Kline v. First Western Government Securities, Inc. , 24 F.3d 480 ( 1994 )

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
5-2-1994
Kline, et al. v. First Western Government Securities,
Inc., et al.
Precedential or Non-Precedential:
Docket 92-1498
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994
Recommended Citation
"Kline, et al. v. First Western Government Securities, Inc., et al." (1994). 1994 Decisions. Paper 3.
http://digitalcommons.law.villanova.edu/thirdcircuit_1994/3
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1994 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 92-1498; 92-1499
ERNEST P. KLINE;
EUGENE KNOPF; STEVEN R. WOJDAK
v.
FIRST WESTERN GOVERNMENT SECURITIES, INC.;
SIDNEY P. SAMUELS; SAMUELS, KRAMER AND CO.;
ARVEY, HODES, COSTELLO AND BURMAN
Ernest P. Kline & Eugene F. Knops, Appellants, in 92-1498
Arvey, Hodes, Costello & Burman, Appellant in 92-1499
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civil Action No. 83-01076)
Argued: January 25, 1993
Before: GREENBERG, ROTH and LEWIS, Circuit Judges
(Opinion Filed May 2, l994 )
Ronald F. Kidd, Esquire (Argued)
Joseph D. Mancano, Esquire
Teresa N. Cavenagh, Esquire
Duane, Morris & Heckscher
4200 One Liberty Place
Philadelphia, PA 19103-7396
Attorneys for Appellants
1
First Western Government Securities, Inc.
c/o Mr. Sidney P. Samuels
3683 Sacramental Street
P.O. Box 18211
San Francisco. CA 94118
Attorney for Appellees:
First Western Government Securities, Inc.
Sidney P. Samuels
Samuels Kramer & Co.
John E. McKeever, Esquire (Argued)
Lori S. Cozen, Esquire
Schnader, Harrison, Segal & Lewis
1600 Market Street
Suite 3600
Philadelphia, PA 19103
Attorneys for Appellee Arvey, Hodes, Costello & Burman
OPINION OF THE COURT
ROTH, Circuit Judge:
This appeal arises from a suit alleging, among other
things, violations of § 10(b) of the Securities and Exchange Act
of 1934, 15 U.S.C. § 78j(b), in connection with plaintiffs'
investment in forward contracts through defendant First Western
Government Securities ("First Western"). Defendant Arvey, Hodes,
Costello & Burman ("Arvey"), a Chicago law firm, issued three
opinion letters concerning the tax consequences of these
investments. Plaintiffs Ernest P. Kline and Eugene F. Knopf
allege that Arvey's opinion letters contained both affirmative
misrepresentations and material omissions in their treatment of
these transactions. They further contend that they relied upon
2
these opinion letters in deciding to invest with First Western
and that as a result they incurred substantial financial losses.
The district court denied Arvey's motion for summary judgment on
the misrepresentation claim but granted it on the omissions
claim. We conclude that both the misrepresentation and omissions
claims should be tried. We will therefore affirm in part and
reverse in part, and we will remand the case to the district
court for further proceedings consistent with this opinion.
I.
It is important to emphasize at the outset that,
because we are reviewing the partial grant of a motion for
summary judgment, we must view the facts in the light most
favorable to the non-moving party. Matsushita Elec. Indus. Co.
v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Thus, "[t]he
evidence of the non-movant is to be believed, and all justifiable
inferences are to be drawn in his favor." Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 255 (1986).
The central figure in this case is defendant Sidney
Samuels, who founded First Western in 1978. Prior to that time
Samuels was a general partner in Price & Company ("Price").
According to plaintiffs, First Western's trading program was
substantially similar to Price's and indeed was modeled on it.
Significantly, Arvey represented both Price and First Western.
Arvey assisted Samuels and his partner, Larry Price, in the
formation of Price, drafted Price's limited partnership agreement
and its 1977 offering memorandum, and represented it in
connection with IRS civil and criminal investigations. Arvey
3
began assisting Samuels in setting up First Western while he was
still a general partner in Price. The firm became First
Western's general counsel and assisted in the drafting of forms
to be used by First Western, including the brochure describing
the program. There is some suggestion in the record that Arvey
helped design the straddle transactions used by First Western.
(Joint Appendix ("JA") at 154.) At First Western's request,
Arvey also provided it with three opinion letters addressing the
federal income tax treatment of these transactions. These
opinion letters were dated September 20, 1978, June 8, 1979, and
November 12, 1980.
The transactions engaged in by First Western involved
forward contracts to purchase and sell money market instruments,
specifically Government National Mortgage Association securities
("GNMA's") and Federal Home Loan Mortgage Corporation
participation certificates ("FMAC's"). A "forward contract" is a
contract to purchase or sell a specified security, at a
designated interest rate, on a fixed future date. In a straddle
transaction an investor enters into a pair of forward contracts,
agreeing both to buy and sell securities in the future. The
difference between the "buy" contract and the "sell" contract
results in a "spread" position, resulting in gain or loss to the
investor depending on whether interest rates rise or fall.
Accordingly, before entering into a straddle an investor must
decide how to "bias" the spread by predicting whether interest
rates will rise or fall.
4
First Western's agreements with its customers provided
that a customer could arrange for the cancellation of his
obligations under a forward contract prior to the settlement
date. First Western would then "charge or credit the customer's
account with an amount equal to the profit First Western or the
customer, respectively, would be entitled to receive in the event
delivery was effectuated pursuant to such contract as of the date
of cancellation." (Arvey Opinion Letters, 9/20/78, JA at 138;
6/8/79, JA at 562.) Typically investors would choose to cancel
the losing side of their straddle. The tax treatment of the
resulting loss was the subject of the Arvey opinion letters.
In the opinion letters Arvey concluded that, if First
Western and a customer agreed "to cancel a forward contract prior
to its settlement date, the consequent gain or loss realized by
the customer should constitute ordinary gain or loss to be
recognized by the customer in the year in which the contract is
canceled." (Arvey Opinion Letter, 6/8/79, JA at 563.)0 The
three letters also contained language advising First Western that
the Internal Revenue Service and the courts might arrive at a
contrary conclusion.
As the following excerpts show, each of the letters
also provided that the opinions were based on facts as provided
by First Western and were for the use of First Western only:
September 20, 1978, letter:
0
The September 20, 1978, and the November 12, 1980, letters
contain essentially the same language. (JA at 139-40, 578.)
5
The following paragraphs contain a summary of
such transactions as you [First Western] have
described them to us. (JA at 135.)
[T]his opinion is subject to the consummation
of the transactions between First Western and
its customers under the facts and conditions
described above and is further expressly
conditioned on your representation that the
transactions entered into by First Western
and its customers will be for the purpose,
and with a reasonable expectation, of
economic gain. (JA at 140.)
This letter is intended for your
personal use only and is not intended to be,
and should not be, relied upon by persons
other than First Western. (JA at 149.)
June 8, 1979, letter:
You have advised us that the facts set forth
below constitute an accurate and complete
presentation of all relevant information with
regard to such transactions. (JA at 558.)
[T]his opinion is subject to the consummation
of the transactions between First Western and
its customers pursuant to the facts and
conditions described above and is further
expressly conditioned on your representation
that such transactions will be consummated by
the customers of First Western with a
reasonable expectation of economic gain. (JA
at 563.)
This letter is intended for your
personal use only and is not intended to be,
and should not be, relied upon by persons
other than First Western. (JA at 574.)
November 12, 1980, letter:
You have advised us that the facts set
forth below constitute an accurate and
complete presentation of all relevant
information with regard to the transactions
between First Western and its customers, and
that no material fact necessary to make the
6
information herein not false or misleading
has been omitted. (JA at 576.)
[T]he conclusions set forth herein are based
upon the facts and conditions described in
this letter as you have represented them to
us and we express no opinion as to the tax
treatment of any transaction to the extent
the facts may differ from those contained
herein.
We express no opinion concerning any
federal income tax consequence other than as
specifically set forth in this letter, and no
opinion is expressed with respect to state
and local taxes, federal or state securities
laws, or any other federal or state law not
explicitly referenced herein. We also
express no opinion as to the advisability of
undertaking any transaction described in this
letter, in that any such determination must
take into account the individual facts and
circumstances affecting the particular
taxpayer.
This letter is intended solely for the
internal use of First Western and,
accordingly, it is not intended to be, and
should not be, relied upon by any person
other than First Western. Further, this
letter is not to be quoted or otherwise
referred to in any documents, including
financial statements of First Western, nor is
it to be filed with or furnished to any
government agency or other person without the
express prior written consent of this firm.
Such consent has not been given, and will not
be given, unless the person to whom this
letter is to be furnished has previously
agreed, in writing, that he will not rely
upon the opinions and conclusions expressed
herein, but will make his own independent
evaluation of the federal income tax
consequences of any transactions to be
entered into with First Western. (JA at
591.)
