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Greenberg v. Pro Shares Trust

2011 WL 2636990 (N.J. Super. App. Div. 2011) (Unpublished)

SECURITIES; FRAUD — An investor’s reliance on alleged oral statements will not be considered as reasonable when the alleged statements are expressly contradicted by disclosures in the prospectus and where, through minimum diligence, the investor could have discovered the truth of the alleged oral representations.

An individual alleged that he invested heavily in shares sold by a registered investment company and its affiliate that provided advisory services. He also alleged that he was induced to make these purchases based on material misrepresentations or omissions of fact. Further, on a visit to the company’s office, the regional vice president of the investment company provided assurances and made representations about the performance of the shares. In the first count of his suit, he claimed deceit and a scheme or artifice to defraud, unknown to him, in violation of the New Jersey Uniform Securities Law (NJUSL). He sought compensatory damages, interest, counsel fees, and the cost of suit. In his second count, the investor sought the right to tender return of the shares and further sought a refund pursuant to the NJUSL. In the third count, he alleged common law fraud, seeking compensatory and punitive damages.

In support of its motion to dismiss, investment company submitted a copy of its prospectus. The investment company argued that the investor’s reliance on the vice president’s alleged statements was unreasonable because the alleged statements were directly contradicted by disclosures in the prospectus.

The elements of common law fraud are a “material misrepresentation of a presently existing or past fact, knowledge of belief by the defendant of its falsity, an intention that the other person rely on it, and reasonable reliance thereon by the other person and resulting damages.” The Appellate Division affirmed the dismissal of the complaint, finding the investor’s reliance on the alleged oral statements was not reasonable because the alleged statements were expressly contradicted by disclosures in the prospectus. The investor had received a copy of the prospectus and even referred to it in his second amended complaint. The Court also found that even if the investor did not have the correct prospectus when making the decision, under Dodds v. Cigna Sec., Inc. 12 F.3d 346 (2nd Cir. 1993) the information was readily available elsewhere and the investor had constructive notice of its contents, which were “sufficient to put a reasonable investor of ordinary intelligence on notice.” In sum, the investor could not have justifiably relied on the alleged misrepresentation if through minimal diligence he could have discovered its truth.

Next, the Court addressed the investor’s claim under the NJUSL. Under that law, a person is in violation if: (1) he or she offers, sells or purchases a security by means of any untrue statement of a material fact or the omission to state a material fact necessary in order to make the statements made…; (2) offers, sells or purchases a security by employing any device, scheme, or artifice to degrade; or (3) offers, sells or purchases a security by engaging in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person. Reasonable reliance is not required for NJUSL claims. The Court also found support for the dismissal of the common law fraud claim as well. The language of the prospectus also contradicted the investor’s allegations that he was “unaware” that the alleged misrepresentations “were untruthful.” Therefore, under the law, the investor could not meet the statutory requirement of not knowing of the untruth. Consequently, the Court affirmed the lower court’s dismissal.

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