122 Wash. App. 258 | Wash. Ct. App. | 2004
A purchaser of securities establishes liability for violation of the Washington State Securities Act (WSSA), chapter 21.20 RCW, by proving that the seller and/or others made material misrepresentations or omissions and the purchaser relied on those misrepresentations or omissions.
Dr. Stewart is a physician who left the practice of medicine to become a full-time professional investor. George Steiner was a registered stockbroker who worked for Prudential Securities, Inc., at the time of the transaction at issue here.
Viewing the evidence in the light most favorable to Dr. Stewart, the nonmoving party in the summary judgment motions before us for review, the facts are as follows. Steiner and Dr. Stewart spoke with each other at a holiday party in late 1999. Dr. Stewart had invested money through Steiner and Prudential in the past, but was not then a Prudential customer. Steiner was a stockbroker employed by Prudential at the time the two spoke.
Steiner described Locate’s stock offering as a “hot” investment in a $15,000,000 offering that was “oversubscribed.” Steiner said he had invested his own money in the offering. As Dr. Stewart was leaving the party, Steiner stopped him and handed him his Prudential business card, inviting him to call.
The Confidential Private Placement Memorandum dated December 1999 (Memorandum) contained detailed information, including over six pages of “Risk Factors,” for a potential investor to consider. There were also specific warnings about the investment’s “high degree of risk” and technological and financing risk factors. The Memorandum also stated that the offering was to raise a minimum of $8,025,000 and a maximum of $15,000,000. It also warned of “the possibility that an investor could lose all of his or her investment.”
After reviewing the Memorandum, Dr. Stewart called Steiner to ask questions about the offering. Steiner said that the offering had raised the full $15,000,000 maximum, but that Dr. Stewart might still be able to invest.
After speaking with Steiner, Dr. Stewart called Michael Crowson to ask him about the offering. Crowson told Dr. Stewart that the offering was fully funded and the company would go public. Crowson also justified the valuation of the founders’ shares by stating that Locate had no financing risk — it was “fully funded,” and had no technology risk— “all of the technology has already been developed.”
Dr. Stewart decided to purchase 40,000 shares for $150,000. He submitted a check and his signed Subscription Agreement to escrow with Locate’s legal counsel. Locate then transferred the shares to Dr. Stewart.
Dr. Stewart became disappointed with the performance of the stock. According to Dr. Stewart, Steiner failed to disclose material information. For example, Dr. Stewart claims he did not know prior to the purchase that Steiner had obtained approval from Prudential to act as an inde
Dr. Stewart also contends that statements by Steiner and/or Crowson were misleading. For example, Dr. Stewart asserts that the offering was not fully subscribed, as represented. Moreover, he claims that Steiner had not invested his own money, as represented. Dr. Stewart contends these were material oral misrepresentations supporting liability under the WSSA.
Dr. Stewart commenced this action under the WSSA against Steiner, Prudential, Locate, and Crowson, seeking the relief specified in that statute. He did not plead any common law claims.
Prudential moved for summary judgment, which the trial court granted. Dr. Stewart moved for reconsideration and clarification, which the court denied. The state Supreme Court denied Dr. Stewart’s motion for direct discretionary review.
The trial court later granted motions for summary judgment by Steiner, Crowson, and Locate, and Dr. Stewart appeals.
RELIANCE
Dr. Stewart first argues that Steiner, Crowson, and Locate violated the WSSA by making material misrepresentations and/or omitting material information in their oral communications with him and that he relied on their statements in making his decision to invest. We hold that Dr. Stewart failed to establish reliance, and under the
Summary judgment is appropriate only “if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.”
To establish liability under the WSSA, the purchaser of a security must prove that the seller and/or others made material misrepresentations or omissions about the security, and the purchaser relied on those misrepresentations or omissions.
