Filed: Jan. 13, 2015
Latest Update: Mar. 02, 2020
Summary: JOSEPH R. ZIMMEL;3, The bankruptcy court ruled that rescission was no longer, available as a remedy because the investors no longer owned the, securities under the confirmed Chapter 11 plan, but found they were, entitled to damages calculated as the amount that would be, recoverable upon a tender.
United States Court of Appeals
For the First Circuit
No. 14-1276
IN RE: ACCESS CARDIOSYSTEMS, INC.
Debtor
RANDALL FINCKE,
Appellant,
v.
ACCESS CARDIOSYSTEMS, INC.; JOHN J. MORIARTY; RICHARD F.
CONNOLLY, JR.; JOSEPH R. ZIMMEL; NORTH AMERICAN ENTERPRISES,
INC.; JOHN MORIARTY AND ASSOCIATES,
Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Lynch, Chief Judge,
Howard and Barron, Circuit Judges.
John J.E. Markham, II, with whom Markham & Read was on brief,
for appellant.
Barry C. Klickstein, with whom Sara A. Colb and Day Pitney LLP
were on brief, for appellees.
January 13, 2015
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 start-
up 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
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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).1 These findings were affirmed
on appeal to the district court. See Fincke v. Access
Cardiosystems, Inc. (In re Access Cardiosystems, Inc.),
488 B.R. 1,
7-10 (D. Mass. 2012).
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.
I.
The leading Massachusetts case on Mass. Gen. Laws
ch. 110A, § 410(a)(2) is Marram v. Kobrick Offshore Fund, Ltd., 809
N.E.2d 1017 (Mass. 2004). Like its federal counterpart, the
Securities Act of 1933, 15 U.S.C. §§ 77a et seq., the state statute
1
This "interminable case" has numerous chapters, not all
relevant here; we follow the district court's numbering of these
bankruptcy decisions. See Fincke v. Access Cardiosystems, Inc. (In
re Access Cardiosystems, Inc.), 488 B.R. 1, 3, 5-6 (D. Mass. 2012)
(listing case history).
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"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":
While not imposing strict liability on the
seller for untrue statements or omissions,
[the state law] holds the seller to the heavy
burden of proof "that he did not know, and in
the exercise of reasonable care could not have
known, of the untruth or omission."
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
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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:
Access has been advised by its patent counsel
that its product does not infringe any patents
known to him.
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.2
2
The paragraph containing this statement appears in Section
Eleven, "Risk Factors," of the October 2002 Business Plan. That
paragraph reads in full (emphasis added):
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Both arguments fail. The bankruptcy court's finding that
patent counsel never offered any opinion, formal or informal, is
fully supported by the record. At most, Fincke had "discussed" the
claims from the Philips letter with patent counsel, and "related
[Fincke's] personal conclusion that the [device] did not infringe."
Access II, 404 B.R. at 666. We agree with the bankruptcy court's
conclusion that this is a "far cry from receiving 'advice.'"
Id.
And Fincke's attempt to distinguish between "advice" and "formal
opinion" is particularly frivolous given that the sentence
immediately following the Plan's misstatement expressly refers to
"that opinion."
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
Many U.S. and foreign patents have been issued to
Access's competitors with respect to AED's and their
constituent components. Access has been advised by its
patent counsel that its product does not infringe any
patents known to him. However, there can be no assurance
that that opinion is correct in all respects.
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):
Access is a defendant in a patent infringement claim
brought by Cardiac Sciences, Inc. Access believes that
it has a complete defense to the infringement claim.
However, there can be no assurance that the Court hearing
the matter will agree with Access. The cost of
litigation may have a material adverse impact on Access,
even if Access prevails.
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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.").
II.
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
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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 investment's
risk. Access II, 404 B.R. at 666; see Access
IV, 460 B.R. at 76.
Fincke's argument as to materiality falls far short of meeting the
clear error standard; the bankruptcy court made no mistake.
Palmacci v. Umpierrez,
121 F.3d 781, 785 (1st Cir. 1997) (noting
that finding clear error requires a "definite and firm conviction
that a mistake has been committed" (citation and internal quotation
marks omitted)).
III.
Finally, Fincke challenges the court's finding as to
damages.3 Here, the bankruptcy court held that only one investor,
3
The bankruptcy court ruled that rescission was no longer
available as a remedy because the investors no longer owned the
securities under the confirmed Chapter 11 plan, but found they were
entitled to damages calculated as the amount that would be
recoverable upon a tender. Access Cardiosystems, Inc. v. Fincke
(In re Access Cardiosystems, Inc.), 438 B.R. 16, 23 (Bankr. D.
Mass. 2010) (hereinafter Access III). Fincke does not contest
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Zimmel, was entitled to damages for investments solicited "by means
of" the material misstatement, and, even then, as to only some of
his investments. See Access IV, 460 B.R. at 82-83. The bankruptcy
court found that Zimmel and the other investors' remaining
investments, though made after the material misstatement, had not
been solicited by means of that misstatement.
