Unpublished Disposition, 879 F.2d 865 (9th Cir. 1986)

MEMORANDUM^* 

Michael Miller ("Miller") appeals the district court's judgment in favor of plaintiff Lamar Loe on his securities fraud claims against defendants Michael Miller and Miller Mining Company for compensatory damages in the sum of $600,000 and punitive damages in the sum of $120,000. We affirm.

* This dispute arises from two investments totalling $600,000 made by Loe, a Mississippi resident, in return for a share in the net profits of Miller Mining Company. Miller Mine, a gold mining operation, is located in California. At all times relevant to this case, the Miller Mine was operated by the Miller Mining Company, Inc., a California corporation, which held a lease on the mine. Michael Miller, a California resident, was Miller Mining Company's president, sole director, and sole shareholder during the relevant time period.

Sometime prior to August 11, 1980, Loe was approached by Joe Campbell, who was authorized by Michael Miller and the Miller Mining Company to sell interests in the Miller Mine. Campbell represented to Loe by long distance telephone that Michael Miller had invested a considerable amount of his own money in the mine operation and that gold could be profitably produced from the mine. Based on these representations, Loe made an initial investment of $100,000, on or about August 11, 1980. In return for his investment, Loe received an assignment of 1% interest in the net profits of the gold and gravel mine, an agreement, and a promissory note.

In the August 11, 1980 agreement, Miller Mining Company warranted that the company had invested no less than $2,000,000 in the Miller Mine and that it had the financial capacity to explore and develop the Miller Mine. Miller Mining Company also warranted that it would acquire title to the precious metals and aggregates upon recovery, and that the Miller Mine had a useful life of approximately nine years at a projected output of 1,080 tons per diem. The agreement further provided that Miller Mining Company would give Loe notice of any cancellation or change in the underlying mineral lease, monthly progress reports of all income and expenses relating to the mine, and at least twenty-four hours notice of any clean up of the mine at which Loe or his agent had the right to be present. The agreement stated that it would be governed by California law and that the parties were not deemed to be partners, joint venturers or agents of each other.

In the spring of 1981, Loe was again approached by Joe Campbell on Miller's and Miller Mining Company's behalf. Several long distance telephone conversations ensued concerning the possibility of an additional investment. Campbell informed Loe that Miller and Miller Mining Company needed additional money. A meeting was held with Miller and others on or about July 28, 1981. During the course of this meeting, various representations were made concerning the status of Miller Mining Company, including representations by Miller himself that: (1) the venture would be profitable; (2) the $500,000 invested by Loe was to be specifically earmarked only for certain designated expenditures; (3) a written statement would be provided to the investors at the end of every thirty days concerning the mining operations; (4) any leases, contracts, or other written obligations of the corporation would be made available to the investors; (5) gold could be profitably produced from the mine; and (6) Michael Miller personally had invested $2,000,000 in the mine.

Sometime after the July 28, 1981 meeting with Miller and others, Loe made a total additional investment of $500,000 in the Miller Mining Company. In exchange for this additional investment, Loe received an assignment of a 5% interest in the net profits of the Miller Mine, an agreement, and a promissory note.

In March and April, 1982, Loe, through his attorney Milton Linder and Ralph Williams, sought to resell back to Miller Mining Company his 5% net profit interest in the Miller Mine for $600,000; he proposed retaining his initial 1% interest. This offer was prompted by Loe's need for liquidity during a period of personal financial difficulties. This offer was never accepted. It was not until about February, 1983 that Loe first suspected that the representations which had been made to him were not true. Loe's concern developed at that time because he was advised that Miller Mining Company had halted attempts to obtain production from the mine because Miller Mining Company was financially unable to continue operations.

On July 27, 1983, Loe instituted this action against Miller and Miller Mining Company in the United States District Court in the Southern District of Mississippi. On September 6, 1985, over Loe's opposition, that court transferred the action under 28 U.S.C. § 1404(a) from the Southern District of Mississippi to the Central District of California.