We first determine whether there are any genuine issues of material fact. While there are disputed facts regarding the alleged misrepresentations and/or omissions under the act, they are immaterial for summary judgment purposes if the record shows there is no genuine issue of fact regarding reliance — the other essential element to prove a claim under the WSSA. Here, that element requires us to examine the warranties and disclaimers in the Subscription Agreement that Dr. Stewart signed as well as other relevant factors to determine whether he reasonably relied on the matters underlying his lawsuit.
We focus first on the specific assertions that Dr. Stewart makes in his claims under the WSSA. In his declaration opposing the grant of summary judgment, he identified
The offering was over-subscribed, and that only a last-minute cancellation afforded me an opportunity to invest; the full $15,000,000 had already been raised in the offering; Steiner had invested his own money in the offering; [Stewart] could only participate in the offering if he [sic] came up with the money in the next “couple of days.”
The alleged material omissions that he identified are:
Steiner’s work on the offering was outside the auspices of Prudential; Steiner was in violation of his contract with Prudential concerning the offering, because the contract prohibited him from soliciting investors or raising capital for Loc8; Steiner’s stake in the offering was not an ordinary commission arrangement, rather he was to be paid $75,000 and given fully-vested ten-year warrants for 160,000 shares of Loc8 stock at the final closing of the offering; Steiner concealed from Loc8 the fact that his contract with Prudential prohibited him from soliciting investors or raising capital for Loc8; Steiner had misrepresented to Loc8 that he had already obtained permission from Prudential to work on the Loc8 offering.
Steiner, Locate, and Crowson argue that the above matters do not constitute either material misrepresentations or omissions, and that we may reach those conclusions as a matter of law on the record before us. We decline to do so. Rather, we assume, without deciding, for purposes of the summary judgment motions only that the above matters that Dr. Stewart identifies create genuine issues of fact whether there were material misrepresentations and/or omissions. Thus, they could be genuine issues of material fact that would preclude summary judgment.
The question is whether Dr. Stewart reasonably relied on any of those matters in making his investment decision.
Subscription Agreement
It is undisputed that prior to closing, Dr. Stewart executed and delivered to Locate his Subscription Agreement together with his check for the purchase of shares. That agreement provides in part:
2. Investor Representations, Warranties and Covenants. The undersigned hereby acknowledges, represents and warrants to, and agrees with, the Company as follows:
(d) The undersigned:
(i) has been furnished with [the Confidential Private Placement Memorandum, dated December 1,1999] and any other documents which have been made available upon request and he/she has carefully read the Memorandum and understands and has evaluated the risks of a purchase of Shares, including the risks set forth under “Risk Factors” in the Memorandum; and has relied solely on the information contained in the Memorandum, and any supplemental written information furnished pursuant to Subsection (ii) below:
(ii) has been given the opportunity to ask questions of, and receive information from the Company concerning the terms and conditions of the offering of the Shares, and has been given the opportunity to obtain such additional information necessary to satisfy himselffherself as to the accuracy of the information contained in the Memorandum or that which was otherwise provided in order for him/her to evaluate the merits and risks of investment in the Shares to the extent that the Company possesses such information or can acquire it without unreasonable effort or expense and such infor*267 mation has not been furnished with any other offering literature except as mentioned herein or in the Memorandum;
(iii) has not relied on any oral representation, warranty or information in connection with the offering of the Shares by the Company, or any officer, employee, agent, affiliate or subsidiary of the Company;
(g) The foregoing acknowledgments, representations, warranties and agreements shall survive the closing at which the Shares are issued . . . .[10 ]
The plain words of the agreement state that Dr. Stewart warranted that he “relied solely on the information contained in the Memorandum” when he tendered his check for purchase of the shares. The same agreement warrants that he did not “[rely] on any oral representations, warranty or information in connection with the offering of Shares by the Company, or any officer .. . agent... of the Company . . . .” It is equally undisputed that prior to executing and delivering the Subscription Agreement to Locate, Dr. Stewart read the Memorandum that contained the following statement:
NO GENERAL SOLICITATION WILL BE CONDUCTED AND NO OFFERING LITERATURE OR ADVERTISING IN ANY FORM WILL OR MAY BE EMPLOYED ... EXCEPT FOR THIS MEMORANDUM (INCLUDING AMENDMENTS AND SUPPLEMENTS TO THIS MEMORANDUM) AND THE DOCUMENTS SUMMARIZED HEREIN OR ENCLOSED HEREWITH. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS MEMORANDUM (INCLUDING AMENDMENTS AND SUPPLEMENTS TO THIS MEMORANDUM) OR IN THE DOCUMENTS SUMMARIZED HEREIN OR ENCLOSED HEREWITH AND, IF GIVEN OR MADE, SUCH OTHER*268 INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON}11 111
There is no genuine dispute by any party that Dr. Stewart is a sophisticated investor, one who has read both offering memoranda and subscription agreements of this general type in prior investments in which he has been involved.
