Brief Fact Summary. Plaintiff, Robert Pommer, bought $200,000 worth of shares in Defendant company, Medtest Corp., from Defendant Patrick Manning after Manning told Plaintiff that the company had a patented technology that made it likely to be acquired by another company.
Synopsis of Rule of Law. A material statement is considered fraudulent at the time it was made, and whether the falsehood turns true, or vice versa, does not affect the determination.
Points of Law - Legal Principles in this Case for Law Students.
The securities laws approach matters from an ex ante perspective: just as a statement true when made does not become fraudulent because things unexpectedly go wrong, so a statement materially false when made does not become acceptable because it happens to come true.
Facts. Manning and another Defendant, Donald West, started Medtest on a technology developed by Manning. Manning knew Plaintiff socially, and he offered a 3% stake in Medtest. The company’s value for Plaintiff was exclusively in its potential to be acquired by another company. Plaintiff claimed that Manning told him that the technology was patented and that they were in discussions with Abbott to be acquired for 50 to 100 million dollars. That would turn Plaintiff’s $200,000 investment into $1.5 to 3 million. Plaintiff claimed that Manning made the possible acquisition sound as if it was a near certainty, yet Manning was unable to give a more accurate figure. Manning also told Plaintiff that a patent was granted for the technology, but it actually was not granted until two years later. Abbott declined to acquire Medtest, but Manning never notified Plaintiff of Abbott’s decision because Plaintiff already agreed to buy the shares at that point. Medtest was never sold, and there fore Plaintiff brought this action to collect his investment plus interest. A jury found for Plaintiff, but the trial court judge set the verdict aside, reasoning that no fraudulent statements were made. The judge reasoned that although Manning misrepresented the patent status, a patent did issue later. The judge added that a reasonable investor would know that any acquisition talks are not definite until the acquisition occurred, so Plaintiff could not reasonably rely on any misrepresentations.
Issue. The issue is whether there were any misrepresentations made by Manning that were material and reasonably relied upon by Plaintiff.
Held. The United States Court of Appeals for the Seventh Circuit reversed the trial court judge and remanded. Manning’s comments regarding the patent were fraudulent despite the fact that a patent later issued.