On September 30, 1985, Miller exchanged his shares of stock in Miller Mining Company for shares of stock in Continental Pacific Corporation. On March 6, 1986, Cumo Resources Limited acquired 90.27% of the shares of Continental Pacific Corporation and assumed Miller Mining Company's liabilities in exchange for shares of Cumo Resources Limited.

At about the same time, the Superior Court of Calaveras County, California terminated Miller Mining Company's lease of the Miller Mine for non-payment under the lease terms. Both Miller and Miller Mining Company failed to notify Loe of the termination of the mining lease. On November 18, 1986, Miller Mining Company filed a petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California. In May, 1987, the Bankruptcy Court lifted the automatic stay to permit Loe to litigate this action.

After trial, the district court held that Miller and Miller Mining Company were jointly and severally liable for a variety of securities violations involving Loe's investment in the Miller Mine. The court found Miller and Miller Mining Company made material misrepresentations both affirmatively and by omission in connection with Loe's investments in violation of Rule 10b-5 of the Securities and Exchange Commission, Section 12(2) of the Securities Act of 1933, and Section 25401 of the California Corporations Code. The district court also held that these misrepresentations and omissions constituted common law fraud under California law. It further held that Miller and Miller Mining Company had failed to register the investment in violation of Section 12(1) of the Securities Act of 1933 and Section 25110 of the California Corporations Code, and that Miller and Miller Mining Company breached their agreement of July 28, 1981. However, Loe now concedes that he failed to bring his Section 12(1) action within the applicable statute of limitations and that Miller was not a party to the July 28 agreement.¹ 

The court awarded compensatory damages of $600,000 plus interest, as well as $120,000 in punitive damages on the common law fraud claim. The $600,000 award compensated Loe for the money he invested in Miller Mine. We have jurisdiction pursuant to 28 U.S.C. § 1291. We review a district court's findings of fact for clear error. United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948).² 

II

Miller contends the district court erred in granting relief to Loe because (1) Loe's first investment on August 11, 1980 was not before the district court for adjudication; (2) Loe failed to commence his action under 12(2) of the Securities Act of 1933 and Sections 25110 and 25401 of the California Corporations Code within the applicable statutes of limitation; (3) Loe failed to prove his claim that Miller violated Section 25110 of the California Corporations Code and Rule 10b-5 of the Securities and Exchange Commission; and (4) Loe failed to prove his common law fraud claim against Miller.

Miller contends that the district court erred in concluding that Loe's first investment, pursuant to the agreement dated August 11, 1980, was before the district court for adjudication. Loe's amended complaint did not explicitly seek relief based on his August 11, 1980 investment. However, the trial court heard considerable evidence regarding this investment, and Loe's attorney at the conclusion of the trial moved to conform the pleadings to the evidence adduced at trial. Under Federal Rule of Civil Procedure 15(b), a party may make a motion to conform the pleadings to the evidence adduced at trial at any time, even at the appellate level. Dunn v. Trans World Airlines, 589 F.2d 408, 412 (9th Cir. 1978). Moreover, we have held that failure formally to amend the pleadings will not jeopardize a verdict based on competent evidence; we will presume that the amendment has been made to support the judgment. Id. at 413. Since Loe presented competent evidence at trial that he had relied on representations made by Miller prior to August, 1980, regarding the first investment, and since Loe's attorney moved to conform the pleadings to the evidence adduced at trial, we conclude that the district court properly awarded damages based on the first investment.

Miller next contends that the district court erred in concluding that Loe brought his claim that defendants violated Section 12(2) of the Securities Act of 1933 and Sections 25401 and 25110 of the California Corporations Code within the appropriate statutes of limitation.

