Byron L. Stubbs, Salt Lake City, Utah, for defendant-appellant.

Lowell N. Hawkes, Salt Lake City, Utah (Harold G. Christensen of Worsley, Snow & Christensen, Salt Lake City, Utah, with him on the brief), for plaintiffs-appellees.

Before LEWIS, Chief Judge, HOLLOWAY, Circuit Judge, and CHRISTENSEN, Senior District Judge.*

CHRISTENSEN, Senior District Judge.

This appeal from judgment on the verdict in a securities case raises questions concerning the applicable statute of limitations and the elements of scienter and reliance in so-called 10b-5 actions.

Plaintiffs' complaint was 'based upon violation of laws of the United States and the State of Utah including the proscriptions of Section 17(a) of the Securities Act of 1933 (15 U.S.C. Sec. 77q), Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78j), Rule 10b-5 promulgated pursuant thereto by the United States Securities and Exchange Commission (17 C.F.R. Sec. 240 10b-5) . . . and the Utah Uniform Securities Act (Utah Code Ann. 61-1-1 et seq. (1953)).'

There is little point in reciting the other allegations set out in plaintiffs' pleadings since they were generally denied by the appellant Conk and the partial transcript of the evidence before us is insufficient to determine with precision any particular allegations that were supported by substantial evidence on the whole record. But from the partial transcript of the testimony of one of the plaintiffs, the exhibits before us, and record statements of counsel during the trial indicating agreement as to certain circumstances, at least these structural facts emerge in view of inferences that may be drawn favorably to the verdict:1

Defendant-appellant Conk in August, 1968, was granted a distributorship for car wash units by Hanna Enterprises, a nonincorporated out-of-state business.2 In the late fall of that year Conk contacted john E. Olson, one of the plaintiff-appellees, and later there was a meeting, or meetings among appellant and appellees as part of a larger group of prospective investors, when an investment proposal was explained by Conk and his associate, Stewart, now deceased. Conk made untrue statements or omitted to state facts necessary to render what he said not misleading, and these statements and omissions were material to the investment judgment of the appellees who relied upon them in making investments in the car washing business being thereby promoted by appellant, to their several damages in the amounts found by the jury.3

Appellant Conk's answer did not plead the statute of limitations nor any other affirmative defense. It was agreed, however, at the final pre-trial conference, that limitations would be one of the issues to be tried. For some reason the pre-trial order included in the record does not so provide, but the transcript of discussions before the trial judge assumes such an agreement and understanding, as do we. The pre-trial order as filed recites that 'there are no contested issues of law' and that 'there are no uncontroverted facts in addition to those established by the pleadings and discovery.'

Far from this being so as to the law however, substantial trial time was consumed by arguments between the parties, which have to a degree been projected here, whether the issue of the statute of limitations had been waived, whether a motion to dismiss on the ground that the claims were barred was timely, whether the statute in the absence of pleading could be considered at all, whether the defendant had been guilty of sharp practice by delaying the pressing of that defense until the opening of the trial, whether on the assumption that a two-year state statute was applicable plaintiffs could successfully claim that they did not discover the alleged fraud until within two years of the commencement of their action in view of allegations in their complaints that they had discovered the fraud one month earlier, and whether the discovery of some elements of fraud that early was effective to start the running of the statute if the greater part of its circumstances and seriousness was not discovered until afterwards.

These problems may be shortly disposed of for the purposes of this case by our rejecting, as did the trial court ultimately, appellant's basic contention that since plaintiffs had claimed under both the 1933 and the 1934 Acts, and also had asserted a claim in reliance upon the Utah Blue Sky Law,4 one of the shorter limitation periods should apply, rather than the three-year period provided by state statutes for fraud cases which this court his repeatedly held applicable to implied rights of action under the Securities Exchange Act of 1934.5

The only serious problem in this case arises from appellant's contention that the trial court erroneously eliminated from plaintiffs' 10b-5 action any requirements for scienter and reliance, and submitted the case to the jury on the basis of a restrictive view of the elements referred to in Stevens v. Vowell, 343 F.2d 374 (10th Cir. 1965).6

The question of whether some species of scienter should have been recognized in the instructions as an element of appellant's 10b-5 action was squarely presented to the trial court in pre-submission conferences.7 The trial court indicated that it might give a modified negligence instruction in this area, and indeed did so as to the other defendant Hanna which was claimed to have been involved through publications furnished to the appellant Conk. But as to the latter, apparently its reading of Stevens v. Vowell, 343 F.2d 374 (10th Cir. 1965), supra, led it to apply rather literally the language that in a 10b-5 action 'it is only necessary to prove one of the prohibited actions such as the material misstatement of fact or the omission to state a material fact', with the result that the subject of scienter was ignored8 except as it might be gathered from the language of Rule 10b-5 itself. It is to be noted, however, that the element of 'reliance' was covered beyond the otherwise restrictive interpretation of the language of Stevens and in harmony with Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972).

