STRATEGIC DIVERSITY, INC. V. ALCHEMIX CORPORATION, 10-15256 (9th Cir. Jan. 20, 2012) (2024)

`
`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`
`529
`
`COUNSEL
`
`James O. Ehinger, Jennings, Strouss & Salmon, P.L.C., Phoe-
`nix, Arizona, for the appellants.
`
`Stephen W. Tully, Gordon & Rees LLP, Phoenix, Arizona,
`for the appellees.
`
`ORDER
`
`The Opinion filed December 2, 2011, slip op. 20613, is
`withdrawn. It may not be cited as precedent by or to this court
`or any district court of the Ninth Circuit. Appellees’ petition
`for panel rehearing is DENIED.
`
`OPINION
`
`HUG, Senior Circuit Judge:
`
`This appeal concerns the maintenance of a suit for rescis-
`sion under section 10(b) of the Securities and Exchange Act
`of 1934 by plaintiffs-appellants Kenneth Weiss and his
`wholly-owned corporation Strategic Diversity, Inc. The dis-
`trict court granted summary judgment to defendants-appellees
`Robert Horton, Alchemix Corporation, and Medici Associates
`
`

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`530
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`
`on all claims and awarded the defendants attorneys’ fees. We
`affirm in part, reverse in part, vacate the attorneys’ fee award,
`and remand.
`
`I. Background
`
`A. The Initial Investment
`
`In April 2001, Kenneth P. Weiss met Robert Horton. Weiss
`expressed interest in investing in Horton’s alternative fuels
`start-up company, Alchemix Corporation. At the direction of
`his accountant, Weiss set up Strategic Diversity, Inc.,
`(“Strategic”) to handle his investments. In Strategic’s first
`venture, Weiss sought to invest $500,000 in Alchemix and
`requested certain collateral to secure his investment. Approxi-
`mately two weeks later, the parties arrived at an agreement.
`
`In a seven-page agreement signed on July 2, 2001, Strate-
`gic agreed to invest $500,000 in Alchemix. The agreement
`incorporated the following: (1) a convertible promissory note
`(“Note”) in the amount of $500,000.00; (2) security interests
`in Alchemix’s patents and intellectual property rights; and (3)
`a warrant which included a provision that ensured capitaliza-
`tion of the company could not exceed 40 million shares
`(“Warrant”).
`
`The Note was to be paid after five years at an interest rate
`of ten percent per year compounded monthly. Under the terms
`of the Note, Weiss had the option of converting the Note to
`250,000 shares of stock at a price of $2 or such price as
`offered to other investors. Alchemix had the ability to prepay
`the Note after one year if three conditions were met: (1)
`Alchemix had to give Strategic 30 days advance written
`notice; (2) Alchemix had to pay a prepayment penalty of
`$10,000; and (3) during the 30 day notice period, Alchemix
`had to give Strategic the option to convert the Note into
`250,000 shares of Alchemix stock at $2 per share or any
`lower price offered to other investors.
`
`

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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
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`531
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`While the agreement did not guarantee Weiss a seat on the
`Board, it stated that Alchemix “shall immediately undertake
`its best efforts . . . to elect Weiss . . . and retain [him] in such
`Board position at least until such time as the [Note] . . . [has]
`been satisfied or converted pursuant to the terms delineated
`therein.” Weiss obtained his seat on the Board shortly after
`his investment was made.
`
`As part of the loan, Weiss also obtained secured interests
`in Alchemix’s property in certain patents and protection in the
`form of anti-dilution provisions.
`
`B. Alchemix Needs Further Investment
`
`In May 2002, Alchemix needed money. To that end,
`Alchemix entered into negotiations with the Alchemix Fund-
`ing Group (“AFG”). AFG was an investment group indepen-
`dent of Alchemix, but the group included members of
`Alchemix’s Board. Horton claims that Weiss was a member
`of AFG, but Weiss denies this assertion.
