COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 02-10-00229-CV
MICHAEL MURPHY APPELLANT
V.
ERNEST REYNOLDS III APPELLEE
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FROM THE 17TH DISTRICT COURT OF TARRANT COUNTY
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MEMORANDUM OPINION1
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I. Introduction
In five issues, a media defendant, Appellant Michael Murphy, brings this
interlocutory appeal, asserting that the trial court erred by partially denying his
motion for summary judgment. See Tex. Civ. Prac. & Rem. Code Ann.
§ 51.014(a)(6) (West 2008). We are constrained to reverse and render.
1
See Tex. R. App. P. 47.4.
II. Factual and Procedural History
Appellee Ernest Reynolds, III sued Murphy, a technology-sector stock
analyst and author of a newsletter, book, and telephone ―hotline,‖ for losses
incurred from investments Reynolds made based on recommendations in
Murphy‘s newsletter, Technology Investing. The parties have appeared before
this court on three prior occasions related to different aspects of the underlying
lawsuit. See Reynolds v. Murphy (Reynolds III), 266 S.W.3d 141 (Tex. App.—
Fort Worth 2008, pet. denied); In re Reynolds (Reynolds II), No. 02-07-00256-
CV, 2007 WL 2460279 (Tex. App.—Fort Worth Aug. 31, 2007, orig. proceeding);
Reynolds v. Murphy (Reynolds I), 188 S.W.3d 252 (Tex. App—Fort Worth 2006,
pet. denied) (op. on reh‘g) (containing a detailed factual history of the case), cert.
denied, 549 U.S. 1281 (2007).
In April 2010, after our opinion in Reynolds III, Reynolds filed his fourth
amended petition in which he sought damages and attorneys‘ fees and claimed
that Murphy (1) violated Texas Business and Commerce Code section 27.01,
articles 581-33 and 581-33-1 of the Texas Securities Act (TSA), and National
Association of Securities Dealers (NASD) rules; (2) breached a fiduciary duty to
Reynolds; (3) committed common law fraud (the surviving claim from our
disposition of Reynolds I); and (4) committed negligence, gross negligence, and
negligence per se. After the parties conducted discovery, Murphy filed a motion
for a traditional and a no-evidence summary judgment and a supplemental
summary judgment motion on all of Reynolds‘s claims, to which Reynolds
2
responded. After overruling each party‘s objections to summary judgment
evidence, the trial court granted Murphy summary judgment on Reynolds‘s
negligence and gross negligence claims but denied summary judgment on
Reynolds‘s first three claims. This interlocutory appeal followed,2 with Murphy
asserting that his motions should have been granted as to all of Reynolds‘s
claims.
III. Summary Judgment
In his third and fourth issues, Murphy argues that the trial court erred by
denying his motion for summary judgment on Reynolds‘s nonnegligence claims
because (1) Murphy was not an investment advisor and was not a primary
violator or aider and abettor in the sale or purchase of stock, thus, he did not
violate business and commerce code section 27.01, TSA articles 581-33 or 581-
33-1, or NASD rules; (2) Murphy did not owe a fiduciary duty to Reynolds, and
(3) Reynolds‘s fraud claims were barred by limitations or, in the alternative,
Reynolds‘s fraud claims fail as a matter of law because Reynolds neither met his
burden to show that Murphy made any material misrepresentations or his burden
to show that Murphy‘s actions caused him damage.3
2
Although Reynolds challenges our jurisdiction to hear Murphy‘s appeal,
we have previously ruled on this matter by denying his prior motion to dismiss the
appeal.
3
In his eighth issue, Murphy complains that the trial court erred by
overruling his objections to Reynolds‘s affidavit as summary judgment evidence,
which we review under an abuse of discretion standard. Nat’l Liab. & Fire Ins.
Co. v. Allen, 15 S.W.3d 525, 527–28 (Tex. 2000). However, we need not
3
A. Standard of Review
In this summary judgment case, the issue on appeal is whether Murphy
met the summary judgment burden by establishing that no genuine issue of
material fact existed and that he was entitled to judgment as a matter of law.
Tex. R. Civ. P. 166a(c); Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding,
289 S.W.3d 844, 848 (Tex. 2009). We review his summary judgment de novo.
Travelers Ins. Co. v. Joachim, 315 S.W.3d 860, 862 (Tex. 2010).
