May 22, 2017
Last month marked 45 years since the U.S. Supreme Court’s ruling in Affiliated Ute Citizens of Utah v. United States, which established a rebuttable presumption of reliance for securities fraud claims based on omissions of material fact. This Expert Analysis special series explores the decision’s progeny in the Supreme Court and various circuits.
Affiliated Ute Citizens of Utah v. United States held that investors need not prove they relied on a defendant’s omission of material information to establish their injury. Affiliated Ute v. United States, 406 U.S. 128 (1972). Instead, reliance is inferred from the importance of the information withheld.[1] Since that ruling, various courts of appeals have explained that Affiliated Ute offers only a presumption of reliance, which is rebuttable.[2] Once the presumption is invoked, the burden of proof then switches to a defendant who withheld information material to investment decisions despite having a duty to disclose. The defendant can only avoid liability by demonstrating that even if the investors had been fully informed, their investment decision would have remained the same.
The rationale underlying Affiliated Ute is common in civil law — a party that is unable to present evidence supporting her position will lose that issue. As a practical matter, it is nearly impossible for an investor to demonstrate that the opposite of the omission was the basis for her investment decision. Accordingly, Affiliated Ute relieves investors of that burden and deems reliance to exist where a defendant owes a duty to disclose the truth, yet omits material information.
The Seventh Circuit Court of Appeal has cited the Affiliated Ute decision 145 times.[3] The most significant of these decisions was the Seventh Circuit’s rejection of the “fraud created the market” theory as an extension of Affiliated Ute. Eckstein v. Balcor Film Investors, 8 F.3d 1121 (7th Cir. 1993) (Easterbrook, J.). What could have been a major blow for investors has had far less impact because the decision acknowledges that investors may establish reliance indirectly.
[1] Justice Harry Blackmun explained, “[u]nder the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision.” Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-154 (1972) (citations omitted).
[2] See Panter v. Marshall Field & Co., 646 F.2d 271, 284 (7th Cir. 1981) (“The Mills-Ute presumption is essentially a rule of judicial economy and convenience, designed to avoid the impracticality of requiring that each plaintiff shareholder testify concerning the reliance element. Mills v. Electric Auto-Lite Co., 396 U.S. 375, 385 (1970); see Chris-Craft Industries Inc. v. Piper Aircraft Corp., 480 F.2d 341, 375 (2d Cir.), cert. denied, 414 U.S. 910, 94 S. Ct. 231, 38 L. Ed. 2d 148, 94 S. Ct. 232 (1973) (“These impracticalities are avoided by establishing a presumption of reliance where it is logical to presume that such reliance in fact existed”); Kohn v. American Metal Climax Inc., 458 F.2d 255, 290 (3d Cir.), cert. denied, 409 U.S. 874, 93 S. Ct. 120, 34 L. Ed. 2d 126, 93 S. Ct. 132 (1972) (Adams, J., concurring in part, dissenting in part) (10b-5 action). However, when the logical basis on which the presumption rests is absent, it would be highly inappropriate to apply the Mills-Ute presumption. “(W)here no reliance (is) possible under any imaginable set of facts, such a presumption would be illogical in the extreme.” Lewis v. McGraw, 619 F.2d 192, 195 (2d Cir. 1980).