Petition for Writ of Certiorari — Lawrence v. Advanced Patent Technology, Inc.

Supreme Court, U.S.

FriLEa@

8 . JUN 16 1986

>) ™ 20 8 @ JOSEPH F. SPANIOL, JR.

No. CLERK

IN THE

SUPREME COURT

OF THE UNITED STATES

October Term 1985

MILTON M. LAWRENCE and

HELEN F. LAWRENCE

Petitioners

VS.

ADVANCED PATENT

TECHNOLOGY, Inc., et al.,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE NINTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

STEINER & GERSTEIN

ROBERT S. GERSTEIN, PH.D.

Suite 700

2566 Overland Avenue

Los Angeles, California 90064

(213) 559-8150

Counsel for Petitioners

Lawyers Brief Service / Legal Publishers / (213) 383-4457

QUESTION PRESENTED

1. Whether the victim of a material omission should, as a

matter of law, be taken to have relied on the person who

withheld the information in an action for securities fraud

under Rule 10b-5.

Page

TOPICAL INDEX

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PETITION FOR A WRIT OF CERTIORARI ................ l

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REASONS FOR GRANTING THE WRIT ...................... 4

THE DECISION BELOW RAISES THE

SIGNIFICANT AND RECURRING

PROBLEM OF WHETHER A SHOWING

OF A MATERIAL OMISSION IN AN

ACTION UNDER 10B-5 ESTABLISHES

RELIANCE BY THE PLAINTIFF AS A

MATTER OF LAW, OR INSTEAD

ESTABLISHES ONLY A REBUTTABLE

PRESSURE TION OF RELIANCE, cccccsccsccsctbisssccesess 4

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APPENDIX A: OPINION, United States Court of

Appeals for the Ninth Circuit

Filed: March 26, 1986

TABLE OF AUTHORITIES

Page

Cases

Affiliated Ute Citizens v. United States

oi cicllcarendssabisbisnsocveesesvenseee 4, 6

Chris-Craft Industries, Inc. v. Piper Aircraft Corp.

is oicss sen shniunmanbaneswecssncserens a ©

Herbst v. IT&T

I BE CITED seevicsstsceconsescnsteoreossoosesescessns 5, 8

Kiernan v. Homeland, Inc.

I acrcinvosonsntasevenseccbnoscssrensesoeconssenve 5

Lewis v. Walston & Co., Inc.

av cccetnerescnsveunesenesnusevesevescsnns 8

Mills v. Electric Auto-Lite Co.

I I ccskarecasescccvcrsorccostsonsnsensssaneeossensee 5

Sonesta International Hotels Corp.

v. Wellington Assoc.

a 6, 7

TSC Industries Inc., v. Northway Inc.

I ac onecdsssecsnverccsecseresconeeavsseeveses 6, 7

Tucker v. Arthur Andersen

i EE ss sscccanannsavopssonreseassnancevonsessenenes 5

Rules and Regulations

17 C.F.R. Section 240.10b-5

SID: TDS nigcnstccseintavssisnstnaccasemniineubuncinnsaiianeiilals i, 4

Texts

Jacobs, Litigation and Practice Under Rule 10b-5,

Section 61.02 (second ed., rev., 1985) ...........e 6

Statutes

ee UF BC Fee COD icccieisseccncgeisnemredicipttnsesiesenntins 2

15 U.S.C. 78] (Security and Exchange Act of 1934).......... 5

No.

IN THE 1

SUPREME COURT

OF THE UNITED STATES

October Term 1985

MILTON M. LAWRENCE and

HELEN F. LAWRENCE

Petitioners,

VS.

ADVANCED PATENT

TECHNOLOGY, Inc., et al.,

Respondents.

PETITION FOR WRIT OF CERTIORARI

The petitioners, Milton and Helen Lawrence, respectfully

pray that a writ of certiorari issue to review the judgment

and opinion of the United States Court of Appeals for the

Ninth Circuit, entered in this proceeding on March 26,

1986. The respondents are: Advanced Patent Technology,

a Nevada Corporation, Diversified Gaming and Technolo-

gy, Inc., a Nevada Corporation, A.P.T. Financial Corpora-

tion, a Nevada Corporation, International Technical

Development Corp., and Jack Solomon.

OPINIONS BELOW

The opinion of the United States Court of Appeals for

the Ninth Circuit is attached hereto as Appendix A.

JURISDICTION

The judgment of the United States Court of Appeals for

the Ninth Circuit, was entered on March 26, 1986

affirming judgment in the United States District Court for

the District of Nevada against petitioners dated

September 5, 1984. The jurisdiction of this court is invoked

under 28 U.S.C. sec. 1254(1).

STATEMENT OF THE CASE

In April 1980 the SEC began a private investigation of

APT with regard to its sale of unregistered stock. On

May 2, 1980, APT and its president, Jack Solomon, received

subpoenas from the SEC requesting documents to be used

in the investigation (Appendix A, p.2). The subpoena

requested 44 items. Solomon stated that it was very onerous

and would take an “enormous amount of work” to comply

with (RT 118-19, 162-64).

