Rosenthal v. Dean Witter Reynolds, Inc.
| Decision Date | 18 December 1995 |
| Docket Number | No. 94SC403,94SC403 |
| Citation | 908 P.2d 1095 |
| Parties | Blue Sky L. Rep. P 74,087, 64 USLW 2464 Howard ROSENTHAL and Rudy L. and Judy J. Bettmann, on behalf of themselves and all others similarly situated, Petitioners/Cross-Respondents, v. DEAN WITTER REYNOLDS, INC.; Frank B. Walker; Jack A. Vickers, III; William B. Graham; and Kutak Rock & Campbell, Respondents/Cross-Petitioners, and Castle Pines Land Company, Helen McMaster Coulson, and Larry Reichert, Respondents. |
| Court | Colorado Supreme Court |
Vinton Nissler Allen & Vellone, P.C., Patrick D. Vellone, Denver, Spector & Roseman, P.C., Eugene A. Spector, Paul J. Scarlato, Debra M. Kahn, Philadelphia, Pennsylvania, for Petitioners/Cross-Respondents.
Brega & Winters, P.C., Charles F. Brega, Thomas D. Birge, Cathryn B. Mayers, Denver, for Respondent/Cross-Petitioner Dean Witter Reynolds, Inc.
Kerr, Friedrich, Brosseau, Bartlett, L.L.C., Andrew J. Friedrich, Denver, for Respondents/Cross-Petitioners Frank B. Walker, Jack A. Vickers, III, and William B. Graham.
Kutak Rock, Diana C. Fields, Denver, Patrick Griffin, Omaha, Nebraska, for Respondent/Cross-Petitioner Kutak Rock & Campbell.
Gale A. Norton, Attorney General, Stephen K. ErkenBrack, Chief Deputy Attorney General, Timothy M. Tymkovich, Solicitor General, Merrill Shields, Deputy Attorney General, Richard Djokic, First Assistant Attorney General, Regulatory Law Section, Denver for Amicus Curiae Philip A. Feigin, Securities Commissioner for the State of Colorado.
A seller's misrepresentations or omissions of material fact, deceptive practices, or fraudulent acts in connection with the sale of a security are actionable under section 11-51-125(2) of the Securities Act of 1981. Pursuant to our grant of certiorari, 1 we must determine the pleading requirements sufficient to overcome a C.R.C.P. 12(b)(5) motion to dismiss. We also address the standing requirements of section 11-51-127(1).
In 1986, petitioners, Howard Rosenthal, Rudy L. Bettmann, and Judy J. Bettmann (purchasers) bought securities, general obligation municipal bonds, 2 issued by the Castle Pines North Metropolitan District (District). The District is a quasi-municipal corporation and a political subdivision of the state, located within the southern suburbs of and "with easy accessibility" to the City and County of Denver. It was organized for the purposes of providing for the construction of water, sanitary sewer, and street improvements within its approximately 1,603 acres of land located in Douglas County, Colorado.
The District offered its municipal bonds for sale under an Official Statement dated July 17, 1986, raising gross proceeds of $38,170,000. A primary purpose of the offering was for refunding, in advance of maturity, the District's General Obligation Bonds, Series 1984, issued in the aggregate principal amount of $22,000,000. In February 1990, the District began encountering financial difficulties. In September 1990, a bondholders meeting was called because "there [were] not sufficient funds available for full payment to bondholders of bond payments scheduled to be made on December 1, 1990." On November 14, 1990, the District filed for bankruptcy.
In July of 1991, Howard Rosenthal filed a securities fraud class action complaint in the District Court of Douglas County against: (1) Castle Pines Land Company (the "Land Company"), the primary developer of the District; (2) Frank B. Walker, Jack A. Vickers, III, Helen McMaster Coulson, William B. Graham, and Larry Reichert, the elected directors for the District; (3) Dean Witter Reynolds, Inc. (Dean Witter), the "Broker" or underwriter; 3 (4) Kutak Rock & Campbell (Kutak), bond counsel for the 1986 bond issuance; and (5) Sherman & Howard (Sherman), disclosure counsel to the District. 4 Specifically, Rosenthal alleged that the defendants, in issuing the general obligation bonds for the District, violated sections 11-51-123(1) and 11-51-125(2), 4B C.R.S. (1987), repealed by ch. 82, sec. 1, §§ 11-51-101 to -802, 1990 Colo. Sess. Laws 700, and recodified as amended at §§ 11-51-501 and 11-51- 604, 4B C.R.S. (1995 Supp.). The class action complaint was filed on behalf of a class consisting of all persons and entities, other than the defendants, who purchased the District's general obligation bonds, Series 1986 A and B, between the date of the offering and the date the District filed for bankruptcy. In November 1991, the Bettmanns were added as named plaintiffs.
