Under Minnesota Statute 80A.01/80A.68 (repealed and recodified in 2006), in connection with the offer, sale, or purchase of a security, directly or indirectly, it is unlawful:
a) to employ any device, scheme, or artifice to defraud;
b) to make any untrue statement of a material fact or to omit to state material facts necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; or
(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Subsections (a) and (c), referring to “schemes,” “frauds,” “deceits,” clearly suggest that liability is based in part on fraudulent intent (aka, “scienter”). But what about subsection (b)? What if someone, with no intent to deceive or defraud, negligently mistates a fact (as in, say, “A very large software company will buy my little start-up and make you rich!”)?
U.S. District Court Judge John R. Tunheim (D. Minn.) tossed out the case of Jerry Trooien against Peter Mansour and others involving Trooien’s investment in a company called Sproqit Technologies, finding that Trooien had failed to come forward with any evidence of fraudulent intent. This week the U.S. Court of Appeals for the Eighth Circuit (Riley, Gibson, Murphy) reversed the district court on this issue. (Judge Murphy wrote the opinion. Judge Riley concurred and dissented in part.)
After examining the Minnesota securities decisions starting with Sprangers [v. Interactive Technology, Inc., 394 N.W.2d 498, 503 (Minn. Ct. App. 1986)], we conclude that claims arising under § 80A.01(b) require only a showing of negligence. Since the district court did not apply a negligence standard in analyzing Trooien’s allegations that Mansour and Roitblat violated § 80A.01(b), we reverse the dismissal and adverse grant of summary judgment as to those claims and remand them forreconsideration under the appropriate standard.
Trooien (represented by George Eck, of Dorsey & Whitney) did not succeed in reviving his misrepresentation claims or his claim for breach of fiduciary duty under the law of Washington state (the state of incorporation for the relevant company). The district court’s judgments in favor of defendants were affirmed. (Notably, the principal decision highlighted in the 8th Circuit discussion of Minnesota law on negligent misrepresentation was a 2007 Minnesota Court of Appeals decision, another in which George Eck prevailed on appeal to revive a lawsuit that had been tossed out in the court below.)