Dunn v. Borta

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
EDWARD M. DUNN, 
Plaintiff-Appellant,
v.
RONALD T. BORTA; PETER C.
LINZMEYER; LESLIE A. DAVIS,  No. 03-1362
Defendants-Appellees,
and
RONBOTICS CORPORATION,
Defendant.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Gerald Bruce Lee, District Judge.
(CA-02-952-A)
Argued: January 20, 2004
Decided: May 19, 2004
Before NIEMEYER, KING, and DUNCAN, Circuit Judges.
Reversed and remanded by published opinion. Judge King wrote the
opinion, in which Judge Duncan joined. Judge Niemeyer wrote a dis-
senting opinion.
COUNSEL
ARGUED: Raymond Charles Fay, BELL, BOYD & LLOYD,
P.L.L.C., Washington, D.C., for Appellant. Sally Ann Hostetler,
2 DUNN v. BORTA
ODIN, FELDMAN & PITTLEMAN, P.C., Fairfax, Virginia, for
Appellees. ON BRIEF: Andrew North Cook, Michael Jay Schrier,
BELL, BOYD & LLOYD, P.L.L.C., Washington, D.C., for Appel-
lant. Bruce Michael Blanchard, ODIN, FELDMAN & PITTLEMAN,
P.C., Fairfax, Virginia; Christopher Ivan Kachouroff, ROBERT H.
KLIMA & ASSOCIATES, Manassas, Virginia, for Appellees.
OPINION
KING, Circuit Judge:
Plaintiff Edward Dunn appeals the decision of the Eastern District
of Virginia, rendered in February 2003, dismissing his securities fraud
claims against defendants Borta, Linzmeyer, and Davis for failure to
state a claim upon which relief can be granted, see Fed. R. Civ. P.
12(b)(6), and for failure to plead fraud with particularity, see id. 9(b).
Dunn maintains that he was defrauded out of more than a half-million
dollars on his investment in Ronbotics Corporation and that the court
erred when it dismissed the claims he asserted under the Virginia
Securities Act. As explained below, Dunn’s Virginia state law claims
pass muster under the applicable pleading requirements, and we
reverse and remand.
I.
A.
Ronbotics Corporation is a privately held Virginia corporation
founded to develop and manufacture electric motion platforms, used
primarily in arcade games and training simulators. Ronbotics was
operated, in part, by the individual defendants: Ronald Borta, its
Chief Technology Officer and Chairman of the Board; Leslie Davis,
its President and Chief Operating Officer; and Peter Linzmeyer, its
Chief Executive Officer (collectively, the "Defendants").1
1
The facts set forth in this section are taken from Dunn’s amended
complaint, which, for purposes of appeal, we must accept as true. See De
Sole v. United States, 947 F.2d 1169, 1171 (4th Cir. 1991) ("The court,
in deciding a 12(b)(6) motion, must take all wellpleaded material allega-
tions of the complaint as admitted and view them in the light most favor-
able to the plaintiff.").
DUNN v. BORTA 3
In January 2001, Ronbotics approached Edward Dunn about
investing in its business, providing him with a Confidential Informa-
tion Memorandum (the "Memorandum") describing Ronbotics’s cur-
rent and proposed product lines, business prospects, assets, and
marketing strategy, and including financial reports and other informa-
tion. The Memorandum asserted that "Ronbotics has developed pro-
prietary motion control technology currently embodied in its patented
electric motion platforms" and that "[t]he low cost of Ronbotics’ pat-
ented platforms is attributable to its proprietary mechanical and sys-
tems designs, proprietary software and trade secret manufacturing
processes."
In addition, the Memorandum made several representations con-
cerning Ronbotics’s business prospects. For example, it asserted that
major manufacturers such as SEGA, Namco, and Gaelco were design-
ing products using the Ronbotics platform, and it specified the stage
of development for each of these companies’ designs. The Memoran-
dum further asserted that Ronbotics was involved in discussions with
General Electric and other major distributors regarding Ronbotics’s
products and that it had sold 225 units of its principal product, the
CoasteRider, prior to January 2001. Finally, the Memorandum made
projections about Ronbotics’s future growth and asserted that the
company was negotiating with a manufacturing facility in Oklahoma
to handle overflow production.
During the third week of January 2001, Dunn met with Borta and
Linzmeyer to discuss his possible investment in Ronbotics. At the
meeting, which lasted several hours, Dunn was asked to invest
$500,000 in the company by purchasing its stock at $3.00 per share.
When he expressed doubt that Ronbotics’s stock was worth that price,
Linzmeyer and Borta suggested that Dunn instead purchase a convert-
ible subordinated note issued by the company. Dunn then voiced con-
cern that Ronbotics did not possess sufficient assets to satisfy such a
note if the company went bankrupt. Linzmeyer and Borta responded
that Ronbotics owned two patents, one for a motion pinball machine
and one for the electric motion platform used in the CoasteRider; that
the patents were "worth millions"; that an outside investment firm had
valued the patents at between $2 million and $4 million; and that the
patents were the company’s primary assets. When Dunn inquired as
to the protections Ronbotics had in place to ensure that competitors
4 DUNN v. BORTA
did not misappropriate its technology, Linzmeyer and Borta repre-
sented that the company’s patents protected against such misappropri-
ation.
On January 31, 2001, Linzmeyer, on behalf of Ronbotics, executed
a convertible subordinated note (the "Note"),2 by which Ronbotics
promised to pay Dunn the principal sum of $500,000 on January 31,
2004, plus ten percent interest per annum, payable on the first day of
each calendar quarter. Ronbotics made the Note’s first required inter-
est payment to Dunn on April 1, 2001, but it failed to make any sub-
sequent interest payments through October 1, 2002. Exercising his
rights under the Note, Dunn then demanded immediate payment of all
principal and interest due thereon. The Note was not paid, and Ronbo-
tics subsequently filed for bankruptcy in the Eastern District of Vir-
ginia bankruptcy court.
B.
On June 28, 2002, Dunn filed a complaint in the Eastern District
of Virginia against Ronbotics and the Defendants, alleging violations
of federal and state securities laws, common law fraud, and breach of
contract. Ronbotics did not enter an appearance in the action, but the
Defendants filed motions to dismiss pursuant to Rules 9(b) and
12(b)(6) of the Federal Rules of Civil Procedure.3 On October 15,
2002, the court granted the motions to dismiss without prejudice, but
authorized Dunn to amend his complaint.
