Investor does not have to show reliance on misstatements

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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 under Chapter 551.

In addition, federal securities statutes permit reliance to be presumed in failure-to-disclose cases; Carney was not a failure-to-disclose case.

Finally, the court found that Carney actually established the absence of reliance as an affirmative defense, rather than making reliance an element — that is, a defendant can defeat the action by proving that the plaintiff knew the representations were false.

Causation

The Court of Appeals then held that causation is established by the mere fact of misrepresentation and sale of a security.

Hoover noted that proof of causation is required under federal securities law, because the seller may be liable to persons other than the purchaser of a security. Thus, causation between the misrepresentation and injury must be positively demonstrated.

Under Wisconsin law, however, the seller is only liable to the purchaser. So, the court concluded, “the causal connection is established when a statutory violation is established.”

Accordingly, after finding that Hilliard’s misrepresentations and omissions were material, the court affirmed the grant of summary judgment for Cuene.

Analysis

Securities

The opinion refutes what appears to be a common misconception — that under Wisconsin’s Blue Sky laws, a plaintiff must prove reliance as an element.

In Shepherd Investments Intern., Ltd., v. Verizon Communications, Inc., 373 F.Supp.2d 853, 869 (E.D.Wis.2005), the opinion in Carney was cited for that very proposition.

More recently, a federal case involving the same defendant as in the case at bar cited Carney for that holding as well. Calnin v. Hilliard, (slip opinion) 2008 LL 336892 (E.D.Wis., Feb. 5, 2008).

In Calnin, a group of stock purchasers sued Hilliard in federal court, alleging a wide variety of state and federal claims, including misrepresentation under Wisconsin’s securities laws.

Citing Carney for support, the district court wrote, “Proof of reliance on a misrepresentation is a requirement for a cause of action under … the Wisconsin Uniform Securities Law.” Id., at *14.

However, it appears the district court is not to blame for that misstatement. Later, the court wrote, “The plaintiffs agree that reliance is a necessary element of their claims.” Id.