LYNCH, Chief Judge.
This appeal concerns the construction and application of a section of the Massachusetts Uniform Securities Act, Mass. Gen. Laws ch. 110A, § 410(a)(2), both as to the materiality of a misrepresentation and as to when an offer or sale has been made "by means of" such a misrepresentation. There is surprisingly little case law interpreting the statute's phrase "by means of." We are mindful that this provision is to be "construed as to ... make uniform" state securities laws and "to coordinate the interpretation and administration of this chapter with the related federal regulation." Id. § 415.
Access Cardiosystems, Inc. ("Access") was a small startup company, a purveyor of portable automated external heart defibrillators ("AED"). Despite investments from four investors of over $20 million from 2001 to 2005, the company struggled and eventually filed for Chapter 11 bankruptcy protection in 2005. The founder, director, and officer of Access was Randall Fincke.
Four investors, in a third amended complaint filed on April 5, 2007, alleged that Fincke had violated Mass. Gen. Laws ch. 110A, § 410(a)(2), and had committed fraud, negligent misrepresentations, and numerous breaches of fiduciary duty. The bankruptcy court heard many witnesses over the course of successive trials on liability and then on damages. The bankruptcy court found as a matter of fact that (i) Fincke had made a false statement of material fact to investors in violation of the Massachusetts blue sky law, Mass Gen. Laws ch. 110A, § 410(a)(2), and (ii) that one such investor, Joseph Zimmel, was entitled to damages, totaling $1.5 million, for his investments that Fincke solicited "by means of" that material misstatement. Access Cardiosystems, Inc. v. Fincke (In re Access Cardiosystems, Inc.), 404 B.R. 593, 698-99 (Bankr.D.Mass.2009) (hereinafter Access II) (liability); Access Cardiosystems, Inc. v. Fincke (In re Access Cardiosystems, Inc.), 460 B.R. 67, 83 (Bankr.D.Mass.2011) (hereinafter Access IV) (damages).
Fincke has appealed those two findings to us. We affirm. The extensive background and facts of the case are stated in both the bankruptcy and the district court opinions. No purpose would be served by repetition here.
The leading Massachusetts case on Mass. Gen. Laws ch. 110A, § 410(a)(2) is Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 809 N.E.2d 1017 (2004). Like its federal counterpart, the Securities Act of 1933, 15 U.S.C. §§ 77a et seq., the state statute "creates criminal and civil liability for securities-related infractions." Marram, 809 N.E.2d at 1025. In turn, § 410(a)(2) specifically creates civil liability for sales of securities "by means of fraud or misrepresentation." Id. (citation and internal quotation marks omitted). Both oral and written material misrepresentations are actionable. Id. at 1026. The state law is very consumer-oriented, and does not require the plaintiff to show that the defendant knew that the statement or omission was false or misleading. Id. Instead, the defendant is held to an "inverse negligence standard":
Id. (quoting Mass. Gen. Laws ch. 110A, § 410(a)(2)) (citing 12A J.C. Long, Blue Sky Law § 9:23 (2003)) (describing a statutory defense). The law limits relief to returning the buyer to the status quo through recission, or if recission is unavailable, to equivalent damages. Marram, 809 N.E.2d at 1025 n. 16, 1028. Contract damages are not available, nor are punitive damages. Id. at 1028.
The bankruptcy court thoroughly examined the context in which the misrepresentation was made. It found that Fincke's faltering start-up company, Access, needed substantial cash infusions in 2002 to pay vendor accounts and buy necessary raw materials. Accordingly, Fincke and others prepared a business plan in October 2002 ("October 2002 Business Plan") to solicit further investments and additional investors. They sent the October 2002 Business Plan to each of the three extant investors, as well as to Joseph Zimmel, a new, potential investor. The Plan contained this statement:
The bankruptcy court found that this was a misrepresentation: patent counsel never offered any opinion, formal or informal, on this matter, and Fincke knew or should have known of the falsity of the statement. Access II, 404 B.R. at 614-15, 666; Access IV, 460 B.R. at 70-71, 75-76.
Fincke's first argument on appeal is that the bankruptcy court erred in so finding falsity. He argues that the court erred by "converting" the statement "from a statement that Fincke had been advised that there were no patent infringements, to the assertion, never made, that Fincke had received a formal legal opinion." He also argues that the bankruptcy court failed to appreciate the context of the statement, which he claims went to great lengths to warn investors that the advice could not be relied upon.
Both arguments fail. The bankruptcy court's finding that patent counsel never
The bankruptcy court also correctly concluded that the warnings could not "cure the obvious falsity of this clear representation of fact." Access II, 404 B.R. at 666. Those warnings, that "there can be no assurance that [the] opinion is correct in all respects" or that others disagreed as evidenced by pending litigation, merely suggest that the supposed advice was not dispositive. But Massachusetts law does not permit a seller to defeat his statutory obligation of truthfulness by suggesting that a nonexistent opinion should not be relied upon, or by hedging his misrepresentation. Cf. Marram, 809 N.E.2d at 1028 ("[T]o permit the seller of securities to discharge, or to defeat, his statutory obligation of truthfulness to the buyer merely by attaching an integration clause to a subscription agreement would enfeeble the statute.").