On October 29, 2002, Dunn filed an amended complaint, naming
the same defendants, which is the operative complaint in this appeal
(the "Complaint"). The Complaint made numerous factual allegations
against the Defendants. First, it alleged that the Defendants had
authored and approved the Memorandum, which contained false and
2
The Note gave Dunn the option of converting it into shares of com-
mon stock in Ronbotics and provided that it was subordinated in right of
payment to all existing and future secured indebtedness of Ronbotics.
3
Federal Rule of Civil Procedure 9(b) provides that, "[i]n all averments
of fraud or mistake, the circumstances constituting fraud or mistake shall
be stated with particularity." Rule 12(b)(6) authorizes motions to dismiss
for "failure to state a claim upon which relief can be granted.
DUNN v. BORTA 5
misleading statements in that it referred to Ronbotics’s patented prod-
ucts, even though the patents were only pending when the Memoran-
dum was provided to Dunn. Complaint ¶¶ 18, 30, 32. The Complaint
further alleged that the Defendants orally made false statements con-
cerning the existence and value of the patents and failed to disclose
that Borta, the inventor, had retained certain reassignment rights in
the patents. Complaint ¶¶ 31-32.
Next, the Complaint alleged that the Memorandum contained false
and misleading statements regarding the status of Ronbotics’s busi-
ness. Complaint Part G. In particular, the Complaint alleged that, con-
trary to the Memorandum, SEGA, Namco, and Gaelco were not in the
process of designing products using Ronbotics’s motion platform.
Complaint ¶¶ 36-39. The Complaint further alleged that Ronbotics
had never engaged in substantive discussions with General Electric
and had never been in serious negotiations with any other major dis-
tributors. Complaint ¶¶ 40-43. Also, according to the Complaint, the
Memorandum falsely asserted that Ronbotics had sold 225 Coaste-
Riders, when in fact the company had not sold anywhere near that
number prior to January 2001. Complaint ¶¶ 46-47. In addition, the
Complaint alleged that the Memorandum provided misleading and
unrealistic financial information. Complaint ¶¶ 50-53.
Based on its factual allegations, the Complaint alleged eight sepa-
rate causes of action. Counts III and IV are the only counts relevant
here, as Dunn has appealed only the two claims arising under the Vir-
ginia Securities Act (the "Act").4 Count III alleged violation of sec-
tions 13.1-502 and 13.1-522(A) of the Act.5 Complaint ¶¶ 88-92.
Section 13.1-502 prohibits selling securities by means of an untrue
statement or omission of a material fact.6 Section 13.1-522(A) creates
4
In the Complaint’s six counts not on appeal, Dunn alleged violations
of various federal and Maryland securities laws, common law fraud, and
breach of contract.
5
The Virginia Securities Act is an adoption, with some variations, of
the Uniform Securities Act of 1956. Section 13.1-522(A) is modeled
after section 410(a) of the Uniform Securities Act. Section 410(a) has
since been revised and can now be found at section 509(b) of the 2002
version of the Uniform Securities Act.
6
Section 13.1-502 makes it unlawful, in the offer or sale of any securi-
ties, to "obtain money or property by means of any untrue statement of
6 DUNN v. BORTA
civil liability for the sale of a security by means of such an untrue
statement or omission.7 Count IV alleged violation of section 13.1-
522(C) of the Act, which provides for control person liability for vio-
lations of section 13.1-522(A).8 Complaint ¶¶ 93-96.
On November 12, 2002, the Defendants again filed motions to dis-
miss pursuant to Rules 9(b) and 12(b)(6). In opposition to the
motions, Dunn maintained that the Act does not require proof of
scienter, reliance, or causation. The district court declined to address
this contention, stating instead that, "even under Mr. Dunn’s construc-
tion, the Virginia statute requires a material misrepresentation.9 Dunn
v. Ronbotics Corp., No. 02-952, at 26 (E.D. Va. Feb. 20, 2003). The
court went on to conclude that Dunn had failed to allege a material
misrepresentation because the fact that Ronbotics’s patents were still
pending constituted publicly available information that a reasonable
investor would have considered. Id. at 14-16, 26. In addition, the
court concluded that the claims against Davis impermissibly relied on
the concept known as "group pleading" rather than alleging specific
actions on her part. Id. at 28-29. On these bases, the court dismissed
the Complaint.10 Id. As noted, Dunn appeals only those claims arising
a material fact or any omission to state a material fact necessary in order
to make the statements made, in the light of the circumstances under
which they were made, not misleading . . . ." Va. Code Ann. § 13.1-502.
7
Section 13.1-522(A) provides that "[a]ny person who: (i) sells a
security in violation of §[ ] 13.1-502 . . . , or (ii) sells a security by means
of an untrue statement of a material fact or any omission to state a mate-
rial fact necessary in order to make the statement made, in the light of
the circumstances under which they were made, not misleading (the pur-
chaser not knowing of such untruth or omission) . . . shall be liable . . . ."
Va. Code Ann. § 13.1-522(A).
8
Section 13.1-522(C) provides that "[e]very person who directly or
indirectly controls a person liable under subsection A or B of this section
. . . shall be liable . . . ." Va. Code Ann. § 13.1-522(C).
9
Like the court below, we refer to both an untrue statement of a mate-
rial fact and an omission of a material fact as a "material misrepresenta-
tion."
10
The court entered an order granting the Defendants’ motions to dis-
miss on December 16, 2002, stating that the reasons for dismissal would
be explained in a forthcoming memorandum order. Dunn v. Ronbotics
Corp., No. 02-952 (E.D. Va. Dec. 16, 2002). The memorandum order
was entered on February 20, 2003. Dunn v. Ronbotics Corp., No. 02-952
(E.D. Va. Feb. 20, 2003).
DUNN v. BORTA 7
11
under the Act, i.e., Counts III and IV. We possess jurisdiction pursu-
ant to 28 U.S.C. § 1291.12
II.
We review de novo a district court’s dismissal of a complaint pur-
suant to Rule 12(b)(6). Mylan Labs., Inc. v. Matkari, 7 F.3d 1130,
1134 (4th Cir. 1993). We also review de novo a court’s dismissal on
the basis of Rule 9(b), because "lack of compliance with Rule 9(b)’s
pleading requirements is treated as failure to state a claim under Rule
12(b)(6)." Harrison v. Westinghouse Savannah River Co., 176 F.3d
776, 783 n.5 (4th Cir. 1999).
