Stat-Tech Liquidating Trust v. Fenster, Civil Action Nos. 92-K-1040, (92-K-1994, 92-K-2368, 92-K-2441, 93-K-308, 95-K-1367).

• Court: U.S. District Court — District of Colorado
• Writing for the Court: Kane
• Citation: Stat-Tech Liquidating Trust v. Fenster, 981 F.Supp. 1325 (D. Colo. 1997)
• Decision Date: 18 July 1997
• Docket Number: Civil Action Nos. 92-K-1040, (92-K-1994, 92-K-2368, 92-K-2441, 93-K-308, 95-K-1367).
• Parties: STAT-TECH LIQUIDATING TRUST, et al., Plaintiffs, v. Raynard M. FENSTER, et al., Defendants. VBW PARTNERS, LTD., a Colorado limited partnership, and TRW Family Partners, Ltd., a Colorado limited partnership, Plaintiffs, v. Rodger THORNTON, Raynard M. Fenster, Hayden H. Thompson, Therese M. Lamb, and Schneider Securities, Inc., a Colorado corporation, Defendants. PROACTIVE PARTNERS, L.P., a California limited partnership and Lagunitas Partners, L.P., a California limited partnership, Plaintiffs, v. Raynard M. FENSTER, Hayden H. Thompson, Therese M. Lamb, Rodger Thornton, and Schneider Securities, Inc., a Colorado corporation, Defendants.

981 F.Supp. 1325

STAT-TECH LIQUIDATING TRUST, et al., Plaintiffs, v. Raynard M. FENSTER, et al., Defendants.

VBW PARTNERS, LTD., a Colorado limited partnership, and TRW Family Partners, Ltd., a Colorado limited partnership, Plaintiffs, v. Rodger THORNTON, Raynard M. Fenster, Hayden H. Thompson, Therese M. Lamb, and Schneider Securities, Inc., a Colorado corporation, Defendants.

PROACTIVE PARTNERS, L.P., a California limited partnership and Lagunitas Partners, L.P., a California limited partnership, Plaintiffs, v. Raynard M. FENSTER, Hayden H. Thompson, Therese M. Lamb, Rodger Thornton, and Schneider Securities, Inc., a Colorado corporation, Defendants.

Civil Action Nos. 92-K-1040, (92-K-1994, 92-K-2368, 92-K-2441, 93-K-308, 95-K-1367).

United States District Court, D. Colorado.

July 18, 1997.

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Tim Atkeson, Arnold & Porter, Denver, CO, for plaintiffs.

Jay S. Horowitz, Kim E. Ikeler, Krendl, Horowitz & Krendl, Steven M. Feder, Bader & Villanueva, P.C., Denver, CO, for defendants.

ORDER ON MAGISTRATE'S JUNE 9, 1997 RECOMMENDATION

KANE, Senior District Judge.

These related securities fraud cases are before me on various objections under Fed. R.Civ.P. 72(b) to the June 9, 1997 Recommendation of Magistrate Judge Pringle. The Magistrate Judge recommended, inter alia, that (1) Defendant Schneider Securities' Resubmitted Motion for Summary Judgment in No. 92-K-1994 be granted as to Plaintiffs' aiding and abetting claims under the Colorado Securities Act, but denied in all other respects; and (2) Defendant Hayden H. Thompson's Motion for Summary Judgment in Nos. 92-K-1040, 92-K-1994 and 92-K-2441 be denied.

After careful review of the objections and responses thereto, as well as the briefs upon which the Recommendation was based, I sustain in part the objections of Defendant Hayden Thompson and the Plaintiffs in Nos. 92-K-1040, 92-K-1994 and 92-K-2441 and overrule the objections of Schneider Securities in No. 92-K-1994. With the modifications explained below, I adopt the Recommendation of the Magistrate Judge as an order of the court for the reasons stated therein.

I. Defendant Thompson's Objections.

In his June 9 order, the Magistrate Judge recommended that Defendant Thompson's motion for summary judgment on the Trust's claims in 92-K-1040, the claims of VBW/TRW in 92-K-1994 and the Proactive Plaintiffs in 92-K-2441 be denied. The Magistrate Judge found sufficient evidence of scienter in the record to support the state and federal securities fraud claims of Stat-Tech, Proactive and VBW against Thompson, but found the Trust had failed to adduce sufficient evidence of reliance to withstand summary judgment on its claim for damages based on Defendants' alleged violations of the federal securities laws. Based on a perceived distinction between Colorado and federal securities law after Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095 (Colo. 1995), the Magistrate Judge recommended the Trust's claim based on violations of the Colorado Securities Act be allowed to proceed to trial. In addition, the Magistrate Judge recommended that Plaintiffs' negligent misrepresentation claims proceed to trial. I review these matters de novo.

A. The Trust's damage claim.

One of the Trust's claims in this case is for the value of the claims asserted in the Stat-Tech bankruptcy proceeding by shareholders for the lost value of their stock. As the Magistrate Judge noted in his Recommendation, this claim is difficult conceptually because of the procedural posture in which it is presented. See Recommendation at 30, n. 7. While the claim resembles an indemnity action, the nature and amount of the underlying liability has not been determined.¹ Analytically, the claim has been treated as a representative action with the Trust standing in the shoes of the individual claimant-shareholders pursuing various corporate claims against Defendants.