`
`Throughout the month, AFG and Alchemix negotiated the
`terms of an agreement. AFG would loan Alchemix approxi-
`mately $3 million, but it required certain terms on its loan.
`Those terms, however, conflicted with Strategic’s then-held
`rights. To get the loan from AFG, Alchemix (and AFG)
`would need Strategic to make concessions. Weiss testified
`that his goal was to see that Alchemix succeed, and he
`believed that securing this line of funding would help
`Alchemix. Weiss agreed to make certain concessions; how-
`ever, not surprisingly, he sought to be compensated for them.
`He negotiated with Alchemix and AFG to find an acceptable
`outcome for all.
`
`The negotiations culminated in a June 5, 2002 letter from
`Strategic to Alchemix. In that letter, Weiss, on behalf of Stra-
`tegic, wrote that he understood Alchemix was seeking fund-
`ing from AFG in the amount of three million dollars. He
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
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`indicated that he intended to be an investor in AFG and that
`his agreement to waive Strategic’s rights was “contingent
`upon my investment in [AFG].” Weiss then noted that he
`would agree to waive Strategic’s rights on certain terms. Spe-
`cifically, he stood ready to waive anti-dilution provisions,
`increase the amount of capitalized shares, and release his
`security interests in Alchemix patents in exchange for a
`$250,000 investment in Alchemix (500,000 shares at $0.50
`per share).
`
`As part of the proposed AFG loan agreement, AFG was to
`initially supply $1.5 million to Alchemix. A portion of that
`money, $560,000, was to be paid to Strategic in order to
`remove Strategic’s security interests in Alchemix property.
`Once collateral requirements were in order, AFG would sup-
`ply another $1.8 million, bringing its total investment in
`Alchemix to $3.3 million.
`
`C. Western Oil Sands
`
`However, the AFG-Alchemix transaction never took place
`because in the midst of those negotiations, Horton received
`welcome news for Alchemix. On June 17, 2002, a Canadian
`company, Western Oil Sands (“Western”), indicated its inter-
`est in a potentially larger investment in Alchemix than AFG
`was willing to offer. Western sent a “Memorandum of Under-
`standing” (“Western Memo”) to Horton. According to the
`Western Memo, Western was to make an initial investment of
`$3 million and had the option to continue investment if certain
`conditions were met. The potential investment was up to $36
`million.
`
`The next day, on June 18, 2002, Horton canceled the nego-
`tiations with AFG. He faxed a copy of the Western Memo to
`members of the Alchemix Board, including Weiss who
`received the document.
`
`Sometime after the Western proposal and the circulated
`Western Memo, Weiss asserts that Horton misrepresented the
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
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`533
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`nature of the Western investment. Weiss testified that he and
`Horton were “on the phone fairly often” and that “Bob Horton
`told me that they [Western] were investing $30 million and
`that the various concessions that I made were, from my per-
`sonal point of view, contingent on and related directly to that
`kind of investment.” Weiss also claims that he inquired as to
`whether there were “any adverse facts or circ*mstances” that
`would affect his decision and that Horton did not offer any
`comments.
`
`Because Weiss was busy with other matters, including
`travel outside the country, Arthur Hagopian, executive assis-
`tant to Weiss and a corporate officer of Strategic, handled the
`“day-to-day discussions with Alchemix’ and Horton’s repre-
`sentative.” Hagopian had one conversation with Horton
`regarding Weiss’s resignation from the Board, but all other
`discussions were with Richard Armstrong, Alchemix’s CFO.
`Horton stated that Armstrong would be the person “shifting
`the paper” on any such transaction.
`
`Hagopian describes his discussions with Armstrong as a
`“single transaction” that would involve the “replacement” of
`Strategic’s loan with an equity holding. Armstrong, however,
`testified in his deposition that he did not recall the transaction.
