## Facts

- Fritz Companies, Inc. acquired other businesses and adopted an accounting system that allegedly created integration problems.
- Fritz issued a press release reporting third-quarter 1996 financial results that the complaint alleged materially overstated revenues, net income, and earnings per share.
- Fritz later restated earnings downward by more than $7 million and announced it would incur a fourth-quarter loss exceeding $3 million.
- After the corrective disclosures, Fritz’s stock price allegedly dropped more than 55%.
- A shareholder representative sued Fritz and certain officers, alleging the misstatements induced existing shareholders to hold their shares rather than sell before the price drop.
- The trial court sustained a demurrer without leave to amend, effectively rejecting a “holder” misrepresentation theory.
- The Court of Appeal reversed.
- The California Supreme Court granted review to decide whether California should recognize a cause of action for shareholders induced to hold stock instead of selling and, if so, what pleading standards apply.

## Issues

1. Whether California common law recognizes fraud or negligent misrepresentation claims by shareholders who allege they were induced by misstatements to hold stock rather than sell it.
2. If such “holder” actions are cognizable, what level of pleading particularity is required for reliance and damages.

## Decision

- The court held California law permits a “holder” action for fraud or negligent misrepresentation based on forbearance induced by misrepresentations.
- The court required stringent pleading standards to reduce speculative, hindsight-driven claims, especially as to reliance and damages.
- The court concluded the complaint as pleaded lacked the necessary specificity regarding actual reliance and concrete damages.
- The court remanded with directions to allow leave to amend to attempt to state a properly particularized holder claim.

## Legal Principles

- Common-law fraud and negligent misrepresentation in California may be predicated on forbearance: a misrepresentation that induces a person not to act can satisfy reliance and causation if resulting damage is shown.
- A shareholder may sue under common-law tort theories when corporate misstatements allegedly induced the shareholder to hold stock instead of selling; the claim is distinct from purchaser-seller limitations in statutory securities regimes.
- Holder claims must be pled with particularity, including:
  - facts showing actual reliance on identified misstatements in deciding to hold;
  - specific, nonconclusory allegations of what the plaintiff would have done absent the misrepresentation (e.g., how many shares, and when the sale would have occurred); and
  - concrete, non-speculative damages tied to the foregone sale and the later, lower value.
- Fraud-based pleading requires identifying the substance of the misrepresentation and the circumstances of its communication (time, manner, and attribution) sufficient to permit meaningful scrutiny at the demurrer stage.

## Conclusion

California recognizes holder actions for fraud and negligent misrepresentation when shareholders plausibly allege they were induced by corporate misstatements to refrain from selling stock, but such claims must be pled with strict particularity as to actual reliance and measurable damages; the plaintiff was allowed leave to amend to try to meet these requirements.


Small v. Fritz Cos., Inc., 30 Cal. 4th 167 (Cal. 2003)