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18.4 Securities—Justifiable Reliance—Generally

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The plaintiff must prove by a preponderance of the evidence that [he] [she] [it] justifiably relied on the alleged misrepresentation or omission in deciding to engage in the [purchase] [sale] of the [security] [securities] in question. The plaintiff may not intentionally close [his] [her] [its] eyes and refuse to investigate the circumstances or disregard known or obvious risks.


Use this instruction unless the plaintiff relies on a fraud-on-the-market theory, in which case Instruction 18.5 (Securities—Justifiable Reliance—Fraud-on-Market Case) should be used. Even in a fraud-on-the-market theory case, however, this instruction may become applicable if the jury finds that the defendant rebutted the presumption of reliance on the market.

The element of "reliance [is] often referred to in cases involving public securities markets . . . as transaction causation . . .." Dura Pharmaceuticals Inc. v. Broudo, 544 U.S. 336, 341 (2005).

In Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1030 (9th Cir.1992), the court found that an investor cannot claim reliance on a misrepresentation if the investor already possessed information sufficient to call the representation into question.

A rebuttable presumption of reliance is deemed to arise when the fraud involves material omissions. Affiliated Ute Citizens v. United States, 406 U.S. 128, 153–54 (1972). In a "mixed case of misstatements and omissions," the presumption will only apply if the case primarily alleges omissions. Binder v. Gillespie, 184 F.3d 1059, 1063–64 (9th Cir.1999) (case resolved on summary judgment), cert. denied, 528 U.S. 1154 (2000). Accordingly, at trial, the court will have to resolve whether the presumption is applicable in light of the evidence.

To provide guidance to jurors required to determine whether the plaintiff’s reliance was justifiable, the judge may consider adding the following language to this instruction:

In deciding whether a plaintiff justifiably relied on the defendant’s alleged misrepresentation[s] or omission[s,] you may consider evidence of:

(1) whether the plaintiff was sophisticated and experienced in financial and securities matters;

(2) whether the plaintiff and the defendant had a long-standing business or personal relationship, or a relationship in which the defendant owed a duty to the plaintiff to not interfere with or adversely affect the plaintiff’s interests;

(3) whether the plaintiff ignored or refused to investigate the circumstances surrounding the transaction;

(4) whether the plaintiff disregarded risks so obvious that they should have been known or risks so great as to make it highly probable that harm would follow;

(5) whether what the defendant misrepresented or concealed suggests that [he] [she] [it] had knowledge of the fraud;

(6) whether the plaintiff had access to the relevant material information;

(7) how specific was the misrepresentation;

(8) who initiated or expedited the transaction—the plaintiff or the defendant;

(9) whether the defendant prepared or provided to the plaintiff materials that contained adequate warnings about the risks associated with the investment or adequate disclaimers describing limitations on the scope of the defendant’s representations or the defendant’s involvement; and

(10) any other evidence you find helpful in deciding whether the plaintiff justifiably relied on the defendant’s misrepresentation[s] or omission[s]."

Although there is no reported decision reflecting that a court actually instructed a jury to consider the foregoing factors, there is some authority for doing so. See, e.g., In re Rexplore, Inc. Securities Litigation, 671 F.Supp. 679, 684 (N.D. Cal. 1987); Luksch v. Latham, 675 F.Supp. 1198, 1203 (N.D. Cal. 1987) (sophistication of plaintiff relevant to determine when plaintiff knew or should have known of a securities law violation, for purposes of statute of limitations); cf. Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 739 F.2d 1434, 1435–36 (9th Cir.1984) ("The scope of duty owed under Rule 10b-5 is to be determined from a number of factors. Among these are the relationship between the advisor and the client, their relative access to information, the benefit derived from the relationship by defendant, defendant’s awareness of plaintiff’s reliance on him and defendant’s activity in initiating the transactions at issue.").

To establish that a defendant adequately warned the plaintiff of the attendant risks in the transaction, the defendant’s disclosures must have been precise and must have related directly to that which the plaintiff claims was misleading. See In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1414–15 (9th Cir.1994).