PUBLISHED
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
No. 18-2194
XIA BI; NIAN CHEN; YUANYUAN CHEN; YING CHENG; JUN HUANG; KUI LE; CHUNGSHENG LI; ZHONGHUI LI; LIN LIN; LAN LIU; MEIMING SHEN; YUNPING TAN; BIXIANG TANG; CHUN WANG; RUI WANG; YAHONG WANG; YUE WANG; JIAN WU; LEI YAN; JUNPING YAO; JIN YOU; ZHEN YU; HOUQIAN YU; NIANQING ZHANG; XUEMEI ZHANG; HUIBIN ZHAO; YAN ZHAO,
Plaintiffs – Appellants,
v.
TERRY MCAULIFFE; ANTHONY RODHAM,
Defendants – Appellees
and
XIAOLIN “CHARLES” WANG; DOES 1-100,
Defendants.
Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Claude M. Hilton, Senior District Judge. (1:17-cv-01459-CMH-IDD)
Argued: May 7, 2019 Decided: June 12, 2019 Amended: July 9, 2019
Before WILKINSON and NIEMEYER, Circuit Judges, and DUNCAN, Senior Circuit Judge. Affirmed by published opinion. Judge Wilkinson wrote the opinion, in which Judge Niemeyer and Senior Judge Duncan joined.
ARGUED: Gerard Patrick Fox, Marina Vladimir Bogorad, GERARD FOX LAW P.C., Los Angeles, California, for Appellants. Marc Erik Elias, PERKINS COIE LLP, Washington, D.C., for Appellees. ON BRIEF: Scott M. Abeles, GERARD FOX LAW P.C., Washington, D.C., for Appellants. Bruce V. Spiva, Amanda R. Callais, PERKINS COIE LLP, Washington, D.C., for Appellees.
2 WILKINSON, Circuit Judge:
Twenty-seven Chinese investors appeal from the dismissal of their claims against
Terry McAuliffe and Anthony Rodham stemming from failed investments in an electric
vehicle startup. For the reasons that follow, we affirm.
I.
A.
We accept as true the following facts, which come from plaintiffs’ amended
complaint. Plaintiffs-Appellants are a group of twenty-seven Chinese citizens who
invested $500,000 each in a partnership that loaned their money to GreenTech
Automotive. GreenTech, founded in 2008, was a Mississippi corporation that wanted to
enter the hybrid and electric vehicle markets. Initially, GreenTech planned to produce the
“MyCar,” a vehicle that would travel at low speeds and thus be subject to lower levels of
regulatory scrutiny.
This ambitious plan required a great deal of capital. GreenTech sought to raise
some funds from foreign investors who might qualify under the Employment-Based
Immigration Fifth Preference, or EB-5, Program. See 8 U.S.C. § 1153(b)(5). This
program offered a path to permanent residency for foreign investors whose investments
in American projects created or preserved at least ten jobs for American workers. While
the program ordinarily required a $1 million investment, investments of $500,000 in
certain rural areas or areas with high unemployment may also qualify under the EB-5
program.
3 GreenTech thus planned to build a new manufacturing facility in Tunica,
Mississippi to take advantage of the lower investment threshold. The company collected
funds from potential EB-5 immigrants through several different investment platforms.
Some Chinese investors, for example, purchased preferred shares directly from
GreenTech. The plaintiffs in this lawsuit, however, invested their money in GreenTech
Automotive Partnership A-3, LP (the “A-3 partnership”), which was created to collect
capital and then loan it to GreenTech. Plaintiffs’ investments were governed by a series
of documents, including “the private placement memorandum, the subscription
agreement, the limited partnership agreement, a construction loan agreement, [and] a
power of attorney agreement.” J.A. 155. These documents were distributed to plaintiffs in
English only, not Chinese.
Plaintiffs allege that they signed the subscription documents “without reviewing
any version” and do not claim to have translated the documents into their native
language. Id. at 181, 186. Pursuant to those written agreements, each of the twenty-seven
plaintiffs paid $500,000 for a partnership share in A-3 sometime between July 2012 and
December 2013. They each also remitted an “Administrative Fee” of $60,000 or $61,000
to Gulf Coast Funds Management, LLC, a GreenTech affiliate that managed the A-3
partnership.