Section 12(2) and Section 25401

The statutes of limitation governing both Section 12(2) of the Securities Act of 1933 and Section 25401 of the California Corporations Code require that a plaintiff bring an action within one year after discovery of facts constituting a violation. See 15 U.S.C. § 77m; Cal.Corp. Code Sec. 25506. The district court found that Loe discovered the misrepresentations in February, 1983, and filed within one year. Miller contends that Loe's attorney's letter of March 3, 1982 indicated that Loe was on "inquiry notice" of possible misrepresentations and, as a result, could have discovered any misrepresentations with reasonable diligence. Loe's attorney in his letter of March 3, 1982, expressed concern about Miller's lack of diligence in fulfilling the representations made to Loe. However, subsequent to that letter, and continuing through at least August 10, 1982, Miller and Campbell gave Loe continuous assurances that the mine operations were progressing as planned. These assurances by Miller in response to the inquiries by Loe's attorney could have alleviated any concern Loe may have had about the mine operation and satisfied his burden of exercising a reasonable diligence. Thus, we conclude that the district court was not clearly erroneous in finding that Loe brought this action under Section 12(2) of the Securities Act of 1933 and Section 25401 of the California Corporations Code within one year after discovering the misrepresentations.

Section 25110

Under the California Corporations Code, an action under Section 25110 must be commenced within "two years after the violation upon which it is based or the expiration of one year after the discovery by the plaintiff of the facts constituting such violation, whichever shall first expire." Section 25507(a). Miller has not explained why Loe should have been aware of Miller's failure to register either the August 11, 1980 or July 28, 1981 investments more than one year before the filing of the suit. Loe's claim based on the July 28, 1983 investment was filed within the absolute two year limitations period. However, Loe's claim based on the August 11, 1980 investment was not filed within this limitations period. We therefore affirm the district court's finding that Miller violated Section 25110 only with respect to the July 28, 1981 investment. However, since we affirm the district court's findings that Miller's conduct with respect to the August 11, 1980 investment violated Rule 10b-5, Section 12(2), Section 25401, and the common law prohibition against fraud, we need not remand for a redetermination of the damages with respect to the August 11, 1980 investment.

Section 25110

Miller argues that he met his burden of proving that the securities sold were exempt from registration under Section 25110 of the California Corporations Code. He contends the district court should have found that the transactions at issue were exempt from registration as private offerings. A private offering exemption applies only where all the offerees either had a preexisting personal or business relationship with the offeror or were sophisticated investors who were able to protect their own interests. People v. Park, 87 Cal. App. 3d 550, 565, 151 Cal. Rptr. 146, 153 (1978). Moreover, the private offering exemption applies only if the sophisticated investors had sufficient accurate information with which to exercise their skills. Id. at 565, 151 Cal. Rptr. at 153. Here, Miller argues that Loe was a sophisticated businessman who was in a position to negotiate a fair deal before making an investment. The district court found, as a matter of fact, that Miller and Miller Mining Company made misrepresentations to Loe with the intent of inducing Loe to act upon them. Therefore, even if Loe were a sophisticated businessman, he was relying on false information when making his investment decisions. We therefore conclude that the district court did not err in finding that the private offering exception is inapplicable in this case and that Miller violated Section 25110 of the California Corporations Code.

Rule 10b-5 and Common Law Fraud

Miller contends the district court erred in concluding that he committed common law fraud and violated Rule 10b-5 of the Securities and Exchange Commission. To establish a violation under Rule 10b-5, the plaintiff must show that material misrepresentations or omissions were made knowingly or recklessly in connection with the offer or sale of a security.³  The district court found that Miller and Miller Mining Company made false representations or concealed material facts with the knowledge of their falsity or without sufficient knowledge of the subject to warrant a representation, and with the intent to induce Loe to act upon them. The court concluded that Loe did in fact rely upon these misrepresentations to his detriment.

On appeal, Miller argues that there was no evidence to show that (1) the representations were material; (2) that they caused Loe's loss; and (3) that Miller acted with scienter.

