Recent Developments Affecting Securities Litigation in Colorado
| Publication year | 1984 |
| Pages | 1161 |
1984, July, Pg. 1161. Recent Developments Affecting Securities Litigation in Colorado
It is not necessary to subscribe to the view that "litigation has become the nation's secular religion"(fn1) to recognize that most business disputes which become the subject of lawsuits for reasons which are personal to the litigants will have public ramifications. Many recent legal histories persuasively demonstrate that capitalism itself was brought to legal life through a succession of judicial decisions prompted by private lawsuits.(fn2) The law of securities is perhaps the most obvious example of this reality. Weekly advance sheets provide stark testimony to the development of new theories of liability and the continuing flow of cases of first impression.
Securities litigation has always required uncommon perspicacity since the maze of federal and state judicial opinions which are relevant to such fundamental decisions as to whether to litigate, what theories to assert and what defenses to raise are often in conflict, when sufficiently clear to be subject to analysis at all. Certainly, the securities trial and appellate advocate must be sensitive to the philosophy and current of opinion contained in each judicial development, especially in those circumstances involving theories of implied civil liability.
This article does not presume to be an exhaustive survey of all recent securities litigation trends or developments of which Colorado lawyers should be aware. Rather, the subject areas presented here are selective in nature. The article is intended merely to present a brief and practical discussion of several of the more significant developments which have taken place since 1980 in securities litigation either in Colorado courts or the federal courts sitting within the state.
The volume of securities litigation which has taken place throughout the nation since 1980 suggests that the U.S. Court of Appeals for the Tenth Circuit was premature and perhaps hopeful when it concluded in 1972 that Rule 10b-5,(fn3) promulgated under the Securities Exchange Act of 1934 ("1934 Act"), is "plain, concise and unambiguous."(fn4) History suggests that the Rule is not clear since the language of the Rule itself does not define the contours of the elements of a Rule 10b-5 breach and federal courts have not been in agreement on the required ingredients of all private causes of action based on the Rule. However, there is little doubt that the Rule continues to be a potent weapon against fraud in securities transactions and, whatever the efficacy of other provisions of the federal securities laws, Rule 10b-5 inevitably seems to be the focus of much attention in Colorado securities litigation.
There is no federal period of limitations expressly applicable to claims under § 10(b) of the 1934 Act(fn5) nor does federal law prescribe any general statute of limitations for civil actions. As with other judicially implied causes of action, suits brought under this provision are subject to the most "analogous," "appropriate" or "applicable" state statute of limitations; i.e., subject to the limitations period applied to actions "of the same kind" by the law of the state where the alleged violations occurred.(fn6) Federal courts in Colorado have consistently ruled that, on the basis of CRS §§ 13-80-108 and 13-80-109, the applicable limitations period for fraud within Colorado is three years.(fn7)
In the most recent consideration of the issue, the Tenth Circuit simply applied the three-year limitation period (three years from the date on which the fraud was committed) which had been previously agreed upon by the parties.(fn8) In doing so, the court observed that even though it is not entirely clear whether Colorado or federal law governs the tolling of the statute, under either law the limitations period is tolled until the aggrieved party learns of the fraud or should have discovered it by the exercise of reasonable diligence.(fn9) Of course, these decisions are part of a pattern of decisions in which the federal courts have concluded that the statute of limitations for traditional common-law fraud within Colorado is the "law of the state" to be applied.
