BNA Securities Regulation and Law Reports relates that:
Sean David Morton, a self-described “natural psychic, trained Remote Viewer, [and ] intuitive consultant,” was charged March 4 in the U.S. District Court for the Southern District of New York over his alleged role in a multi-million dollar offering fraud in which he touted his psychic ability to predict stock market movements (SEC v. Morton, S.D.N.Y., Civil Action No. 10-CV-1720, 3/4/10).
In a release that day, the Securities and Exchange Commission said that beginning in 2006, Morton solicited investors in companies he and his wife controlled—the entity defendants—by claiming he would use his “psychic expertise to provide investment guidance to his investing team.”
In order for statements to be actionable as securities fraud, they must be material. Facts are material if there is a substantial likelihood the reasonable investor would consider them to be important in making decisions about investments. Granted, the SEC complaint identifies a number of statements that purport to be factual. E.g., "'I have called ALL the highs and lows ofthe market, giving EXACT DATES for rises and·· crashes over the last 14 years.' (emphasis in original."
But shouldn't context matter? Consider, by way of analogy, the bespeaks caution doctrine. The doctrine, in its simplest form, says that statements are to be read in context. In practice, courts posit that corporate statements alleged by plaintiffs to be materially misleading must be read in the context of relevant cautionary statements the company has made elsewhere. Take a statement by a CEO saying something like, “I am confident that our earnings this year are going to be much better than those in the past.” Let us say that the facts suggest that the company was doing badly at the time the CEO made the statement, or at least not showing any signs of outdoing its past performances. A court using the bespeaks caution doctrine might point to other language in the prospectus and registration statement along the lines of “this company exists in a volatile marketplace and there are no guarantees that our stock price will consistently increase” and say that, in the context of the warning, the CEOs statement is immaterial as a matter of law.
Here, the relevant other language is not cautionary in the traditional sense. If Morton in fact was telling investors that he was using "his 'psychic expertise to provide investment guidance to his investing team,'" shouldn't that have alerted a reasonable investor to take any other statements made by Morton with more than just a grain of salt? A reasonable investor presumably does not make decisions using a Magic 8 ball. Yet, one of Morton's investment vehicles was named "Magic Eight Ball Distributing."
The SEC complaint claims that we can infer materiality from the fact that some investors invested with Morton. But this is bootstrapping, at best. The mere fact that some investors are idiots does not tell us anything about what the proverbial reasonable investor would have done in these circumstances. After all, as PT Barnum put it, there's a sucker born every minute. See See Hillson Partners L.P. v. Adage, Inc., 42 F.3d 204, 213 (4th Cir.1994)(courts need not ascribe “childlike simplicity” to reasonable investor, but should ask whether investors would have considered information significant).