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California’s First District Court of Appeal ruled July 28 that a common law fraud case is not trumped by regulations in the field of securities fraud litigation, allowing a class action complaint against a transportation firm to go forward. The case, Greenfield v. Fritz Companies, stems from a 55 percent drop in the San Francisco-based company’s stock value after it revised downward its economic prospects in July 1996. The case is unique because plaintiffs neither bought nor sold stock based on the flawed financial reports, but held it. Justice Marcel Poch�, writing for the three-judge panel, said that such suits, which cannot be brought under California securities statutes, may be brought under common law. “Because no sale is involved, defendants face no statutory liability,” Poch� noted. “They are trying to secure a like immunity from common law exposure … There is no logical or legal reason why defendants should be given such immunity.” The case aligns California law with several other states, including New York and Massachusetts. Fritz and its lawyer, Orrick, Herrington & Sutcliffe partner William Alderman, had argued that such a ruling would open up “an entire universe of potential investors [who] could state a class action fraud claim any time a stock price fluctuated.” But Poch� said simply, “Defendants overstate.” Joined by Justices Daniel “Mike” Hanlon and Patricia Sepulveda, Poch� decided to let the legal process separate the wheat from the chaff. Alderman was out of the country Monday and could not be reached. The decision overturns the trial court, which threw out the complaint. Harvey Greenfield filed the suit against the company and three of its executives on behalf of stockholders who received a rosy financial report in April 1996, only to see the report revised that July, causing the stock to drop more than $15 per share. Poch�’s opinion lays into both parties, saying “neither side has been exemplary in appreciating the scope of the arguments which are legitimate for this appeal nor overly scrupulous in their presentation.” He also didn’t buy the defendant’s argument that the cause of action Greenfield alleged was without precedent. “Our research proves otherwise,” Poch� wrote. “The core of plaintiff’s complaint is that defendants made misrepresentations which induced him to continue holding shares of the corporation that he otherwise would have sold, but for the misrepresentations. Starting almost a century ago, virtually identical causes of action have already been recognized in Massachusetts and New York.”

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