In total, the A-3 partnership collected $500,000 from each of eighty-six investors,
and then loaned the total of about $43 million to GreenTech. The loan terms were “not
the result of arm’s length negotiations.” Id. at 169. The Private Placement Memorandum
reveals that the loan, which was non-recourse, “specifically exclude[d] customary
4 provisions designed to protect the interests of lenders.” Id. at 278. GreenTech would
make interest-only payments to the A-3 partnership at a 4% interest rate; of that amount,
1.5% would be used to pay Gulf Coast yearly management fees. Id. at 257.
Defendants-appellees are Terry McAuliffe and Anthony Rodham. 1 McAuliffe was
the co-founder and former Chairman of GreenTech. Rodham was the CEO of both the
A-3 partnership and another entity that was formed to serve as A-3’s general partner,
GreenTech Automotive Capital A-3 GP, LLC. Rodham also served as President and CEO
of Gulf Coast, the management company that received plaintiffs’ administrative fees.
Plaintiffs claim that Rodham and McAuliffe made a series of false statements
relating to the A-3 partnership’s fundraising efforts. The complaint alleges that Rodham
made the following misstatements:
(1) On April 25, 2011, Rodham claimed that EB-5 funds accounted for only 7.8% of GreenTech’s capital during an event in Beijing, China.
(2) At this same event, Rodham expressed that Gulf Coast “chose” GreenTech as a suitable investment.
The complaint alleges that these statements were false because (1) far more than 7.8% of
GreenTech’s funds came from EB-5 investors; and (2) Gulf Coast could not choose
GreenTech since they were under joint ownership and management.
The plaintiffs also allege that McAuliffe made four misstatements:
1 We note that defendant Anthony Rodham passed away on June 7, 2019. Inasmuch as plaintiffs have failed to prevail against any appellee in this action, his passing has no bearing on the resolution of this appeal.
5 (1) On November 11, 2011, McAuliffe told a CNBC interviewer that GreenTech “ha[d] only sold 11,000 cars, but it’s still a new business for us.” J.A. 154.
(2) On January 14, 2012, McAuliffe informed Jan Paynter during an interview that GreenTech’s first-year’s production of electric vehicles would be sold to the country of Denmark.
(3) On July 23, 2012, McAuliffe said in an interview with three Chinese reporters that GreenTech was the first corporation to mass produce low- speed electric cars.
(4) On December 5, 2012, McAuliffe stated in an interview with a local NBC station that GreenTech “had a thousand employees.” J.A. 155.
The complaint alleges that each of those statements was false when made because
GreenTech (1) had not sold 11,000 cars; (2) did not have a contract with Denmark; (3)
had not mass-produced any electric vehicles; and (4) had fewer than one hundred
employees.
Plaintiffs allege that they each “relied on some or all of the statements in these
newsletters, statements on GreenTech’s websites and social media, and statements made
by Mr. McAuliffe [and] Mr. Rodham . . . during roadshows, in interviews, and in written
materials they authorized before signing the subscription agreement . . . .” J.A. 162. But
there are no specific allegations that any individual plaintiff encountered any of those
alleged misstatements in promotional materials or on Greentech’s website. Twenty-two
plaintiffs, moreover, allege that they moved to the United States on provisional visas in
reliance on defendants’ misrepresentations.
GreenTech, along with a web of related corporate entities, eventually failed to
manufacture and sell vehicles according to its business plan. GreenTech defaulted on the
6 loan from the A-3 partnership, and the plaintiffs have not recovered their $500,000
investments. As of the filing of the amended complaint, GreenTech and several of the
related entities had filed for bankruptcy. Plaintiffs now seek, inter alia, to recover the
losses from their failed investments in the A-3 partnership.
B.
Plaintiffs filed their original complaint in Virginia state court. After removing the
suits to the Eastern District of Virginia, McAuliffe and Rodham filed motions to dismiss.
The district court granted the motions under Federal Rule of Civil Procedure 12(b)(6).
