STATE OF OREGON, acting by and through the Oregon State Treasurer, and the Oregon Public Employee Retirement Board, on behalf of the Oregon Public Employee Retirement Fund, Plaintiff-Appellant,
MARSH & McLENNAN COMPANIES, INC. and Marsh, Inc., Defendants-Respondents, and Jeffrey GREENBERG and Ray Groves, Defendants
Submitted on remand October 30, 2013.
Argued on remand September 30, 2014.
Multnomah County Circuit Court. 050808454. On remand from the Oregon Supreme Court, State Treasurer v. Marsh & McLennan Companies, Inc., 353 Or. 1, 292 P.3d 525 (2012) . Frank L. Bearden, Judge.
In State Treasurer v. Marsh & McLennan Companies, Inc., 241 Or.App. 107, 250 P.3d 371 (2011) (Marsh I), this court held that a stock purchaser seeking to recover under ORS 59.137 for securities law violations must prove direct reliance rather than utilize a presumption of reliance under the " fraud-on-the-market" doctrine recognized under federal securities law. The Supreme Court subsequently reversed that decision, concluding that the Oregon legislature intended to incorporate the fraud-on-the-market doctrine when it enacted ORS 59.137.
State Treasurer v. Marsh & McLennan Companies, Inc. 353 Or. 1, 292 P.3d 525 (2012) (Marsh II). The Supreme Court then remanded the case to this court to consider two questions that, because of our rejection of the fraud-on-the-market doctrine, we had not reached in Marsh I. The first is whether, on the summary judgment record, defendants successfully rebutted any presumption of reliance. The second is whether, as applied to defendants, ORS 59.137 is unconstitutional because it does not require plaintiff to prove scienter--that is, that defendants acted with a guilty state of mind when they made the alleged misrepresentations. Held: Defendants were not entitled to summary judgment on either issue. The fact that the state's investment advisors relied on their own valuation of securities rather than the market's valuation did not automatically rebut the presumption of reliance under the fraud-on-the-market doctrine. A " value investor" presumably tries to estimate how undervalued or overvalued a particular stock is, and that type of estimate can be affected by a market price that has been tainted by fraud. The predicate for defendants' constitutional challenge--that ORS 59.137 imposed a higher standard than corresponding federal securities law--was also incorrect. ORS 59.137 was enacted to create consistency with federal securities law and, like the implied cause of action under federal Rule 10b-5, incorporated a scienter requirement.
Reversed and remanded.
Joshua L. Ross argued the cause for appellant. With him on the briefs were Scott A. Shorr and Keith A. Ketterling, Special Assistant Attorneys General; and Stoll Stoll Berne Lokting & Shlachter P.C. With him on the supplemental briefs on remand were Frederick M. Boss, Deputy Attorney General, Anna M. Joyce, Solicitor General, Denise G. Fjordbeck, Attorney-in-Charge, Civil/Administrative Appeals, Matthew J. Lysne, Senior Assistant Attorney General; Keith A. Ketterling, Keith S. Dubanevich, Scott A. Shorr, Special Assistant Attorneys General; and Stoll Stoll Berne Lokting & Shlachter P.C.
James T. McDermott argued the cause for respondents. With him on the briefs were Dwain M. Clifford and Ball Janik LLP. With him on the supplemental briefs on remand was Dwain M. Clifford.
Before Duncan, Presiding Judge, and Armstrong, Judge, and Schuman, Senior Judge.
[269 Or.App. 33] DUNCAN, P. J.