We consider the evidence presented in the light most favorable to
Reynolds, crediting evidence favorable to him if reasonable jurors could, and
disregarding evidence contrary to him unless reasonable jurors could not. Mann
Frankfort, 289 S.W.3d at 848. We indulge every reasonable inference and
resolve any doubts in Reynolds‘s favor. 20801, Inc. v. Parker, 249 S.W.3d 392,
399 (Tex. 2008). Murphy, as defendant below, was entitled to summary
judgment on an affirmative defense to Reynolds‘s claims if he conclusively
proved all the elements of his asserted affirmative defense. Frost Nat’l Bank v.
Fernandez, 315 S.W.3d 494, 508–09 (Tex. 2010), cert. denied, 131 S. Ct. 1017
(2011); see Tex. R. Civ. P. 166a(b), (c). To accomplish this, Murphy must have
presented summary judgment evidence that conclusively established each
determine if the trial court abused its discretion because, as we set forth herein,
Reynolds did not raise a fact issue on Murphy‘s summary judgment grounds
even with the trial court admitting that evidence. See Tex. R. App. P. 47.1; see
also Reynolds I, 188 S.W.3d at 261–62 (summarizing Reynolds‘s affidavit).
4
element of his affirmative defense. See Chau v. Riddle, 254 S.W.3d 453, 455
(Tex. 2008).
In the no-evidence motion, Murphy, as defendant below and the party
without the burden of proof, moved for summary judgment on the ground that
there was no evidence to support an essential element of Reynolds‘s claims.
See Tex. R. Civ. P. 166a(i). The motion was required to specifically state the
elements for which there was no evidence, and the trial court was required to
grant the motion unless Reynolds produced summary judgment evidence that
raised a genuine issue of material fact as to those issues. See id. & cmt.; Timpte
Indus., Inc. v. Gish, 286 S.W.3d 306, 310 (Tex. 2009); Hamilton v. Wilson, 249
S.W.3d 425, 426 (Tex. 2008).
When reviewing this no-evidence summary judgment, we examine the
entire record in the light most favorable to Reynolds, indulging every reasonable
inference and resolving any doubts against the motion. See Sudan v. Sudan,
199 S.W.3d 291, 292 (Tex. 2006). We review this no-evidence summary
judgment for evidence that would enable reasonable and fair-minded jurors to
differ in their conclusions. See Hamilton, 249 S.W.3d at 426 (citing City of Keller
v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005)). We credit evidence favorable to
Reynolds if reasonable jurors could, and we disregard evidence contrary to
Reynolds unless reasonable jurors could not. See Timpte Indus., 286 S.W.3d at
310 (quoting Mack Trucks, Inc. v. Tamez, 206 S.W.3d 572, 582 (Tex. 2006)). If
Reynolds brought forward more than a scintilla of probative evidence that raised
5
a genuine issue of material fact, then a no-evidence summary judgment was not
proper. Smith v. O’Donnell, 288 S.W.3d 417, 424 (Tex. 2009); King Ranch, Inc.
v. Chapman, 118 S.W.3d 742, 751 (Tex. 2003), cert. denied, 541 U.S. 1030
(2004).
B. Article 581-33-1: Investment Advisor
In his third issue, Murphy asserts that because he is not an ―investment
advisor‖ as defined by TSA article 581-4(N), the trial court erred by denying his
motion for summary judgment on Reynolds‘s article 581-33-1 claim.4 In his
motion, Murphy asserted that he was an author of a bona-fide publication and not
an ―investment advisor‖ for purposes of the TSA.
1. Applicable Law
Article 581-33-1 outlines the civil liability that investment advisors have to
their clients. See Tex. Rev. Civ. Stat. Ann. art. 581-33-1 (West Supp. 2010).
Article 581-4(N), added in 2001, mirrors the federal Investment Advisors Act‘s
(IAA) definition, and defines ―investment advisor‖ to
[i]nclude[ ] a person who, for compensation, engages in the business
of advising another, either directly or through publications or writings,
with respect to the value of securities or to the advisability of
investing in, purchasing, or selling securities or a person who, for
compensation and as part of a regular business, issues or adopts
4
Although we usually address the no-evidence motion first when both no-
evidence and traditional summary judgment motions are filed, see Ford Motor
Co. v. Ridgway, 135 S.W.3d 598, 600 (Tex. 2004), we will review the propriety of
granting the traditional summary judgment on Murphy‘s article 581-33-1 claim
first because it is dispositive. See Tex. R. App. P. 47.1.
6
analyses or a report concerning securities, as may be further defined
by Board rule. The term does not include:
....
(4) the publisher of a bona fide newspaper, news magazine, or
business or financial publication of general or regular circulation[.]
