PUBLISHED OPINION
Case No.: 95-2529
Complete Title
of Case:
TIMOTHY R. CARNEY,
KATHLEEN CARNEY,
MICHAEL CARBONE and
LORI CARBONE,
Plaintiffs-Appellants,
v.
ANTHONY J. MANTUANO,
Defendant-Respondent.
Submitted on Briefs: September 3, 1996
COURT COURT OF APPEALS OF
WISCONSIN
Opinion Released: September 25, 1996
Opinion Filed: September 25, 1996
Source of APPEAL Appeal
from a judgment
Full Name JUDGE COURT: Circuit
Lower Court. COUNTY: Kenosha
(If "Special", JUDGE: Michael S. Fisher
so indicate)
JUDGES: Anderson,
P.J., Brown and Snyder, JJ.
Concurred:
Dissented:
Appellant
ATTORNEYSOn
behalf of the plaintiffs-appellants, the cause was submitted on the briefs of Cletus
R. Willems and Charles R. Shedlak of O'Connor & Willems, S.C.
of Kenosha.
Respondent
ATTORNEYSOn
behalf of the defendant-respondent, the cause was submitted on the brief of Richard
J. Sankovitz of Whyte, Hirschboeck, Dudek, S.C. of Milwaukee.
COURT OF APPEALS DECISION DATED AND RELEASED September 25, 1996 |
NOTICE |
A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See § 808.10 and
Rule 809.62, Stats. |
This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official Reports. |
No. 95-2529
STATE
OF WISCONSIN IN
COURT OF APPEALS
TIMOTHY R. CARNEY,
KATHLEEN CARNEY,
MICHAEL CARBONE and
LORI CARBONE,
Plaintiffs-Appellants,
v.
ANTHONY J. MANTUANO,
Defendant-Respondent.
APPEAL from a judgment
of the circuit court for Kenosha County:
MICHAEL S. FISHER, Judge. Affirmed.
Before Anderson, P.J.,
Brown and Snyder, JJ.
BROWN, J. No court has imposed liability
for securities fraud based upon a theory of misrepresentation without proof
that the investor actually relied on the misrepresented information. We are satisfied that the legislature
recognized this principle when it crafted Wisconsin's Blue Sky Laws and hold
that our state law requires an investor pursuing a theory of seller
misrepresentation to establish reliance.
This case concerns an
offering in the Landmark Limited Partnership.
Its primary asset was a proposed (now failed) sports bar and restaurant
located in Kenosha known as “The Lower Deck.”
The plaintiffs, who we refer to as the Investors, each purchased shares
in this limited partnership and sued the named general partner and manager,
Anthony J. Mantuano, seeking the return of their original investments when
The Lower Deck closed. The Investors
claimed that the offering memorandum misstated the degree to which Anthony would
be involved with operations and that, in fact, his brother Eugene, who had
little pertinent experience, secretly planned from the start to serve as the
manager.
After a bench trial, the
trial court granted judgment to Anthony.
While the trial court agreed that the offering contained misstatements
of fact, it also found that the Investors knew and accepted that Eugene, not
Anthony, would fulfill the general partner role. The trial court thus reasoned that the Investors had not proven
reliance on the misstatements made in the written offering.[1] The Investors appeal.
We first turn to the
factual findings of the trial court and observe that neither party challenges
any of these findings as being clearly erroneous. See § 805.17(2), Stats.
The Investors purchased
their shares in the late summer of 1991.
The primary purpose of the partnership was to open and operate The Lower
Deck. The partnership was going to
lease an entire building in Kenosha and sublease the upstairs space not used
for The Lower Deck to a banquet facility that would be operated by
Anthony.
The misstatements that
the Investors premised their case on are contained in the written
offering. We observe that a schedule to
the offering, along with other portions, clearly names “Anthony J. Mantuano” as
the “General Partner.” The trial court
also found that the Investors knew that Anthony was a successful restaurateur
with properties in Kenosha and Chicago (namely, Mangia's, Spiaggio's and
Tutaposto), suggesting that they might have relied on the value of Anthony's
name when making their investment decision.
But the trial court also
found that Anthony never intended to fulfill the role of general manager or
become otherwise involved with the Landmark partnership. As a “favor” to his brother Eugene, Anthony
permitted his name to be used on the offering.
Eugene was behind the project from the beginning and always planned to
serve as general partner and manager.
However, because Eugene was concerned that he might lose this asset to
his wife during an upcoming divorce, he kept his name off of the partnership
agreement.
The trial court further
found that Eugene discussed his plan to hide his involvement with the
Investors. Based on these discussions,
the trial court made the significant finding that the Investors knew that
Eugene “was in charge right from the beginning.”