In State Treasurer v. Marsh & McLennan Companies, Inc., 241 Or.App. 107, 250 P.3d 371 (2011) ( Marsh I ), we held that a stock purchaser seeking to recover under
ORS 59.137 for securities law violations must prove direct reliance rather than utilize a presumption of reliance under the " fraud-on-the-market" doctrine recognized under federal securities law. The Supreme Court subsequently reversed our decision, concluding that the Oregon legislature intended to incorporate the fraud-on-the-market doctrine when it enacted ORS 59.137. State Treasurer v. Marsh & McLennan Companies, Inc., 353 Or. 1, 23, 292 P.3d 525 (2012) ( Marsh II ). The Supreme Court then remanded the case to us to consider two questions that, because of our rejection of the fraud-on-the-market doctrine, we had not reached in Marsh I. The first is whether, on the summary judgment record, defendants successfully rebutted any presumption of reliance. The second is whether, as applied to defendants, ORS 59.137 is unconstitutional because it does not require plaintiff to prove scienter --that is, that defendants acted with a guilty state of mind when they made the alleged misrepresentations. For the reasons that follow, we hold (1) that there are genuine issues of material fact with regard to whether defendants rebutted the presumption of reliance; and (2) ORS 59.137 includes a scienter requirement and is not unconstitutional as applied to defendants. Accordingly, we reverse the trial court's grant of summary judgment and remand for further proceedings.
This case arises under the Oregon Securities Law, ORS chapter 59. Plaintiff is the State of Oregon, acting by and through the Oregon State Treasurer, and the Oregon Public Employee Retirement Board, on behalf of the Oregon Public Employee Retirement Fund (OPERF) (collectively, " the state" ). In its complaint, the state alleged that defendants Marsh & McLennan Companies, Inc. and Marsh, Inc. (collectively, " Marsh" ) violated ORS 59.135 by making false and misleading statements that caused the state to lose approximately $10 million on investments in Marsh stock, and that those defendants were therefore liable under ORS 59.137. [269 Or.App. 34] The Supreme Court summarized those claims in Marsh II :
" The state's amended complaint alleges that the state purchased more than $15 million of common stock in [Marsh & McLennan Companies, Inc. (MMC)] in the open market on the New York Stock Exchange (NYSE) in 2003 and 2004. The state further alleges that the MMC shares are traded on an efficient securities market, that the price of MMC shares traded on the NYSE during 2003 and 2004 reflected the material information that Marsh disclosed to the market, and that the price of MMC shares was artificially inflated because of misrepresentations made by Marsh. The state contends that Marsh made three types of misrepresentations: falsely representing that Marsh had complied with a strict ethical code of conduct; misrepresenting the nature of contingent commission agreements that Marsh had with brokers; and concealing the fact that MMC's reported financial results had been achieved through unethical and illegal business practices. The state's complaint further alleges that the state's money managers who purchased MMC stock had no reason to know of those misrepresentations and would not have purchased the MMC stock at the price paid had they known of those misrepresentations. Finally, the state asserts that the misrepresentations were brought to light through an investigation by the New York Attorney General and that, once the misrepresentations were disclosed in October 2004, the price of MMC stock declined some 37 percent causing the state to lose approximately $10 million in damages."
Marsh II, 353 Or. at 4.
The trial court granted summary judgment in favor of Marsh on all of the state's claims. The court's ruling was based on two alternative grounds. First, the court ruled that, as applied to Marsh, ORS 59.137 was unconstitutional under the so-called dormant Commerce Clause, insofar as the state was not required to prove that Marsh acted with scienter. Second, the court ruled that the state had failed to prove the element of reliance, in part because the state was not entitled to a rebuttable presumption of reliance under a " fraud-on-the-market" theory. In short, that doctrine
" refers to a rebuttable presumption establishing the reliance element in securities fraud cases that was addressed [269 Or.App. 35] and accepted by the United States Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224, 247, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). The doctrine is grounded in the theory that the price of a security traded on the open market is based on publicly available information and that material misrepresentations therefore artificially distort a security's price, thereby establishing indirect or second-order reliance by a purchaser of the security, even if that purchaser did not rely on the misrepresentations directly."
Marsh II, 353 Or. at 3 n 1. The trial court ruled that the state failed to prove reliance under the fraud-on-the-market theory, both because the doctrine is not available under Oregon law and because, in any event, Marsh had rebutted the presumption.
