By eliminating positive proof of reliance when materiality is established, the Court relieved the plaintiffs from an almost impossible burden of proof. See Holdsworth v. Strong, 10 Cir. 1976, 545 F.2d 687, 695; Jackson v. Oppenheim, S.D.N.Y. 1974, 411 F. Supp. 659. Ute Citizens creates a distinction between affirmative misrepresentation cases, in which plaintiffs must demonstrate reliance on the assertions of defendants, and omission cases, in which such proof is not required. When due care is discussed in terms of reliance, then, the misrepresentation-omission distinction could remove from plaintiffs the responsibility of exercising due care to protect their interests in omission cases. If reliance never becomes an issue, in other words, a court will have no basis to assess the justifiability of that reliance.
Jackson. v. Oppenheim, 411 F. Supp. 659, 668 (S.D.N.Y. 1974) (insider's duty depends on "'the basis of what a party knows or reasonably should know considering the information to which he had access.'") (quoting Harnett v. Ryan Homes, Inc., 360 F. Supp. 878, 886 (W.D.Pa. 1973)), aff'd in part, rev'd in part, 533 F.2d 826 (2d Cir. 1976). This Court certainly would reject plaintiffs' reliance to the extent they had actual knowledge concerning information they claim was misrepresented, and also to the extent that plaintiffs' directors at Guild reasonably should have known of that information.
In order for plaintiff to succeed on its present claims under Section 17 of the Securities Act of 1933, 15 U.S.C. § 77q, Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, plaintiff must show on the part of defendants (a) a materially false representation, (b) scienter, (c) intent to deceive, manipulate or defraud, and (d) reliance on the representation, which (e) proximately caused the injury. See Jackson v. Oppenheim, 411 F. Supp. 659, (S.D.N.Y. 1974), aff'd in part and rev'd in part, Jackson v. Oppenheim, 533 F.2d 826 (2nd Cir. 1976) (elements to be proven in an action under § 17 of the Securities Act of 1933 and 15 U.S.C. § 78j dealing with fraud in connection with the sale of securities are scienter, materiality, reliance, and due care). See also Lloyd v. Industrial Bio-Test Laboratories, Inc., 454 F. Supp. 807 (S.D.N.Y. 1978); Huddleston v. Herman and MacLean, 640 F.2d 534, 543 (5th Cir. 1981), aff'd in part and rev'd in part, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983).
There is simply no basis on this record for concluding that any further statements regarding the size of the Gardner account would have caused plaintiff to act differently. See List v. Fashion Park, Inc., 340 F.2d 457, 463-64 (2d Cir. 1965); Jackson v. Oppenheim, 411 F. Supp. 659, 668 (S.D.N.Y. 1974), aff'd in part, reversed in part on other grounds, 533 F.2d 826, 830 n. 9 (2d Cir. 1976). Finally, plaintiff has failed to establish the element of scienter, i.e., defendant's willful or reckless disregard for the truth, as required by Rule 10b-5 and § 17.
And although causation can be established by the mere failure to disclose material facts, Affiliated Ute Citizens v. United States, supra, 406 U.S. at 154, 92 S.Ct. at 1472, "there is no duty to disclose information to one who reasonably should already be aware of it." Myzel v. Fields, 386 F.2d 718, 736 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968), quoted with approval in Seibert v. Sperry Rand Corp., supra, 586 F.2d at 952; see Jackson v. Oppenheim, 411 F. Supp. 659, 668-69 (S.D.N.Y. 1974), aff'd, 533 F.2d 826 (2d Cir. 1976). "The securities laws were not enacted to protect sophisticated businessmen from their own errors of judgment."
At the outset, the court notes that the substantive elements of a § 10(b) violation and the elements of a § 17(a) violation are identical. See, e.g., Jackson v. Oppenheim, 411 F. Supp. 659, 665 (S.D.N.Y. 1974) ("The Sections are essentially the same, except that Section 10(b) and Rule 10b-5 are broader in that they apply to the purchase as well as the sale of securities."), aff'd in relevant part, 533 F.2d 826 (2d Cir. 1976); see also United States v. Naftalin, 441 U.S. 768, 778, 99 S.Ct. 2077, 2084, 60 L.Ed.2d 624 (1979) (noting overlap between provisions of 1933 Securities Act and 1934 Securities Exchange Act). Defendants do not dispute that a violation of § 10(b) may serve as a predicate act under RICO.
In any event, the elements to establish a claim under § 17(a) are the same. Jackson v. Oppenheim, 411 F.Supp. 659, 665 (S.D.N.Y.1974), aff'd in part, rev'd in part, 533 F.2d 826 (2d Cir.1976) (citations omitted). The element of scienter encompasses " a mental state embracing an intent to deceive, manipulate or defraud."
Furthermore, these violations of section 10(b) of the '34 Act also constitute violations of section 17(a) of the '33 Act, 15 U.S.C. § 77q(a). Section 17(a) prohibits the identical conduct as does section 10(b), although the fraud under section 17(a) must be more closely linked to the offer or sale of securities than is required under section 10(b). Kogan v. National Bank of North America, 402 F. Supp. 359 (E.D.N Y 1975); Jackson v. Oppenheim, 411 F. Supp. 659 (S.D.N.Y. 1974), aff'd in part, rev'd in part, 533 F.2d 826 (2d Cir. 1976). Given my holding above with respect to the defendants' violations of section 10(b) and Rule 10b-5, I further find that Netelkos and Gamarekian also violated section 17(a) of the '33 Act in failing to make the disclosures of material fact and misstating material facts, as discussed above.
The two sections are essentially the same, although the reach of § 10(b) is broader. Jackson v. Oppenheim, 411 F. Supp. 659, 665 (S.D.N Y 1974), aff'd in part, rev'd in part, 533 F.2d 826 (2d Cir. 1976). Because private rights of actions under these sections were judicially created, the statutes do not set out the elements of the cause of action.
The court concludes, therefore, that the requirements for a private cause of action under § 17(a) are the same as those under § 10 and Rule 10b-5 and that the plaintiffs may maintain this action under § 17(a). Jackson v. Oppenheim, 411 F. Supp. 659 (S.D.N Y 1974), aff'd in part, rev'd in part and remanded in part, 533 F.2d 826 (2d Cir. 1976). 4.