The answers that you see below are actual candidate answers that are unedited.
July 2009
Question #1
Torts
Joe, a former Wall Street investment banker, recently opened his own financial planning firm. He was licensed to sell securities, but this license lapsed due to his failure to pay the renewal fee. State law requires that all persons who sell publicly traded securities be licensed.
Joe often had dinner with his parents at their country club, hoping to meet new clients. They introduced Joe to their dear friend Sally, a wealthy widow. During dinner, Sally complained that she needed to earn more interest on her investments and asked Joe for suggestions.
Joe had just made a deal with M Fund to receive a 20% sales commission, which was much higher than the 5% offered by other funds. Joe told Sally, “Many of my clients and even my parents have invested in M Fund and are very happy with their consistently high returns. You may want to look into this to get high interest on your money.”
In fact, Joe’s parents had never invested in M Fund. Joe would not let them, since after researching the fund, he was very concerned that the reported results were not possible and may even be inaccurate.
Over the next week Sally asked other friends about M Fund, and all confirmed they were happy with the reported high returns. She asked her longtime accountant, and he warned her about the risks of a private fund. But Sally was desperate to earn more interest, so she called Joe to say she wanted to invest in M Fund.
Joe had Sally complete a financial statement to be certain she qualified for the private fund. She completed the application showing a net worth of $1.5 million, and she gave Joe a check payable to M Fund for $1 million. Joe did not question her about her other sources of income or investment experience.
Sadly, 5 days after Sally’s check for $1 million cleared, the M Fund filed for bankruptcy. The fund showed high returns for the past 10 years, but only because it was a fraudulent scheme. Sally lost her entire investment.
Sally comes to your office and wants to sue Joe. She is already part of a class action that is suing the M Fund.
Your senior partner asks you to prepare a memorandum of law to discuss her causes of action against Joe and any defenses he may raise.
PREPARE THE MEMORANDUM
Sample Answer A
Memorandum
To: Senior Partner
From: Applicant
Date: July 30, 2009
Re: Sally v. Joe
You have asked me to discuss any causes of action Sally may bring against Joe and any defenses he may raise in response. The first addresses potential cause of action in tort and the second part assesses Joe’s defenses.
I. Sally’s causes of action
Sally’s strongest claim against Joe is for misrepresentation. She should raise an intentional misrepresentation claim first, but in the alternative, she may have a claim for negligent misrepresentation. I will discuss each in turn.
In New Jersey, under the common law, intentional misrepresentation (or fraud) consists of six elements to state a prima facie case and survive a motion to dismiss. First the defendant must have made a Statement of material fact. This means the Statement must be of some relevance and not collateral to the injury. Next, that statement must be false. Fraud requires scienter, or knowledge, that the statement was not true. Scienter also is satisfied if the statement was made recklessly, meaning without regard to the truth or falsity of the statement. So, scienter is satisfied with knowledge of reckless conduct. Fourth, the statement must be intended to induce reliance on it. Intent is subjective and refers to the speaker’s state of mind when made. The statement must then actually induce the intended reliance on the part of the plaintiff. Reliance must be justifiable in that the plaintiff cannot meet this element if the statement was obviously intended to be false or made in jest. Finally, there must be damages – some stated injury to the plaintiff.
Sally meets all of the elements for an intentional misrepresentation claim. First, Joe made a material statement of fact. He told her that “Many of (his) clients and even his parents have invested in M Fund.” He told her they “are very happy with their consistent high returns.” In fact, this statement was false. His parents have never invested in M Fund because he would not let them. Joe was aware of the risks involved with investing in that fund and suspected something was awry with the fund. He nonetheless represented this as a promising investment to Sally. thus, Joe meets the scienter requirement—he made the representation knowing it was false. He intended to induce Sally’s reliance on his statement. He received a high commission for sales to M Fund, so that was his intent. Sally did, in fact rely on that statement. She inquired about the funds with others and finally made a decision to invest in the fund. The fifth element is met. Finally, Sally suffered injury—she lost $1 million or 2/3 of her net worth on this investment when M fund went into bankruptcy. Sally is already part of a class action against M Fund but she may additionally bring this claim against Joe as her financial planner.
In the case that Joe is able to successfully argue that he did not have scienter (see defenses below), Sally can, in the alternative, argue Joe is liable for negligent misrepresentation. For this cause of action the same elements are required as for intentional, but without the knowing or reckless requirement. Sally can again argue that Joe made a statement that was false, and he made it negligently (not knowingly). This representation was intended to induce Sally’s reliance, which it did, and it caused damages to Sally. Sally can argue it was made negligently because he may have negligently assumed people are “happy with their returns” on M Fund since it had showed consistently high returns for the past ten years. If that is the part of the statement on which Sally relied, then she can argue for negligent misrepresentation.
