance parties of plaintiffs complaint. adequacy and non- what needed is some device to meritorious
Ideally, separate is cases, in of trial. meritorious if advance California’s possible requirement on for in fraud pleading purpose (Committee cases serves specific Television, Children’s Inc. v. General Foods 35 Cal.3d Corp., supra, California, “In fraud must be 216-217). pled specifically; general pp. “ do not ‘the conclusory and suffice. ‘Thus allegations policy [Citations.] invoked to liberal construction of the . . . will not be pleadings ordinarily ” a in material This respect.’ sustain defective pleading [Citation.] how, which “show necessitates particularity requirement pleading facts where, whom, ten when, means the were representations what ’ ” Court, (Lazar dered.” v. 12 Cal.4th Superior supra, p. 645.) have whether the tort of negligent
California courts
never decided
here,
in the
must
be
with
also
misrepresentation, alleged
complaint
pled
the
But
a
in
of two
requirement
implied
reasoning
such
specificity.
Television,
decisions
on Children’s
Inc. v. General Foods
(Committee
Corp.,
216;
35 Cal.3d at
B.L.M. Sabo & Deitsch
55 Cal.App.4th
supra,
823,
asserted
in Justice
335])
835-837
and was
Cal.Rptr.2d
expressly
[64
728,
Moslc’s
in Garcia v.
Court
50 Cal.3d
dissenting opinion
Superior
P.2d
Because of the
for false
Cal.Rptr.
potential
960].
claims,
a hold
we hold
a
for
in
negligent misrepresentation
complaint
the
a holder’s
er’s action should be
with
same
pled
specificity required
for fraud.
no
on whether this pleading requirement
action
view
(We express
other actions for
apply
negligent misrepresentation.)
trial
Court
claimed that
In the
court and the
defendants
Appeal,
was
relied on defendants’
having
misrepresentations
assertion of
plaintiffs
suits,
We
that in view of the
of nonmeritorious
danger
insufficient.
agree
In a
conclusory
such
does
language
satisfy
specificity requirement.
reliance
the defendants’
holder’s action a
must
allege
plaintiff
specific
that if
had read a truthful account
example,
plaintiff
representations:
stock,
financial status the
would have sold
corporation’s
plaintiff
sold, and
the sale would
how
shares the
would have
when
many
plaintiff
actions, as
taken
must
place.
allege
distinguished
plaintiff
decisions,
that would indicate
thoughts
unrecorded
unspoken
relied on
actually
misrepresentations.
fide
who
with
to show a bona
specificity
Plaintiffs
cannot
sufficient
plead
who
not stand
from the mass of stockholders
claim of actual reliance do
out
Mirkin,
on the
market. Under
5 Cal.4th
rely
such
cannot
supra,
persons
individual or
bring
class actions for fraud or misrepresentation. They may,
however, be able to
derivative action
bring corporate
against
corporate
officers and
for harm
directors
caused to the
v. General
corporation. (Sutter
Petroleum
28 Cal.2d
P.2d
Corp. (1946)
Plaintiff here did not action, attempt bring derivative however. His *17 complaint does not to the allege injury or a common to corporation wrong stockholders, the entire body but to those stockholders only who actually relied on defendants’ Thus the misrepresentations.3 must stand or complaint fall on the allegations of reliance. personal
We conclude that did not plaintiff reliance in this adequately plead case. But because the we set forth here requirement has not been stated in previous cases, plaintiff should be given leave to amend his to make the complaint necessary allegations. of the judgment reversed, Court of is and the Appeal cause is
remanded for further proceedings consistent with this opinion. J., J., C.
George, Moreno, J., Werdegar, concurred. KENNARD, J., Concurring. The majority authored, which I opinion, upholds right of stockholders to sue for fraudulent or negligent misrep- resentation when they on the reasonably rely misrepresentation refrain their selling stock. It does not discuss whether the here has adequately pled because damage, defendants did not raise that I question. write separately explain my disagreement with separate opinions Justices Baxter and Brown.
I Justice Baxter’s concurrence urges this court to declare that holder plain- tiffs must realized, allege they sustained permanent damage. Such a require- ment, he would acknowledges, mean in cases many that plaintiffs must allege sold the stock they after learning fraud.
Justice Baxter begins his discussion with the correct proposition must show actual damages. But he asserts more two propositions express We no view on whether the facts complaint imply wrong as in the to the corporation, corporation, by market, or whether the perpetrating a fraud wronged on the body entire of stockholders. First, he
that are unsound and
asserts
unsupported by any authority.
their
was
damages
defrauded stockholders incur no
unless
value of
stock
if,
Second,
an initial decline
diminished.
he maintains
after
permanently
revealed,
time
when the fraud is
of the stock
later
rises
the plaintiff’s
reasons unrelated to the
this rise reduces
eliminates
fraud,
maintains,
rise, he
make
too
loss.1 The
of such a
possibility
damages
These
that in most
lead Justice Baxter
conclude
speculative.
premises
sue,
because there is
instances stockholders must sell their stock in order
fix the
they
no other
can
amount
suffered
way
prove
stock,
at some
will not benefit from an increase in
value of
unknown
date,
future
from unknowable future circumstances.
arising
But Justice Baxter’s
are
is
premises
wrong. Temporary injury
legally
One who
sue
compensable.
personal injuries may
abound.
sustains
Examples
heal.
taking
even if the
will
A
injuries
eventually
temporary
property
even if the
is later returned.
Kimball
compensable,
(See, e.g.,
property
v. U.
U.S. 1
L.Ed.
Co.
S.
S.Ct.
Laundry
*18
Zaslow Kroenert
I is with could be termed economy derisively filled what disagree. estate, the of a goodwill value of real assets”—the “paper appreciated account, receivable, business, checking accounts the balance of a uncollected on the etc. and make decisions based value Business individual investors not, however, argue falls because of factors price 1He that if the the stock further does fraud, damages. plaintiffs the Justice Brown’s concur to the this decline increases unrelated hand, ring dissenting imply on does that a decline caused opinion, the other damage. (See conc. & intervening plaintiffs to the increase the causes unrelated fraud would post, opn., p. 209.) dis. stock, such assets. A decline in the value of like a decline in balance asset, a in the net a bank account or in the worth of a is decline physical stockholder, worth of the whether or not the stock is sold. For individual stockholders, it take a affects such matters as whether the stockholders will vacation, whether can and what other investments they get mortgage, they make or do not make. It can on retirement have drastic effects plans. Businesses and institutions also hold stock. A decline in the value of the stock it holds can lead a an college raise tuition or insurer to raise It affects a or issue new premiums. company’s ability money borrow sum, stock. In ours is a and declines in stock paper economy, prices real and serious effects whether or not the stockholders sell the stock.