Id. art. 581-4(N) (West 2010); see also 15 U.S.C.A. § 80b-2(a)(11) (West 2009);
House Research Org., Bill Analysis, Tex. H.B. 2255, 77th Leg., R.S. (2001)
(indicating that the addition codified, but did not alter, the Texas Securities
Board‘s existing rules and exemptions regarding the regulation of investment
advisors). Oversight of investment advisors is split between state and federal
authorities. See 15 U.S.C.A. § 80b-3a (West 2009). Any entity or person
qualifying for an exemption under the federal definition of investment advisor is
statutorily exempt from state registration. See id. § 80b-3a(b)(1)(B) (noting that
an entity exempt under § 80b-2(a)(11) is not subject to state registration,
licensing, or qualification).
Consistent then with article 581-4(N)(4), we will examine whether Murphy
(a) was a publisher (b) of a bona fide financial publication (c) of general
circulation.5 We revisit Lowe v. Securities & Exchange Commission, 472 U.S.
181, 105 S. Ct. 2557 (1985), for guidance. See Reynolds I, 188 S.W.3d at 263
(quoting Lowe, 472 U.S. at 183, 105 S. Ct. at 2559). As we noted in Reynolds I,
the issue in Lowe ―was whether the Securities and Exchange Commission . . .
5
Reynolds I held that as a matter of law, Technology Investing is a general
circulation publication. See 188 S.W.3d at 266–67.
7
could obtain a permanent injunction under the federal Investment Advisors Act
(IAA) . . . [against an unregistered publisher, in order to stop] publication of
securities newsletters containing ‗nonpersonalized investment advice and
commentary.‘‖6 See id. The Supreme Court concluded that Lowe‘s publications
met the statutory exemption, holding that they did ―not fit within the central
purpose of the [IAA] because they [did] not offer individualized advice attuned to
any specific portfolio or to any client‘s particular needs,‖ and that Lowe—a
publisher—was not an ―‗investment advisor‘ as defined by the act.‖ Lowe, 472
U.S. at 208–11, 105 S. Ct. at 2572–2573 (emphasis supplied). In reaching its
conclusion, the Supreme Court reviewed the publications to determine if they
were of ―general and regular circulation‖ and ultimately concluded that
impersonal, nonindividualized communications ―do not develop into the kind of
fiduciary, person-to-person relationships . . . that are characteristic of investment
advisor-client relationships,‖ and are thus presumed to be exempt and not
subject to registration under the IAA. Id., 105 S. Ct. at 2572–73. It is axiomatic
to say that we are required to follow this reasoning, and having previously held
that Murphy‘s newsletter was of general circulation like those found in Lowe, see
Reynolds I, 188 S.W.3d at 266–67, we must determine whether Murphy—an
author—falls under the IAA‘s definition of ―publisher‖ and whether Murphy‘s
newsletter qualifies as ―bona fide‖ within the meaning of the statute.
6
In Reynolds I, Reynolds acknowledged that Lowe was based solely on the
Supreme Court‘s construction of the IAA. See 188 S.W.3d at 265 n.19.
8
a. “Publisher”
In his response, Reynolds argues that the denial of summary judgment
was proper because the exemption does not apply to Murphy. Specifically,
Reynolds argues that we must strictly construe the statute, including the term
―publisher,‖ and therefore because Murphy admitted that he provided investment
advice and that he was an author, and hence not a publisher, he is an investment
advisor under the statute.
We first note that in the ―admissions‖ Reynolds references, Murphy stated
that he provided ―general investment advice, . . . not personalized.‖ And, even
though in his deposition Murphy indicated that he was not a publisher, his
―admission‖ is not determinative of the legal effect of any distinction between
author and publisher.
The Supreme Court has emphasized that ―Congress intended the [IAA] to
be construed like other securities legislation ‗enacted for the purpose of avoiding
frauds,‘ not technically and restrictively, but flexibly to effectuate its remedial
purposes.‖ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84
S. Ct. 275, 284–85 (1963) (footnote omitted). The TSA is both penal and
remedial, but when the TSA is invoked to enforce a remedy, it should be
considered as a remedial and not a penal statute. See Dempsey-Tegler & Co.,
v. Flowers, 465 S.W.2d 208, 211 (Tex. Civ. App.—Beaumont), rev’d on other
grounds, 472 S.W.2d 112 (Tex. 1971). And, even if strict construction was
required as Reynolds asserts, strict construction of the statute does not mean
9
isolating terms or phrases from the context in which they appear. Thomas v.
