## Facts

- Sovereign Pocahontas Company (plaintiff) was a creditor of a coal company for which M. L. Moyer (president) and William C. Bond, Jr. (secretary-treasurer) were officers (defendants).
- Plaintiff claimed defendants represented that the corporation was making money, including specific profit figures (about $800 for the prior quarter and over $3,000 for the prior year).
- Defendants caused financial statements to be sent to plaintiff that reflected profits; in fact, the corporation had lost money (about $86 for the quarter and about $2,700 for the year), and the statements were incorrect.
- Relying on these representations and statements, plaintiff refrained from immediate collection action on the overdue debt and made an additional sale on credit.
- The corporation’s financial condition continued to decline, and plaintiff ultimately collected less than it contended it could have collected had it acted earlier.
- Defendants were frequently in the corporation’s office and often spoke for it, but the corporate books were kept by other persons.
- Plaintiff’s evidence did not directly show that defendants examined the books, understood bookkeeping, prepared the financial statements, knew the statements were erroneous, or knew the corporation was unprofitable.
- An accountant testified in a way that supported the view that the profit-and-loss presentation could not be squared with good faith.
- The trial court directed a verdict for defendants at the close of plaintiff’s evidence, and plaintiff appealed.

## Issues

1. Whether the evidence was sufficient to permit a jury to find that defendants’ profit statements and related financial statements were made with knowledge of falsity or in reckless disregard of the truth, so the case should not have been taken from the jury by a directed verdict.
2. Whether plaintiff’s evidence of reliance (forbearance and additional credit) and resulting loss was sufficient to allow the fraud claim to go to the jury.

## Decision

- The appellate court reversed the directed verdict and remanded.
- Even without direct proof that defendants examined the books or prepared the statements, the evidence permitted an inference that defendants made untrue statements of objective fact in reckless disregard of the truth.
- The evidence also permitted an inference that defendants’ positive, unqualified assertions of profitability could support a finding of fraud, making the case one for the jury rather than the court.

## Legal Principles

- In an action for fraud/deceit, the plaintiff must show that the misrepresentation was made either with knowledge of its untruth or in reckless disregard of the truth, and that the plaintiff relied on it to its detriment.
- Scienter may be shown by circumstantial evidence; direct proof of what a defendant read or knew is not required if the facts allow a reasonable inference of knowing falsity or recklessness.
- Corporate officers may be found to act recklessly when they make specific, definite financial representations about the corporation’s recent performance without a reasonable basis, particularly where the statements are sharply at odds with the company’s actual results.
- A directed verdict is improper when reasonable jurors could draw competing inferences on disputed elements such as scienter and reliance; those determinations belong to the jury.
- Individuals can be personally liable for their own fraudulent misrepresentations even when made in a corporate role.

## Conclusion

The D.C. Circuit held that plaintiff’s evidence—showing that corporate officers made specific, unqualified profit claims and sent financial statements that were materially inconsistent with the corporation’s actual losses, inducing the creditor to delay collection and extend more credit—was enough for a jury to decide whether defendants acted knowingly or in reckless disregard of the truth and whether that conduct caused plaintiff’s loss, so the directed verdict for defendants was reversed and the case remanded.


Sovereign Pocahontas v. Bond, 120 F.2d 39 (1941)