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FILED: February 23, 2011

IN THE COURT OF APPEALS OF THE STATE OF OREGON

STATE OF OREGON,
acting by and through the Oregon State Treasurer,
and the Oregon Public Employee Retirement Board,
on behalf of
the Oregon Public Employee Retirement Fund

Plaintiff-Appellant,

v.

MARSH & MCLENNAN COMPANIES, INC.
and MARSH, INC.,

Defendants-Respondents,

and

JEFFREY GREENBERG
and RAY GROVES,

Defendants.

Multnomah County Circuit Court
050808454
A139453

Frank L. Bearden, Judge.

Argued and submitted on May 20, 2010.

Scott A. Shorr argued the cause for appellant. With him on the briefs were Keith A. Ketterling, Joshua L. Ross, and Stoll Stoll Berne Lokting & Shlachter P.C., Special Assistant Attorneys General.

James T. McDermott argued the cause for respondents. With him on the brief were Dwain M. Clifford and Ball Janik LLP.

Before Schuman, Presiding Judge, and Wollheim, Judge, and Rosenblum, Judge.

SCHUMAN, P. J.

Affirmed.

SCHUMAN, P. J.

Investment managers retained by the State of Oregon purchased stock, on behalf of the Oregon Public Employee Retirement Fund (OPERF), in an insurance consulting and brokerage firm called Marsh & McLennan. After most of the purchases had occurred, the Attorney General of New York announced that Marsh & McLennan executives had pled guilty to criminal charges relating to various corporate misdeeds. Marsh & McLennan shares immediately fell; according to the state, the decline in value cost OPERF approximately $10 million. The state subsequently brought this action alleging that the $10 million loss resulted from, among other things, Marsh & McLennan's violations of Oregon securities laws, ORS 59.135 (prohibiting fraud and misrepresentation in security transactions), and ORS 59.137 (creating cause of action for violating ORS 59.135).(1) The trial court granted Marsh & McLennan's motion for summary judgment on the ground that the state failed to provide evidence from which a jury could find that OPERF's agents had purchased the stock in reliance on Marsh & McLennan's fraudulent misrepresentations, and that reliance was a necessary element of a claim under ORS 59.137. Additionally, the trial court concluded that Oregon's statute was unconstitutional because it unduly interfered with Congress's power to regulate interstate commerce. We agree with the trial court's ruling on reliance, and we therefore affirm without reaching the constitutional issue.

This case has already had a long procedural history. The state filed its complaint in 2005, alleging that Marsh & McLennan and one of its subsidiaries, Marsh, Inc. (hereafter collectively "Marsh"), had engaged in a fraudulent scheme perpetrated by means of false and misleading statements.(2) According to the complaint, Marsh presented itself as an honest broker in the business of helping people and corporations devise an insurance plan, solicit bids from competing insurers, and purchase the best plan at the best rates. Instead, the state alleged, Marsh collected hundreds of millions of dollars annually under "contingent commission agreements" with insurance companies; these payments

"represented little more than kickbacks, in return for which Marsh agreed to direct business to insurance companies on a non-competitive basis, rig bids, and fix prices. In return for the kickbacks, Marsh predetermined the 'winning' policy. It then solicited phony and artificially high 'competing' bids from other insurance companies. The insurance companies that provided the phony inflated bids knew that they would be the designated winner for a subsequent policy placement. Marsh's clients were deceived into believing their insurance premiums were set with a fair and competitive bidding process. Marsh's investors were deceived into believing that Marsh's financial results did not depend on unethical and illegal business practices."

The state alleged that, in order to deceive its investors, including OPERF, Marsh published false and misleading statements on its website and in official documents regarding its business ethics, the nature of the "contingent commission agreements," and the source of its income (stated source, legitimate services provided; actual source, kickbacks). The complaint also alleged that OPERF relied on the misrepresentations and that "senior officers and directors" of Marsh knew of the fraudulent scheme and knew that it had not been disclosed to the public. Finally, the complaint alleged that Marsh shares fell from a price of $46.13 per share at close of business on the day before the Attorney General of New York made public the results of his investigation into Marsh's practices, to a price of $29.20 by close of business two days later.

