Introduction
You have asked us to research,
identify and summarize the key cases on the issue of what
might be held to constitute reasonable reliance on representations
made in a private placement memorandum offering interests
in a fund. These issues require discussion of:
Relevant Cases
DELAWARE
1. AES Corp.V. The Dow Chemical
Company; Dynegy Power Corporation., 325 F.3d 174 (3rd Cir.
2003)
Plaintiff purchaser sued
defendants, a parent company and a subsidiary, alleging securities
law violations in connection with a transaction in which the
purchaser bought the stock of the subsidiary's subsidiary.
After the subsidiary settled, the United States District Court
for the District of Delaware granted summary judgment in favor
of the parent company. The purchaser appealed.
The purchaser alleged that
defendants violated the Securities Exchange Act of 1934 by
conspiring to sell the purchased company at an artificially
inflated price by making misrepresentations material to an
evaluation of the purchased company. The district court determined
that non-reliance clauses in the transaction documents rendered
the purchaser's reliance on the alleged misrepresentations
unreasonable as a matter of law. The appellate court disagreed
and determined that enforcement of the non-reliance clauses
to bar the purchaser's fraud claims as a matter of law would
be inconsistent with § 29(a) (15 U.S.C.S. § 78cc(a))
of the Securities Exchange Act of 1934, which forecloses anticipatory
waivers of compliance with the duties imposed by Rule 10b-5,
17 C.F.R. § 240.10b-5. The appellate court rejected the
parent company's argument that it would be impossible for
a buyer to show reasonable reliance in any case where there
is a non-reliance clause. Rather, the existence of the non-reliance
clauses should have been treated as one of the circumstances
to be taken into account in determining whether the purchaser's
reliance was reasonable. The appellate court reversed the
judgment of the district court.
2. Harry Lewis v. The Dow
Chemical Company, 1992 U.S. Dist. LEXIS 15792 (D. Del. 1992)
Plaintiff investor instituted
the class action against defendant corporation that asserted
that the company engaged in fraudulent practices to reduce
the redemption value of securities issued as part of a merger
of a subsidiary with another company in violation of Section
10(b) of the Securities Exchange Act of 1934 and its implementing
regulation, Rule 10b-5. 17 C.F.R. § 240.10b-5 (1991).
The company filed a motion to dismiss.
The securities that were
involved were contingent value rights, which had been issued
to shareholders of an acquired company as part of the acquisition
and were redeemable on call by the company. The company asserted
that the investor did not have standing to sue under Rule
10b-5 since he was not a purchaser or seller of securities
because the contingent value rights were issued and redeemed
and that he failed to show reliance, an element of causation,
since the contingent value rights were issued and redeemed
without representations that could be considered inducements
to a purchase or sale. The court granted the motion to dismiss
because it determined that the investor lack standing to bring
the action. The court found that the investor had failed to
assert that there was reliance on a fraudulent representation,
which was a necessary element of a Rule 10b-5 cause of action.
The court further found that the invocation of the forced
sale doctrine did not relieve the investor of the requirement
of establishing reliance for the cause of action.
The court granted the company's
motion to dismiss the investor's securities fraud claims.
3. Raymond K. Peil v. Marvin
M. Speiser, 806 F.2d 1154 (3rd Cir. 1986)
Plaintiffs appealed a jury
verdict and an order for a directed verdict from the United
States District Court for the Eastern District of Pennsylvania
for defendants in a class action suit based on alleged violations
of the federal Securities Acts and the common law. Plaintiffs
in a class action suit claimed that misrepresentations by
defendants violated 17 C.F.R. § 240.10b-5, § 11
of the Securities Act of 1933, 15 U.S.C.S. § 77k, and
the common law. The court affirmed the judgment below, finding
that the directed verdict as to the common law and §
11 claims were proper as plaintiffs did not directly rely
on the misrepresentations of defendants. The court found that
the directed verdict as to the claim based on 17 C.F.R. §
240.10b-5(b) was an error by the court below, because the
claim in, addition to the § 240.10b-5(a) and (c) claims,
could be supported by the "fraud on the market"
theory. However, as the harmless error did not exclude any
of the evidence presented by plaintiffs, the jury instructions
and verdict precluded a new trial. The order for a directed
verdict and jury verdicts was affirmed because the order was
appropriate for the common law claims, and while the order
was in error for the securities law claim, the effect of the
jury verdict, given the jury instructions presented, precluded
the need for a new trial and was harmless error.
To prevail in a common law
action for deceit, a plaintiff had to establish six elements:
1) a false representation of 2) a material 3) fact; 4) defendant's
knowledge of its falsity and his intention that plaintiff
rely on it; 5) the plaintiff's reasonable reliance thereon;
and 6) his resultant loss. There is little dispute that plaintiffs
in 17 C.F.R. § 240.10b-5 claims must generally satisfy
all of these requirements as well. Id at 1161.
4. In re Ramada Inns Sec.
Litigation, 550 F. Supp. 1127 (D. Del. 1982)
Shareholders claimed that
a corporation and directors fraudulently inflated the price
of common stock. The alleged fraud caused an artificial inflation
of the corporation's stock during the period when the shareholders
were purchasing stock. The court denied the motion to dismiss
and held that the shareholders could be able to introduce
sufficient evidence of a causal connection between the management's
misleading information and the stock price. They also could
show that they relied on the pricing of stock in the market
to permit an inference that management's misconduct was responsible
for their unfortunate investment decision. The shareholders'
attorneys, even if relying solely on information from the
Wall Street Journal to support the shareholders' claims, satisfied
their obligation under Fed. R. Civ. P. 11. The claims were
not dismissed for failure to state a claim.
5. Jacobs v. Hanson, 464
F. Supp. 777 (D. Del. 1979)
Plaintiffs alleged that
majority stockholders and officers unlawfully transferred
assets to other defendants for lucrative consulting agreements.
Defendants allegedly made misrepresentations to minority shareholders
to induce them to vote for the sale of assets and to permit
liquidation of the corporation. The court denied a motion
to dismiss, which was treated as a summary judgment motion,
holding that: (1) the evidence supported a causal connection
between the alleged misrepresentation and the transactions
giving rise to the loss of assets and was sufficient to preclude
summary judgment; (2) the alleged fraud and misrepresentations
were made in connection with the forced sale of securities,
which, thus, stated a claim under § 10(b) of the Act
and under S.E.C. Rule 10b-5; (3) the filing of the certificate
of dissolution in Delaware was an integral and essential part
of the scheme so as to establish venue under § 27 of
the Act, 15 U.S.C.S. § 78aa; and (4) transfer was denied
where the degree of inconvenience was not substantial so as
to overcome the presumption in favor of plaintiffs' choice
of venue. The court denied defendants' motion to dismiss the
action alleging securities violations. The court also denied
defendants' alternative motion to transfer the action.
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