Bruschi v. Brown

• Decision Date: 12 July 1989
• Docket Number: No. 88-5574,88-5574
• Citation: 876 F.2d 1526
• Parties: Fed. Sec. L. Rep. P 94,517 Margaret R. BRUSCHI, Plaintiff-Appellant, v. Ken BROWN, Defendant-Appellee, Elmco, Inc., Defendant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1526

876 F.2d 1526

Fed. Sec. L. Rep. P 94,517

Margaret R. BRUSCHI, Plaintiff-Appellant, v. Ken BROWN, Defendant-Appellee, Elmco, Inc., Defendant.

No. 88-5574.

United States Court of Appeals, Eleventh Circuit.

July 12, 1989.

Michael R. Casey, Hatch, Mager, Casey & Beilly, Fort Lauderdale, Fla., for plaintiff-appellant.

Richard L. Allen, Wallace, Engels, Pertnoy, Martin & Solowsky, Miami, Fla., for defendant-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before VANCE and COX, Circuit Judges, and DYER, Senior Circuit Judge.

VANCE, Circuit Judge:

This is an appeal from summary judgment for defendant entered after the district court elected to treat the defendant's Fed.R.Civ.P. 12(b)(6) motion to dismiss as a motion for summary judgment under Fed.R.Civ.P. 56. At issue is the correctness of the court's decision with respect to the plaintiff's claim under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5. We reverse.

I. FACTS

The amended complaint alleges and appellant has offered proof in support of the following facts. In the fall of 1981 plaintiff-appellant Margaret R. Bruschi, a high school graduate with only minimal investment experience, sought the services of a reputable investment firm to assist her in the management of the financial affairs of her and her husband. She eventually selected the brokerage firm of Dean Witter Reynolds, Inc., because of its highly-regarded investment management expertise. Defendant-appellee Ken Brown, an account executive and securities salesman at Dean Witter's branch office in Baco Raton, Florida, became Bruschi's broker and investment advisor.

Brown met with Bruschi to present his analysis of her portfolio and to recommend investment opportunities. One of these opportunities was a computer equipment sale and lease arrangement known as the Elmco investment. Brown strongly recommended the Elmco investment and described it in positive terms. He also told Bruschi that it would provide her with significant tax deductions. Brown did not disclose, however, that the Elmco investment was in fact a complex and risky venture involving unregistered securities and was neither endorsed nor offered by Dean Witter. He also did not disclose that he and Elmco had entered into an agreement in which Brown was to receive a sales commission from Elmco for any securities sold by Brown.

Bruschi agreed to invest in Elmco and Brown visited her at home to close the transaction. Because the Elmco investment was a private securities offering, he brought several disclosure documents ¹ designed to bring the transaction within the exemption provision of Rule 146 of the Securities and Exchange Commission. ² The documents consisted of approximately 160 pages of text and exhibits. Brown agreed to act as Bruschi's "offeree representative" and advise her as to the tax ramifications and economic merits and risks of the Elmco investment. ³ Bruschi signed the documents without reading them ⁴ after being assured by Brown that the signature process was a mere formality.

Bruschi invested approximately $84,000 in the Elmco securities. In April 1985 the Internal Revenue Service disallowed several deductions taken by Bruschi and her husband on their joint tax returns for the years 1981, 1982, and 1983. Bruschi negotiated a settlement after her accountants and attorneys advised her that a successful contest of the IRS's ruling was uncertain and would be costly.

II. DISCUSSION

The elements of a Rule 10b-5 cause of action are: (1) the defendant made a false statement or omission of material fact (2) with scienter (3) upon which the plaintiff justifiably relied (4) that proximately caused the plaintiff's damages. See Diamond v. Lamotte, 709 F.2d 1419, 1423 (11th Cir.1983); Huddleston v. Herman & MacLean, 640 F.2d 534, 543 (5th Cir. Unit A 1981), aff'd in part and rev'd in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). Summary judgment for the defendant is improper unless the record reveals that there are no genuine issues as to any material fact supporting the plaintiff's claim and the defendant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In applying this standard we must resolve all reasonable doubts in favor of Bruschi, the nonmoving party. Williams v. City Dothan, 745 F.2d 1406 (11th Cir.1984). The parties agree that there are material facts in dispute as to the first two elements of Bruschi's Rule 10b-5 claim. We conclude that there also are material facts in dispute as to the third and fourth elements of Bruschi's claim; consequently, the district court erred in granting summary judgment to Brown.

