## Facts

- About 400 individual and institutional investors bought limited partnership interests in an oil-and-gas income fund after recommendations by brokerage account executives.
- Investors alleged the brokers orally assured them the investment was “low risk,” conservative, and suitable for income-oriented purchasers.
- The offering included a promotional brochure describing the fund as relatively “low risk” but directing investors to the prospectus risk disclosures.
- The prospectus contained detailed warnings describing the investment as speculative, cautioning that production could fall short or cease, and warning of possible total loss.
- The prospectus also stated that no person was authorized to make representations inconsistent with the prospectus and that investors should not rely on such statements.
- After poor performance allegedly rendered the interests worthless, investors sued for a federal unsuitability claim under § 10(b) and Rule 10b-5 plus state-law claims (including fraud and breach of fiduciary duty).

## Issues

1. Whether investors bringing a § 10(b)/Rule 10b-5 unsuitability claim can show justifiable reliance on brokers’ oral “low risk” assurances when the prospectus expressly and specifically warns of significant risk and possible total loss.
2. Whether the absence of a special or fiduciary relationship permits resolving justifiable reliance against investors as a matter of law on summary judgment.

## Decision

- The court affirmed summary judgment for the defendants on the § 10(b)/Rule 10b-5 unsuitability claim.
- The court held investors’ reliance on oral “low risk” assurances was not justifiable as a matter of law because the written materials clearly and comprehensively disclosed contrary risks.
- The court treated investors as charged with knowledge of the prospectus disclosures provided to them.
- The court noted no special relationship or heightened fiduciary duty that would excuse disregarding express written warnings.
- With the federal claim dismissed, the dismissal of pendent state-law claims for lack of subject-matter jurisdiction remained in place.

## Legal Principles

- A § 10(b)/Rule 10b-5 unsuitability claim requires, among other elements, justifiable reliance; failure of that element defeats the claim.
- Reliance on oral representations is unjustifiable where written offering documents directly contradict the oral statements with specific, prominent risk disclosures.
- Investors furnished a prospectus are generally charged with knowledge of its contents in assessing the reasonableness of reliance.
- The existence (or absence) of a special or fiduciary relationship is relevant to whether reliance on oral statements contrary to written disclosures may be justified.
- When risk disclosures are clear and available, ignoring them in favor of contradictory oral assurances can render reliance unreasonable as a matter of law, permitting summary judgment.

## Conclusion

The court held that investors could not maintain a federal unsuitability claim based on oral “low risk” assurances that conflicted with explicit prospectus warnings of speculative risk and potential total loss, and it affirmed summary judgment because justifiable reliance was lacking as a matter of law.


Brown v. E.F. Hutton Grp., Inc., 991 F.2d 1020 (2d Cir. 1993)