III.
In assessing whether the district court erred in dismissing Counts
III and IV of the Complaint, we must first determine whether the
Complaint sufficiently alleges material misrepresentations on the part
of the Defendants, and we must then examine the Defendants’ conten-
tion that we should imply elements of reliance and causation into the
Act. Finally, we must assess whether the allegations against Davis in
Counts III and IV impermissibly relied on the group pleading pre-
sumption. As explained below, we reject the Defendants’ contentions
and conclude that Counts III and IV were erroneously dismissed.13
11
On December 10, 2002, the court entered default judgment against
Ronbotics in the sum of $579,848. Ronbotics has never appeared in the
litigation, and the Ronbotics judgment is not an issue on appeal.
12
The district court possessed federal question and diversity jurisdic-
tion over this dispute. See 28 U.S.C. §§ 1331-32. Although Dunn appeals
only the Virginia causes of action, jurisdiction remains because the par-
ties are of diverse citizenship — Dunn is a citizen of Maryland and the
Defendants are citizens of Virginia. See id. § 1332.
13
Because the only issues on appeal relate to the state law claims, we
need not assess whether the allegations satisfy the heightened pleading
requirements for federal securities fraud claims enacted in the Private
Securities Litigation Reform Act of 1995. See 15 U.S.C. § 78u-4(b).
8 DUNN v. BORTA
A.
We first consider whether the district court correctly concluded that
the alleged misrepresentations were not material. In so doing, we
recall that "a fact stated or omitted is material if there is a substantial
likelihood that a reasonable purchaser or seller of a security (1) would
consider the fact important in deciding whether to buy or sell the
security or (2) would have viewed the total mix of information made
available to be significantly altered by disclosure of the fact." Long-
man v. Food Lion, Inc., 197 F.3d 675, 683 (4th Cir. 1999) (citing
Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); Gasner v. Bd.
of Supervisors, 103 F.3d 351, 356 (4th Cir. 1996)); see also TSC
Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976) (setting forth
"total mix" standard).
In applying this materiality standard, we must bear in mind that it
does not require proof that an investor would not have invested had
he known the truth; rather, the reasonable investor standard requires
"a showing of a substantial likelihood that, under all the circum-
stances, the omitted fact would have assumed actual significance in
the deliberations of the reasonable [investor]." TSC Indus., 426 U.S.
at 449. In addition, we are mindful that, "[i]n general, the materiality
of a statement or omission is a question of fact that should normally
be left to a jury rather than resolved by the court on a motion to dis-
miss. Thus, we review the complaint only to determine that it pleads
the existence of such statements and presents a plausible jury question
of materiality." Bielski v. Cabletron Sys., Inc. (In Re: Cabletron Sys.,
Inc. Secs. Litig.), 311 F.3d 11, 34 (1st Cir. 2002) (internal citation
omitted); see also Anderson v. Clow (In re Stac Elecs. Secs. Litig.),
89 F.3d 1399, 1405 (9th Cir. 1996). As explained below, we conclude
that Dunn has sufficiently pleaded misrepresentations that, if factually
supported, would present a jury question as to their materiality.14
14
In reaching this conclusion, we are, of course, cognizant that we are
reviewing a Rule 12(b)(6) dismissal rather than an award of summary
judgment. Therefore, our determination that Dunn’s allegations are suffi-
cient is based on the assumption, required on review of a 12(b)(6)
motion, that Dunn can prove those allegations. See De Sole v. United
States, 947 F.2d 1169, 1171 (4th Cir. 1991). We intend no implication
as to whether Dunn possesses a sufficient factual basis to proceed to
trial; we merely conclude that his allegations are adequate to survive a
motion to dismiss.
DUNN v. BORTA 9
1.
a.
First, a reasonable jury could conclude that the Defendants’ mis-
representations concerning their ownership of the patents were mate-
rial. The Complaint alleges that the Defendants "represented to Dunn
that the patents were the most valuable and primary assets of Ronbo-
tics." Complaint ¶ 31. A reasonable investor would undoubtedly
attach significance to whether the company in question actually
owned what it deemed its "most valuable and primary assets," as
opposed to merely anticipating owning them in the future. The belief
that a company currently possesses property that, in fact, it only hopes
to possess would cause a reasonable investor to misassess the risk of
his potential investment. Unbeknownst to Dunn, he faced a substan-
tial risk that Ronbotics would never own its "most valuable and pri-
mary assets"; that is, the patent applications could well have been
rejected.15 That Ronbotics eventually obtained patent rights does not
alter the fact that, when Dunn was faced with the decision whether to
invest, the company did not possess those rights. A reasonable jury
could find that, to a reasonable investor, the knowledge that Ronbo-
tics risked rejection of its patent applications would have assumed
actual and substantial significance. See TSC Indus., 426 U.S. at 449.
b.
i.
On the other hand, the Defendants contend that the total mix of
information available to Dunn included the fact that Ronbotics’s pat-
ents were pending at the time Dunn made his investment, because
such information was publicly available and readily obtainable. The
Act does not, however, impose any duty to investigate upon a pur-
15
In 2001, the year Dunn made his investment, fifty-three percent of
patents applied for were awarded by the United States Patent and Trade-
mark Office. See U.S. Patent Statistics, Calendar Years 1963-2001,
available at http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.pdf
(reporting that, in 2001, 183,975 patents were awarded out of 345,732
applications filed).
10 DUNN v. BORTA
chaser, and the court thus impermissibly imposed a due diligence
requirement upon Dunn.
Most importantly, the plain language of sections 13.1-502 and
13.1-522(A) of the Act does not impose on a purchaser of a security
the duty to investigate a seller’s statements. Section 13.1-502(2)
imposes no obligation on the buyer but merely declares it illegal, in
the offer or sale of securities, to obtain money or property by means
of a material misrepresentation. As for section 13.1-522(A), the Act
requires simply that "the purchaser not know[ ] of such untruth or
omission." There is nothing in the Act indicating that this phrase
implies constructive knowledge as well as actual knowledge. The
Complaint, read in the light most favorable to Dunn, alleges that he
had no actual knowledge of the Defendants’ misrepresentations, and
the Act does not impose a duty to investigate upon him.16
Our construction of the Act is consistent with the manner in which
other courts have construed similar statutes modeled on section
410(a) of the Uniform Securities Act. For example, in MidAmerica
Federal Savings and Loan Ass’n v. Shearson/American Express, Inc.,
886 F.2d 1249 (10th Cir. 1989), the Tenth Circuit had occasion to
construe section 408(a)(2) of the Oklahoma Securities Act, Okla. Stat.