With respect to the fraud claims so central to the complaint, it held that the plaintiffs had
failed “to identify the facts needed to adequately plead claims . . . with particularity,” J.A.
134, including allegations over “the manner in which [any false statements] misled the
plaintiff[s], and the manner in which plaintiff[s] relied on the statements.” Id. at 133-34.
Plaintiffs were allowed twenty days to file an amended complaint.
The amended complaint honed plaintiffs’ allegations by reducing the number of
claims and dropping from the case several corporate defendants, which by that point had
filed for bankruptcy and thus stayed any actions against them. The amended complaint
raised claims against both McAuliffe and Rodham for fraud in the inducement (Count I);
fraud (Count II); federal securities fraud (Count III); and conspiracy to commit fraud and
breach fiduciary duties (Count VII). Plaintiffs also brought claims against Rodham for
breach of fiduciary duty (Count IV); accounting (Count V); aiding and abetting a breach
of fiduciary duty (Count VI); unjust enrichment (Count VIII); and negligence (Count IX).
7 McAuliffe and Rodham again moved to dismiss the claims against them for failure
to state a claim under Rule 12(b)(6). And the district court again granted the motion, this
time with prejudice. As to the fraud claims, the court noted that “[p]laintiffs do not state
which of the named [p]laintiffs claims to have relied on each statement, or where or how
any specific [p]laintiff heard or learned of the alleged statements.” J.A. 478-79. For that
reason, plaintiffs still had failed to plead reliance with the particularity required under the
Rules of Civil Procedure. See Fed. R. Civ. P. 9(b). The court also noted that any reliance
on the alleged misstatements was unreasonable because plaintiffs by their own admission
did not read or review the offering documents.
The court also dismissed the claims for breach of fiduciary duty, unjust
enrichment, and negligence because plaintiffs were not the appropriate party to bring
these claims, which properly should have been brought by the partnership itself or as
derivative claims. The subscription documents included a Delaware choice-of-law
provision. See J.A. 351. Whether a claim is direct or derivative under Delaware law turns
on whether the partnership suffered the alleged injury and whether it would receive the
benefit of any recovery. El Paso Pipeline GP Company, L.L.C. v. Brinckerhoff, 152 A.3d
1248, 1256-65 (Del. 2016).
As the district court put it, “[p]laintiffs still lack standing to assert such a claim . . .
because any alleged injury that was suffered was suffered by the Limited Partnership and
not by the [p]laintiffs directly” and because “[a]ny recovery to be had would be to the
Limited Partnership and not to the individual [p]laintiffs.” J.A. 481-82, 483-84. This was
true, in part, because the subscription documents did not provide plaintiffs with a right to
8 withdraw their money from the partnership. See J.A. 334. The aiding and abetting a
breach of fiduciary duty claim failed for the same reason. The district court dismissed the
conspiracy claim along with the underlying breach of fiduciary duty and fraud claims.
Finally, it dismissed the accounting claim because plaintiffs asserted no right to an
accounting under the partnership agreement. Plaintiffs now appeal the district court’s
order dismissing their claims. 2
II.
Review of the district court’s dismissal involves the special pleading standards
applicable to claims of fraud. All complaints in federal court must, at a minimum, “state a
claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Federal Rule of
Civil Procedure 9(b) heightens pleading standards for claims of fraud, so that “a party
must state with particularity the circumstances constituting fraud,” except that
“conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). Plaintiffs’
federal securities fraud claim must also comply with the Private Securities Litigation
Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737. The PSLRA leaves in place the
general requirements of Rule 9(b), but requires pleadings to demonstrate, inter alia, “the
2 The appeal chiefly concerns fraud claims based on alleged misstatements by Rodham and McAuliffe. We have reviewed the record and affirm the dismissal of plaintiffs’ other claims for the reasons stated by the district court. With respect to plaintiffs’ federal securities fraud claim, while we do not endorse the district court’s statement that “the PSLRA[] prohibits the amendment of complaints,” J.A. 480-81, the district court did in fact allow the complaint to be amended and any additional amendments would have been futile for the reasons set forth herein.
9 reason or reasons why [each alleged] statement is misleading” and to provide facts
“giving rise to a strong inference” of scienter. 15 U.S.C. § 78u-4(b); see Teachers’ Ret.