The emphasized provisions in the Subscription Agreement are generally identified as “non-reliance” clauses in securities cases. No Washington court has addressed the effect of such clauses under the WSSA. But we are persuaded that this case is controlled by the principles articulated in the analogous federal securities cases addressing such clauses.
First among them is Rissman v. Rissman.
The court started with the observation that “Securities law does not permit a party to a stock transaction to disavow such representations — to say, in effect T lied when I told you I wasn’t relying on your prior statements’ and then to seek damages for their contents.”
We also note that Dr. Stewart does not allege that he was fraudulently induced into signing the agreement. Rather, he claims that the defendants violated the WSSA by misrepresenting and/or omitting material information in connection with the sale of Locate securities to him. Thus, absent unenforceability of the disclaimers and warranties in the Subscription Agreement, Dr. Stewart may be bound by them.
Dr. Stewart advances several arguments to escape the effect of the language in the Subscription Agreement that he signed. None is persuasive.
He argues that the disclaimers at issue are unenforceable because they effectively waive compliance with the requirements of the WSSA. We hold that the disclaimers before us do no such thing.
First, nowhere in the plain language of the Subscription Agreement that we have already quoted in this opinion is there any express or implied waiver of compliance by any of the defendants with the WSSA. Moreover, Dr. Stewart fails
Second, Dr. Stewart’s theory appears to be based almost exclusively on Rogen v. Ilikon Corp.
Whatever validity that dictum may have had in that case, it has been rejected in Harsco Corp. v. Segui, a more recent decision out of the Second Circuit Court of Appeals.
We reject the Rogen reasoning both because the plain language of the Subscription Agreement does not require anyone to waive compliance with the WSSA, and for the reasons stated in Harsco.
Dr. Stewart also argues, without citation to any authority, that the alleged misrepresentations that are not contradicted by the Memorandum are not immunized by the disclaimers. We disagree.
Noting that the alleged misrepresentations relate to the status of the offering and whether Steiner invested his own money, not to Locate or other information addressed in the Memorandum, he claims that he justifiably relied on the oral misrepresentations. The simple answer to this argument is that he expressly agreed that he did not rely on any oral representations and relied solely on the Memorandum. And we simply view as unconvincing Dr. Stewart’s statement that he viewed the disclaimers as limited to establishing the Memorandum as “the ‘official’ source of information about the subjects addressed in the Offering Memorandum.” A fair reading of the Subscription Agreement and the Memorandum does not support such an interpretation.
Dr. Stewart next cites Ito International Corp. v. Prescott, Inc.,
Similarly in Special Transportation Services, Inc. v. Balto,
The antireliance provision in the Locate Offering Memorandum did not violate the WSSA’s antiwaiver provision and is enforceable.
Dr. Stewart next argues that the disclaimers cannot apply to omissions of material fact. We also disagree with this contention.
He bases this argument, in part, on the view that disclaimers equate to waiver of the protections of the WSSA. We already dispensed with this argument in our preceding discussion.
