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IN THE COURT OF APPEAL
1896 Jan. 16.
 1 Q.B. 372
BEFORE THEIR LORDSHIPS
LORD ESHER M.R.
Carson, Q.C., and Abrahams, for the defendants:
Astbury, Q.C. (McCall, Q.C., and T. M. Whitehouse, with him), for the plaintiff:
Solicitors for plaintiff: Nunn & Popham.
Solicitors for defendants: Michael Abrahams, Sons & Co.
COMPANY LAW:- Misrepresentation – Prospectus – Intention to induce Purchase of Shares – Liability to Purchaser – Publication of False Statements confirming those of Prospectus – Purchase of Shares by Person who had received Prospectus – Liability of Person causing Publication.
HISTORY AND SUMMARY OF FACTS
Where the object with which the prospectus of a company is issued is not merely to induce application for an allotment of shares, but also to induce persons to whom it is sent to purchase shares in the market, its function is not exhausted when the company has gone to allotment, and the person issuing the prospectus is responsible for the consequences of a false representation contained in it, and known to him at the time to be false, to any person to whom the prospectus has been sent who is induced by the false representation to purchase shares, and thereby sustains a loss.
Peek v. Gurney (L. R. 6 H. L. 377) distinguished.
Where a person who has issued the prospectus of a company, containing a false representation, known to him at the time to be false, subsequently causes to be published a false representation to the same effect as that of the prospectus, with the direct intent of inducing persons to purchase shares in the company, he is responsible for the consequences of so doing to anyone who, having received a prospectus, purchases shares on the faith of the false representation so published, and thereby sustains a loss.
APPLICATION that judgment should be entered for the defendants or for a new trial.
The case was tried before the Lord Chief Justice, and was an action against the defendants for conspiring together to defraud the plaintiff by inducing him by false and fraudulent statements to purchase shares in a company called the Sutherland Reef Company. The defendants were father and son, and it was proved that W. G. S. Mockford, the father, formed a company, called the Harmony Proprietary Company, with a view that this company should purchase from him a tract of land in the northern part of the Transvaal. There were six other signatories besides Mockford senior to the memorandum of association, including among them the defendant Mockford junior, and each of the six held one share, the whole of the remaining shares being held by Mockford senior. The defendants then promoted a company, to be called the Sutherland Reef Company, to purchase a part of the property held by the Harmony Proprietary Company, and they issued a prospectus, of which a copy was sent to the plaintiff. The Sutherland Reef Company were to purchase of the Harmony Company partly for cash and partly by allotment of shares. This prospectus contained statements as to the gold-bearing reefs on the property and the yield of gold from a ton of quartz, which was alleged to amount to pounds weight instead of ounces. The company went to allotment. The plaintiff kept this prospectus by him, but did not apply to have any shares allotted to him, although he noted from time to time the prices at which the shares stood. About seven months after he had received the prospectus he read in the Financial News the following paragraph, headed “A big jump in Sutherland Reefs.” “The sudden rise in the shares of the Sutherland Reef, Limited, is due to a very rich discovery on the property. During the last few months the company’s engineer has been developing the reef, and a telegram just to hand brings the welcome news that the main shaft is now down fifty feet, and that a cross-cut driven at that depth has opened up a large body of payable ore, assaying by Government assay 24 ounces to the ton.” In fact, a telegram had been received by Mockford senior from the manager (who was also a son of Mockford senior) as follows: “Sutherland Reef. Main shaft down fifty feet; discovered large body of pay ore, assays 24 ounces to the ton.” On reading the paragraph as to the mine the plaintiff bought fifty shares, the cost of which, with stamps, fees, and commission, was 411l. 15s. 6d. From that time the shares went down in price, and within a year the company was wound up, without having ever paid a dividend.
The case was tried before Lord Russell of Killowen C.J., who left a number of questions to the jury. The first four of these, with the answers of the jury, were as follows:–
(1.) Did the defendants conspire to defraud the plaintiff as one of the public by promoting sham companies, the Harmony and the Sutherland Reef?– Answer. Yes.
