Garcia v. Cordova, 89-2226

• Decision Date: 22 April 1991
• Docket Number: No. 89-2226,89-2226
• Citation: 930 F.2d 826
• Parties: Fed. Sec. L. Rep. P 95,891 Candido GARCIA; Theresa Ruiz, Special Administrator of the Estate of Fedelina Munoz; Adela Baros, Plaintiffs-Appellees, v. Gil E. CORDOVA, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 826

930 F.2d 826

Fed. Sec. L. Rep. P 95,891

Candido GARCIA; Theresa Ruiz, Special Administrator of the Estate of Fedelina Munoz; Adela Baros, Plaintiffs-Appellees, v. Gil E. CORDOVA, Defendant-Appellant.

No. 89-2226.

United States Court of Appeals, Tenth Circuit.

April 22, 1991.

Ronald Segel of Sutin, Thayer and Browne, Albuquerque, N.M., for defendant-appellant.

John G. Baugh of Eaves, Darling and Porter, P.A., Albuquerque, N.M., for plaintiffs-appellees.

Before MOORE, TACHA, and BRORBY, Circuit Judges.

TACHA, Circuit Judge.

This case, involving a securities fraud claim, requires us to decide whether the purchase of stock by a corporate insider triggered a duty under Rule 10b-5(b) requiring him to disclose to the selling shareholders certain inside information regarding corporate asset appraisals. The district court allowed the securities fraud claim to reach the jury, implying that the defendant had a duty to disclose. Because we find the asset appraisal information here to be immaterial as a matter of law due to its speculative and unreliable nature, we hold that the defendant had no duty of disclosure and that the question of securities fraud should not have been presented to the jury. We also reject the plaintiffs' contention that the evidence was sufficient to find the defendant liable for securities fraud under subparagraphs (a) and/or (c) of Rule 10b-5. We therefore reverse the district court.

Westland Development Company (Westland) is a community land grant corporation whose primary capital asset is approximately forty-nine thousand acres of raw land located mostly within the ancient boundaries of the Atrisco land grant west of Albuquerque, New Mexico. Westland's articles of incorporation provide that only the heirs of the persons who incorporated the town of Atrisco in 1891 can be Westland shareholders. At the time of trial, the number of shareholders had grown to a little over 4600, out of a total of approximately twenty thousand Atrisco heirs eligible to be shareholders. There were approximately 723,000 Westland shares issued and outstanding. Westland shares have never been listed on any national or regional stock exchange.

Mr. Gil Cordova, the defendant, became president of Westland in 1983. Between November 1983 and June 1986, Mr. Cordova purchased a total of 2513 shares of Westland stock from the three plaintiffs in this case. The purchase prices, according to plaintiffs, ranged from $4.62 per share to $8.65 per share.

The three plaintiffs brought separate actions against Mr. Cordova alleging securities fraud under federal and state law, RICO Act violations and common law fraud. The plaintiffs alleged, inter alia, that Mr. Cordova had committed fraud by failing to disclose certain asset value information and the results of various appraisals that had been performed on portions of Westland's holdings. The cases were consolidated, and the district court eventually dismissed the claims brought under the New Mexico Securities Act. Following a jury trial, judgment was entered against Mr. Cordova for compensatory and punitive damages for securities fraud and RICO Act violations, and in favor of Mr. Cordova on plaintiffs' common law fraud claims.

The court granted Mr. Cordova's motion for j.n.o.v. in part, vacating the judgment for punitive damages and for damages arising from the claimed RICO Act violations. The district court, however, denied Mr. Cordova's motion for j.n.o.v. with regard to the securities fraud claim. Mr. Cordova appeals this decision.

The denial of a motion for j.n.o.v. is reviewed by this court de novo using the same standard as that used by the trial court. Guilfoyle v. Missouri, Kan. & Tex. R.R. Co., 812 F.2d 1290, 1292 (10th Cir.1987). With regard to the factual findings underlying the jury's verdict against the defendant, a district court errs in refusing to grant judgment notwithstanding the verdict only if the evidence points but one way and will support no reasonable inference favoring the plaintiffs. Zimmerman v. First Fed. Sav. & Loan Ass'n, 848 F.2d 1047, 1051 (10th Cir.1988). In this case, however, the determinative question is whether the defendant had a duty to disclose the inside information he possessed to the plaintiffs. The answer to this question depends on whether that information was material. In re Cady, Roberts & Co., 40 S.E.C. 907, 911 (1961); see also Basic Inc. v. Levinson, 485 U.S. 224, 238, 108 S.Ct. 978, 986, 99 L.Ed.2d 194 (1988). Materiality in this context is a mixed question of fact and law. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 2132-33, 48 L.Ed.2d 757 (1976). When a mixed question of fact and law presents issues that are more clearly legal than factual, our review is de novo. Supre v. Ricketts, 792 F.2d 958, 961 (10th Cir.1986). For the reasons discussed below, we find the question of whether Mr. Cordova had a duty to disclose the information at issue here to be more legal than factual in nature and thus review it de novo.