The other part of this argument is based on state case authority that indicates that a rebuttable presumption of reliance applies when a material omission is at issue. Based on Morris v. International Yogurt,
Dr. Stewart maintains that we should use the Morris analysis and hold that disclaimers cannot bar the assertion of a claim of an omission of a material fact. Steiner does not address the point. And Locate and Crowson argue that we need not reach the issue because none of the alleged omissions were material to Dr. Stewart’s investment decision.
Morris is distinguishable. First, the state supreme court did not have before it the question of the effect of non-reliance clauses in a subscription agreement. Thus, the court did not have occasion to address the precise issue now before us. Second, the rationale for the rule the court adopted in that case was to address proof problems by a securities case plaintiff who contends there was nondisclosure of a material fact. In contrast, we have a separate question: what effect should be given to written proof that a securities plaintiff has not relied on oral representations and has relied only on an offering memorandum. These distinct questions make application of the Morris principles far less significant if indeed they have any application to this situation. For these reasons, we are unpersuaded by the contention that the disclaimers before us cannot apply to alleged material omissions in a state securities case.
We are mindful of the admonition that our state securities laws are to be interpreted liberally to achieve the desired effect of protecting investors.
Jackvony lists those other factors that we believe are appropriate to consider in making this determination. They are (1) the sophistication and expertise of the plaintiff in financial and securities matters, (2) the existence of longstanding business or personal relationships, (3) access to the relevant information, (4) the existence of a fiduciary relationship, (5) concealment of the fraud, (6) the opportunity to detect the fraud, (7) whether the plaintiff initiated the stock transaction or sought to expedite the transaction, and (8) the generality ( or specificity of the misrepresentations.
Here, the first nondispositive factor is that Dr. Stewart is a sophisticated investor with expertise in financial and securities matters. There was no long-standing business or personal relationship between Locate and Dr. Stewart, as required by the second factor. There was a prior relationship between Dr. Stewart and Prudential, the broker. There was no fiduciary relationship, as required by the fourth factor. As to the eighth factor — the generality or specificity of the alleged misrepresentations — there were specific matters on which Dr. Stewart claims he relied.
As to the third factor — access to the relevant information — Dr. Stewart takes the position that he did not have access to information regarding the misrepresentations or
Finally, Dr. Stewart argues that reliance cannot be determined on summary judgment because it involves the examination of numerous factors. While reliance requires examination of relevant factors, we reject the contention that such examination cannot be done in a summary judgment motion.
We need cite only to Jackvony and the cases we have already discussed to support the proposition that examination and resolution of the relevant factors can be done in a summary judgment motion. We have done so here.
We hold that this record demonstrates that Dr. Stewart has failed to overcome the showing that he did not reasonably rely on the oral representations or omissions in connection with the sale of stock. His Subscription Agreement expressly states that he did not rely on any oral representations and relied solely on the Memorandum. And the other relevant factors affecting evaluation of reliance show that he did not reasonably rely on the matters he identified to attempt to withstand the summary judgment motions.
EQUITABLE ESTOPPEL DEFENSE
Dr. Stewart also asserts that equitable estoppel is unavailable to persons who violate the WSSA. Steiner, on the other hand, contends that such a defense is available. Because we conclude that Dr. Stewart did not reasonably rely on the matters he asserts, we need not resolve this dispute in this opinion.
“CONTROL PERSON” AND RESPONDEAT SUPERIOR
Dr. Stewart argues that Prudential is liable under the WSSA as a “control person” of Steiner. Moreover, he asserts
We first note that Dr. Stewart’s claim in his amended complaint was limited to alleged violation of the WSSA. He did not plead respondeat superior or any other common law claims against Prudential or any other defendant. In his opposition to the summary judgment motion of Prudential, he asserted summary judgment was barred, in part, by agency, the common law doctrine of respondeat superior. Prudential’s reply neither moves to strike nor otherwise addresses this part of Dr. Stewart’s arguments. More importantly, the court’s order granting summary judgment listing the documents the judge considered includes Dr. Stewart’s reply, but does not exclude the discussion concerning agency.