A separate COA Sally can raise is negligence on the part of Joe in acting as her financial planner. A negligence claim under New Jersey law requires 4 elements be satisfied: (1) duty to plaintiff; (2) breach of that duty; (3) causation and (4) injuries. The duty is satisfied in one of two ways. The defendant, who holds himself out to be a professional must act like a prudent person in a like position. In the alternative, state laws and regulations can step into the duty element by setting a standard of care. This is called negligence per se and arises when the plaintiff is a part of the class of persons intended to be protected by the law and the harm suffered is of the type of harms that the law seeks to prevent. Second, when defendants’ duty falls below either standard, he is in breach of duty. There is causation when 2 prongs are satisfied: (a) but for the breach of duty, P would not have been injured, and (b) the harm was foreseeable or the breach was the proximate cause of the injury. Lastly, any economic injury will count as an injury.
Sally can bring a negligence claim against Joe under both standards. First, she can argue that Joe held himself out to be a professional – a financial planner and so he was expected to act like a reasonably prudent investor. When he lied to her about his parent’s investment and concealed the level of risk involved with M Fund, he reached that duty. If it was not for him even alerting Sally about the existence of this fund, she would not have invested in it. Investing in a fraudulent scheme is going to create the foreseeable risk of injury of losing one’s investment. Causation is satisfied. And, we know Sally lost a substantial sum or money, hence she was injured.
In the alternative, Sally can argue that negligence per se applies here because Joe violated a state law requiring all persons who sell publicly traded securities be licensed. Joe was not licensed to sell securities in M Fund, yet he did to Sally anyway. The law is likely designed to prevent people like many from making or selling bad deals to persons without the qualifications. The harm from making bad investments is expected to be financial loss. Thus, the standard set in the state law was violated and it was intended to both protect persons like Sally and the type of harm she suffered. So, negligence per se applies and Sally satisfies the duty and breach of duty elements causation and injury, as discussed, is also satisfied.
II. Joe’s defenses.
A. Misrepresentation.
Joe’s strongest defense to Sally’s intentional misrepresentation claim is that he did not have scienter. He can argue the part she relied on was that people were happy with their investments and he did not make the statement knowingly or recklessly. He did not think it was false at all since people had strong returns. In any event, as a defense to both negligent and intentional misrepresentation, he can say the statement was true and therefore Sally does not meet the prima facie elements. Of course, he will have to defend by saying the actual false statement – that even his parents invested in that fund, did not intend to nor actually induced reliance. It was not material to the decision to invest; it was merely puffery and collateral.
B. Negligence
Joe can say he did not have a duty to Sally and therefore he cannot be liable to her for negligence. He met Sally at his parents country club – not exactly the place where one expects to make business deals or financial planning. He did not hold himself out to be a professional to Sally; only as someone who had a recommendation for Sally. After all, she is the one who raised her money problems. Joe did not solicit her. All of these facts tend to show that he had no duty to her and any subsequent injury is her own. Sally can be contributarily negligent because she is also expected to act like a reasonably prudent, wealthy (investor) and the facts indicate she did inquire about the fund. Any losses that results, Joe will argue, are a result of Sally’s assumption of the risk.
Conclusion
There are 2 strong COA for Sally and Joe has viable defenses. These are questions for the jury.
Sample Answer B
MEMORANDUM
To:
Senior Partner
From: Associate
Re: Sally's Causes of Action Against Joe
Potential Claims
In addition to her class action law suit against M Fund, Sally may file the following causes of action against Joe:
First, Sally may claim that Joe made an intentional and/or negligent misrepresentation of material fact. To prove this claim under the intentional standard, Sally will have to show that: Joe made a false statement of fact to her, the false statement was material to the discussion between them, she relied on this statement, this statement induced her to take a certain action, and Joe had the specific intent of making this false statement for the purpose of Sally's reliance and action thereon. Here, the facts clearly show that Joe told Sally that she should invest in MFund because his parents had done so and they were please with the investment when, in fact, he knew that his parents had not done so because he would not let them as it seemed like it might be a poor investment. This constitutes a false statement of fact. Further, the false statement was material because the discussion between Sally and Joe specifically regarded investment in MFund. It also appears from the facts that Joe made the false statement with the intent that Sally rely on it because he stood to receive a 20% sales commission, which was far more than the 5% offered by other funds. Sally may have trouble proving that she relied on Joe's false statement and it induced her to invest in MFund because the facts show that Sally consulted other persons, including her accountant, who warned her of the risks of investment. As such, Joe may argue in defense that his false statement was mere sales "puffing" that is typical and inherent in the sales profession and did not amount to a misrepresentation of material fact that Sally relied on and took action on account of it. He may further argue that Sally did not rely on his statements, but those of her friends who had invested in MFund and were pleased. Joe may also defend more generally on the bases listed below in the "Defenses" section. Finally, Sally certainly suffered damages because she lost her money in the investment. If she proves this claim, she may further be able to recover punitive (punishment) damages against Joe for his conduct, because it was intentional. In conclusion, this claim is still worth asserting in our Complaint because through Discovery, we may be able to prove the elements that are not as strong at this point.
