In response to a Certified Question from the United States Court of Appeals for the Second Circuit, the Georgia Supreme Court recently concluded in Holmes v. Grubman (opinion available here) that the common law of Georgia recognizes fraud claims that are based on forbearance in the sale of publicly traded securities. The Holmes decision is a major victory for Georgia investors. Under the Securities Exchange Act of 1934, only those who actually purchase or sell securities can maintain a fraud claim; a person who chooses not to sell a declining stock because of the intentional or negligent misrepresentations of another–misinformation that could cost the investor thousands upon thousands of dollars–simply has no claim under federal securities law. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-31 (1975). The Georgia decision fills that void and redresses that inequity.
A plaintiff investor who forbears from selling stock may maintain a cause of action for fraud or negligent misrepresentation if he alleges that the “misrepresentations were directed at [him] to [his] injury,” i.e., the allegedly false and misleading information was directly communicated to the plaintiff, he relied on it, and suffered damages as a result. Specifically, a plaintiff who hopes to maintain a claim for this class of fraud or negligent misrepresentation must be able to show
specific reliance on the defendants’ representations: for example, that if the plaintiff had read a truthful account of the corporation’s financial status the plaintiff would have sold the stock, how many shares the plaintiff would have sold, and when the sale would have taken place. The plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations.
The Georgia Supreme Court’s holding is not surprising or controversial. It accords with the rules adopted in a majority of other jurisdictions that have considered the question, and it is likely the conclusion that the United States Supreme Court expected states to reach when it decided Blue Chip Stamps. (In that opinion, the Court noted that its seemingly harsh holding (limiting Rule 10b-5 claims to only purchasers and sellers of securities) “is attenuated to the extent that remedies are available to nonpurchasers and nonsellers under state law” and that “in the ordinary case of deceit [] a misrepresentation which leads to a refusal to purchase or to sell is actionable in just the same way as a misrepresentation which leads to the consummation of a purchase or sale.”). But the decision is nevertheless significant because it may give the shareholders of Georgia’s many failed banks a vehicle by which to present their “holder” claims.