State, 919 S.W.2d 427, 430 (Tex. Crim. App. 1996); see also Bruner v. State,
463 S.W.2d 205, 215 (Tex. Crim. App. 1970) (concluding that the TSA‘s highly
penal nature requires that the act be strictly construed). Neither does a strict
construction mean that we ignore the plain meaning of terms. See Thomas, 919
S.W.2d at 430 (citing SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 355, 64
S. Ct. 120, 125 (1943) (―The rule of strict construction is not violated by
permitting the words of the statute to have their full meaning, or the more
extended of two meanings, as the wider popular instead of the more narrow
technical one . . . .‖) (quoting United States v. Hartwell, 73 U.S. (6 Wall.) 385, 396
(1867))).
In Reynolds I, we discussed Ginsburg v. Agora, Inc., 915 F. Supp. 733 (D.
Md. 1995), a federal case applying Lowe to facts similar to ours. See Reynolds I,
188 S.W.3d at 264–67. In Ginsburg, which involved an author, the court applied
Lowe to determine that the IAA ―was designed to apply to those persons . . . who
provide personalized advice attuned to a client’s concerns, . . . [and] offer
individualized advice attuned to any specific portfolio or to any client’s particular
needs.‖ Ginsburg, 915 F. Supp. at 737. The court then concluded that because
a newsletter was generalized in nature, contained impersonal commentary, and
did not provide ―individualized advice attuned [to the plaintiff‘s] specific portfolio
[or his] particular needs,‖ the publication was not subject to the IAA, and that, by
10
extension, the newsletter‘s author was not an ―investment advisor.‖ 915 F. Supp.
at 737; see Reynolds I, 188 S.W.3d at 264–65 & n.14.
Here, Ginsburg‘s analysis and holding apply to the determination of
whether an author, such as Murphy, qualifies as an investment advisor under the
IAA.7 We must agree with Ginsburg’s analysis and holding, and we hold that an
author is included within the term ―publisher‖ found in the IAA‘s definition of
―Investment Advisor‖ when the author is not offering personalized advice to
individual investors. Accordingly, we conclude that if Murphy‘s Technology
Investing newsletter is a bona fide publication, it qualifies for the exemption found
in 15 U.S.C.A. § 80b-2(a)(11) pursuant to Ginsburg and Lowe, and therefore,
pursuant to 15 U.S.C.A. § 80b-3a(b)(1)(B), Murphy was not required to register
as an investment advisor under the TSA.
b. Bona Fide
In Lowe, the Supreme Court determined that the term ―bona fide‖ applied
to the publication and not to the publisher and that the term translated best to
―genuine.‖ It then assessed Lowe‘s publications to determine if they contained
false or misleading information or if they touted any security in which Lowe had
an interest. Lowe, 472 U.S. at 208, 105 S. Ct. at 2572. The Supreme Court
noted that to ―the extent that the [newsletters] contain[ed] factual information
7
In Reynolds I, we discussed and adopted Ginsburg relative to First
Amendment protection from negligence and negligent misrepresentation claims.
See 188 S.W.3d at 263–65.
11
about past transactions and market trends, and the newsletters [commented] on
general market conditions, there can be no doubt about the protected character
of the communications.‖ Id. at 210, 105 S. Ct. at 2573. Federal law prohibits the
―touting‖ of securities, including promoting stock in exchange for compensation,
without disclosing the nature and amount of compensation paid. See 15
U.S.C.A. § 77q(b) (West 2009); SEC v. Liberty Capital Grp., Inc., 75 F. Supp. 2d
1160, 1162 (W.D. Wash. 1999).
In response to Murphy‘s summary judgment motion, Reynolds argued that
Murphy (1) misled Reynolds as to his credentials, analysis, methodology, and
past performance as a fund manager; (2) failed to disclose that he authored other
investing newsletters that contradicted his advice in Technology Investing; (3)
―touted‖ his professional expertise and the stocks he recommended; and (4)
failed to disclose his criminal background.
Murphy‘s criminal background is not relevant to determining whether the
newsletter is a ―bona fide‖ publication. See Lowe, 472 U.S. at 208, 105 S. Ct. at
2572 (noting that the term ―bona fide‖ pertains to the publication, not the
publisher, and therefore the publisher‘s unsavory history would not prevent the
newsletter from being ―bona fide‖). Thus, we must determine (1) whether the
newsletter violated section 77q(b) by touting securities and (2) whether the
newsletter was disqualified from being bona fide because it contained false or
misleading statements—either about Murphy‘s credentials, analysis,
methodology, or fund management performance or by failing to disclose
12
Murphy‘s authorship of other investing newsletters containing advice
contradicting the advice provided in Technology Investing.