The Lower Deck opened in the fall of 1991 and
closed by June 1992. The Investors
filed suit in March 1993 against Anthony, alleging that he engaged in various
forms of securities fraud and had breached his duties as general partner. The Investors subsequently narrowed their
theory to the securities claims now before us.
We briefly outline the
Blue Sky Laws on which the Investors rely.
The subchapter prohibiting “Fraudulent Practices” provides:
Sales and purchases. It is unlawful for any person, in connection
with the offer, sale or purchase of any security in this state, directly or
indirectly:
(1) To employ any device, scheme or artifice to
defraud;
(2) To make any untrue statement of a material
fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they are made,
not misleading; or
(3) To engage in any act, practice or course of
business which operates or would operate as a fraud or deceit upon any person.
Section
551.41, Stats. A related section provides investors with a
civil remedy against a “person who offers or sells a security” in violation of
the above law.
Section 551.59(1)(a), Stats.
The statute establishing
this civil remedy also contains a defense for sellers of securities; it states
in pertinent part:
A person who offers or sells a security
in violation of s. 551.41(2) is not liable ... if the purchaser knew of the
untrue statement of a material fact ....
Section
551.59(1)(b), Stats. The interrelation of these statutes is at
the heart of this case.
As a further aid to our
analysis, we will also describe the parties' trial strategies. The Investors claimed that Anthony's conduct
in making this offering violated all three subsections of § 551.41, Stats. They urged that Anthony's statement in the offering, that he would
be the restaurant manager, was an “untrue statement of a material fact.” See § 551.41(2). Moreover, they contended that Anthony's
agreement to hide Eugene's involvement in the partnership, with the goal of
fooling Eugene's wife during the upcoming divorce, was a “scheme” or “fraud”
related to the sale of these securities.
See §§ 551.41(1) and (3).
Anthony defended these
claims with evidence that the Investors each knew that Anthony was involved in
name only. Indeed, Anthony conceded
during closing arguments that “there was a misrepresentation made in this
case.” Still, Anthony contended that
the Investors “knew fully well that [Anthony] was not going to be involved” and
argued that they therefore could not have legitimately relied on what was
written in the offering.
We have now set the
stage for the Investors' two appellate claims.
First, they argue that the trial court erred when it ruled that
Anthony's defense—that the Investors had not relied on his misstatements when
making their investment decision—was available to him. Second, the Investors cite comparable federal
securities laws and argue that they are entitled to a presumption that they
relied on Anthony's misstatements and that the trial court erred because it did
not give this presumption proper weight.
Both issues are questions of law because they require us to determine if
the trial court applied the appropriate legal standard. See Bucyrus-Erie Co. v. DILHR, 90
Wis.2d 408, 417, 280 N.W.2d 142, 146-47 (1979).
The Investors cite to
the language of § 551.59(1)(b), Stats.,
and the general construction of the above-outlined Blue Sky Laws to support their
first claim. As noted above,
Wisconsin's law establishes a defense for sellers who can prove that the
allegedly defrauded investors in fact knew the truth concerning the alleged
misstatements. See id. But since the language of this provision
states that it applies when there is an alleged “violation of s. 551.41(2)
...,” the Investors claim that the trial court erred when it applied this
defense to this case. Because the trial
court found, as a matter of fact, that Anthony had participated in a plan to
defraud Eugene's wife, and because such fraud is seemingly prohibited by
§ 551.41(3), Stats., the
Investors contend that Anthony could not rely on this defense when defending a
claim under this subsection.
However, either way the
Investors shape their claim—that Anthony made misstatements to them to induce
purchases, or that Anthony made misstatements as part of plan to defraud
Eugene's wife—Anthony argues that their case boils down to the fact that he
made misstatements. See
§ 551.41(2), Stats. And because the Investors' case is a
misstatement case, they must meet his defense and prove that they did not know
the truth regardless of the way that they wrote their pleading or argued their
case.
Although Anthony has not
identified Wisconsin case law, he buttresses this argument with federal case
law regarding the analogous federal securities regulations. See 15 U.S.C.A. § 77q(a)
(1981). This federal case law holds
that a victim in an alleged misstatements case must show that he or she relied
on the misstated information. See,
e.g., Basic, Inc. v. Levinson, 485 U.S. 224, 243 (1988).[2] Thus, he argues that Wisconsin law, which is
comparable to the federal law, should follow the same standard. See State v. Temby, 108 Wis.2d
521, 528, 528-29 n.1, 322 N.W.2d 522, 526 (Ct. App. 1982) (noting similarities
between Wisconsin and federal securities laws).[3]
We agree with Anthony
that a party bringing a securities fraud case under the Wisconsin Blue Sky
Laws, which is grounded on an alleged misstatement by the seller, must be
prepared to establish that he or she relied on the misstatement. Although the defense set out in
§ 551.59(1)(b), Stats.,
speaks to how the seller may defend such charges with proof that the purchaser
“knew of the untrue statement,” this defense, in essence, is the same as
establishing “no reliance” on the misstatement under federal securities
laws. See Basic, Inc.,
485 U.S. at 243. For if the purchaser
knew that the seller's statement was untrue, as Wisconsin law describes, then
this purchaser could not have legitimately “relied” on the statement, as
federal law describes.
