Court Reaffirms that Securities Laws are There to Protect Consumers


By: John Perten

In a case of first impression, the United States Court of Appeals for the First Circuit determined that a misrepresentation in a business plan provided to potential investors violated state securities laws even without proof that the investor actually relied upon the false representation. In In re: Access Cardiosystems, Inc., a start-up company selling portable automated external defibrillators, the company prepared a business plan to share with potential investors. The plan contained the statement that “Access has been advised by its patent counsel that its product does not infringe any patents known to him. However, there can be no assurance that the opinion is correct in all respects.” Contrary to the statement in the business plan, there was a potential patent infringement and no opinion of counsel had ever actually been obtained. The company ultimately filed for bankruptcy and an investor sued under state securities law alleging that he had been defrauded by means of the material misrepresentation in the business plan.

In defense, the company’s principal argued that whether he actually received an opinion from counsel as to potential patent infringement was irrelevant because the statement in the business plan was not that he received an opinion, but rather that he was “advised.” The court rejected this argument because the evidence showed that he had not even received advice, much less an opinion. The Court also rejected the argument that the disclaimer in the business plan, that there could be no assurance that counsel’s opinion was correct, provided a safe harbor for the company. To rule otherwise, the appeals court ruled, would undermine the goals of securities laws as it would allow a party to patently lie to investors, and then avoid any liability simply by affixing a disclaimer. Finally, and of most importance, the principal argued that absent proof that the investor actually relied on the misstatement, there could be no liability. The court rejected this argument too noting that the representation was part of the total investment package and a plaintiff does not have to prove that the specific sentence was relied upon. In context, the whole package was misleading.

In contrast to common law misrepresentation where reliance is a necessary element, this decision makes it easier for investors to recover for misrepresentation by suing under state security laws. By allowing recovery for misrepresentation in a securities context even absent proof of reliance, the Court highlighted that securities laws will be read broadly and are there to protect consumers. The moral of the story? If you are soliciting investors, don’t embellish or gloss over. Be as accurate as you can as any material misstatement could subject you to liability.


John H. Perten is a shareholder at Sheehan Phinney Bass + Green PA. He is a member of the Construction, Litigation and Business Groups. He may be reached at or 617.897.5641.

This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice.

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