I also disagree with Justice Baxter’s second premise—that damages defrauded stockholders should receive would become if unduly speculative continued to hold the stock because of the possibility price later, the stock indefinite might future, increase time into the because of matters unrelated to the fraud. The rule In accepted contrary. case, securities fraud the loss is calculated by using “market after price the fraud is discovered when ceases to be fictitious price [i.e., based on false represents consensus of buying selling opinion data] Torts, 549, c, value of the securities.” com. (Rest.2d Later p. 110.) § direction, in either changes, do not affect the calculation of the loss. This rule does not mean that necessarily must be computed the basis of the market of the stock on the fraud is day possible revealed; the market take and react to the longer digest news. In 1995 *19 Congress, the Public Securities Reform Act of Litigation 1995 (PSLRA), addressed of in cases in proof damages which a was plaintiff who fraudu- induced lently to purchase securities sued the and its officers corporation after the fraud was revealed and the fell. U.S.C. price (15 78u-4(e).) § PSLRA calculates based on the damages mean of the trading price security within a after the date 90-day period when the misstated or omitted fact is disclosed to the market. (Kaufman, Securities Litigation: Damages (2002) 3.13, 3-95 to pp. 3-102.) mean is the of the (The trading price average § the closing If, however, of prices security throughout 90-day period.) sell the before the plaintiffs security of the dam- expiration 90-day period, are based on the mean ages in the trading price postdisclosure period ending on the date of the sale.2 There (Ibid.) are differences between the buyer’s actions regulated here, the PSLRA and the by holder’s actions issue but share a common need: fix they a date and to use in postdisclosure price calculating In this damages. two actions are and the respect analogous, federal legislation action a for regulating buyer’s suggests workable rule alone, price
2Not on the sale proposes. as Justice Baxter may that the market actions: It recognizes in holder’s damages computing better indicator of fraud, a later be a may of and that overreact to news a stock, it not diminish but does value true postdisclosure economic fac- that long-term because of the possibility plaintiff’s damages to rise to its level. cause the stock eventually predisclosure tors may until not be able to sue that stockholders should Justice Baxter’s proposal mentioned and never endorsed a notion rarely “realize” their loss is a century A on securities regulation.3 quarter the cases and commentaries Investment in Harris v. American was argument rejected a similar ago 227-228, in a held that 523 F.2d which Cir. (8th Company may of securities buyer “A defrauded action no sale was buyer’s required: continues . . even he though under damages 10(b). maintain an action for § law, a defrauded purchaser At common to hold the securities. [Citations.] action for an maintaining to sell them duty prior securities is under no if he chooses. them for investment purposes deceit but hold [Citations.] stock, . . Thus, mitigation no to sell his . duty Harris was under . . . this action. сommencing [|] or other any purposes, prior discovery as of the date of public be measured damages may Harris’s be able to avail circumstances, will not those fraud. Under ‘[t]he date. So after that security decrease in the value of himself of further any increase in able to avail itself of the defendant should not be also in which a is the method only after that date. This value of stock This reasoning applies can be obtained.’” measure of damages consistent here. a holder’s action as involved equally actions, of holder’s commentators, support those critical No including that, in cases Justice Baxter except discuss the notion advanced even sell their stock stockholders must or special damages, corporate bankruptcy case; it arose only briefed in this This was not before suit. bringing proposal hesitant to adopt We should be very at oral argument. during questioning tested not been briefed or previously own invention that has rule of our commentary.4 or academic judicial opinion Justice
Moreover, consequences. have harmful might to sue” rule “sell *20 would sell to pre- stockholders it that defrauded unlikely Baxter considers stock, unless of the further damages, depressing serve their right 1011, but (D.Conn. 1994) F.Supp. Surgical Corp. Baxter cites U.S. 3Justice Chanoff minority view and action at all—a entertain a holder’s that courts should not that case held could be sustained say that a holder’s action rejects. did not Baxter one that Justice Chanoff of the fraud. sold the stock after disclosure if the holder (1) How soon questions: to decide two require a court a “sell to sue” rule would 4Adopting all, the stockholder long, if at must How sell after disclosure? must the stockholder to “realize” the loss? recognize the sale as valid buying back for court wait before to sell This is without Mutual they anyway. speculation analysis. planned funds and institutional stockholders make decisions how to allocate daily their assets and decide that stock affected fraud is less might holding well if, shares, attractive than some alternative investment their selling would lose the to recover in a class fraud action. they opportunity Individual investors who think stock recover some its may eventually value still believe that is worth less than their recovery possibility And investors to have their cake and eat it right damages. may try some suit, too; loss, their in a stоck to “realize” their so can fraud selling they join then can stock so share fiiture repurchasing any appreciation. the effect of rule is an Ultimately, a “sell to sue” question empirical rule, one. If court it this were to “sell to sue” would launch an adopt without from economists or market which experiment, analysts, input have severe might consequences.
II I also with Justice disagree Brown’s concurring dissenting opinion. Justice Brown notes that that Fritz Inc.’s plaintiff pled Companies, (Fritz’s) market,” shares were traded in an “efficient and she declines to accept the efficient reject market & dis. at opn., post, capital hypothesis5 (cone. p. disclaimer but her 203), despite she relies on that economic for her theory however, The analysis.6 efficient markets does not capital hypothesis, sup- her port analysis. 5There are three capital hypothesis. versions efficient market The weak version holds prices eventually that market publicly semistrong reflect all available information. The says version prices rapidly. strong prices do so The holds that reflect all version material information, public. (Saari, even that not Capital available to the The Market Efficient
Hypothesis, Theory Regulation Industry (1977) Economic and the the Securities Stan. 1031, 1041.) L.Rev. obviously The weak version position. does not aid Justice Brown’s For reasons stated in version, (post, p. 190), semistrong strong text at neither does the version. The which would imply that the reports long market knew Fritz’s financial were false before Fritz disclosed this fact, Brown, days strongest would assist Justice but accepts one these version of the “[n]o capital hypothesis, automatically efficient market under non-public which information affects prices. That empirically (West (7th version is false . . . .” v. Prudential Securities Cir. 935, 938.) 282 F.3d fact, 6Numerous factual in her opinion proven propo assertions are not statements of but sitions derived from capital hypothesis. the efficient market These include: “ (a) only great ‘The market not publicly reflects available information with [efficient] ” rapidity; anticipated (Conc. it public also formal announcements of much information.’ & opn., post, p. 203.) at dis. (b) accurately efficiently “Because the market public assimilates all information (Conc. . .” & opn., post, p. 204.) . . dis. (c) forgets prices quickly that stock in an market ‘react an efficient “[P]laintiff ” publicly (Conc. 205.) unbiased fashion to opn., post, available information.’ & dis. Saari, quotation Capital Each of these statements is based on or a Market Efficient Hypothesis, Theory Regulation Industry, Economic supra, and the the Securities 29 Stan. L.Rev. 1050.
