UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
filed: November 28, 1986.
RAYMOND K. PEIL, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, APPELLANT,
MARVIN M. SPEISER, LEON C. BAKER, MARVIN S. CALICOR, GERALD CHICE, ESTATE OF WALTER KUTLER, ROY MARCUS, AGIS F. KYDONIEUS, HEALTH-CHEM CORPORATION, DREXEL BURNHAM LAMBERT, INC., APPELLEES
On Appeal from the United States District Court for the Eastern District Court for the Eastern District of Pennsylvania, D.C. Civil No. 82-1289.
Before: SEITZ, HIGGINBOTHAM and BECKER, Circuit Judges.
Opinion OF THE COURT
BECKER, Circuit Judge.*fn1
In this securities fraud case, purchasers of corporate stock, suing as a class, seek damages against the corporation and its officers, alleging that the officers' misrepresentations about the corporation's business prospects artificially inflated the price of its stock and induced the purchasers to make a losing investment. The plaintiffs alleged violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); section 11 of the Securities Act of 1933, 15 U.S.C. § 77k; and the common law. With respect to their rule 10b-5 claim plaintiffs alleged violations of clauses (a), (b) and (c) of 17 C.F.R. § 240.10b-5 (1986). Following a five-week jury trial the district court directed a verdict in favor of the defendants on the Rule 10b-5(b) claim and submitted the remaining claims to the jury which found for all defendants, including the corporations' underwriters on a bond issue, on all claims. In part I, we unanimously affirm the judgment entered on the verdicts returned by the jury.
Because the class representative did not prove direct reliance upon the defendants' representations, we are called upon to consider the soundness of the "fraud on the market" theory of causation. Under this widely accepted theory, see infra part II, the purchasers can establish causation by showing that, in making their purchase, they relied on the price of the stock, which in turn had been skewed by the fraudulent actions. In part II, we unanimously approve of this theory and establish it as the law of this circuit. However, we must also address the question of the applicability of the fraud on the market theory to claims of individual misstatements or omissions under rule 10b-5(b). The defendants urge us to limit the use of the fraud on the market theory to claims of a scheme to defraud under rules 10b-5(a) and (c), 17 C.F.R. § 240.10b-5(a) and (c). Because the market is distorted by a 10b-5(b) violation as well as by a 10b-5(a) or (c) violation, we decline to recognize such a distinction, and therefore hold, in Part III, that the district court should have submitted the rule 10b-5(b) claim to the jury on a fraud on the market theory, rather than directing a verdict for defendants on that issue.*fn2 However, we also find that, in view of the manner in which the rule 10b-5(a) and (c) claims were submitted to the jury, the verdict on the rule 10b-5(a) and (c) claims serves as a bar to a new trial on the rule 10b-5(b) claims.*fn3 The judgment of the district court will therefore be affirmed in all respects.
I. Facts and Procedural History
Defendant Health-Chem Corporation is a company involved in various lines of business, most relevantly the development of technology that permits the regulated release of chemicals through plastic membranes. The individual defendants are officers of Health-Chem: Marvin Speiser, Chairman of the Board and President; Roy Marcus, Senior Vice President; Leon C. Baker, a member of Health-Chem's Executive Committee; and Agis Kydonieus, Executive Vice-President of Health-Chem's Hercon Division. Drexel Burnham Lambert, an investment banking firm that underwrote an April 15, 1981 offering of Health-Chem convertible debentures, is a defendant with respect to the claim brought by plaintiffs under § 11 of the Securities Act of 1933, 15 U.S.C. § 77K. The plaintiff class consists of individuals who purchased Health Chem's stock from April 15, 1980 through November 2, 1981 and sold at a loss.