A couple of themes emerge from these excerpts. First,
Arvey stressed that its view of the transactions' validity hinged
on whether they were entered into with a reasonable expectation
7
of generating a profit. Second, the letters asserted that
Arvey's conclusions might be changed by facts and circumstances
unique to individual customers' accounts. Arvey also made these
points in response to inquiries from potential First Western
customers about its opinion letters. (JA at 365-77.)
Despite the letters' statement that they were for the
exclusive use of First Western, Arvey was aware at least as early
as May 31, 1979, that its opinion letters had reached potential
investors. (JA at 365.) The record before us reflects some ten
instances in which potential First Western investors contacted
Arvey regarding its opinion. (JA at 365-78.) As the following
excerpt from an October 21, 1980, letter to Arvey from an
attorney representing a potential investor makes clear, Arvey was
put on notice that its efforts to dissuade reliance were not
always successful:
Surely you realize that First Western
Government Securities is using your letter in
an effort to obtain investors and is
furnishing copies of your letter with
brochures indicating the mechanical operation
of the program. As a result, notwithstanding
statements made in your October 16, 1980,
letter, please be advised that my client is
awaiting my receipt of your opinion letter
before making a decision as to his investment
with First Western Government Securities. (JA
at 376.)
Plaintiffs Kline and Knopf invested in forward
contracts with First Western in December 1980, after reading and
relying upon Arvey's June 1979 and November 1980 opinion letters.
They incurred losses on their investments, deducted these losses
8
in their income tax filings, and had their deductions disallowed
by the IRS.
Kline and Knopf allege that Arvey knew or recklessly
disregarded the truth about First Western's trading program. As
a result, they contend, Arvey in its opinion letters made
material misrepresentations and omitted material facts concerning
the actual structure of First Western transactions. Plaintiffs
allege a number of misrepresentations. They allege that the
opinion letters stated that under the First Western trading
program investors would be required to make or accept delivery of
the underlying securities when in fact no such requirement
existed. They allege that the opinion letters represented that
the prices of First Western's contracts moved independently, and
thus subject to market risk, when in fact First Western's
computer trading program artificially set the prices to eliminate
any risk of loss.0 They allege misrepresentations as to whether
0
Plaintiffs contend that the prices set by First Western's
computer program bore virtually no relation to actual market
prices. They point to a study of the First Western trading
program undertaken by Professor E. Philip Jones of Harvard
Business School. Following a thorough analysis of First
Western's operations, including a review of the assumptions used
in the computer pricing program, Professor Jones concluded as
follows:
First Western's portfolios were a sham. There
was no independent movement of prices of
different contracts. Most of the risk on one
side of a portfolio was exactly cancelled by
the risk on the other side of the portfolios.
... This cancellation of risk was
accomplished by ignoring market prices for
GNMAs and FHLMCs, in favor of artificial
pricing calculations that resulted in prices
which were substantially different from
market prices.
9
customers would be required to make additional margin deposits
and as to how First Western calculated the fees it charged for
cancellation of contracts. Finally, they allege that the opinion
letters misrepresented the fact that First Western's transactions
were designed to obtain tax losses and as structured could not
support a reasonable expectation of economic gain.
As for material omissions, plaintiffs allege that Arvey
made no reference to prior IRS investigations of Price & Company
or Sidney Samuels' connection to that firm.0 Furthermore, a
number of investigations into First Western's trading program had
commenced by the time Arvey issued its final opinion letter. The
IRS had audited a number of First Western investors, the SEC had
started an investigation and requested numerous documents from
First Western, and the Minnesota Department of Commerce was
investigating First Western. The only reference to these
activities in the November 12, 1980, opinion letter was as
follows: "Further, you have informed us that customers of First
Western are being audited by the Service and that the Service has
questioned the deductibility of losses realized by customers on
the basis of the theory set forth by the Service in Rev. Rul. 77-
185." (JA at 588.) The letter made no mention of the SEC or
(JA at 527.)
0
As noted above, plaintiffs allege that First Western's trading
program was modeled after Price's. Thus, plaintiffs allege that
Arvey should have disclosed the fact that, before Arvey issued
its 1979 opinion letter, the IRS had undertaken a criminal
investigation into Price's operations. The IRS investigations
ultimately led to a finding that Price's trades were sham
transactions. Price v. Commissioner, 88 T.C. 860 (1987).
10
State of Minnesota investigations, or the IRS investigation into
Price.
Arvey moved for summary judgment on the omissions
claim, the misrepresentation claim, and tort and RICO claims not
before us on this appeal. The district court denied summary
judgment on all counts except those asserting liability for
omissions of material fact. Because the district court believed
that this case presents two "'controlling issues of law as to
which there is a substantial ground for difference of opinion,'"
Kline v. First Western Gov't Secs., 794 F. Supp. 542, 557 (E.D.Pa.
1992) (quoting 28 U.S.C. § 1292(b)), it certified for immediate
appeal the following two issues: first, whether an attorney may
be held liable for alleged misrepresentations of fact in an
opinion letter when those alleged factual statements have been
specifically attributed to another individual; and, second,
whether attorneys may be held liable for omissions of fact in an
opinion letter absent a duty to disclose.0 The district court
also ruled that Arvey did not meet its burden of proving that
0
Plaintiffs sued defendant Arvey under § 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78(j) and Rule 10(b)(5), 17
C.F.R. 240.10b-5, both as an aider and abettor in Count I of the
complaint and a primary violator in Counts IV and VI. We note
that in Central Bank v. First Interstate Bank, the Supreme Court
ruled that "a private plaintiff may not maintain an aiding and
abetting suit under §10(b)." 62 U.S.L.W. 4237 (U.S. April 19,
1994). This ruling would appear to bar plaintiffs' claims
against Arvey in Count I, a point which we do not now decide.
However, we do not believe it affects our analysis with respect
to whether Arvey may be held liable for material
misrepresentations or omissions as a primary violator under
Counts IV and VI.
11
plaintiffs' reliance was unreasonable, id. at 552-54, but did not
certify that issue for appeal.
II.
The district court had subject matter jurisdiction over
this case pursuant to 28 U.S.C. § 1331. This court has
jurisdiction over this certified interlocutory appeal pursuant to
28 U.S.C § 1292(b). This court granted both parties' petitions
to appeal on June 8, 1992.
Our review of a district court's grant of summary
judgment is plenary. Erie Telecommunications, Inc. v. City of
Erie, 853 F.2d 1084, 1093 (3d Cir. 1988). "On review the
appellate court is required to apply the same test the district
court should have utilized initially." Goodman v. Mead Johnson &
Co., 534 F.2d 566, 573 (3d Cir. 1976), cert. denied, 429 U.S.
1038 (1977).
A court may grant summary judgment only when the
submissions in the record "show that there is no genuine issue as
to any material fact and that the moving party is entitled to
judgment as a matter of law." Fed. R. Civ. P. 56(c). "The
inquiry performed is the threshold inquiry of determining whether
there is the need of a trial--whether, in other words, there are
any genuine factual issues that properly can be resolved only by
a finder of fact because they may reasonably be resolved in favor
of either party." Anderson v. Liberty Lobby, 477 U.S. at 250.
Stated differently, "a motion for summary judgment must be
granted unless the party opposing the motion can produce evidence
which, when considered in light of that party's burden of proof
12
at trial, could be the basis for a jury finding in that party's
favor." J.E. Mamiye & Sons, Inc. v. Fidelity Bank, 813 F.2d 610,
618 (3d Cir. 1987)(Becker, J., concurring). Thus, the party
opposing summary judgment "must do more than simply show that
there is some metaphysical doubt as to material facts."
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
586 (1986).
III.
The district court in its resolution of Arvey's motion
for summary judgment relied on the distinction between liability
imposed under Rule 10b-5 for misrepresentations and that imposed
for omissions. While this distinction is significant in some
circumstances,0 we do not find it helpful to resolving the
particular issues presented in this case. We conclude instead
that attorneys may be liable for both misrepresentations and
omissions where the result of either is to render an opinion
letter materially inaccurate or incomplete.
A. The Misrepresentations Claim
Arvey argues that the district court erred in denying
summary judgment in its favor on plaintiffs' claims that Arvey is
liable under the federal securities laws for affirmatively
misrepresenting material facts concerning First Western's trading
program. Arvey contends that it was entitled to summary judgment
on this claim for the simple reason that its opinion letters did
0
For example, the Supreme Court has held that in cases "involving
primarily a failure to disclose," i.e., omissions, reliance may
be presumed. Affiliated Ute Citizens of Utah v. United States,
406 U.S. 128, 153 (1972).
13
not contain any misrepresentations. That is, it asserts that as
a matter of law it cannot be held liable for an opinion letter in
which it made explicit that it was basing its opinion on an
assumed set of facts represented to it by its client and that it
had conducted no independent investigation into whether those
represented facts accurately reflected reality. We are
unpersuaded by this argument.