Ann. tit. 71, § 408(a)(2) (West. Supp. 1989), a nearly identical statute
to section 13.1-522(A) of the Act. Observing that "[s]ection 408 is
designed to protect purchasers," the court concluded that the Okla-
homa statute required that the plaintiff demonstrate only a lack of
actual knowledge of the misleading statement or omission, and it thus
"decline[d] to impute constructive knowledge of the information con-
tained in the prospectuses to [the plaintiff]." MidAmerica Fed. Sav. &
Loan Ass’n, 886 F.2d at 1254-55.
16
In fact, the only due diligence requirement the Act imposes is on the
seller, creating liability for a seller "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 . . . ." Va. Code Ann.
§ 13.1-522(A). The juxtaposition of this language with the simple
requirement that "the purchaser not know[ ] of such untruth or omission"
serves to emphasize that the statute places a different duty on the seller
than on the purchaser.
DUNN v. BORTA 11
Similarly instructive are judicial constructions of section 12(2) of
the federal Securities Act of 1933, 15 U.S.C. § 77l(a)(2), a statute
substantially identical to section 13.1-522(A) of the Act.17 In Wright
v. National Warranty Co., for example, the Sixth Circuit construed
section 12(2) to "bar[ ] recovery only when a plaintiff has actual
knowledge that a representation is false or knows that existing infor-
mation has been withheld." 953 F.2d 256, 262 (6th Cir. 1992). Nota-
bly, the Eighth Circuit reached the same conclusion in Alton Box
Board Co. v. Goldman, Sachs & Co., in which it explained that "[t]he
district court’s conclusion that [the plaintiff] ‘should have been aware
from the public record’ of the financial condition of [the company in
which he invested] and therefore was barred from recovery under
§ 12(2) . . . clearly is not the law." 560 F.2d 916, 919 n.3 (8th Cir.
1977); see also Haralson v. E.F. Hutton Group, Inc., 919 F.2d 1014,
1032-33 n.10 (5th Cir. 1990) (noting that "a purchaser who is actually
ignorant that a seller’s representation is inaccurate or incomplete may
recover even though the full truth is apparent from materials in her
possession"); MidAmerica Fed. Sav. & Loan Ass’n, 886 F.2d at 1256
("A purchaser has no duty to investigate a seller’s possible fraud and
need not verify a statement’s accuracy."); Casella v. Webb, 883 F.2d
805, 809 (9th Cir. 1989); Sanders v. John Nuveen & Co., 619 F.2d
1222, 1229 (7th Cir. 1980); Hill York Corp. v. Am. Int’l Franchises,
Inc., 448 F.2d 680, 696 (5th Cir. 1971). In sum, we agree with these
17
Like section 13.1-522(A) of the Act, section 12(2) of the federal act
imposes civil liability on a person for the sale of a security by means of
a material misrepresentation. See 15 U.S.C. § 77l(a)(2). Section 12(2)
differs from section 13.1-522(A) in that the former imposes liability for
offers as well as sales, requires a nexus to interstate commerce, and pro-
vides that the securities offer or sale must be "by means of a prospectus
or oral communication." Id.
As the Draftsmen’s Commentary to section 410(a) explains, "[t]he
resemblance [of section 410(a)(2)] to §12(2) of the Securities Act of
1933 . . . will once more make for an interchangeability of federal and
state judicial precedence in this very important area." Louis Loss, Com-
mentary on the Uniform Securities Act 147 (1976); see also Furr v.
Echols, 36 Va. Cir. 349, 349-50 (1995) ("Virginia courts will look to
interpretations of the federal securities laws when called upon to construe
the Virginia [Securities] Act.") (citing Ascher v. Commonwealth, 408
S.E.2d 906 (Va. Ct. App. 1991)).
12 DUNN v. BORTA
authorities and with the observations of a leading commentator on
Blue Sky Laws, Joseph C. Long, that "[t]he investor has no due dili-
gence obligation to make any investigation concerning the investment
or to verify any information. The [Uniform] Securities Act was
intended to reverse the age-old concept of caveat emptor and replace
it with the concept of caveat venditor or seller beware. Therefore, the
investor is not charged with information which he might have
acquired or with constructive knowledge." Joseph C. Long, 12A Blue
Sky Law § 9:24 (2003).
ii.
The Defendants nonetheless maintain that our decision in Phillips
v. LCI International, Inc., 190 F.3d 609 (4th Cir. 1999), mandates a
contrary result and that the ruling of the district court should be
affirmed. In Phillips, we considered a situation in which the defen-
dants had asserted that their company was not for sale when, alleg-
edly, they were in ongoing negotiations to sell it. Our distinguished
panel explained that, "[i]f what [the defendant] actually said here [that
the company was not for sale] is examined in the context of all of the
information publicly available, we believe that a reasonable factfinder
could not conclude that the contested statement constitutes a material
misrepresentation." Id. at 615. Based on this observation, the Defen-
dants maintain that Phillips requires us to charge Dunn with knowl-
edge that the patent applications were pending.
A careful examination of the Phillips decision leads us to conclude
otherwise. First, the Phillips plaintiffs did not assert state blue sky
claims, but instead brought federal claims under section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-
5, 17 C.F.R. § 240.10b-5. Such federal claims have no statutorily-
defined elements; rather, they were judicially created.18 See Basic
Inc., 485 U.S. at 230-31. And because the causes of action under sec-
tion 10(b) and Rule 10b-5 are implied, the responsibility of defining
those claims rests with the courts. Gerhard W. Gohler, IRA v. Wood,
18
Section 10(b) and Rule 10b-5 do not explicitly create a cause of
action — they simply provide that certain sales of securities by deceptive
means or material misrepresentations are unlawful. 15 U.S.C. § 78j(b);
17 C.F.R. § 240.10b-5.
DUNN v. BORTA 13
919 P.2d 561, 565 (Utah 1996). In this dispute, however, the cause
of action has been created by the Virginia General Assembly and cod-
ified at section 13.1-522 of the Act. It would be inappropriate for us
to augment a Virginia cause of action with a requirement that does not
appear on the face of the statute. See id.; E.F. Hutton & Co. v.
Rousseff, 537 So. 2d 978, 981 (Fla. 1989).