190 Justice here entitled to on damages
I with Brown that is not agree high the that he would sold Fritz stock at artificially prices have theory maintained concealment of adverse information. “Plaintiffs through Fritz’s an cannot claim the from what was right they allege unlawfully profit inflated stock value.” v. U. S. 857 at (Chanoff Surgical Corp., supra, F.Supp. Sciences, 1018; Arent v. see Distribution Inc. Cir. 975 F.2d (8th 1992) 1370, 1374; Crocker v. Federal Ins. Cir. 826 F.2d Deposit Corp. (5th fraud, Plaintiff to the only is entitled attributable 351-352.) is, to defendants’ and their conceal- false 1996 representations April ment of the true financial condition of Fritz until 1996. July Brown, however, the market Justice relies on efficient capital hypothesis matter that as a of law sustained no She asserts: argue damage. Fritz’s 24 the “The true worth of stock on reflected fact that July necessarily Thus, 2. the restated third results should have been on quarter reported April was, definition, of Fritz stock the same the the on price July price have had on if Fritz’s stock would that date defendants had true reported third results on 2.” & dis. at This p. 205.) quarter April (Conc. opn., post, unsound. Under version of efficient argument logically semistrong ante, market fn. of Fritz’s stock on hypothesis 5), price July capital (see reflected that the third results should necessarily the fact quarter on that does not on July been 2. But mean the was reported April price the stock have had on that date if Fritz had reported same would 2. had July those results on Here is On the market additional April why: false the true facts information—that was and that had April report over been concealed for three and one-half months. Justice Brown asserts market, that in an efficient “the market a stock reflects all publicly (Conc. available information.” & dis. efficient opn., post, p. 204.) only market that investors consider hard hypothesis does capital presume economic data and other information doubt on ignore casting integrity logical There is no reason under efficient management. competence market informa hypothesis disregard to assume investors would capital tion false and concealment of true data showing earnings reports as if no had value the stock such occurred. things “While loss of investor confidence in goes Justice Brown to say: 24 announcement July affect a stock’s management may adversely price, confidence in even managements would have caused investors to lose Fritz’s A if been made on 2.” & p. 205.) it had dis. April (Conc. opn., post, announcement of a loss will indeed shake investor company’s quarterly that its false and that the confidence. But an announcement was past report anxiety. concealed from view far Investors generates greater loss was public also its integrity. will not but only question management’s competence
191 other, yet there were whether reason to wonder would have Investors really fraud, management to doubt whether instances of undisclosed Investors would of stockholders. the interests duty its recognized protect the management doubt the concerned, too, integrity that lenders would be They credit status. data, affecting company’s their financial and question and expense the disruption incur might fear that the company would of false sum, In revelations lawsuits, as this one. such numerous defending host of raise a management misrepresentations financial statements in warranted beyond lead to a decline stock values concerns that may itself. the financial information be speculative would alternatively damages argues
Justice Brown to fraud the loss in value attributable in difficulty separating because of financial of truthful but unfavorable from that attributable to disclosure established, the amount must be damage clearly data. But “though fact be left to but certainty be the same degree need not with proved rule would mean or inference. other Any reasonable approximation be wholly damage sometimes a who had suffered substantial not, reason, be items could for some denied because the recovery particular Torts, Witkin, ed. Cal. Law Summary (9th 1988) determined.” (6 precisely Clemente v. 1325, decisions this principle. (See Numerous p. 782.) support § 445, P.2d 202, 707 Cal.Rptr. State 40 Cal.3d 219 of California 1325, Law, Torts, and cases Witkin, of Cal. 783 818]; supra, 6 Summary § “Because of the extra in fraud cases. there It is cited.) particularly applicable Court v. Superior measure of fraud” inhering (Lazar blameworthiness 377, P.2d 981]), Cal.4th Cal.Rptr.2d . . . than where is to broader tendency consequences “modem impose [the Witkin, of Cal. Summary merely negligent.” (6 conduсt was defendant’s] Law, Torts, supra, p. 781.) § of the loss is
Thus, once a holder can show that a portion will fraud, the amount of attributable to difficulty proving will, course, often evi- expert a of action. Proof require not bar cause fraud actions. (See Such in securities commonplace dence. evidence 301; Behrens F.2d v. Butcher & Inc. Cir. Singer, (3d 1991) Sowell 118 F.R.D. 542.) Experts Inc. Enterprises, (S.D.Fla. v. Wometco a holder’s cause that is no reason reject often do—but may disagree—they of action. would be a company Brown fears that under majority opinion
Justice bad news or whenever it announces to securities fraud claims subject allege have to merely correction. she “would “[P]laintiffs,” says, negative that the bad news of investor confidence due investor speculation loss & dis. post, p. 207.) resulted from fraud or incompetence.” (Conc. opn., *23 stated in the contrary, majority opinion, plaintiffs To under principles would have to fraud with to state a cause of action. allege specificity
It unclear limits Justice Brown would on the class of holders what place who could recover She cases claims damages. distinguishes upholding defendants, who on face-to-face thus rely misrepresentations by persons that in her view such have a valid cause of action. would implying persons the class of on face-to-face is a misrepresentations But who persons rely and the face-to-face nature of the may miniscule class representations cases, make more or less than in other damages any depending speculative the stock- whether the defendants made the same representations upon holders generally. the investors facts indicat “alleged
She also cases which distinguishes the sale of their stock or considering were to sell or ing preparing and that the induced them not sell.”7 property misrepresentations (Conc. & dis. If she maintains that such have valid persons opn., post, p. 209.) fraud, then her differs in nuance from the only cause of action for position that a holder “must allege specific which states majority opinion, plaintiff reliance on the for that if the example, plaintiff defendant’s representations: had read a truthful account of the financial status corporation’s plaintiff sold, stock, how shares the would have many plaintiff would sold ante, at italiсs and when the sale would have taken place” (Maj. opn., p. Brown The difference between the and Justice added.) majority appears if the would be that the would allow a cause of action stockholder majority information, if he or she had been truthful while given have sold the stock dis Justice Brown limit the cause of action to who were persons be two ways saying suaded from false information—which selling by Moreover, than damages Justice Brown would allow thing. greater same on misrepresen who majority allowing persons actually rely proposes, intervening due to tations to claim for market “drops at p. to the & dis. (Conc. opn., post, causes unrelated misrepresentations.” 210.) allege relationship between the cannot a causal 7Justice Brown’s assertion assumes that damages (conc. opn., post, & dis. misrepresentations considering the sale of his Fritz stock and that the allege prepared that he to sell or cannot was may may not be true. Until this decision induced him not to sell. This or
misrepresentations filed, why allege to a cause of action. This is plaintiff did not know what he had to state was gives him leave to amend. the court III have revealed extensive sum, three during past years
In disclosures false financial re- often involving numerous involving corporations, fraud it so massive that of true financial data—fraud and the concealment ports to a decline market and perhaps contributed to an decline in the stock overall those who only bought include not in the victims economy generally. statements, held but also those who in reliance the false sold stock upon such holders sue in reliance. The allows majority opinion stock that only should not be so hedged qualified That damages. remedy redress. would be able to injured gain fraction of those actually *24 BAXTER, J., the and result majority’s reasoning with Concurring. I agree Thus, the of a as as I in shareholder they go. accept principle publicly far the traded have a direct common law action against company company their intentional or about and its officials when negligent misrepresentations relied, condition, induced financial on which he company’s personally shares, an “efficient him not to sell his and thus caused him damage. Despite news, shares, of bad market” for the I can conceive that disclosure dеlayed dishonestly under circumstances that earlier were suggesting reports false, the shares have an effect on the market of incompetently might the effect of the bad news itself. beyond
I also
that in a suit of this kind—a so-called holder’s
strongly agree
actual,
action—the
facts showing
must
complaint
plead specific
personal
reliance on the defendants’
As
alleged misrepresentations.
majority
indicate, the
before
in its
enough
allegations
us is not
complaint
specific
reliance,
actual
and a remand for
amendment is
possible
appropriate.1
case,
But under the
this
the majority’s dispo-
circumstances of
protracted
sition is
filed in October
Counting
incomplete.
original complaint,
forth,
original
majority
1As the
set
the second
does aver that the
named
complaint
amended
“
(and
alleged
allegedly
third
plaintiff
members)
quarter
all other
class
‘read
inaccurate
[the
Companies,
(Fritz)],
statement of
Fritz
Inc.
. . . and relied on
defendant
[the inaccurate]
”
deciding
through [July
information
to hold Fritz stock
1996].’
