Opinion
1884CV02841BLS2
06-21-2019
MILLER INVESTMENT TRUST et al. v. MORGAN STANLEY & CO., Incorporated
MEMORANDUM AND ORDER DENYING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
Kenneth W. Salinger Justice
Morgan Stanley & Co. sold Plaintiffs millions of dollars’ worth of notes issued by Shengdatech, which later defaulted. Plaintiffs claim that Morgan Stanley sold those debt securities by means of misleading statements and is therefore liable under the Massachusetts Uniform Securities Act, G.L.c. 110A, § 410 (the "MUSA").
Morgan Stanley has moved for summary judgment. It argues that the undisputed material facts demonstrate that none of the challenged sales were made "by means of" the alleged misrepresentations, because Plaintiffs purportedly cannot establish any connection between the allegedly misleading private placement memorandum issued by Morgan Stanley and Plaintiffs’ purchases.
The Court is not convinced that Morgan Stanley is entitled to judgment in its favor as a matter of law. A reasonable jury might find, based on the facts in the summary judgment record, that Morgan Stanley did in fact sell Shengdatech debt securities to Plaintiffs "by means of" the private placement memorandum. The Court will therefore DENY the motion for summary judgment.
1. Undisputed Factual Background
The following are undisputed facts, as demonstrated in the evidentiary materials submitted by the parties or reasonable inferences that one could draw from those facts. The Court "must ... draw all reasonable inferences" from the evidence presented "in favor of the nonmoving party," as a jury or judicial fact finder would be free to do at trial. Godfrey v. Globe Newspaper Co., Inc., 457 Mass. 113, 119 (2010). It has done so.
Between December 2010 and February 2011, Plaintiffs collectively bought net $8.7 million worth of 6.5% Shengdatech Senior Convertible Notes due 2015 (the "New Bonds") from Morgan Stanley, which was the lead underwriter for the issuance of those securities. A private placement memorandum (the "PPM") was prepared in connection with the issuance of the New Bonds by Morgan Stanley, Shengdatech, and KPMG Hong Kong (which was Shengdatech’s independent auditor).
Plaintiffs had previously bought 6% convertible bonds issued by Shengdatech (the "Old Bonds"). Morgan Stanley was not involved in the issuance of the Old Bonds.
In December 2010, the Plaintiffs’ investment advisor (Wellesley Investment Advisors, or "WIA") decided to sell at least part of the Old Bonds owned by the Plaintiffs and to purchase some of Shengdatech’s New Bonds on their behalf. It made that decision after reviewing Shengdatech’s financial statements, as disclosed by Shengdatech in filings with the Securities and Exchange Commission, and other publicly-available information regarding Shengdatech’s finances.
By the morning of Thursday, December 9, 2010, WIA had decided that it wanted to buy New Bonds on behalf of the Plaintiffs. It did so before it ever communicated with Morgan Stanley about the New Bonds. That morning, WIA spoke by telephone with someone working on Morgan Stanley’s convertible bond trading desk to place an order for the New Bonds. There is no evidence in the summary judgment record that the Morgan Stanley employee accepted that oral offer. WIA then sent a confirming email to Morgan Stanley at 10:00 a.m. on December 9, saying that they wanted to purchase $6.0 million of the new Shengdatech convertible bond that would be issued that day. WIA had not yet received the preliminary version of the PPM. But by this time WIA knew that Morgan Stanley, a well-respected underwriter, was underwriting the New Bonds and would be issuing a PPM in connection with the private placement.
Morgan Stanley did not respond until the next morning, when it sent WIA a preliminary PPM for the New Bonds. Morgan Stanley emailed the preliminary PPM to WIA on Friday, December 10, 2010, at 8:37 a.m. That email did not say that Morgan Stanley was accepting, or whether Morgan Stanley planned to accept, WIA’s offer to purchase New Bonds.
The PPM that Morgan Stanley sent to WIA repeated the same Shengdatech financial statements that WIA had already reviewed online, word-for-word and number-for-number. Plaintiffs contends that the financial information circulated by Morgan Stanley in the PPM was false and that it materially misstated Shengdatech’s sales, income, cash on hand, and other assets, among other things.
Two minutes later, at 8:39 a.m. on December 10, Morgan Stanley sent WIA a term sheet setting forth the final terms of the purchase, including the final price that Morgan Stanley would charge for the notes. Once again, that email did not say that Morgan Stanley was accepting, or whether Morgan Stanley planned to accept, WIA’s offer to purchase New Bonds.
On Monday, December 13 at 3:33 p.m., Morgan Stanley sent WIA a form by email, asking WIA to confirm in writing that it was a "Qualified Institutional Buyer" or a "Qualified Purchaser." The email said "[w]e need this doc signed off on to settle the [Shengdatech] allocation from Friday." Although this email suggests that at some point on Friday December 10 Morgan Stanley decided to allocate part of the New Bond issuance to WIA (acting for the Plaintiffs), there is no evidence in the summary judgment record that Morgan Stanley informed WIA of that fact or did anything else to accept WIA’s purchase offer at any time before the afternoon of December 13.