Second, the consideration of all publicly available information was
logical in Phillips because there the plaintiffs were relying on a
"fraud-on-the-market" theory. Id. at 617. That theory authorizes a
plaintiff to demonstrate reliance (as required for the federal claims at
issue in Phillips) based on a presumption that he relied on the integ-
rity of the market, as reflected in the company’s stock price. See
Longman, 197 F.3d at 682 n.1. In such a situation, the "reasonable
investor" is the market itself; therefore, courts charge the market with
knowledge of all publicly available information, because such infor-
mation is exactly what affects the market price. See Basic Inc., 485
U.S. at 243-48. This dispute differs significantly from Phillips in that
we are obligated to examine materiality from the viewpoint of a rea-
sonable purchaser, not the market, and thus we need not deviate from
our previous conclusion that Dunn is not charged with knowledge of
all publicly available information.19
2.
The Complaint also makes allegations that, if sufficiently proven,
19
We recognize that, in Banca Cremi, S.A. v. Alex. Brown & Sons, Inc.,
we required "minimal diligence" on the part of a plaintiff who was not
relying on a fraud-on-the-market theory. 132 F.3d 1017, 1027-28 (4th
Cir. 1997). However, this discussion in Banca Cremi, like Phillips,
involved federal claims asserted under section 10(b) and Rule 10b-5, for
which the federal courts are free to define the requirements. Furthermore,
our analysis of the federal claims focused solely on the issue of justifi-
able reliance — an element of section 10(b)/Rule 10b-5 claims. And
whether a plaintiff’s reliance was justifiable would certainly require con-
sideration of whatever information was readily available. Because reli-
ance is not an element of Dunn’s claims, see infra pp. 16-18, Banca
Cremi does not require that we consider whether Dunn’s actions were
justified.
14 DUNN v. BORTA
would present a jury question concerning the Defendants’ failure to
inform Dunn that it had reassigned its patent rights to Borta. On May
28, 1998, unbeknownst to Dunn, Davis had executed an Agreement
to Reassign on behalf of Ronbotics. In that Agreement, Ronbotics,
which had been assigned the patent rights to Borta’s electric motion
platform and control system, agreed to reassign those rights to Borta
upon the occurrence of any of a number of specified events. One such
event was Ronbotics defaulting on its obligations and seeking bank-
ruptcy protection. The Defendants failed to disclose to Dunn that, if
Ronbotics were to file for bankruptcy, Borta would regain all patent
rights in the electric motion platform and its control system. A jury
could conclude that this omitted information would have been signifi-
cant to a reasonable investor, in that such an investor would consider
whether, in the event of Ronbotics’s bankruptcy, the company’s most
substantial assets would be available for creditors such as himself.
Assuming Dunn’s allegations are true, the Defendants’ failure to
inform Dunn of the Agreement to Reassign thus presents a plausible
question as to materiality.
3.
The district court also decided that the Defendants’ representations
concerning Ronbotics’s business prospects constituted mere "puffery"
and were therefore insufficient to support an allegation of fraud. As
the court observed, the judiciary has long distinguished between mere
puffing statements utilizing opinion and exaggeration to pitch a sale,
on the one hand, and factual statements that constitute fraudulent mis-
representations, on the other. The Supreme Court has explained that
"when a proposed seller goes beyond [mere exaggeration of the quali-
ties which an article has], assigns to the article qualities which it does
not possess, does not simply magnify in opinion the advantages which
it has but invents advantages and falsely asserts their existence, he
transcends the limits of ‘puffing’ and engages in false representations
and pretenses." United States v. New S. Farm & Home Co., 241 U.S.
64, 71 (1916) (reversing dismissal of indictment for fraudulent sales
of swamp land in Florida because misrepresentations did not consti-
tute mere puffery); see also Miller v. Premier Corp., 608 F.2d 973,
981 (4th Cir. 1979) (observing that "an unspecific and false statement
of opinion such as occurs in puffing generally cannot constitute
fraud").
DUNN v. BORTA 15
In his Complaint, Dunn does not allege mere exaggeration and
opinion, nor does he assert that the Defendants promised him a great
investment or an amazing return on his money. Instead, Dunn alleges
very specific misrepresentations on the part of the Defendants: that
Ronbotics had sold 225 CoasteRider units, Complaint ¶ 46; that
SEGA, Namco, and Gaelco were designing products using Ronbo-
tics’s technology, Complaint ¶ 36; that Ronbotics was in negotiations
with General Electric, Betson, Atlas, State Sales, and other major
companies, Complaint ¶¶ 40-43; that Ronbotics planned to introduce
in early 2001 a product simulating gravitational forces with two
degrees of freedom, and would feature its motion theater with three
degrees of freedom, Complaint ¶¶ 44-45; and that Ronbotics was
negotiating with a particular manufacturing facility in Oklahoma to
handle overflow production, Complaint ¶ 48. These specific factual
allegations regarding Ronbotics’s business dealings and prospects are
not simply sales pitches but rather can be proven true or false — and,
if properly supported, could be found material by a reasonable jury.
See generally Raab v. Gen. Physics Corp., 4 F.3d 286, 289 & n.1 (4th
Cir. 1993) (declaring as inactionable puffery statements that company
expected certain growth rate and was poised to carry that rate into
future and distinguishing Cooke v. Manufactured Homes, Inc., 998
F.2d 1256, 1259 (4th Cir. 1993), in which we held that representa-
tions of specific business projects, including negotiations with insur-
ance company that would act as guarantor, were actionable). Counts
III and IV are therefore sufficient to state claims against the Defen-
dants under the Act.20
20
The Complaint also alleges additional misrepresentations by the
Defendants, including providing misleading growth projections based on
unrealistic figures. Complaint ¶ 50. Although financial projections are
often held not to constitute material misrepresentations, "projections and
statements of optimism are false and misleading for the purposes of the
securities laws if they were issued without good faith or lacked a reason-
able basis when made." Kowal v. MCI Communications Corp., 16 F.3d
1271, 1277 (D.C. Cir. 1994). The Complaint asserts that the projections
lacked a reasonable basis, see Complaint ¶ 51, and therefore sufficiently
presents a question as to whether a reasonable investor would consider
the projections significant.
Similarly, the Complaint alleges that the Defendants: (1) failed to pro-
vide requested year-end financial statements and falsely explained that
16 DUNN v. BORTA
B.
