FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
LIVID HOLDINGS LTD,
Plaintiff-Appellant,
v.
SALOMON SMITH BARNEY, INC.;
SALOMON SMITH BARNEY HOLDINGS
INC.; BNY CLEARING SERVICES No. 03-35374
LLC, Successor in interest to
Schroders & Co, Inc.; ANDREW D.C. No.
CV-02-01607-JCC
VAN DER VORD; ROBERT CHAMINE;
MICHAEL DURA; ROBERT HAMECS; OPINION
WILLIAM HURST; LEON KALVARIA;
ILAN KAUFTHAL; JOHN O’DONOGUE;
HERC SEGALAS; JED SHERWINDT;
JAMES STONE; FREDERICK TAYLOR;
SAMUEL WEINHOFF,
Defendants-Appellees.
Appeal from the United States District Court
for the Western District of Washington
John C. Coughenour, Chief Judge, Presiding
Argued and Submitted
October 5, 2004—Seattle, Washington
Filed April 6, 2005
Before: Dorothy W. Nelson, Stephen Reinhardt, and
Sidney R. Thomas, Circuit Judges.
Opinion by Judge D.W. Nelson
4035
LIVID HOLDINGS v. SALOMON SMITH BARNEY 4039
COUNSEL
Marc M. Seltzer (argued), Susman Godfrey, LLP, Los Ange-
les, California, and Paula K. Jacobi (on the briefs), Sugar,
Friedberg & Felsenthal, LLP, Chicago, Illinois, for the
plaintiff-appellant.
William F. Alderman, Orrick, Herrington & Sutcliffe, LLP,
San Francisco, California, for the defendants-appellees.
OPINION
D.W. NELSON, Circuit Judge:
Livid Holdings, Ltd. (“Livid”) appeals the district court’s
dismissal with prejudice of its complaint against the corporate
successors to Schroders & Co., Inc. (collectively referred to
as “Schroders” or “Defendants”) under Federal Rule of Civil
Procedure 12(b)(6). Livid’s complaint alleges that Defendants
violated: (1) §10(b) of the Securities Exchange Act of 1934
(“1934 Act”), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R.
§ 240.10b-5, promulgated thereunder; (2) the Washington
Securities Act (“WSA”), Wash. Rev. Code § 21.20.010; and
(3) Washington tort law. We hold that the district court erred
in dismissing Livid’s complaint.
4040 LIVID HOLDINGS v. SALOMON SMITH BARNEY
FACTS AND PROCEEDINGS BELOW
Livid’s claims arise out of its December 1999 purchase of
$10 million worth of shares in Purely Cotton, Inc. (“PCI”)
stock. In January 1999, Schroders helped PCI arrange a pri-
vate placement of $25 million worth of its stock. For this pur-
pose, Schroders created a Confidential Offering Memoran-
dum (“the Memorandum”), which outlined PCI’s operations,
business plan, and financial position. After the distribution of
the Memorandum to potential investors, Livid alleges that
UAE, a Gibralter-based company, agreed to purchase over
98% of the offering. The individual Defendants, who were
directors and/or officers of Schroders, agreed to purchase the
remaining stock. Livid alleges that there was never a contrac-
tual document requiring UAE to pay more than $2 million of
the $25 million purchase price.
In September 1999, PCI asked Schroders for additional
copies of the Memorandum in order to solicit additional
investors. Livid alleges that before providing PCI with these
extra copies, Defendant Van der Vord, the managing director
at Schroders in charge of the offering, and his team amended
the Memorandum by attaching the following notice:
This Memorandum was written in January 1999 and
represents the original Offering Memorandum dis-
tributed to potential investors in the Company’s $25
million private equity fund raising. Subsequent to the
writing and distribution of this document the Com-
pany may have undergone various changes including
but not limited to management changes, ownership
changes and business strategy changes. This docu-
ment has not been updated or amended to reflect any
events that have occurred since January 1999. As
such, it does not reflect the fact that the above-
mentioned $25 million private equity fund raising
has been completed.