[contained therein]
ante,
added;
say
(Maj. opn.,
p.
p. 180.)
majority
quite
italics
see
id. at
The
do not
also
so,
that,
I
but
assume
consistent with Mirkin v. Wasserman
Hоwever, the majority another round of encourage yet pleading litigation, because omit all they reference an element even more crucial and basic than those discuss. The demand in the they majority properly specificity reliance, overlook, address, but complaint’s allegations by failing the brief and in which conclusory way damage pled.3
On that the second amended contains an additional fatal point, complaint recites that the named and other gap. complaint original members class are who held Fritz stock from persons before 2, 1996, results, Fritz when first overstated its third April quarter through 24, 1996, Fritz July when its third and also downgraded quarter figures announced fourth to the com- disappointing earnings. According quarter these investors suffered “detriment” when the of Fritz plaint, shares *25 share, $12.25 to plummeted by on 1996—detriment percent, per July if, done, could have they avoided as would have had sold their they they shares timely disclosure truth. upon
There are uncertainties in this claim of many vague as defendants damage, and their amici curiae the have stressed But most fundamental flaw length. whether, how,
is the utter the failure state or described complaint’s shareholders have suffered a realized loss as a of the alleged result fraud. does not such investor sold shares at a complaint allege any price revelation of the scandal. Nor does it articulate other depressed by any way in this Fritz which shareholders sustained actual group out-of-pocket 24, 1996, as a direct result of the disclosures. The damage July complaint acknowledge stage may 2I properly proceed we cannot resolve at this whether the case as by specifying a class action. But facilitate that determination all the of an we elements individual cause action. 3Throughout litigation, only this defendants and their amici curiae have volunteered two first, complaints attacks on the various filed herein: that there is no California common law action, second, allegations Perhaps, and that the reliance insufficient. there holder’s are fore, However, majority rights the are within their technical to avoid other issues. this court “whether, supplemental light did briefs on the issue in of the so-called solicit receive otherwise, sufficiently alleges a capital hypothesis’ complaint ‘efficient markets or the causаl alleged any alleged, relationship misrepresentations nonspeculative between the dam ages.” (Italics added.) argument, questioned specifically problem At oral I counsel about the Hence, opportunity to brief and parties of realized loss. the have had reasonable notice and issue, argue judicial efficiency. (Cal. the it in the interest of Rules of we resolve Court, 29(b)(2).) rule
19S Fritz shares on July these were holding that because suggests persons simply the to which difference between are entitled to recover date, the shares could fell and the at which shares actually had been announced if the true third results been sold promptly quarter fashion. timely for the recovery monetary
These are insufficient allegations support fraud is California, In in a tort action for “recovery fraud and deceit. alleged limited (Ward to the actual suffered plaintiff. [Citations.]” “ italics ‘Actual’ 534], added.) 51 Cal.2d P.2d Taggart (1959) [336 contrasted with or ‘potential’ is defined as in fact or as ‘existing reality,’ ‘nominal.’ and as or distinguished ‘apparent’ (Web ‘hypothetical,’ Dict. It follows that ‘actual dam ster’s Third New Internat. (1964) p. 22.) he are those someone for the harm from which or ages’ which compensate he she has been suffer or from which evidence shows proven currently or is certain in the v. Taylor (1996) she to suffer future.” (Saunders 1538, 1543 Cal.App.4th Cal.Rptr.2d 395].) Where fraud is to have caused connection with damage sale, California purchase, exchange property, applies out-of-pocket the difference the actual loss rule. This doctrine limits between recovery values, economic, gave intrinsic and of that which defrauded person up return, and that which he or she received in sums in reliance plus expended fraud, on the and it based on the “benefit of the recovery bargain,” precludes i.e., Code, interest created fraud. plaintiffs expectancy (Civ. 3343; see Alliance Co. v. 10 Cal.4th Rothwell Mortgage § 352, 900 P.2d Cal.Rptr.2d 601].) *26 must, course,
Similar limitations to loss apply actual out-of-pocket one he or deceit to hold he where that was induced fraud alleges by property least, At the the defrauded must person plead otherwise sold. that, he ultimately gave aside from reliance prove any specific expenses, value, less, more in for the or that its or received up exchange property, diminished, as the fraud. vаlue was a result of permanently All who Fritz shares at a inflated the false unfairly by persons bought price or who sold such shares at the depressed price reports April 24, 1996, either disclosure of the July misrepresentations, produced more, less, if the fraud had or received for their shares than gave up or actually not occurred. This between what the shareholders gap paid received, received, will never and what should have they fairly paid diminish or no matter what to the of the stock price disappear, happens measurement, actual out- thereafter. If the difference capable represents that the should damage law of-pocket compensate. however,
The same does not where there was premise necessarily apply, neither action, a nor a sale related to the fraud. In a purchase holder’s the shares at their fair value. If he did plaintiff presumably bought prefraud disclosed, not sell them when fraud was at a influenced price disclosure, thereafter, but instead retained them for a substantial their period value, market, to the subject fluctuations of an efficient securities daily may reasons, amount, have risen or fallen that time for and in an during unrelated to the fraud. course,
Of who held Fritz on shares suffered at least persons July losses when the of those shares These momentary paper dropped. liabilities, investors’ balance sheets of assets and as of computed July However, would show lower values for their Fritz than 23. shares on July losses, such shareholders did not suffer realized necessarily permanent the law the latter. those on may compensate only who sold shares Only news, measurable, bad or otherwise incurred irretrievable out-of-pocket result, losses as a should be deemed to have suffered actual damage subject Otherwise, to recovery. are and the entirely speculative, opportu- for windfall recoveries is manifest. nity
If a stock was held for a substantial after the fraud and company’s period disclosure, its events have obliterated the effect of the fraud intervening may on the of the An value shareholders’ investments. efficient securities public market both to economic responds rapidly accurately changing general conditions, and to the of each business whose shares are shifting prosрects traded therein. events that affected Transitory company’s shares on certain days have little to do with during particular year may value of the shares A months or later. fortunes years company’s fraud, rebound from under new and honest such that perhaps management, an investment retained for the than term be worth more long may ultimately if the had an trace the effect of fraud never occurred. Certainly attempt fraud in that occurred 1996 on the current value of the shares is company’s an exercise futile speculation.
Thus, I cannot the narrow on which accept “snapshot” theory damage the current loss asks us to focus. instantaneous incurred complaint Any paper Fritz shareholders who saw their share values by longtime drop July but did is not an accurate measure nothing response, necessarily *27 the actual if did or will suffer because of the damage, any, they ultimately company’s misrepresentations.4 the notion that one who
No case I have found embraces or squarely rejects can damages he was induced fraud to retain securities recover alleges by argument, responded questioned plaintiff’s 4When about these difficulties at oral counsel gamely my but offered little to refute concerns. after to hold shares that he continued by proving simply pleading course, there are no Of their value to drop. of the truth caused disclosure fraudulent of action for a cause recognizing decisions prior California Most of the authorities traded securities. to hold publicly inducement not focus and do vintage are of ancient cite from other jurisdictions majority efficient in a modem fraud of damages marketplace on measurement market. securities cited by majority (Gutman the most recent case “proholder”
In
the complaint expressly
1990)
254),
Sav. Bank
(D.N.J.
F.Supp.
Howard
disclosed,
did sell their stock
the plaintiffs
that when
fraud was
(Id.
hand, the one recent “antiholder”
at
On the other
“at
loss.”
great
p. 257.)
v. U.S. Surgical Corp.
acknowledged by
majority (Chanoff
decision
31 F.3d
affd.
Cir.
(2d
F.Supp.
(Chanoff),
(D.Conn. 1994)
reasoned
130 L.Ed.2d
cert. den.
