Laird v. Integrated Resources, Inc.
| Citation | 897 F.2d 826 |
| Decision Date | 06 April 1990 |
| Docket Number | No. 89-2201,89-2201 |
| Parties | Fed. Sec. L. Rep. P 95,013, RICO Bus.Disp.Guide 7451 L.W. LAIRD, et al., Plaintiffs-Appellants, v. INTEGRATED RESOURCES, INC., et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
K. Charles Peterson, Reynolds, White, Allen & Cook, Houston, Tex., for defendants-appellees.
Charles W. Schwartz, David C. Holmes, Vinson & Elkins, Houston, Tex., J. Lawrence Blades, Myerson & Kuhn, New York City, for Planning Ahead, Inc. and Jack Socrcic.
Appeals from the United States District Court for the Southern District of Texas.
Before GOLDBERG, POLITZ and JONES, Circuit Judges.
I. THE FACTS
Laird, Underwood, and Hannington, the plaintiffs in this suit, (the "plaintiffs") are employees of the LEM Construction Company Inc. ("LEM"). They also serve as trustees for the benefit of the LEM Profit Sharing Plan and Trust ("Trust"). LEM established the trust to benefit its approximately 200 employees.
The plaintiffs wanted professional assistance in managing the Trust. Consequently, they interviewed Jack Sorcic, one of the defendants, and hired him for $125 per hour. Sorcic is the president of Planning Ahead, a registered investment adviser, also a defendant. Unbeknownst to the plaintiffs, Sorcic also served as a registered representative of Integrated Resources. Integrated Resources marketed investment securities and paid its brokers commissions for the sale of these securities. Integrated Resources Marketing and Integrated Resources Equity Corporation are subsidiaries of Integrated Resources. All are defendants in this suit. Integrated Resources sponsored or approved all of the securities Sorcic recommended and sold to the plaintiffs. Because Sorcic was a registered representative of Integrated Resources, he earned commissions for all of these sales.
The record is unclear whether Sorcic, through Planning Ahead, properly disclosed to the plaintiffs information required of investment advisers by Securities and Exchange Commission regulations. 1 Securities and Exchange Regulation 17 CFR section 275.204-3 states, in relevant part, that "an investment adviser ... shall ... furnish each advisory client and prospective advisory client with a written disclosure statement which may be a copy of Part II of its form ADV." 2 The form "ADV part II" referred to in these regulations Simpson, LEM's office manager, took notes at Sorcic's interview. According to Simpson's notes, Sorcic stated that he worked for an hourly fee because "he did not want to have to be in a position to get you to buy something in order to make a commission." In addition, Simpson testified that Sorcic did not mention his affiliation with Integrated Resources, a brokerage company. Laird and Hannington also testified that Sorcic did not disclose that he received commissions on the investments he recommended.
discloses that Sorcic: (1) completed securities transactions for compensation as a broker; (2) possessed an interest in the securities that he recommended to investment advisory clients; (3) worked as a registered representative of Integrated Resources; and, (4) received commissions on Integrated Resources products purchased by clients.
The contract between Planning Ahead and the plaintiffs stated that Sorcic received an hourly fee for his services. The contract states that Planning Ahead would:
[provide] investment advice and furnish recommendations to the profit sharing plan as to the allocation of present financial resources among different types of assets with a view toward better correlating the assets with the Advisory Client's investment objectives.... The Advisory Client shall pay P.A. [Planning Ahead] for investment services provided, a fee of $125.00 per hour.... Implementation of the plan is entirely at the discretion of the Advisory Client.
The Trust suffered significant losses from the investments Sorcic recommended. When the plaintiffs learned, after the contract expired, that Sorcic was earning commissions, they filed suit in state court in Fort Bend County, Texas. In this lawsuit, the plaintiffs sought recovery under seven theories: (1) common law fraud; (2) breach of fiduciary duties; (3) breach of contract; (4) rescission of the contract based on fraud; (5) violation of the Texas Deceptive Trade Practices-Consumer Protection Act; (6) gross negligence in making investment recommendations; and (7) violation of the Texas Securities Act.
Approximately one year later, the plaintiffs sued Sorcic, Integrated Resources, and Planning Ahead in federal court. In this suit, the plaintiffs asserted three claims: (1) violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)-5 passed under this act; (2) violation of the Racketeer Influenced Corrupt Organization Act ("RICO"); and (3) violation of the Investment Advisers Act of 1940. The plaintiffs also sought judgment against the Integrated Resources defendants alone for: (1) common law fraud; (2) recission of the investments; and, (3) violation of section 27.01 of the Texas Business and Commerce Code.
While the state court action was pending, Sorcic and Planning Ahead filed a motion for summary judgment in the federal action. The Integrated Resources defendants did not seek summary judgment. The trial court on its own motion named the Trust as a party to the federal court action and then granted summary judgment in favor of Sorcic and Planning Ahead.