The Defendants also maintain on appeal that, even if the Complaint
alleges material misrepresentations, the Act should be construed as
requiring both reliance and causation, which the Complaint does not
allege. As explained below, we are unable to construe the Act as
requiring these elements.
The necessary starting point for determining the elements of a
claim under section 13.1-522(A) — the text of the statute — does not
include any reference to either reliance or causation. Its only provi-
sion that could arguably be read to imply a requirement of reliance
or causation is the phrase "by means of an untrue statement." Va.
Code Ann. § 13.1-522(A)(ii). And the pertinent authorities are to the
contrary. First, according to the Draftsmen’s Commentary to section
410(a), "[t]he ‘by means of’ clause . . . is not intended as a require-
ment that the buyer prove reliance on the untrue statement or the
omission." Louis Loss, Commentary on the Uniform Securities Act
148 (1976). We implied as much in Johns Hopkins University v. Hut-
ton, in which we rejected a "causation" theory as "an impermissible
attempt to introduce reliance . . . as a necessary element of Section
12(2)." 422 F.2d 1124, 1129 (4th Cir. 1970). In so ruling, we charac-
terized as a "similar ploy" an argument that was summarily rejected
in Demarco v. Edens, 390 F.2d 836, 841 (2d Cir. 1968), in which "the
seller sought to defend on the ground that the sale was not ‘by means
of’ an offending circular." Johns Hopkins Univ., 422 F.2d at 1129-30.
Furthermore, as the Seventh Circuit has correctly explained,
"[a]lthough the ‘by means of’ language in the statute requires some
Ronbotics’s Chief Financial Officer had only recently been hired, and (2)
falsely implied that Davis and Borta had personally made substantial
financial investments in Ronbotics. Complaint ¶¶ 52-53. A reasonable
jury could conclude, if these allegations were proven, that a reasonable
investor would consider these falsehoods significant. See Fecht v. Price
Co., 70 F.3d 1078, 1081 (9th Cir. 1995) ("[O]nly if the . . . materiality
of the statement is so obvious that reasonable minds could not differ [is
this] issue[ ] appropriately resolved as a matter of law.") (internal quota-
tions and alteration omitted).
DUNN v. BORTA 17
causal connection," the statute in question (section 12(2)) "imposes
liability without regard to whether the buyer relied on the misrepre-
sentation or omission." Sanders, 619 F.2d at 1225. According to the
Supreme Court, "[t]here is, however, more than one way to demon-
strate the causal connection." Basic Inc., 485 U.S. at 243. In this situ-
ation, the connection is created through the privity required by section
13.1-522(A), that is, that the seller of the security "shall be liable to
the person purchasing such security from him . . . ." (emphasis
added). See Gerhard W. Gohler, IRA, 919 P.2d at 565-66 ("Privity . . .
establishes the necessary link between the alleged misrepresentation
and the plaintiff’s injury and therefore serves the same purpose as the
reliance requirement of common law fraud and the federal implied
cause of action."). The plain language of section 13.1-522(A) of the
Act therefore does not include the elements of reliance and causation.
Indeed, the Defendants do not contend on appeal that the statute
explicitly contains these elements; rather, they urge that these ele-
ments should be implied by the judiciary, asserting, "[i]n the absence
of legal precedent, Appellees submit that both of these requirements
should be implied into the Virginia Securities Act."21 Because the Act
fails to mention reliance or causation, however, it would be inappro-
priate for a court to imply them. See Schmidt v. Goddin, 297 S.E.2d
701, 704 (Va. 1982) (declining to read additional requirements into
a statute because the court is "not permitted to add words to a statute
or to accomplish the same result by judicial interpretation").22
Even were we to view the statute as ambiguous on the issues of
reliance and causation, we would be compelled to reach the same
21
A Virginia trial court has examined the required elements of a sec-
tion 13.1-522(A) claim, concluding that "‘in non-disclosure cases it is
not necessary to allege and prove reliance and causation.’" Williams v.
Chamer, 32 Va. Cir. 12, 23 (1993) (quoting McCowan v. Sears, Roebuck
& Co., 722 F. Supp. 1069, 1075 (S.D.N.Y. 1989)).
22
In reaching this conclusion, we recognize that federal courts have
implied the elements of reliance and causation into claims initiated under
section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),
and Rule 10b-5, 17 C.F.R. § 240.10b-5. What the federal courts have
done, however, is easily distinguishable, in that the federal cause of
action is judicially created. See supra pp. 12-13.
18 DUNN v. BORTA
result. First, our construction comports with the purpose of the Act,
which "is intended to protect investors from fraudulent sales of secur-
ities." Pollok v. Commonwealth, 229 S.E.2d 858, 859 (Va. 1976). It
is therefore proper to construe a statutory ambiguity, if any exists, in
favor of the investor.
In addition, we have rejected similar contentions that the elements
of reliance and causation should be implied into section 12(2) claims,
which are practically identical to section 13.1-522(A) claims. See
supra note 17. In Johns Hopkins University v. Hutton, we firmly
rejected the suggestion that reliance was an element, explaining that,
"[u]nder Section 12(2) . . . a buyer need not prove that he relied on
the misstatement or omission. ‘To say that purchaser reliance is a pre-
requisite to seller liability is to import something into the statute
which is not there.’" 422 F.2d at 1129 (quoting Woodward v. Wright,
266 F.2d 108, 116 (10th Cir. 1959)); see also Caviness v. DeRand
Res. Corp., 983 F.2d 1295, 1304 (4th Cir. 1993); Adalman v. Baker,
Watts & Co., 807 F.2d 359, 373 (4th Cir. 1986). And other courts and
commentators have reached the same conclusion with respect to simi-
lar adoptions of section 410(a). See, e.g., In re Westcap Enters., 230
F.3d 717, 726 (5th Cir. 2000) (Texas statute); Gerhard W. Gohler,
IRA, 919 P.2d at 565 (Utah statute); E.F. Hutton & Co., 537 So. 2d
at 981 (Florida statute); see also Unif. Sec. Act § 509 (2002), official
cmt. 4. ("Unlike the current standards on implied rights of action
under Rule 10b-5, neither causation nor reliance has been held to be
an element of a private cause of action under the precursor to Section
509(b) [i.e., section 410(a), whose language is mirrored by Va. Code
Ann. section 13.1-522]."); Joseph C. Long, 12 Blue Sky Law § 5:15
(2003). We therefore decline to read the elements of reliance and cau-
sation into the Act, and Counts III and IV are not deficient in that
regard.23
23
We note that, were we to imply the elements of reliance and causa-
tion, Counts III and IV may nonetheless state claims under the Act. The
Complaint includes allegations that Dunn relied on the Defendants’ mis-
representations and that the misrepresentations caused his loss. See Com-
plaint Parts H, J.