LIVID HOLDINGS v. SALOMON SMITH BARNEY 4041
(emphasis added).
Livid’s claims against Defendants arise out of the last sen-
tence of this notice. This sentence, Livid contends, implies
that the proceeds of the initial $25 million sale had been
received by PCI, but that the Memorandum had not yet been
updated to reflect this additional capital. At the time this
notice was written, however, UAE and the Defendants had
actually paid less than $2 million to PCI. Livid alleges that
additional payments on UAE’s balance were conditional on
UAE’s approval of a PCI business plan and a new chief exec-
utive officer — meaning that UAE was not actually bound to
pay for the PCI stock. Livid further alleges that all of the
named Defendants bought stock through this initial offering
on the same terms as UAE, and therefore knew that the sale
was incomplete when the notice was attached to the Memo-
randum for the express purpose of attracting additional inves-
tors. Defendants do not contest that they had such knowledge.
In addition, Livid alleges that Defendants had a motive to
deceive potential investors because PCI had not yet paid
Schroders for the services it provided in connection with the
first fund-raising campaign. In essence, Livid contends that
Defendants had a motive to try to bring additional capital into
PCI — to increase the likelihood that it would be paid for past
services rendered.
The district court dismissed each of Livid’s claims with
prejudice. With respect to the federal claim, the district court
found that Livid failed to plead adequately that the notice
statement was a material misrepresentation, upon which it
reasonably relied in purchasing PCI stock. In addition, the
district court found that Livid’s complaint did not satisfy the
heightened pleading standards for scienter under the 1995 Pri-
vate Securities Litigation Reform Act (“PSLRA”). The dis-
trict court dismissed Livid’s state securities claim because it
found the alleged misrepresentation immaterial, and that
Defendants were not sellers of securities within the meaning
of the WSA. Because the district court found that Livid’s reli-
4042 LIVID HOLDINGS v. SALOMON SMITH BARNEY
ance on the representations in the notice was unreasonable,
the court also dismissed the state tort claims. Finally, the dis-
trict court refused to grant Livid leave to amend its complaint,
concluding that any such attempt would be futile.
DISCUSSION
I. Standard of Review
We review dismissals for failure to state a claim pursuant
to Federal Rule 12(b)(6) de novo. Decker v. Advantage Fund,
Ltd., 362 F.3d 593, 595-96 (9th Cir. 2004). In conducting
such a review, we generally limit consideration to the com-
plaint and construe all allegations of material fact in the light
most favorable to the nonmoving party. Warren v. Fox Family
Worldwide, Inc., 328 F.3d 1136, 1141 n.5 (9th Cir. 2003); No.
84 Employer-Teamster Joint Council Pension Trust Fund v.
Am. W. Holding Corp., 320 F.3d 920, 931 (9th Cir.), cert.
denied, 540 U.S. 966 (2003). A Federal Rule 12(b)(6) dis-
missal is inappropriate unless it appears beyond doubt that the
plaintiff can prove no set of facts in support of the claim enti-
tling plaintiff to relief. No. 84 Employer-Teamster Joint
Council, 320 F.3d at 931. The district court’s dismissal of a
complaint without leave to amend is reviewed de novo and is
improper unless it is clear that the complaint could not be
saved by any amendment. Thinket Ink Infor. Res., Inc. v. Sun
Microsystems, Inc., 368 F.3d 1053, 1061 (9th Cir. 2004).
II. Federal Securities Law Claim
[1] Section 10(b) of the 1934 Act makes it unlawful “for
any person, directly or indirectly, . . . [t]o use or employ, in
connection with the purchase or sale of any security . . . any
manipulative or deceptive device or contrivance in contraven-
tion of such rules and regulations as the Commission may pre-
scribe.” 15 U.S.C. §§ 78j, 78j(b). Rule 10b-5, promulgated
under § 10(b), in turn provides: “It shall be unlawful for any
person . . . [t]o make any untrue statement of a material fact
LIVID HOLDINGS v. SALOMON SMITH BARNEY 4043
or to omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances under
which they were made, not misleading.” 17 C.F.R. § 240.10b-
5. The elements of a Rule 10b-5 claim are: (1) a misrepresen-
tation or omission of a material fact; (2) scienter; (3) causa-
tion; (4) reliance; and (5) damages. In re Daou Systems, Inc.
