Unpublished Disposition, 927 F.2d 609 (9th Cir. 1983)

No. 89-15379.

United States Court of Appeals, Ninth Circuit.

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.

N.D. Cal.

AFFIRMED.

Before SCHROEDER and CANBY, Circuit Judges and REA^* , District Judge.

MEMORANDUM^** 

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

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.

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."

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 

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

Leason's eight claims for relief are:

(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;

(2) federal securities fraud based on reckless conduct;

(3) federal securities fraud under section 20 of the Securities Exchange Act of 1934 (15 U.S.C. § 78t(a)) predicated on Berg's role as a controlling person over Actrix;

(4) conspiracy to violate, and aiding and abetting others in violating, federal securities laws;

(5) violation of RICO (18 U.S.C. §§ 1961-1968);

(6) common law fraud;

(7) fraud under California securities law; and

(8) negligence and negligent misrepresentation.

We address each of these claims in turn.

Claim 1 and 2

Primary Liability for Federal Securities Fraud

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.

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.

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).

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.

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.

Claim 3

Secondary Liability for Federal Securities Fraud

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. § 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).

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.

Claim 4

Conspiracy to Violate, and Aiding and Abetting Others in

Violating, Federal Securities Laws

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).

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. § 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.

Claim 5

RICO Violation

Leason's fifth claim alleges a RICO violation. 18 U.S.C. § 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.

Claims 6 & 8

Common Law Fraud and Negligent Misrepresentation

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.

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.

Claim 7

Secondary Securities Liability Under California Law

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.

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

Summary judgment in favor of Berg is appropriate on all claims.

AFFIRMED.