DUNN v. BORTA 19
C.
Finally, we turn to the district court’s dismissal of Counts III and
IV against Davis on the basis of Rule 9(b). The court concluded that
Dunn’s allegations failed to meet the specificity requirements of Rule
9(b) with respect to Davis because, "[i]n his 114-paragraph Amended
Complaint, Mr. Dunn fails to plead how Ms. Davis, individually, con-
tributed to the alleged fraud," relying instead on "impermissible group
pleading." Dunn v. Ronbotics Corp., No. 02-952, at 28-29 (E.D. Va.
Feb. 20, 2003). On the contrary, the group pleading presumption
(sometimes known as the "group-published information" presump-
tion) is not a prohibition on forms of pleading; rather, it serves as a
presumption that may be invoked in favor of a plaintiff. As the Fifth
Circuit has explained, "‘[g]roup pleading’ allows a plaintiff to rely on
a presumption that statements in company generated documents rep-
resent the collective work of those individuals directly involved in the
company’s daily management." Schiller v. Physicians Res. Group
Inc., 342 F.3d 563, 569 n.4 (5th Cir. 2003); see also Decker v. Glen-
Fed, Inc. (In re GlenFed, Inc., Secs. Litig.), 60 F.3d 591, 593 (9th Cir.
1995).
We have never addressed the issue of whether the group pleading
presumption should be recognized in this Circuit,24 and, because
Counts III and IV satisfy the pleading requirements as to Davis with-
out reliance on the presumption, we need not decide that issue today.
This approach was taken by the First Circuit in Bielski v. Cabletron
Systems, Inc., 311 F.3d 11. There the court of appeals declined to
address the question of whether the group pleading presumption
should be applied because the complaint alleged that the officers and
directors had access to information contrary to the company’s public
statements, that they had participated in making the fraudulent state-
24
Several district courts in this Circuit have rejected the group pleading
presumption. See, e.g., In re First Union Corp. Secs. Litig., 128 F. Supp.
2d 871, 888 (W.D.N.C. 2001) (concluding that "‘group pleading’ is
clearly inconsistent with Rule 9(b)’s express requirements of specific-
ity"); Glaser v. Enzo Biochem, Inc., 2003 U.S. Dist. LEXIS 14121, at
*18 (E.D. Va. July 16, 2003). But see Andrews v. Fitzgerald, 823 F.
Supp. 356, 373-74 (M.D.N.C. 1993) (recognizing availability of group
pleading presumption but declining to apply it).
20 DUNN v. BORTA
ments and stock sales, and that they had signed certain forms. Id. at
40-41.
Similarly, Counts III and IV assert claims against Davis, not solely
because of her position as an officer of Ronbotics, but because she
was directly involved in making material misrepresentations to Dunn.
Although Dunn refers to Borta, Linzmeyer, and Davis in short-hand
form (naming them the "Individual Defendants"), he clearly explains,
"[e]xcept where otherwise specified, ‘Individual Defendants’ is to
include each or all of these individuals." Complaint ¶ 16. As a result,
each allegation made concerning the Individual Defendants is a spe-
cific allegation against Davis. And Dunn explicitly alleges that the
Individual Defendants "participated in the drafting, preparation,
and/or approval of the written and oral statements complained of
herein," such as the Memorandum. Complaint ¶ 18. Like the officers
in Bielski, Davis is alleged to have had access to contrary information
and to have personally participated in making the misrepresentations.
The Complaint therefore provides Davis with fair notice under Rule
9(b) of the claims made against her in Counts III and IV, and they
should not have been dismissed on this basis.
IV.
Pursuant to the foregoing, we reverse the dismissal of Counts III
and IV of the Complaint and remand for such other and further pro-
ceedings as may be appropriate.25
REVERSED AND REMANDED
25
Dunn also seeks our review of a magistrate judge’s evidentiary ruling
excluding his expert witness. In a Memorandum Order dated December
12, 2002, the magistrate judge excluded the expert’s testimony on the
grounds that it was rife with speculation and not based on professional
methodologies. Dunn v. Ronbotics Corp., No. 02-952 (E.D. Va. Dec. 12,
2002). The next day, Dunn filed objections to the magistrate judge’s
order pursuant to Federal Rule of Civil Procedure 72(a), and a hearing
on the matter before the district court was scheduled for December 20,
2002. On December 16, 2002, however, the court dismissed the Com-
plaint, and no ruling was made on Dunn’s objections. In these circum-
stances, we remand on this issue as well.
DUNN v. BORTA 21
NIEMEYER, Circuit Judge, dissenting:
Because the misrepresentations on which Edward Dunn allegedly
relied in investing $500,000 in Ronbotics Corporation were not mate-
rial and, in any event, did not cause Dunn’s loss, I would affirm the
district court’s dismissal of Dunn’s complaint under Federal Rules of
Civil Procedure 9(b) and 12(b)(6).
Ronbotics was a small corporation formed to manufacture and
develop electric motion platforms for arcade video games and training
simulators. In January 2001, Ronbotics approached Dunn about
investing in Ronbotics, giving him a "Confidential Information Mem-
orandum" about Ronbotics’ business. The memorandum was a busi-
ness plan for Ronbotics that expressed its hopes and projections for
profit, but it contained no traditional financial data, such as a balance
sheet, income statement, or cash flow statement. Moreover, the docu-
ment stated on its face:
Neither the Company nor any of its respective affiliates,
employees or representatives makes any representation or
warranty, express or implied, as to the accuracy or com-
pleteness of any of the information contained in this Memo-
randum or any other information (whether communicated in
written or oral form) transmitted or made available to pro-
spective investors, and each of such persons expressly dis-
claims any and all liability relating to or resulting from the
use of this Memorandum or such other information by a pro-
spective investor or any of their affiliates or representatives.