Sec. Litig., 397 F.3d 704, 710 (9th Cir. 2005).
Claims brought under Rule 10b-5 must meet the particular-
ity requirement of Federal Rule of Civil Procedure 9(b),
which requires that “[i]n all averments of fraud or mistake,
the circumstances constituting fraud or mistake shall be stated
with particularity.” Fed. R. Civ. P. 9(b). The PSLRA raised
the pleading standards for Rule 10b-5 claims by requiring that
plaintiffs plead scienter by “stat[ing] with particularity facts
giving rise to a strong inference that the defendant acted with
the required state of mind.” 15 U.S.C. § 78u-4(b)(2) (1997).
A. Material Misrepresentations or Omissions
[2] For the purposes of a 10b-5 claim, a misrepresentation
or omission is material if there is a substantial likelihood that
a reasonable investor would have acted differently if the mis-
representation had not been made or the truth had been dis-
closed. Basic Inc. v. Levinson, 485 U.S. 224, 231-232 (1988).
We conclude that Livid has sufficiently pled materiality by
raising a substantial likelihood that a reasonable investor
would not have purchased $10 million worth of PCI stock
after learning that the company had $25 million less in cash
than it was led to believe. If this misrepresentation had not
been made, Livid would likely have believed that PCI’s finan-
cial status was closer to the negative net worth of $743,646
reported in the Memorandum, rather than $24.2 million pre-
dicted to result from the stock offering.1 This misrepresenta-
tion radically altered the picture of PCI’s overall economic
1
This amount reflects the $25 million in income from the offering less
expenses from the sale.
4044 LIVID HOLDINGS v. SALOMON SMITH BARNEY
health and viability presented to Livid by the Memorandum.
Thus, Livid successfully pled the materiality of Defendants’
misrepresentation regarding PCI’s capital.
[3] The district court, however, found that the notice
Defendants attached to the Memorandum contained caution-
ary language rendering “any statement made in the [n]otice
legally immaterial.” In making this finding, the district court
relied on the bespeaks caution doctrine, which “provides a
mechanism by which a court can rule as a matter of law that
defendants’ forward-looking representations contained
enough cautionary language or risk disclosure to protect the
defendant against claims of securities fraud.” In re Stac Elecs.
Sec. Litig., 89 F.3d 1399, 1408 (9th Cir. 1996) (quoting Fecht
v. The Price Co., 70 F.3d 1078, 1081 (9th Cir. 1995)). We
have applied the bespeaks caution doctrine in situations where
“optimistic projections coupled with cautionary language . . .
affect[ ] the reasonableness of reliance on and the materiality
of those projections.” In re Worlds of Wonder Sec. Litig., 35
F.3d 1407, 1414 (9th Cir. 1994).
[4] Dismissal on the pleadings under the bespeaks caution
doctrine, however, requires a stringent showing: There must
be sufficient “cautionary language or risk disclosure [such]
that reasonable minds could not disagree that the challenged
statements were not misleading.” In re Stac, 89 F.3d at 1409
(quoting Fecht, 70 F.3d at 1082). We cannot agree that the
only reasonable interpretation of the contested sentence is that
it warned potential investors that PCI may not have received
all of the capital from the $25 million stock sale. Instead, the
most obvious interpretation of this sentence is that this cash
had already been received, but that this “fact” and the result-
ing cash increase was not yet updated in the Memorandum.