The question presented concerns the Trust's inability to prove individual shareholder reliance on the 1989 10-K forming the principal basis of its claims against Thompson. The Trust originally hoped to avail itself of a "fraud-on-the-market" presumption of reliance, but the Magistrate Judge rejected this presumption based on the Trust's failure to present evidence to support it. The Magistrate Judge went on to consider and apply, sua sponte, the material omission presumption of reliance recognized by the Supreme Court in Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972).

In Affiliated Ute, the United States Supreme Court recognized a limited presumption of reliance in cases involving material omissions where the nature of the relationship between plaintiff and defendant gives rise to an affirmative duty to disclose. Finding the Tenth Circuit had never definitively considered how the presumption would apply in cases where, as here, both affirmative misrepresentations and omissions were alleged, the Magistrate Judge looked to case-law from other circuits and determined that, as a matter of federal law, the presumption was limited to cases primarily involving concealment.² Because the Trust's claims are premised primarily on affirmative misrepresentations in the 1989 10-K, and not omissions, the Magistrate Judge concluded the Trust could not avail itself of the Affiliated Ute presumption in conjunction with its federal securities claims.

Turning to the Trust's state securities claims, the Magistrate Judge looked to the Colorado Supreme Court's "refus[al] to recognize a misstatement/omissions dichotomy" in Rosenthal to conclude Colorado courts "would apply the Affiliated Ute presumption to any case where omissions are alleged." Accordingly, the Magistrate Judge recommended the Trust's claim for stockholder-claimant damages under the Colorado Securities Act be permitted to proceed to trial. Recommendation at 35.

While I have made no secret of my concerns regarding the double standards articulated in Rosenthal for pleading state and federal securities claims, I disagree the Colorado Supreme Court created such a standard for the application of the Affiliated Ute presumption of reliance. I read the Rosenthal decision as applying a narrow, not broad, interpretation of Affiliated Ute. In fact, the court in Rosenthal went beyond where many federal courts have been willing to go and found the presumption "totally inapplicable" where, as there, the alleged omissions occurred during market transactions between purchasers and brokers, and not in the context of a "relationship of trust and confidence." 908 P.2d at 1103.

I find the Colorado Supreme Court "refuse[d] to recognize a misstatements/omissions dichotomy" in the application of Affiliated Ute not because it favored a broader application of the presumption, but because it found "`[t]he labels by themselves [to be] of little help'" in determining whether a case involved primarily misstatements or omissions. Rosenthal, 908 P.2d at 1104 (quoting Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 93 (2d Cir.1981)). "`What is important,'" the Court continued, "`is to understand the rationale for a presumption of causation in fact in cases like Affiliated Ute, in which no positive statements exist: reliance as a practical matter is impossible to prove.'" Id.

In Wilson, the case upon which the Colorado Supreme Court relied to analyze Affiliated Ute, the facts were deemed not to support an application of the presumption because positive statements did exist and reliance, as a practical matter, was not impossible to prove. 648 F.2d at 88 (oral financial projections reaffirmed in written report formed primary basis of plaintiff's claims and did not give rise to Affiliated Ute presumption notwithstanding allegations of nondisclosure based on defendant's failure to correct them). Wilson, 648 F.2d at 93. A similar situation exists here. The Trust's fraud claims against Thompson are based primarily on the misleading financial projections and information affirmatively set forth in the 1989 10-K. Reliance on such information is not impossible to prove, as is apparent from the other Plaintiffs' ability to withstand summary judgment on their federal and state securities claims.

Based on the Trust's inability to fit within the rationale of Affiliated Ute articulated by the Colorado Supreme Court in Rosenthal, I conclude Colorado courts would not allow the Trust to avoid having to present reliance evidence to support its Colorado Securities Act claims. Accordingly, I modify the Magistrate Judge's Recommendation to grant Thompson's motion to strike that aspect of the Trust's damages claim that would allow it to recover for the devaluation of the shareholder-claimants' stock under either a federal or state securities fraud theory of relief.

B. The "negligent misrepresentation" claims.

In addition to their securities fraud claims, Plaintiffs Trust, VBW and Proactive assert common law claims for fraud, breach of fiduciary duty and negligent misrepresentation against Thompson based on his signing of the 1989 10-K containing misrepresentations upon which Stat-Tech investors allegedly relied. Thompson argues the negligent misrepresentation claim should be barred where, as here, the alleged misrepresentation was made in connection with the purchase or sale of securities. To impose liability for such conduct on a theory of simple negligence, Thompson reasons, would subject an outside director to a higher standard of care than that imposed by the federal securities laws.

The Magistrate Judge rejected Thompson's argument. Citing Thompson's failure to provide authority to the contrary, the Magistrate Judge reasoned Colorado could impose a higher standard of care on corporate officers and directors in connection with securities transactions than that imposed by Congress, and declined to disallow the claim. The Magistrate...