Id. All parties
appealed to the district court, which affirmed. Access
Cardiosystems, 488 B.R. at 9-10.
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.
this. Cf. Mass. Gen. Laws ch. 110A, § 410(a)(2) (providing for
damages).
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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. § 77l[(a)](2)" (citations
and internal quotation marks omitted)).4
4
The relevant provision reads:
(a) In general[.] Any person who . . .
(2) offers or sells a security (whether or not
exempted by the provisions of section 77c of
this title, other than paragraphs (2) and (14)
of subsection (a) of said section), by the use
of any means or instruments of transportation
or communication in interstate commerce or of
the mails, by means of a prospectus or oral
communication, which includes an untrue
statement of a material fact or omits to state
a material fact necessary in order to make the
statements, in the light of the circumstances
under which they were made, not misleading
(the purchaser not knowing of such untruth or
omission), and who shall not sustain the
burden of proof that he did not know, and in
the exercise of reasonable care could not have
known, of such untruth or omission,
shall be liable, subject to subsection (b) of this
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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." Sanders v. John Nuveen & Co., 619
F.2d 1222, 1225 (7th Cir. 1980); see also Jackson v. Oppenheim,
533
F.2d 826, 830 & n.8 (2d Cir. 1976). Although the characterization
of this connection as "causal" raises clarity problems, the cases
themselves are instructive. Cf.
Sanders, 619 F.2d at 1225
(explaining that it is "well settled" that "by means of" does not
create a reliance requirement). Sanders found that the requirement
was satisfied by the use of a misleading prospectus to sell
"securities of which those purchased by the plaintiff were a part,"
even though the plaintiff never received the report.
Id. at 1225-
27. Conversely, Jackson held that the requirement was not met
where the allegedly misleading omissions occurred during a
conversation at which it was "undisputed that no sale was
section, to the person purchasing such security
from him, who may sue either at law or in equity in
any court of competent jurisdiction, to recover the
consideration paid for such security with interest
thereon, less the amount of any income received
thereon, upon the tender of such security, or for
damages if he no longer owns the security.
15 U.S.C. § 77l(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. § 77l(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).
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contemplated or discussed," such that "the evidence [was] clear
that the challenged communication was neither intended nor
perceived as instrumental in effecting the sale." Jackson, 533
F.2d at 829-30 (emphasis added).
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.8.5 This is an
5
The Second Circuit's language exhibits the same tension
identified above. First, the court states that while "the
statement that 'reliance' need not be proven by plaintiffs in 12(2)
actions has been broadly read by several courts[,] [t]heir purport
is that a plaintiff need not prove that the challenged
communication had a 'decisive effect' in his decision to buy the
stock." Jackson, 533 F.2d at 830 n.8 (collecting cases) (citations
omitted). That is, the court explains, "[w]here liability is not
based on an offer containing a misleading communication, but is
based on a sale, Section 12(2) requires there to be some causal
relationship between the challenged communication and the sale,
even if not 'decisive.'"
Id. (emphasis added) (citations omitted).
Then, second, the court summarizes its reasoning: "In short, the
communication must have been intended or perceived as instrumental
in effecting the sale."
Id. (emphasis added).
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
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objective standard, readily met. This gives content to the phrase
"by means of" that is consistent with the plain language of the
statute, and follows the federal decisions to which we are directed
by Marram.
Accordingly, the bankruptcy court committed no error in
looking to objective evidence of whether Fincke had used the
October 2002 Business Plan to solicit particular investments.
Access IV, 460 B.R. at 82. Contrary to what Fincke argues, the
court did not merely rely on the timing of the investments relative
to the plan, but looked to objective evidence of whether Fincke had
used the October 2002 Business Plan to solicit particular
investments.6 See
id. This is an objective test. The court
found that Fincke provided Zimmel with the October 2002 Business
Plan when Fincke met with Zimmel in October to discuss Zimmel's
becoming a new investor in Access. Access
II, 404 B.R. at 615.
Zimmel had not purchased Access shares earlier and was not part of
the original investor group.
Id. Zimmel then purchased $1 million
in Access shares later that month on October 30 and another
standard that determines use without reference to the seller's
actual state of mind.)
6
We need not decide whether a mere timing connection is
sufficient. It would, however, be consistent with the Supreme
Court's construction of a related provision in the federal law,
Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j.
See SEC v. Zandford, 535 U.S. 813, 820-25 (2002) (defining "in
connection with" in terms of the misrepresentation and investment
"coincid[ing]").
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$500,000 in shares in November. Id.; Access IV, 460 B.R. at 82-83.
These facts, the court correctly concluded, were sufficient to show
that Fincke had solicited Zimmel's October and November investments
"by means of" the October 2002 Business Plan. Access
IV, 460 B.R.
at 83 ("[B]ecause Zimmel need not demonstrate actual reliance on
the misstatement, the use of the Business Plan to solicit that sale
of stock allows Zimmel to recover damages under § 410(a)(2) for
that particular transaction." (emphasis added)).
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),
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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.
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