Investor does not have to show reliance, rules Wisconsin Court of Appeals.

Byline: David Ziemer

After an entrepreneur's promises of a commuter airline failed to take wing, an angry investor does not need to prove that he relied on those misstatements in order to bring a lawsuit under Wisconsin's securities fraud statute.

The state's appellate court also found that causation is presumed. Thus, a plaintiff needs only to show that the defendant's misrepresentation or omission was material to prevail under sec. 551.59.

In 2001, Wallace J. Hilliard formed Florida Air Holdings, Inc., envisioning it as a commuter airline operating in Florida.

However, Hilliard's dream never got off the ground. The Department of Transportation would not issue a Part 121 operating certificate.

In addition, Florida Air defaulted on more than $3.5 million in loans.

Nevertheless, in 2002, Florida Air sought investors. The sales materials represented that the airline was ready to fly and that governmental approval was anticipated in the very near future.

In addition, no mention was made of the defaulted loans. Florida Air has never operated as a commuter airline, although it did operate as a charter airline.

Herbert J. Cuene, Jr., one of the investors, sued Hilliard in state court, alleging securities fraud under Wisconsin law.

Brown County Circuit Court Judge Sue E. Bischel granted summary judgment in favor of Cuene, and the Wisconsin Court of Appeals affirmed, in a decision by Judge Michael W. Hoover.

Section 551.41(2) provides: It is unlawful for any person, in connection with the offer, sale or purchase of any security in this state, directly or indirectly ... [t]o 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.

Reliance

The court first held that Cuene did not need to prove he relied on Hilliard's statements, even though reliance is an element of common law misrepresentation.

The Court of Appeals acknowledged that, in Carney v. Mantuano, 204 Wis.2d 527, 528, 554 N.W.2d 854 (Ct.App. 1986), it stated, 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.

However, Hoover wrote that this statement contradicts an earlier Wisconsin Su-preme Court decision, Esser Distrib. Co. v. Steidl, 149 Wis.2d 64, 70, 437 N.W.2d 884 (1989), which held that there is no reliance element...