(2.) Did the defendants authorize the prospectus of the Sutherland Reef to be sent to the plaintiff?–Answer. Yes.
(3.) Did they do so to induce an application for shares to the company, or to induce the plaintiff to buy the shares in the market, or both?–Answer. Both.
(4.) Did the plaintiff, in consequence of that prospectus, buy shares in the open market?–Answer. Yes.
The next two questions related to the creation of fictitious prices, and the non-disclosure of a contract material in the formation of the Sutherland Reef Company. The remaining questions were as follows:–
(7.) Was the telegram a genuine telegram, or a false and concocted one in the sense that there was no such discovery as to warrant the sending of the telegram?–Answer. False.
(8.) If false and concocted, was it so to the knowledge of the defendants or either of them?–Answer. Yes, of both.
(9.) Was it published by the defendants or either of them?–Answer. By both.
(10.) Was it calculated to bring about the result that the plaintiff and others would buy shares in the market?–Answer. Yes.
(11.) Did the plaintiff in consequence of that telegram, and acting upon it, buy shares?–Answer. Yes.
The jury assessed the damages at the cost of the shares, 411l. 15s. 6d., and the learned judge entered judgment for the plaintiff for that amount.
The defendants appealed.
Carson, Q.C., and Abrahams, for the defendants:
There was no evidence to go to the jury of any cause of action against the defendants. Assuming that the statements in the prospectus were false, and that those who put forth the prospectus were conspiring to induce those to whom it was sent to become allottees of shares in a sham company, the damage sustained by the plaintiff did not arise from the prospectus. He did not apply for an allotment of shares in the company upon the faith of the prospectus, but purchased the shares long afterwards in the market. It was held in Peek v. Gurney [FN1] that the proper purpose of a prospectus of an intended company is to invite persons to become allottees of the shares or original shareholders in the company, and that, when it has performed this office, its effect is exhausted. A person who, having received a prospectus, waits to see whether the company is a success on the Stock Exchange, and then buys shares, cannot be considered to buy with reference to the statements in the prospectus.
FN1 L. R. 6 H. L. 377.
There was no evidence that the telegram mentioned in the article in the Financial Newswas a false and concocted telegram on the part of the defendants. Assuming that it was, and that the plaintiff purchased in consequence of reading the article, the authorities shew that this is too remote a consequence to form the basis of an action for false representation.
A false representation made by one person to another, upon which a third person acts to his detriment, cannot afford a ground of action to that third person, unless it is shewn that it was made with intent that it should be communicated to and acted upon by him. An action will not lie at the suit of any third person to whose knowledge it may come, and who acts upon it, and that is the position of the plaintiff in this case: Rex v. De Berenger [FN2]; Peek v. Gurney [FN3]; Salaman v. Warner. [FN4]The plaintiff has no cause of action arising out of the prospectus or out of the statement of the newspaper, and the jury should have been so directed.
FN2 3 M. & S. 67.
FN3 L. R. 6 H. L. 377.
FN4 65 L. T. (N.S.) 132.
Astbury, Q.C. (McCall, Q.C., and T. M. Whitehouse, with him), for the plaintiff:
There was evidence to support all the *376 findings of the jury. The false statements of the prospectus were made to the plaintiff, and were intended to induce him to purchase shares. The effect of the prospectus was not limited, as in Peek v. Gurney [FN5], to the time up to allotment, and consequently the case comes within the first proposition of Wood V.-C. in Barry v. Croskey [FN6], quoted with approval by Lord Cairns in Peek v. Gurney [FN7], to the effect that “every man must be held responsible for the consequences of a false representation made by him to another, upon which that other acts, and, so acting, is injured or damnified.” The plaintiff is, therefore, entitled to judgment, even if the publication of the telegram is not taken into consideration.
FN5 L. R. 6 H. L. 377.
FN6 2 J. & H. 1.
FN7 L. R. 6 H. L. 377, at p. 412.