Other courts have interpreted the language of Stevens as meaning that there is no requirement of scienter in this circuit more burdensome than a showing of negligence.9 This court has rejected such an interpretation expressly,10 which rejection undoubtedly survives any contrary inference that might be drawn from dicta in our latest opinion.11

The emphasis in Stevens v. Vowell of the necessity of a flexible interpretation of the security laws to cover all conduct, schemes and contrivances within its scope independently of the rigid requirements of common law fraud has been often quoted. We reaffirm that essential principle as it constitutes the hallmark, genius and strength of modern securities legislation. Yet the facts and setting of Stevens v. Vowell do not permit the extrapolation of the view for which it sometimes is cited. The case involved an attack by appellant upon the jurisdiction of the trial court 'for the reason that the evidence wholly fails to establish any of the elements required to make out a case under 15 U.S.C.A. 78j and Rule X-10B-5.' It is rather clear from the opinion that the defendant knowingly made untrue statements and omissions of material facts which by their very nature and context were misleading.12 There are two quotations which frequently have been applied out of context to indicate that this circuit in 10b-5 cases recognizes neither any species of scienter nor reliance as essential elements. We have already quoted one. The other is as follows:

'It will be observed that neither the statute nor the rule requires that the manipulative or deceptive device or contrivance be a part of or actually transmitted in the mails or instrumentality of interstate commerce. All that is required is that such a device or contrivance be used or employed in connection with the use of the instruments of interstate commerce or the mails.'

This court concluded 'that there is abundant evidence to establish each and every element required under the statute and rule. The trial court therefore had jurisdiction over the subject matter.'

The same year Judge Doyle, author of Trussell v. United Underwriters, Ltd., 228 F. Supp. 757 (D.Colo.1964), still the leading district court case on the subject, had before him again in Parker v. Baltimore Paint And Chemical Corp., 244 F. Supp. 267 (D.Colo.1965), the question of whether scienter and reliance were essential elements. It was stated:

'We concluded in Trussell that these elements are essential in a 10b-5 case. Our reasons are extensively articulated in that decision, and although the case at bar involves an allegedly defrauded seller rather than a purchaser, the rule applies nevertheless. Plaintiff argues that the decision of this Circuit in Stevens v. Vowell (10 Cir. 1965) 343 F.2d 374, dispenses with the mentioned requirements. However, Stevens does not specifically consider the question and the dicta which is the source of the plaintiff's contention does not in our opinion require adoption of a ruling which is contrary to that expressed in Trussell.'

In Gilbert v. Nixon, 429 F.2d 348 (10th Cir. 1970), supra, this court agreed with the district court that the fractional interests in suit were securities within the meanings of 15 U.S.C. 77b(1) of the 1933 Act, and 15 U.S.C. 78c(a) (10) of the 1934 Act, and K.S.A. 17-1252(j). The appellants in their brief had considered liability under Rule 10b-5 to be most appropriate but they also pursued remedies under, and the trial court appeared to have based its decision upon, claimed violations of Section 12(2) of the Securities Act of 1933, 15 U.S.C. 77l(2), comparable to the Kansas statute. This court considered whether the trial court in denying recovery by appellants applied to the evidence the correct legal principles. It recognized that purchasers of securities have an implied action for damages under 10b-5 in addition to a remedy under Section 12(2) and that the two provisions, as interpreted, are not altogether consistent with each other, citing Trussell. The court then said:

'Had appellants invoked Section 12(2) alone our task in formulating the proper legal standards for recovery would have been simplified. We note, however, that a private action under Rule 10b-5 originated in the need for a sellers remedy where none had otherwise been provided. Once a remedy was implied for the seller, it was extended to include the buyer even though relief was already available to him under Section 12(2). Since in this case recovery is sought under both provisions, we resolve any conflict between them in favor of Section 12(2), where the statutory remdey is explicit, (footnotes omitted except to note that in footnote 14 the court says 'in reaching this conclusion we do not mean to say that buyers never have an action under 10b-5 independent of Section 12(2).').'

Later in the opinion it was commented:

'While the purchaser has been required to prove his reliance in an action under 10b-5 by some courts, (citing among others Trussell v. United Underwriters, Ltd., 228 F. Supp. at 773, supra) we do not place the burden on appellants in this case as we have decided that in such circumstances the rules of Section 12(2) should prevail. We held in Woodward v. Wright, supra, 266 F.2d (108) at 116, that 'to say that purchaser reliance is a prerequisite to seller liability is to import something into the statute which is not there.' We do not think the result should be otherwise because appellants sought recovery under 10b-5 as well as Section 12(2).