The purchasers' complaint alleged that the defendants conspired to and did "issue[ ] material misstatements and information which they knew or had reason to know were false and misleading, and omitted to state material facts necessary to make those statements not misleading." First Am. Class Action Compl. p 63. In addition to these misstatements and omissions, purchasers alleged that "defendants ... initiated and/or joined in a course of conduct which was designed" and intended to: (1) deceive the investing public regarding the Land Company's prospects for completion of the planned development and the District's ability to make payments on the 1986 bonds; (2) introduce the bonds into the market although the bonds were "otherwise not entitled to be marketed"; (3) cause class members to purchase or acquire the 1986 bonds at inflated prices; and (4) permit the Land Company to continue its development activities and to profit from the sale of land to other developers and of homes to individual purchasers. Id. p 15. The purchasers alleged that the defendants' misstatements and omitted material facts caused them financial injury. Id. pp 69, 79, 86.
The alleged misstatements and omissions appeared in or were omitted from the preliminary Official Statement and the definitive Official Statement dated July 17, 1986. 5 The Official Statement, seventy-eight pages long with its addenda in final form, was prepared by or disseminated to the investing public by the defendants. The Official Statement, the principal selling document for the sale of the District's municipal bonds, described: (1) the District, the municipal bonds offered for sale, and its governing body; (2) the development of the Castle Pines community, including private home construction; and (3) the basis by which the District would meet its payment obligations on the municipal bonds.
In addition, purchasers alleged that defendants made misstatements and omitted material facts in "press releases, and presentations to the investing public." Id. p 19. The Official Statement also included " 'cautionary' language" specifically indicating "[i]t is difficult to predict the rate at which future development ... may occur." However, purchasers alleged the Official Statement portrayed "a positive scenario" regarding the District's "ability to make payment on the 1986 Bonds," even if "there were insufficient funds collected from ... taxes levied on District property." Id. pp 44, 45.
Purchasers alleged that the defendants misstated that "proceeds from [the offering] in the amount of $19,488,039.66 and certain other funds of the District in the amount of $8,034,805.91 were to be deposited" in escrow and used "to pay the principal and interest required" on the municipal bonds. Id. p 51. Purchasers claimed investors were led to believe funds "would be available to make payment." Id. p 52. Yet, "[a]s of October 3, 1990 there was approximately $912,000 available for payment of the December 1, 1990 payment on the 1986 Bonds (the total repayment required was $3,535,612.00)." Id. p 58. Finally, among other allegations, purchasers claimed that, although defendants stated that $22,000,000 of the proceeds would be used to "pay-off the 1984 Bonds" before maturity, "defendants failed to adequately disclose" that the reason for such prepayment "was because the District was experiencing undisclosed financial problems which would, and did, materially affect payment on the 1984 Bonds." Id. p 63(c).
Defendants Walker, Vickers, Graham, Dean Witter, Kutak, and the Land Company immediately filed motions to dismiss. The district court granted the motions in part and dismissed portions of the complaint pursuant to C.R.C.P. 12(b)(5), holding that the purchasers failed to sufficiently allege reliance on the defendants' misstatements or material omissions of fact. 6 In a later order, the court denied class certification, holding that the Securities Act of 1981 did not apply to plaintiff Rosenthal's claims because Rosenthal, a resident of the Commonwealth of Pennsylvania, did not purchase his bonds in Colorado. The district court, pursuant to C.R.C.P. 54(b), directed the entry of a final judgment on the C.R.C.P. 12(b)(5) dismissal and on the order denying class certification. The court of appeals affirmed the dismissal in part, reversed in part, and remanded with directions for reconsideration of the class certification. Rosenthal v. Dean Witter Reynolds, Inc., 883 P.2d 522, 526-29 (Colo.App.1994).
The court of appeals concluded that the "fraud-created-the-market" doctrine "should be imported into Colorado law." Rosenthal, 883 P.2d at 526. However, the court of appeals held that the complaint did not sufficiently allege reliance because: (1) the doctrine of fraud-created-the-market, while available, was inapplicable because the purchasers improperly pleaded its elements, id. at 526-28; and (2) the Affiliated Ute presumption did not apply because the purchasers pleaded primarily misstatements rather than omissions. Id. at 528-29. The court of appeals also held that Colorado law applied to Rosenthal's claims and that the statute of repose did not bar the Bettmanns' claims. Rosenthal, 883 P.2d at 529-32. Accordingly, the court of appeals remanded the case for reexamination of class certification. Id. at 532.
Purchasers claim the court of appeals erred: (1) in interpreting the pleading requirements of sections 11-51-123 an...
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