`Hagopian stated that Armstrong had opened discussions by
`claiming that a number of concessions were needed to “clear
`the way” for a “new investor.” The new concessions for the
`Western investment included the following: prepayment of
`the Note; relinquishment of Weiss’s Board seat; waiver of
`Strategic’s non-dilution rights; and waiver of Strategic’s right
`to make further loans to Alchemix. Hagopian stated that Arm-
`strong proposed that an equivalent investment in Alchemix
`stock would be provided at a discounted price in exchange for
`these concessions. Hagopian and Armstrong negotiated the
`price of the stock, ultimately arriving at a “discount” price of
`$1 per share. Armstrong told Hagopian that the 250,000
`shares would not originate from Alchemix but rather from
`Horton’s family’s holdings in Medici Associates.
`
`

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`534
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`
`In the midst of the Weiss and Horton negotiations, Western
`made its first $3 million investment in Alchemix, pursuant to
`the terms in the Western Memo.
`
`On June 27, 2002, Strategic accepted prepayment of the
`Note with interest and penalties totaling $560,531. In consid-
`eration of the prepayment, Strategic (1) waived the thirty day
`notice, (2) waived Strategic’s right to loan an additional
`$500,000 to Alchemix, and (3) modified the Warrant to allow
`capitalization of up to 45 million shares. Although the docu-
`ment accepting prepayment of the Note itself makes no refer-
`ence to the right to purchase Alchemix shares at $1 per share,
`Weiss produced a sheet with wiring instructions for the pay-
`ment that also includes the following statement: “Please do
`not transfer this payment until you send a note stating, ‘Strate-
`gic Diversity and/or Kenneth P. Weiss shall have the right to
`purchase up to 500,000 shares of Alchemix Corp. at $1 a
`share directly from Robert Horton.’ ” Hagopian also wrote to
`Armstrong that if there were issues with the arrangement, then
`the loan repayment should not be made because “the docu-
`ments were conceived and created as one package.”
`
`On July 2, 2002, Alchemix sent a check to Strategic in the
`amount of $560,832.00. Concurrent with the payment of the
`Note, Horton sent a letter to Weiss in which he agreed to sell
`“up to 390,000 shares of Alchemix common stock on or
`before July 10, 2002, that is owned by Medici or me for a
`sales price per share of $1.00.” The next week, on July 8,
`2002, Weiss sent a check to Medici in the amount of
`$250,000 to purchase 250,000 shares of Alchemix common
`stock. On July 11, 2002, Weiss, as part of the transaction, ten-
`dered his resignation as a member of the Alchemix Board.
`
`Horton views the facts differently. Although Horton and
`Armstrong both testified that they cannot recall the details of
`the transaction, they contend that it was two separate transac-
`tions: (1) the repayment of the Note to Strategic; and (2)
`Weiss’s subsequent purchase of stock from Medici. In Hor-
`
`

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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`
`535
`
`ton’s view, the repayment of the Note was made, and any sub-
`sequent offer of shares was strictly because Weiss was part of
`AFG negotiations, a point that Weiss disputes.
`
`By the end of July 2002, Western, pursuant to the Western
`Memo, had the option to invest another $5 million in
`Alchemix. However, it never did so. Due to a fire at its facili-
`ties, the company was “strapped for cash” and decided not to
`continue its investment in Alchemix. Horton testified that the
`news of Western forgoing its Alchemix investment was a
`“game changer.” He notified members of the Alchemix
`Board, but he did not notify Weiss.
`
`On August 5, 2002, Weiss released the security interests in
`certain Alchemix patents.
`
`Weiss contends that since he left the Alchemix Board, he
`had not received “any updates, legally required annual
`reports, or any communication regarding the status of
`Alchemix’ technology, finances and development.” It was
`only in December 2005 that Weiss learned for the first time
`that Western had never made an investment of $30 million
`and that the Alchemix Board had resigned.