Second, Sally may claim that Joe made a negligent misrepresentation of material fact to her. The elements of this claim and analysis thereunder would be the same as those already set forth, with the exception that, instead of proving that Joe had specific intent of making a false statement for the purpose of Sally's action and reliance thereon, Joe was simply negligent in doing so. To prove negligence, Sally will have to show: duty, breach, actual (factual) cause, proximate (foreseeable) cause and damages. The applicable standard for Joe's duty would be to act as a reasonably prudent investment banker in his community. It appears that Joe did not act as a reasonably prudent investment banker here, because such a professional should not make false statements of material fact to a potential investor. It also seems reasonable to expect that an investment banker did or should have known that any mistatement of material fact regarding a potential investment to a client may cause the client to rely on it and act. To prove actual cause, Sally will have to show that "but for" Joe's misrepresentations, she would not have lost her investment. Certainly, the facts show that Sally lost her money in the investment that she made; however, Joe may argue in defense that Sally relied not on him, but on her friends who also invested in MFund and told her they were happy with their investments. To prove proximate cause, Sally will have to show that she was a foreseeable Plaintiff within the zone of danger of Joe's breach of duty. It seems reasonable here that Joe should have been able to have foreseen that, if he made a mistatement of material fact to Sally, she would rely on it, act, and suffer a loss. To prove damages, it will be sufficient for Sally to show that she lost her entire investment, which the facts make clear. Joe may also defend more generally on the bases listed below in the "Defenses" section.
Third, Sally may be able to make a claim against Joe in negligence per se for practicing his profession without a valid license and/or generally, for malpractice. As noted, to prove negligence, Sally will have to prove duty, breach, actual (factual) causation, proximate (foreseeable) causation and damages. The standards and analysis here will be similar to that already set forth, except that Sally will have to show that Joe did not act as a reasonably prudent investment banker by not having a license. Professionals are reasonably deemed to follow the procedures proscribed by law. Negligence per se results when there is an applicable statute that is designed to protect a certain class of persons, the plaintiff is in that class of persons, the defendant violates the statute and the harm that results is the type that the statute is designed to protect. Here, there certainly is a statute that requires Joe to be licensed as an investment banker, and he clearly violated the statute by not having a license. Although the facts don't specify, it certainly also seems that the purpose of this statute would be to protect a person like Sally from improper advice from an investment banker. It also seems that the statute is designed to prevent the harm that occured here-- the plaintiff making a bad investment and losing money based on reliance on an individual who did not meet the minimum standards of comptency. Joe may argue that the statute is designed not for this purpose, but for another purpose, such as administrative knowledge of investment bankers in the state. Such an argument is poor. Joe may also defend more generally on the bases listed below in the "Defenses" section. As such, Sally has a strong claim on this basis.
Potential Defenses
In addition to the arguments listed above, Joe may defend that he had Sally's consent to make her investment-- he did not do so under duress, embezzlement, false pretenses, etc. He may argue that Sally assumed the risk inherent in investments because she knew, from her accountant who warned her, of the risks associated with the investment, and she voluntarily chose to proceed. Such a defense may bar Sally's claim if proven. Or, he may argue that Sally was contributority negligent by proceeding to invest despite the risks inherent and those that she was aware of. If he so proves, his liability may be limited by the percentage that can be attributed to Sally's negligence by the finder of fact. He may also seek contribution and/or indemnity from MFund, under the argument that it was MFund's bankruptcy and/or fraudulent scheme that caused Sally's loss-- not his misrepresentation and/or failure to have a license. He may argue that this constituted a superseding cause of Sally's loss. If he so proves, he may be relieved from liability in whole or in part. Finally, he may try to intervene into the class action in order to have all claims related to this transaction resolved under the same action. This may be difficult, however, because it appears that only Sally, and not other class members, worked with Joe in making investments with MFund.