927 F.2d 609
Unpublished Disposition
NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders
designated for publication are not precedential and should not be cited except when
relevant under the doctrines of law of the case, res judicata, or collateral estoppel.
Hayden LEASON, Plaintiff-Appellant,
v.
Carl E. BERG, Defendant-Appellee,
and
Actrix Computer Corporation, a corporation, Porter A. Hurt,
Frank Lonergan, H. Earl Bushman, PH Components, Inc., a
corporation, Edward M. Alvarez, Testology, Inc., a
corporation, Ferrari, Alvarez, Olsen & Ottoboni, a
professional corporation, Defendants.
1
No. 89-15379.
2
United States Court of Appeals, Ninth Circuit.
Argued and Submitted May 17, 1990.
Decided March 1, 1991.
3
Appeal from the United States District Court for the Northern District of California, No.
CV 84-20108-WHO; William H. Orrick, Jr., District Judge, Presiding.
4
N.D.Cal.
5
AFFIRMED.
6
Before SCHROEDER and CANBY, Circuit Judges and REA*, District Judge.
7
MEMORANDUM**
8
Hayden Leason, an unsuccessful investor, sued fellow investor, Carl Berg, alleging fraud,
negligent misrepresentation, and violations of federal and state securities laws and federal
RICO.1 The district court granted summary judgment in favor of Berg on all causes of
action. Leason appeals contending that the district court impermissibly weighed the
evidence.2 We affirm the judgment of the district court.
BACKGROUND
9
Between June 1 and June 10, 1983, Berg invested $2,000,000 in Actrix, a new
manufacturer of a personal computer system. Berg became a director on June 6. On June
24, Leason invested $3,001,500 in Actrix.
10
Before Leason invested, Berg had one telephone conversation with Leason and one with
Leason's advisor, Wainwright.3 During those telephone conversations, Berg
characterized Actrix as a "very good investment" and "the best venture deal he'd seen in
two years." Berg also stated that "Porter Hurt [Actrix's president] was a good manager,"
and that "his [Berg's] people ... review[ed] the machine ... [and] gave it a favorable
review." In addition, Berg told Leason that "I think I wouldn't invest the whole
$5,000,000. Three million sounds like ... Like maybe something."4 According to Leason,
Berg also commented that in six months Actrix could either be doing very well or be in a
lot of trouble. Leason and Berg discussed Actrix's business plan" in a very general sense."
Leason told Berg that he wanted the "same deal" as Berg, but Berg responded, "Well you
talk to Porter Hurt and make your own deal."
11
Leason contends that Berg fraudulently or recklessly made the above
"misrepresentations," and that Berg failed to disclose that Actrix had problems and that
the offering brochure contained misstatements. In particular, Leason contends that Berg
failed to disclose the following: Actrix was three months behind projected sales, Berg did
not believe Actrix would meet the sales projections, part of Leason's investment would be
used to bail out two companies associated with Actrix, and Berg had a secret option with
Porter Hurt to protect his investments.5
12
The district court granted summary judgment concluding that Berg did not owe Leason a
duty of disclosure, and that no rational finder of fact could find either that Berg intended
to defraud or that Berg provided substantial assistance to another's fraud. We agree that
summary judgment was appropriate and affirm the district court's order.
DISCUSSION
I.
Leason's eight claims for relief are:
13
(1) federal securities fraud under section 10(b) of the Securities Exchange Act of 1934
(15 U.S.C. 78j(b) and Securities and Exchange Commission rule 10b-5 (17 C.F.R. Sec.
240.10b-5), based on intentional conduct;
14
(2) federal securities fraud based on reckless conduct;
15
(3) federal securities fraud under section 20 of the Securities Exchange Act of 1934 (15
U.S.C. Sec. 78t(a)) predicated on Berg's role as a controlling person over Actrix;
16
(4) conspiracy to violate, and aiding and abetting others in violating, federal securities
laws;
17
(5) violation of RICO (18 U.S.C. Secs. 1961-1968);
18
(6) common law fraud;
19
(7) fraud under California securities law; and
20
(8) negligence and negligent misrepresentation.
21
We address each of these claims in turn.
II.