Sys. of La. v. Hunter, 477 F.3d 162, 172 (4th Cir. 2007).
Plaintiffs bring both common law fraud claims under Virginia law and statutory
fraud claims under federal law, here Rule 10b-5. See 15 U.S.C. § 78j; 17 C.F.R.
§ 240.10b-5 (Rule 10b-5). There are, no doubt, important legal differences between
federal and state fraud claims. The state claims, for example, need not involve the
“purchase or sale of a security” as required under Rule 10-5. Stoneridge Inv. Partners,
LLC v. Sci.-Atlanta, 552 U.S. 148, 157 (2008). Rule 10b-5 claims, moreover, sometimes
rely on legal theories that may not be available as a matter of Virginia common law.
Compare Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (applying the
fraud-on-the-market theory), with Fentress Families Tr. v. Va. Elec. & Power Co., 81
Va. Cir. 67 (2010) (rejecting application of that theory).
This case, however, bottoms out on shared features of the state and federal fraud
claims. Both federal and state law require that each defendant made a material
misstatement. See Stoneridge, 552 U.S. at 157; Owens v. DRS Auto. Fantomworks, Inc.,
764 S.E.2d 256, 260 (Va. 2014). To support recovery on any theory, moreover, plaintiffs
must have justifiably relied on those same misstatements. See Miller v. Asensio & Co.,
Inc., 364 F.3d 223, 227 (4th Cir. 2004) (federal securities law); Jared & Donna
Murayama 1997 Tr. v. NISC Holdings, LLC, 727 S.E.2d 80, 86 (Va. 2012) (Virginia
common law). It is to these common elements that we now turn.
10 B.
First, we consider whether the complaint alleges material misstatements.
Defendants argue that some of their alleged statements cannot be material misstatements
as a matter of law. They note that “an action based upon fraud must aver the
misrepresentation of present pre-existing facts, and cannot ordinarily be predicated on
unfulfilled promises or statements as to future events.” Abi-Najm v. Concord Condo.,
LLC, 699 S.E.2d 483, 490 (Va. 2010) (internal quotation marks omitted); see Raab v.
General Physics Corp., 4 F.3d 286, 289-90 (4th Cir. 1993) (forward-looking statements
are often immaterial under federal securities law). Similarly, courts have long accepted
that immaterial boasting and exaggerations, often called puffery, do not normally
constitute actionable fraud. See Longman v. Food Lion, Inc., 197 F.3d 675, 685 (4th Cir.
1999) (federal securities law); Tate v. Colony House Builders, Inc., 508 S.E.2d 597, 600
(Va. 1999) (Virginia common law).
The above rules serve important purposes. Forward-looking statements provide
valuable information for investors in the securities marketplace, and they allow
contracting parties to make better-informed judgments. But as Yogi Berra observed, “It’s
tough to make predictions, especially about the future.” Even the most careful projections
will sometimes prove wrong. Pinning liability on forward-looking statements would risk
an influx of lawsuits concerning every major event, and would shut valuable projections
entirely out of the market. See 15 U.S.C. § 78u-5(c) (federal safe harbor for forward-
looking statements by certain issuers and their affiliates).
11 Puffery, too, serves an important role in the formation of contracts large and small.
There is little doubt that expressions of enthusiasm and use of superlatives are common
tools for skilled salespersons. See J.A. 155 (McAuliffe describing GreenTech as a “great
American success story”). These sorts of statements can help inspire confidence and trust
when those qualities are in short supply, and ultimately serve to encourage the free flow
of capital in the marketplace. There is, in the end, little reason to purge the market of all
optimism. Projections and puffery will thus rarely qualify as material misstatements
under federal and state law. See Longman, 197 F.3d at 685; Tate, 508 S.E.2d at 600.