Seeing how this
statutory defense simply codifies a general principle within securities law, we
cannot accept the Investors' argument that this defense only applies in actions
pleaded and argued as pure misrepresentation claims under § 551.41(2), Stats.
Doing so would effectively nullify the defense set out in
§ 551.59(1)(b), Stats. If we so ruled, from this point on, every
investor would plead his or her case as a § 551.41(1) or (3) violation,
even when the alleged “scheme” or “fraud” was rooted in the seller's
misrepresentation, simply to foreclose the defending seller from being able to
assert “knowledge of the truth” (or “no legitimate reliance”) as a
defense.
In this case, Anthony
raised this defense when he claimed that the Investors knew he was not going to
be involved despite what the offering said.
Since he made this prima facie showing, the burden shifted and the
Investors had to prove either that they did not know about his actual degree of
involvement, or that they legitimately relied solely on what was printed in the
offering. The trial court resolved this
factual debate by concluding that the Investors knew Anthony was not involved
and did not rely on the statements in the written offering. We see no error in the trial court's
analysis.
Having concluded that
the Investors were required to meet Anthony's defense (and failed in their
efforts), we turn to their second claim.
Here, they contend that they were entitled to a presumption of reliance
because they had proven that there was a misstatement in the offering. They argue that the Supreme Court set out
such a rule in Affiliated Ute Citizens v. United States, 406 U.S.
128, 153-54 (1972). They further
complain that the trial court erred because it failed to give this presumption
any weight in its factual analysis.
We disagree. In Affiliated Ute Citizens,
the Supreme Court did not remove the substantive element of reliance. Rather, the Court recognized the possible
difficulties of proving reliance in cases where the seller had allegedly
failed to disclose pertinent information. Thus, the Court permitted a presumption of reliance in that
class of cases. See id.;
see also Basic, Inc., 485 U.S. at 243 (“[W]e previously
have dispensed with a requirement of positive proof of reliance, where a duty
to disclose material information has been breached ¼.”).
This is not, however, a
failure to disclose case. The Investors
clearly premise their case on the misstatements made in the offering. The trial court, therefore, did not err when
it failed to “presume” reliance and instead required the Investors to offer
proof countering Anthony's defense that they knew all along that he was not
going to be involved.[4]
In sum, our analysis of
this state's Blue Sky Laws and the comparable federal legislation and
interpretative case law reveals that Wisconsin securities regulation contains
general prohibitions against fraudulent practices in the sale of securities, see
§§ 551.41(1) and (3), Stats.,
and also has a provision (and a defense) specifically aimed at
misrepresentation. See
§§ 551.41(2) and 559.51(1)(b), Stats. Accordingly, when an investor pursues a
misrepresentation theory, he or she must be prepared to meet the seller's
defense that the investor did not legitimately rely on the alleged
misstatements.
By the Court.—Judgment
affirmed.
[1] The trial court, however, did award judgment to investors who had purchased shares without any knowledge about Anthony's true degree of involvement with the restaurant. Anthony does not challenge this component of the trial court's judgment.
[2] But see Astor Chauffeured Limousine v. Runnfeldt Inv. Corp., 910 F.2d 1540, 1546 (7th Cir. 1990) (explaining that “reliance” is really a combination of materiality and causation).
[3] Federal securities-related case law is persuasive authority when interpreting comparable Wisconsin provisions. See Gygi v. Guest, 117 Wis.2d 464, 467, 344 N.W.2d 214, 216 (Ct. App. 1984).
[4] Because we conclude that the Investors have failed to prove reliance, we can affirm the judgment without addressing Anthony's further claim that the Investors have failed to prove causation. See generally Bastian v. Petren Resources Corp., 892 F.2d 680, 685-86 (7th Cir.) (describing role of “loss causation” in securities litigation), cert. denied, 496 U.S. 906 (1990); see also State v. Blalock, 150 Wis.2d 688, 703, 442 N.W.2d 514, 520 (Ct. App. 1989) (“[C]ases should be decided on the narrowest possible ground ....”).