The case also comes within the third proposition of the Vice-Chancellor, also approved by Lord Cairns. That proposition is that, in the case of statements not made direct to the person seeking redress, “to bring it within the principle the injury must be the immediate, and not the remote, consequence of the representation thus made. To render a man responsible for the consequences of a false representation made by him to another, upon which a third person acts, and so acting is injured or damnified, it must appear that such false representation was made with the direct intent that it should be acted upon by such third person, in the manner that occasions the injury or loss.” The false statements communicated to the newspaper were made to influence those who had received the prospectus, and amongst others the plaintiff. The findings of the jury bring the case directly within this proposition. The defendants have no right to separate the prospectus and the statement in the newspaper: they were all parts of one fraud intended to induce the purchase of shares with the object of creating a market for the shares, so as to provide a fund from which the cash to be paid to the Harmony Company could be procured, and to facilitate the sale of the shares held by that company. The object was, therefore, to injure the plaintiff and to advantage the defendants; and it is not material that the shares actually purchased by the plaintiff cannot be traced to either of the defendants. [He cited in addition Bedford v. Bagshaw [FN8] and Scott v. Dixon. [FN9]]
FN8 4 H. & N. 538; 29 L. J. (Ex.) 59.
FN9 29 L. J. (Ex.) 62, n. to Bedford v. Bagshaw.
Carson, Q.C., in reply.
LORD ESHER M.R.
I am of opinion that this appeal should be dismissed. A new trial is moved for on three grounds, the first of which is that there was no evidence to go to the jury in support of the plaintiff’s case. The second point is, that evidence had been wrongly admitted; but I need say no more about that point except that I think it comes to nothing. The third point raised is that there was misdirection by the learned judge; but the only suggestion in support of this is that the learned judge should have directed a verdict for the defendants on the ground that there was no evidence in support of the plaintiff’s case. The case is therefore reduced to this–Was there evidence on which the jury could find as they did? I think it is obvious that the case put forward by the plaintiff in evidence entitled the jury to take the view that the defendants issued to the plaintiff personally a prospectus of the proposed company. There was evidence, and, to my mind, strong evidence, that the prospectus was fraudulent: that it contained a fraudulent description of the Sutherland Reef Mine which the defendants knew to be false, and that when the defendants sent it to the plaintiff they did not merely mean it to be an invitation to subscribe to the mine, but they had in their minds the intention to carry out the fraud and support the prospectus by other and fraudulent means. Further, there is evidence that they subsequently did this by having a telegram sent by the manager, who was a son of the elder defendant, from Africa. There was evidence on which the jury could find that the sending of the telegram was suggested to this son, and that it was arranged that the telegram was to contain statements as to the working of the mine which the defendants knew to be untrue, and that this was done not merely for the purpose of inducing people who had not received the prospectus to take shares in the company, but for the express purpose of strengthening the effect of the prospectus on the minds of those to whom it had been sent. The plaintiff did not see the telegram, so that the matter must be carried a step further. I am satisfied that there was evidence on which the jury could find that the defendants sent to the Financial News, in order that it might be published, either the telegram or the article which elaborated it and connected it with the prospectus. This was done for the purpose of carrying out the original intention to strengthen the effect of the prospectus, and to induce those to whom it had been sent, if they had not already done so, to buy shares.
The jury have drawn the conclusion that there was one continuous fraud by which the defendants induced the plaintiff, to whom a prospectus had been sent, to buy shares. If this be so, I think the defendants are liable to the plaintiff, and the jury were entitled to find a verdict for the plaintiff on the around that the case comes within the third of the propositions of Wood V.- C. in Barry v. Croskey [FN10], quoted with approval by Lord Cairns in Peek v. Gurney. [FN11] The proposition is that the injury complained of must be the immediate and not the remote consequence of the representation made, and that “to render a man responsible for the consequences of a false representation made by him to another, upon which a third person acts, and, so acting, is injured or damnified, it must appear that such false representation was made with the direct intent that it should be acted upon by such third person, in the manner that occasions the injury or loss.” The false representation in the newspaper on which the plaintiff acted, and by so doing was damnified, was made with the intent that it should be acted on by any person who had already received the prospectus. The jury have found that the natural consequence of the publication in the newspaper was that the plaintiff should buy shares; and, if so, the injury received by the plaintiff was the immediate, and not the remote, consequence of the representation thus made. It follows, therefore, that the plaintiff was entitled to recover, and that this appeal must fail.