The Securities and Exchange Commission (SEC), pursuant to its authority under Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j (1988), has promulgated Rule 10b-5. That rule provides, in pertinent part:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

....

(b) 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 light of the circumstances under which they were made, not misleading,

....

in connection with the purchase or sale of any security.

17 C.F.R. Sec. 240.10b-5.

Pursuant to Rule 10b-5, insiders involved in securities transactions have a further affirmative duty to "disclose material facts which are known to them by virtue of their position but which are not known to persons with whom they deal and which, if known, would affect their investment judgment." In re Cady, Roberts, 40 S.E.C. at 911. If such disclosure cannot be made, the insider is obligated to abstain from trading. Id.; see Chiarella v. United States, 445 U.S. 222, 226-29, 100 S.Ct. 1108, 1113-15, 63 L.Ed.2d 348 (1980) (endorsing the SEC's position requiring that an insider wishing to trade in the issuer's stock either disclose or abstain); see also Dirks v. SEC, 463 U.S. 646, 653-54, 103 S.Ct. 3255, 3260-61, 77 L.Ed.2d 911 (1983). In this case, Mr. Cordova, an officer and director of Westland, is considered to be an "insider" of that corporation. See Dirks, 463 U.S. at 653, 103 S.Ct. at 3260. Thus, under Rule 10b-5, Mr. Cordova will be liable if the information he possessed can be considered "material facts" which, by virtue of his insider status, he was obligated to disclose. The question of whether Mr. Cordova was under a duty to disclose the asset appraisals is, therefore, intertwined with the question of whether the appraisals were material facts. See In re Craftmatic Sec. Litigation v. Kraftsow, 890 F.2d 628, 641 (3d Cir.1990).

The standard for materiality in securities cases was defined by the Supreme Court in TSC Industries: "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." 426 U.S. at 449, 96 S.Ct. at 2132. The Court has explained that it deliberately did not set the materiality standard too low because of concern that a minimal standard would result in avalanches of information that would bury stockholders in trivia, Basic, 485 U.S. at 231, 108 S.Ct. at 983, a result the Court has condemned as "hardly conducive to informed decisionmaking." TSC Indus., 426 U.S. at 448-49, 96 S.Ct. at 2132. "[T]o fulfill the materiality requirement 'there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.' " Basic, 485 U.S. at 231-32, 108 S.Ct. at 983 (quoting TSC Indus., 426 U.S. at 449, 96 S.Ct. at 2132). ¹ Although generally more a factual question under the mixed standard of review, the question of materiality is to be resolved as a matter of law where the information is " 'so obviously important [or unimportant] to an investor, that reasonable minds cannot differ on the question of materiality.' " TSC Indus., 426 U.S. at 450, 96 S.Ct. at 2133 (quoting Johns Hopkins Univ. v. Hutton, 422 F.2d 1124, 1129 (4th Cir.1970)).

In considering whether the question of materiality can be resolved in this case as a matter of law, we first look to the nature of the information possessed by Mr. Cordova. That information included: (1) a land appraisal of the bulk of Westland's real estate holdings done for Westland in 1976 for the purpose of determining how much title insurance to purchase; (2) forty-five separate appraisals of smaller parcels of Westland property done between 1971 and mid-1986; (3) Westland's record of comparable land sales; and (4) an opinion from Morgan Stanley, prepared for Westland's Board of Directors, valuing the corporation's stock.

The parties agree that the information at issue here is the type referred to in the securities industry as "soft information," that is, "information about a particular issuer or its securities that inherently involves some subjective analysis or extrapolation, such as projections, estimates, opinions, motives, or intentions." Hiler, The SEC and the Courts' Approach to Disclosure of Earnings Projections, Asset Appraisals, and Other Soft Information: Old Problems, Changing Views, 46 Md.L.Rev. 1114, 1116 (1987) [hereinafter Hiler]. Asset appraisals have traditionally been considered such "soft information." See Kohn v. American Metal Climax, Inc., 458 F.2d 255, 265 (3d Cir.), cert. denied, 409 U.S. 874, 93 S.Ct. 120, 34 L.Ed.2d 126 (1972). Soft information contrasts with hard...