Claim 1 and 2
22
Primary Liability for Federal Securities Fraud
23
Leason claims that Berg is primarily liable under Sec. 10(b)6 of the 1934 Act and Rule
10b-57 for making misleading statements and for failing to disclose material information
to Leason. To establish primarily liability, plaintiffs must show that defendants (1)
intentionally or recklessly8 (2) misrepresented or failed to disclose (3) a material fact (4)
in connection with the purchase or sale of securities. See Caravan Mobile Home Sales v.
Lehman Bros. Kuhn Loeb, 769 F.2d 561, 564 (9th Cir.1985) (citations omitted). Plaintiffs
must also establish that they relied on the misleading information and that the defendants'
misleading information proximately caused plaintiffs' loss. Id.
24
We agree with the district court that no jury reasonably could find that Berg had the
requisite scienter to defraud or that Berg made the affirmative statements recklessly.9
Berg cautioned Leason against investing $5,000,000 and told him to make his own deal
with Hurt. Berg was not reckless in making the other statements regarding his assessment
that Actrix was a good investment. Berg himself had invested $2,000,000, and Berg had
not acquired any additional knowledge about Actrix in the time between making that
investment and talking with Leason.
25
Moreover, Berg's comments did not contain statements of material fact. A fact is material
when there is a substantial likelihood that a reasonable investor would consider the fact
important in making an investment decision. Vaughn v. Teledyne, Inc., 628 F.2d 1214,
1221 (9th Cir.1980). Berg's statements--even the optimistic ones, such as that Actrix was
the best "venture" deal he had seen--are not the kind of statements upon which a
reasonable investor bases an investment decision. Berg's statements constitute statements
of opinion rather than material fact, and an expression of pure opinion cannot give rise to
an action for misrepresentation. Bulgo v. Munoz, 853 F.2d 710, 716 (9th Cir.1988)
(citation omitted). To establish actionability, Leason would have to show, at a minimum,
that Berg's statements of optimism were not believed by Berg, or that he had no
reasonable grounds for his belief or that he knew facts undermining the belief. In re
Apple Computer Securities Litigation, 886 F.2d 1109, 1113 (9th Cir.1989). No such
showing has been made. Berg's statements, particularly when taken together, do not
preclude summary judgment on the securities fraud claims.10 See id. at 1118-19
(expressions of optimism accompanied by substantial publicity concerning riskiness of
venture not actionable under "fraud on market" claim).
26
Leason contends, however, that Berg's failure to disclose certain material facts does
preclude summary judgment.11 We disagree. Although a reckless omission of material
facts upon which the plaintiff put justifiable reliance is actionable under 10(b) and 10b-5,
Leason has not shown that Berg recklessly omitted material facts or that Leason
justifiably relied on any purported omissions. See Hollinger, 914 F.2d at 157012. No
rational jury could find that Berg was guilty of " 'a highly unreasonable omission,
involving not merely simple, or even inexcusable negligence, but an extreme departure
from standards of ordinary care.' " Id. at 1569 (quoting Sundstrand Corp. v. Sun Chem.
Corp., 553 F.2d 1033, 1045 (7th Cir.), cert. denied, 434 U.S. 875 (1977) ("the danger of
misleading buyers must be actually known or so obvious that any reasonable man would
be legally bound as knowing, and the omission must derive from something more
egregious than even 'white heart/empty head' good faith")). Given the limited and general
nature of Berg's contact with Leason, and the fact that Berg knew that Leason employed
his own investment advisor and was doing an independent analysis of Actrix, no rational
jury could find that Berg was reckless in omitting to disclose more detail about Actrix to
Leason.
27
Even if Leason were successful in establishing material misstatements and actionable
omissions, summary judgment is appropriate because no jury could reasonably find that
Leason justifiably relied on Berg's alleged fraudulent omissions. Leason is a veteran
investor who did independent research into Actrix; he toured the facilities and met with
Actrix management. Moreover, any reasonable investor of Leason's level of
sophistication would have been put on notice by Berg's cautionary comments (that
Leason should invest $2,000,000 less than he contemplated, that Actrix could be doing
very well in six months or be in a lot of trouble, and that Leason should make his own
deal with Hurt). Leason, a sophisticated businessman, cannot now use the securities laws
to protect against his own errors in judgment.
III.