This court has generally recognized securities fraud
claims based on allegations of misrepresentations in opinion
letters. We have held that "[a]n opinion or projection, like any
other representation, will be deemed untrue for purposes of the
federal securities laws if it is issued without reasonable
genuine belief or if it has no basis." Herskowitz v.
Nutri/System, Inc., 857 F.2d 179, 184 (3d Cir. 1988), cert.
denied sub nom. Nutri/System, Inc. v. Herskowitz, 489 U.S. 1054
(1989). Interpreting the Supreme Court's "scienter" or intent
requirement as articulated in Ernst & Ernst v. Hochfelder, 425
U.S. 185 (1976), we have explained that
an opinion must not be made 'with reckless
disregard for its truth or falsity,' or with
a lack of 'genuine belief that the
information disclosed was accurate and
complete in all material respects.'
Therefore, an opinion that has been issued
without a genuine belief or reasonable basis
is an 'untrue' statement which, if made
knowingly or recklessly, is culpable conduct
actionable under § 10(b) and Rule 10b-5.
Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir. 1985) (citations
omitted), cert. denied sub nom. Wasserstrom v. Eisenberg, 474
U.S. 946 (1986).
14
Eisenberg concerned litigation over a tax shelter
involving the sale of coal rights. The defendant law firm had
prepared a tax opinion letter, which was included in the offering
memoranda, in which it opined that the IRS would allow certain
deductions. Plaintiffs alleged that the law firm knew that there
was no reasonable basis for its opinion. We held that the law
firm and an accounting firm that issued an opinion letter
verifying profit projections included in the offering memoranda
"are liable if they recklessly expressed opinions which they had
good reason to believe were baseless." Id. at 778. We explained
that such liability is proper because of the greater information
possessed by professionals who express opinions upon which third
parties would rely.
When a representation is made by
professionals or 'those with greater access
to information or having a special
relationship to investors making use of the
information,' there is an obligation to
disclose data indicating that the opinion or
forecast may be doubtful. When the opinion
or forecast is based on underlying materials
which on their face or under the
circumstances suggest that they cannot be
relied on without further inquiry, then the
failure to investigate further may 'support
an inference that when the defendant
expressed the opinion it had no genuine
belief that it had the information on which
it could predicate that opinion.'
Id. at 776 (citations omitted).
Herskowitz presented this court with a similar
situation. In that case, we held that a securities fraud claim
against a bank that had issued an opinion letter concerning the
fairness of the transaction should be submitted to a jury when
15
the claim alleged that the bank knew that the assumptions on
which it based its opinion were unfounded. Herskowitz, 857 F.2d
at 184-85. See also Sharp v. Coopers & Lybrand, 649 F.2d 175,
184 (3d Cir. 1981), cert. denied, 455 U.S. 938 (1982)
(recognizing securities fraud claim against accounting firm based
on materially false representations contained in opinion letter).
These cases leave no doubt concerning the existence of
a cause of action for knowing or reckless misrepresentations in
opinion letters. The question we must address, then, is whether
Arvey's disclaimers, to the effect that the opinion was based
only on facts provided to it by Samuels, should lead us to
conclude otherwise than that this case should go to trial. The
district court relied on Gilmore v. Berg, 761 F. Supp. 358 (D.N.J.
1991), in concluding that the disclaimers should not have that
effect. We agree with that analysis.
Gilmore involved a claim against an attorney who, in a
tax opinion letter, represented that the purchase price of the
real property involved in the tax shelter at issue was fair "as
determined by the general partner." Id. at 370. Plaintiffs
contended that the attorney knew that the property had been
purchased out of bankruptcy for less than one-half the stated
price. The court stated:
The court agrees with plaintiffs that a jury
could find [the attorney's] statement that
"the purchase price of $5.3 million reflects
the fair market value of the property as
determined by the general partner" is so
grossly misleading as to constitute
actionable fraud in failing to disclose
important facts underlying the determination
of fair market value. [The attorney] seeks
16
to exculpate his misleading statement by
pointing to the qualifying language, "as
determined by the general partner.' However,
plaintiffs have presented evidence that ...
[he] knew that the fair market value of $5.3
million was insupportable.
Id.
The analysis in Gilmore, we believe, follows directly
from Eisenberg and this court's other cases concerning liability
for opinion letters. We held in Eisenberg that professionals and
others with similar access to information must disclose data that
calls into question the accuracy of an opinion. 766 F.2d at 776.
This responsibility cannot be evaded by the inclusion of a
statement that the opinion is based on facts provided by someone
else. Thus, when a law firm knows or has good reason to know
that the factual description of a transaction provided by another
is materially different from the actual transaction, it cannot
escape liability simply by including in an opinion letter a
statement that its opinion is based on provided facts.
Plaintiffs here have alleged that Arvey had a long and
close relationship with Samuels, which extended to assisting him
in setting up First Western, designing the transactions in which
First Western engaged, and acting as First Western's general
counsel. Plaintiffs also point to Arvey's representation of
Price, the firm on which First Western allegedly was modeled, in
IRS audit proceedings. These allegations clearly permit the
inference that Arvey knew or had good reason to know that the
factual assertions contained in its opinion letters did not
reflect the substance of actual First Western transactions. As
17
such, Arvey's opinions, despite their disclaimers, fall squarely
within the category of opinion letters that we have held to be
actionable.
That said, we feel it necessary to emphasize that there
is a distinction between the issue we have just addressed--
whether the presence of disclaimers precludes an action for
misrepresentations--and the question of whether plaintiffs
reasonably relied on the opinion letters. As this court has
noted, a plaintiff bringing suit under § 10(b) and Rule 10b-5
must prove that the defendant (1) made misstatements or omissions
of material fact; (2) with scienter; (3) in connection with the
purchase or sale of securities; (4) upon which plaintiffs relied;
and (5) that plaintiffs' reliance was the proximate cause of
their injury. In re Phillips Petroleum Secs. Litig., 881 F.2d
1236, 1244 (3d Cir. 1989).
Thus far we have been concerned with the first of these
issues--whether Arvey is entitled to summary judgment based on
its contention that its opinion letters did not contain
misrepresentations because of the presence of the disclaimers.
Whether plaintiffs' reliance on Arvey's opinion letters was
reasonable pursuant to the standard we articulated in Straub v.
Vaisman & Co., 540 F.2d 591, 598 (3d Cir. 1976), presents a
separate issue. The presence and character of disclaimers has
clear relevance to that determination.
The district court concluded that Arvey has not met its
burden of showing that plaintiffs' reliance on the opinion
letters was unreasonable, Kline v. First Western Gov't Secs., 794
18
F. Supp. at 552-54, and we believe that the record supports its
conclusion. Although, as we have noted, the district court did
not certify the reliance issue for our review, we nevertheless
feel it necessary to address the issue briefly because under
§1292(b) "it is the order that is appealable, and not the
controlling question; and thus we may address any issue necessary
to decide the appeal before us." Ivy Club v. Edwards, 943 F.2d
270, 275 (3d Cir. 1991), cert. denied sub nom. Del Tufo v. Ivy
Club, 112 S. Ct. 1282 (1992). See also United States v. Stanley,
483 U.S. 669, 677 (1987). Thus we could reverse the denial of
summary judgment if, like the dissent, we felt that plaintiffs'
reliance was unreasonable as a matter of law.
In Straub we stated that a variety of factors should be
considered in determining whether a plaintiffs' reliance was
reasonable, including: (1) the existence of a fiduciary
relationship; (2) plaintiffs' opportunity to detect the fraud;
(3) the sophistication of the plaintiffs; (4) the existence of
long-standing business or personal relationships; and, (5) access
to the relevant information. 540 F.2d at 598. Consideration of
the evidence before us in light of these factors, we believe,
leads inexorably to the conclusion that there exists a genuine
issue of material fact as to whether plaintiffs' reliance was
reasonable so that the denial of summary judgment on this ground
was proper.