`
`D. Glenn Litigation
`
`In the summer of 2002, Horton was an individual defendant
`in Glenn v. Horton, a securities fraud action in Maricopa
`County Superior Court. The litigation involved securities
`fraud in connection with another project of Horton’s called
`“Genesis Coals.” Weiss claims that Horton failed to inform
`him of this information and that this was material to his 2002
`decision to invest in Alchemix.
`
`E. District Court Proceedings
`
`Weiss filed his original complaint in federal district court
`on May 7, 2007, seeking rescission of the transaction. He
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`

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`536
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
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`amended his complaint on August 29, 2008, again seeking
`rescission and asserting causes of action for federal securities
`fraud (count 1), state securities fraud (count 2), common law
`fraud (count 3), and negligent misrepresentation (count 5). He
`also brought claims for mutual mistake (count 6), failure of a
`condition precedent (count 7), and unjust enrichment (count
`8).
`
`On January 5, 2010, the district court granted summary
`judgment to defendants on all claims. The court held that
`Weiss’s federal and state securities law claims were time
`barred. In the alternative, the court held that Weiss’s federal
`and state securities claims, common law fraud, and negligent
`misrepresentation claims failed for a lack of showing of dam-
`ages. The district court also granted summary judgment to the
`defendants on all remaining state law claims. The district
`court also awarded attorneys’ fees to Horton in the approxi-
`mate amount of $318,000. Weiss filed appeals on the sum-
`mary judgment ruling as well as the attorneys’ fee award.
`
`II. Jurisdiction
`
`We have jurisdiction pursuant to 28 U.S.C. § 1291 because
`this case arrives to us on a grant of motion for summary judg-
`ment.
`
`III. Standards of Review
`
`We review de novo the district court’s grant of summary
`judgment. Oak Harbor Freight Lines, Inc. v. Sears Roebuck
`& Co., 513 F.3d 949, 954 (9th Cir. 2008). “Viewing the evi-
`dence in the light most favorable to the nonmoving party, we
`must determine whether there are genuine issues of material
`fact and whether the district court correctly applied the rele-
`vant substantive law.” Id. We review de novo the district
`court’s dismissal on statute of limitations grounds. Johnson v.
`Lucent Techs. Inc., 653 F.3d 1000, 1005 (9th Cir. 2011).
`
`

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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`IV. Analysis
`
`537
`
`A. Limitations Period on Securities Claims
`
`[1] Federal securities fraud claims “may be brought not
`later than the earlier of (1) 2 years after the discovery of the
`facts constituting the violation; or (2) 5 years after such viola-
`tion.” 28 U.S.C. § 1658. With regard to the state claims, the
`relevant provision of Arizona law provides that “no civil
`action shall be brought . . . unless brought within two years
`after discovery of the fraudulent practice on which the liabil-
`ity is based, or after the discovery should have been made by
`the exercise of reasonable diligence.” Ariz. Rev. Stat. § 44-
`2004(B).
`
`[2] The transaction that forms the basis of the complaint
`occurred on July 8, 2002. Weiss claims that he did not actu-
`ally discover the facts underlying his cause of action until
`December 2005, when he spoke with Horton, who told him
`that the Alchemix Board had quit and that the sizable Western
`investment never materialized. With respect to the alleged
`omission regarding the Glenn litigation, Weiss claims that it
`was not until “years after” his tenure on the Alchemix Board
`that he learned that Horton was a defendant in a state fraud
`suit. Weiss filed his complaint on May 7, 2007. The parties
`agree that the suit was filed within the five-year limitation.
`However, they disagree as to whether Weiss should have
`known of the claims more than two years prior to filing his
`complaint. If the facts conclusively demonstrate that Weiss
`should have discovered the facts of his claim prior to May 7,
`2005, the claims are time-barred.