[5] In finding the statement immaterial, the district court
also extended the bespeaks caution doctrine to statements of
fact, despite the lack of approval from this circuit for such
application of the doctrine as well as the explicit rejection of
LIVID HOLDINGS v. SALOMON SMITH BARNEY 4045
such an extension by two other circuits. See Shaw v. Digital
Equip. Corp., 82 F.3d 1194, 1213 (1st Cir. 1996) (holding
that the bespeaks caution doctrine does not apply to represen-
tations of “present facts” that were false when made); Harden
v. Raffensperger, Hughes & Co., 65 F.3d 1392, 1405-06 (7th
Cir. 1995) (similarly holding that the doctrine does not apply
to misrepresentations of “hard facts,” but only to subjective or
“soft information”). To date, this circuit has only applied the
doctrine to forward-looking statements, such as estimates of
future performance or economic projections. See Gray v. First
Winthrop Corp., 82 F.3d 877, 883 (9th Cir. 1996) (acknowl-
edging that “the bespeaks caution rule is not applicable to
misrepresentations of historical facts,” but refusing to find
that a district court clearly erred when considering the doc-
trine when the contested historical facts formed the basis of
projections about future profitability); see also PSLRA
§ 21E(c)(2), 15 U.S.C. § 78u-5(c)(1) (expressly codifying the
bespeaks caution doctrine for “forward-looking statements”).
We now expressly adopt the logic of the First and Seventh
Circuits and hold that extension of the bespeaks caution doc-
trine to statements of historical fact is inappropriate. See also
Worlds of Wonder, 35 F.3d at 1414 (“[A]n overbroad applica-
tion of the [bespeaks caution] doctrine would encourage man-
agement to conceal deliberate misrepresentations beneath the
mantle of broad cautionary language.”) (quoting In re Worlds
of Wonder Sec. Litig., 814 F. Supp. 850, 858 (N.D. Cal.
1993)). Accordingly, we hold that the district court erred in
concluding that the contested statement was immaterial.
B. Scienter
[6] This circuit has interpreted the PSLRA’s heightened
pleading standard as requiring plaintiff to “plead, in great
detail, facts that constitute strong circumstantial evidence of
deliberately reckless or conscious misconduct.” In re Silicon
Graphics, Inc. Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999).
“[T]o show a strong inference of deliberate recklessness,
plaintiffs must state facts that come closer to demonstrating
4046 LIVID HOLDINGS v. SALOMON SMITH BARNEY
intent, as opposed to mere motive and opportunity [to commit
fraud].” Id. When determining whether plaintiffs have suffi-
ciently plead scienter, we must consider “whether the total of
plaintiffs’ allegations, even though individually lacking, are
sufficient to create a strong inference that defendants acted
with deliberate or conscious recklessness.” No. 84 Employer-
Teamster Joint Council, 320 F.3d at 938 (citation omitted). In
making this assessment, we consider all reasonable infer-
ences, whether or not favorable to the plaintiff. Gompper v.
VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002).
Defendants, who purchased PCI stock on the same terms as
UAE, do not contest that they were fully aware that the initial
stock sale had not been completed. Nonetheless, Defendants
wrote and attached the notice statement, which at best omitted
crucial information about the prior sale’s terms and status, and
at worst was an intentional attempt to trick potential investors
into believing that the sale had been completed and the cash
had been received by PCI but was simply not incorporated
into the previously written Memorandum. The district court,
however, believed that the Defendants lacked the requisite
mental state because “if [they] had intended to mislead inves-
tors, [they] would have made the misrepresentation more
explicit.” We disagree. There are few ways to make the mis-
representation more explicit as it states as “fact” that the ini-
tial stock offering “has been completed,” but that the attached
Memorandum had not been updated to reflect this alleged
fact. If Defendants’ intention was to warn potential investors
that the Memorandum was not current and to make no state-
ment on whether or not the sale was successfully concluded,
the Defendants could have conveyed this warning in a much
clearer way. For example, had the sentence read: “The docu-
ment does not reflect any capital that may have been gener-
ated by the private equity fund-raising,” it would not imply
that the $25 million fund-raising effort had been successfully
completed and that PCI had received these funds, but the
Memorandum did not yet reflect this fact.