A. Justifiable Reliance

Brown first contends that there are no material facts in dispute to support the justifiable reliance element of Bruschi's Rule 10b-5 claim. Brown points to representations in the disclosure documents that conflict with the alleged oral misrepresentations and argues that, as a matter of law, an investor is not justified in relying on oral misrepresentations that conflict with contemporaneous written representations. We disagree.

We have never held that, regardless of the circumstances, an investor is always precluded from recovering under Rule 10b-5 if the misrepresentations upon which the investor relied were oral and conflict in some way with contemporaneous written representations available to the investor. Determinations of whether an investor's reliance was justified requires the consideration of all relevant factors, including: (1) the sophistication and expertise of the plaintiff in financial and security matters; (2) the existence of long standing business or personal relationships between the plaintiff and the defendant; (3) the plaintiff's access to relevant information; (4) the existence of a fiduciary relationship owed by the defendant to the plaintiff, (5) concealment of fraud by the defendant; (6) whether the plaintiff initiated the stock transaction or sought to expedite the transaction; and (8) the generality or specificity of the misrepresentations. See Kennedy v. Josephthal & Co., 814 F.2d 798, 804 (1st Cir.1987); Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1516 (10th Cir.1983) (citing G.A. Thompson & Co. v. Partridge, 636 F.2d 945, 955 (5th Cir.1981); Nye v. Blyth Eastman Dillon & Co., 588 F.2d 1189, 1197 (8th Cir.1978); Straub v. Vaisman & Co., 540 F.2d 591, 598 (3d Cir.1976); Hughes v. Dempsey-Tegeler & Co., 534 F.2d 156, 176-77 (9th Cir.), cert. denied, 429 U.S. 896, 97 S.Ct. 259, 50 L.Ed.2d 180 (1976)). No single factor is dispositive; all must be considered and balanced in determining whether reliance was justified. Zobrist, 708 F.2d at 1516-17.

It may be argued that the most prudent course for Bruschi to have taken would have been to read the disclosure documents before deciding whether to invest in Elmco. Under the circumstances, however, her failure to do so--and thereby discover the inconsistencies between the alleged oral misrepresentations and the written representations--does not make her reliance unjustified as a matter of law. We first note that while some statements in the disclosure documents conflicted with some of the alleged oral misrepresentations, other statements in these documents confirmed some of the alleged oral misrepresentations. Bruschi alleges that Brown made oral misrepresentations that the economic and tax risks of the Elmco investment were minimal. These misrepresentations conflicted with statements in the disclosure documents that the economic and tax risks were substantial. The disclosure documents, however, were consistent with Brown's alleged oral misrepresentations that (1) there were no material relationships between himself and Elmco and (2) that he had not and would not be receiving any compensation from Elmco. The "Offeree Representative's Written Disclosure" states the following:

By copy of this document, I [ (Brown) ] hereby disclose to the above named prospective subscriber [ (Bruschi) ] any material relationships between myself and the Issuer [ (Elmco) ] or its affiliates which now exist, are mutually understood to be contemplated or which have existed at any time during the previous two years and any compensation received or to be received as a result of such relationship: [ (blank) ] ⁵ Thus, even if Bruschi had read the disclosure documents, she would have received conflicting signals as to the reliability of the alleged oral misrepresentations rather than the obvious indication of unreliability argued by Brown.

The fact that some information in the disclosure documents would have indicated that some of Brown's alleged oral misrepresentations were unreliable is a factor to consider, but this factor alone is not dispositive; all of the relevant factors must be balanced. See Zobrist, 708 F.2d at 1516-17. We also must consider the following factors: Bruschi was unsophisticated and inexperienced in financial matters; Brown was her investment advisor and was more knowledgeable as to the economic and tax risks of the investment; as Bruschi's offeree representative Brown undertook a fiduciary obligation to act in Bruschi's best interests, see 17 C.F.R. Sec. 230.146(a)(1)(iv) note 3 (1982); Bruschi did not read the disclosure documents because Brown advised her not to do so; Brown knew the misrepresentations were false; and Brown initiated the transaction. See G.A. Thompson & Co. Inc. v. Partridge, 636 F.2d 945, 955 (5th Cir.1981); Zobrist, 708 F.2d at 1516. When all factors are considered, it cannot be held as a matter of law that Bruschi's reliance on the alleged oral misrepresentations was not justified.

B. Causation

Brown next contends that there are no material facts in dispute which would support the allegation that his actions were the proximate cause of Bruschi's loss. To satisfy the causation element of a Rule 10b-5 cause of...