Claim 3
28
Secondary Liability for Federal Securities Fraud
29
Leason claims that Berg is secondarily liable as a "controlling person" under Section 20
of the Securities and Exchange Act of 1934. See 15 U.S.C. Sec. 78t(a).13 To establish
that a defendant is a controlling person, a plaintiff must show that the defendant had
actual power or influence over the alleged controlled person. Buhler v. Audio Leasing
Corp., 807 F.2d 833, 835 (9th Cir.1987); see Hollinger v. Titan Capital Corp., 914 F.2d at
1573-74 (broker-dealer "controlling person" over its registered representatives because of
power and duty to supervise).
30
The evidence that Leason presents regarding Berg's power or influence is insufficient to
establish "control" under section 20(a). As evidence of Berg's control, Leason points to
the fact that Berg suggested Actrix reduce its projections, and Berg circulated several
Actrix brochures. Actrix, however, was free to disregard any advice Berg offered14, and
the mere distribution of several brochures in no way establishes control. There are no
facts at all suggesting that Berg controlled Actrix or Actrix management, either by reason
of his investment or of his position as director. We affirm the grant of summary judgment
in favor of Berg for lack of evidence indicating that Berg had power over Actrix with
regard to the alleged unlawful activity.
IV.
Claim 4
31
Conspiracy to Violate, and Aiding and Abetting Others in
Violating, Federal Securities Laws
32
Leason asserts that Berg aided and abetted, and conspired with Actrix and others to
violate the securities laws. Two essential elements in an aiding and abetting claim are: (1)
the defendant must have had actual knowledge of the wrong and of his role in furthering
it; and (2) the defendant must have substantially assisted in the wrong. Harmsen v. Smith,
693 F.2d 932, 943 (9th Cir.1982), cert. denied, 464 U.S. 822 (1983). Co-conspirator
liability requires the plaintiff prove the same two elements, plus that there was an
agreement to defraud. Hill v. Equitable Bank, 655 F.Supp. 631, 646 (D.Del.1987), aff'd,
851 F.2d 690 (3rd Cir.1988).
33
We indicated in Harmsen that a greater degree of scienter must be proven to establish
aider and abettor liability than is necessary to establish primary liability under 15 U.S.C.
Sec. 78j(b). Harmsen, 693 F.2d at 944 n. 10. We have already concluded that the
evidence falls short of showing that Berg had the requisite scienter for primary liability or
for controlling person liability. We reach the same conclusion here. Moreover, as the
district court correctly noted, Berg's warning Leason, the allegedly defrauded person, to
reduce his investment defeats any attempt to establish "substantial assistance." The
evidence defeats both components of Leason's aiding and abetting claim. Similarly, the
co-conspirator claim is defeated.
V.
Claim 5
RICO Violation
34
Leason's fifth claim alleges a RICO violation. 18 U.S.C. Sec. 1961-68. A necessary
element of a RICO claim is a related predicate act. H.J. Inc. v. Northwestern Bell
Telephone Co., 109 S.Ct. 2893 (1989). Leason has failed to offer evidence that supports a
finding of that predicate act.
VI.
Claims 6 & 8
35
Common Law Fraud and Negligent Misrepresentation
36
Leason's common law fraud and negligent misrepresentation claims also fail. Common
law fraud requires that the defendant had fraudulent intent. Leason has produced no
evidence from which a rational jury could find that Berg had such intent. See supra,
Section II.
37
Negligent misrepresentation requires "the suggestion, as a fact, of that which is not true,
by one who has no reasonable ground for believing it to be true." Cal.Civ.Code Sec.
1710(2). As we have already noted, Berg had a reasonable basis for his statements as
indicated by his own $2,000,000 investment in Actrix.
VII.
Claim 7
38
Secondary Securities Liability Under California Law
39
Leason contends that California Corporations Code Sec. 2550415 imposes a prima facie
inference of liability on Berg as a director. We do not agree. In order to be secondarily
liable under section 25504, the defendant must exercise some control over the alleged
perpetrator of the fraud. Sherman v. Lloyd, 226 Cal.Rptr. 495, 502, 181 Cal.App.3d 693,
703 (1986) (imposing liability upon a general partner who "in this position controls" the
partnership and upon a shareholder, who was also an officer and director, where
shareholders prepared the documentation describing the investment property, but
declining to impose liability upon defendant company that provided only accounting
expertise). Berg did not exercise control over Actrix and therefore cannot be liable under
section 25504.