Even if means some my reasoning recover, I no dire market consequences. sell their shares in order to foresee In the first the class of shareholders to whom such a requirement place, above, those who small. For reasons indicated would apply relatively would never shares in reliance on the bought company’s misrepresentations occurred, the fraud have to sell to sue. those who before Among bought evidence, other ones who could sue in event would be those with only any claims, intended to sell but were than their own uncorroborated had they It reliance on the misrepresentations. induced not to do so their by personal manage- seems loss of confidence likely general company thus investors, investors, far overshadow ment institutional would by particularly their rights market effect of shareholders induced to sell any only preserve holder’s actions. bring event, defrauded holders will sell simply In it seems unlikely otherwise their and recover when right damages, they sue preserve the fraud. the disclosure of been inclined to retain their shares despite make a they do so because Those who sell on the disclosure presumably bemay their Those who decide to sell rational decision to cut losses. and its shares will an rational belief that the acting company equally believe will less profit This latter group may recover prosper. choice an for the Whichever waiting recovery. than selling suing makes, and eat it too. Both economics he should not have his cake investor no fundamental problem elections of this kind. I see and law are with replete one here. with imposing
Indeed, holders to sue and by allowing recover even when realized no loss, we do more harm to the and to value of its company’s prospects, shares, than such by withholding Investors are to eligibility. likely display little interest the stock of a saddled with such corporation unjustified liabilities.
I do not that an sale of the suggest open-market shares is company’s a shareholder can incur a realized If only possible way loss. fraud caused a fail, worthless, to such that its shares became or led to company permanently merger which shareholders received a low acquisition remaining fraud, value traceable to effect of the that suffice.5 So might might any showing a fraud-related share led to a collapse company’s prices shareholder, call at margin against suing least where collateral was pledged sold anat unfavorable to cover the loan. see margin (But Chanoff, 1011, supra, F.Supp. 1018.)
I am not concerned that the I limitations would allow Fritz and its propose dishonest officials for their fraud. who escape liability Anybody bought at shares an in reliance on the artificially high price falsely optimistic report 2, 1996, of or sold them at a when the April depressed dishonesty was 24, 1996, disclosed on or could otherwise demonstrate an July actually realized loss from the have a remedy. would To exclude misrepresentation, who cannot persons demonstrate actual loss of this kind is simply fraud, i.e., one element recognize of a common law action for damage caused the fraud.
In her Justice separate concurring Kennard insists conclu opinion, my sions flow from two false loss is not premises—that temporary compensable Kennard, J., ante, be too (conc. opn. p. 186), if the shares continued be held until after market speculative intervening forces, fraud, (id. unrelated to the had determined their 186- value pp. Her contentions are not 187). persuasive. “ kind, realize, 5Injuries might ‘injury corporation, of this I be to the or to the considered body property among
whole of its stock or without severance or distribution individual ” 898, (Sutter Corp. (1946) shareholders’ v. General Petroleum 28 Cal.2d P.2d 271]), only 167 A.L.R. such a derivative action would be available. us, Though parties appears May neither the record nor the informed it that in so disclosure, nearly years acquired five 1996 fraud and its Fritz was after for Service, Finance, Online, (Yahoo! value United Parcel Inc. EDGAR substantial SEC Filings, (May Companies (FRTZ), 2001) <http://biz.yahoo.eom/e/ Fritz Inc. form 8-k Pressroom, Releases, 7, 2003]; April 010524/fftz.html> UPS 2001 Press UPS [as $450 (Jan. Acquire Companies, Fritz Inc. Million in Class B Common Stock <http://pressroom.ups.eom/pressreleases/archives/archive/0,1363,3844,00.html> April [as 7, 2003].) intervening development only difficulty tracing the effect This underscores long-past periods on the current value of investments retained for substantial after events those events occurred.
199
outset,
are inapt.
of
losses
compensable “temporary”
At the
her examples
arising
loss
damage
temporary
I
demonstrable
or
agree
any
the
and use of one’s
of
full
enjoyment,
property
deprivation
possession,
conversion,
or eminent
such acts as
by
trespass,
where caused
compensable
S.Ct.
No arises use of the at issue All the enjoyment, rights, or shares here. possession, retained, the to sell of were powers ownership including right privileges, shares, so, the the or not do when fraud was disclosed. Plaintiff alleged to for a their on a drop trading seeks in value simply particular compensation facts it from the But the no day, claiming complaint resulted fraud. pleads shares, that this turn on the chart for the however indicating downward actual, caused realized an loss. temporary, losses are real because
Justice Kennard’s argument “paper” influence the is also beside the actual conduct economic affairs point. California, fact remains that in one does not suffer legally cognizable caused a merely “blip” because disclosure a fraud damage transitory or the for fraud contrary, damages value one’s stock On the portfolio. sale, are exchange deceit in connection the or purchase, with property loss—i.e., the between the value of limited difference actual out-of-pocket that with which and that which the defrauded person the defrauded parted, received, words, of the must as a result fraud. In other person person less, if more, receive than the fraud had actually give property Code, occurred. (Civ. 3343.) § held, did not but shares
As a one who consequence, purchase, merely the theory on fraud establish an loss on reliance cannot out-of-pocket simply daily that a later of the fraud caused the value trading disclosure on Yet the sum substance of shares to fall this is day. particular allegations here.6 damage in this case seeks measured by
Though disclosed, fraud I do Fritz shares fell was very day which on buy publicly traded shares agree marketplace 6I that where induced fraud one was amount disclosed, price, and them the fraud wаs an did not sell before inflated the shares places the market compensable loss must be measured accurate value not contend that one must sell on that in order to very day show compensable I have damage. no with Justice quarrel Kennard’s observation that the market take some time news, the bad digest a somewhat later *30 date a better may provide measure of how the market reacted to the fraud and its disclosure. All I is that the in a propose plaintiff holder’s action must actual, and an realized plead prove attributed, loss which can be in a directly amount, to the fraud specified and its disclosure. It stands to reason simply that the hand, the interval longer between disclosure on the one and the other, moment a loss was realized on the allegedly less it likely may become that this link can be established.
Nor do I that such a claim is suggest obviated of time by passage because the value simply received for the stock ultimately was influenced part by market forces unrelated to the intervening fraud. But in an efficient market, securities public conditions, which responds rapidly changing that, events matter, to the fraud so intervene as a subsequent may logical value the obtained bears no plaintiff ultimately whatever to the relationship case, believe, fraud. In such a I continue to fraud-related should not damages be recoverable. I would that those
Accordingly, require who assert were induced by fraud to hold shares company must and facts plead prove specific showing that they actually realized losses aas result of the fraud and its out-of-pocket disclosure. and that the Pleading of the shares fell on a proof particular as a day result of disclosure of the fraud would not suffice. Because that is claims, all the current I find its complaint damage allegations inadequate state a cause of action. I would allow an to amend the opportunity complaint in accordance with the views in this expressed opinion. and Dissenting.
BROWN, J., Concurring Like the I that majority, agree California law does not categorically a cause of action for fraud or preclude Torts, c, (see when the truth becomes known p. opn. Rest.2d com. cited in cone. § Kennard, J., ante, p. 187)—at discounting at least after factors unrelated to fraud that intervening change also have affected the price. only This restates the fundamental paid truth that one who too much aas result of fraud is entitled to recover the excess over paid, what he should have no more or It compensable damage less. does not mean that is necessarily fraud, merely one who shares in nothing held reliance on then did suffered when disclosure fraud caused the market of the shares to fall. Company (8th Harris v. American Investment Cir. 523 F.2d which Justice proposition Kennard cites for the that a defrauded shareholder need not “realize” his loss in recover, unavailing order to for similar That purchaser. reasons. case involved a defrauded ante, explained length (see p. 196), buyers always damaged, As I have at at defrauded are so, permanently price they paid the difference between the fraud-inflated and the true merely through value of the shares at that time. Persons who held shares both the fraud and its similarly disclosure are not situated. from selling refrained alleging plaintiff negligent misrepresentation ante, maj. opn., (See stock due to the defendant’s misrepresentations. action such a cause of I did state also pp. 173-183.) agree id. specificity. (See actual reliance with adequate because he failed to plead actions, as distin “allege In failed to 184-185.) particular, plaintiff pp. decisions, that would thoughts and unrecorded guished unspoken (Id. I 184.) at indicate that relied on actually misrepresentations.” [he] with in order to allege also with Justice Baxter agree plaintiff, actual, realized loss which “must an sufficient particularity, plead prove amount, attributed, to the fraud and its can be in a directly specified Nonetheless, Baxter, J., ante, at I write disclosure.” (Conc. p. 200.) opn. I does not and cannot a causal allege because believe separately *31 Accord between the relationship alleged misrepresentations damages. the to sustain defendants’ demur I would affirm trial court’s decision ingly, rer without leave to amend.