During the late 1970's, Health-Chem developed technology designed to combat gypsy moths with the aid of an aphrodisiac called "pheromone."*fn4 During 1980 and 1981, when gypsy moth defoliation was a matter of great concern, Health-Chem's work attracted the attention of security analysts, newspapers, scientific journals, and gardening journals. Although the price of Health-Chem's stock rose substantially during the latter half of 1980 and early 1981, it subsequently declined. Named plaintiff Raymond K. Peil purchased 500 shares of Health Chem's stock on December 5, 1980, in the midst of the stock's surge. After the decline of the stock's price, he sold his shares for a loss in excess of $6,000. The other members of the plaintiff class made similarly unprofitable investments in Health-Chem's stock during this period.
Peil brought this action in the United States District Court for the Eastern District of Pennsylvania, on behalf of himself and all others similarly situated, alleging that Health-Chem Corporation and its officers and directors had violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and section 11 of the Securities Act of 1933, 15 U.S.C. § 77k and had committed various common law offenses. With respect to their rule 10b-5 claim, plaintiffs alleged that Health-Chem and its directors and officers had violated clauses (a), (b) and (c) of 17 C.F.R. § 240.10b-5 (1986). Peil also claimed that Drexel Burnham Lambert, Inc., had violated Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k.
The gravamen of plaintiffs' case was that the price of Health-Chem's stock had been artificially inflated by the defendants' false and misleading statements about Health-Chem's business prospects, and that the price of the shares induced plaintiffs to purchase Health-Chem's stock. Plaintiffs alleged that they had suffered financial losses when the falsity of defendants' representations became apparent and the stock fell to its true value.
Following certification of a class pursuant to Fed. R. Civ. P. 23(b)(3), the case proceeded to a five-week jury trial during which plaintiffs presented 29 witnesses and 200 exhibits. Plaintiffs sought to establish that defendants,*fn5 knew that the pheromone was not likely to be effective, and that they intentionally disseminated false and misleading information in order to increase the value of Health-Chem's stock.*fn6 Plaintiffs also sought to establish: 1) that as a result of the misrepresentations and material omissions, Health-Chem's stock was very heavily traded and was a leading percentage gainer on the American Stock Exchange in 1980; 2) that the pheromone never lived up to its billing and was eventually abandoned by Health-Chem; and 3) that plaintiffs suffered losses as a result of their purchase of Health-Chem's stock.
The most significant testimony was Peil's own. Peil testified that he had purchased the stock on the recommendation of his broker, who advised him of an article in Financial World magazine that predicted an enormous increase in Health Chem's stock. The article included allegedly false representations by individual defendants about Health-Chem's outstanding prospects. Peil conceded that he had never read the Financial World article and that, apart from that article, he had neither read nor heard of defendants' alleged misrepresentations.
After plaintiffs presented their evidence, defendants moved for a directed verdict on the rule 10b-5 and common law claims on the ground that Peil had failed to produce evidence from which a jury could conclude that he had relied on defendants' alleged misrepresentations and omissions. The district court granted a directed verdict for defendants on the common law claims and the rule 10b-5(b) claim. The court stated that Peil's own testimony that he was unaware of defendants' representations conclusively rebutted that presumption: "no reasonable person could conclude that the named plaintiff relied in any way on any recommendation or misrepresentation by defendants . . . The named class representative's own testimony rebuts the presumption of reliance." App. at 1867-68. The district court then decertified the class with respect to the rule 10b-5(b) and common law claims. The court, however, denied defendants' motion for a directed verdict with respect to the rule 10b-5(a) and (c) claims. It stated that "direct" reliance by plaintiffs on defendants' misrepresentations is not an essential element of those claims. Rather, it stated, defendants could be found liable if they committed a a fraud on the market, i.e., if they were involved in a scheme that affected the market price of the stock which, in turn, induced appellants to purchase the stock, see infra pp. 13-21.
The court then submitted plaintiffs' rule 10b-5(a) and (c) and § 11 claims to the jury by special interrogatories, Fed. R. Civ. P. 49(a). On the basis of the jury's responses to the interrogatories, and the district court's previous rulings on defendants' motions for directed verdicts, the court entered judgment for the defendants on all claims.