In Marsh I, we affirmed the trial court on the narrow grounds that the state had not produced any evidence of direct reliance and that Oregon law does not recognize a presumption of reliance under the fraud-on-the-market doctrine. We did not address whether, if that doctrine were available, Marsh had rebutted it. We also declined to address the court's alternative reasoning regarding the existence and constitutional implications of a scienter requirement, other than to note in passing that the constitutional question was properly analyzed under preemption principles rather than the dormant Commerce Clause. 241 Or.App. at 112 n 3.
In Marsh II, the Supreme Court reversed our decision and held that " the requisite reliance [under ORS 59.137] may be established by a plaintiff who purchases stock in an open and efficient market by means of the rebuttable presumption available under the fraud-on-the-market doctrine." 353 Or. at 23. The court then remanded the case to us to address two unresolved issues that flowed from that holding: First, notwithstanding the availability of the fraud-on-the-market doctrine, should Marsh prevail because the evidence in the record successfully rebutted the presumption of reliance? 353 Or. at 21 n 8. Second, is ORS 59.137 " unconstitutional because it does not contain a requirement that the defendant act with scienter to be found liable" ? Id. at 23 n 10. As for the latter question, the Supreme Court agreed with our observation that the constitutional issue [269 Or.App. 36] implicated a preemption rather than dormant Commerce Clause analysis. Id. at 5 n 2.
On remand, the parties have submitted supplemental briefing on both questions. As we will explain, we hold (1) that there are genuine issues of material fact with regard to whether Marsh rebutted the presumption of reliance; and (2) that, consistently with analogous federal law, a purchaser has the burden of proving scienter under ORS 59.137(1) and, for that reason, the statute is not preempted by federal law and does not violate the federal constitution. Accordingly, we reverse and remand for further proceedings.
A. Presumption of Reliance
In granting Marsh's motion, the trial court explained that, " [e]ven if the presumption of reliance through the fraud on the market doctrine is accepted as Oregon law, here, defendants have clearly rebutted the presumption." The court explained that
" the two financial advisors hired by OPERF who bought and sold MMC stock in 2003 and 2004 testified that they did not rely on MMC's alleged misrepresentations when purchasing stock for OPERF. [One of the advisors, Richard Rubstein,] could not recall whether he had reviewed any of MMC's 10-K's or 10-Q's before purchasing shares. Records also show that hours after the New York Attorney General's announcement of civil and criminal charges against MMC in connection to bid rigging and contingent commissions, Mr. Rubenstein bought an additional 50,000 shares of MMC for OPERF. He continued to hold 300,000 shares on behalf of the fund. Steve Gorham, the other financial advisor who bought and sold MMC stock for the fund, bought MMC stock primarily because
he was interested in Putnum, MMC's asset management business. Mr. Gorham's purchases had nothing to do with any statements made by Marsh. Neither advisor relied on Marsh's misrepresentations or omissions when purchasing MMC shares."
On appeal, the state argues that the trial court, by focusing on whether the state's advisors directly relied on Marsh's misrepresentations, turned the presumption on its head. The presumption, the state contends, is itself [269 Or.App. 37] a substitute for direct reliance in the case of a well-developed and efficient market, which sets the price for shares based on public disclosures. It is the efficient market, not the individual investors, who directly rely on the misstatements and omissions. Thus, " [t]his presumption is not rebutted by showing that an individual investor did not rely on any misrepresentations or omissions upon purchase," but rather, by a showing that " (1) there was not an efficient market for the company's stock, (2) the company's misrepresentation or omission was actually known to the market or purchaser, (3) the misrepresentation or omission had no effect on the market, or (4) that plaintiff purchaser would have acted no differently when [it] purchased the shares had it known the truth." (Citing Basic, 485 U.S. at 248-49.)
Marsh, for its part, argues that the trial court's underlying premise was correct: The deposition testimony of the state's advisors, Rubenstein and Gorham, indicates that they did not actually rely on the integrity of the market price when purchasing MMC stock. Rubenstein, Marsh points out, testified that his investment ...