Fincke's next argument on appeal appears to be that it was somehow inconsistent for the court to find this particular misstatement was material to investors. Fincke argues that the bankruptcy court found the numerous other statements he made were not misrepresentations and that the court disbelieved many of the investors' assertions of reliance at the damages trial.
There is no inconsistency. The standard for materiality is "objective," only requiring a "substantial likelihood" that the (hypothetical) reasonable investor would find that the misrepresentation "significantly altered the `total mix' of information made available." See Marram, 809 N.E.2d at 1030 (quoting Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 641 (3d Cir.1989)). It does not require that the particular investor in question actually so relied. Id. at 1026-27 ("[B]ecause ... § 410(a)(2) ... holds the seller liable for inaccurate disclosure or nondisclosure of material information, foremost among the elements that the buyer does not have to prove is reliance." (citation and internal quotation marks omitted)).
As the bankruptcy court found, affirmatively representing that patent counsel "has reviewed and preliminarily passed muster on the patent soundness of the intellectual property" significantly alters the total mix of information about the proposed
Finally, Fincke challenges the court's finding as to damages.
Only Fincke presses his appeal. He claims that he does not dispute the court's finding that the language of § 410(a)(2) limits liability to instances where securities were sold "`by means of' [a] material misstatement," or that reliance need not be shown. Rather, he argues that the court's reasoning is insufficient to meet the "by means of" requirement because it is based solely on the timing of the investor's receipt of the misrepresentation and the dates of the actual investments made, and not, he says, on the role the misstatement actually played in Zimmel's decision to invest. But the alternative standard he appears to suggest for determining the role played, and so for determining if the "by means of" requirement has been met, comes too dangerously close to a reliance or loss-causation requirement.
There is little discussion of the "by means of" requirement under § 410(a)(2) in the case law, including in Massachusetts, in part because the issue rarely arises. See 12A J.C. Long, Blue Sky Law §§ 9:117.44-45 (2014) (explaining "[i]t should be obvious that virtually all" § 410(a)(2) cases satisfy the requirement "if the misrepresentations are made before the sale"). We turn for guidance to the related federal legislation, and in particular to "Federal decisions under § 12(2), as well as to the plain language of the statute." Marram, 809 N.E.2d at 1025 (noting that Mass. Gen. Laws § 410(a)(2) "is almost identical with § 12(2) of the Securities Act of 1933, 15 U.S.C. § 771[(a)](2)" (citations and internal quotation marks omitted)).
Several federal courts have held that the "by means of" language in § 12(2) of the federal statute requires "some causal connection between the misleading representation or omission and [the] plaintiff's purchase."
We find this "use" approach persuasive. Given that a central purpose of the statute is to provide a "heightened deterrent" against the use of misrepresentations in selling securities, Marram, 809 N.E.2d at 1025 (citation and internal quotation marks omitted), we find that the requisite connection is established when the communication containing the material misrepresentation was used to effect the sale — and not whether it was actually successful in securing the sale that, in any event, transpired. See Jackson, 533 F.2d at 830 n. 8.
That the bankruptcy court discounted Zimmel's testimony that he had read the plan and relied on it as to his investments, id. at 78-79, 82, does not undermine the conclusion that Fincke used the plan to secure the investments. Reliance may be an easy or obvious way to demonstrate that a sale was "by means of" the relied upon misrepresentation, but it is not necessary. In context, the seller's actions alone may also show that a subsequent sale was "by means of" the misrepresentation. Cf. Marram, 809 N.E.2d at 1025 ("Section 410(a)(2) provide[s] a heightened deterrent against sellers who make misrepresentations by rendering tainted transactions voidable at the option of the defrauded purchaser, regardless of the actual cause of the investor's loss." (citations and internal quotation marks omitted) (alteration in original)).
Our interpretation is supported by the statutory limitation on defenses. Mass. Gen. Laws ch. 110A, § 410(a)(2), provides only "two affirmative defenses in addition to a direct attack on one of the prima facie elements of a § 410(a)(2) claim": (i) that the plaintiff "actually knows that a representation is false or knows that existing information has been withheld," and (ii) that the defendant "did not know, and in the exercise of reasonable care could not have known, of the untruth or omission." Id. at 1027-28 (citations and internal quotation marks omitted). The second keeps the emphasis squarely on the seller's actions; the first prevents buyers from intentionally exploiting misrepresentations to insure their investments.
Affirmed.
The Business Plan also made plain that others disagreed that the AED did not infringe any known patents by disclosing that Access had already been sued for patent infringement (emphasis added):
15 U.S.C. § 771(a)(2). There is an important difference between the two causes of action, however: the federal cause of action does require loss causation, as expressly provided for in a separate provision not relevant here. Compare 15 U.S.C. § 771(b) (providing lack of loss causation as an affirmative defense), with Mass. Gen. Laws ch. 110A, § 410(a)(2) (providing no such limitation on or defense to liability).
These are two distinct standards. "Intending" there to be some causal relationship does not entail that there will actually "be" some causal relationship. We adopt the "intended or perceived as instrumental" standard, to the extent that what the Second Circuit meant by this is that "the communication must have been used." (Despite talk of intentionality, we adopt an objective standard that determines use without reference to the seller's actual state of mind.)