`
`[3] In Merck & Co., Inc. v. Reynolds, the Court held that
`“ ‘discovery’ as used in [28 U.S.C. § 1658] encompasses not
`only those facts the plaintiff actually knew, but also those
`facts a reasonably diligent plaintiff would have known.” 130
`S.Ct. 1784, 1796 (2010). However, the “ ‘discovery’ of facts
`that put a plaintiff on ‘inquiry notice’ does not automatically
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`538
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
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`begin the running of the limitations period.” Id. at 1798.
`“[T]erms such as ‘inquiry notice’ and ‘storm warnings’ may
`be useful to the extent that they identify a time when the facts
`would have prompted a reasonably diligent plaintiff to begin
`investigating.” Id. (emphasis added). The Court rejected
`Merck’s argument that the limitations period should run when
`the plaintiff fails to exercise diligence and undertake an inves-
`tigation once on inquiry notice. Id. at 1797-98. The Court held
`that the ultimate burden is on the defendant to demonstrate
`that a reasonably diligent plaintiff would have discovered the
`facts constituting the violation. See id. at 1799.
`
`Here, operating without the benefit of the Supreme Court’s
`ruling in Merck & Co., the district court found that the West-
`ern Memo put Weiss on “inquiry notice,” and it marked the
`time of the commencement of the statute of limitations at the
`time of inquiry notice, i.e., June 2002. Accordingly, the dis-
`trict court found Weiss’s federal and state securities claims
`time-barred.
`
`[4] However, under Merck & Co., Horton has not met his
`burden of showing that the claims are time barred. Even
`assuming that Weiss was on inquiry notice in 2002, Horton
`does not demonstrate how a reasonably diligent plaintiff from
`that point forward would have discovered the violations.
`“[T]he limitations period does not begin to run until the plain-
`tiff . . . discovers or a reasonably diligent plaintiff would have
`discovered ‘the facts constituting the violation,’ . . . irrespec-
`tive of whether the actual plaintiff undertook a reasonably dil-
`igent investigation.” Id. at 1798.
`
`[5] Because the district court did not have the benefit of
`recent Supreme Court authority, we vacate the ruling on these
`grounds and remand. See Betz v. Trainer Wortham & Co.,
`Inc., 610 F.3d 1169, 1171 (9th Cir. 2010) (noting the pru-
`dence of remand in light of recent Supreme Court authority).
`
`

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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`B. Federal Securities Fraud Claim
`
`539
`
`[6] To state a claim under § 10(b), a plaintiff must allege:
`(1) a material misrepresentation (or omission); (2) scienter;
`(3) a connection with the purchase or sale of a security; (4)
`reliance; (5) economic loss; and (6) loss causation. Dura
`Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005).
`
`[7] As a preliminary matter, we are not convinced that
`Horton’s omission concerning his involvement in the Glenn
`litigation was material to Weiss’s investment decision. “An
`omitted fact is material if there is a substantial likelihood that
`the disclosure of the omitted fact would have been viewed by
`the reasonable investor as having significantly altered the total
`mix of information made available.” S.E.C. v. Platforms
`Wireless Int’l Corp., 617 F.3d 1072, 1092 (9th Cir. 2010).
`The standard of materiality is an objective one. TSC Indus.,
`Inc. v. Northway, Inc., 426 U.S. 438, 445 (1976). An incom-
`plete statement is not sufficient if the misrepresentation is not
`significant. See Basic Inc. v. Levinson, 485 U.S. 224, 238
`(1988). Other than a conclusory allegation that Horton’s
`omission was material, there is no reason to conclude that this
`affected the “total mix” of information available or that any
`reasonable investor would consider this material. Horton was
`the civil defendant in another securities fraud case involving
`a completely different company. The company was in no way
`related to Alchemix (except by Horton’s association), and it
`was not connected to the instant transaction. To the extent that
`any federal securities claim relies on this omission, summary
`judgment was proper.
`
`The central issue here is whether the district court erred
`when it granted summary judgment on Weiss’s § 10(b) claim
`on the ground that he failed to produce evidence of damages.
`Weiss argues that he need not have shown economic loss
`because he sought rescission and not damages.
