Myers v. Finkle

• Decision Date: 27 November 1991
• Docket Number: No. 90-1892,90-1892
• Citation: 950 F.2d 165
• Parties: Fed. Sec. L. Rep. P 96,404, RICO Bus.Disp.Guide 7880 Arthur R. MYERS, II, Mary J. Myers, Arthur R. Myers, III, Plaintiffs-Appellants, v. Robert FINKLE, Stephen Wetter, Paul Kaplan, George Allen, III, Jack Bleiberg, Michael Banker, F. Wayne Holton, Paul Forsythe, Julius Finkle, Frank Convertini, James Goldslager, Lee Weinberg, John Does 1 Through 20, formerly known as FKL Associates, FKL Associates, d/b/a Finkle & Company, formerly known as Exec Associates, Defendants-Appellees, and Lawrence N. Frankel, Defendant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 165

950 F.2d 165

Fed. Sec. L. Rep. P 96,404, RICO Bus.Disp.Guide 7880

Arthur R. MYERS, II, Mary J. Myers, Arthur R. Myers, III Plaintiffs-Appellants, v. Robert FINKLE, Stephen Wetter, Paul Kaplan, George Allen III, Jack Bleiberg, Michael Banker, F. Wayne Holton, Paul Forsythe, Julius Finkle, Frank Convertini, James Goldslager Lee Weinberg, John Does 1 Through 20, formerly known as FKL Associates, FKL Associates, d/b/a Finkle & Company, formerly known as Exec Associates, Defendants-Appellees and Lawrence N. Frankel, Defendant.

No. 90-1892.

United States Court of Appeals, Fourth Circuit.

Argued May 10, 1991.

Decided Nov. 27, 1991.

Norman Rifkind, Beigel & Sandler, Ltd., Chicago, Ill., argued (Herbert Beigel, Stephen D. Sharp, Philip Fertik, Beigel & Sandler, Ltd., on brief), for plaintiffs-appellants.

Stephen Atherton Northup, Mays & Valentine, Richmond, Va., argued (Wayne Lustig, Mays & Valentine, on brief), for defendants-appellees.

Before PHILLIPS and WILKINS, Circuit Judges, and KAUFMAN, Senior District Judge for the District of Maryland, sitting by designation.

OPINION

WILKINS, Circuit Judge:

Arthur R. Myers, II, his wife, Mary J. Myers, and their son, Arthur R. Myers, III, instituted this action against an accounting firm and its partners (collectively "Finkle"). The Myers alleged violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b) (West 1981), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1990), and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.A. §§ 1961-68 (West 1984 & Supp.1991). They also asserted state law claims for fraud, breach of fiduciary duty, and negligence. The district court granted summary judgment in favor of Finkle on the securities claims, dismissed the RICO claims, and declined to exercise pendent jurisdiction over the state claims. Myers v. Finkle, 758 F.Supp. 1102 (E.D.Va.1990). Because we conclude that the evidence, viewed in the light most favorable to the Myers, raises material issues of fact regarding alleged violations of section 10(b) and Rule 10b-5, we reverse in part, affirm in part, and remand.

I.

For purposes of our review, the following summary of facts is presented in a light most favorable to the Myers. In 1977 Finkle began performing accounting services for the Myers that included preparation of their individual and corporate income tax returns. In 1981 Finkle advised the Myers that they could reduce their income tax liability by investing in real estate limited partnerships as tax shelters. Recommending specific partnerships in which Finkle had a financial interest, Finkle assured the Myers that the investments would result in an "economic profit" in addition to tax benefits. The Myers relied on this advice and followed Finkle's recommendations.

From 1981 to 1985 the Myers invested over $4.8 million in 15 real estate limited partnerships specifically recommended by Finkle. For each investment, the partnership sent the Myers a private placement memorandum describing the risks and prospects of the real estate project being developed by that limited partnership. The private placement memoranda were generally sent to the Myers after Finkle presented them with the necessary investment documents for execution and the investment transaction was completed. The Myers took substantial deductions for tax purposes as a result of losses incurred by the partnerships, but did not realize any monetary return on their investments. The limited partnerships are now in severe financial distress. The Myers claim as damages the amount of their investments, lost use of the funds invested, and consequential damages. A more detailed statement of the facts may be found in the opinion of the district court. Myers, 758 F.Supp. at 1104-06.

II.

Summary judgment is proper if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). In determining whether this showing has been made, the court must assess the evidence in a light most favorable to the party opposing the motion. Charbonnages de France v. Smith, 597 F.2d 406 (4th Cir.1979). The appellate standard of review of a grant of summary judgment is de novo. Higgins v. E.I. DuPont de Nemours & Co., 863 F.2d 1162, 1167 (4th Cir.1988).

Section 10(b) of the 1934 Act prohibits the use of any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security. 15 U.S.C.A. § 78j(b); see generally Nobles v. First Carolina Communications, Inc., 929 F.2d 141 (4th Cir.1991). Rule 10b-5 provides that it is unlawful "[t]o 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 were made, not misleading ... in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b5. "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." Bruschi v. Brown, 876 F.2d 1526, 1528 (11th Cir.1989).

For purposes of this appeal, Finkle concedes that the Myers have established all elements of their claim except justifiable reliance. The Myers contend that this concession, coupled with the existence of material issues of fact regarding the justifiable reliance element, made summary judgment inappropriate. A determination of whether an investor may be justified in relying on oral representations that conflict with contemporaneous written statements in the investor's possession requires a consideration of all relevant factors, including:

(1) [t]he sophistication and expertise of the plaintiff in financial and securities matters; (2) the existence of long standing business or personal relationships; (3) access to 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.

Foremost Guar. Corp. v. Meritor Sav. Bank, 910 F.2d 118, 123-24 (4th Cir.1990) (quoting Kennedy v. Josephthal & Co., 814 F.2d 798, 804 (1st Cir.1987)). Because no single factor is dispositive, consideration of all factors is necessary. Bruschi, 876 F.2d at 1529.

In determining whether the Myers were justified in relying on Finkle's oral representations, we are presented with an unusual factual situation in which the oral representations are contradicted by warnings contained in the private placement memoranda. The Myers concede that they "did not study" these documents. In our view, knowledge of information should be imputed to investors who fail to exercise caution when they have in their possession documents apprising them of the risks attendant to the investments. Investors are charged with constructive knowledge of the risks and warnings contained in the private placement memoranda. See Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1518 (10th Cir.1983). Consequently, in evaluating the various factors relevant to justifiable reliance, the conduct of the Myers must be examined as if they were aware of the warnings. Id.

The first factor regarding justifiable reliance involves a consideration of the sophistication of the Myers and their experience in financial and investment matters. A review of the affidavits addressing this issue demonstrates their contradictions: in summary, the Myers claim to be inexperienced in investment matters and to have been unfamiliar with tax shelters, while Finkle claims that the Myers have a substantial net worth and operate a successful family-owned seafood business. The district court expressly acknowledged that "[t]he level of the Myers' sophistication is a material issue of fact as to which there is a genuine dispute." 758 F.Supp. at 1108. However, the court viewed the Myers' apparent wealth as dispositive of the issue of sophistication. We disagree. While wealth may be an important factor, other criteria such as age, education, professional status, investment experience, and business background may also be...