Materiality

Miller contends that there was insufficient evidence presented at trial to show that the misrepresentations made were material.⁴  We have held that questions of materiality, scienter, and reliance are mixed questions of law and fact, but ones involving assessments peculiarly within the province of the trier of fact; therefore, we review for clear error. Arrington v. Merrill Lynch, Pierce, Fenner & Smith, 651 F.2d 615, 619 (9th Cir. 1981). We have held that a fact is material "if its existence or nonexistence is a matter to which a reasonable person would attach importance in determining a choice of action in the transaction." Toombs v. Leone, 777 F.2d 465, 469 (9th Cir. 1985). Loe testified at trial that he based his investment decision, among other things, on representations that Miller had personally invested $2,000,000 in the Miller Mine, that Miller and Miller Mining Co. had the financial capacity to explore and develop the Miller Mine, that the Miller Mine would be profitable, that all liens against Miller Mining Co. in excess of $5,000 had been disclosed to Loe, that Miller would not withdraw funds from Miller Mining Co. unless Loe received a proportionate return on his investment, and that Loe's investment would fund a limited production program at Miller Mine. We conclude that the district court did not commit clear error in concluding that these representations are ones "to which a reasonable person would attach importance in determining a choice of action in the transaction" and therefore conclude that the district court did not commit clear error in finding that these representations were material.

Causation

Miller also disputes the district court's conclusion that the defendants' misrepresentations caused Loe to invest in Miller Mine. To establish causation under Rule 10b-5, a plaintiff normally is required to prove both transaction causation, that the misrepresentations in question caused the plaintiff to make the transaction, and loss causation, that the misrepresentations or omissions caused the harm. Hatrock v. Edward D. Jones & Co., 750 F.2d 767, 773 (9th Cir. 1984). Miller argues that Loe did not prove that his loss in the mine was caused by the misrepresentations and omissions. We have recognized the view, however, that the plaintiff should not have to prove loss causation where the true evil is the defendant's fraudulent inducement of the investor to purchase the security. Id. Loe testified at trial that he relied on Miller's and Miller Mining Co.'s agent's misrepresentations in deciding to invest $600,000 in Miller Mine. We find no basis in the record for concluding that the district court committed clear error in concluding that Loe had satisfied the causation requirement of Rule 10b-5.

Scienter

Miller also challenges the district court's conclusion that he acted with scienter. He claims that Loe failed to sustain his burden of proving scienter. We have held that a plaintiff may sustain his burden of proving scienter by showing that a defendant acted willfully or recklessly. Brophy v. Redivo, 725 F.2d 1218, 1220 (9th Cir. 1984). The record in this case supports the district court's conclusion that Miller and Miller Mining Co.'s other agents intentionally or recklessly made misrepresentations to Loe. For example, Miller represented to Loe at the July, 1981 meeting that he had personally invested $2,000,000 in the Miller Mine. It was revealed during discovery that at the time Loe made his second investment, Miller's investment in Miller Mine was substantially below $2,000,000. At the July, 1981 meeting, Miller also represented to Loe that he would take no money out of the mine unless the investors also withdrew funds in proportion to their investment. Miller also represented to Loe that no existing liens exceeding $5,000 existed against the company. Financial records produced in discovery show that during the period 1979-1983, Miller had withdrawn a total of $794,486 from the company. Additional liens, which had not been revealed to Loe at the July 28, 1981 meeting, existed against Miller Mining Company at that time. In light of the evidence in the record, we conclude the district court's finding of scienter was not clearly erroneous. Accordingly, we affirm the district court's decision that Miller violated Rule 10b-5 of the Securities and Exchange Commission.

Common Law Fraud

To establish common law fraud under California law, a plaintiff must show the following elements: (1) fraudulent misrepresentations; (2) knowledge by defendant of their falsity; (3) intent to deceive the plaintiff; (4) reliance upon the representations by the plaintiff, believing them to be true; and (5) resulting injury to the plaintiff. Paul Revere Life Ins. Co. v. Bass, 523 F. Supp. 134, 135 (N.D. Cal. 1981). In light of the evidence discussed above regarding the misrepresentations Miller personally made to Loe, we conclude that the district court did not err in finding that Miller committed common law fraud.

The judgment of the district court is AFFIRMED.