In recent years, federal courts in certain other jurisdictions have applied the limitations period included within the applicable state "Blue Sky" statute rather than the limitations period for common-law fraud.(fn10) The reasoning of these decisions seems to be that the
Blue Sky laws in question---which deal with fraudulent transactions in securities---more nearly embodied the policies behind § 10(b) than did the elements of the states' common-law fraud cause of action. It is unlikely that this analysis will be of interest to the Tenth Circuit for actions arising within the District of Colorado, however, since the 1981 amendments to the Colorado securities act contain an express limitations period of three years for the section which appears to be the analogue of § 10(b) of the 1934 Act.(fn11)
As a general proposition, in order to sue on the basis of Rule 10b-5, a party must allege and prove both that he is within the zone of interest that Congress intended to protect and that his injury is directly related to the alleged unlawful conduct.(fn12) The U.S. Court of Appeals for the Second Circuit was the first court to create a Rule 10b-5 standing requirement. In 1952, a panel of that court (which included Learned Hand and his cousin Augustus) enunciated the "Birnbaum Rule," a standing test which requires a Rule 10b-5 plaintiff to be an actual purchaser or seller of a security in order to have standing.(fn13) This test was necessarily implied since there is no specific language in Rule 10b-5 which would impel a purchaser-seller standing requirement.
The imminent demise of this test was predicted for several years. However, in 1975 the U.S. Supreme Court affirmed the "Birnbaum" Rule in the case of Blue Chip Stamps v. Manor Drug Stores.(fn14) Since that time, the Tenth Circuit has had only a few occasions to define the parameters of the purchaser-seller requirement. In Aldrich v. McCulloch Properties, Inc.,(fn15) the court construed Blue Chip Stamps as defining the term "purchasers" in terms of persons with contractual rights. In Westinghouse Credit Corp. v. Bader & Dufty,(fn16) the court never reached the issue of whether the Rule 10b-5 purchaser-seller requirement applies to a private action which is purely injunctive in nature. However, it did reaffirm an earlier ruling that a plaintiff who does not actually purchase or sell securities may nevertheless maintain an action for equitable relief under Rule 10b-5 if he can show a "causal connection" between the fraudulent sale of a security and injury to himself.(fn17) "Causal connection" between the fraudulent sale and the resultant injury was once again interpreted as meaning that the fraudulent sale was "directly" associated with the alleged injury.(fn18)
It has long been a generally applicable proposition that a complaint stating a Rule 10b-5 claim must meet the "particularity" requirements of Federal Rule of Civil Procedure 9(b).(fn19) The theory of Rule 9(b) is that the defendant in a case wherein the plaintiff alleges either fraud or mistake, unlike defendants in other actions, should be specifically apprised of the occasion and the circumstances of the alleged fraud. The Rule 9(b) guidelines which must be followed within the District of Colorado were established twenty years ago.(fn20) At the very minimum, a Rule 10b-5 complaint must plead scienter.(fn21) Whether or not the scienter requirement includes the obligation to state with specificity the facts constituting the allegation of scienter(fn22) remains to be seen.
Practice also suggests that a charge of fraud, which implies moral turpitude, should not be casually alleged and that pleadings of fraud should be long on facts and short on invectives.(fn23) Allegations which are conclusory in nature and fail to identify specific misrepresentations or misleading statements have been found by the U.S. District Court for the District of Colorado to be inadequate.(fn24) Recently, a member of that court granted in part a motion to dismiss based upon Rule 9(b), holding that it was necessary for the plaintiff to identify the occasions on which the affirmative misstatements were allegedly made and that it was further necessary to identify the specific nature of the alleged misstatements.(fn25)
Since 1976, the starting point for any analysis of the scienter requirement for Rule 10b-5 actions has been the U.S. Supreme Court's opinion in Ernst & Ernst v. Hochfelder.(fn26) In this case, the court held that liability under Rule 10b-5 requires a finding of scienter, defined as "a mental state embracing intent to deceive, manipulate, or defraud."(fn27) The court concluded that negligent conduct is not sufficient for civil liability, but declined to decide whether, in some circumstances, reckless behavior is sufficient. In 1982, the District of Colorado ruled that Hochfelder required a showing of knowing conduct.(fn28) The Tenth Circuit settled the issue when it adopted the view that convincing proof of recklessness will establish scienter under the federal securities laws, and it defined reckless behavior as conduct that is:
an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the...
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