The problem for defendants, however, is that their alleged misstatements go
beyond mere projections or puffery. Rodham, for example, said that EB-5 funds
accounted for only 7.8% of GreenTech’s capital. This statement was not an expression of
optimism or speculation as to who might invest in the future; it was an assertion about
what funds had been raised in the past. McAuliffe’s alleged misstatements were even
more aggressive. GreenTech either had “sold 11,000 cars,” or it had not; it had “a
thousand employees,” or not; and it had mass-produced electric cars, or not. Those
statements were plainly not forward-looking. See Malone v. Microdyne Corp., 26 F.3d
471, 472-80 (4th Cir. 1994) (discussing forward-looking statements).
Even McAuliffe’s alleged statement that the first year of vehicle production would
be sold to the country of Denmark, which at first blush describes a future event, fails
closer inspection. Read in the light most favorable to the plaintiffs, this is no simple
statement of opinion or future intent; it claims that a named buyer had agreed to purchase
12 specific vehicles at a particular time. Plaintiffs’ allegation thus counts as an assertion of
fact under the case law in this circuit. See Raab, 4 F.3d at 289-90.
In toto, defendants’ statements ran in front of the facts on the ground. There are no
laurels in this case, no accolades to be bestowed. These are just the sort of misstatements
targeted by statutory and common law fraud causes of action. False information is not
useful to the market, and may lead investors to commit their resources in ways that will
prove harmful. See Rubin v. Coors Brewing Co., 514 U.S. 476, 496 (1995) (Stevens, J.,
concurring in judgment). Far from building investor confidence, misstatements like those
alleged in this case undermine public trust. We decline to whitewash the alleged
misstatements here.
C.
Defendants also argue that plaintiffs have failed to adequately plead justifiable
reliance on the alleged misstatements. We agree with the district court that plaintiffs’
complaint falls far short of plausibly pleading justifiable reliance.
1.
Under Virginia common law, plaintiffs must allege “reasonable or justifiable
reliance” on a defendant’s misrepresentations. Murayama 1997 Tr., 727 S.E.2d at 86
(internal quotation marks omitted). “[T]he touchstone of reasonableness” under Virginia
law “is prudent investigation.” Hitachi Credit Am. Corp. v. Signet Bank, 166 F.3d 614,
629 (4th Cir. 1999). Federal law similarly requires that an investor “justifiably relied” on
particular misstatements in an action under Rule 10b-5. Miller, 364 F.3d at 227 (internal
quotation marks omitted). As with Virginia common law, federal securities law “requires
13 plaintiffs to invest carefully” and conduct at least “minimal diligence.” Banca Cremi, S.A.
v. Alex. Brown & Sons, Inc., 132 F.3d 1017, 1028 (4th Cir. 1997) (internal quotation
marks and alterations omitted). Plaintiffs cannot recover, in other words, if they
“possess[] information sufficient to call a misrepresentation into question but
nevertheless close [their] eyes to a known risk.” Id. (internal quotations marks and
alterations omitted).
Plaintiffs invite the court to assess the element of justifiable reliance without
turning to Rule 9(b)’s heightened pleading standards. See Fed. R. Civ. P. 9(b). But our
circuit has previously held that “[r]easonable, detrimental reliance upon a
misrepresentation is an essential element of a cause of action for fraud . . . and such
reliance must be pleaded with particularity.” Learning Works, Inc. v. The Learning
Annex, Inc., 830 F.2d 541, 546 (4th Cir. 1987) (citing Rule 9(b)). Indeed, Rule 9(b) itself
provides that “a party must state with particularity the circumstances constituting
fraud . . . .” Fed. R. Civ. P. 9(b). How and whether a party relied on a misstatement is
every bit as much a “circumstance[] constituting fraud” as any other element. Id. And
when Congress or the Federal Rules intend for an element of fraud to be pleaded under a
different standard, they tell us so explicitly. Rule 9(b), for example, specifically instructs
that “[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged
generally.” Id. Plaintiffs can point to no similar language placing the element of reliance
beyond the reach of Rule 9(b). With equal clarity, the PSLRA requires pleadings to
include facts “giving rise to a strong inference” of scienter, 15 U.S.C. § 78u-4(b), while
leaving Rule 9(b)’s background pleading standards in place for the other elements of
14 fraud. See Hunter, 477 F.3d at 172. There is, in sum, no textual basis to give plaintiffs
extra wiggle room in pleading the reliance elements of their state and federal fraud
claims.
