Levine v. Diamanthuset, Inc.

TANG, Circuit Judge: Lewis Levine and others (“Levine”) brought a class action for purported violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities Exchange Commission Rule lob-5, 17 C.F.R. § 240.10b-5 (collectively “Rule 10b-5”), as well as other federal and state laws. The complaint named the following defendants: Diamanthuset, a corporation to which we will refer by its more recent name, “Investía”; various individuals associated with Investía; the Wilmington Trust Company (“Wilmington”) and the Bank of Delaware, both Delaware corporations; and Security Pacific National Bank (“Security Pacific”), a California corporation. The two Delaware corporations and Security Pacific eventually moved to dismiss the claims against them for failure to state a cause of action. The district court granted the motion, 722 F.Supp. 579 (N.D.Cal.1989), and subsequently entered judgment as to these defendants pursuant to Fed.R.Civ.P. 54(b). Having settled with the Bank of Delaware, Levine now appeals the dismissal of the Rule 10b-5 claims against Wilmington and Security Pacific. We reverse and remand for further proceedings. I Levine alleged the following: Beginning in June 1979, Investía marketed to the public a guaranteed return on an investment in diamonds. Investía offered a contract linking a purchase by the investor of diamonds represented to have a certain value with an undertaking on the part of Investía to obtain for the investor a subsequent buyer who would pay a higher price for the diamonds. Investía designed its representations to deceive investors into believing that their principal investment was secured by diamonds with a fair market value equivalent to what was paid by the investor. Investia’s sales pitch also led prospective investors to believe that an independent third party would serve as a depository for the investor, acknowledging the receipt of diamonds having the value indicated and certifying the value to the investor. Furthermore, Investía stated that it would advance the amount of guaranteed appreciation in the diamonds’ value to an account with an independent bank where it would be held in trust for the investor. The diamonds sold by Investía were small diamonds, known in the jewelry trade as melee, with a weight of seven to fourteen percent of one carat. Investía highly overvalued the diamonds by regularly reporting to investors that the diamonds’ value had appreciated after the purchase, when in fact no appreciation had occurred. Investía persuaded investors to have the diamonds they purchased shipped to a depository in Delaware. Wilmington began service as a depository for Investía in December 1984. After an investor had purchased diamonds from Investía they were packed in a “cassette” that was then sealed and shipped to Wilmington, which would acknowledge receipt of a cassette in the following terms: Dear_: Investía has recently deposited the cassettes listed on the attached sheet having the indicated insured value with our precious metals depository, subject to its order. — 1481 — Investía has indicated these cassettes were acquired on your behalf and has requested we send you this advice. These letters were signed by a banking officer in the precious metals division of Wilmington and, pursuant to agreement with Investía, mailed directly to the investors. Wilmington’s involvement was a material factor in the investment decision of virtually all class members. Indeed, Levine claims the trust company’s participation “was crucial to Defendants’ plan to deceive investors regarding the value of the diamonds.” Complaint at 24-25. Wilmington’s acknowledgments stating the insured value of the diamonds constituted a representation that the diamonds had the value stated and were insured for that value. The trust company failed to indicate that it had made no independent evaluation of the diamonds, and omitted other material facts bearing on its responsibility for the diamonds, such as the nature of the indicated insurance.1 Wilmington’s actions facilitated the fraudulent sale of securities by Investía in part because potential purchasers would check with current investors, whose names were provided by Investía. Current investors would confirm the representations of the trust company, including the issuance of the acknowledgments. Wilmington also served as a reference for Investía by appearing in Investia’s written promotional materials and by responding to the telephone inquiries of potential investors. The effect was to deceive potential investors into believing that Wilmington