California Court of Appeal Holds
Common Law Fraud Action Available to Non-Selling Shareholder
by Gibson, Dunn & Crutcher LLP
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In Greenfield v. Fritz Companies, Inc.,[1] the California Court of Appeal recently held that a shareholder who alleged that he chose not to sell his stock in a publicly held company in reliance on a materially misleading quarterly earnings report could state a cause of action against the company for damages when the stock declined materially after the initially reported revenues and earnings were restated. To prevail on his cause of action, the Court of Appeal held that the plaintiff would have to show that (1) the company made a misrepresentation of fact (not opinion), (2) the misrepresentation was material to the plaintiff's decision to retain ownership of his securities, (3) the plaintiff justifiably relied upon the misrepresentation, and (4) the misrepresentation was the proximate cause of the plaintiff's damages. The court reversed a dismissal on general demurrer and remanded the case to the trial court for a determination of whether class status was appropriate.
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ARTICLES ARCHIVE
The decision in Greenfield, which is apparently the first in which a fraud claim by a non-buyer or non-seller of stock has been sustained in California, is based on common law fraud, not the California Corporate Securities Law. The Court of Appeal held that the California Corporate Securities Law did not supersede common law actions for fraud. According to the Court of Appeal, common law fraud claims have long been recognized in the securities context in New York,[2] Massachusetts[3] and New Jersey[4]. The Court of Appeal rejected the rationale underlying Blue Chip Stamps v. Manor Drug Stores,[5] a 1975 case in which the United States Supreme Court held that a non-buyer or non-seller of securities could not assert a claim under Rule 10b-5 of the Securities Exchange Act of 1934. The Greenfield opinion did not address the potential "no damage" argument, i.e., that if the proper disclosure had been made, the market would have reflected the real value of the securities before the plaintiff sold, so that there was no damage. It also did not address the issue of fairness to non-selling shareholders who cannot prove that they retained ownership of securities in reliance on a material misrepresentation. The Greenfield decision appears to apply only to shareholders who do not sell their stock, and not to persons who do not buy securities.
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