Rosenthal v. Dean Witter Reynolds, Inc., 92CA1789

• Decision Date: 21 April 1994
• Docket Number: No. 92CA1789,92CA1789
• Citation: 883 P.2d 522
• Parties: Blue Sky L. Rep. P 74,013, 62 USLW 2756 Howard ROSENTHAL and Rudy L. and Judy J. Bettmann, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. DEAN WITTER REYNOLDS, INC., Castle Pines Land Company, Frank B. Walker, Jack A. Vickers, III, Helen McMaster Coulson, William B. Graham, Larry Reichert, and Kutak Rock & Campbell, Defendants-Appellees. . V
• Court: Colorado Court of Appeals

Page 522

883 P.2d 522

Blue Sky L. Rep. P 74,013, 62 USLW 2756

Howard ROSENTHAL and Rudy L. and Judy J. Bettmann, on behalf of themselves and all others similarly situated Plaintiffs-Appellants, v. DEAN WITTER REYNOLDS, INC., Castle Pines Land Company, Frank B. Walker, Jack A. Vickers, III, Helen McMaster Coulson William B. Graham, Larry Reichert, and Kutak Rock &amp Campbell, Defendants-Appellees.

No. 92CA1789.

Colorado Court of Appeals Div. V.

April 21, 1994.

As Modified on Denial of Rehearing

June 2, 1994.

Petition and Cross-Petition for

Certiorari Granted Nov. 15, 1994.

Vinton Waller Slivka & Panasci, Richard P. Slivka, Patrick D. Vellone, Denver, Spector & Roseman, P.C., Eugene A. Spector, Robert M. Roseman, Robert G. Eisler, Philadelphia, PA, for plaintiffs-appellants.

Brega & Winters P.C., Charles F. Brega, Thomas D. Birge, Cathryn B. Mayers, Denver, for defendant-appellee Dean Witter Reynolds, Inc.

Weller, Friedrich, Ward & Andrew, Geoffrey S. Race, Andrew J. Friedrich, Suanne M. Dell, Denver, for defendants-appellees Frank B. Walker, Jack A. Vickers, III, and William B. Graham.

Kutak Rock, Timothy P. Daly, Denver, Patrick B. Griffin, Omaha, NE, for defendant-appellee Kutak Rock & Campbell.

No appearance for defendants-appellees Castle Pines Land Co., Helen McMaster Coulson, and Larry Reichert.

Opinion by Judge CASEBOLT.

In this action premised on an alleged violation of the Colorado Securities Act, § 11-51-101, et seq., C.R.S. (1987 Repl.Vol. 4B), plaintiffs Howard Rosenthal and Rudy L. and Judy J. Bettmann appeal the judgment of dismissal entered in favor of defendants, Dean Witter Reynolds, Inc.; Castle Pines Land Company; Frank B. Walker; Jack A. Vickers, III; Helen McMaster Coulson; William B. Graham; Larry Reichert; and Kutak Rock & Campbell. Plaintiffs also appeal from the trial court's order denying their motion for class certification. We affirm in part, reverse in part, and remand for further proceedings.

This case arises from the plaintiffs' purchase of bonds issued by Castle Pines North Metropolitan District (District). That entity, a quasi-municipal corporation and a political subdivision of Colorado, encompasses approximately 1,600 acres of land located in Douglas County, Colorado. It was created to provide for the construction and installation of water, sanitary sewer, and street improvements for residents living within the District.

Frank B. Walker, Jack A. Vickers, III, Helen McMaster Coulson, William B. Graham, and Larry Reichert were the elected board of directors for the District. Kutak Rock & Campbell was bond counsel for the issuance of the bonds. Dean Witter, a national brokerage firm, was the underwriter for the bond offering. It sold the bonds through its Colorado offices and through numerous regional offices nationwide.

On July 17, 1986, the District issued Series 1986 A and B bonds in the face amount of $38,170,000 in order to repay, in advance of maturity, the District's Series 1984 Bonds. Proceeds from the bonds were also intended to pay for the costs of acquiring, constructing, and completing water, sanitary sewer, street, transportation, and recreation improvements within the District. The District's ability to make payment on the 1986 bonds was dependent upon the completion, sale, and occupation of approximately 3,700 residential units on the property.

In connection with the bond offering, an Official Statement was prepared. That Statement contained, among other things, approximately six pages of risk factors associated with issuance of the bonds, information concerning the sources and uses of funds, and the prospects for development within the District.

Plaintiff Rosenthal, a Pennsylvania resident, purchased five of the District's Series 1986 A bonds through Dean Witter's regional office in Pennsylvania. Plaintiffs Bettmann purchased two of the District's Series 1986 B bonds in Colorado.

