## Facts

- A Maine corporation sought to sell preferred stock to the public and arranged for bankers to market the offering.
- A circular/prospectus, including a letter from the corporation’s president, described the plant, expected earnings, oil supply prospects, and anticipated dividends.
- The prospectus listed the corporation’s directors; the board (including defendants) adopted and approved it.
- The plaintiff purchased fifty shares of preferred stock (par value $100 each), alleging he relied on statements in the prospectus.
- The plaintiff sued the directors personally for fraud and deceit, alleging the prospectus contained false statements about the plant’s capacity, profitability, access to crude oil, and dividends.
- No proof was offered that any director had actual knowledge of falsity or participated in drafting the alleged misstatements beyond approving the circular as directors; the directors acted solely for the corporation and were not underwriters or stock promoters.

## Issues

1. In a fraud and deceit action against corporate directors, is negligence or failure to investigate sufficient for liability, or must the plaintiff prove scienter (a willful purpose to deceive)?
2. Did the trial court use an improper measure of damages for fraudulent inducement to buy stock by instructing the jury to award a “value as represented minus actual value” recovery?

## Decision

- The Court of Appeals reversed the judgment for the plaintiff and ordered a new trial.
- The court held that fraud and deceit require scienter; negligence or mere lack of caution does not establish fraud.
- The court held that the jury charge misstated the directors’ duty by permitting liability for fraud based on failure to know or verify the truth of prospectus statements, without requiring intent to deceive.
- The court held that the jury charge also misstated the measure of damages in a fraud action, constituting reversible error.

## Legal Principles

- Fraud and deceit require proof of intentional wrongdoing: a willful purpose to deceive; negligence and fraud are not equivalent.
- Corporate directors do not incur personal tort liability for fraud solely because, in their official capacity, they approved a prospectus later claimed to contain false statements, absent proof they knowingly or intentionally participated in the deception.
- A verdict in a fraud action must rest on correct instructions both on the element of scienter and on the proper measure of damages; fundamental errors in either require a new trial.

## Conclusion

The court required proof of scienter to impose personal liability on directors for fraud based on a stock offering prospectus and reversed because the jury was allowed to find fraud on a negligence-like standard and was also misinstructed on damages.


Reno v. Bull, 226 N.Y. 546, 124 N.E. 144 (N.Y. 1919)