STATE OF OREGON, acting by and through the Oregon State Treasurer, and the Oregon Public Employee Retirement Board, on behalf of the Oregon Public Employee Retirement Fund v. MARSH & McLENNAN COMPANIES, INC. and Marsh, Inc., and Jeffrey GREENBERG and Ray Groves
CC 050808454; CA A139453; SC S059386
In the Supreme Court of the State of Oregon
December 13, 2012
292 P.3d 525
DE MUNIZ, J.
Argued and submitted December 7, 2011, decision of Court of Appeals reversed, and case remanded to Court of Appeals for further proceedings
Keith S. Dubanevich, Special Counsel, Salem, argued the cause for petitioner on review.
James T. McDermott, Ball Janik LLP, Portland, argued the cause for respondents on review. With him on the brief was Dwain M. Clifford.
Kim T. Buckley and John W. Stephens, Esler, Stephens & Buckley, LLP, Portland, filed a brief on behalf of amici curiae Oregon Trial Lawyers Association and Economic Fairness Oregon.
Meyer Eisenberg, Washington D.C., and Franklin Jason Seibert, F.J. Seibert, LLC, Salem, filed a brief on behalf of amici curiae Meyer Eisenberg and Franklin Jason Seibert.
Robert S. Banks, Jr., Banks Law Office, PC, Portland, filed a brief on behalf of amicus curiae North American Securities Administrators Association.
DE MUNIZ, J.
DE MUNIZ, J.
This case arises under provisions of the Oregon Securities Law set out in
The state‘s amended complaint alleges that the state purchased more than $15 million of common stock in MMC in the open market on the New York Stock Exchange (NYSE) in 2003 and 2004. The state further alleges that the MMC shares are traded on an efficient securities market, that the price of MMC shares traded on the NYSE during 2003 and 2004 reflected the material information that Marsh disclosed to the market, and that the price of MMC shares was artificially inflated because of misrepresentations made by Marsh. The state contends that Marsh made three types of misrepresentations: falsely representing that Marsh had complied with a strict ethical code of conduct; misrepresenting the nature of contingent commission agreements that Marsh had with brokers; and concealing the fact that MMC‘s reported financial results had been achieved through unethical and illegal business practices. The state‘s complaint further alleges that the state‘s money managers who purchased MMC stock had no reason to know of those misrepresentations and would not have purchased the MMC stock at the price paid had they known of those misrepresentations. Finally, the state asserts that the misrepresentations were brought to light through an investigation by the New York Attorney General and that, once the misrepresentations were disclosed in October 2004, the price of MMC stock declined some 37 percent
The state‘s complaint claims that the course of misrepresentation engaged in by Marsh violated
On the state‘s appeal, the Court of Appeals affirmed the trial court‘s determination that actual reliance must be established by a stock purchaser under
RELIANCE
The state contends that it need not establish any form of reliance as part of its claim. The state bases its argument on what it perceives to be a straightforward application of statutory construction principles. The state asserts that neither
“(1) Any person who violates or materially aids in a violation of ORS 59.135(1), (2) or (3) is liable to any purchaser or seller of the security for the actual damages caused by the violation, including the amount of any commission, fee or other remuneration paid, together with interest at the rate specified in ORS 82.010 for judgments for the payment of money, unless the person who materially aids in the violation sustains the burden of proof that the person did not know and, in the exercise of reasonable care, could not have known of the existence of the facts on which the liability is based.”
“It is unlawful for any person, directly or indirectly, in connection with the purchase or sale of any security or the conduct of a securities business or for any person who receives any consideration from another person primarily for advising the other person as to the value of securities or their purchase or sale, whether through the issuance of analyses or reports or otherwise:
“(1) To employ any device, scheme or artifice to defraud;
“(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances
under which they are made, not misleading; “(3) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person[.]”
