Before Judges Havey, Skillman and Lesemann.
The opinion of the court was delivered by: Skillman, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
On appeal from Superior Court of New Jersey, Law Division, Mercer County.
The primary issue presented by this appeal is whether a person who purchases corporate securities for a price which is artificially inflated by deliberately false statements issued by the corporation may maintain an action for common law fraud even though the purchaser was not aware of those statements. The trial court held that to maintain a fraud action based upon a corporation's deliberate false statements about its financial condition, a plaintiff must allege that he or she was aware of and directly relied upon those statements. Because plaintiff does not allege such direct reliance, the court dismissed her complaint. We conclude, however, that a plaintiff may satisfy the reliance element of a cause of action for fraud by showing reliance upon the integrity of the market price for a corporate security which has been artificially inflated by the corporation's deliberate false statements. Therefore, we reverse the dismissal of plaintiff's complaint.
Defendant i-Stat Corporation (i-Stat) is involved in the manufacture and sale of blood analysis products. The corporation's stock is publicly traded on the NASDAQ. The individual defendants are officers and directors of i-Stat: William P. Moffitt is the President and Chief Executive Officer; Imants R. Lauks is the Executive Vice President and Chief Technology Officer; Lionel N. Sterling and Matthias Plum, Jr. are both directors.
On May 22, 1995, plaintiff Susan Kaufman purchased 100 shares of i-Stat common stock. She subsequently filed this action as a putative class representative of all persons who purchased i-Stat stock between May 9, 1995 and March 19, 1996. Plaintiff's complaint alleges that during this period i-Stat issued various materially misleading statements concerning the company's sales and acceptance of its products in the medical community. Plaintiff alleges that i-Stat issued public statements which "reported sales that were not, in fact, true sales, but were, instead, loans on a trial basis." Plaintiff also alleges that i-Stat reported sales to certain hospitals without disclosing that the sales were induced by a major stockholder's charitable donations to the hospitals. Plaintiff claims that these sales practices portrayed an exaggerated picture of i-Stat's sales and the degree of market acceptance of its products. Plaintiff further alleges that during the period i-Stat was issuing public statements which materially misrepresented the magnitude of its sales and acceptance of its products in the medical community, the individual defendants sold more than 85,000 shares of stock from which they realized proceeds of almost three million dollars.
In early 1996, i-Stat's sales practices were publicly described in articles published in the New York Times and Wall Street Journal, one of which also reported that the Securities and Exchange Commission had commenced an investigation of the company. After publication of these articles, the market price of i-Stat's stock decreased substantially. Subsequently, plaintiff sold her i-Stat stock at a loss.
Plaintiff's complaint contains two counts: the first asserts a claim for negligent misrepresentation and the second a claim for common law fraud. After filing their answer, defendants moved for an order limiting initial discovery to the issue of plaintiff's reliance upon defendants' alleged false statements regarding i-Stat's financial condition and prospects. The parties subsequently entered into a stipulation on this issue, which states:
"1. In purchasing and retaining her i-STAT securities, plaintiff did not actually or directly receive or rely on any communication containing any misrepresentation alleged in the complaint in this action, nor did she actually receive or rely on any communication which omitted material facts necessary to make any statements alleged in the complaint not false or misleading."
"2. Plaintiff made her purchase of i-STAT securities through a brokerage firm. Plaintiff did not actually or directly receive or rely on any communication from the brokerage firm in connection with her purchase of i-STAT securities."
"3. In purchasing and retaining her i-STAT securities, plaintiff relied exclusively on the integrity of the market price of i-STAT stock at the time of her purchase. Accordingly, in order to satisfy the reliance element of her common law claims for fraud and negligent misrepresentation in this action, plaintiff relies solely on the complaint's fraud-on-the-market allegations ..., which allege that a presumption of reliance applies because the alleged misrepresentations and/or omissions made by defendants caused i-STAT's common stock to trade at artificially inflated prices during the class action period."
Based on this stipulation, defendants moved for summary judgment. At oral argument on the motion, the trial court expressed the view that plaintiff's claim "makes all the sense in the word." However, the court concluded that it would be inappropriate for a trial court "to expand" common law principles relating to the reliance element of a cause of action for fraud or negligent misrepresentation. Therefore, the court granted defendants' motion and dismissed plaintiff's complaint. *fn1
We conclude that indirect reliance in the form of reliance upon the integrity of the market price for a corporate security which has been artificially inflated by the corporation's deliberate false statements concerning its financial condition may satisfy the reliance element of a common law fraud action. However, we also conclude that considerations of public policy preclude recognition of such indirect reliance as a foundation for liability for negligent misrepresentation. Therefore, we reverse the summary ...