In addition to the memorandum, Dunn had a single, four-hour
meeting in late January 2001 with the principals of Ronbotics, during
which the principals expressed enthusiasm about their patented tech-
nology, which they said was worth millions of dollars and would jus-
tify Dunn’s investment. They also expressed enthusiasm for the future
of the company. Based on the memorandum and the single meeting,
Dunn invested $500,000 in Ronbotics. He has alleged that in doing
so, he relied principally on the value of the patented technology. His
complaint asserts, "Dunn’s primary interest in Ronbotics related to
Ronbotics’ patented technology, as represented by defendants." Skep-
22 DUNN v. BORTA
tical even about this value, Dunn demanded a "convertible subordi-
nated note" from Ronbotics in the face amount of $500,000.
After Ronbotics failed as a company, Dunn commenced this action
and alleged his reliance on five misrepresentations made by Ronbo-
tics in the Confidential Information Memorandum and at the January
2001 meeting, characterized as follows:
First, Linzmeyer and Borta confirmed the existence [of] the
patents and described them as two patents, one for a motion
pinball machine, and the other for the electronic motion
platform used in Ronbotics’ principal product, the Coaster-
Rider. Second, Linzmeyer and Borta stated on more than
one occasion at the January meeting that the company
owned the patents and had the assigned rights to them.
Third, Linzmeyer and Borta made numerous statements to
Dunn at the January meeting concerning the value of the
patents, including the fact that they were "worth millions,"
and that they had been valued between $2 million to $4 mil-
lion. Linzmeyer and Borta told Dunn that the value of the
patents was based not only on their own opinion, but on the
opinion of an outside investment firm that had valued the
patents. . . . Fourth, Dunn also inquired of Linzmeyer and
Borta at the January meeting what protection Ronbotics had
against a competitor misappropriating the Ronbotics’ tech-
nology, and Linzmeyer and Borta replied that the Ronbotics
patents protected against such misappropriation. Fifth, in
describing the value of the patents and in relating to Dunn
the other assets of Ronbotics, the Individual Defendants
directly and implicitly represented to Dunn that the patents
were the most valuable and primary assets of Ronbotics.
Dunn then alleged that these representations were false in the fol-
lowing respects. First, he alleged that no patents had issued at the time
the representations were made in January 2001; one patent was not
issued until April 16, 2002, and the other was not issued until Septem-
ber 3, 2002. When they did issue, Borta was listed as the inventor and
Ronbotics as the assignee. Second, Dunn alleges that the valuations
conducted about the patents were overstated because they were based
"on unrealistic three-year projections in which sales were projected to
DUNN v. BORTA 23
exceed $843 million and operating profits were projected in the range
of 55 percent of sales." Finally, the patents were misrepresented
because Borta retained a security interest in the patents which would
permit the patents to be reassigned to Borta on the occurrence of cer-
tain contingencies.
The district court reviewed the complaint in the context of all the
arguments presented to it by counsel and concluded in part that the
representations on which Dunn relied were not material. As the court
explained:
[A] reasonable investor would have considered the total mix
of information which included the publicly available infor-
mation that the patents were pending before the PTO. The
court also finds that, although the valuation of the patents by
an outside firm may have seemed high, Mr. Linzmeyer’s
and Mr. Borta’s statements about the value of the patents
were based on this independent valuation and were not mis-
representations.
I would add to what the district court observed a fact most impor-
tant to the proper disposition of the issue: Despite the fact that the pat-
ents had not yet issued, Ronbotics and its principals nonetheless
owned the technology when the representations were made, and
patent applications protecting the technology were pending. Thus,
Dunn’s case hinges on the distinction he draws between pending
patent applications and patents. Although this distinction would have
been material had the patent applications been denied, the applica-
tions were granted, confirming patentability and the right to exclude
the world from use of the technology. No competitor used the tech-
nology, nor could it have used the technology at the time of the mis-
representations. As a consequence, the procedural status of the patent
applications could not and did not significantly alter the total mix of
information made available to Dunn. Ronbotics’ business was pre-
sented on the basis that it had the exclusive right to the technology
in the patents, and any prospect for making a profit using that technol-
ogy was not affected.
The fact that Ronbotics did not disclose that Borta, one of the prin-
cipals of Ronbotics, retained a security interest in Ronbotics’ patent
24 DUNN v. BORTA
rights through a right of assignment upon the event of bankruptcy or
other contingencies, was also not material. Dunn expressly subordi-
nated his interest in Ronbotics to "all existing and future secured
indebtedness of the Company." Moreover, Dunn made no inquiry
about the company’s secured debt, and its nature and amount are not
alleged as misrepresentations in Dunn’s complaint.
It is also apparent from Dunn’s complaint that Ronbotics’ misrep-
resentations as enumerated above did not cause Dunn’s loss in the
way required by Virginia Code Annotated § 13.1-522(a) (stating a
securities violation when a person sells a security "by means of" a
misrepresentation). As the majority agrees, "the ‘by means of’ lan-
guage in the statute requires some causal connection . . ." between the
misrepresentation and Dunn’s loss. Sanders v. John Nuveen & Co.,
Inc., 619 F.2d 1222, 1225 (6th Cir. 1980). The majority asserts, how-
ever, that mere privity between Ronbotics and Dunn fulfills this
requirement. I respectfully disagree. To support its point that privity
alone can supply the necessary causal connection, the majority relies
on the statement in Basic that "[t]here is . . . more than one way to
demonstrate the causal connection." Basic, Inc. v. Levinson, 485 U.S.
224, 243 (1988). Basic, however, was a fraud-on-the-market case, in
which a plaintiff can prove causation merely by establishing that the
price he paid for the security was too high on the date of sale because
the defendants had artificially inflated it. See, e.g., Gebhardt v. Con-
Agra Foods, Inc., 335 F.3d 824, 832 (8th Cir. 2003). Indeed, Basic
predicated this relaxation of the causation requirement on the obser-
vation that "modern securities markets, literally involving millions of
shares changing hands daily, differ from the face-to-face transactions
contemplated by early fraud cases." Id. at 243-44. Here, where we
have just such a face-to-face transaction, Basic’s statement as to cau-
sation is inapposite.
Under the circumstances of this case, where the patents eventually
issued and the technology was fully and continuously protected, the
misrepresentations about them were truly insignificant. Allowing
Dunn to recover his entire investment because of a misrepresentation
that could not have played a role in his loss obliterates causation
entirely. It was a business risk known to Dunn that caused the failure
of the company, not any misrepresentation about the procedural pos-
ture of the patent applications.
DUNN v. BORTA 25
For these reasons and the other reasons more fully described by the
district court in its February 20, 2003 order, I would affirm.