The state correctly notes that these two statutes do not contain the terms rely or reliance. Based on the methodology established in PGE v. Bureau of Labor and Industries, 317 Or 606, 859 P2d 1143 (1993), and State v. Gaines, 346 Or 160, 206 P3d 1042 (2009), the state asserts that the text of these statutes is unambiguous, that the text does not contain a reliance requirement, and that inserting a reliance requirement into the statutory claim established by
To sustain its position, the state begins its statutory interpretation by separating the statutory terms in
“three successive phrases in ORS 59.137(1): ‘a person who violates or materially aids in a violation of ORS 59.135 (1), (2) or (3) is liable‘; ‘to any purchaser or seller of the security‘; and ‘for actual damages caused by the violation.‘”
In particular, the state suggests that the phrase “for actual damages caused by the violation” limits the claim to actual damages and that the terms “caused by the violation” limit the damages to those brought about by the defendant‘s conduct without introducing any requirement that the purchaser of the security rely on the defendant‘s conduct—i.e., in the state‘s view, the terms “caused by” do not expressly or necessarily limit damages to those resulting from a plaintiff‘s reliance. As support, the state cites to a definition of “cause” set out in Black‘s Law Dictionary, defining cause as “[t]o bring about or effect.” See Black‘s Law Dictionary 213 (7th ed 2002). Conversely, Marsh asserts that Webster‘s Collegiate Dictionary (10th ed 2000) defines “cause” to mean “a reason for action or condition: MOTIVE.” Marsh argues that, in analyzing an alleged misstatement made in relation to the purchase of a security, the plaintiff‘s “motive” or “reason” for purchasing the security forms the requisite causal nexus between the alleged misstatement and the plaintiff‘s damages.
When we undertake our own review of dictionary definitions, we observe that both definitions of the term “cause” that the parties emphasize are reasonably applicable here. Webster‘s Third New Int‘l Dictionary 356 (unabridged ed 2002) provides the following definition of the noun “cause“:
“1a: a person, thing, fact or condition that brings about an effect or that produces or calls forth a resultant action or state *** b: a reason or motive for an action or condition *** c: a good or adequate reason: a sufficient activating factor ***”
And Webster‘s similarly defines the verb “cause” to mean:
“1: to serve as cause or occasion of: bring into existence: MAKE *** 2: to effect by command, authority, or force ***”
Id.
Marsh has the better of the textual argument. The state essentially posits a strict liability theory, contending that a defendant can be found liable for all losses whether or not any stock purchaser relied on any misrepresentations made by the defendant. We think that it is significant, however, that even the definition of “cause” on which the state relies requires some causal link between the misrepresentation made and the damages
We do not conclude our statutory analysis by viewing the textual terms of
The state cites to
the Director of DCBS to enjoin a person from engaging in an act or practice that the person is “about to engage in,” but that has not yet occurred, by definition does not require reliance. But a claim for restitution or damages that may be included in such an enforcement action under
We determine, therefore, that whether
The state also contends that
“ORS 59.115(1)(b) applies in direct transactions between a security purchaser and seller. The text of ORS 59.135(2) is
functionally identical to the text of ORS 59.115(1)(b) (1983), which the Court of Appeals held does not contain a reliance requirement. See Everts v. Holtmann, 64 Or App 145, 152, 667 P2d 1028, rev den, 296 Or 120 (1983). Thus, this court may presume that when the legislature enacted ORS 59.137(1), that proof of a violation of ORS 59.135(2) would not require reliance in light of the long-established construction of a functionally identical statutory provision in Everts. See In Re Weber, 337 Or 55, 67, 91 P3d 706 (2004) (‘[t]his court presumes that the legislature enacts statutes in light of existing judicial decisions that have a direct bearing upon those statutes‘).”