Plaintiffs moved for judgment n.o.v. on the § 11 claim, but the court denied the motion. Judgment was entered on the verdicts and plaintiffs appealed, seeking 1) vacatur of the verdicts and the final judgment; 2) reversal of the judgment on the § 11 claims; 3) a new trial on plaintiffs' § 10 and pendant common law claims; and 4) a trial on a civil RICO claim that the district court refused to allow plaintiffs to amend their complaint to interpose. Our jurisdiction is pursuant to 28 U.S.C. § 1291.
Although plaintiffs allege a number of trial errors, with the exception of the point discussed in part III infra, the allegations are without merit.*fn7 Because the challenge to the rule 10b-5(a) and (c) judgments is based solely on such allegations, we will affirm the judgment of the district court insofar as it is based on those claims. We also find the plaintiffs' challenges to the § 11 verdict and the directed verdict on the common law claims are meritless.*fn8
The district court's directed verdict on the rule 10b-5(b) claim is troublesome, however, and our evaluation of it requires resolution of a legal question heretofore unaddressed by this court -- the applicability of the "fraud on the market" theory to rule 10b-5 claims in general and rule 10b-5(b) claims in particular.
II. Legal Background on Rule 10b-5; The Fraud on the Market Theory
Section 10 of the 1934 Securities Act provides that
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange--
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j. Subsequent to passage of the 1934 Act, the Securities and Exchange Commission promulgated Regulation 10b-5, providing that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) to employ any device, scheme, or artifice to defraud,
(b) to 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 were made, not misleading, or
(c) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
Section 10 was built on, and retained, many of the characteristics of the common law tort action of deceit. See 3 Loss, Securities Regulation 1430 (1961). To prevail in such an action, a plaintiff had to establish six elements: 1) a false representation of 2) a material 3) fact; 4) defendant's knowledge of its falsity and his intention that plaintiff rely on it; 5) the plaintiff's reasonable reliance thereon; and 6) his resultant loss. Id. at 1431. There is little dispute that plaintiffs in § 10(b) claims must generally satisfy all of these requirements as well,*fn9 but only the reliance requirement concerns us here.
Traditionally, plaintiffs in a rule 10b-5 suit had the burden of establishing that they relied on the fraudulent actions of the defendant. List v. Fashion Park, Inc., 340 F.2d 457, 463 (2d Cir.), cert. denied, 382 U.S. 811, 86 S. Ct. 23, 15 L. Ed. 2d 60 (1965). Thus, plaintiffs were required, as a threshhold matter, to establish that they were aware of and directly misled by defendant's actions. However, many courts have come to realize that, in certain situations, the requirement of showing direct reliance "imposes an unreasonable and irrelevant evidentiary burden." Blackie v. Barrack, 524 F.2d 891, 907 (9th Cir. 1975).
The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business. See Note, The Fraud-on-the-Market-Theory, 95 Harv. L. Rev. 1143, 1145-56 (1982), Misleading statements will therefore defraud purchasers of stock, and thus defraud purchasers who rely on the price as an indication of the stock's value. By artificially inflating the price of the stock, the misrepresentations defraud purchasers who rely on the price as an indication of the stock's value. The causal connection between the defendants' fraud and the plaintiffs' purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations. In both cases, defendants' fraudulent statements or omissions cause plaintiffs to purchase stock they would not have purchased absent defendants' misstatements and/or omissions.