`
`[8] Contrary to Weiss’s argument, we are not convinced
`that a suit under section 10(b) obviates the need for proving
`
`

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`540
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`
`economic loss and loss causation. Under section 10(b), the
`Supreme Court has held that whether rescission or a rescis-
`sionary measure of damages is available is “an unsettled one.”
`Randall v. Loftsgaarden, 478 U.S. 647, 661 (1986). The statu-
`tory framework surrounding § 10(b)’s requirements is hard to
`square with Weiss’s argument that one seeking rescission
`need not demonstrate loss causation. See 15 U.S.C. § 78u-
`4(b)(4) (requiring loss causation); 15 U.S.C. § 78bb(a) (pro-
`hibiting a plaintiff ’s recovery “in excess of his actual dam-
`ages on account of the act complained of”); see also Ryan v.
`Foster & Marshall, Inc., 556 F.2d 460, 464 (9th Cir. 1977)
`(“Actual damages mean some form of economic loss.”). At a
`minimum, these statutory requirements demonstrate that a
`§ 10(b) plaintiff must present a showing of economic loss to
`warrant rescission. Even in Holdsworth v. Strong, the one
`case cited by Weiss on this point, the court held that it was
`“not engaging in the process merely to vindicate a principle”
`and that “the plaintiff must establish his injury” and “show
`that he is injured and aggrieved in order to move the court to
`grant rescission.” 545 F.2d 687, 697 (10th Cir. 1976). Thus,
`rescission does not alleviate the burden of producing evidence
`of economic loss.
`
`[9] Prior to addressing Weiss’s evidence of economic loss,
`we must determine whether rescission is warranted. Although
`rescission is a flexible remedy in equity, true rescission in this
`case is not entirely feasible. “Rescission reverses the fraudu-
`lent transaction and returns the parties to the position they
`occupied prior to the fraud.” Ambassador Hotel Co., Ltd. v.
`Wei-Chuan Inv., 189 F.3d 1017, 1031 (9th Cir. 1999). “Under
`true rescission, the plaintiff returns to the defendant the sub-
`ject of the transaction, plus any other benefit received under
`the contract, and the defendant returns to the plaintiff the con-
`sideration furnished plus interest.” Id. Although Weiss stands
`ready to tender the 250,000 shares of Alchemix for the con-
`sideration he offered ($250,000), the passage of time has ren-
`dered the complete restoration of the parties to the status quo
`ante difficult if not impossible. The Note has long since
`
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
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`541
`
`expired, coming due in July 2006. We doubt that Weiss’s
`demand for his seat on the Alchemix Board is even possible
`when there does not appear at present to be an existing board.
`In addition, true rescission would also involve the unfurling
`of security interests that are currently held as collateral on
`other debts. Thus, we conclude that true rescission is neither
`feasible nor practical.
`
`[10] Yet even though true rescission is not warranted, the
`district court had the discretion to consider an approach under
`a rescissionary measure of damages. “If true rescission is no
`longer possible . . . , the court may order its monetary equiva-
`lent.” Id. It is within the discretion of a district judge in “ap-
`propriate circ*mstances” to apply a rescissionary measure of
`damages. Blackie v. Barrack, 524 F.2d 891, 909 (9th Cir.
`1975). “This remedy entitles the plaintiff to the return of the
`consideration paid less any value received on the investment.”
`Ambassador Hotel Co., 189 F.3d at 1031. “There are two
`standard measures of damages in securities law.” Jordan v.
`Duff & Phelps Inc., 815 F.2d 429, 441 (7th Cir. 1987) (citing
`Randall, and Affiliated Ute Citizens v. United States, 406 U.S.