LIVID HOLDINGS v. SALOMON SMITH BARNEY 4047
[7] Because Livid alleges, and Defendants do not contest,
that they knew the contested statement’s most obvious inter-
pretation was false when made, Livid has met the heightened
pleading standard for scienter by raising a strong inference of
defendants’ deliberate recklessness. See Nursing Home Pen-
sion Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1230
(9th Cir. 2004). In combination with Livid’s allegation that
Defendants had a motive to misrepresent the status of the
stock sale, Livid has pled facts constituting a strong inference
of scienter. Although this court has found that allegations of
a motive to mislead, standing alone, cannot satisfy the height-
ened scienter standard, we are not precluded from considering
allegations of motive in combination with other allegations of
Defendants’ intent to mislead or deliberate recklessness. In re
Silicon Graphics, 183 F.3d at 974. Therefore, we hold that the
totality of the allegations creates a strong inference that the
Defendants acted with the requisite scienter and reverse the
district court’s conclusion to the contrary.
C. Causation
[8] The causation requirement for Rule 10b-5 actions
includes “both transaction causation, that the violations in
question caused the plaintiff to engage in the transaction, and
loss causation, that the misrepresentation or omissions caused
the harm.” Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir.
1999). Livid has sufficiently pled both elements of causation
because it has alleged both that they would not have pur-
chased the PCI stock but for the misrepresentation and that
the Defendants’ misrepresentation induced a disparity
between the transaction price and the true investment quality
of the stock at the time of the transaction. See id. at 938-39.
Our case law requires no more. Accordingly, Livid pled cau-
sation sufficient to survive a Rule 12(b)(6) motion to dismiss.
D. Reliance and Damages
[9] The district court concluded, as a matter of law, that
Livid could not establish reliance because the notice con-
4048 LIVID HOLDINGS v. SALOMON SMITH BARNEY
tained sufficient cautionary language to make any reliance
unreasonable. For the reasons discussed above, we refuse to
extend the bespeaks caution doctrine to misrepresentations of
historical facts as opposed to forward-looking projections.
Therefore, we reverse the district court’s finding that Livid
inadequately plead reliance.
Finally, although the district court claims to have made its
reliance finding as a matter of law, it stated that even if the
Defendants could have expected potential investors to “draw
such a faulty inference” that the initial stock offering had been
completed, that Defendants “would have had to assume fur-
ther that the same investors would fail to perform even the
most cursory due diligence,” which would have quickly
revealed the truth. Such a factual determination by the court
is inappropriate in a Rule 12(b)(6) dismissal, especially when,
as here, the Defendants do not contest that Livid conducted
adequate due diligence, which produced statements from
UAE and PCI falsely claiming that the sale had been com-
pleted. If Livid justifiably relied on Defendants’ misrepresen-
tation about the stock sale and, in turn, bought PCI stock
based on this reliance, it incurred damages from Defendants’
fraud. Livid’s assertions to this effect are sufficient to survive
Defendants’ motion to dismiss under Rule 12(b)(6).
E. Statute of Limitations
As an alternative ground for affirming the district court,
Defendants argue that Livid’s federal securities claim is time-
barred. This court can affirm the district court’s dismissal on
any ground supported by the record, even if the district court
did not rely on the ground. See, e.g., United States ex rel. Ali
v. Daniel, Mann, Johnson & Mendenhall, 355 F.3d 1140,
1144 (9th Cir. 2004); Cardenas v. Anzai, 311 F.3d 929, 938
(9th Cir. 2002). Because the record does not establish that the
statute of limitations for the federal securities claim has run,
we refuse to affirm the district court on this alternative
ground.
LIVID HOLDINGS v. SALOMON SMITH BARNEY 4049
[10] Rule 10b-5 does not contain its own statute of limita-
tions. The Supreme Court, however, has construed the limita-
tions period in § 9(e) of the 1934 Act to apply to Rule 10b-5
actions. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbert-
son, 501 U.S. 350, 364 (1991). Since this decision, Rule 10b-
5 actions have been required to be filed within the earlier of
either “one year after the discovery of facts constituting the
violation” or three years after such violation. Id. In 2002,
Congress passed the Sarbanes-Oxley Act (SOA) extending
the statute of limitations for Rule 10b-5 actions. Pub. L. No.