had certified the value of the diamonds contained in the cassettes and was otherwise acting as trustee for the benefit of the investors. Furthermore, the deceptive nature of Investia’s scheme was evident to Wilmington, in part because of the ever-increasing value of the diamonds. Wilmington had an independent interest in examining these values because its storage fee was based on a percentage of the diamond’s value as declared by Investía.2 Security Pacific’s involvement in the Investía scheme was somewhat different. As part of its offering, Investía represented to investors that a Reserve Account would be created in an amount equal to twenty-five percent of each investment. This fund would be available to the investors in the event that Investía was unable to effect liquidation of their respective accounts. In promotional literature, Investía stated: “We totally secure your return through funds deposited in a bank trust account. So your profits are protected.” Complaint at 26. Each client’s Reserve Account was part of an account opened by Investía with Security Pacific. The sole signatory on the account was Investía, and Investía alone was responsible for determining the amount of any client’s reserve. In its deposit agreement with Investía, Security Pacific assumed no trust responsibilities. The contract provided that Security Pacific would distribute principal and income as directed by Investía. Once an investor bought into the scheme, Investía would issue a “Client Reserve Certificate.” This certificate misrepresented Investia’s deposit agreement with Security Pacific by indicating that the funds in the client’s Reserve Account, exclusive of interest and appreciation, would be distributed to the client in the event of Investia’s insolvency. The implications of the Client Reserve Certificate were that the funds in the — 1482 — Reserve Account were being held by Security Pacific as trustee with an obligation to the investors upon the occurrence of specified events. The Reserve Account and the Client Reserve Certificates were designed to deceive investors into believing that the appreciation guaranteed to them by Inves-tía had been paid to Security Pacific to be held in trust. Various individuals who were considering investing contacted officers of Security Pacific to verify the status of the Reserve Account and confirm the role of Security Pacific as provided in Investia’s promotional materials. Officers of Security Pacific assented to or made no objection to the portrayal of Security Pacific’s role contained in the promotional materials. Furthermore, Security Pacific continued its participation even after newspaper articles, in which bank officials were interviewed concerning Investía, disclosed inconsistencies between the representations made in the Client Reserve Certificate and the actual terms of Investia’s deposit agreement with Security Pacific. Upon Investia’s demise, these inconsistencies became evident when investors failed to receive disbursements from the Reserve Account. According to Levine, Security Pacific was “a necessary and substantial participant in the Investía Scheme, with a pervasive presence in the offering.” Complaint at 35. It served as a reference for Investía prior to sale. It permitted the defendants to issue a prospectus which was materially misleading in relation to the relative rights of Security Pacific, Investía, and the investor. The bank also provided financing and other banking services to Investía and its officers and lent credibility to Investia’s sales offers. Based on the foregoing allegations, Levine charges that Wilmington and Security Pacific were both principals and aiders and abettors of Investia’s securities fraud. II In dismissing the Rule 10b-5 claims against Wilmington and Security Pacific, the district court held that neither Wilmington’s “written confirmation” nor the Client Reserve Certificate referring to Investia’s Reserve Account at Security Pacific were securities. 