The initial sale of $6.0 million in New Bonds to the Plaintiffs was completed on December 14, 2010, when Plaintiffs paid Morgan Stanley.
Plaintiffs quickly sold some of the New Bonds, and then bought more from Morgan Stanley. The Miller Investment Trust sold $1.81 million of its New Bonds on December 21 and 23, 2010. It then bought $2.0 million of additional New Bonds from Morgan Stanley on January 21, 2011. Plaintiffs bought another $2.51 million of New Bonds from Morgan Stanley in February 2011. The net effect of these various purchases and sales is that Plaintiffs ended up buying net $8.7 million of Shengdatech’s New Bonds from Morgan Stanley.
Neither Morgan Stanley nor Shengdatech issued a corrected PPM, nor did anything else to notify WIA or Plaintiffs of any inaccuracies in the December 2010 PPM, before Plaintiffs bought additional New Bonds in January and February 2011.
2. Legal Background
The MUSA "creates a strong incentive for sellers of securities to disclose fully all material facts about the security," and "provides strong protections for a buyer who received misleading information from a seller of securities." Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 51 & 52 (2004). It does so by "rendering tainted transactions voidable at the option of the defrauded purchaser," without the purchaser having to prove that the misrepresentation caused them to suffer any loss or even that they relied upon the misrepresentation when they bought the security. Id. at 51, 53, 57 n.24. "The buyer’s sophistication is also irrelevant." Id. at 53.
The statute "seeks not only to secure accuracy in the information that is volunteered to investors, but also, and perhaps more especially to compel disclosure of significant matters that were heretofore rarely, if ever, disclosed." Id. at 51-52, quoting Shulman, Civil Liability and the Securities Act, 43 Yale L.J. 227, 227 (1933). The MUSA imposes a duty of full disclosure on sellers of securities; the buyer has no "duty to investigate or to ‘verify a statement’s accuracy.’" Id. at 53, quoting Mid-America Fed. Sav. & Loan Ass’n v. Shearson/American Express, Inc., 886 F.2d 1249, 1256 (10th Cir. 1989).
The MUSA "is almost identical with" parallel provisions in the federal Securities Act of 1933. Marram, 442 Mass. at 50. As a result, decisions and commentary construing the federal statute provides useful guidance on how to construe and apply the MUSA. Id. at 50-51.
The MUSA imposes primary liability on any person or entity who "offers or sells a security by means of a false statement or by omitting to disclose some material fact. See G.L.c. 110A, § 410(a)(2). To state such a claim, a plaintiff must allege facts plausibly suggesting that: "(1) the defendant ‘offers or sells a security’; (2) in Massachusetts; (3) by making ‘any untrue statement of a material fact’ or by omitting to state a material fact; (4) the plaintiff did not know of the untruth or omission; and (5) the defendant knew, or ‘in the exercise of reasonable care [would] have known, ’ of the untruth or omission" (bracketed word in original). Marram, 442 Mass. at 52, quoting § 410(a)(2).
"While not imposing strict liability on the seller for untrue statements or omissions," the MUSA provides that if an investor proves that securities were sold by means of such misrepresentations then burden shifts to the seller to prove "that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission." Marram, supra, at 52, quoting § 410(a)(2).
3. Initial Sale of New Bonds
Morgan Stanley argues that no jury could find that its initial sale of New Bonds to Plaintiffs in December 2010 was "by means of" the alleged misstatements in the PPM because Plaintiffs had purportedly entered into a binding contract to buy New Bonds before their agent ever received the PPM.
There are two independent reasons why Morgan Stanley is not entitled to summary judgment on this ground.
First, there is a material dispute as to when Morgan Stanley accepted WIA’s offer to purchase $6.0 million of Shengdatech’s New Bonds, and whether it did so before or after Morgan Stanley sent the preliminary PPM to WIA. There is no direct evidence in the summary judgment record of any explicit acceptance by Morgan Stanley before the afternoon of December 13, 2010, more than three days after Morgan Stanley had emailed the PPM to WIA. Morgan Stanley insists that the only reasonable inference, based on the sequence of events and course of dealing between the parties, is that Morgan Stanley must have accepted the offer the day it was made (December 9), and thus before it sent the PPM (on December 10). But a jury could reasonably draw a different influence and conclude that no contract was formed until after Morgan Stanley sent out the PPM.
The jury will have to sort all of this out at trial. See generally Molly A. v. Commissioner of Dept. of Mental Retardation, 69 Mass.App.Ct. 267, 284 (2007) ("summary judgment cannot be granted if the evidence properly before the motion judge reveals a genuine issue of disputed material fact"); Flesner v. Technical Communications Corp., 410 Mass. 805, 811-12 (1991) ("Where a jury can draw opposite inferences from the evidence, summary judgment is improper").