We acknowledge that the first and fourth factors weigh
in favor of Arvey. The rest, however, favor plaintiffs. There
is no evidence suggesting that plaintiffs had access to
19
information that would have allowed them to understand that which
they allege was really taking place. Arvey, on the other hand,
had an ongoing attorney-client relationship with First Western
and Samuels. Nor is there a suggestion that plaintiffs had an
opportunity to detect the alleged fraud even without the benefit
of access to such information. And while Arvey argues that
plaintiffs were sophisticated investors, the evidence does not
compel the conclusion that they were so sophisticated in these
matters that they should have recognized that the descriptions of
the transactions in the opinion letters bore little relation to
reality.0 A potential First Western investor, armed with Arvey
opinion letters and the information about his own account that
Arvey stressed might be important, could have obtained a tax
opinion from his attorney that would have been wrong simply
because of the misleading way in which the program allegedly was
described in the opinion letters.0 Mere reliance on the legal
0
Unlike the dissent, we do not believe that the fact that "the
transactions discussed in the opinion letters were meant for
sophisticated investors," typescript at 15, means that plaintiffs
were in fact sophisticated enough to unravel First Western's
scheme. And while the "cutting edge" nature of these
transactions perhaps should have put plaintiffs on notice of
potential tax complications involving the transactions described
in the opinion letters, id., it has no logical connection to
whether plaintiffs should have suspected that Arvey knowingly
misdescribed the transactions.
0
The dissent contends that "there is no way that another attorney
could have confirmed from the letters themselves that the facts
underlying the opinions were correct as they were solely within
the knowledge of First Western." Typescript at 16-17.
Plaintiffs' claim, however, is that Arvey also knew or should
have known that the descriptions of the transactions in the
opinion letters were inaccurate. We believe the record contains
evidence sufficient to support the inference that Arvey had or
should have had such knowledge, thereby creating a genuine issue
20
conclusions expressed in the opinion letters, without more, would
have been unreasonable. But we cannot say as a matter of law
that it was unreasonable to rely on the description of First
Western's trading program. Indeed, such reliance would be
consistent with the disclaimers insofar as an independent legal
opinion was sought on the basis of the description of the
program.
In addition to disputing our application of Straub to
this case, the dissent feels that Arvey is entitled to summary
judgment based on the "bespeaks caution" doctrine. Under that
doctrine
when an offering document's forecasts,
opinions or projections are accompanied by
meaningful cautionary statements, the
forward-looking statements will not form the
basis for a securities fraud claim if those
statements did not affect the 'total mix' of
information the document provided investors.
In other words, cautionary language, if
sufficient, renders the alleged omissions or
misrepresentations immaterial as a matter of
law.
In re Donald J. Trump Secs. Litig., 7 F.3d 357, 371 (3d Cir.
1993). See also Donald C. Langevoort, Disclosures that "Bespeak
Caution", 49 Bus. Law. 481 (1994) (summarizing and analyzing
"bespeaks caution" jurisprudence). Not just any cautionary
language will trigger application of the doctrine. Instead,
disclaimers must relate directly to that on which investors claim
to have relied. As we noted in Trump, "a vague or blanket
of material fact. Assuming Arvey possessed such knowledge, its
recitations of the facts "as provided to it by First Western"
were made without a genuine belief in their validity and thus
actionable under the law as expounded in the body of our opinion.
21
(boilerplate) disclaimer which merely warns the reader that the
investment has risks will ordinarily be inadequate to prevent
misinformation. To suffice, the cautionary statements must be
substantive and tailored to the specific future projections,
estimates or opinions in the prospectus which the plaintiffs
challenge." 7 F.3d at 371-72.
So conceived, the "bespeaks caution" doctrine clearly
does not apply to this case except to the extent that plaintiffs
relied solely and without further investigation or consideration
on the opinion letters' conclusions as to the tax consequences of
the First Western transactions. The cautionary statements in the
opinion letters provided investors with information that should
have suggested nothing more to them than the possibility that
Arvey might have gotten the law wrong or incorrectly assessed the
risk that the IRS would deny deductions. The opinion letters did
not contain statements from which plaintiffs should have inferred
the risk that Arvey was knowingly or recklessly misstating the
structure of the entire First Western trading program.
In the only other case that we have found concerning a
similar situation the court reached the same conclusion. The
court in Griffin v. McNiff, 744 F. Supp. 1237 (S.D.N.Y. 1990),
aff'd without op., 996 F.2d 303 (2d Cir. 1993), provided the
following account of the case and its resolution:
Plaintiffs ... challenge more than just the
future forecasts and predictions in the
offering materials. They argue that the
underlying assumptions of the PPMs, tax
opinions and projections were designed to
mislead the investors into believing that the
partnership investments offered them the
22
opportunity to achieve a profit and a tax
benefit from their investment, when in
reality defendants knew that these
possibilities did not exist ... . Inasmuch
as certain of these allegations go to the
misleading nature of the statements when
made, the existence of cautionary language
regarding the general unpredictability of,
inter alia, oil and gas operations, economic
trends, and the interpretation of the tax
laws, will not bar plaintiffs from
maintaining their claims against the
remaining defendants.
Id. at 1253-54 (footnote omitted).
In order for there to be a plausible argument for
application of the "bespeaks caution" doctrine in this case more
than the simple assertion that the opinion is based on
represented facts is required. Trump requires that the language
bespeaking caution relate directly to that by which plaintiffs
claim to have been misled. 7 F.3d at 371-72. Under the law
regarding omissions, discussed in the next section, Arvey's
statement that its opinion was based on facts represented to it
by First Western also contained the implicit assertion that Arvey
did not know the facts to be otherwise. It could not therefore
have alerted plaintiffs to the possibility that Arvey did know
otherwise. Thus, for the doctrine to even conceivably preclude
plaintiffs' claims in this case it would be necessary for the
letters to have included a disclaimer stating, in essence, that
there was a possibility that Arvey did know otherwise and that
the opinion letter was a sham commissioned to construct a facade
of legitimacy for a trading program that both First Western and
23
Arvey knew was a farce.0 We find no such language and therefore
conclude that Arvey was not entitled to summary judgment in its
favor on the basis that plaintiffs' reliance was unreasonable as
a matter of law.
B. The Omissions Claim
The district court granted summary judgment for Arvey
on all claims to the extent that they alleged liability for
omissions of material fact. The court reasoned that attorneys
cannot be held liable for omissions in an opinion letter unless
plaintiffs can demonstrate that the attorneys had a duty to
disclose to them the information that was omitted. Id. at 550-
51. Because it concluded that plaintiffs did not show the
existence of a fiduciary or other relationship which would give
rise to such a duty, the court held that plaintiffs could not
proceed with their claims based on Arvey's alleged omissions.
0
We note, however, that we do not decide at this time whether
such a disclaimer would be effective. One court has noted that
"it would appear that the doctrine does not apply unless the
projection at issue reflects an honestly held belief." Gurfein
v. Sovereign Group, 826 F. Supp. 890, 908 (E.D.Pa. 1993) (Pollak,
J.). Judge Pollak further remarked that if the rule were
otherwise
one could construct a completely inaccurate
and fraudulent offering memorandum, yet be
shielded from a fraud claim as long as there
was language in the document cautioning
investors of the specific risks. To the
extent that such a rule would allow, if not
encourage, fraud and non-disclosure on the
part of corporate actors, it clearly is not a
viable application of the "bespeaks caution"
doctrine.
Id. at 908 n.20.
24
We believe the district court's analysis misapprehends
the issues presented by this case. We are dealing here with a
situation in which Arvey, by authoring its opinion letters, has
elected to speak regarding the transactions at issue. Plaintiffs
allege that this speech was misleading because Arvey failed to
include in its opinion letters information that, if included,
would have undermined the conclusions reached in those letters.
In contrast, the cases cited by the district court, as well as
those cited by Arvey, for the proposition that attorneys may not
be held liable for omissions absent a duty to disclose concern
the question of whether a law firm or similar entity has a duty
to "blow the whistle" on its client. See Fortson v. Winstead,
McGuire, Sechrest & Minick, 961 F.2d 469 (4th Cir. 1992); Abell
v. Potomac Ins. Co., 858 F.2d 1104 (5th Cir. 1988), cert. denied
sub nom. Abel v. Wright, Lindsey & Jennings, 492 U.S. 918 (1989);
Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490 (7th
Cir. 1986). That is, those cases concerned situations where the
alleged omissions were unrelated to the validity of the law
firm's opinion letter or similar communication.
Fortson, for example, concerned a suit against a law
firm that had prepared a tax opinion letter that was included in
the private placement memorandum used in the offering of
interests in a real estate limited partnership. Plaintiffs
"sought to recover from Winstead on the ground that the firm
breached its duty under federal securities laws and state common
law by failing to inquire into and ensure complete and accurate
disclosure." Fortson, 961 F.2d at 471. Plaintiffs did not
25
allege that the tax opinion was inaccurate. "Instead, they
challenge[d] the sufficiency of the information provided to them
as potential investors and contend[ed] that Winstead had a
responsibility to ensure full and accurate disclosure." Id. at
472. The court refused to impose this obligation on law firms in
the absence of a fiduciary relationship between the law firm and
the plaintiffs. Id. at 472-74. To do so, the court remarked,
would be to make attorneys "guarantors of integrity in all
commercial transactions, whether the context be one of raising
capital, marketing a product, or negotiating a contract. Lawyers,
in short, would function in the business world as designated
watchdogs." Id. at 475. See also Barker, 797 F.2d at 496 ("When
the nature of the offense is a failure to 'blow the whistle', the
defendant must have a duty to blow the whistle. And this duty
does not come from § 10(b) or Rule 10b-5; if it did the inquiry
would be circular. The duty must come from a fiduciary relation
outside securities law.").