I matter, As a the issue of threshold this court address whether may plaintiff causation neither the trial court nor the adequately pled damage though even First, Court of considered it. the had Appeal parties ample opportunity causation, the address issue. Various amici curiae raised the issue of damage Moreover, had an plaintiff opportunity respond. parties specifi- “whether, briefed the court on the issue of of the so-called cally light efficient markets capital hypothesis, sufficiently alleges complaint causal between relationship alleged misrepresentations any alleged Thus, our nonspeculative damages.” resolution issue damage causation should come as no surprise.
Second, reviewing of dismissal sustenance upon judgment following demurrer, of a court affirm “on stated in the reviewing any grounds demurrer, whether or not the acted on that v. ground.” court (Carman [lower] “ 318, 506, Alvord 31 Cal.3d 324 644 P.2d (1982) Cal.Rptr. 192].) [182 ‘[I]t action, action, is of the court’s and not of the reason for its validity “ White, (E.L. Beach which is reviewable.’ Inc. v. City Huntington (1978) 497, 504, 614, 21 Cal.3d 2 P.2d 505], fn. 579 Cal.Rptr. quoting [146 212, v. Eissler 224 225 Cal.Rptr. 537].) Weinstock (1964) Cal.App.2d [36 demurrer, The trial court in this case sustained defendants’ which general other failed to “state facts sufficient alleged, among things, Thus, Proc., 430.10, constitute a cause of action.” Civ. subd. (Code (e).) § reason, for we must affirm the of dismissal if the judgment complaint, any 2 to state action. Dist. Tri-City fails a cause of (See Aubry Hospital 962, 92, must be judgment Cal.4th 967 831 P.2d Cal.Rptr.2d [9 317] [“The 202 of demurrer is well grounds taken’”].)
affirmed ‘if one of several any element of cause of action Because causation is an essential damage reason to remand for fraud or I see no negligent misrepresentation, this element. And I if cannot sufficiently plead further proceedings do not he can. believe
II
fraud,
is an essential element
damage
“In an action for [common law]
Television,
on Children’s
Inc. v. General
the cause of action.” (Committee
197,
783,
P.2d
35 Cal.3d
673
Cal.Rptr.
Foods
219
Corp. (1983)
[197
660]
(Committee
maliciously
even
on Children’s Television).) “Misrepresentation,
suffered
committed,
a cause of action unless the plaintiff
does not support
v. Bank America
(1996) Cal.App.4th
consequential damages.” (Conrad
“A
causal
between
relationship’
Cal.Rptr.2d 336].)
‘complete
[53
deceit and the
required.” (Williams
the fraud or
plaintiff’s
658],
Cal.Rptr.2d
quoting
v. Wraxall (1995)
Cal.App.4th
Cal.Rptr.
Court
50 Cal.3d
Garcia v. Superior
a cause
At the
“must show
stage,
complaint
Like other element of fraud or any negligent misrepresentation, do and conclusory allegations causatiоn “must be pled specifically; general 631, 12 645 Court Cal.4th (1996) not suffice.” v. (Lazar Superior [49 377, allega- P.2d of without 981].) “Allegations damages 909 Cal.Rptr.2d law, which are not them are but conclusions tions of fact to support 25 If 12.) demurrer.” supra, Cal.App.3d admitted by (Zumbrun, in a fraud damages alleged pleading existence—and not amount—of uncertain,” cannot state a claim remote, then pleading “too speculative 214, Cal.Rptr. Tobin 45 219 Cal.App.3d for relief. v. (Block (1975) [119 756, P.2d 172 768 Cal.App.2d see also v. Paries 288]; Agnew (1959) [343 “ . . . will not liberal construction of pleadings And ‘the policy 118].) ” damages in alleging defective’ pleading be invoked to sustain ordinarily Televi- on Children’s the alleged misrepresentations. (Committee caused by Witkin, ed. 216, 3 Cal. Procedure sion, (2d at p. quoting 35 Cal.3d supra, Pleadings, 574.) § induced case, that defendants’ alleges misrepresentations In this in Fritz Inc. (Fritz). his stock Companies, him to forbear from selling because, forbearance from this induced he suffered damages Plaintiff claims
203 he his stock at a price absent the would have sold misrepresentations, defendants their than the stock on revealed higher day price below, cannot sufficiently allege As misrepresentations. explained a causal between the and the alleged damages relationship misrepresentations. “ as all the material allegations Because we must true ‘accept ” Vacanti, M.D., J. Inc. v. State Ins. Fund
complaint’ (Charles Comp. (2001) 800, 562, 24 Cal.4th 14 P.3d Shoemaker 234], 807 Cal.Rptr.2d quoting [102 1054, 52 Cal.3d 801 P.2d Myers (1990) Cal.Rptr. assume, A.L.R.5th I of this that Fritz stock 1016]), purposes appeal, market, traded in an efficient market.1 In an efficient “the market information, and, hence, shares . . . reflects all available publicly material Inc. v. Levinson 485 U.S. misrepresentations.” (Basic 978, 991, S.Ct. L.Ed.2d 194], fn. available omitted.) “[PJublicly information to stock relevant values is so reflected market quickly prices that, matter, as a investors cannot general expect profit trading such information.” Are Takeover Premiums Premiums? Market (Stout, Really Price, Value, 1235, 1240, Fair Law 99 Yale L.J. fn. Corporate “The market not omitted.) only reflects available infor publicly [efficient] mation with it great also formal announcements rapidity, anticipates public of much information.” Market Eco (Saari, Capital Hypothesis, Efficient nomic and the Theory Regulation Securities Stan. Industry (1977) 29 (The L.Rev. Therefore, Market Capital Hypothesis).) Efficient market, definition, such a is “efficient in information assimilating available to it.” (Id. p. 1056.) mind,
With this I now turn to Plaintiff plaintiffs damage allegations. claims as the difference between the of Fritz stock on the date *33 he would have sold the stock if defendants had Fritz’s true timely reported 2, 1996, third quarter 24, results on and the of Fritz April stock on price July 1996—the date defendants announced Fritz’s true third actually quarter words, results. In other $15.25 seeks to some the plaintiff recover portion in Fritz stock drop occurred on 24—the defendants price July day publicly corrected the alleged they made in Al- misrepresentations April. clear, the though is less than to claim that this complaint plaintiff appears in stock drop price recoverable as because it was caused damages by: (1) the content of defendants’ of the an- misrepresentations; timing (2) results, nouncement of Fritz’s true third which coincided with the quarter results; announcement of Fritz’s fourth the loss of disappointing quarter so, doing accept reject capital hypothesis. 1In I neither nor the so-called efficient markets 1082, 1101, (See Mirkin Cal.Rptr.2d v. Wasserman 5 Cal.4th fn. 7 858 P.2d 568].) 204 dis- delayed from management resulting confidence in Fritz’s
investor news; no connection to the causes with (4) intervening closure of the bad i.e., the fourth results. Plaintiffs portions quarter misrepresentations, however, for fraud or causation, cannot a claim support theories of damage misrepresentation. negligent
First,
no
due to the content of
misrepr
suffered
plaintiff
injury
infor
All
concerned
alleged misrepresentations
public
esentations.2
market, the market
had to disclose. In an efficient
mation that defendants
information.