The plaintiffs’ argument also fails as a matter of common sense. Rule 9(b) seeks
“to provide defendants with fair notice of claims against them and the factual ground
upon which they are based . . . .” McCauley v. Home Loan Inv. Bank, F.S.B., 710 F.3d
551, 559 (4th Cir. 2013). This rationale applies with special force to allegations of
reliance, which inherently rest on information within a plaintiff’s possession. See Evans
v. Pearson Enters., Inc., 434 F.3d 839, 852-53 (6th Cir. 2006). Whereas defendants are
likely to know facts that will allow them to contest the falsity of their own statements or
their own state of mind, they have little reason to know how a plaintiff learned of any
misstatements or what role they played in a plaintiff’s investment decisions. Particular
allegations of reliance thus lie at the core of Rule 9(b)’s mandate.
2.
Plaintiffs’ complaint fails to adequately plead justifiable reliance, instead relying
only on general and conclusory allegations. Paragraph 103 of the amended complaint
provides a prime example:
Each of the Plaintiffs relied on some or all of the statements in these newsletters, statements on GreenTech’s websites and social media, and statements made by Mr. McAuliffe [and] Mr. Rodham . . . during roadshows, in interviews, and in written materials they authorized before signing the subscription agreement and transferring their $500,000 investment and $60,000 or $61,000 Administrative Fee.
15 As the district court noted, “[p]laintiffs do not state which of the named [p]laintiffs
claims to have relied on each statement, or where or how any specific [p]laintiff heard or
learned of the alleged statements.” J.A. 478-79. The only information provided that is
specific to any given plaintiff is the individual’s name, citizenship, current residence, and
the dates of his subscription agreement and money transfer. A list of names and
investment dates may be important, but it does nothing to show how any plaintiff learned
of a given misstatement, or whether any plaintiff even relied on a given misstatement at
all. The district court was correct to dismiss the complaint because these general
allegations do not satisfy us that the plaintiffs have “substantial prediscovery evidence of
those facts.” Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir.
1999).
The facts of this case make those omissions particularly glaring. Most of the
alleged misstatements, for example, were made in English—a language that many of the
plaintiffs allege they do not understand. What is more, many of those alleged
misstatements were made to American media, sometimes of the local variety. It is far
from clear how or whether plaintiffs learned of these statements. This is not to say that
statements to media sources, even local ones in distant lands, cannot form the basis of a
meritorious fraud claim. Far from it. We live in a day and age where news travels fast and
vast amounts of information are easily accessible online. But the realities of the Internet
do not alter the fundamental need for plaintiffs to plead reliance with particularity, and
the amended complaint falls short of that bedrock requirement.
16 Even if plaintiffs had properly described who relied on each misstatement and how
that person heard of it, they fail to plead justifiable reliance. Investments often boil down
to a series of written contracts. In this case, those contracts included “the private
placement memorandum, the subscription agreement, the limited partnership agreement,
a construction loan agreement, [and] a power of attorney agreement.” J.A. 155. The
written offering documents must control, and here they in fact contradicted the sorts of
stray media statements attributed to Rodham and McAuliffe.
The Private Placement Memorandum, for example, made clear that GreenTech
was “a development stage company,” J.A. 243, that was raising money to “design, build,
and commence production” of vehicles at a new production facility, J.A. 274 (emphasis
added). It also warned that the underlying loans from the partnership to GreenTech did
“not contain market terms and specifically exclude[d] customary provisions designed to
protect the interests of lenders.” Id. at 278. It said, in all capital letters, that “AN
INVESTMENT IN THE PARTNERSHIP IS SPECULATIVE AND INVOLVES A
SIGNIFICANT DEGREE OF RISK.” J.A. 237. It also described how GreenTech had
already raised capital from investors under the EB-5 program, id. at 275, and that “[n]o
assurance can be given that an investor will receive a conditional or permanent lawful
resident status in the U.S. or that an investment in the Partnership will comply with the
EB-5 [p]rogram,” J.A. 259 (internal emphasis omitted). In short, the plaintiffs plainly
“possesse[d] information sufficient to call [the alleged] misrepresentation[s] into
question.” Banca Cremi, 132 F.3d at 1028 (internal quotations marks and alterations
omitted).