Thereafter, on May 16 and June 30, 1980, the Lawrences

bought 50,000 restricted shares of stock in APT from

Solomon. Solomon failed to inform the Lawrences of the

investigation during the negotiations for the sale (Appendix

A, p.2). He explained this lapse at trial with the statement,

“T guess I just didn’t think it was important (RT 165).”

On July 2, 1980, APT issued a press release describing

the investigation. The Wall Street Journal of July 3, 1980

then published an article on the investigation (Plaintiffs’

Excerpt of the Record, p. 34, hereinafter ER). When the

Lawrences first learned of this, in August of 1980, they

made several efforts to rescind the sale, but to no avail (RT

68-73).

In its annual report for 1980, APT admitted that its

actions in previous years “may have constituted violations

of the registration and anti-fraud provisions of Federal and

state securities laws.” (Ex. 2).

On March 24, 1981, the National Association of Security

Dealers de-listed APT stock. On March 30, 1981, the SEC

suspended trading in it (ER 5). Having held the stock for

the two years required by law, the Lawrences sold it in June

1982, incurring a loss of $122,500 (Appendix, p.2).

The Lawrences filed suit for fraud and violation of Rule

10b-5 in July 29, 1982. In its decision of September 5, 1984,

the District Court entered judgment for defendants,

“holding, inter alia, that the Lawrences had not relied on

what Mr. Solomon said or did not say” (Appendix, p.2).

The Court of Appeals affirmed, holding that the

presumption that the Lawrences relied on Solomon’s

omission had been rebutted. In the Court of Appeals’ view,

the presumption of reliance was rebutted by a showing that

the Lawrences would have bought even if they had known

about the investigation (Appendix, p.2-3).

REASONS FOR GRANTING THE WRIT

THE DECISION BELOW RAISES THE

SIGNIFICANT AND RECURRING PROB-

LEM OF WHETHER A SHOWING OF A

MATERIAL OMISSION IN AN ACTION

UNDER 10B-5 ESTABLISHES RELIANCE

BY THE PLAINTIFF AS A MATTER OF

LAW, OR INSTEAD ESTABLISHES ONLY A

REBUTTABLE PRESUMPTION OF RELI-

ANCE.

This Court held in Affiliated Ute Citizens v. United

States, 406 U.S. 128 (1972) that, in actions under section

10b-5 for failure to disclose information to investors,

[Plositive proof of reliance is not a prerequisite to

recovery. All that is necessary is that the facts

withheld be material in the sense that a reasonable

investor might have considered them important in

the making of this decision. ... . This obligation

to disclose and this withholding of a material fact

establish the requisite element of causation in fact.

406 USS. at 153-54

This language clearly establishes that the plaintiff does

not have the burden of proving reliance where materiality

has been shown; it leaves open the question of whether a

defendant responsible for a material omission can stave off

liability for it by showing that the plaintiff, though deprived

of material information, was not in any case relying on the

defendant to make full disclosure to him.

There are two schools of thought on this issue. One,

represented by the Ninth Circuit opinion on which Court of

Appeals here relied (Kiernan v. Homeland Inc., 611 F.2d

785 at 789 (1980)), holds that a showing of materiality

establishes only a presumption of reliance, rebuttable if

defendant shows that “plaintiff . . . would not have attached

significance to the omitted facts, and therefore would have

acted as he did if he had known the truth.”

On the other hand, there is the view espoused by Judges

Mansfield and Lumbard of the Second Circuit Court of

Appeals. That view, originally stated by Judge Mansfield in

his concurring and dissenting opinion in Chris-Craft

Industries v. Piper Aircraft Corp. 480 F.2d 341, 399- 400

(1973), rejects the “presumption” of reliance and takes the

teaching of this Court in UTE Citizens to be that reliance is

established ‘“‘as a matter of law” once the materiality of an

omission has been shown. Judge Lumbard, endorsing Judge

Mansfield’s view in Herbst v. IT&T, 495 F.2d 1308, 1316,

footnote 14 (1974), pointed out that neither in UTE nor in

its predecessor Mills vy. Electric Auto-Lite Co. 396 U.S. 375

(1970), had this Court “remanded ... for the purpose of

allowing defendants to raise a defense” after finding

materiality. See also Tucker v. Arthur Andersen 67 F.R.D.,

468 at 479, footnote 19 (1975).

This Court should now affirm the Mansfield-Lumbard

approach as essential to the achievement of the purposes of

the Security and Exchange Act of 1934, and to the rules

established under it.

As this Court has already held, these laws

embrace a “fundamental purpose . . . to substitute

a philosophy of full disclosure for the philosophy

of caveat emptor and thus to achieve a high

standard of business ethics in the securities

industry.” SEC vy. Capital Gains Research Bureau,

375 U.S. 180, 186 ... (1963) .... Congress

intended securities legislation enacted for the

purpose of avoiding frauds to be construed “not

technically and restrictively, but flexibly to

effectuate its remedial purposes.”