Both sides have fully briefed the respondeat superior issue and none has asserted any prejudice in our consideration of that particular claim. Accordingly, we consider it to promote justice and facilitate a decision on the merits.
The provision of the WSSA at issue is RCW 21.20.430(3), which states:
(3) Every person who directly or indirectly controls a seller or buyer liable under subsection (1) or (2) above, every partner, officer, director or person who occupies a similar status or performs a similar function of such seller or buyer, every employee of such a seller or buyer who materially aids in the transaction, and every broker-dealer, salesperson, or person exempt under the provisions of RCW 21.20.040 who materially aids in the transaction is also liable jointly and severally with and to the same extent as the seller or buyer, unless such person sustains the burden of proof that he or she did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is*277 alleged to exist. There is contribution as in cases of contract among the several persons so liable.
Dr. Stewart emphasizes in his brief the first part of the above statute,
Dr. Stewart relies heavily on federal case authority construing federal securities statutes that parallel the WSSA. Specifically, he relies on Hollinger v. Titan Capital Corp.,
Prudential correctly acknowledges that the Ninth Circuit in Hollinger established a general rule that broker-dealers are “controlling persons” with respect to their registered representatives.
To summarize, a broker-dealer controls a registered representative for the purposes of § 20(a). By recognizing this control relationship, we do not mean that a broker-dealer is vicariously liable under § 20(a) for all actions taken by its registered representatives. Nor are we making the broker-dealer the “insurer” of its representatives, which is a result we rejected in Christoffel [a. E.F. Hutton & Co., 588 F.2d 665 (9th Cir. 1978)] as going beyond the scope of the vicarious liability imposed upon a broker-dealer by § 20(a). The mere fact that a controlling person relationship exists does not mean that vicarious liability necessarily follows. Section 20(a) provides that the “controlling person” can avoid liability if she acted in good faith and did not directly or indirectly induce the violations. By making the good faith defense available to controlling persons, Congress was able to avoid what it deemed to be an undesirable result, namely that of insurer’s liability, and instead it made vicarious liability under § 20(a) dependent upon the broker-dealer’s good faith.[48 )
Prudential argues there were no genuine issues of material fact and it was entitled to judgment as a matter of law under the WSSA, arguing that the mere fact of the employment relationship between Steiner and itself is not enough to impose liability. There are conflicting declarations from the respective sides on these issues.
We need not address further whether Prudential sustained its burden on summary judgment for either the statutory cause of action under the WSSA or the common law claim under respondeat superior. We have already
We affirm the summary judgment orders.
Becker and Ellington, JJ., concur.
Review denied at 153 Wn.2d 1022 (2005).
Hines v. Data Line Sys., 114 Wn.2d 127, 134, 787 P.2d 8 (1990); RCW 21.20.010(2).
Steiner died in 2003. We hereby grant the motion for substitution of parties and the Estate of George Steiner is hereby substituted for George Steiner. Nevertheless, we shall refer to both the original defendant and the substituted party, as the context requires, as “Steiner” throughout this opinion.
Locate Networks, Inc. was originally named Loc8.net, Inc., but its name was changed to Locate Networks, Inc., in September 2000. We shall refer to the corporation as “Locate.”
Trimble v. Wash. State Univ., 140 Wn.2d 88, 93, 993 P.2d 259 (2000).
Young v. Key Pharms., Inc., 112 Wn.2d 216, 225, 770 P.2d 182 (1989) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S. Ct. 2548, 2553-54, 91 L. Ed. 2d 265 (1986)).
Trimble, 140 Wn.2d at 92.
Hines, 114 Wn.2d at 134; ROW 21.20.010(2).
ROW 21.20.010; Douglass v. Stanger, 101 Wn. App. 243, 2 P.3d 998 (2000).
Dr. Stewart contends mere reliance, not reasonable reliance, on a misrepresentation or an omission is sufficient under the WSSA. That view appears to be at odds with the relevant case law, and we reject it. See Clausing v. DeHart, 83 Wn.2d 70, 73, 515 P.2d 982 (1973) (adopting the objective view of a material fact
(Emphasis added.)