Although Reynolds alleged that Murphy ―touted‖ securities, nothing in the
record shows or allows an inference that Murphy received compensation from
the companies he recommended or that he personally gained by promoting the
companies discussed in the newsletter. See U.S.C.A. § 77q(b); see, e.g., U.S.
SEC v. Park, 99 F. Supp. 2d 889, 894–95 (N.D. Ill. 2000) (noting that ―touting‖
occurred when an investment newsletter publisher failed to disclose ownership
of, and subsequent profits on, the stocks he recommended); Liberty Capital Grp.,
Inc., 75 F. Supp. 2d at 1162 (finding ―touting‖ when publisher of electronic and
print stock recommendations failed to disclose compensation received from
companies he recommended). Therefore, Reynolds failed to raise an issue of
material fact to show that Murphy ―touted‖ securities in a manner sufficient to
bring him under the IAA‘s purview.
In his petition, Reynolds alleged that the newsletter falsely represented
Murphy‘s expertise, methodology, success rates, and the security of investments
made based on Murphy‘s recommendations. The record contains copies of the
advertisements and newsletters that (1) outline Murphy‘s experience, (2) contain
investment result excerpts, (3) provide third-party quotations, recommendations,
and success stories, and (4) include articles authored by Murphy on various
topics related to technology sector investing. Although Reynolds asserted that
Murphy had an overall dismal record as a fund manager, nothing in the record
13
refutes the validity of the performance summaries listed in the newsletters or
shows that the endorsements and third-party success stories were manufactured
or false. Additionally, Reynolds does not direct us to any specific claim of return
or guaranteed result to support his claim that Murphy‘s methodologies were
inaccurate. Rather, the record reflects that Murphy‘s newsletters stated that his
analysis incorporated a model accounting for and leveling technology company
research funding and that Murphy did in fact develop and utilize such a model in
his recommendations.
Further, in his response to Murphy‘s summary judgment motion, Reynolds
asserted that Murphy‘s promotional materials falsely claimed that Murphy was a
―millionaire maker‖ and a ―hugely successful‖ investment fund manager, but
Reynolds cited no particular page or pages in which these statements could be
found in the ninety-page appendix attached to his response, which contained
copies of the newsletter and promotional materials. See Tex. R. Civ. P. 166(a)(i)
& 1997 cmt.; Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 81 (Tex. 1989)
(noting that neither the trial court nor reviewing courts are required to wade
through a voluminous record to marshal respondent‘s proof). And, simply
pointing out these statements does not provide any evidence raising a fact issue
as to whether they were false. Reynolds also does not point to any instance in
which Murphy promised him individually a specific rate of return or that his
investments would be one-hundred percent secure; instead, the record shows
that Murphy made generalized assertions as to investment opportunities,
14
performance, and expected or estimated returns—essentially, Murphy gave his
opinion as to future market events. Therefore, Reynolds‘s summary judgment
response evidence is insufficient to raise a fact issue on his section 581-33-1
claim. See Guthrie v. Suiter, 934 S.W.2d 820, 826 (Tex. App.—Houston [1st
Dist.] 1996, no writ) (noting that attaching entire document to a response and
referencing it only generally does not eliminate a party‘s responsibility to point out
to the trial court where in the document the issues set forth in the response are
raised).
Reynolds also claimed that Murphy‘s failure to disclose authorship of other
investment publications that advised subscribers to sell short, while at the same
time he advised Technology Investing subscribers to avoid selling short, violated
section 581-33-1. We previously addressed this same claim in Reynolds I,
wherein we noted that Murphy‘s recommendations were not misleading because
the investment approaches between the various newsletters differed and that
Technology Investing ―consistently emphasize[d] the long-term investment
approach . . . as opposed to more aggressive or short-term methods advocated
by Murphy in different contexts.‖ Reynolds I, 188 S.W.3d at 274. Thus,
Reynolds has failed to produce a fact issue to support his section 581-33-1 claim
that Murphy‘s advice contradicted the long-term investment approach outlined in
Technology Investing.
15
For the reasons set out above, we conclude that Murphy‘s Technology
Investing newsletter is a bona fide publication as defined by the IAA, and by
extension the TSA. Therefore, because Reynolds did not show that there is a
genuine issue of material fact regarding whether Murphy is anything other than
an author entitled to the protection of a publisher of a bona fide publication of
general circulation in response to Murphy‘s summary-judgment evidence,
Murphy was entitled to a traditional summary judgment as a matter of law
because he proved that he is not subject to registration as an investment advisor
under the IAA, and by extension under the TSA. See 15 U.S.C.A. § 80b-
3a(b)(1)(B); Ginsburg, 915 F. Supp. at 738. We sustain the portions of Murphy‘s
third issue relative to Reynolds‘s claims arising under TSA article 581-33-1.