`128, 154-55 (1972)). The generally employed “out-of-pocket”
`or “market” measure is the difference between the fair value
`of what was received and the fair value of what one would
`have received had there been no fraudulent conduct. Affiliated
`Ute Citizens, 406 U.S. at 155. By contrast, rescissionary dam-
`ages are to be measured so as to result in the substantial
`equivalent of rescission. Loftsgaarden, 478 U.S. at 656. One
`court effectively distinguished the two measures of damages
`in the following manner:
`
`When comparing out-of-pocket and rescissory dam-
`ages, the fundamental distinctions are these: (1) out-
`of-pocket damages accept the transaction as com-
`pleted, whereas rescissory damages attempt to undo
`it; and (2) out-of-pocket damages are measured by
`reference to the value of the property on the date of
`the transaction, while rescissory damages, in order
`
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`542
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`
`to approximate the undoing of the transaction, take
`account of the value of the property, and any income
`produced by it, after the date of the transaction.
`
`Standard Chtd. PLC v. Price Waterhouse, 190 Ariz. 6, 35 (Ct.
`App. 1996) (emphasis in original); see also Jordan, 815 F.2d
`at 442 (noting the rescissionary measure “often value[s] the
`transaction as it turned out”). For the victim of fraudulent
`inducement, the economic loss in a rescissionary approach
`exists in the present retention of a depressed investment
`minus any benefits received in the retention of the investment,
`e.g., dividends, rents, profits. Here, the district court did not
`consider whether the rescissionary measure of damages was
`appropriate. Applying an out-of-pocket measure, it found no
`evidence of damages and rejected Weiss’s claim.
`
`The specific question with respect to rescissionary damages
`will be what monetary equivalent is necessary to return Weiss
`to the status quo ante. Unlike true rescission, Weiss need not
`tender his shares; however, any rescissionary damage award
`should be offset by the value of the stock as well as any other
`benefits incurred after the transaction.1 Also, to place Weiss
`in the true status quo ante, Weiss’s damage award should be
`offset by the received benefit of the interest and prepayment
`penalty paid by Alchemix.
`
`In addition, we note that Weiss’s rescissionary approach
`does not relieve him of demonstrating loss causation. See 15
`U.S.C. § 78bb (limiting recovery to damages “on account of
`the act complained of”). The misrepresentation here is that
`Horton claimed that a decision to invest $36 million had been
`
`1We decline to assess the value of the stock at present. If necessary, the
`value should be assessed on the date of judgment. See Nelson v. Serwold,
`576 F.2d 1332, 1339 (9th Cir. 1978) (“To adhere to the model of rescis-
`sion the monetary equivalent should be determined as of the date the pur-
`chaser was under a present duty to return the stock, viz. the day of
`judgment.” (quoting Green v. Occidental Petroleum Corp., 541 F.2d 1335,
`1342 (9th Cir. 1976) (Sneed, J., concurring))).
`
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`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`
`543
`
`made. To establish causation, Weiss must demonstrate that
`had he known of the truth, Weiss would not have taken the
`action he did i.e., relinquishing the Note to purchase
`Alchemix stock. This is a question of fact. The finder of fact
`will determine whether Weiss would have acted or not. Weiss
`faces challenges in light of the evidence that he stood ready
`to make the same concessions and purchase the same if not
`more Alchemix stock on the basis of an AFG investment of
`only $3 million. On the other hand, Horton testified that the
`loss of the substantial investment from Western was a “game
`changer,” suggesting that a reasonable person might have
`behaved differently had he known that only a $3 million
`investment was being made. In any event, Weiss must carry
`his burden on causation.
`
`[11] Thus, we remand for consideration of the claim under
`a rescissionary measure of damages and loss causation.
`
`C. State Securities Fraud
`
`As in his federal securities claim, Weiss argues that the dis-
`trict court erred in dismissing his securities fraud claim under
`Ariz. Rev. Stat. § 44-1991 because Arizona securities law
`does not require a showing of damages in a rescission suit.
`Unlike federal law, rescission under Arizona securities law
`does not require the existence of damages.