Affiliated Ute Citizens v. United States, 406 at

151, supra.

This philosophy can be made effective only by assuring

sellers that they will be held to account for withholding

material information from any investor, however sophisti-

cated or unsophisticated they might believe that investor to

be. See TSC Industries Inc., v. Northway Inc., 426 U.S. 438,

449 (1976); Jacobs, Litigation and Practice Under Rule

10b-5, Section 61.02 (second ed., rev., 1985).

In the words of the Second Circuit Court of Appeals,

Rule 10b-5 is

founded on the principle that full and fair

disclosure of all material facts must be made to

investors so that they may have the benefit of the

facts in making their investment decisions.

Sonesta International Hotels Corp. v. Wellington

Assoc., 483 F.2d 247 at 249 (1973).

If sellers are assured that they cannot be held liable to

investors they can show to be particularly sophisticated or

skeptical, the deterrent force of the law will be severely

diluted. Crucially, the effectiveness of this body of law

depends upon ensuring that sellers must always take full

responsibility for their conduct:

The obligation is placed squarely on those making

the offer in the first instance to disclose all

material factors necessary to make their offer not

misleading. That duty cannot be shified to the

shoulders of others

Sonesta International Hotels Corp. v. Wellington

Assoc., 483 F.2d 247 at 255 supra.

To allow this presumption of reliance to be rebutted is

precisely to shift the duty from the shoulders of the sellers

to those of investors. This amounts to the adoption of a

subjective, rather than objective, standard of materiality,

contrary to the decisions of this court. See TSC v. Northway

Inc., 426 U.S. 438, 449, supra; Jacobs, para. 61.02(b)(ii), 3-

131. It gives the seller an opportunity to divert attention

from his own wrongdoing by making the subjective state of

mind of the investor the center of attention.

Such an approach “emasculateds]” the purposes of the

law, resulting in a virtual “nullification of the disclosure

requirements of the act.” Sonesta International Hotels

Corp. v. Wellington Assoc., 483 F.2d 247 at 255, supra. This

consequence is apparent here. By giving the defendants the

opportunity to disprove reliance, the trial court allowed

Jack Solomon to distract it from the undisputed fact that

Solomon consciously withheld relevant information from

the Lawrences, information which, only a short time later,

was important enough to publish in the Wall Street Journal

(RT 165, ER 34).

Instead, the court focussed on evidence showing that

Milton Lawrence was an “expert” in the law of restricted

stock (ER 31-32, para. 8), that the Lawrences understood

the risk they were taking in buying this stock (ER 32, para.

9), and that the Lawrences knew that Jack Solomon

exaggerated and neither believed or relied upon anything he

said (ER 33-34, paras. 11, 12, 15).

The irony of allowing such evidence to rebut reliance,

and defeat liability, is particularly clear here. Because it was

being looked at, not from the objective perspective of the

public interest in full disclosure, but from the Lawrences’

i oon

supposed subjective point of view, the evidence of Jack

Solomon’s untrustworthy character was a positive asset to

him, not the deficit it should have been.

Thus, as was to be expected from this approach, the

victimized investors were put on trial in place of the seller

who victimized them. The trial court found reliance to be

refuted, in spite of the fact that Milton Lawrence made

strenuous efforts to rescind the purchase as soon as he

learned of the information which had been withheld from

him (RT 68-73). Unable to rescind, the Lawrences were

compelled to hold onto the stock for two years, the period

required by law before restricted stock can be resold. Then,

as soon as the law allowed, they sold the stock, at a nearly

total loss (Appendix, p.2). The selier has now been allowed

to profit from his wrongdoing, and the investors are without

a remedy for their loss.

This case is, then, a perfect example of how securities

legislation can be “emasculated” by allowing defendants to

shift attention from their own conduct to that of the

investors. Such emasculation must not be tolerated by this

Court. It can be avoided through the adoption of the

approach championed by Judges Mansfield and Lumbard:

once it has been established that a seller of securities has

withheld objectively material information from investors,

the investors’ reliance must be taken to be established as a

matter of law. It must be made clear to the sellers of

securities that they will be given no chance to avoid their

responsibility for full disclosure. Chris-Craft Industries,

Inc. v. Piper Aircraft Corp. 480 F.2d 341, 399-400, supra;

Herbst v. IT&T, 495 F.2d 1308, 1316, footnote 14, supra,

Cf., Lewis v. Walston & Co. Inc.,487 F.2d 617 (1973).

There are many thousands of investors like the

Lawrences. In fact, there are many others around the

country who, like them, invested in APT restricted stock.

By firmly establishing the doctrine that reliance cannot be

rebutted, this Court can ensure that these investors will

have a remedy for past wrongs, and that insiders will not be

tempted to victimize them again in the future.

CONCLUSION

For these reasons, the petition for writ of certiorari

should be granted.

Respectfully submitted,

ROBERT S. GERSTEIN

STEINER & GERSTEIN

Counsel for Petitioners