C. Article 581-33 and NASD Rules Violation Claims
Reynolds‘s petition alleged that Murphy was ―liable to [Reynolds] pursuant
to Art. 581-33, Texas Statutes (Texas Blue Sky Law), . . . . [And] [a]t all times
material, [Murphy] was also an ‗aider and abettor‘ under Art. 581-33 . . . .‖ We
construe Reynolds‘s petition to claim that Murphy was either primarily liable
under article 581-33A(2) or secondarily liable as an aider and abettor under
article 581-33F(2). See Tex. Rev. Civ. Stat. Ann. art. 581-33-1. In his fourth
issue, Murphy argues that the trial court erred by denying his motion for summary
judgment because there was no evidence to prove that Murphy made a material
misrepresentation or omitted a material fact or that a primary violation of
16
securities laws occurred, necessary elements of both of Reynolds‘s article 581-
33 claims. See Tex. R. Civ. P. 166a(i).
1. Applicable Law
The Texas Securities Act establishes both primary and secondary liability
for securities violations. Sterling Trust Co. v. Adderley, 168 S.W.3d 835, 839
(Tex. 2005). Primary liability arises when a person ―offers or sells a security . . .
by means of an untrue statement of a material fact or an omission to state a
material fact necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading.‖ Id. (quoting Tex.
Rev. Civ. Stat. Ann. art. 581-33A(2) (West 2010)). Secondary liability is
derivative liability for another person‘s securities violation; it can attach to either a
control person, defined as ―[a] person who directly or indirectly controls a seller,
buyer, or issuer of a security,‖ or to an aider, defined as one ―who directly or
indirectly with [an] intent to deceive or defraud or with reckless disregard for the
truth or the law materially aids a seller, buyer, or issuer of a security.‖ Id.
(quoting Tex. Rev. Civ. Stat. Ann. art. 581-33F(1)–(2)). Both control persons and
aiders are jointly and severally liable with the primary violator ―to the same extent
as if [they] were the primary violator.‖ Id.
The comments to the 1977 revisions to the TSA contain the notation that
article 581-33A(2) ―is a privity provision, allowing a buyer to recover from his
offeror or seller.‖ Tex. Rev. Civ. Stat. Ann. Art. 581-33, cmt. §§ 33A(1), (2) (West
17
2010). The comment also notes that ―some nonprivity defendants may be
reached‖ under section 33F. Id.
To prove aider and abettor liability, the plaintiff must demonstrate:
(1) that a primary violation of the securities laws occurred; (2) that
the alleged aider had ―general awareness‖ of its role in this violation;
(3) that the actor rendered ―substantial assistance‖ in this violation;
(4) that the alleged aider either (a) intended to deceive [the] plaintiff
or (b) acted with reckless disregard for the truth of the
representations made by the primary violator.
Frank v. Bear, Stearns & Co., 11 S.W.3d 380, 384 (Tex. App.—Houston [14th
Dist.] 2000, pet. denied); see also In re Enron Corp. Sec., Derivatives & ERISA
Litig., 235 F. Supp. 2d 549, 568 (S.D. Tex. 2002).
2. Analysis
Reynolds‘s petition generally alleged that Murphy violated article 581-33
and that Reynolds purchased stock based on Murphy‘s violations. Reynolds did
not specify which transaction or transactions in the over 125 pages of his
brokerage account statements in the record qualified as the primary securities
law violation that supported his claim. See In re Perry, 404 B.R. 196, 219 (Bankr.
S.D. Tex. 2009) (noting that a failed investment is not necessarily a mark of
securities fraud actionable under the TSA). Reynolds‘s petition cited NASD Rule
96-608 and New York Stock Exchange Rule Interpretation 90-59 to support his
8
Although Reynolds generally alleged that Murphy violated NASD rules, he
mentioned only NASD Rule 96-60 in his pleadings.
9
Reynolds did not attach copies of NASD rule 96-60 or NYSE rule 90-5 to
either his petition or his response to Murphy‘s summary judgment motion.
18
position that the contents of Technology Investing constituted Murphy‘s
recommendations on specific securities and that a recommendation of a specific
security qualifies as a transaction. However, because we have determined that
Murphy is not an investment advisor and because Reynolds has not alleged or
proven that Murphy is a registered securities dealer or broker, Murphy is not
subject to NASD or NYSE rules.10 See 15 U.S.C.A. §§ 78f, 78o, 78o-3 (West
2011) (providing statutory authority for the creation of registered securities
associations (such as NASD and NYSE) and rules to govern securities
exchanges and registered brokers and dealers).