Inc. v.
(Basic
of a stock reflects all
available
publicly
price
Therefore, the
Levinson,
S.Ct. at p. 991].)
485 U.S.
246
supra,
unlawfully
2
was
of Fritz stock after
price
April misrepresentations
its true third
results
quarter
April
inflated. If Fritz had timely reported
reflected this information
then the market
of Fritz stock would have
price
Sciences,
Arent v. Distribution
have dropped accordingly. (See
would
if
had
everyone
Inc.
Cir.
975 F.2d
1374
1992)
(Arent)
(8th
[“But
reflected the
fact, then the stock’s value would have
known this adverse
his stock immediately
would have sold
assuming
Even
adversity”].)
plaintiff
results, he
of Fritz’s true third
quarter
after a
announcement
timely
to the
in share
suffered a
in share
commensurate
drop
price
inflation
Because the market
the content
the misrepresentations.
caused
price
all
information
(see
assimilates
accurately
efficiently
public
Effi
this
L.Rev. at p. 1044),
drop
cient
Market
29 Stan.
Hypothesis, supra,
Capital
in share
attributable
in share
would have been equal
drop
v.
Corp.
made on
U.S.
July
(see
Surgical
representations
Chanoff
1011, 1018,
occurred on not allegedly by misrepresentations. the caused
205 Second, from the of the timing suffered no cognizable injury 857 announcement of Fritz’s true third results. quarter (See Chanoff, supra, the caused at 1018 claim that the disclosure F.Supp. p. [rejecting timing in was more dra- Plaintiff contends Fritz’s stock damage].) drop price 24 third matic on because Fritz announced its restated July simultaneously Plaintiff, however, fourth results. quarter disappointing quarter ignores his the costs of allegations. According own defendants concealed plaintiff, Fritz’s on and did not reveal these costs until 24. acquisitions July April that defendants concealed that plaintiff alleged deliberately Specifically, $11 Fritz would have to take an million in the third and an charge quarter Thus, $11.5 additional million in the even if Fritz had charge quarter. fourth announced these on the announcement would have timely charges April resulted in lower third but also only reported quarter earnings, presaged announced Indeed, Fritz’s loss. when Fritz these on quarter charges fourth 24, it that these reduced its July expressly acknowledged charges previously third reported earnings caused the fourth loss. quarter reported quarter such, As effect caused psychological allegedly by timing announcement would occurred if even defendants had timely reported the information concealed Fritz’s for three allegedly by management months. Any attributable to the combined effect of the negative announcement third and fourth earnings on are therefore quarter July illusory. event,
In any that stock in forgets an efficient market prices “react in an unbiased fashion to available quickly information.” publicly Market (The 29 Stan. L.Rev. at Capital Hypothesis, supra, p. Efficient italics Stock in an efficient market “are added.) prices definition ‘fair’ by . . . it is to be investors cheated more for impossible by paying [and] securities than their true worth.” fn. The true worth (Id. p. omitted.) of Fritz’s stock on reflected the July necessarily fact that restated third Thus, results should have been 2. of Fritz quarter reported April price was, definition, stock on the stock had July same would have on that date if defendants had Fritz’s true third results on reported quarter 2. April (See ibid.)
Third, in stock due to an any drop alleged loss investor confidence in Fritz caused management announcement is either delayed illusory or too While to constitute loss of investor speculative cognizable damages.3 confidence in affect a stock’s management may adversely July price, announcement have caused investors to lose confidence in Fritz’s even if it had been management made on 2. As April conclusion, not, reaching 3In suggests, rely this I do as Justice Kennard efficient on the Kennard, J., ante, capital hypothesis. (See 190.) market opn. conc. *35 these During a series of Fritz’s made management acquisitions. complaint, these seamlessly integrate acquisitions Fritz touted its ability acquisitions, infrastructure that these acquisitions and claimed into its existing However, announce- July financial Fritz’s performance. improve costs had lowered unreported acquisition ment—which stated that previously such, these claims. As earnings—refuted Fritz’s third and fourth quarter had miscalcu- management established that Fritz’s 24 announcement July to achieve its and failed strategy, mismanaged acquisitions lated its Thus, of the July the contents timing. of its regardless corporate objectives in had, delay fraudulent any itself and by irrespective 24 announcement in Fritz’s contents, investor confidence already destroyed these reporting in Indeed, supplemental cited analyst reports plaintiffs management. brief this. verify the additional loss of
Moreover, in attributable to stock any drop price by of fraud induced from investor resulting suspicion investor confidence cogni- to support is too remote and speculative in the announcement delay matter, the fraudulent nature allegedly an initial zable As damages. the July When Fritz made affected Fritz’s stock price. could not have delay it or announcement, intentionally negli- not announce that had Fritz did its third quarter costs or misrepresented concealed the acquisition gently to account for Rather, that it had failed 2. Fritz announced earnings April third costs, quarter lowered its previously reported certain which acquisition cases of loss. Unlike recent corporate and caused a fourth quarter earnings that the attributed fraud, in record even suggests public this nothing to fraud or negli- these costs announcing acquisition in delay three-month of fraud or that public suspicion the time of the announcement gence have otherwise in than would resulted in a greater drop price somehow stock costs by of these Thus, concealment negligent deliberate or any occurred. 24. stock on July influenced Fritz’s could not have defendants engaged management that Fritz’s certainly speculate Investors could But such the announcement. in delaying or acted incompetently wrongdoing an- company occur in case which every could investor speculation Thus, in stock any drop correction. negative or issues nounces bad news state- that earlier company caused investor speculation allegedly will occur regardless false dishonestly incompetently ments were such, As defendants’ acted fraudulently. whether the defendants resulting in stock price caused drop could not have misrepresentations the mere event, claim In any investor speculation. from such caused a greater conduct defendants of fraudulent possibility in stock price greater drop a correspondingly confidence and in investor drop not be and should highly speculative occurred is have otherwise than would
207 v. Coburn America as a matter of law. Marino cognizable (See Corp. of 19, 1971, 247, *4 determining Feb. No. 1971 WL (E.D.N.Y., 70-C-960) [in of courts should “fanciful about damages, ignore speculation psychоlogy investors”].)