FN10 2 J. & H. 1 .
FN11 L. R. 6 H. L. 377, at p. 413.
The plaintiff in this action seeks to recover damages from the defendants for having by fraudulent devices induced him to purchase shares in a sham or pretended gold-mining company, for which he has paid the sum of 411l. 15S. 6d.; and the jury, in answer to specific questions left to them by the Lord Chief Justice, have found that the plaintiff has established his allegation, and have given a verdict for him for the amount claimed, for which judgment has been entered.
Application is now made to this Court to enter judgment for the defendants or for a new trial, upon the grounds that there was no evidence to support the plaintiff’s case; mis-reception of evidence; misdirection. The case made by the plaintiff against the defendants is this–that the defendants fraudulently agreed together to publish and to have sent to the plaintiff, and did send to him, a prospectus of a company, the Sutherland Reef Company, which they knew, when brought out, would be a sham or pretended company, in order to induce the plaintiff to purchase shares therein; that the plaintiff did not then do so; that the prospectus so issued, having produced but a scanty subscription for shares, the defendants thereupon fraudulently caused to be published in the Financial News a telegram, which they knew to be false, in order to stimulate and bring about that which the prospectus had been intended to effect but had failed in doing; that the plaintiff, believing in the truth of the telegram confirming, as he thought it did, the statistics given in the prospectus, was thereby induced to purchase the shares; whereby he was damnified.
The Lord Chief Justice left a number of questions to the jury, of which the first four are material to the point I am now upon. The effect of them is this–that the defendants conspired to defraud the plaintiff, as one of the public, by promoting sham companies; that both the companies were shams; that the defendants authorized the prospectus of the Sutherland Reef Company being sent to the plaintiff; that they did so to induce an application for shares and to induce him to buy shares in the open market; and that the plaintiff in consequence bought shares. It appears to me that this makes out the plaintiff’s case; but it is said there is no evidence to support some of these findings.
The plaintiff gave evidence, and there was none brought forward to contradict him on the part of the defendants, who were both in Court, that he received the prospectus sent to him by post (it was not disputed that the prospectus had been issued by the defendants); that having read it he did not then apply for shares, but laid it aside for a time; that he afterwards saw the telegram in the Financial News, and, believing that its contents were true, and that it confirmed the statistics in the prospectus, he thereupon purchased the shares– in other words, that he purchased, upon the faith of the statements contained in the prospectus, supplemented by the statements in the telegram, which last statements were that a shaft had been driven, and that a large body of payable ore had then been opened, assaying by Government assay twenty-four ounces to the ton.
It is now argued on behalf of the defendants that on the evidence the plaintiff did not purchase the shares by reason of the conjoint operation of the prospectus and the telegram, but only upon what he saw in the Financial News; but as to this I will refer to a passage in the judgment of the Lord Chancellor in Arnison v. Smith [FN12], which is very pertinent to this point: “It is an old expedient, and seldom successful, to cross-examine a person who has read a prospectus, and ask him as to each particular statement what influence it had on his mind, and how far it determined him to enter into the contract. This is quite fallacious; it assumes that a person who reads a prospectus and determines to take shares on the faith of it can appropriate among the different parts of it the effect produced by the whole.” These remarks are applicable to the attempt to divide this case into parts.
FN12 41 Ch. D. 348, at p. 369.