Second, Reynolds also generally alleged that he would not have
purchased stock ―but for‖ Murphy‘s advice, but he provided no evidence that
Murphy or another party qualified as a primary violator, that is, that Murphy or
another party, such as Reynolds‘s broker, brokerage firm, or the issuing
company, ―offered‖ or ―sold‖ Reynolds the stock in question by means of an
untrue statement or omission of a material fact, as required to invoke the
protections of article 581-33. See Flowers v. Dempsey-Tegeler & Co., 472
S.W.2d 112, 113, 115 (Tex. 1971) (noting the TSA applies to persons and
corporations that offer or sell unregistered securities). Moreover, statements of
10
Moreover, even if Murphy were subject to the rules, we are uncertain
whether Reynolds would have a private right of action for violations of NASD or
NYSE rules. See Colman v. D.H. Blair & Co., 521 F. Supp. 646, 654 (S.D.N.Y.
1981) (noting that even though Appellant was within the class that Congress
intended to protect, Appellant did not have a private right of action for NASD and
NYSE rules violations).
19
opinion, including opinions about a security‘s value, are generally not actionable
under article 581-33. See Aegis Ins. Holding Co., L.P. v. Gaiser, No. 04-05-
00938-CV, 2007 WL 906328, at *6 (Tex. App.—San Antonio Mar. 28, 2007, pet.
denied) (mem. op.) (stating that opinion of value of security is generally not
actionable); Tex. Capital Sec., Inc. v. Sandefer, 58 S.W.3d 760, 776 (Tex. App.—
Houston [1st Dist.] 2001, pet. denied) (noting that predictions of increased share
prices generally do not amount to actionable misrepresentations). Thus,
Reynolds failed to carry his burden under rule 166a(i), and a no-evidence
summary judgment was proper on both of Reynolds‘s theories. See Kastner v.
Jenkins & Gilchrist, P.C., 231 S.W.3d 571, 579, 581 (Tex. App.—Dallas 2007, no
pet.) (affirming summary judgment in favor of ―aider and abettor‖ when
respondent failed to prove primary violation).
We sustain that part of Murphy‘s fourth issue arising under TSA article
581-33 and NASD rules.
D. Fiduciary Duty
Murphy also claims in his fourth issue that because he was not subject to
any laws giving rise to a fiduciary duty and because prior to filing his lawsuit,
―Reynolds had never met or spoken to Murphy[,]‖ the trial court erred by denying
his motion for no-evidence summary judgment on Reynolds‘s fiduciary duty
claims.
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1. Applicable Law
Fiduciary duties arise either from certain formal relationships that are
recognized as fiduciary as a matter of law, or from the existence of an informal,
―confidential‖ relationship between the parties. Ins. Co. of N. Am. v. Morris, 981
S.W.2d 667, 674 (Tex. 1998). An informal fiduciary duty may arise from a moral,
social, domestic, or purely personal relationship of trust and confidence,
generally called a confidential relationship. Hubbard v. Shankle, 138 S.W.3d
474, 483 (Tex. App.—Fort Worth 2004, pet. denied). A confidential relationship
exists when influence has been acquired and abused and confidence has been
extended and betrayed. Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App.—
Houston [14th Dist.] 1997, pet. denied). A person is justified in placing
confidence in the belief that another party will act in his best interest only when
he is accustomed to being guided by the other party‘s judgment or advice and
there exists a long association in a business relationship as well as personal
friendship. Id. Thus, the relationship must exist prior to and apart from the
agreement that is the basis of the suit. Hubbard, 138 S.W.3d at 483. Whether a
confidential or fiduciary relationship exists is ordinarily a question of fact, and the
issue only becomes a question of law when it is one of no evidence. Crim Truck
& Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 594 (Tex. 1992),
superseded by statute on other grounds as stated in Subaru of Am., Inc. v. David
McDavid Nissan, Inc., 84 S.W.3d 212, 225–26 (Tex. 2002) (op on reh‘g). A party
asserting breach of a fiduciary duty must establish the existence of a confidential
21
or similar relationship giving rise to a fiduciary duty. See Bado Equip. Co. v.
Bethlehem Steel Corp., 814 S.W.2d 464, 475 (Tex. App.—Houston [14th Dist.]
1991,no writ) (op. on reh‘g).
2. Statutory Fiduciary Duties
Because we conclude above that Murphy was not subject to TSA articles
581-33 and 581-33-1, the laws giving rise to the statutory fiduciary duties that
Reynolds alleged Murphy violated, we sustain that part of Murphy‘s fourth issue
with respect to Reynolds‘s statutory-based breach of fiduciary duty claims.