40
Moreover, liability is not imposed under section 25504 if the director "had no knowledge
of or reasonable grounds to believe in the existence of the facts of which liability is
alleged to exist." Cal.Corp.Code Sec. 25504. Nothing in the record indicates that Berg
knew of Actrix's fraud against Leason. Berg had no reason to believe that Actrix would
withhold information from Leason; the company had previously revealed negative
information to Berg. Berg is entitled to summary judgment on the pendent California
claim.
CONCLUSION
41
Summary judgment in favor of Berg is appropriate on all claims.
42
AFFIRMED.
*
The Honorable William J. Rea, United States District Judge for the Central District of
California, sitting by designation
**
This disposition is not appropriate for publication and may not be cited to or by the courts
of this circuit except as provided by Ninth Cir.R. 36-3
1
Leason also sued Actrix Computer Corporation and others involved in Actrix. The
proceedings against Actrix were stayed pursuant to 11 U.S.C. Sec. 362 when Actrix filed
for bankruptcy. The other defendants settled
2
We review de novo a grant of summary judgment. Gabrielson v. Montgomery Ward &
Co., 785 F.2d 762, 764 (9th Cir.1986)
3
For purposes of deciding this appeal from a summary judgment against Leason, we
accept Leason's version of the disputed facts
4
Leason did in fact invest $3,000,000, instead of the $5,000,000 originally contemplated
5
The option allowed Berg to convert his loan to shares at a low valuation if Actrix failed
to earn 70% of its projected profits in six months. Berg was to obtain the additional
shares from Porter Hurt, who could purchase the extra shares at a fraction of the offering
price. Berg never exercised his option
6
Section 10(b) makes it unlawful "[t]o use or employ, in connection with the purchase or
sale of any security ... any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C.
Sec. 78j(b)
7
Rule 10b-5, which implements Sec. 10(b), makes it unlawful:
(a) to employ any device, scheme, or artifice to defraud,
(b) to 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.
17
C.F.R. Sec. 240.10b-5
8
In Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir.1990), modified by No. 873837 (Nov. 13, 1990), we held that recklessness satisfied the scienter requirement of a
10(b) and 10b-5 claim. Thus, Leason's first two claims are collapsed into one
9
The essential test in a recklessness inquiry is whether the statements were highly
unreasonable and whether the defendant's conduct in making the statements constitutes
an extreme departure from standards of ordinary care. Hollinger v. Tital Capital Corp.,
914 F.2d 1564, 1570 (9th Cir.1990), modified by No. 87-3837, slip op. at 13920 (Nov.
13, 1990)
10
Leason also contends that Berg was responsible for making false statements in the
offering brochure. We do not need to determine whether any possible false statements in
that brochure give rise to a 10b or 10b-5 action; the undisputed evidence indicates that
Berg was not responsible for the statements in that brochure and therefore cannot be
liable for misrepresentations
11
See Background section of this memorandum disposition for a list of four omissions
alleged to be actionable
12
Hollinger put to rest the "flexible duty standard" announced in White v. Abrams, 495
F.2d 724, 735-36 (9th Cir.1974), which was essentially a negligence standard
13
15 U.S.C. Sec. 78t(a) provides:
Every person who, directly or indirectly, controls any person liable under any provision
of this chapter or of any rule or regulation thereunder shall also be liable jointly and
severally with and to the same extent as such controlled person to any person to whom
such controlled person is liable, unless the controlling person acted in good faith and did
not directly or indirectly induce the act or acts constituting the violation or cause of
action.
14
In In re Catanella and E.F. Hutton & Co. Securities Litigation In In re Catanella and E.F.
Hutton & Co. Securities Litigation, the court held that a stock market advisor did not
"control" a brokerage firm which sometimes used his advice, because the brokerage firm
exercised independent judgment as to whether to employ that advice. 583 F.Supp. 1388,
1421 (E.D.Pa.1984), cited with approval in Kersh v. General Council of Assemblies of
God, 804 F.2d 546, 549 (9th Cir.1986)
15
Section 25504 in relevant part provides:
[E]very person who directly or indirectly controls a person liable under Section 25501 or
25503, every partner in a firm so liable, every principal executive officer or director of a
corporation so liable, ... are also liable jointly and severally with and to the same extent as
such person, unless the other person who is so liable had no knowledge of or reasonable
grounds to believe in the existence of the facts of which liability is alleged to exist.