(Footnote omitted.) There are, however, significant logical flaws embedded in the state‘s reliance on the provisions of
First, the state contends that
of
Furthermore, the text of
Finally,
In sum, we conclude that many of the contextual arguments presented by the state are inapposite. Moreover, the relevant contextual
Although this court has stated that analysis of the statutory text in context is primary, the court also has recognized that the proper analysis of statutory terms can be illuminated by reference to the legislative history of a statute. As we noted in Gaines, the court “remains responsible for fashioning rules of statutory interpretation that, in the court‘s judgment, best serve the paramount goal of discerning the legislature‘s intent.” 346 Or at 171. And, as we also observed in Gaines, legislative history can confirm the plain meaning of statutory terms or show that superficially clear language is not as plain as first appears. Id. at 172. We now undertake an examination of the legislative history of the statutes involved to further inform our understanding of the legislature‘s intent in enacting the statutory terms at issue.
“WHAT THE MEASURE DOES: Specifies that person who offers security or offers to purchase security in violation of securities laws or by means of untrue statement or omission may be liable for damages. Allows investors to
recover for damages involving fraud for securities purchased in open market. Sets three-year time limit on actions.”
The Staff Measure Summary also provided the following by way of background information:
“The primary beneficiaries of extending the Oregon Securities Law (OSL) are the PERS and other public funds who purchase securities. Currently, a person or public fund may not bring a claim under the OSL against a fraudulent corporation, such as Enron, unless the securities were purchased directly from Enron.
“This bill permits a public fund or other investor to state a claim even when the securities were purchased in the open market. SB 609-A also creates consistency between Oregon law and corresponding federal laws.”
The Staff Measure Summary explicitly described the bill as providing for claims by investors who purchased securities in the open market for damages based on fraud. Furthermore, as the Court of Appeals noted:
“The testimony before committees considering the bills that ultimately became ORS 59.137 (footnote omitted) contains repeated statements that the target of the statute is
‘fraud’ or ‘fraudulent’ conduct; nearly every person who testified used one or another of those terms.”7
Joseph Arellano, and Andrew Morrow), Ex L (statement of State Treasurer Randall Edwards).”
Most directly, the Administrator of the Department of Consumer and Business Services, Division of Finance and Corporate Securities, testified that one of the purposes of the bill was to ensure that “investors *** have the right to bring so-called ‘fraud-on-the-market’ lawsuits when they buy stock on the open market in reliance on financial statements and similar information that turn out to have been fraudulent.” Testimony, Senate Committee on Business and Labor, SB 609, Apr 7, 2003, Ex K (statement of Floyd G. Lanter).
The legislative history surrounding adoption of
Based on our review of the text, context, and legislative history, we determine that a purchaser of securities on the open market must establish some form of reliance on misrepresentations made by the defendant in order to establish a claim for damages under
FRAUD-ON-THE-MARKET
Before deciding whether the “fraud-on-the-market” presumption is available for claims brought under Oregon Securities Law, we first describe the doctrine in general terms, as it has been developed and accepted under federal securities law.
The fraud-on-the-market doctrine was adopted by the United States Supreme Court in Basic Inc. v. Levinson, 485 US 224, 108 S Ct 978, 99 L Ed 2d 194 (1988). In Basic Inc., the Court addressed claims brought under the Securities and Exchange Commission‘s Rule 10b-5, promulgated under § 10(b) of the Securities Exchange Act of 1934. The Court endorsed the fraud-on-the-market doctrine in the following terms:
“We turn to the question of reliance and the fraud-on-the-market theory. Succinctly put:
“The fraud-on-the-market theory is based on the hypothesis that, in an open and developed securities market, the price of a company‘s stock is determined by the available material information regarding the company and its business. *** Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. *** The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant, than in a case of direct reliance on misrepresentation. Peil v. Speiser, 806 F2d 1154, 1160-1161 (CA3 1986).