17 But plaintiffs make clear in their complaint that they signed the subscription
documents “without reviewing any version.” J.A. 181, 186. Indeed, they allege that they
only recently discovered “the nature of the documents they signed.” Id. at 155. There is
no allegation in the complaint that they made any effort to translate the documents into
their native language, or even asked any English-speaking attorney or investment advisor
to review the documents for them.
The question is whether plaintiffs could justifiably rely on the alleged
misstatements when they did not read, translate, or ask advisors to review the
subscription documents. Several factors may influence whether reliance was justifiable as
a matter of law. See Banca Cremi, 132 F.3d at 1028; Sweely Holdings, LLC v. Suntrust
Bank, 820 S.E.2d 596 (Va. 2018) (finding reliance unjustifiable as a matter of law). But
this case is not close. The investments in a start-up company on the edge of new
automotive technology obviously signaled a high degree of risk. Risk invites prudence;
prudence involves inquiry. The plaintiffs here were putting more than half a million
dollars in the hands of foreigners with whom they alleged no prior relationship. It was
unjustifiable to make such an investment in reliance on stray media statements without so
much as translating or even reviewing the subscription documents before signing them.
While everyone occasionally skips over the fine print in their day-to-day endeavors, it is
fair to expect some minimal level of due diligence before making this large an investment
in a company whose prospects were chancy and where sizeable returns were anything but
guaranteed.
18 Even so, plaintiffs ask this court to excuse any unjustifiable reliance on the basis
that defendants “divert[ed them] ‘from making the inquiries and examination which a
prudent man ought to make.’” Hitachi, 166 F.3d at 629 (quoting Horner v. Ahern, 153
S.E.2d 216, 219 (Va. 1967)). This argument also fails. Plaintiffs were clearly provided
the relevant offering documents. Nothing in plaintiffs’ amended complaint so much as
suggests that defendants prevented them from taking the modest step of reviewing the
operative offering documents that they signed. The defendants had no generalized duty to
translate the subscription documents for the benefit of foreign investors, especially when
translation would open a new avenue of dispute and the English version of those
documents would have been controlling in any event. J.A. 353. Imposing some invariable
new duty of translation on parties seeking to raise funds from foreign investors would
hike the costs of international financing for many nations, encourage new mistranslation
lawsuits, and open the door to additional forms of mischief. There is no plausible
allegation in the complaint that defendants diverted plaintiffs from conducting a prudent
and objectively reasonable investigation before investing. See Hitachi, 166 F.3d at 629.
Our emphasis on reliance should come as little surprise: that element occupied the
lion’s share of the briefing in this court and was part of both the first and second orders to
dismiss from the district court. See J.A. 133-34, 478-79. Yet when the panel asked
plaintiffs’ lead counsel where the complaint adequately alleged reliance, he repeatedly
stated that his co-counsel would answer those questions on rebuttal. But the court was not
obligated to hold its questions on reliance for rebuttal, at which point the opposing party
would no longer have a fair opportunity to respond. Just as counsel may divide oral
19 argument time, the court may expect lead advocates to be familiar with more than a tiny
corner of the complaint and parties to advance arguments when opposing counsel has the
chance to take issue with them. Our ultimate inquiry, of course, rests on the adequacy of
the complaint itself—but basic fairness must not become a casualty of the appellate
process at any stage.
III.
America has always relied on entrepreneurship and investment to propel her
economy forward. The EB-5 program was intended to recognize that immigrants can play
an integral role in that story, providing jobs for our society in exchange for the
opportunity to be a part of it. But the truth of the matter is that investments are inherently
risky, with the hope of reward weighed always against the fear of failure. Not every
failed investment can lead to a meritorious fraud lawsuit. The element of justifiable
reliance encourages a modicum of personal responsibility for investment decisions and
helps to distinguish those who were wrongly misled from those making post hoc attempts
to recoup market losses. Because the amended complaint failed to adequately allege
justifiable reliance, the district court’s decision to dismiss it is
AFFIRMED.