Accordingly, we hold that plaintiffs who purchase in an open and developed market,*fn10 need not prove direct reliance on defendants' misrepresentations, but can satisfy their burden of proof on the element of causation by showing that the defendants made material misrepresentations. If plaintiffs make such a showing, the court will presume that the misrepresentations occasioned an increase in the stock's value that, in turn, induced the plaintiffs to purchase the stock. The defendants are, of course, free to assert appropriate defenses, including the defenses that the market did not respond to the alleged misrepresentations, and that plaintiffs knew of the falsity of defendants' representations or would have purchased the stock even if they had known of them. In an open and developed market, the dissemination of material misrepresentations or withholding of material information typically affects the price of the stock as a reflection of its value. See In Re LTV Securities Litigation, 88 F.R.D. 134, 145 (N.D. Tex. 1980) (Higginbotham, J.).*fn11
III Does the "Fraud on the Market" theory Apply to Rule 10b-5(b) claim?*fn12
Defendants do not contest the validity of the fraud on the market theory generally,*fn13 but contend that it ought to be limited to rule 10b-5(a) and (c) claims, and that plaintiffs should retain the burden of establishing direct reliance in the rule 10b-5(b) claims. This was the position of the district court. Plaintiffs assert that there is no justification for limiting the theory in this way and that it ought be applied to rule 10b-5 claims whether cognized under clause (a), (b) or (c).
This question is complicated by the uncertainty surrounding the differences and overlap among the three clauses of rule 10b-5.*fn14 For present purposes, the salient distinction between clause (b) on the one hand, and clauses (a) and (c) on the other, is that the latter arguably require proof of a scheme to defraud, whereas clause (b) is indisputably satisfied by a single fraudulent action.
We need not decide whether this alleged distinction is accurate, i.e., whether clauses (a) and (c) do require a scheme, because even assuming the distinction, we believe that the existence of a scheme to defraud is irrelevant to the applicability of the fraud on the market theory. Even under the theory, plaintiffs must show that defendant's misrepresentations were "material." Material misrepresentations or omissions, by definition, are likely to influence the behavior of buyers and sellers and thus to affect the market. A single misrepresentation or omission, like a more widespread scheme, may artificially inflate the price of stock and thus defraud plaintiffs who rely on the price of the stock in deciding to purchase shares. See Digilog, 648 F. Supp. at ......, Fed. Sec. L. Rep. (CCH) P 92,274 at 91,895 (applying fraud on the market to 10b-5(b) action) ("Imposing such a requirement [of a scheme] creates another burden which could effectively preclude the maintenance of otherwise legitimate suits under the Security laws. Securities legislation, enacted for the purpose of avoiding fraud, is intended by Congress to be construed . . . flexibly to effectuate its remedial purposes.").
Neither the district court nor defendants have explained why rule 10b-5(b) claims should be exempt from the "fraud on the market" theory. Appellees rely on the authority of Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981 (en banc), cert. denied, 459 U.S. 1102, 74 L. Ed. 2d 949, 103 S. Ct. 722 (1982), which held that the theory was applicable to clause (a) and (c) allegations of a pervasive scheme, but inapplicable to clause (b) claims of particular misrepresentations or omissions. But See Lipton v. Documation, Inc. 734 F.2d 740, 747 n.11 (11th Cir. 1984) (expressing discomfort with Sklar's limitation of the "fraud on the market" theory to cases involving a scheme). Sklar, however, involved a newly issued security rather than a security already being traded in a well-developed market. As we read Sklar, the court believed it unlikely that a single misrepresentation or omission would result in the sale of a new security; only a widespread scheme could have that effect. Regardless of whether the Sklar court was correct in requiring direct reliance on the misrepresentations in such a case, its rationale does not apply here, because a well-developed market can reasonably be presumed to respond to even a single material misrepresentation or omission concerning a stock already being traded in that market.*fn15 We therefore conclude that the fraud on the market theory pertains to rule 10b-5(b) claims as well as claims brought under clauses (a) and (c).*fn16
Defendants urge that even if we apply the fraud on the market theory to plaintiffs' rule 10b-5(b) claim, Peil's testimony that he had not directly relied on the alleged misrepresentations conclusively rebutted the presumption of reliance. This argument, however, misses the point of the fraud on the market theory, under which plaintiff may prevail even if he was entirely may prevail even if he was entirely unaware of the alleged misrepresentations. Under the fraud on the market theory, plaintiffs' reliance is not on defendants' fraudulent actions directly, but on the marketplace's reflection of the value of the stock. Thus, this reliance can be rebutted by showing that either: 1) the misrepresentations did not affect the market price of the stock; or 2) plaintiff would have purchased the stock even at the price it would have been at but for the misrepresentations. In this case, defendants did not attempt to establish either of these points. Peil's testimony established only that he did not rely directly on defendants' misrepresentations, a fact that is not relevant under the fraud on the market approach.*fn17
IV. The Preclusive Effect of the Jury Verdict
As noted above, the district court permitted plaintiffs to proceed on a fraud on the market theory with respect to their rule 10b-5(a) and (c) claims. The court changed the jury accordingly, and submitted to the jury the following special interrogatory:
Did any of the following defendants knowingly or recklessly employ any device, scheme or artifice which defrauded plaintiffs in connection with their purchase or sale of Health-Chem stock, or knowingly or recklessly engage in any act, practice or course of business which operated as a fraud or deceit upon plaintiffs in connection with their purchase or sale of Health-Chem stock?