Even though Jot-Em-Down says "write-em-up," the district court did not file an opinion. 3 We must thus "wring-out" the transcript of the summary judgment hearing to discern the district court's rationale. Apparently, the district court ruled in favor of Sorcic and Planning Ahead for three reasons. First, the parol evidence rule barred consideration of Sorcic's alleged statements that he did not receive commissions because Sorcic made those statements prior to the signing of the contract. Second, Sorcic and Planning Ahead's disclosures were adequate as a matter of law After the district court granted summary judgment to Sorcic and Planning Ahead, Integrated Resources signed a "Stipulated Order of Dismissal" with the plaintiffs. The order conditionally dismissed the Integrated Resources defendants from the federal action. The dismissal was subject to Integrated Resources being rejoined if the summary judgment was reversed on appeal. The district court then granted Sorcic and Planning Ahead's application for a preliminary injunction against the plaintiffs. The injunction: (1) prohibited the plaintiffs from prosecuting the state court action pending final disposition of this appeal; and (2) required the plaintiffs to dismiss the state court action if this court affirmed the summary judgment.
because: (1) various authorization forms and confirmation slips sent to the plaintiffs stated that Sorcic was a registered representative of Integrated Resources; and (2) the prospectuses sent to the plaintiffs stated that the registered representative received a commission for the sale of the particular investment. Based on these latter two factors, the district court reasoned that the plaintiffs should have realized that Sorcic received commissions for the investments he recommended. Finally, the court dismissed the plaintiff's RICO counts reasoning that they were based on Sorcic's alleged failure to disclose under rule 10(b)-5.
The district court ruled that Sorcic and Planning Ahead were entitled to summary judgment as a matter of law. 4 We exercise de novo review to determine whether this ruling was correct. 5
II. THE RELATIONSHIP BETWEEN THE PAROL EVIDENCE RULE AND RULE 10(b)-5
We stated that the parol evidence rule cannot operate to exclude evidence of fraud under rule 10(b)-5 in Grainger v. State Security Life Insurance Company. 6 Grainger was an action brought by purchasers of insurance contracts against an insurance company under rule 10(b)-5. The issue was whether the contracts were securities. 7 The resolution required, among other factors, consideration of the companies' sales methods. 8 Responding to the argument that the parol evidence rule barred evidence of the companies' promotional efforts, the Grainger panel stated:
[e]ven if we were to hold that the parol evidence rule applied in the case before us, it still by its own terms would not operate to bar evidence of the oral representations made by Great States salesmen [the insurance company].... [P]laintiffs' 10b-5 cause of action is a fraud-based cause of action.... Traditionally, the parol evidence rule will not operate to exclude parol evidence introduced to show fraud. 9
This ruling is sound. The Grainger panel recognized that 10(b)-5 is a fraud-based In the present case, the district court incorrectly applied the parol evidence rule by excluding statements Sorcic allegedly made before executing the investment advisers contract. This decision could allow a possible instance of fraud, Sorcic misrepresentations or failure to disclose, to remain unnoticed in a rule 10(b)-5 claim. On remand, the district court must consider the plaintiffs', Simpson's, and Sorcic's testimony, and any other circumstances surrounding the execution of the contract.
cause of action 10 and that the parol evidence rule does not bar evidence of fraud. 11 By admitting parol evidence to assess rule 10(b)-5 claims, the panel promoted the fundamental purpose of the Securities Act of 1934 ".... to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus ... achieve a high standard of business ethics in the securities industry." 12 Application of the parol evidence rule to rule 10(b)-5 is thus inimical to rule 10(b)-5's purpose, the elimination of fraud in securities transactions, and would eviscerate
...To continue reading
Request your trial
-
Porter v. Shearson Lehman Bros. Inc.
...the fraudulent device. Shivangi v. Dean Witter Reynolds, Inc., 825 F.2d 885, 888, n. 6 (5th Cir.1987); Laird v. Integrated Resources, Inc., 897 F.2d 826, 832 n. 13 (5th Cir.1990) (review of Fifth Circuit The Court of Appeals for the Fifth Circuit has stressed that every element of an offens......
-
Capital Dist. Physician's Health Plan v. O'HIGGINS
...provision; therefore (3) plaintiff in this case may void the contract and sue for restitution of fees. Cf. Laird v. Integrated Resources, Inc., 897 F.2d 826, 839 (5th Cir.1990) (plaintiff made out sufficient fraud claim under Investment Advisers Act; district court should have granted resci......
-
City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
...in "purchase and sale" and "offer and sale" of securities are sufficient to state cause of action under RICO]; Laird v. Integrated Resources, Inc. (5th Cir.1990) 897 F.2d 826, 838 [securities "churning" is a predicate act under RICO]; James v. Meinke (5th Cir.1985) 778 F.2d 200, 205-207 [co......
-
US v. Cannistraro
...that this interpretation of Blavin is erroneous and contrary to the Fifth Circuit's interpretation of Blavin in Laird v. Integrated Resources, Inc., 897 F.2d 826 (5th Cir. 1990). In discussing the standard for affirmative misrepresentations, the Laird Court stated the status of a defendant ......