Evidence was given that the telegram was published at the defendants’ instance in the Financial News. One of the main points insisted on by the defendants was that there was no evidence of this. I am of opinion that there was. [The Lord Justice then dealt with this matter and with the evidence as to the falsity of the telegram.] It was not really insisted upon before us that there was no evidence that the company was a sham and a fraud, or that there was no evidence that the prospectus contained false and fraudulent statements–indeed, this could not have been seriously argued upon the facts of the case. It was said that, assuming all this, and that the telegram was proved to have been published at the instance of the defendants with a fraudulent intent, and that the contents were false to their knowledge, and that the plaintiff really did act upon the conjoint representation of the prospectus and the telegram, nevertheless the Lord Chief Justice should have directed judgment for the defendant upon the grounds, firstly, that Peek v. Gurney [FN13], in the House of Lords, has decided that when shares are purchased upon the market, and not taken by allotment from a company, fraudulent misstatements in a prospectus cannot be relied upon by a purchaser, because the prospectus had theretofore performed its function, which was only to obtain purchasers from the company of shares by allotment, and so the plaintiff had no cause of action on the prospectus; and, secondly, that the false statements in the telegram could not be relied upon by the plaintiff, because it had been pointed out in reference to the case of Rex v. De Berenger [FN14] that the propagation of false news of peace, whereby the price of the funds was sent up, did not give a cause of action for damage to one of the public who had been deceived and injured thereby, through having purchased stock when unduly inflated by the false news; and the judgment of Page Wood V.-C. in Barry v. Croskey [FN15], dealt with by Lord Cairns in Peek v. Gurney [FN16], was referred to. In my opinion, without discussing the effect of these cases, neither decision governs the present one, which is a case of continued systematic fraud from its commencement to its end.
FN13 L. R. 6 H. L. 377.
FN14 3 M. & S. 67.
FN15 2 J. & H. 1.
FN16 L. R. 6 H. L. 377, at p. 412.
The effect of the findings of the jury as to the telegram is *382 that the telegram was false and concocted to the knowledge of both defendants, and published to induce the plaintiff, amongst others, to buy shares on the market, and that he did in consequence buy shares. I have already dealt with the evidence on which the jury might find, if such evidence was unanswered, that the telegram was false and concocted, and the result of their findings is to bring the case within the proposition of Wood V.-C. in Barry v. Croskey [FN17], which deals with the responsibility of a man for a false representation made by him to another on which a third person acts.
FN17 2 J. & H. 1.
Upon these findings there was proved against the defendants a continuous fraud on their part, commencing with the sending of the prospectus to the plaintiff, and culminating in the direct lie told in the telegram, which was intended by the defendants to operate upon the plaintiff’s mind as well as on the minds of others, and did so operate to his prejudice, and to the advantage of the defendants. It is not taking the correct view of the case to sever it into parts, as the defendants’ counsel sought to do, and to argue that the prospectus by itself would not support a cause of action, and that the telegram by itself would not do, and since two nothings make nothing, the combination of the two does not support a cause of action. This case must be taken as a whole. In this case the function of the prospectus was not exhausted, and, indeed, in answer to the third question, the jury so find; and the false telegram was brought into play by the defendants to reflect back upon and countenance the false statements in the prospectus.
For these reasons the plaintiff, in my opinion, is entitled to retain the judgment entered for him.
I am of the same opinion. The case has been argued in the only way in which it could plausibly be presented to the Court–that is to say, by dividing it into parts and treating each one separately. To my mind, that is not permissible. The case made was one of fraud from the very inception of the company: fraud in each of the stages of its progress; a sham company created for the purpose of inducing *383 the public to believe that there was a real one; a fraudulent prospectus, not merely for the purpose of inducing the public who read the prospectus to take shares by allotment from the company, but, as the jury have found, for the purpose also of inducing the readers of the prospectus, if they did not get shares by allotment, to get them by purchase; and further frauds–or rather one fraud running throughout a great number of stages. I may say, first of all, that on the findings of the jury, irrespective of the prospectus, and if the prospectus ought to be laid aside as an inducement to the plaintiff to buy, I think there is quite enough to justify the judgment that has been entered. The prospectus is in any case, and even if the plaintiff had never seen it, evidence of the fact that the defendants made a statement to the effect of the telegram afterwards received. But I do not wish to avoid the question arising on the issue of the prospectus as it has been argued before us. In my judgment, there is nothing in Peek v. Gurney [FN18], or in any other case, which precisely meets the present one.