This case, in contrast, presents the question of
whether, once a law firm has chosen to speak, it may omit facts
material to its non-confidential opinions. Here, unlike Fortson,
the allegedly omitted facts bear directly on the accuracy of the
tax opinion. Thus, this situation closely resembles that before
the Seventh Circuit in Ackerman v. Schwartz, 947 F.2d 841 (7th
Cir. 1991). In Ackerman investors brought suit against a law
firm that wrote an opinion letter concluding that the investors
were entitled to certain deductions for their investments in a
tax shelter. The opinion letter recited facts that made the
26
transaction seem legitimate, but were fictitious. The letter
cautioned that the firm had "relied on unnamed persons for
unspecified facts," id. at 843, and added that "'[w]e have not
made an attempt to independently verify the various
representations.'" Id. The court held that the district court's
grant of summary judgment in favor of the law firm was improper.
Under Rule 10b-5 ... the lack of an
independent duty does not excuse a material
lie. A subject of a tender offer or merger
bid has no duty to issue a press release, but
if it chooses to speak it must tell the truth
about material issues. Although the lack of
duty to investors means that Schwartz had no
obligation to blow the whistle, and none to
correct a letter he had not authorized to be
circulated in the first place ... Schwartz
cannot evade responsibility to the extent he
permitted the promoters to release his
letter.
Id. at 848 (citations omitted).
This analysis flows naturally from Eisenberg. There we
held that an opinion is actionable if issued "with a lack of a
genuine belief that the information disclosed was accurate and
complete in all material respects." 766 F.2d at 776. Indeed,
when the foundations of an opinion "suggest that they cannot be
relied on without further inquiry, then the failure to
investigate further may 'support an inference that when the
defendant expressed the opinion it had no genuine belief that it
had the information on which it could predicate that opinion.'"
Id. (citations omitted). Thus, this court has adopted a limited
duty to investigate and disclose when, by the drafter's omission,
a public opinion could mislead third parties.
27
This limited duty not to omit was particularly well-
articulated in Rose v. Arkansas Valley Envtl. & Util. Auth., 562
F. Supp. 1180, 1206-08 (W.D.Mo. 1983). The Rose court, in holding
that an attorney's failure to disclose material facts in a bond
opinion letter formed the basis of an actionable securities fraud
claim, explained that when a professional "undertakes the
affirmative act of communicating or disseminating information,"
there is
a general obligation or "duty" to speak
truthfully; or, alternatively stated, a
"duty" not to communicate something which is
known to be untrue (or, perhaps, in which the
defendant has so little basis for honest
belief that the requisite degree of
"recklessness" is involved). And encompassed
within that general obligation is also an
obligation or "duty" to communicate any
additional or qualifying information, then
known, the absence of which would render
misleading that which was communicated. While
this latter "duty" might loosely be described
as a "duty to disclose," I would prefer, for
purposes of distinguishing it from a true
"duty to disclose," ... to label it as a
"duty not to omit." In reality, it is simply
one facet of the general obligation to speak
truthfully, arising out of and because of an
affirmative act by the defendant in
communicating.
Id. at 1207 (citations omitted).
The record contains evidence sufficient to preclude
summary judgment on the omissions claim. Arvey received
inquiries concerning its opinion letter from potential investors
prior to issuing its second letter and was explicitly told prior
to issuing its third letter that First Western was distributing
copies of its letters along with brochures describing the
28
program. Plaintiffs have alleged that Arvey failed to disclose
the SEC and State of Minnesota investigations as well as the IRS
investigation into the analogous Price trading program. This
evidence creates genuine issues of material fact sufficient to
defeat Arvey's motion for summary judgment.
Finally, we must address Arvey's argument that a duty
not to omit runs against the ethical standards of attorney
conduct. This argument is unpersuasive. Privileges and ethical
rules cannot be relied on to perpetrate fraud. See Clark v.
United States, 289 U.S. 1, 15 (1933) ("The privilege takes flight
if the relation is abused. A client who consults an attorney for
advice that will save him in the commission of a fraud will have
no help from the law. He must let the truth be told.").
IV.
For the foregoing reasons, we will reverse the district
court's decision granting summary judgment for Arvey on
plaintiffs' claim that Arvey's tax opinion letters contained
material omissions upon which plaintiffs relied. We will affirm
the district court's opinion in all other respects, and will
remand for proceedings consistent with this opinion.
29
Kline v. First Western Government Securities
Nos. 92-1498, 92-1499
GREENBERG, Circuit Judge, dissenting.
This case raises the issue of when a law firm may be
liable to third parties for misrepresentations and omissions in
opinion letters written by the firm to its client. I am unable
to join in the majority's opinion because the explicit
disclaimers in the opinion letters, portions of which the
majority quotes, made the plaintiffs' reliance on these letters
unreasonable as a matter of law. Therefore, I would reverse the
order of the district court to the extent that it denied the firm
summary judgment, would affirm the order to the extent that it
granted the firm summary judgment, and would remand the matter
for entry of summary judgment in favor of the firm against the
plaintiffs on the claims involved on this appeal. My dissent
addresses only the reasonable reliance issue as described on
pages 18 through 24 of the typescript of the majority opinion and
the accompanying footnotes, as in my view that issue is
dispositive.
As germane on this appeal, the plaintiffs alleged that
the law firm, Arvey, violated section 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78(j), and Rule 10b-5, 17
C.F.R. § 240.10b-5. The plaintiffs focus their attack on Arvey
on the factual descriptions of First Western's program contained
in Arvey's opinion letters. The plaintiffs contend that these
30
descriptions are inaccurate as a result of both
misrepresentations and omissions. They further allege that as a
consequence of Arvey's misrepresentations and omissions, they
suffered adverse tax consequences upon the cancellation of losing
forward contracts because the Internal Revenue Service disallowed
the deductions they claimed based on these losses. Indeed, the
relationship of the plaintiffs' claims to the tax portions of
Arvey's opinions is demonstrated by the district court's holding
of this case on its suspense calendar pending the outcome of
litigation in the Tax Court regarding deductions for losses upon
the cancellation of losing forward contracts arranged by First
Western. The district court activated this case after the
taxpayers were unsuccessful in that forum. See Freytag v.
Comm'r, 89 T.C. 849 (1987), aff'd, 904 F.2d 1011 (5th Cir. 1990),
aff'd, 111 S. Ct. 2631 (1991).0 The plaintiffs, however, were not
parties to that Tax Court case. Instead, they settled their
cases with the Internal Revenue Service.
Arvey responds to the plaintiffs' charges by urging
that the plaintiffs could not have relied justifiably on the
opinion letters, as the letters: (1) explicitly addressed assumed
facts; (2) stated that these facts had been provided by the
client; and (3) stated that the firm furnished the opinion to
First Western and it should not be relied upon by persons other
than First Western. Thus, Arvey argues that the district court
0
The Supreme Court did not deal with the merits of the
controversy. The opinion of the Court of Appeals contains a
succinct description of the First Western program. 904 F.2d at
1013-14.
3
erred in concluding that the qualifying language in the opinion
letters did not shield it from liability as a matter of law. I
agree.
I recognize that it is well settled that projections,
forecasts, and opinions may be actionable under Rule 10b-5 if the
declarant makes them without a genuine belief in their validity
or a reasonable basis to believe in their accuracy. In re Donald
J. Trump Casino Sec. Litig., 7 F.3d 357, 368, (3d Cir. 1993),
cert. denied, 114 S. Ct. 1219 (1994); Herskowitz v. Nutri/System,
Inc., 857 F.2d 179, 184 (3d Cir. 1988), cert. denied, 489 U.S.
1054, 109 S. Ct. 1315 (1989); Eisenberg v. Gagnon, 766 F.2d 770,
775-76 (3d Cir.), cert. denied, 474 U.S. 946, 106 S. Ct. 342
(1985). As we explained in Eisenberg, "[a]n opinion must not be
made 'with reckless disregard for its truth or falsity' or with a
lack of a 'genuine belief that the information disclosed was
accurate and complete in all material respects.'" 766 F.2d at
776 (citation omitted). Attorneys and other professionals are
not exempt from this requirement, and courts have permitted the
imposition of liability for securities fraud on professionals who
knowingly or recklessly have issued false or misleading opinions.