In November 1990, the District filed a petition for bankruptcy. Subsequently, on July 16, 1991, Rosenthal filed a class action complaint on behalf of a class alleged to consist of all persons and entities, other than the defendants, who purchased the 1986 bonds between the date of the offering and the date of bankruptcy filing by the District. The action was filed within the three-year statute of limitations and within the five-year statute of repose contained in § 11-51-125(8), C.R.S. (1987 Repl.Vol. 4B) of the Colorado Securities Act.

In his complaint, as pertinent to this appeal, Rosenthal alleged that defendants made misstatements of fact and omitted material facts in the Official Statement, that defendants conspired to deceive the investing public, to introduce bonds into the marketplace which were not entitled to be marketed, to cause class members to purchase or acquire the bonds at inflated prices, and to permit the developer to obtain large profits from the sale of land to other developers and homes to individual purchasers.

Rosenthal asserted that, even though he did not read the Official Statement before purchasing the bonds, he was not required to plead or prove direct reliance on the alleged misstatements contained within it. Rather, Rosenthal insisted that he was entitled to a presumption of reliance, based either upon application of a doctrine known as "fraud created the market," or based upon the application of Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972).

On November 8, 1991, Rosenthal filed a motion to amend the complaint, seeking to add the Bettmanns as named plaintiffs. The court granted that motion. In the meantime, several of the defendants had filed motions to dismiss, each alleging various grounds, including failure to state a claim upon which relief could be granted, lack of subject matter jurisdiction, and failure to allege reliance on the asserted misrepresentations.

In response to the motions to dismiss, the trial court dismissed portions of plaintiffs' complaint. In particular, the court ruled that the "fraud created the market" doctrine was not available here to bond purchasers in order to create a presumption of reliance. Further, the court ruled that the presumption of reliance enunciated in Affiliated Ute was inapplicable.

Thereafter, the trial court denied plaintiffs' C.R.C.P. 23 motion for class certification. The court specifically found that the events surrounding the offer and sale to Rosenthal occurred in Pennsylvania, not in Colorado, thus holding that Rosenthal could not present a claim under Colorado law, and that this was a unique defense applicable to him. Consequently, Rosenthal was not typical of the class, and therefore, he could not maintain a class action under C.R.C.P. 23.

Further, the court ruled that unique defenses also applied to the Bettmanns and, therefore, concluded that they also were not typical of the class. Specifically, the court found that since the Bettmanns had joined the action as named plaintiffs more than five years after their purchase of the securities, they were barred from maintaining the class action by the five-year statute of repose, § 11-51-125(8), C.R.S. (1987 Repl.Vol. 4B).

This appeal followed the trial court's C.R.C.P. 54(b) dismissal and class action orders. One other claim remains pending in the trial court and is not directly involved in this appeal.

I.

Plaintiffs contend that their failure to plead direct reliance was not fatal because they were entitled to a presumption of reliance by virtue of the "fraud created the market" doctrine. Further, relying upon Affiliated Ute Citizens v. United States, supra, plaintiffs argue that they were entitled to a presumption of reliance based on material misrepresentations and omissions contained in the Official Statement. We disagree.

To prove a claim of fraud under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988), Securities & Exchange Commission Rule 10b-5, 17 C.F.R. 240.10b-5; and § 11-51-123, C.R.S. (1987 Repl.Vol. 4B), a plaintiff must demonstrate reliance on a defendant's representation in order to show a causal connection between the defendant's fraud and the plaintiff's injury. Basic, Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); Boettcher & Co. v. Munson, 854 P.2d 199 (Colo.1993). Since 1972, however, some federal courts have, under certain circumstances, tempered the perceived harshness of the reliance requirement by creating rebuttable presumptions of reliance, instead of requiring proof of actual reliance. See Affiliated Ute, supra; Blackie v. Barrack, 524 F.2d 891 (9th Cir.1975).

These presumptions of reliance have arisen under a "fraud on the market" doctrine, a "fraud created the market" doctrine, or situations involving primarily material omissions as opposed to misstatements. See Affiliated Ute, supra; Freeman v. Laventhol & Horwath, 915 F.2d 193 (6th Cir.1990).

To be entitled to a presumption of reliance under the "fraud on the market" doctrine, a plaintiff must plead and prove that there is an open, developed, and efficient market in which the price of a security is determined by the use of all available public information about the issuer. Basic, Inc. v. Levinson, supra. It must be shown that the security was traded in large volume during the period at issue, that a significant number of securities analysts followed and reported on the security, and that the price changed in relation to public statements or reports about the activities of the issuer. Alter v. DBLKM, Inc., 840 F.Supp. 799 (D.Colo.1993).

The "fraud created the market" doctrine has been classified either as a subspecies of fraud on the market, see Mott v. R.G. Dickinson & Co. (D.Kan.1993) (1993 WL 342839), or as a separate theory in its own right. See H. Bloomenthal, Securities Law Handbook § 17.04 (1993); T. Hazen, The Law of Securities Regulation § 13.5 (2d ed. Supp.1993). This doctrine has been used to create a presumption of reliance in cases...