722 F.Supp. at 584-85. The district court also suggested as an alternative ground for dismissal Levine’s inability to show that Wilmington’s and Security Pacific’s alleged wrongdoing was “in connection with a purchase or sale of a security.” Id. at 584. The court, however, did not elaborate on this alternative basis for its ruling, except to say that Security Pacific’s “titular inclusion in [the] Client Reserve Certificate^] [issued by Investía] does not establish that the Bank engaged in the purchase or sale of securities.” Id. at 585. Nevertheless, on appeal the parties argue the absence of a “connection” between Investia’s scheme and the activities of Wilmington and Security Pacific as an alternative ground on which to affirm the district court. See Smith v. Block, 784 F.2d 993, 996 n. 4 (9th Cir.1986) (permitting affirmance of district court on any basis supported in the record). The parties also contest a point not discussed by the district court: whether Levine’s allegations are sufficient to make out a claim for aiding and abetting violations of Rule 10b-5. Ill Dismissal for failure to state a claim is reviewed de novo. Guillory v. County of Orange, 731 F.2d 1379, 1381 (9th Cir.1984). Review is limited, however, to the contents of the complaint. North Star Int’l v. Arizona Corp. Comm’n, 720 F.2d 578, 581 (9th Cir.1983). All factual allegations are to be taken as true and construed in the light most favorable to the non-moving party. Id. at 580. Dismissal of an action pursuant to Fed.R.Civ.P. 12(b)(6) is proper only where it “appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957) (footnote omitted). Under section 10(b) of the Securities Exchange Act of 1934 it is unlawful “[t]o use or employ, in connection with the pur — 1483 — chase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate.” 15 U.S.C. § 78j. The Commission’s Rule 10b-5 makes it unlawful (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5. The existence and involvement of a “security” is a necessary prerequisite to a Rule 10b-5 violation. The district court concluded that neither Wilmington nor Security Pacific could be held liable for federal securities law violations in part because neither the acknowledgments issued by Wilmington nor the Reserve Certificates referring to Investia’s bank account with Security Pacific constitutes a security within the meaning of federal law. We need not review these decisions because Levine does not challenge them on appeal. Rather, Levine contends he has alleged primary and secondary Rule 10b-5 violations against Wilmington and Security Pacific based on Investia’s issuance of securities in the form of an offer of diamonds coupled with the promise to find a future buyer. For purposes of this appeal, we will assume to be true Levine’s allegation that Investia’s offer constituted a security within the meaning of federal securities law. We are thus presented with the following questions: First, can either Wilmington or Security Pacific be found liable for aiding and abetting violations of Rule 10b-5? Second, did the alleged involvement of Wilmington or Security Pacific with Investia’s diamond offer occur “in connection with the purchase or sale of any security” such that Levine has stated claims for primary violations of Rule 10b-5? A. Aiding and Abetting Liability To state a claim of aiding and abetting securities fraud, one must plead (1) the existence of an independent primary wrong, (2) actual knowledge or reckless disregard by the alleged aider and abettor of the wrong and of his or her role in furthering it, and (3) substantial assistance in the wrong. Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646, 652 (9th Cir.1988) (per curiam) (setting forth three elements), cert. denied, 493 U.S. 1002, 110 S.Ct. 561, 107 L.Ed.2d 556 (1989); DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 188-89 (9th Cir.1987) (including reckless conduct as a basis for aiding and abetting liability under Rule ¡10b — 5); SEC v. Seaboard Corp., 677 F.2d 1301, 1312 (9th Cir.1982) (same). The parties do not contest the sufficiency of the allegations concerning Investia’s primary violations of Rule 10b-5, nor do we have cause to question the pleadings in this regard. Instead, the dispute centers on the sufficiency of the allegations regarding the second and third elements of aiding and abetting liability. 1. Wilmington as Aider and Abettor Regarding Wilmington’s knowledge or recklessness, Levine charges that Investia’s fraud must have been “readily apparent” to Wilmington by virtue of the fact that Wilmington’s confirmations “reflected ever increasing values arbitrarily attributed by INVESTIA to the diamonds.” Complaint at 25. When viewed in light of Levine’s allegations that Wilmington's compensation was based on the value of the diamonds declared by Investía, and that Investía contracted with Wilmington to have the latter disclose the “ever increasing values” to third parties, we conclude there are facts that Levine might prove to show, at least, Wilmington’s reckless disregard of Investia’s Rule 10b-5 violations, and Wilmington’s involvement therein. Cf. First Trust & Sav. Bank v. Fidelity-Philladelphia Trust Co., 214 F.2d 