## Facts

- A Mexican banking institution and its affiliate (Banca Cremi) purchased collateralized mortgage obligations (CMOs) through a broker at Alex. Brown & Sons, Inc.
- The portfolio included complex, high-risk instruments, including inverse floaters and inverse interest-only (IIO) strips.
- Banca Cremi’s treasury/investment function was staffed by three educated investment professionals.
- The bank relied in part on the broker’s recommendations but also consulted other brokerage firms regarding CMO investments.
- The strategy produced profits for several years.
- In 1994, interest rates rose unexpectedly and the CMO market declined sharply; Banca Cremi sustained losses on several CMO positions totaling about $21 million.
- Banca Cremi alleged that the broker and firm misrepresented or omitted material information about the CMOs’ risks and pricing, sold unsuitable securities, and charged excessive markups.
- The district court granted summary judgment to the defendants on all federal securities and state-law claims.

## Issues

1. Whether the record created a genuine dispute of material fact that defendants made material misrepresentations or omissions actionable under Exchange Act § 10(b) and Rule 10b-5 regarding CMO risk, suitability, or pricing.
2. Whether a sophisticated institutional investor that conducted independent inquiry could prove justifiable reliance and loss causation for purposes of Rule 10b-5.
3. Whether allegations of unsuitability or excessive markups, on these facts, could support federal securities-fraud liability.
4. Whether related state-law claims (fraud, negligence, negligent misrepresentation, breach of fiduciary duty) and a claim under the Maryland Securities Act could survive for reasons distinct from the federal theory.

## Decision

- The Fourth Circuit affirmed summary judgment for Alex. Brown & Sons and the broker on all claims.
- The court held the evidence insufficient to permit a reasonable jury to find actionable material misrepresentation or omission under Rule 10b-5.
- The court held Banca Cremi failed to show justifiable reliance in light of its sophistication, internal expertise, and consultation with multiple dealers.
- The court found the bank’s losses were attributable to market events in 1994 rather than fraud-based causation.
- The court rejected suitability and markup theories as independent grounds for federal securities-fraud liability on the summary-judgment record.
- The court concluded the state-law and Maryland statutory claims failed for substantially the same reasons as the federal claims.

## Legal Principles

- A Rule 10b-5 plaintiff must produce evidence of a material misrepresentation or omission (or deceptive conduct), scienter, justifiable reliance, and loss causation.
- Where an investor is sophisticated, has internal analytical capacity, and pursues information from multiple sources, alleged reliance on a counterparty’s characterizations may be unreasonable as a matter of law.
- Market losses following adverse interest-rate movement do not establish securities fraud without proof tying the loss to an actionable misstatement or omission rather than market risk.
- “Suitability” allegations and “excessive markup” allegations generally must be connected to a material misrepresentation or omission (such as concealment of pricing or false statements about safety or appropriateness) to support Rule 10b-5 liability.
- State-law fraud and related tort theories premised on the same alleged misstatements and reliance will fail where the record does not support actionable misrepresentation, reasonable reliance, or causation.

## Conclusion

The court treated the dispute as an attempt by a sophisticated institutional investor to recharacterize adverse market outcomes as fraud and held that, absent evidence of actionable misstatements, justifiable reliance, and fraud-based causation, neither federal securities claims nor parallel state-law theories could proceed past summary judgment.


Banca Cremi, S.A. v. Alex. Brown & Sons, Inc., 132 F.3d 1017 (4th Cir. 1997)