(Emphasis added.)
213 F.3d 381 (7th Cir. 2000).
Rissman, 213 F.3d at 383.
Rissman, 213 F.3d at 383.
Rissman, 213 F.3d at 382.
Rissman, 213 F.3d at 384.
873 F.2d 411 (1st Cir. 1989) (holding the investor could not have reasonably-relied upon alleged misrepresentation by a corporation’s employees where a written agreement and plan of reorganization specifically provided that it represented the entire agreement between investor and the corporation, and superseded all prior agreements and understandings, both written and oral).
848 F.2d 1283 (D.C. Cir. 1988) (holding an integration clause in a stock option contract precluded a securities fraud claim based on representations made by the option holder before the contract was entered into).
Tirapelli v. Advanced Equities, Inc., 215 F. Supp. 2d 964 (N.D. Ill. 2002) (Holding investors bringing a § 10(b) (15 U.S.C. § 78(b)) securities fraud action against a company could not have reasonably relied upon alleged representations when nonreliance and integration clauses in subscription documents precluded any reliance upon representations that were not set forth in subscription documents.).
361 F.2d 260 (1st Cir. 1966).
Rogen, 361 F.2d at 260.
Rogen, 361 F.2d at 267-68.
Rogen, 361 F.2d at 268.
91 F.3d 337, 343-44 (2d Cir. 1996).
Harsco, 91 F.3d at 343-44.
Harsco, 91 F.3d at 343.
Harsco, 91 F.3d at 344.
83 Wn. App. 282, 921 P.2d 566 (1996).
60 Wn. App. 743, 806 P.2d 1266 (1991).
Ito, 83 Wn. App. at 288-89.
Rutter, 60 Wn. App. at 746-47.
325 F. Supp. 1185 (D. Minn. 1971).
Special Transp., 325 F. Supp. at 1187.
107 Wn.2d 314, 729 P.2d 33 (1986).
Morris, 107 Wn.2d at 317.
Morris, 107 Wn.2d at 324.
Morris, 107 Wn.2d at 326.
Morris, 107 Wn.2d at 330; 17 C.F.R § 240.10b-5 (1985).
Hoffer v. State, 113 Wn.2d 148, 152, 776 P.2d 963 (1989).
Rissman, 213 F.3d at 386-87 (Rovner, J., concurring).
Jackvony, 873 F.2d at 416.
RAP 1.2.
Emphasizing selected portions of the statute and citing provisions in Hines, 114 Wn.2d at 135-36, establishing the test for a control person of a seller.
The controlling person doctrine is based on section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) and section 15 of the Securities Act of 1933, 15 U.S.C. § 77o. Section 20(a) provides: “Every person who, directly or indirectly, controls any person liable under any provision of this chapter ... shall also be liable jointly and severally with and to the same extent as such controlled person ... unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.” 15 U.S.C. § 78t(a) (1982).
Section 15 provides: “Every person who, by or through stock ownership, agency, or otherwise,. .. controls any person liable under . .. this title, shall also be liable jointly and severally with and to the same extent as such controlled person... unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.” 15 U.S.C. § 77o (1982).
The analogous provision under the WSSA, RCW 21.20.430(3) states:
(3) Every person who directly or indirectly controls a seller or buyer liable under subsection (1) or (2) above, every partner, officer, director or person who occupies a similar status or performs a similar function of such seller or buyer, every employee of such a seller or buyer who materially aids in the transaction, and every broker-dealer, salesperson, or person exempt under the provisions of RCW 21.20.040 who materially aids in the transaction is also liable jointly and severally with and to the same extent as the seller or buyer, unless such person sustains the burden of proof that he or she did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist. There is contribution as in cases of contract among the several persons so liable.
914 F.2d 1564 (9th Cir. 1990).
Hollinger, 914 F.2d at 1577.
Hollinger, 914 F.2d at 1574-75.
Hollinger, 914 F.2d at 1575.