The jury marked a space designating "No" with respect to each individual defendant, and the court therefore entered a verdict for defendants on the rule 10b-5(a) and (c) claims.
Defendants contend that the jury's answer to this interrogatory precludes plaintiffs from attacking the propriety of the directed verdict on rule 10b-5(b). They point out that the interrogatory asked if defendants had employed any fraudulent device or had engaged in any fraudulent act. Defendants argue, therefore, that the jury's response in the negative amounts to a finding that appellees committed no improper act, including any misrepresentation or omissions in violation of rule 10b-5(b). The jury's factual finding, they contend, necessarily defeats any claim under 10b-5(b), as well as under clauses (a) and (c).
Plaintiffs' respond that defendants' argument makes sense only if the interrogatory is read in a vacuum. In their submission, when one reads the court's charge to the jury, which is quoted in the margin,*fn18 the case takes on a different complexion. Plaintiffs assert that an examination of the charge demonstrates that the jury was instructed that only a "scheme" to defraud warranted a finding of liability. The court explained, they point out, that "the question is whether defendants made any material misrepresentations or omissions [ sic ] to consumers as part of a scheme in order to artifically increase the price at which Health-Chem stock was selling." App. at 1950. The court, plaintiffs note, went on to say, "you must also find that the information directed to consumers was part of a course of business or scheme in violation of the rule [10b-5]." Id.*fn19
The majority has carefully considered the plaintiffs' arguments. It believes, however, that the jury necessarily passed on the rule 10b-5(b) claim based on misstatements in finding defendants not liable under rule 10b-5(a) and (c). The majority concludes that the jury's finding is preclusive and the panel will therefore not grant a new trial on the 10b-5(b) claim.
The entire case of the plaintiffs involved a number of alleged misstatements attributed to defendants. None of plaintiffs' evidence was withheld from the jury as a result of the district court's direct verdict on the rule 10b-5(b) claim. In addition, in charging the jury on the 10b-5(a) and (c) claims, the court in fact defined each element required to prove a 10b-5(b) claim. Finally, although we have made the point above, we repeat here in view of its importance the fact that the district court submitted the following special interrogatory to the jury:
Did any of the following defendants knowingly or recklessly employ any device, scheme or artifice which defrauded plaintiffs in connection with their purchase or sale of Health-Chem stock, or knowingly or recklessly engaged in any act, practice or course of business which operated as a fraud or deceit upon plaintiffs in connection with their purchase or sale of Health-Chem stock?
(emphasis supplied). Under this interrogatory, even a single fraudulent act, including a single misstatement, would warrant an affirmative answer to the interrogatory. The jury thus necessarily rejected 10b-5(b) liability in returning a negative answer to the interrogatory.