'One is not to be held liable, however, because of his misleading misrepresentation or omission of material fact, the truth of the matter being unknown to the purchaser, if the party responsible for the misrepresentation or omission sustains the burden of proving that he did not know, and in the exercise of reasonable care could not have known that it was a misrepresentation or omission. Once again, as in the case of reliance, the seller's burden of proving lack of scienter, made necessary by the specific provisions of Section 12(2), see Woodward v. Wright, supra, 266 F.2d at 116; Wilko v. Swan, 346 U.S. 427, 431, 74 S. Ct. 182, 98 L. Ed. 168 (1953), should not be affected in this case by different requirements in this regard under 10b-5.'

In Mitchell v. Texas Gulf Sulphur Company, 446 F.2d 90 (10th Cir. 1971), supra, this court again referred to Stevens v. Vowell, stating:

'In civil actions instituted on the basis of 10b-5 violations, the keynote of which is fraud, the full panoply of common law fraud elements-- misrepresentation or nondisclosure, materiality, scienter, intent to defraud, reliance and causation-- have crept in and played varying roles of significance. However, a number of these elements have diminished in importance in private actions, and we have stated in Stevens v. Vowell, 343 F.2d 374, 379 (10th Cir. 1965), that 'it is not necessary to allege or prove common law fraud to make out a case under the statute and rule. It is only necessary to prove one of the prohibited actions such as the material misstatement of fact or the omission to state a material fact.' Notwithstanding, appellants urge that appellees have failed to establish the presence of most of the common law fraud ingredients, i.e., misrepresentation or nondisclosure of material facts, scienter, intent to defraud, reliance, and some semblance of privity. A full measure of our attention will be devoted to each of these constituent parts.'

After disposing of the claim of immateriality by holding that 'the trial court had little difficulty finding from the testimony of Fogarty and other corporate officers that the April 12 statement was made in a manner reasonably calculated to influence the investing public', this court proceeded to examine the problem of scienter. Judge Hill, the author of Stevens v. Vowell, stated for the court:

'But while some degree of scienter is required, it does not equate with the intent to defraud required in a common law fraud action. Globus v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir. 1969); Heit v. Weitzen, supra (402 F.2d 909); Astor v. Texas Gulf Sulphur Company, 306 F. Supp. 1333 (S.D.N.Y.1969). Contrariwise, in the Eighth Circuit, City National Bank of Fort Smith, Ark. v. Vanderboom, 422 F.2d 221 (8th Cir. 1970), and the Ninth Circuit, Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961), the rule is that scienter is not required to maintain a private 10b-5 damage action. We have dealt with the issue under significantly different circumstances in Stevens v. Vowell, 343 F.2d 374 (10th Cir. 1965). But in Gilbert v. Nixon, 429 F.2d 348, 357 (10th Cir. 1970), we considered the identical issue in a case involving Section 12(2) and Rule 10b-5. The rule there articulated is applicable here. 'One is not to be held liable . . . because of his misleading misrepresentation or omission of material fact, the truth of the matter being unknown to the purchaser, if the party responsible for the misrepresentation or omission sustains the burden of proving that he did not know, and in the exercise of reasonable care could not have known that it was a misrepresentation or omission.'

'Two times during his opinion the trial judge recited: 'The record here discloses that the press release issued by defendants was misleading, intentionally deceptive, inaccurate and knowingly deficient in material facts.' . . . Confronted with the abundance of evidence in the record, we cannot conclude that TGS sustained its burden of proving that it did not know of the misrepresentation, nor was it demonstrated that with due diligence TGS could not have known of the faultiness of the statement.'

In Reyos v. United States, 431 F.2d 1337 (10th Cir. 1970), the trial court was reversed by this court inter alia because of the lack of proof of 'reliance':

'In Stevens v. Vowell, 343 F.2d 374 (10th Cir.), we considered a private action under Regulation 10b-5. The trial court had made findings that critical facts had been concealed from the plaintiff investor and misrepresentations were made to him. The court also specifically found that the plaintiff had there relied upon all the representations made to him by the defendants. These findings were supported by the record. There was no issue on appeal as to reliance, and little as to the fact of misrepresentations. We there stated that it was not necessary to prove common law fraud, but necessary to prove 'one of the prohibited actions.' This referred to one of the (a), (b) or (c) subsections of the rule. In the cited case the (b) subsection was relied upon and with the reliance established the case was proven. The opinion does not hold that reliance is not required, as the plaintiff urges. It is a basic element of a cause of this nature, and was there shown.'

In reversing in part and affirming in part the last mentioned decision subnom., Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972), supra, Mr. Justice Blackmun stated for the court: