Angiulo: First Circuit Says Buyer Beware When Picking Stocks
Monday, February 09, 2015
On February 6, 2015 the case of Fire and Police Pension Assoc. v. Abiomed, Inc. was released. The matter arose out of a Federal District Court of Massachusetts case that pitted institutional investors against a particular manufacturer of medical implant devices. Exactly which state the public pensioners came from, and exactly what medical devices were being made, may be interesting details but they are not the material issues for this column. The pressing question examined here is: what does it take to prove an investor got hustled with bad information?
The sale of stock in publicly traded companies is a heavily regulated activity. Coincidentally, manufacturing and selling medical implant devices is as well. According to the facts of the Abiomed case, neither of these realities discouraged the plaintiffs from investing in stock of the defendants' company. Things went bad, however, when the defendants allegedly ran into regulatory problems causing the the plaintiffs to lose significant amounts of money on their investment.
The plaintiffs in the Abiomed case were of the opinion that their loss was not just a result of market forces; they believed that they had been cheated. They filed suit in the Federal District Court of Massachusetts alleging the defendants had broken federal law and engaged in securities fraud.
In order to make out a case for securities fraud, a plaintiff has to show more than just a loss and more than just salesmanship caused them to buy stock in the first place. According to the learned justices of the Abiomed decision a plaintiff must allege that they relied on a material misrepresentation or omission by the defendant when involved in the sale of a security. This communication, or lack thereof, must also have been made with a wrongful state of mind and caused an economic loss. As the court went on to explain, not every claim of wrongdoing will support a lawsuit for securities fraud.
As anyone who has lived through the roller-coaster of the last twenty years in the stock-market can tell you, sometimes stocks are up and sometimes stocks are down. In addition, as sure as there are highs and lows, there are marketing and sales people who are paid to make you interested in products. In the Abiomed case, the court looked at all of the facts and found that, while there were marketing efforts by the defendant, there were also disclosures by the company of their regulatory issues. It was the combination of appearances on television shows geared to investors and public filings with explanations of what they were being investigated for by federal agencies that supported the court's findings that there was no wrongful mindset of the defendants.
When it affirmed the Trial Court's dismissal of the plaintiffs' complaint, the Appeals Court was, in a way, giving all investors an important reminder. There are no guaranteed returns on investment and there are no promises in the open market. Or, as the Romans say, caveat emptor. Buyer beware.
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