An appeal was filed in the Tennessee Court of Appeals regarding the dismissal of a securities fraud lawsuit by plaintiffs John Constantine, III, and others against defendants Miller Industries, Inc., and its executives, William G. Miller and Adam L. Dunayer. The plaintiffs, who purchased stock between December 12, 1996, and September 5, 1997, alleged that the defendants made misrepresentations during a public stock offering, seeking class action certification for those who acquired shares from October 15, 1996, to September 11, 1997.
The trial court dismissed the case, stating that the plaintiffs failed to show common law reliance on the misrepresentations as required by Tennessee law, specifically T.C.A. 48-2-121 and 48-2-122(c). The plaintiffs contended that reliance was not necessary to establish a cause of action under the relevant statute and argued for the adoption of the federal "fraud on the market" theory, which does not require direct reliance. However, the trial court maintained that previous interpretations of related statutes required proof of reliance, leading to the dismissal.
The Court of Appeals affirmed the trial court's dismissal, concluding that the plaintiffs did not adequately plead fraud and did not meet the necessary legal standards under Tennessee law. The defendants had filed a motion to dismiss based on failure to state a claim, which was granted by Chancellor R. Vann Owens, who noted insufficient particularity in the allegations of fraud.
On September 28, 1998, Plaintiffs filed a Second Amended Complaint under T.R.C.P. Rule 15.01, asserting claims under the Tennessee Securities Act of 1980 based on alleged misleading statements related to a public stock offering. These statements purportedly constituted a violation of T.C.A. 48-2-122(c), which allows for private actions under the securities fraud statute, T.C.A. 48-2-121. The Plaintiffs sought to add Bear, Stearns & Company, Inc. as a defendant, but the Trial Court denied this request.
Defendants filed a second Motion to Dismiss on November 9, 1998, arguing that the Plaintiffs did not plead fraud with sufficient particularity as required by T.R.C.P. Rule 9.02 and failed to state a viable claim under T.R.C.P. Rule 12.02. They contended that the “fraud on the market” theory was not applicable to the Tennessee Securities Act and that the Plaintiffs did not adequately demonstrate the elements of reliance and scienter necessary for common law fraud.
After reviewing additional briefs and hearing arguments, the Trial Court, presided over by Chancellor W. Frank Brown III, dismissed the case on March 11, 1999. The Court found that the Plaintiffs failed to allege fraud with requisite specificity and did not establish reliance or scienter. It concluded that Tennessee law had not adopted the "fraud on the market" theory, emphasizing that any significant legal change should come from the Tennessee Supreme Court or the Court of Appeals. The Court noted that dismissal did not leave the Plaintiffs without remedy, as a similar class action was pending in Georgia involving the same theory.
The Plaintiffs appealed the dismissal, posing two main issues with four specific questions regarding the requirements for pleading reliance and knowledge of falsity under the statute.
Defendants contend that Plaintiffs have mischaracterized the issues for review, asserting that the focus should be on whether the Second Amended Complaint states a viable claim for relief. The central issue on appeal is whether Plaintiffs' reliance on alleged actions by Defendants, claimed to violate T.C.A. 48-2-121, is necessary for a suit under T.C.A. 48-2-122(c). The review involves statutory construction, which is conducted de novo, meaning there is no presumption of correctness. The Court's role is to determine legislative intent based on the ordinary meaning of the statute's language, as established in Myint v. Allstate Ins. Co.
T.C.A. 48-2-121, part of the Tennessee Securities Act of 1980, outlines unlawful acts related to securities fraud, including fraudulent devices, untrue statements, and misleading omissions. T.C.A. 48-2-122(c) provides a private right of action but does not create an independent cause of action; instead, it requires a violation of T.C.A. 48-2-121 for any claim to exist. The Trial Court's comprehensive Memorandum Opinion concluded that Plaintiffs did not adequately plead reliance on Defendants' representations, which is necessary for a civil cause of action under T.C.A. 48-2-122. This finding is supported by the precedent set in Diversified Equities, Inc. v. Warren, which established that common law reliance must be demonstrated in similar cases.
Plaintiffs argue that common law reliance is not required for a fraudulent practice claim under T.C.A. 48-1644. However, the court finds no cases interpreting this statute analogous to federal Rule 10b-5, which necessitates proving reliance on a material misrepresentation to recover damages. The court emphasizes that reliance must be shown as a substantial factor influencing the plaintiff's conduct, aligning with the common law misrepresentation standard established in *Diversified Equities*. Plaintiffs attempt to circumvent this requirement by citing *State v. Brewer*, but the court distinguishes between the different burdens of proof in private actions under T.C.A. 48-2-122 and criminal actions under T.C.A. 48-2-121, noting that private plaintiffs must prove fraud and loss, unlike the government in enforcement actions. The court references federal case law, specifically *Kramas v. Security Gas & Oil, Inc.*, to support this distinction. It also reaffirms that the Tennessee Securities Act of 1980 closely mirrors federal securities law, thereby upholding the *Diversified Equities* holding that common law reliance remains a prerequisite for private securities fraud claims. The court dismisses the plaintiffs' reliance on the *Wakefield v. Crawley* case as irrelevant, stating that it does not change the requirement of proving reliance for the statutory actions in question.
The Wakefield case emphasizes the specificity of its citations and discussions related to the Uniform Commercial Code (UCC), limiting their broader applicability. The 1995 amendments to the Tennessee UCC were intended to clarify the definition of a "security," particularly concerning the perfection of security interests in stocks and investment instruments, addressing uncertainties from the Tennessee Supreme Court's ruling in Blasingame v. American Materials, Inc. The General Assembly aimed to include closely-held corporation stock within this definition. The Wakefield opinion reinforces the notion that the legislature was aware of prior statutory enactments, including the requirement of actual reliance for private causes of action under the Tennessee Securities Act of 1980. The court concluded that the request for a "fraud on the market" theory is inappropriate without legislative action. The Trial Court found that Plaintiffs did not adequately plead actual reliance, a finding upheld by the appellate court. Consequently, the court affirmed the Trial Court's dismissal of the Plaintiffs' suit with prejudice, rendering the question of scienter moot. The appellate court's judgment is affirmed, with costs taxed to the Appellants.