See, e.g., Id.; Duke v. Touche Ross & Co., 765 F. Supp. 69
(S.D.N.Y. 1991); Stevens v. Equidyne Extractive Indus., 694 F.
Supp. 1057 (S.D.N.Y. 1988).
To state a violation of section 10(b) and Rule 10b-5, a
plaintiff must allege that the defendant made (1) a misstatement
or an omission (2) of material fact (3) with scienter (4) on
which the plaintiff relied (5) and which proximately caused the
4
plaintiff's injury. See, e.g., Hayes v. Gross, 982 F.2d 104, 106
(3d Cir. 1992); Shapiro v. UJB Fin. Corp., 964 F.2d 272, 280 (3d
Cir.), cert. denied, 113 S. Ct. 365 (1992); Lewis v. Chrysler
Corp., 949 F.2d 644, 649 (3d Cir. 1991); Straub v. Vaisman & Co.,
540 F.2d 591, 598 (3d Cir. 1976). Moreover, the plaintiff's
reliance on the alleged misstatement or omission must be
reasonable, even though the defendant has the burden of proof to
show it was not reasonable. Straub, 540 F.2d at 598.
Consequently we have stated that to recover under section 10(b)
and Rule 10b-5, "the plaintiff [must] act reasonably" and that "a
sophisticated investor is not barred by reliance upon the honesty
of those with whom he deals in the absence of knowledge that the
trust is misplaced." Id. (emphasis added). Thus, "an investor
cannot close his eyes to a known risk" and if he is "cognizant of
the risk, then there is no liability." Teamsters Local 282
Pension Trust Fund v. Angelos, 762 F.2d 522, 530 (7th Cir. 1985).
Accordingly, a securities action defendant may obtain summary
judgment by demonstrating that the plaintiff's reliance on the
defendant's statements was unreasonable as a matter of law.
It stands to reason that where opinion letters
regarding a potential investment -- even those prepared with
scienter -- "bespeak caution," reasonable investors should not
rely on the representations in them. See Luce v. Edelstein, 802
F.2d 49, 56 (2d Cir. 1986). The majority concedes that "[m]ere
reliance on the legal conclusions expressed in the opinion
letters, without more, would have been unreasonable," but states
that it was not unreasonable for plaintiffs to rely on Arvey's
5
descriptions of First Western's trading program although Arvey
specifically attributed them to First Western and did not purport
to have verified them. Typescript at 20-21. Thus, the majority
holds that the "bespeaks caution" doctrine applies only "to the
extent that plaintiffs relied solely and without further
investigation or consideration on the opinion letters'
conclusions as to the tax consequences of the First Western
transactions" because the language in the letters would not have
alerted plaintiffs that Arvey knew or had reason to know that the
descriptions were inaccurate. Id. at 22-24. The majority's
suggestion that the plaintiffs could reasonably rely on Arvey's
opinion letter because "Arvey's statement that its opinion was
based on facts represented to it by First Western . . . contained
the implicit assertion that Arvey did not know the facts to be
otherwise" improperly equates scienter with reasonable reliance.
Id. at 23. These requirements are two independent elements which
must be alleged to state a primary violation of section 10(b) and
Rule 106-5.
Consequently, warnings and disclaimers -- by limiting
the extent to which an investor can rely on the offering
documents -- will preclude recovery for securities fraud even
when the defendant's scienter has been established. "Dismissal of
securities fraud claims may be appropriate where the offering
documents specifically warn plaintiffs not to rely on the alleged
misrepresentations made by defendants, thus making any subsequent
reliance unjustified." Griffin v. McNiff, 744 F. Supp. 1237,
1253 (S.D.N.Y. 1990), aff'd, 996 F.2d 303 (2d Cir. 1993) (table).
6
For this reason, several courts have dismissed cases similar to
this one on the ground that it was unreasonable for the investor
to have relied on representations in the challenged opinion
letter in the face of the letter's broad disclaimers or its
attribution of the facts it recites to a third party.
For example in Buford White Lumber Co. v. Octagon
Properties, Ltd., 740 F. Supp. 1553 (W.D. Okla. 1989), the
plaintiffs brought a securities fraud suit against the law firm
that had prepared the offering memorandum for the limited
partnerships in which they had invested. The memorandum stated
that the principals of the limited partnership and not the law
firm had prepared the historical and financial statements and
that the firm had not audited these statements. 740 F. Supp. at
1561. Accordingly, the court held that
[i]n the face of these disclaimers and
disclosure of the limited undertaking of
defendant with respect to information or
matters disclosed in the offering memorandum,
it would be unforeseeable as a matter of law
to a prudent law firm in Defendant's position
that potential purchasers, including
Plaintiffs, would rely upon Defendant's
nondisclosure of any misrepresentations or
omissions in the financial statements of [the
limited partnership] as a representation by
Defendant that the statements were accurate
by reason of which Plaintiffs might be
harmed. . . . The Offering memorandum states
that the financial statements were prepared
by and were the sole responsibility of [the
limited partnership]. In short, Defendant did
not undertake to prepare, evaluate the
accuracy of, or opine upon the accuracy of
financial statements by [the limited
partnership] and said so.
7
740 F. Supp. at 1563. The court then went on to explain:
[i]n the face of the statements in the
Offering Memorandum that the financial
statements were the sole responsibility of
[the limited partnership] and were unaudited,
and disclosures concerning the limited role
of Defendant in preparing or evaluating
statements made in the Offering Memorandum,
the Court agrees with Defendant that any
reliance by Plaintiffs on Defendant's duty to
disclose inaccuracies, misrepresentation or
omissions of [the limited partnership] in
information it supplied is unreasonable as a
matter of law.
Id. at 1666.
Numerous other courts have reached similar decisions.
See, e.g., Moorhead v. Merrill, Lynch, Pierce, Fenner & Smith,
Inc., 949 F.2d 243 (8th Cir. 1991) (holding that bond purchasers
could not maintain securities fraud action against consultant
that filed a feasibility study despite alleged
misrepresentations, where study contained detailed cautionary
language and specific warnings of risk factors, along with
underlying factual assumptions); Luce v. Edelstein, 802 F.2d at
56 ("we are not inclined to impose liability on the basis of
statements that clearly 'bespeak caution'" where offering
memorandum warned investors that projections of potential cash
and tax benefits were "'necessarily speculative'") (citation
omitted); Friedman v. Arizona World Nurseries Ltd. Partnership,
730 F. Supp. 521, 541 (S.D.N.Y. 1990) (dismissing section 10(b)
claims on ground that plaintiffs' reliance was unreasonable,
where accountant's tax opinion stated that the projections
contained therein were based on representations which were made
8
to the accountants by the promoter of the limited partnership),
aff'd, 927 F.2d 594 (2d Cir. 1991) (table); O'Brien v. National
Property Analysts Partners, 719 F. Supp. 222, 227-29 (S.D.N.Y.
1989) (holding that no liability attaches where accountant
specifically attributes its financial assumptions to documents
given to it by representatives of the limited partnership);
Stevens v. Equidyne Extractive Indus. 1980, 694 F. Supp. at 1063-
64 (dismissing securities fraud suit against accountant, because
statements in accountant's opinion letter "set forth that they
[were] based on supplied facts, [and] additionally state[d] that
there is no implication that the results predicted can or will be
achieved"); Feinman v. Shulman Berlin & Davis, 677 F. Supp. 168,
170-71 (S.D.N.Y. 1988) (holding that where "offering memorandum
warned plaintiffs not to rely on the misrepresentations which the
defendants allegedly made [,] plaintiffs' reliance on those
misrepresentations, if made was unjustified and dismissal is
appropriate")0; Andreo v. Friedlander, Gaines, Cohen, Rosenthal &
Rosenberg, 651 F. Supp. 877, 881 (D. Conn. 1986) (dismissing
section 10(b) claims because the cautionary "language of the
document in question limited the degree to which investors should
rely on it" as it told investors that defendant accounting firm
did not verify the data upon which its projections were based);
Devaney v. Chester, Fed. Sec. L. Rep. (CCH) ¶ 92,747, at 93,649
(S.D.N.Y. 1986), rev'd on other grounds, 813 F.2d 566, 569 (2d
0
In my view, Friedman and Feinman are particularly significant
because they dealt with caveats concerning the tax consequences
of the transactions and, as here, warned that the IRS might
challenge the tax assumptions underlying the investments.
9
Cir. 1987) (dismissing securities fraud claim against investment
bank because the confidential memorandum it prepared "with its
broad disclaimers as to the source of information contained
therein, does not support an allegation of reliance. Investors
would not be likely to rely on memoranda which so definitely
stated their dependency on another source").0
Like the law firm in Buford White Lumber Co., Arvey
made it clear that it did not undertake to guarantee to potential
investors the accuracy of the factual information contained in
its letters. Arvey also made it clear that it was not offering
advice to such investors. Each of the opinion letters is
addressed to Sidney Samuels as president of First Western, and is
stated to be for the exclusive use of Samuels or First Western.