The dissent says, in effect, that this understanding of the case makes sense only if the interrogatory is read without regard to the language of the jury charge as a whole. On the contrary, while the charge dealt only with the (a) and (c) claims as such, it effectively defined the requisites for liability under (b). Thus, after stating the terms of rule 10b-5(a) and (c), the district court instructed the jury "in deciding whether any one or more, or all of defendants engaged in any such activity, you may consider whether the defendants made any untrue statement or statements of material fact or omitted to state any material fact or facts."
It is true that the same paragraph of the charge concludes: "plaintiffs contend that part of the fraud was the making of such statements." The dissent suggests that this language barred a finding of liability predicated exclusively on a single misstatement. The district court certainly makes repeated references in its instructions to the requirement of a "scheme" or "course of business." It does so, however, in the context of explaining that the fraud on the market liability is based on an effort to inflate the stock price artificially. In its setting, then, the instruction does not exclude the finding of liability based on a single misstatement.
The charge included a long discussion distinguishing securities fraud from efforts to defraud consumers about the nature of defendants' product. The district court told the jury that if they found only misstatements made to consumers, and none directly to investors, the jury must find an additional tie to investors for liability to attach:
While we can never say with certainty how a jury understood a particularly charge, the purpose of this language was to explain how misstatements directed to consumers could form the basis for a 10b-5(a) or (c) liability. The charge, however, does not exclude a finding of a liability based on misstatements that are themselves intended to mislead investors. As the subsequent paragraph of the charge makes evident, this part of the charge did not require a finding of a scheme as a precondition of liability, but simply distinguished consumer fraud from securities fraud.*fn20
The dissent also concludes that the district court excluded the possibility of rule 10b-5(b) liability in instructing the jury: "The question is whether defendants made any material misrepresentations or ommissions [sic] to consumers as part of a scheme in order to artificially inflate the price at which Health-Chem stock was [trading]." Here, again, the district court was defining the difference between consumer and securities fraud in its explanation of the scienter and the fraud on the market elements of a 10b-5 action. It was not excluding single acts of misrepresentation. We simply do not see what the charge required plaintiffs to prove that would not be part of their burden in a rule 10b-5(b) action. In fact, liability under the "scheme" or "course of conduct" language of the rule might be based on a series of minor misrepresentations that artificially inflate the stock price only when taken together. See Blackie v. Barrack, 524 F.2d 891, 903 (9th Cir. 1975). The jury found no liability after presumably considering each and all of the alleged misstatements.
In sum, we believe the assumed error of the district court in taking the 10b-5(b) assumed claim from the jury was harmless because none of the plaintiffs' evidence was excluded and the jury's determinations on the (a) and (c) claims necessarily excluded any factual basis for liability on the claim (b) claim.
For the reasons set forth above, the judgment of the district court will be affirmed in all respects.
JUDGE BECKER'S SEPARATE DISSENTING STATEMENT ON THE PRECLUSIVE EFFECT OF THE JURY VERDICT
The majority correctly notes that the district court stated that the jury might consider "whether the defendants made any untrue statement or statements of material fact or omitted to state any material fact or facts." The court never instructed the jury, however, that a single misstatement or omission could constitute a violation of rule 10b-5. On the contrary, the court gave the jury the clear impression that, while it was to consider the making of misrepresentations or omissions, such acts could violate the rule only if they were part of some larger scheme or course of activity. The district court explained to the jury that the question was "whether defendants made any material misrepresentations or ommissions [ sic ] to consumers as part of a scheme in order to artificially increase the price at which Health-Chem stock was selling." App. at 1950. (Emphasis added.) Moreover, immediately after mentioning "any untrue statement" and "any material fact," the court reminded the jury that the plaintiffs were contending "that part of the fraud was the making of such statements." Id. This statement supports the impression that a scheme was required.