“*****
“We agree that reliance is an element of a Rule 10b-5 cause of action. See Ernst & Ernst v. Hochfelder, 425 U.S., at 206 (quoting Senate Report). Reliance provides the requisite causal connection between a defendant‘s misrepresentation and
a plaintiff‘s injury. See, e.g., Wilson v. Comtech Telecommunications Corp., 648 F2d 88, 92 (CA2 1981); List v. Fashion Park, Inc., 340 F2d 457, 462 (CA2), cert denied sub nom. List v. Lerner, 382 US 811 (1965). There is, however, more than one way to demonstrate the causal connection. ***”
“The modern securities markets, literally involving millions of shares changing hands daily, differ from the face-to-face transactions contemplated by early fraud cases, (footnote omitted) and our understanding of Rule 10b-5‘s reliance requirement must encompass these differences. (Footnote omitted.) ***
“*** The courts below accepted a presumption, created by the fraud-on-the-market theory and subject to rebuttal by petitioners, that persons who had traded Basic shares had done so in reliance on the integrity of the price set by the market, but because of petitioners’ material misrepresentations that price had been fraudulently depressed. Requiring a plaintiff to show a speculative state of facts, i.e., how he would have acted if omitted material information had been disclosed, see Affiliated Ute Citizens of Utah v. United States, 406 US at 153-154, or if the misrepresentation had not been made, see Sharp v. Coopers & Lybrand, 649 F2d 175, 188 (CA3 1981), cert. denied, 455 US 938 (1982), would place an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market. Cf. Mills v. Electric Auto-Lite Co., 396 US, at 385.
“Arising out of considerations of fairness, public policy, and probability, as well as judicial economy, presumptions are also useful devices for allocating the burdens of proof between parties. See E. Cleary, McCormick on Evidence 968-969 (3d ed. 1984); see also Fed Rule Evid 301 and Advisory Committee Notes, 28 US C App, p. 685. The presumption of reliance employed in this case is consistent with, and, by facilitating Rule 10b-5 litigation, supports, the congressional policy embodied in the 1934 Act. In drafting that Act, Congress expressly relied on the premise that securities markets are affected by information, and enacted legislation to facilitate an investor‘s reliance on the integrity of those markets. ***
“*** The presumption is also supported by common sense and probability. Recent empirical studies have tended to confirm Congress’ premise that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence any material misrepresentations. (Footnote omitted.) *** It has been noted that ‘it is hard to imagine that there ever is a buyer or seller who does not rely on market integrity. Who would knowingly roll
the dice in a crooked crap game?’ Schlanger v. Four-Phase Systems, Inc., 555 F Supp 535, 538 (SDNY 1982).”
The United States Supreme Court has reaffirmed the fraud-on-the-market doctrine numerous times. See, e.g., Musick, Peeler & Garrett v. Employers Ins. of Wausau, 508 US 286, 295, 113 S Ct 2085, 124 L Ed 2d 194 (1993) (citing to Basic Inc. for reliance requirement under SEC Rule 10b-5); Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 US 164, 180, 114 S Ct 1439, 128 L Ed 2d 119 (1994) (same). In Dura Pharmaceuticals, Inc. v. Broudo, 544 US 336, 341, 125 S Ct 1627, 161 L Ed 2d 577 (2005), the Court expounded on the private federal securities fraud actions based on Section 10b of the Securities Exchange Act of 1934 and SEC Rule 10b-5 in the following terms:
“In cases involving publicly traded securities and purchases or sales in public securities markets, the action‘s basic elements include:
“(1) a material misrepresentation (or omission), see Basic Inc. v. Levinson, 485 US 24, 231-232, 108 S Ct 978, 99 L Ed 2d 194 (1988);
“(2) scienter, i.e., a wrongful state of mind, see Ernst & Ernst, supra, at 197, 199, 96 S Ct 1375;
“(3) a connection with the purchase or sale of a security, see Blue Chip Stamps, supra, at 730-731, 95 S Ct 1917; “(4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as transaction causation, see Basic, supra, at 248-249, 108 S Ct 978 (nonconclusively presuming that the price of a publicly traded share reflects a material misrepresentation as long as they would not have bought the share in its absence);
“(5) economic loss, 15 USC §78u-4(b)(4); and
“(6) ’loss causation,’ i.e., a causal connection between the material misrepresentation and the loss, ibid.;”
See also Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 131 S Ct 1309, 179 L Ed 2d 398 (2011) (reaffirming fraud-on-the-market doctrine generally); Erica P. John Fund, Inc. v. Haliburton Co., 563 U.S. 804, 131 S Ct 2179, 180 L Ed 2d 24 (2011) (specifically reaffirming fraud-on-the-market doctrine as to causation and reliance).