Second, even if Morgan Stanley could prove that it accepted WIA’s purchase offer before sending out the preliminary PPM on December 10, a jury could still reasonably conclude that Morgan Stanley made the initial sale of New Bonds to the Plaintiffs "by means of" the alleged misstatements in the PPM. It is undisputed that the transaction did not close until December 14, 2010, four days after WIA received the PPM from Morgan Stanley.
If on December 10 Morgan Stanley had sent out a PPM that did not repeat Shengdatech’s false statements, but instead provided accurate information about the company’s financial condition, the contract that Morgan Stanley says it entered into to sell New Bonds to WIA on December 9 may well have been voidable either on the ground that it had been fraudulently induced by Shengdatech’s prior false statements or on the ground that there had been a mutual mistake by Morgan Stanley and WIA about Shengdatech’s finances at the time they had allegedly entered into their contract. See generally Green v. Harvard Vanguard Medical Assoc., Inc., 79 Mass.App.Ct. 1, 11 (2011) (contract voidable for fraudulent inducement); LaFleur v. C.C. Pierce Co., 398 Mass. 254, 257-58 (1986) (contract voidable for mutual mistake).
That could be enough for Plaintiffs to establish the requisite causal connection between the PPM and the initial sale of New Bonds, even assuming that the parties had formed a contract before WIA received the PPM. To sue Morgan Stanley under the MUSA for offering securities "by means of" material misstatements, Plaintiffs need not allege or prove that Morgan Stanley’s alleged misstatements actually caused Plaintiffs to buy any Shengdatech notes. See Marram, 442 Mass. at 51 and 57 n.24 (misstatement need not be cause of loss). The statute "requires only ‘some’ causal connection between the alleged communication and the sale, ‘even if not "decisive." ’" Id. at 58 n.24, quoting Metromedia Co. v. Fugazy, 983 F.2d 350, 361 (2d Cir. 1992), cert. denied, 508 U.S. 952 (1993), quoting in turn Jackson v. Oppenheim, 533 F.2d 826, 830 n.8 (2d Cir. 1976). "[T]he requisite connection is established when the communication containing the material misrepresentation was used to effect the sale- and not whether it was actually successful in securing the sale that, in any event, transpired." In re Access Cardiosystems, Inc., 776 F.3d 30, 36 (1st Cir. 2015) (construing "by means of" language in § 410(2)(2)); accord Jackson, supra . If a jury were to conclude that the initial sale of New Bonds would never have been completed if the PPM sent to WIA on December 10 had been accurate, it could reasonably conclude that the misleading PPM "was used to effect the sale" that was completed four days later.
4. Subsequent Sales of New Bonds
Morgan Stanley further argues that no jury could find that its subsequent sales of New Bonds to Plaintiffs in January and February 2011 were by means of the PPM because too much time had passed. It asserts that because WIA did not start making additional purchases of New Bonds from Morgan Stanley until 42 days after it received the PPM, none of the subsequent sales could have been "by means of" the PPM as a matter of law.
The Court is not convinced. A jury must consider all the circumstances to determine whether a particular sale of securities was made by means of an alleged misstatement. Morgan Stanley has not shown that the passage of six weeks from an alleged misstatement to a sale and purchase of securities must always bar a claim under the MUSA as a matter of law.
Morgan Stanley’s reliance on federal court decisions in Cardiosystems is misplaced. Morgan Stanley says that, in Cardiosystems, "although the initial purchases that were made shortly after the dissemination of the alleged misstatements were determined to be ‘by means of’ those misstatements, subsequent purchases occurring months later or not." But in fact those subsequent purchases were not cut off by the mere passage of time. Instead, the bankruptcy court found that by the time of the later purchases the previous misstatements had been superseded by new, accurate disclosures made in writing and during conversations. See In re Access Cardiosystems, 460 B.R. 67, 83 (Bkr.D.Mass. 2011) (Boroff, Bkr. J.), aff’d, 488 B.R. 1, 10 (D.Mass. 2012) (Gorton, J.), aff’d, 776 F.3d 30 (1st Cir. 2015). Contrary to what Morgan Stanley argues, "the court did not merely rely on the timing of the investments relative to" the document containing the misstatements, "but looked to objective evidence of whether" the defendant "had used" the earlier document "to solicit particular investments." Id., 776 F.3d at 37.
Although the PPM contained language stating that it had been prepared "solely for use in connection with the placement" of the New Bonds, a jury might reasonably find- based on the circumstances as a whole- that Morgan Stanley made the later sales to Plaintiffs by means of the allegedly misleading PPM.
ORDER
Defendant’s motion for summary judgment is DENIED.