107-204, 116 Stat. 745 (2002), codified in part at 28 U.S.C.
§ 1658(b). Section 804(a) states that:
a private right of action that involves a claim of
fraud, deceit, manipulation, or contrivance in contra-
vention of a regulatory requirement concerning the
securities laws, as defined in section 3(a)(47) of the
Securities Exchange Act of 1934 . . . , may be
brought not later than the earlier of—
(1) 2 years after the discovery of the facts consti-
tuting the violation; or
(2) 5 years after such violation.
Id. § 804(a). This new statute of limitations period “appl[ies]
to all proceedings . . . that are commenced on or after the date
of enactment of this Act,” which was July 30, 2002. Id.
§ 804(b).
Livid filed its complaint on August 1, 2002, two days after
the SOA’s effective date. This fact alone does not bring the
complaint within the SOA’s longer statute of limitations
period as the SOA also contains a statement warning that the
new limitations period should not be interpreted as “creat[ing]
a new, private right of action.” Id. § 804(c). The Defendants
argue that when Livid filed its complaint, the pre-SOA limita-
tions period had already run. If this were true, in order to
4050 LIVID HOLDINGS v. SALOMON SMITH BARNEY
uphold the complaint, we would have to find that Congress
clearly intended the SOA’s new statute of limitations to
revive previously expired claims. Because we cannot con-
clude that the pre-SOA statute of limitations had run when
Livid filed its complaint, we refuse to decide, based on this
record, whether the new statute of limitations period revives
dead claims.
[11] According to the pre-SOA standard, Livid’s claim is
time-barred if Livid discovered the “facts constituting the vio-
lation” it alleges a year before filing its complaint. Lampf, 501
U.S. at 364. The Defendants argue that this statute of limita-
tions began to run over two years before Livid filed its com-
plaint when, on March 19, 2000, three PCI employees filed an
involuntary bankruptcy petition against PCI, which put Livid
on inquiry notice of the alleged fraud. This court has consid-
ered, but not made a final determination on whether actual or
inquiry notice of the alleged fraud triggers the running of Rule
10b-5’s statute of limitations. Berry v. Valence Technology,
Inc., 175 F.3d 699, 704 (9th Cir. 1999). In Berry, the court
declined to adopt either an inquiry or actual notice standard,
but noted that “[i]f we were to adopt inquiry notice, we would
agree with the . . . formulation of . . . most circuits” which
apply “an inquiry notice standard coupled with some form of
reasonable diligence requirement.” Id. (citation omitted).
Since Berry, this court has left the notice standard unresolved
and applies both the actual notice and inquiry-plus-due dili-
gence standards in applicable cases.
The complaint alleges that Livid did not have actual notice
of the alleged fraud until “late September 2001” when it
received a report from the independent auditor for the bank-
ruptcy proceeding. If actual notice is required to trigger the
statute of limitations, we cannot hold, as a matter of law, that
Livid filed its complaint more than one year after it discov-
ered the alleged fraud. It is not evident, based on the allega-
tions in the complaint, whether Livid timely filed this action
LIVID HOLDINGS v. SALOMON SMITH BARNEY 4051
if inquiry notice triggers the running of the statute of limita-
tions.
[12] We cannot decide on this record whether under this
circuit’s modified inquiry notice standard Livid should have
been aware of the fraud one year before it filed its complaint.
This court has held that financial problems alone are generally
insufficient to suggest fraud. Mosesian v. Peat, Marwick,
Mitchell & Co., 727 F.2d 873, 878 (9th Cir. 1984). Therefore,
the filing of the bankruptcy petition alone seems unlikely to
satisfy the inquiry-plus-due diligence standard, especially
since we have held that “[t]he question of what a reasonably
prudent investor should have known is particularly suited to
a jury determination,” id. at 879. Livid alleges that it first
learned of the bankruptcy proceedings against PCI on May
25, 2001, which caused it to evaluate the filings submitted in
this proceeding. This investigation revealed a verified plead-
ing affirmatively representing that the $25 million stock sale
had been received by PCI. Therefore, we cannot decide, as a
matter of law, whether Livid should have been on notice of
the alleged fraud one year before the complaint was filed.