Marsh attempted unsuccessfully to remove the case to federal court. Upon remand to Multnomah County Circuit Court, Marsh filed a motion to dismiss, raising several arguments. First, it contended that plaintiff failed to allege facts sufficient to state a cause of action under ORS 59.137(1). That statute provides:

"Any person who violates or materially aids in a violation of ORS 59.135 (1), (2) or (3) is liable to any purchaser or seller of the security for the actual damages caused by the violation * * * unless the person who materially aids in the violation sustains the burden of proof that the person did not know and, in the exercise of reasonable care, could not have known of the existence of the facts on which the liability is based."

ORS 59.135, in turn, provides:

"It is unlawful for any person, directly or indirectly, in connection with the purchase or sale of any security or the conduct of a securities business or for any person who receives any consideration from another person primarily for advising the other person as to the value of securities or their purchase or sale, whether through the issuance of analyses or reports or otherwise:

"(1) To employ any device, scheme or artifice to defraud;

"(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading;

"(3) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person; or

"(4) To make or file, or cause to be made or filed, to or with the Director of the Department of Consumer and Business Services any statement, report or document which is known to be false in any material respect or matter."

In its motion to dismiss, Marsh argued that the state failed to plead two necessary elements to a violation of ORS 59.137: reliance and scienter. According to Marsh, the complaint did not allege facts demonstrating that OPERF had purchased shares of Marsh stock in reliance on any misrepresentations or omissions, and it did not allege facts demonstrating that Marsh's misrepresentations or omissions, had there been any, were intentional. In the alternative, Marsh argued that, if Oregon's security regulation statutes did not require reliance or scienter, the statutes were unconstitutional because they imposed more onerous duties on stock issuers than were imposed by federal and other states' securities laws.(3)

In its response, the state disputed Marsh's statutory and constitutional arguments. It maintained that ORS 59.137 created a cause of action that could be maintained without reliance and that, in any event, the complaint pleaded both actual reliance and reliance based on the so-called "fraud on the market" or "efficient market" theory, that is, the theory that the price of a security is based on publicly available information, and material misrepresentations therefore artificially distort a security's price, thereby establishing indirect or second-order reliance. See Basic Inc. v. Levinson, 485 US 224, 247, 108 S Ct 978, 99 L Ed 2d 194 (1988). The state also maintained that Marsh could be liable under ORS 59.137 even if its violations of ORS 59.135 were unintentional, that is, that there was no scienter requirement--but that, in any event, the complaint sufficiently pleaded that responsible corporate officers did have the necessary degree of scienter. Regarding the constitutional issues, the state maintained that its security laws are even-handed regulations of transactions involving Oregon residents, that the statutes do not interfere with federal laws, and that the burden that the state laws impose on interstate commerce is not excessive in relation to the legitimate benefit that the laws conferred on Oregonians.

The trial court denied the motion to dismiss. The court agreed with the state that it did not have to plead and prove scienter, but the court agreed with Marsh that that the state did have to plead reliance and had not adequately done so. The court noted,

"To a certain extent plaintiff has pled reliance in that it can be 'inferred' from the lengthy general summary. However, specific facts will need to be pled making clear who * * * relied on which statements or documents and made the purchase decision in order for the defense to decide on the content of their answer.

"Thus, I am requiring that reliance be more specifically pled, denying the motion to dismiss[.]"

The court did not reach plaintiff's argument that reliance could be presumed under the efficient market theory, nor did it rule on the constitutional issues.

Thereafter, the state filed an amended complaint with several new paragraphs explaining the efficient market theory and also alleging that, had "Oregon's money managers been aware" of Marsh's unlawful activities, they "would not have made the purchases of [Marsh] stock." Marsh answered and, after some discovery, the case proceeded to summary judgment.

Apparently accepting the trial court's ruling that the state was not required to allege or prove scienter, Marsh reiterated its contention that this feature of Oregon's statutes makes them unconstitutional, because imposing strict liability for misrepresentations on companies that traded on a national exchange would require those companies to meet a standard that conflicts with federal law and, potentially, with the laws of other states, thereby unduly burdening interstate commerce. Marsh also reiterated its argument that ORS 59.137 requires reliance and added the argument that the state, after appropriate discovery, had failed to produce evidence of that element as required by the trial court's order on the motion to dismiss. The state reprised its argument defending the statutes' constitutionality. Regarding reliance, the state contended that it had presented some evidence of actual reliance; for the most part, however, the state emphasized the efficient market rationale. The trial court ruled in favor of Marsh on the constitutional and reliance issues. This appeal ensued.