`
`[12] Under section 44-1991(A)(2) of the Arizona Revised
`Statutes, a plaintiff need not demonstrate the existence of
`damages. See Aaron v. Fromkin, 196 Ariz. 224, 228 (Ct. App.
`2000). “[E]stablishing statutory securities fraud requires only
`that a misrepresentation of material fact was made in the sale
`of securities.” Id. (citing State v. Superior Court of Maricopa
`Cnty., 123 Ariz. 324, 331 (1979)). Thus, because the district
`court erroneously dismissed Weiss’s securities fraud claim for
`lack of damages, we remand this claim to the district court.2
`
`2With respect to loss causation in a suit for rescissionary damages, Ari-
`zona law directs the court to consider “equitable considerations” to deter-
`
`

`
`544
`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`D. Common Law Fraud & Negligent Misrepresentation
`
`Weiss claims that the district court also erred in granting
`summary judgment on his common law fraud claim for lack
`of damages. Citing Lehnhardt v. City of Phoenix, 105 Ariz.
`142, 144 (1969), Weiss argues that his claims for common
`law fraud and negligent misrepresentation do not require a
`showing of damages. We disagree and thus affirm the district
`court’s ruling.
`
`[13] Weiss reads Lehnhardt too broadly. Lehnhardt dealt
`with innocent misrepresentation, not fraud. It held that “a
`transaction induced by the material though innocent misrepre-
`sentation of a party is voidable against that party.” Id. In other
`words, one may seek to rescind on the basis of an innocent
`misrepresentation, and proof of all the “nine elements of
`actionable fraud” is not essential.3 Assuming arguendo that
`Weiss’s claim was for innocent misrepresentation, it does not
`necessarily follow that damages are not required. As other
`courts have recognized, the element required in a common
`law fraud action that is not required in an innocent misrepre-
`sentation claim is the speaker’s knowledge of the falsity. See,
`e.g., Lundy v. Airtouch Communs., Inc., 81 F. Supp. 2d 962,
`968 (D. Ariz. 1999). In contrast, “if the party seeking [rescis-
`sion] asserts only fraudulent misrepresentation . . . then proof
`of all nine of the elements of actionable fraud appears to be
`required . . . .” Id. Given that common law fraud pertains to
`
`mine whether loss causation is required. See Grand v. Nacchio, 214 Ariz.
`9, 28 (Ct. App. 2006). We leave that determination to the district court on
`remand.
`3The elements of common law fraud under Arizona law are: “(1) A rep-
`resentation; (2) its falsity; (3) its materiality; (4) the speaker’s knowledge
`of its falsity or ignorance of its truth; (5) his intent that it should be acted
`upon by the person and in the manner reasonably contemplated; (6) the
`hearer’s ignorance of its falsity; (7) his reliance on its truth; (8) his right
`to rely thereon; (9) his consequent and proximate injury.” Staheli v. Kauff-
`man, 122 Ariz. 380, 383 (1979) (internal quotations omitted).
`
`

`
`STRATEGIC DIVERSITY v. ALCHEMIX CORP.
`
`545
`
`fraudulent conduct, we conclude that damages are a required
`element of the claim.
`
`In addition, Weiss claims that the district court erred in dis-
`missing his negligent misrepresentation claim for a lack of
`damages. His argument is without merit. “[A] cause of action
`for negligent misrepresentation includes damage as an ele-
`ment.” Fromkin, 196 Ariz. at 229.
`
`[14] Not only do the above claims require a showing of
`damages, Arizona law requires an out-of-pocket, not rescis-
`sionary, measure of damages with respect to these claims. See
`Standard Chartered PLC, 190 Ariz. at 35 (trial court did not
`err in granting partial summary judgment limiting damages to
`an out-of-pocket measure). As Weiss failed to present evi-
`dence of out-of-pocket damages, summary judgment on these
`claims was proper.
`
`E. Mutual Mistake
`
`Under Arizona law, “[m]utual mistake of fact is an
`a