DID MICKEY MANTLE COMMIT SECURITIES FRAUD?
by Lawrence C. Melton, Esq., lmelton@dhayeslaw.com
THE HAYES LAW FIRM, www.dhayeslaw.com, 1-866-332-3567, toll free
In 1969, Mickey Mantle, the legendary baseball player, attempted to franchise a line of restaurants in his name. Apparently, Mantle was a better athlete than he was a business man. Soon after the initial public offering, the stock in Mickey Mantle's Country Cookin, Inc. became worthless. This prompted one of the investors to sue the corporation's founder under Rule 10b-5, alleging numerous omissions of material fact. Stier v. Smith, 473 F.2d 1205, 1207 (5th Cir. 1973). The trial court found fourteen undisclosed facts, but held that disclosure was adequate because the plaintiff was financially sophisticated. Id. The Fifth Circuit reversed, however, issuing the much-repeated epigram that "sophisticated investors, like all others, are entitled to the truth." Id.
Other courts followed, articulating this position in more expansive terms. Consider the following statement from the Northern District of Illinois:
"The sophistication of the investor is immaterial when it comes to plaintiffs' claims based upon misrepresentation and omissions. The securities laws entitle all investors, experienced and novice, to full and truthful disclosure of material information. Moreover, Section 12(2), of the Securities Act of 1933 does not establish a graduated scale of duty depending upon the sophistication and access to information of the customer. Thus, whether or not plaintiffs were sophisticated investors has no bearing on whether or not they can sustain a cause of action under the applicable federal securities laws."
In re Olympic Brewing Co. Securities Litigation [1985-1986 Transfer Binder] Fed. Sec. L. Rep. (CCH) paragraph 92,461, 1985 WL 3928 at *9 (N.D. Ill. Nov. 13, 1985).
One of the chief problems with the sophisticated investor defense is that it imposes a "graduated scale of duty" contrary to our system of equal justice. It places the "giants and pygmies," of which Justice Douglas spoke, on unequal footing. Scherk v. Alberto-Culver Co., 417 U.S. 506, 526 (U.S. 1974) (Dougals, J., dissenting). http://supreme.justia.com/us/417/506/case.html.
But that is not the only flaw. The primary flaw is one of false reasoning. If fraud is involved in the sale of a security, sophistication is simply a meaningless concept. A sophisticated investor is no more able to guard against fraudulent conduct by the sellers of securities than an unsophisticated investor. In securities transactions, Rule 10b-5 prohibits omission of material facts necessary to make a statement not misleading. The failure to disclose information is a form of fraud regardless of ones level of sophistication. The same may be said with respect to untrue statements of material fact. No investor, sophisticated or unsophisticated, can safely buy and sell securities without having full disclosure and an intelligent basis for forming a decisions to buy.
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This "sophisticated investor" angle is interesting indeed. To me, it seems akin to the hate crimes laws. If a man is accused of murder, is the victim less dead if hate were not involved?
When Orwellian nuances are applied to our various laws, are not these laws then encouraged to blossom, flourish, and "enrich" our entire culture in countless other ways? Carried out to a ridiculous extreme: if the Supreme Court rules (as it has) that local jurisdictions
can impose laws prohibiting guns from being possessed within 500 feet of a school, what's the stopping point? If the excuse is the commerce clause of the Constitution, because guns and bullets are used in interstate commerce, shouldn't such laws then be extended to the hunter and his bullets?
It seems to me that this "investor sophistication" thing could be a forerunner to opening a can of worms that might be hard to handle for all of us.
Posted by: Jack Payne | September 03, 2007 at 04:27 PM