In Ayoub v. Spencer, 550 F.2d 164 (3d Cir. 1977), we reversed a jury verdict for defendant in a medical malpractice case because the relationship between proximate cause and contributory negligence was not laid out for the jury with sufficient clarity in the jury instructions. Although some language in the instructions stated the law on this issue properly, we believed that "this [issue] should have been made perfectly clear to the jury." Reversal was deemed appropriate because "we [were] convinced that the issue was not properly clarified for the jury and that confusion may have resulted to appellant's prejudice." 550 F.2d at 168. Application of that standard here requires us to reverse and remand for a new trial on the 10b-5(b) issue. While the question of whether or not defendants made a single misstatement or omission which damaged plaintiffs was contained in the jury instructions, I am convinced that it was not expressed with sufficient clarity. Rather the clear impression is that a scheme was required. At the very least, "confusion may have resulted to appellant's prejudice" on the issue. Under these circumstances plaintiffs' rule 10b-5(b) claim cannot be said to have been rejected by the jury. I therefore believe a retrial is required.
As the majority points out, careful scrutiny of the charge allows the interpretation that the court distinguished between frauds perpetrated on investors from those perpetrated on consumers, and that it instructed the jury it need find a scheme only with respect to the former. One might then argue that the jury's finding of no liability under rules 10b-5(a) and 10b-5(c) implies that it found no material misrepresentations or omissions directed toward investors, and thus that there could be no liability under rule 10b-5(b). This argument is not explicitly made by the defendants or the majority, and I would reject it if were. Although close, patient reading of the charge might permit this interpretation, the jury only heard the charge; it did not have the opportunity to read and analyze it at its leisure. To be absolutely fair on the appeal, one must consider what the jury would have understood by the charge, and for the reasons I have stated, I believe that the overwhelming effect of the charge would have been that the jury would have believed that a finding of a scheme was a predicate to a finding of liability.
Defendants make two other arguments which the majority does not address but which, in the interests of completeness, I feel constrained to consider. First, defendants argue that even if the jury did understand that a scheme was necessary to liability on the rule 10b-5(a) and rule 10b-5(c) claims, the jury verdict on these "scheme" claims logically included a finding for defendants on the rule 10b-5(b) claim. This argument is incorrect because a scheme to defraud involves more elements than a single material misrepresentation or omission, although such a scheme may be composed of a series of material misrepresentations and omissions. Thus, the question whether Health-Chem made any misstatement or omission was not "necessary to the outcome of the jury verdict," Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326 n.5, 58 L. Ed. 2d 552, 99 S. Ct. 645 (1979), and a finding of material misstatements or omissions sufficient for liability under 10b-5(b) would not be inconsistent with the verdict on 10b-5(a) and 10b-5(c).
Finally, defendants raise another, and slightly different argument based on the relationship between clauses (b) and (c) of rule 10b-5. Defendants contend that, as clause (c) prohibits " any act " that defrauds a purchaser, it is a "catch-all" and a verdict in favor of a defendant on clause (c) necessarily encompasses all rule 10b-5 claims. This point is problematic. As has been noted, the distinction between parts (a), (b) and (c) of rule 10b-5 is far from clear. One obvious problem with defendants' proposed reading of rule 10b-5(c) is that it would make clause (b) (and possibly clause (a) as well) superfluous. I would hesitate before reaching this uncomfortable result. Even if this contention is correct, however, it is irrelevant here because according to the district court's charge to the jury clause (c) is not a catch-all, but requires a scheme to defraud, see supra. Thus, whether or not defendant is correct about the relationship between clauses (c) and (b), this much is certain: (1) a plaintiff can prevail on a rule 10b-5 claim without establishing a scheme; and (2) given the jury charge, plaintiffs could have prevailed only if they established a scheme.
In sum, I believe that plaintiffs' rule 10b-5(b) claim cannot be said to have been rejected by the jury. I conclude not only that the district court erred in granting a directed verdict for defendants with respect to the 10b-5(b) claim, see supra part III, but also that the jury verdict on the (a) and (c) claims was not preclusive. I would therefore reverse the judgment and remand for a new trial of the 10b-5(b) claim. I also would reinstate the class action certification with respect to that cause of action.