III. State Securities Law Claim
[13] The district court dismissed Livid’s state securities
claim based on its finding regarding Livid’s federal securities
claim that “the alleged misrepresentation was immaterial as a
matter of law.”2 Because we reverse the district court’s imma-
teriality finding on Livid’s federal securities claim, we also
reverse the immateriality finding on the state securities law
claim.
2
Livid did not allege a violation of the WSA in its original complaint.
This allegation was added in Livid’s proposed First Amended Complaint.
The district court refused to allow Livid leave to file either its first or sec-
ond amended complaints, finding that amendment would be futile. None-
theless, the district court considered the proposed amended complaints in
its order dismissing Livid’s claims.
4052 LIVID HOLDINGS v. SALOMON SMITH BARNEY
Alternatively, the district court concluded that Livid’s state
securities claim must be dismissed because the Defendants
were not sellers of securities under the WSA. Washington
case law suggests otherwise. Under Washington law, Livid
need not allege that Defendants directly sold it the PCI stock,
but must simply allege that Defendants were a “substantial
contributive factor in the sales transaction.” Haberman v.
Wash. Pub. Power Supply Sys., 744 P.2d 1032, 1052 (Wash.
1987); Herrington v. Hawthorne, 47 P.3d 567, 570-71 (Wash.
Ct. App. 2000). The district court analogizes Defendants’ role
in Livid’s stock purchase to the role of the law firm in Hines
v. Data Lines Systems, Inc., 787 P.2d 8, 20 (Wash. 1990). In
Hines, the Washington Supreme Court upheld summary judg-
ment for the law firm, which served as the legal preparer for
a private stock offering, but otherwise had no personal contact
with any of the investors alleging fraud under the WSA and
was not involved in the solicitation process. The Washington
Supreme Court concluded that the law firm did nothing more
than provide routine professional advice about the materiality
of certain facts in connection with the offer. Id. Therefore, the
Washington Supreme Court found that others “had the pre-
dominant effect of bringing about the sale.” Id. Defendants,
however, did not simply provide routine professional advice.
Instead, Livid alleges that Defendants wrote and inserted a
prominent, misleading statement in the Memorandum being
used to solicit investors and that this statement induced it to
purchase PCI stock. Therefore, the complaint raises a genuine
issue of fact as to whether Defendants served as a catalyst for
the sale and, thus, can be considered sellers under the WSA.
Accordingly, we hold that the district court erred in finding,
as a matter of law, that Defendants were not a substantial con-
tributive factor in the sales transaction at issue.
IV. State Tort Law Claims
[14] The district court based its dismissal of Livid’s state
tort claims for fraudulent and negligent misrepresentation on
its holding that Livid’s reliance on the notice’s statements was
LIVID HOLDINGS v. SALOMON SMITH BARNEY 4053
unreasonable. Under either tort claim, Washington law
requires plaintiffs to show reasonable reliance. ESCA Corp. v.
KPMG Peat Marwick, 959 P.2d 651, 654 (Wash. 1998) (neg-
ligent misrepresentation); Haberman, 744 P.2d at 1070
(fraudulent misrepresentation). Here again, because we find
that the district court erred in determining, as a matter of law,
that Livid failed to allege adequately reasonable reliance on
the statements in the notice as to Livid’s federal securities
claim, we must similarly reverse the district court’s decision
as to Livid’s state tort claims.
CONCLUSION
Plaintiff’s complaint states a claim for federal securities
fraud, state securities fraud, and state tort violations — even
under the heightened pleading standards of the PSLRA. The
case is remanded to the district court for further proceedings
consistent with this opinion.
REVERSED AND REMANDED.