This consistent line of decisions by the United States Supreme Court is telling. We think it significant that that Court has held, since its decision in Basic Inc. in 1988, that reliance can be established in SEC Rule 10b-5 claims through the fraud-on-the-market doctrine. Furthermore, although the fraud-on-the-market presumption originated in class action cases, the federal courts have applied it to claims brought by individual investors. See, e.g., Black v. Finantra Capital, Inc., 418 F3d 203, 209 (2d Cir 2005) (applying the fraud-on-the-market presumption of reliance to an individual stock purchase); Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F2d 522, 529 (7th Cir 1985) (same).
As a matter of timing, Basic Inc. was decided by the United States Supreme Court in 1988, and
The legislative history confirms that SB 609, now codified as
“SB 609 clarifies and extends the Oregon Securities Law. Currently, state funds may not be able to bring a claim against a fraudulent corporation unless the state fund purchased securities directly from the corporation or in a new offering. SB 609 allows defrauded investors to recover damages when investors purchase stock in the ‘open market.’
“*****
“SB 609 allows for these ‘fraud-on-the-market’ claims and would make Oregon law consistent with the federal statutes that allows for these claims.”
Testimony, Senate Committee on Business and Labor, SB 609, Apr 7, 2003, Ex I (statement of Sen Kate Brown).
Scott A. Shorr, one of the proponents of the bill, provided additional testimony that echoed that provided by Senator Brown. Mr. Shorr‘s written testimony also stated that:
“SB 609 clarifies and extends the Oregon Securities Laws to allow an investor which is damaged by fraud to recover its losses when the investor purchased its stock in the ‘open market.’ The amendment would allow for so-called ‘fraud-on-the-market’ claims and would make Oregon law consistent with the corresponding federal statute that allows for such claims.”
Testimony, Senate Committee on Business and Labor, SB 609, Apr 7, 2003, Ex H (statement of Scott A. Shorr).
Floyd G. Lanter, Administrator of the Division of Finance and Corporate Securities of the Department of Consumer and Business Services, provided similar testimony. Mr. Lanter stated:
“In general, we agree with the sponsors of this bill that investors should be able [to] bring suits to recover their losses not only from the company that issued the stock or
the person who had title to the investment but also from those persons who facilitate and promote the stock sale and who make their living by sales commissions. We also believe investors should have the right to bring so-called ‘fraud-on-the-market’ lawsuits when they buy stock on the open market in reliance on financial statements and similar information that turn out to have been fraudulent.”
Testimony, Senate Committee on Business and Labor, SB 609, Apr 7, 2003, Ex K (statement of Floyd G. Lanter).
Marsh contends that these statements evince nothing more than an intent that the bill would extend the reach of Oregon Securities Laws to purchases made in the open, or secondary, markets such as the New York Stock Exchange—as opposed to face-to-face transactions—but not to incorporate the fraud-on-the-market doctrine. The Court of Appeals agreed with that reading of the legislative history, finding that the statements in the legislative record merely expressed an intent to provide a cause of action for investors who are defrauded when they purchase securities in non-face-to-face transactions, as they normally do in “open market” purchases. According to Marsh and the Court of Appeals, the open market stock purchaser still would be required to prove direct reliance on a misrepresentation by the defendant. We disagree.
