## Facts

- Clarence E. Bishop, Jr. purchased First Mortgage Revenue Bonds issued by an Alabama industrial development board.
- Repayment depended on lease payments from a single industrial lessee whose plant was financed by the bond proceeds.
- The lessee quickly defaulted on rent, and the bonds’ value dropped sharply.
- Bishop alleged that participants in the issuance (including bond counsel and others) carried out a pervasive scheme to defraud investors by fabricating a materially misleading offering circular to induce issuance and public purchase.
- Bishop did not see or know of the offering circular when he bought the bonds; he purchased based on oral representations from his broker.
- After Bishop’s death, his executor, James L. Shores, Jr., continued the action.

## Issues

1. Whether a § 10(b) and Rule 10b-5 plaintiff must prove direct reliance on misstatements or omissions in an offering circular when he did not see it.
2. Whether reliance and causation may be satisfied by proof that a pervasive fraudulent scheme caused the bonds to be marketed at all, and the plaintiff relied on the bonds’ apparent legitimacy and availability in the market.

## Decision

- The en banc Fifth Circuit reversed the summary judgment for defendants and remanded.
- The court held that a Rule 10b-5 plaintiff need not show specific reliance on a particular disclosure document if he can prove the security was “fraudulently marketed,” meaning the scheme was so pervasive that absent the fraud the bonds would not have been offered on the market at any price.
- The court held that, on such allegations, reliance may be shown by the investor’s reliance on the integrity of the market in which the security appeared.
- The court emphasized it was not finding fraud proven, only that the pleadings and evidence could support the theory and thus the case should not have been dismissed at the summary judgment stage.

## Legal Principles

- Section 10(b) and Rule 10b-5 reach beyond false statements in a single disclosure document to include deliberate, manipulative schemes that corrupt the market’s screening function.
- In a “fraudulently marketed” case, reliance may be established by showing the investor relied on the security’s market availability and apparent legitimacy, rather than reading and relying on the offering circular.
- A plaintiff must ultimately prove but-for causation at the market-entry level: without the alleged scheme, the issuer would not have issued, intermediaries could not have sold, and the investor could not have purchased the security.

## Conclusion

The court permitted a Rule 10b-5 theory allowing recovery without direct reliance on an offering circular where the plaintiff alleges and can prove a pervasive fraud that brought the security to market and that he relied on the market’s integrity in purchasing it, requiring reversal of summary judgment and remand for further proceedings.


Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981)