We begin with the subconstitutional question--reliance--and we do so for two reasons. First, for prudential reasons, we should, when possible, refrain from passing constitutional judgment on the work of a coequal branch; if the state has failed to create an issue of material fact with respect to one of the elements of its claim, the constitutional question simply does not arise. Leo v. Keisling, 327 Or 556, 560, 964 P2d 1023 (1998). Second, for practical and logical reasons, we cannot gauge a statute's constitutionality until we determine what it means.

The state's primary argument regarding reliance is textual: Neither ORS 59.135 nor ORS 59.137 contains an express reliance requirement. That fact alone, the state maintains, should end the inquiry, because reading a reliance requirement into the statutes would violate ORS 174.010, which mandates that, "[i]n the construction of a statute, the office of the judge is * * * not to insert what has been omitted[.]" Turning to context, the state notes that this court has held that a related statute, ORS 59.115, has no reliance requirement. That statute creates a cause of action for purchasers of stock who are damaged by misrepresentations in face-to-face securities transactions (as opposed to transactions occurring on an exchange).(4) Everts v. Holtmann, 64 Or App 145, 152-53, 667 P2d 1028, rev den, 296 Or 120 (1983). "It follows," the state argues,

"that if a claim under ORS 59.115 for a violation of ORS 59.135 does not require proof of reliance, a nearly identical claim under ORS 59.137 for a violation of ORS 59.135 also does not require proof of reliance. * * * There is a presumption that the legislature enacts similar statutes in a manner consistent with interpretations of existing statutes."

(Footnote omitted.)

The state's arguments have some force, but we are not persuaded. It is true that neither ORS 59.135 nor ORS 59.137 uses the word "reliance." However, the offense for which liability is imposed in this case is defined repeatedly as a form of fraud or in other terms that necessarily imply reliance:

"It is unlawful * * *:

"(1) To employ any device, scheme or artifice to defraud;

"(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading;

"(3) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person[.]"(5)

ORS 59.135 (emphasis added). "Fraud" is a term of art naming a common-law cause of action. We presume that the legislature intends such terms to carry their specialized meaning, Tharp v. PSRB, 338 Or 413, 423, 110 P3d 103 (2005), and, as a common-law cause of action, fraud necessarily requires reliance, Conzelmann v. N. W. P. & D. Prod. Co., 190 Or 332, 350, 225 P2d 757 (1950); Morasch v. Hood, 232 Or App 392, 222 P3d 1125 (2009). "Deceit" is also a common-law tort with a reliance requirement. Riley Hill General Contractor v. Tandy Corp., 303 Or 390, 405, 737 P2d 595 (1987). In nontechnical usage, an act is not deceit unless somebody is deceived; deception cannot occur in a vacuum. Likewise, to mislead is "to lead in a wrong direction or into a mistaken action or belief." Webster's Third New Int'l Dictionary 1444 (unabridged ed 2002). One cannot "lead" without "leading" something or somebody else. Thus, although the statutory text does not contain the word "reliance," it nonetheless implies that, in order to prove a violation, a purchaser must demonstrate fraud, deceit, or misleading, all of which require reliance.

This court's Everts opinion, declaring that a related statute, ORS 59.115, contains no reliance requirement, does not undercut our conclusion that ORS 59.135 does contain one. Everts focused on subparagraph (1)(b) of ORS 59.115, and held only that that subsection did not contain a reliance requirement: "ORS 59.115(1)(b) imposes liability without regard to whether the buyer relies on the omission or misrepresentation." Everts, 64 Or App at 152. It is true that the current version of ORS 59.115(1)(b) imposes liability for "the sale of a security in violation of ORS 59.135 (1) or (3) or by means of an untrue statement," and, for that reason, might be seen as also incorporating the reliance-laden language of ORS 59.135. However, the italicized language was not part of ORS 59.115(1)(b) when Everts was decided. At that time, ORS 59.115(1)(b) imposed liability on any person who "[o]ffers or sells a security by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made * * * not misleading * * *." The phrase "in violation of ORS 59.135 (1) or (3)" was not added until 2003. Or Laws 2003, ch 631,