First, the testimony outlined above is replete with references to fraud-on-the-market claims. It is significant that numerous witnesses, including the legislator who introduced and carried the bill, used the same particular and rather unique phrase to describe the effects of the bill. The phrase “fraud-on-the-market” is a specific enough term that, even if it does not constitute a legal term of art, it conveys more than simply expanding available state law claims to non-face-to-face transactions. Unlike the Court of Appeals, we conclude that the legislative history amply supports the determination that the legislature intended to incorporate the fraud-on-the-market doctrine recognized under federal securities law when it enacted
Second, our conclusion is bolstered by the undisputed fact that the intent and effect of enacting
Third, our conclusion is fully consistent with the terms of
“The fraud-on-the-market theory is based on the hypothesis that, in an open and developed securities market, the price of a company‘s stock is determined by the available material information regarding the company and its business. *** Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. *** The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant, than in a case of direct reliance on
misrepresentation.”
Basic Inc., 485 US at 241-42 (quoting Peil v. Speisoy, 806 F2d 1154, 1160-61 (CA3 1986)).
We conclude that, in recognizing claims under Oregon law for damages to open market stock purchasers “caused by” misrepresentations by companies whose stock is sold on the open market, the Oregon Legislative Assembly intended that the causal connection in such sales could be established through the use of the fraud-on-the-market doctrine. In other words, we understand that in recognizing claims by open market stock purchasers, the Oregon legislature also provided the means of proving such claims when the stock purchases were made in non-face-to-face transactions on the open market and we further understand that the Oregon legislature intended to adopt as one of the available means the fraud-on-the-market doctrine that the federal courts had provided under federal securities law since 1988. To conclude otherwise would be to interpret the terms of
Marsh asserts, however, that other state courts have not endorsed the fraud-on-the-market doctrine under their state securities laws. Each state court, of course, must address the issue as a matter of statutory interpretation under its particular statutory scheme using its own method of statutory interpretation. As we have set out above, we reach our determination that the fraud-on-the-market presumption applies under Oregon securities laws by applying our own well-established method of interpreting Oregon statutory law. The fact that other state courts have not determined that the fraud-on-the-market doctrine applies under their own state laws provides little reason for us to follow that same path here in Oregon.
OMISSION
Finally, we turn to the state‘s argument that a stock purchaser should not have to prove reliance in claims alleging that a company has omitted stating material facts about the security. The state relies primarily on the United States Supreme Court‘s decision in Affiliated Ute Citizens of Utah v. United States, 406 US 128, 92 S Ct 1456, 31 L Ed 2d 741 (1972). In Affiliated Ute Citizens, the Court held that a plaintiff need not provide direct proof of reliance under SEC Rule 10b-5, where the defendant has made statements with material omissions of fact:
“Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite for recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision.”
We decline to reach that issue because we conclude that this is not an “omission” case. The state pleaded its case
primarily as a misrepresentation case. The state presented the omission theory only as an adjunct theory of liability based on the failure to disclose the misrepresentations.9 Furthermore, the state presents its omission argument to this court only as an alternative ground for disposition. The state asserts:
“As a final matter,
if this court concludes that ORS 59.137(1) contains a reliance requirement and that the ‘fraud-on-the-market’ doctrine is not available under state law, this court must consider whether reliance is necessary when a violation of ORS 59.135(2) is premised on the omission of material facts in a statement about a security.”
As we have concluded, the fraud-on-the-market claim is available and must be addressed and resolved on remand. Resolution of the issue whether reliance is required in an “omission” case should be addressed in a true omission case, when the issue is directly presented factually and the issue is fully briefed by the parties involved. Consequently, we decline to reach that issue here.
CONCLUSION
We conclude that claims based on misrepresentations that are brought under
The decision of the Court of Appeals is reversed, and the case is remanded to the Court of Appeals for further proceedings.