The 1980 opinion letter emphasizes this point most strongly. It
warns that it "supersedes our letter of June 8, 1979, upon which,
as you were previously informed, you should no longer rely," App.
at 576, and contains an even more forceful cautionary statement
than the earlier letters that:
[t]his letter is intended solely for the
internal use of First Western and,
accordingly, it is not intended to be, and
should not be, relied upon by any person
other than First Western. Further, this
letter is not to be quoted or otherwise
referred to in any documents, including
0
The Court of Appeals for the Second Circuit reversed the
district court's judgment on the ground that the court should
have permitted the plaintiffs to file an amended complaint. This
holding, however, did not cast doubt on the district court's
determination that reliance is unjustified where the document at
issue contains cautionary language and represents that the source
of the information contained therein came from a third party.
10
financial statements of First Western, nor is
it to be filed with or furnished to any
governmental agency or other person without
the express prior written consent of this
firm.
Id. at 590-91.
Furthermore, the opinion letters were replete with
cautionary language. All three warned that the IRS and the
courts might "take a strong stance contrary to the opinion
expressed herein." Id. at 147 (1978 letter), 574 (1979 letter),
591 (1980 letter).0 Indeed, the 1980 opinion letter disclosed
that the IRS was investigating First Western's customers for
engaging in tax avoidance transactions and that the IRS generally
viewed the simultaneous holding and selling of forward contracts
with suspicion. The letter stated that:
Rev. Rul. 77-185 is part of a concerted
effort by the Service to curb what it
considers the abusive use of offsetting
positions in securities and commodities to
minimize or defer tax liability. In addition
to promulgating Rev. Rul. 77-185, the Service
has added Chapter 700 ('Commodity Options and
Futures') to its Tax Shelters Examination
Handbook, in which it identifies, among other
transactions, 'the simultaneous buying and
selling of futures contracts in . . . GNMA
Certificates' as a 'basic tax shelter
arrangement.' The Service has also announced
a policy of identifying for audit returns
which contain significant securities and
commodities transactions, and is presently
litigating various cases involving
transactions similar to those involved in
Rev. Rul. 77-185. Due to the Service's
concern with transactions similar to those
0
The plaintiffs made their investments in December 1980 after
they read Arvey's 1979 and 1980 letters.
11
entered into between First Western and its
customers, persons who enter into
transactions with First Western may
substantially increase their chances of being
audited by the Service. Further, you have
informed us that customers of First Western
are being audited by the Service and that the
Service has questioned the deductibility of
losses realized by such customers on the
basis of the theory set forth by the Service
in Rev. Rul. 77-185.
App. at 588 (emphasis added). This warning, in no uncertain
terms, put potential investors who read Arvey's letters,
including the plaintiffs, on notice of the strong possibility
that the IRS would disallow deductions by investors of any losses
resulting from the cancellation of First Western contracts on the
ground that the transactions were really only a tax avoidance
scheme. Of course, that is exactly what happened. Furthermore,
the 1980 letter disclosed First Western's troubled past by
discussing the IRS's audits of prior First Western transactions
identical to those analyzed in the opinion letters. Thus, the
plaintiffs cannot state a claim of misrepresentation because the
facts upon which their claim is premised were disclosed clearly.
"[T]he naked assertion of concealment of material facts which is
contradicted by published documents which expressly set forth the
very facts allegedly concealed is insufficient to constitute
actionable fraud." Spiegler v. Wills, 60 F.R.D. 681, 683
(S.D.N.Y. 1973).0 Furthermore, in the face of this disclosure,
0
The cases I have cited do not always distinguish among the
related concepts that a statement may be so conditioned that: (1)
it cannot be regarded as misleading; (2) the representations it
contains may not be material; and (3) reliance on the statement
may be unreasonable. Nevertheless all support the conclusion
that the plaintiffs' reliance in this case was unreasonable.
12
it was unreasonable for the plaintiffs to rely on the Arvey
letters as support for the validity of deductions for ordinary
losses upon the cancellation of a losing forward contract.
In addition to warning of the possible non-
deductibility of losses resulting from the purchase of First
Western's forward contracts, the opinion letters clearly
indicated that they depended on assumed facts. In this regard,
the letters prefaced their factual description of First Western's
trading programs with the following introductory remarks,
attributing the descriptions to Samuels: "the following
paragraphs contain a summary of such transactions as you have
described them to us," App. at 135 (1978 letter); "you have
advised us that the facts set forth below constitute an accurate
and complete presentation of all relevant information with regard
to such transactions," Id. at 558 (1979 letter); and "you have
advised us that the facts set forth below constitute an accurate
and complete presentation of all relevant information with regard
to the transactions between First Western and its customers, and
that no material fact necessary to make the information herein
not false or misleading has been omitted," Id. at 576 (1980
letter).
Furthermore, almost every specific factual description
of how the First Western trading program functioned began with
the phrase "you have represented to us. . ." or the equivalent.
For example, both the 1979 and 1980 letters included the
following statements:
13
you have represented to us that the various
combinations of forward contracts obligating
the customer to deliver and take delivery of
money market instruments will, as described
above, have sufficiently different stated
interest rates and delivery dates so as to
produce independent price movement among such
contracts and cause the customer to have a
reasonable opportunity of realizing economic
gain (and a corresponding risk of loss) with
respect to his various positions.0
Id. at 560-61, 577 (1979 and 1980 letters).
You have represented to us that the
transactions entered into by First Western
and its customers will reflect the customer's
market strategy and interest rate forecast,
will have economic validity independent of
their respective tax consequences, and will
produce a reasonable opportunity for economic
gain and risk of economic loss.
Id. at 573 (emphasis added) (1979 letter).
In addition, this opinion is subject to the
consummation of the transactions between
First Western and its customers pursuant to
the facts and conditions described above and
is further expressly conditioned on your
representation that such transactions will be
consummated by the customers of First Western
with a reasonable expectation of economic
gain.
Id. at 563 (emphasis added) (1979 letter).
Thus, Arvey's opinion letters, like those in the above
cited cases, expressly noted that Samuels and First Western, not
Arvey, supplied the facts, that even under those facts there was
no guarantee that the results predicted would be achieved, and
that the letters should not be relied upon by the investors.
0
The words which I have underscored read as follows in the 1980
letter: "with respect to his overall position."
14
Given all of this cautionary language, the plaintiffs should not
have understood the opinion letters to mean that Arvey had made
factual representations regarding First Western's programs. I
would therefore hold that the plaintiffs' could not have relied
reasonably on the opinion letters as to the accuracy of the
factual descriptions they contain, or indeed anything else, and
thus no liability may be imposed on Arvey.
I have demonstrated already that the plaintiffs'
reliance on the opinion letters was unreasonable. But there is
even more evidence to support this conclusion, as the 1980 letter
also includes a veritable bugle blast of an announcement
cautioning investors not to rely on Arvey's opinion:
[h]owever, as discussed in more detail
below, the deductibility of any particular
customer's losses may depend upon certain
facts and circumstances related to such
customer's account with First Western at the
time the loss is incurred. Accordingly, it
is impossible for us to express an opinion as
to the deductibility of any particular loss
incurred by a customer of First Western.
Id. at 586 (emphasis added). In view of the foregoing statement,
the plaintiffs' reliance on Arvey's letters was not simply
unreasonable. It was reckless. I believe that it is absolutely
clear that the plaintiffs could not have relied reasonably on an
opinion letter to justify tax deductions when the letter
indicates that "it is impossible for us to express an opinion as
to the deductibility of any particular loss incurred by a
customer of First Western."
15
An examination of the factors which we said in Straub
should be considered when determining whether a plaintiff
justifiably relied on the defendant's misrepresentations
reinforces my conclusion, though I hasten to add that it is so
obvious that the plaintiffs' reliance on Arvey's letters was
unreasonable that I could stop my dissent at this point. 540
F.2d at 598. But I will go on. There are five Straub factors:
(1) the existence of a fiduciary relationship; (2) the
plaintiffs' opportunity to detect the fraud; (3) the
sophistication of the plaintiffs; (4) the existence of a long-
standing business or personal relationship; and (5) access to the
relevant information. Id. In regard to the first and fourth
factors, Arvey clearly had no special relationship with the
plaintiffs that would give the plaintiffs any grounds to trust
Arvey's representations or that would impose on Arvey any duty to
inform the plaintiffs of possible inaccuracies. Indeed, the
majority acknowledges this point. See typescript at 20.
As to the other factors, we must remember that we are
not dealing with plaintiffs who made conventional investments.