Indeed, a of a recognizing subject such would theory damages company claims, claims, fraud securities or seller whenever including buyer announces bad news or a correction. In order to company negative issues dismissal, the securities have to a loss escape merely allege would plaintiffs of investor confidence due to investor that the bad news resulted speculation such, from fraud or As be forced to incompetence. companies expend considerable resources or defending claims of fraud mis- against negligent their merits. Rather than make California the representation regardless actions, locale of choice for securities class I would refuse to such recognize speculative damages. to the extent
Finally, claims due to in the stock injury drops price i.e., unrelated to the the announcement of fourth misrepresentations, quarter losses, he results, does not allege causal “Remote requisite relationship. by causes, intermediate are produced sequences reach of beyond any just 55, rule of practicable damages.” v. Deetz 102 Cal. (Martin (1894) Co., 368]; 68 P. see also v. A. B. Leach & Inc. 247 N.Y. Hotaling (1928) [36 87 N.E. 871 57 A.L.R. (Hotaling) [guilty [159 1136] [“defendants of securities should not be held liable for loss any part plaintiffs fraud] caused by Plaintiff, events not connected such subsequent with as fraud”].) law, matter of cannot establish that any in Fritz’s stock portion drop July was caused price by defendants’ alleged misrepresentations. (See ante, at pp. 204-207.) cannot claim Consequently, plaintiff any drop Fritz’s stock attributable to other causes as in his fraud and damages negligent Martin, 68; claims. misrepresentation Service Medal- (See lion, Inc. v. Clorox Co. 1818-1819 Cal.App.4th causal connection Cal.Rptr.2d between caused termi- 650] [no nation of contract and fraud which contract]; induced to enter into cf. Carlson v. Richardson Cal.App.2d Cal.Rptr. enrichment where the unjust increase value “resulted property 769] [no from market conditions rather than from act or forbearance act” on the part plaintiff].)
Plaintiffs this causal connection re- inability allege requisite simply flects the nature of these Plaintiff that he would speculative damages. alleges have avoided in Fritz’s stock unrelated to drops misrepresentations because he would have his sold stock some date aftеr April indefinite 2—the date defendants true third should have Fritz’s results. reported quarter however,
Plaintiff,
would have
his
indicating
no facts
when he
sold
alleges
that he
stock. He does not
facts
was
allege any
suggesting
planning
He does not even
considering
misrepresentations.
such
sale before
the fraud on July
that he sold his Fritz stock after defendants revealed
allege
*37
24.
228
Blake v. Miller
178 Wis.
N.W.
(See
[absent
476]
action,
of
that
was
some sort of
plaintiff
considering
allegation
allegation
is
Because the date on which
wholly speculative].)
plaintiff
forbearance
is,
best,
it is
to
have sold his shares
conjectural,
impossible
would
Thus, the
ascertain which
in stock
he would have avoided.
drops
due to
causes unrelated to the
any damages
intervening
misrep-
existence of
remote,
a
resentations is too
and uncertain to
fraud
speculative
support
Crocker,
that
claim.
Likewise,
the investors in
of these
facts
many
out-of-state cases
were
to sell or
the sale of their
indicating
considering
preparing
stock or
and that the
induced them not to sell
property
misrepresentations
*38
to the revelation
the truth.6
prior
Unlike'
these investors did
plaintiff,
not
allege that
have
stock
at
simply
they would
sold their
or
some
property
indefinite
after
date
the revelation of the
absent
the
truth
misrepresenta-
tions;
alleged facts
on which
would
they
indicating
date
have
specific
they
sold
the
the
Thus,
to
revelation of
truth.
the claim of
investors
prior
these
that
would have avoided certain
to
they
in market
due
interven-
drops
price
ing causes unrelated to the
was
misrepresentations
neither
nor
speculative
uncertain.7
4(See, e.g., Marbury Management,
705,
(2d
1980)
(Marbury)
Inc. v. Kohn
F.2d
Cir.
629
707
misrepresentations directly
plaintiffs
made individual
to
[defendant
which induced them to
buy
254,
securities];
260,
F.Supp.
hold
Gutman v. Howard
(D.N.J.
Sav. Bank
748
266
misrepresentations directly
plaintiffs
allayed
made individual
to
which
their
[defendants
misleading public statements];
Moseley
concerns about defendants’
(1901)
Fottler v.
179
788,
Mass. 295
misrepresentations
N.E.
made
which
face-to-face
induced
[60
788] [defendant
371,
plaintiff
stock]; Duffy
(1895)
to hold his
Smith
(Duffy)
v.
that
to
until he
Moseley,
intended
sell his stock
saw the
Fottler
supra,
p.
plaintiff
given
order];
Finally,
by plaintiff
investors
their
them
and retain
misrepresentations
induced
purchase
have
they
not
than
should
only
stock
These investors
more
property.
paid
also would have avoided subsequent drops
stock or
but
property
not
stock or
market
because
have otherwise
they
price
purchased
words,
a clear and definite
purchase
In other
the date
established
property.
risks—i.e.,
at
fraud
investors to
which the defendants’
these
point
subjected
due to
causes—that
would not
intervening
market
drops
price
the differ
otherwise faced. The
measure of
was therefore
proper
and the
ence between the amount of the
induced investment
fraudulently
the fraud
to be
value of the stock or
“after
ceased
operative.”
property
708;
372;
at
Marbury,
32 A.
see also
629 F.2d at
supra,
supra,
p.
(Duffy,
p.
873];
I no remand in to an to also see reason to order give plaintiff opportunity allege Although amend the to causation. complaint damage sustaining “ to ‘if demurrer without amend is an abuse of discretion generally leave there reasonable defect can be cured amend- possibility ” “ ment,’ ‘the on the to trial burden is demonstrate court plaintiff ” 335, abused (Goodman its discretion.’ v. 18 Cal.3d Kennedy (1976) Co. 737], 556 P.2d Leslie Salt Cal.Rptr. quoting Cooper “ 70 Cal.2d 451 P.2d ‘Plaintiff must Cal.Rptr. 406].) show in what manner he can amend his and how that complaint amendment will effeсt of change legal his pleading.’” (Goodman, quoting Co., v. Leslie Salt Cooper supra, Although defendants raised the p. 636.) damage demurrer, causation issue in their two first had oppor- amend, tunities nothing the record can amend his suggests plaintiff complaint allege damage causation. Plaintiff’s briefs— supplemental which specifically addressed issue of causation—confirm this. In damage briefs, his claims that his complaint adequately damage pleads causation on the loss of investor confidence Fritz’s premised management. In causation, however, this espousing he offered no theory damage alternative if the court theory his and never asked for an rejected opportunity to amend the complaint allege damage causation. Because either the “[n] record nor tenor of [plaintiffs] argument briefs or oral indicates any ability upon part plead facts which would establish” the prove [his] causation, element of damage trial court did not abuse its discretion leave to refusing (Goodman, amend. at pp. 349-350.) conclusion, In reaching this I remain true to the behind the purpose heightened standard for pleading fraud claims. “The of fraud . . . pleading *40 is . . . the last habitat of the common notion that a remaining law complaint should be sufficiently the court can out nonmeritorious specific weed actions on the basis Television, of the pleadings.” (Committee on Children’s 35 Cal.3d at supra, This pp. 216-217.) weeding process out is especially in the important securities context. As the United States Court Supreme recognized over 25 years ago, securities fraud litigation “presents danger of vexatiousness in different and in kind degree which accompa- (Blue nies litigation general.” v. Manor Stores Chip Stamps Drug 421 1917, 1927, U.S. S.Ct. 44 L.Ed:2d Because “a 539].) [95 which complaint standards little chance of objective may very success at trial has a settlement out of value to any proportion its trial success at so as he the suit from prospect long being prevent resolved him dismissal against danger summary judgment,” (Id. at 1927- significant. or strike suits is at S.Ct. p. pp.
nuisance [95 of a defendant’s normal business activities 1928].) disruption The potential burden on the defendant at discovery (id. p. (ibid.), disproportionate and the fact that these claims often turn on the oral S.Ct. at p. 1928]), render pp. S.Ct. testimony plaintiff (id. 1928-1929]), I believe must Accordingly, vigorously these lawsuits for abuse. we ripe causation damage enforce our well-established standards pleading of dismissal. fraud cases would therefore affirm judgment Chin, J., concurred.