3. Informal, or Nonstatutory, Fiduciary Duties
Based on the record before us, the only relationship between the parties
involves Reynolds‘s individual decision to subscribe to Technology Investing.
Thus, Reynolds failed to show that he had a confidential relationship with Murphy
prior to and apart from his subscription to Technology Investing. See Cotten v.
Weatherford Bancshares, Inc., 187 S.W.3d 687, 698–699 (Tex. App.—Fort
Worth 2006, pet. denied) (holding that no informal fiduciary relationship existed
when plaintiff did not prove confidential relationship prior to and apart from
contract giving rise to his lawsuit). Because Reynolds failed to meet his burden
under 166a(i) to show the existence of a fiduciary relationship between the
parties giving rise to a duty, we sustain Murphy‘s fourth issue with respect to
Reynolds‘s informal breach of fiduciary duty claim as well.
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E. Fraud Claims
In his fourth issue, Murphy also argues that because causation is an
element of all of Reynolds‘s claims and because Reynolds cannot prove that
Murphy‘s actions caused Reynolds‘s injury, the trial court erred by denying his
no-evidence motion for summary judgment on all of Reynolds‘s claims. Thus, we
will determine whether a no-evidence summary judgment is proper on
Reynolds‘s remaining claims: common law fraud and fraud under section 27.01.
To prevail on a common law fraud claim, a plaintiff must establish (1) the
defendant made a material representation, (2) the representation was false, (3)
the defendant either knew the representation was false when made or made it
recklessly without any knowledge of its truth and as a positive assertion, (4) the
defendant made the representation with the intention that it be acted upon, (5)
the representation was in fact relied upon, and (6) damage to the plaintiff
resulted. See Ins. Co. of N. Am., 981 S.W.2d at 674; DeSantis v. Wackenhut
Corp., 793 S.W.2d 670, 688 (Tex. 1990) (op. on reh‘g), cert. denied, 498 U.S.
1048 (1991); Trenholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex. 1983). Section
27.01 provides for a statutory cause of action for fraud in real estate and stock
transactions. See Tex. Bus. & Com. Code Ann. § 27.01 (West 2009); Burleson
State Bank v. Plunkett, 27 S.W.3d 605, 611 (Tex. App.—Waco 2000, pet.
denied). The elements of statutory fraud under section 27.01 are essentially
identical to the elements of common law fraud except that section 27.01 does not
require proof of knowledge or recklessness as a prerequisite to the recovery of
23
actual damages. See Brush v. Reata Oil & Gas Corp., 984 S.W.2d 720, 726
(Tex. App.—Waco 1998, pet denied); see also Poteet v. Kaiser, No. 02-06-
00397-CV, 2007 WL 4371359, at *5 (Tex. App.—Fort Worth Dec. 13, 2007, pet.
denied) (citing Robbins‘s conclusion that causation is an essential element of
fraud in a real estate transaction). ―[R]eliance is a necessary element of a
statutory fraud claim under section 27.01.‖ Schlumberger Tech. Corp. v.
Swanson, 959 S.W.2d 171, 182 (Tex. 1997).
Reynolds argues that he ―unequivocally testified that acting in reliance
upon the fraudulent investment advice provided by Murphy[,] he purchased and
held securities in his retirement portfolio that he would not have otherwise
purchased or held‖ and that he liquidated his holdings when he discovered the
truth of Murphy‘s fraudulent operations. But as was noted in Reynolds I,
Reynolds caused his own losses when he sold stock in 2002 against Murphy‘s
advice to ―hold‖ the recommended stocks long-term. See Reynolds I, 188
S.W.3d at 274. Thus, we hold that Reynolds failed to raise a fact issue to show
that his reliance on Murphy‘s statements caused his injury, an essential element
of both his section 27.01 and common law fraud claims. Accordingly, we sustain
the remainder of Murphy‘s fourth issue.
IV. Conclusion
Having sustained Murphy‘s third and fourth issues, we reverse the trial
court‘s order denying Murphy summary judgment on Reynolds‘s remaining
24
claims and render a final summary judgment in Murphy‘s favor on all of
Reynolds‘s remaining claims.11
BOB MCCOY
JUSTICE
PANEL: LIVINGSTON, C.J.; GARDNER and MCCOY, JJ.
DELIVERED: September 29, 2011
11
Based on our disposition of Murphy‘s third and fourth issues, we do not
reach his remaining issues. See Tex. R. App. P. 47.1.
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