Documents Speak Louder Than Words in Securities Fraud Suit

Clifton L. Brinson, Michael W. Mitchell and Donald H. Tucker, Jr.

The Eastern District of North Carolina recently granted summary judgment for the defendant in a securities fraud action, holding that the plaintiff had failed to prove either scienter or reliance where alleged verbal misrepresentations were contradicted by an accurate written description of the investment.  

The case, William L. Thorp Revocable Trust v. Ameritas Investment Corp., involved the sale of variable annuities. According to the plaintiff, the defendant insurance agent had described a particular annuity as having a “guaranteed five percent yield.” Based on this alleged oral misrepresentation, the plaintiff sued for securities fraud under federal Rule 10b-5 and the North Carolina Securities Act. 

While the insurance agent denied that he promised a five-percent yield, the plaintiff’s allegations had to be presumed true for purposes of summary judgment. His defense for summary judgment purposes was based on written annuity documents he provided to the plaintiff’s attorney and accountant prior to her investment, which described the nature of the investment and the accompanying risks accurately. The insurance agent contended that his production of these documents negated any inference that he was trying to defraud the plaintiff. 

The Court (Judge Dever) agreed and granted summary judgment to the insurance agent. The Court held that, in light of the accurate documentation that was provided by the agent, the plaintiff had inadequate proof of scienter, i.e., “a mental state embracing intent to deceive, manipulate, or defraud.” Furthermore, in addition to producing the annuity documentation, the insurance agent had referred plaintiff to other individuals for further information on the annuity, which was likewise inconsistent with an intent to defraud. At most, the insurance agent was negligent in failing properly to explain the nature of the investment, but mere negligence is insufficient to prove scienter. 

The Court also held that even if the insurance agent had misrepresented that the annuity had a guaranteed five-percent return, the plaintiff had produced insufficient evidence of reasonable reliance on that misrepresentation. Any reliance on the alleged verbal misrepresentation was unreasonable in light of the pre-investment documentation that accurately described the annuity.

The Court’s opinion does not suggest that a person is free to make whatever verbal representations he wants about an investment so long as the accompanying written materials are accurate. To the contrary, the Court carefully analyzed all the facts and circumstances, including matters such as the sophistication of the plaintiff and the absence of a fiduciary relationship, in determining the legal significance of the written documentation. But this case, like a similar Fourth Circuit case earlier this year (discussed here), is yet another reminder of the difficulties faced by private plaintiffs in bringing claims for securities fraud. 

Your eye on the Fourth Circuit and the
federal districts in North Carolina