Undoubtedly, if there be a prospectus issued for the sole purpose of obtaining subscriptions for the original capital of the company, or subscriptions for any issue of shares about to take place, and if that can be treated as a separate transaction, people who did not respond to that invitation, and did not act upon it in the way which it was intended to be acted upon, but who afterwards bought shares in the open market, cannot rely on statements in the prospectus, which they may be able to establish as being fraudulent misrepresentations. It is, however, a totally different matter when the conclusion is arrived at that the prospectus was not intended solely, or even primarily, for the purpose of getting the public to subscribe to the shares. If the object was, in pursuance of a deliberate scheme of fraud, to impress the minds of all persons who read the prospectus with the idea that the sham company which was created was a real and most prosperous company–if that was a part of the scheme, and if, after the issue of the prospectus, that scheme was continued by other devices intended to produce the same results, it is idle to say there is any rule of law or any principle which should *384 oblige us to shut our eyes to that portion of the fraud which was contained in the prospectus. I repeat, however, that it appears to me that, even if we were bound to put aside the findings as to the prospectus as an inducement to the plaintiff to buy, there is in the other findings, if they can be supported–that is to say, if there was any evidence to go to the jury upon them–what is amply sufficient to justify the judgment in favour of the plaintiff.
FN18 L. R. 6 H. L. 377.
That the telegram was undoubtedly false, that it did not correspond with the facts of the case, is patent. It was said, however, that there was no evidence that the telegram was not believed in by the defendants. Now in substance the telegram was a mere repetition, in different words, of the statement to the same effect made in the prospectus–a statement for which the defendants are responsible, which was to their knowledge absolutely groundless, and which was made fraudulently by them. To suppose that when they found their own fraudulent misstatement repeated in the telegram, arriving so opportunely, they believed it to be true, would be to credit them with a credulity which no jury was bound to impute to them. Having regard to the way in which the telegram was dealt with when received, it seems to me that there was strong evidence from which a jury might infer that the defendants had no such belief. [The Lord Justice then dealt with the evidence that the telegram was published by the defendants.
The learned counsel for the defendants raised a point of law on the telegram. He said, assuming that it was a false telegram, there is no case for the plaintiff to sustain an action for damages. The facts existing in the case of Rex v. De Berenger [FN19] have been referred to as an illustration, and it is necessary to see what principle of law would have been required to sustain an action in such a case. There was a false report which was intended to lead to the conclusion that peace was imminent. A man acting upon that might have done many things besides buying public funds. He might have bought French funds, or bought land in France, or incurred expenses in preparing to act upon the making of peace with France. *385 It seems to me that the principle required would be this–that when a man tells a lie he is responsible for every sort of damage that accrues to any person, wherever he may be, who hears of the lie, and takes action upon it, whatever the nature of that action may be. So extravagant and extensive a rule as that would in all probability lead to fraud to such an extent that no system of law would support it, and this, I think, was the opinion of Fry L.J. from what he said in Salaman v. Warner. [FN20]
FN19 3 M. & S. 67.
FN20 65 L. T. (N.S.) 132.
What was done in the case before us was something totally different. The publication of the contents of the telegram was an invitation to members of the public who were thinking of investing money to buy shares of the Sutherland Reef Company. The jury have found that it was intended to be acted upon in that manner, and I do not see any reason to differ from them in the verdict they have arrived at. From this point of view Rex v. De Berenger [FN21] has nothing to do with the present case. The Lord Chief Justice pointed out that nothing said by Wood V.-C. about. Rex v. De Berenger [FN22] led him to say that there was no case for damages here; and I venture to repeat that nothing that has been said, nothing that could probably be said about that case, would, in my view, alter the liability of persons who, being the owners of property, procure false statements to be made about that particular property, in order to induce members of the public to buy that property from them. On these grounds I agree that the appeal should be dismissed with costs. [FN23]
FN21 3 M. & S. 67.
FN22 3 M. & S. 67.
Application having been made, at the close of the case, on behalf of the plaintiff, that the cost of a shorthand writer’s note of the summing-up should be allowed on taxation, the Master of the Rolls intimated that the Court would consult the other Lords Justices, and now stated that the conclusion arrived at was that there was no hard and fast rule that such costs should never be allowed, but that they would be allowed only in very exceptional cases. He added that the present case was not exceptional, and therefore the costs would not be allowed.
Appeal dismissed. (A. M. )