Straddle transactions are not designed for the proverbial "person
on the street." To the contrary, the transactions discussed in
the opinion letters involved very complex financial arrangements
meant for sophisticated investors looking for tax advantages. The
mere fact that these transactions were on the cutting edge of
strategic tax planning should have put any reasonable investor on
notice that there was a substantial risk of tax complications.
Furthermore, the various disclosures in the letters should have
16
provided the plaintiffs with the incentive and opportunity to
detect possible fraud. As I explain above, the letters not only
made it clear that they were predicated on facts provided by
Samuels, and not verified by Arvey, but they also disclosed past
instances in which the IRS questioned the validity of
transactions identical to those discussed in the letters, and
indicated that it was likely there would be future trouble as
well. Thus, the letters gave the plaintiffs every incentive to
make further inquiries into the legitimacy of the First Western
program and should have caused them to withhold their investments
until they had the information necessary to make informed
decisions. In sum, the application of the Straub factors
dictates the conclusion that an investor could not justifiably
rely on the representations contained in Arvey's opinion letters.
In rejecting this conclusion, the majority writes that
there is no evidence that these plaintiffs had any particular
knowledge or sophistication which would enable them to notice any
irregularities in First Western's programs. Id. at 20. The
majority notes further that reliance on the letters might be
justified because an investor could take the letters to an
attorney and, predicated on the facts in them, obtain an
erroneous opinion. Id. at 20-21.
But the opinion letters made it clear that the facts
they contained originated from First Western, not Arvey. Although
another attorney might have agreed with the legal analysis in the
opinion letters, there is no way that another attorney could have
confirmed from the letters themselves that the facts underlying
17
the opinions were correct as they were solely within the
knowledge of First Western. Any reasonable person reading the
letters would have realized this and questioned the reliability
of the factual descriptions of First Western's trading practices
and, in particular, the statements regarding the independent
economic validity of the transactions. Furthermore, as I noted
above, the 1980 opinion letter states that investors are not to
make an investment decision based on the letter, but if they do,
they should at least obtain written permission from Arvey. This
admonishment should have pounded home to the plaintiffs the risk
that they were taking.
I emphasize that it is critically important to focus on
the precise nature of the plaintiffs' claims, because the
reasonableness of the plaintiffs' reliance cannot be considered
in the abstract. The precise issue is whether the plaintiffs
could rely reasonably on the letters in considering the tax
consequences of canceling a forward contract. As the plaintiffs
explain in their opening brief at 5, "[t]he focus of each opinion
letter was the federal income tax treatment of a loss sustained
by a First Western customer upon the cancellation of a losing
forward contract (a 'loss contract') prior to the contract's
settlement date." In particular, the plaintiffs claim that Arvey
mislead them because its opinion letters said that they would
have ordinary losses when canceling losing forward contracts.0
0
Actually, it never has been established that this advice was
wrong. While the Tax Court ruled against other investors in the
First Western program, and its decisions were affirmed on the
merits by the Court of Appeals for the Fifth Circuit, the
18
In the face of this claim, I ask the rhetorical
question: how can an investor reasonably rely on opinion letters
to anticipate favorable tax treatment when they: (1) are
addressed to someone else; (2) are by their terms only for the
use of someone else; (3) by their terms cannot be shown to the
investor; (4) are predicated on facts not supplied by the author
of the letters; (5) warn that the IRS likely will challenge the
claim for favorable treatment as it has in similar situations;
(6) explain the basis for the challenge; (7) state that the
courts might take a strong stance contrary to the opinion; and
(8) flatly announce that it is "impossible" for the author of the
letter "to express an opinion as to the deductibility of any
particular loss incurred by" an investor? The answer is obvious.
The investors could not rely reasonably on such letters, and thus
Arvey is entitled to summary judgment on the Section 10(b)
claims.0 In my view, nothing could be clearer.
Surely if there ever was any doubt as to Arvey's right
to a summary judgment, it did not survive our recent opinion in
plaintiffs were not parties to that case. For all that we know,
it is possible that if the plaintiffs had not chosen to settle
with the IRS, they might have prevailed in litigation in either
the Tax Court or in a different court of appeals. Courts of
appeals, after all, do not always view identical tax issues
similarly. See Pleasant Summit Land Corp. v. Comm'r., 863 F.2d
263, 265 n.2. (3d Cir. 1988), cert. denied, 493 U.S. 901, 110
S. Ct. 260 (1989). I acknowledge, however, that probably the
plaintiffs would have lost and I further recognize that the
Freytag case was a "test case." Freytag, 904 F.2d at 1014. Of
course, my opinion is not dependent on whether Arvey's opinion
was right or wrong.
0
Of course, there is no dispute of fact precluding summary
judgment, as the plaintiffs do not contend that the opinion
letters do not contain the provisions I have quoted.
19
In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357. In Trump,
as in this case, the plaintiffs asserted a Section 10(b) action.0
The action arose from the sale of bonds by the defendants to
acquire, complete the construction of, and open a gigantic casino
in Atlantic City, New Jersey. The plaintiffs were purchasers of
the bonds who claimed that in making their purchases they relied
on false statements in the prospectus. The plaintiffs also
asserted that material matters were omitted from the prospectus.
The defendants successfully moved to dismiss under Fed. R. Civ.
P. 12(b)(6), as the complaint failed to state a claim on which
relief could be granted.
On appeal we affirmed on the basis of the "bespeaks
caution" doctrine. We pointed out that the prospectus was so
filled with cautionary language that the allegedly misleading
statements became immaterial as a matter of law. Trump, 7 F.3d
at 371-73. I will not set forth the representations and
cautionary language in Trump, for I see no need to do so. Rather,
I indicate only that it seems obvious that the facts in Trump
gave the investors a stronger claim for recovery than the facts
in this case give the plaintiffs here. Yet in Trump we affirmed
the order of the district court granting the defendants judgment
under Rule 12(b)(6).
I acknowledge that in Trump we held that the cautionary
language rendered the alleged misrepresentation immaterial as a
matter of law while here we are concerned with whether the
0
Trump also involved other counts which we need not describe.
20
plaintiffs reasonably relied on Arvey's opinion letters. But
this distinction makes no difference. The point is that the
cautionary language in the Trump prospectus should have hammered
home to the investors the risk they were taking. Precisely the
same thing is true here. The plaintiffs here could not rely
reasonably on documents which by their terms were not for their
view and which were conditioned so thoroughly. While it is true,
as the majority points out, that Arvey may have known that
investors would see the letters, that knowledge is immaterial to
the question of reasonable reliance, a determination that must be
predicated on what should be the investor's state of mind. Thus,
I do not urge that we hold that Arvey did not misrepresent.0
Rather, I would hold Arvey has demonstrated that the plaintiffs
unreasonably relied on its opinion letters.
By its holding that there is a triable issue as to
whether the plaintiffs' reliance on the Arvey letters was
reasonable, the majority effectively holds that no matter how
thoroughly a law firm conditions its opinion, it may be liable to
the investors in a Section 10(b) action for misrepresentation and
omissions. In this circuit there now will be no safe harbor for
attorneys in the sea of Section 10(b) cases. The majority's
holding thus cannot be reconciled with the warnings, recently
made by the Court of Appeals for the Fourth Circuit, that where,
as here, a law firm has "unequivocally informed potential
0
Of course, on the basis of Trump and the other opinions I have
cited, we could hold that there were no misrepresentations, but
even if there were, they were not material. But I am not taking
that approach.
21
investors that the law firm had not verified the financial data
provided to it by the client[,] . . . [t]o find a duty in the
face of this express disclaimer of verification would render law
firms powerless to define the scope of their involvement in
commercial transactions." See Fortson v. Winstead, McGuire,
Sechrest, & Minick, 961 F.2d 469, 475 (4th Cir. 1992). I cannot
conceive of more explicit disclaimers than Arvey's. If such
disclaimers cannot permit a law firm to foreclose the possibility
of imposition of liability on it to outside parties for issuing a
written opinion to a client, then nothing will. The result of
the majority's position is therefore "a rigid rule charging all
attorneys who involve themselves in any narrow corner of a
commercial transaction with responsibility for the whole
transaction" even when they expressly disclaim any such
involvement. Id.
Furthermore, as a practical matter, the majority
opinion has eliminated the justifiable reliance element of
Section 10(b) actions which hereafter in this circuit will exist
only in theory. The opinion will have far-reaching consequences
in this circuit and perhaps beyond because in our national
economy attorneys anywhere may recognize that in some securities
transactions litigation in this circuit may materialize. The
opinion should lead knowledgeable commercial attorneys in
situations in which the Securities Exchange Act may become
implicated to be reluctant to advise anyone about anything which
could affect the rights of investors or the value of the
securities. Indeed, I see no principled way to limit the
22
majority's decision to opinions given by attorneys. Accordingly,
I dissent.
23