320, 322, 326 (3d Cir.) (emphasizing, in case holding that — 1484 — trust company did not warrant the genuineness of documents left with it for safekeeping, that the trust company’s nominal service charge for the bailment was “barely sufficient to cover its expenses in connection therewith”), cert. denied, 348 U.S. 856, 75 S.Ct. 81, 99 L.Ed. 674 (1954). Under the circumstances, it may well have been reckless — that is, highly unreasonable and constituting an extreme departure from standards of ordinary care — for Wilmington not to look a gift horse in the mouth when the reputation of the company’s business was at stake. See Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569-70 (9th Cir.1990) (en banc) (defining recklessness for purposes of Rule 10b-5), cert. denied, — U.S. -, 111 S.Ct. 1621, 113 L.Ed.2d 719 (1991).3 As to the third element of an aiding and abetting claim, Levine has alleged that Wilmington rendered substantial assistance to Investia's violations of Rule 10b-5. This contention is supported by allegations that Wilmington allowed its name to be used by Investía in its promotional materials, that the trust company accepted telephone inquiries regarding Investía, and especially that Wilmington issued confirmations to investors which deceptively repeated the value of the diamonds originally attributed to them by Investía. This last contention is particularly important to pleading a secondary violation of Rule 10b-5, not necessarily because the alleged assistance aided Inves-tía in retaining investors, but because prospective investors are alleged to have relied on the description of Investia’s offering rendered by participating investors. A prominent portion of those descriptions recounted the involvement of Wilmington in the Investía scheme, including the issuance of the confirmations. On the whole, we conclude that Levine has sufficiently alleged an aiding and abetting violation of Rule 10b-5 against Wilmington. Cf. Roberts, 857 F.2d at 653 (indicating that accountant’s knowledge of alleged Rule 10b-5 violation coupled with accountant’s permission for primary violator to use accountant’s name in offering memoranda stated cause of action for secondary liability under Rule 10b-5).4 2. Security Pacific as Aider and Abettor Levine alleges that Security Pacific, “with knowledge such representations were false,” permitted Investía to issue promotional materials and Client Reserve Certificates “which were materially misleading in relation to the relative rights of SECURITY PACIFIC, INVESTIA and the investor, under circumstances designed to lead the investor to believe that SECURITY PACIFIC was acting as a trustee for the investor’s benefit.” Complaint at 35-36. — 1485 — In support of this contention, Levine also alleges that Security Pacific and Investía considered amending their deposit agreement to conform it to representations made in the Reserve Certificates. Levine further contends that a newspaper article based on interviews with Security Pacific officers informed the bank of discrepancies between the two documents. Yet, despite this knowledge, Security Pacific permitted Investía to associate the bank’s name with misrepresentations of the Reserve Account. The bank provided further assistance in aid of Investia’s Rule 10b-5 violations by sending an officer to attend Investía seminars, by coordinating with Investía the handling of investor inquiries, and by representing to prospective investors that it knew of no reason not to participate in the Investía scheme although it was aware of misrepresentations of material fact. From the foregoing, it is abundantly clear that Levine has stated a cause of action against Security Pacific. Specifically, it appears to us that Levine could prove facts indicating Security Pacific’s reckless disregard, if not actual knowledge, of both Investia’s Rule 10b-5 violations and the bank’s role in the violations, together with the provision of substantial assistance by the bank in the violations. Cf. Roberts, 857 F.2d at 653.5 The allegations in the present case are thus distinguishable from the facts in Schneberger v. Wheeler, 859 F.2d 1477 (11th Cir.1988), cert. denied, 490 U.S. 1091, 109 S.Ct. 2433, 104 L.Ed.2d 989 (1989), wherein the Eleventh Circuit concluded plaintiffs had failed to establish liability against a bank for aiding and abetting Rule 10b-5 violations. Id. at 1480-81. Unlike the case at bar, the bank in Schneberger had no contact with prospective investors, id. at 1479, and was unaware of any misrepresentations or omissions made by its client to investors. See id. at 1480-81. The bank only knew that its client’s financial condition was weak, and that loans made by the bank to its client would make investments in the client more attractive. Id. On these facts, the court concluded that the bank lacked any knowledge of fraud. Id. at 1481. Levine’s allegations, however, cast Security Pacific in a much more active role within Investia’s scheme. B. Primary Liability Three elements must be pleaded and proved in 10b-5 actions: “ ‘(1) conduct by the defendants proscribed by the rule; (2) a purchase or sale of securities “in connection with” such proscribed conduct; and (3) resultant damages to the plaintiffs.’ ” Woodward v. Metro Bank, 522 F.2d 84, 93 (5th Cir.1975) (quoting Sargent v. Genesco, Inc., 492 F.2d 750, 759 (5th Cir.1974)); see also SEC v. Rogers, 790 F.2d 1450, 1458 (9th Cir.1986).6 The “in connection with” language contained in section 10b and rule 10b-5 requires something more than any fraud tangentially related to a securities transaction. To show a Rule 10b-5 violation, a private plaintiff must prove a “causal connection between a defendant’s misrepresentation and [the] plaintiff’s injury.” Basic, Inc. v. Levinson, 485 U.S. 224, 243, 108 S.Ct. 978, 979, 99 L.Ed.2d 194 (1988); accord Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646, 650 (9th Cir.1988) (per — 1486 — curiam), cert. denied, 493 U.S. 1002, 110 S.Ct. 561, 107 L.Ed.2d 556 (1989); see also SEC v. Clark, 915 F.2d 439, 449 (9th Cir.1990).7 The private plaintiff must also prove a proximate relationship between the plaintiff’s injury and the purchase or sale of a security. See Roberts, 857 F.2d at 650. Furthermore, a plaintiff must establish a connection between the defendant's alleged misrepresentation and the security at issue. See Jett v. Sunderman, 840 F.2d 1487, 1494 (9th Cir.1988); Elias v. Arthur Andersen & Co. (In re Fin. Corp. of Am. Shareholder Litig.), 796 F.2d 1126, 1130 (9th Cir.1986) (“In re FCA ”). The three parts of the “in connection with” requirement thus represent three lines with which one might form a triangle. Only if each of the three lines are of sufficient length to bridge the distances between three points — identified by (A) a defendant’s material misrepresentation or omission, (B) a plaintiff’s injury, and (C) a security — will a Rule 10b-5 cause of action be pleaded and proved. Cf. id. at 1130 n. 4 (noting Third Circuit’s four factor test for assessing “in connection with” requirement). 1. From Point A to Point B: Connecting Defendants’ Misrepresentations to Plaintiffs’ Injuries Regarding the first leg of the triangle, Levine’s allegations are sufficient to survive a motion to dismiss. a. Wilmington Levine has pleaded that Wilmington’s acknowledgments contained material misrepresentations and omissions that perpetuated Investia’s fraud. For example, Levine alleges that investors regarded Wilmington’s representations of the diamonds’ insured value as accurate indications of the diamonds’ actual worth. In turn, investor confidence inspired by such representations is alleged to have played a material role in attracting new investors. Even apart from the additional allegations concerning Wilmington's acceptance of telephone inquiries and its appearance in promotional material, we find the allegations sufficient to show transaction causation.8 Furthermore, in — 1487 — view of Wilmington’s prominent reputation, the trust company’s working relationship with Investía, and Investia’s encouragement of prospective investors to contact those who had already invested, the damages allegedly suffered by Levine were at least “a reasonably foreseeable result of the misleading statement” so as to demonstrate loss causation. Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir.1985) (quotations omitted). b. Security Pacific Levine has alleged that, while Security Pacific was aware of material discrepancies between the Reserve Certificates and the deposit agreement, the bank nevertheless responded to the inquiries of prospective investors by stating that it knew of no reason not to participate in the Investía program. These statements were made as part of Security Pacific’s allegedly prominent role in the Investía scheme. We therefore have little doubt that Levine’s allegations demonstrate transaction causation. Additionally, the failure of the Reserve Account to perform its represented function upon Investia’s demise evidences loss causation. 2. From Point B to Point C: Connecting Plaintiffs’ Injuries to a Security Regarding the second leg of the “in connection with” requirement, we note initially that this case involves plaintiffs who actually bought into Investia’s scheme. Cf. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-31, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) (holding that Rule 10b-5 plaintiffs must be actual purchasers or sellers of securities). In addition to the requirement of an actual purchase or sale (or contract therefor), we have also said that conduct actionable under Rule 10b-5 must occur before investors purchase the securities, if—as here—they allege the fraud induced them to make the purchase. See Roberts, 857 F.2d at 651; see also Lewelling v. First Cal. Co., 564 F.2d 1277, 1279-80 (9th Cir.1977); Williams v. Sinclair, 529 F.2d 1383, 1389 (9th Cir.1975), cert. denied, 426 U.S. 936, 96 S.Ct. 2651, 49 L.Ed.2d 388 (1976). Thus, to the extent Wilmington’s and Security Pacific’s liability under Rule 10b-5 is premised on the confirmations and the Reserve Certificates, respectively, early investors will not be able to recover because Levine’s allegations indicate these documents were not issued until after the purchase of Investia’s securities.9 Only after Investía began referring prospective investors to those who had already chosen to participate could liability for misrepresentations and omissions in these documents arise. Nevertheless, under the circumstances present here, this is enough to avoid dismissal for failure to state a claim. We will inquire further, however, to determine whether there are pre-purchase misrepresentations or omissions for which the entire class of Investía investors could recover. a. Wilmington In addition to the trust company’s confirmations, Levine alleges that Wilmington accepted telephone inquiries regarding the Investía scheme. Although Levine does not detail the nature of these inquiries or Wilmington’s response, we believe he may yet plead and prove facts in regard to these inquiries on which recovery may be had. Levine also alleges that Wilmington permitted Investía to use its name and a photograph of the trust company’s facility in Investía promotional materials, and that Investía told prospective investors that Wilmington would issue confirmations after investments were made. Because none of these statements appear to involve material misrepresentations or omissions, they are better addressed in the context of aiding and abetting liability. — 1488 — b. Security Pacific Levine’s allegations concerning misrepresentations and omissions made by Security Pacific extend beyond the four corners of the Reserve Certificates. One of the most egregious allegations concerns Security Pacific’s responses to telephone inquiries by prospective investors. Levine contends that, pursuant to arrangements with Inves-tía, and with awareness of material inconsistencies between the Reserve Certificate and the deposit agreement, Security Pacific told prospective investors that the bank knew of no reason not to buy into the Investía program. Other allegations of pre-purchase misrepresentations and omissions by Security Pacific may also suffice as bases on which to premise primary Rule 10b-5 liability.10 On the whole, Security Pacific did not simply act after the securities were purchased, but before purchase as well. The bank’s conduct is therefore actionable under Rule 10b-5. 3. From Point C back to Point A: Connecting a Security to Defendants' Misrepresentations The third leg of the “in connection with” requirement tests whether a defendant’s alleged misrepresentations are sufficiently proximate to the purchase or sale of the security in question. This circuit’s leading cases are discussed in Jett v. Sunderman, 840 F.2d 1487 (9th Cir.1988), where we observed that, while a broker’s misrepresentations about the risks involved in purchasing securities through a margin account were made “in connection with” the sale of securities^] ... an auditor’s advice concerning [a plaintiff’s] accounting treatment of certain securities which were subsequently purchased by the plaintiff was not given “in connection with” the purchase of the securities. Id. at 1494 (discussing Arrington v. Merrill Lynch, Pierce, Fenner & Smith, 651 F.2d 615 (9th Cir.1981) (margin account), and In re FCA, 796 F.2d 1126 (9th Cir.1986) (accounting treatment)). In the present case, Wilmington’s confirmation and Security Pacific’s Reserve Certificate were both integral components of the investment product marketed by Inves-tía. This fact stands in stark contrast to the accounting advice offered in In re FCA, which had “nothing to do with the intrinsic nature” of the securities at issue in that case. 796 F.2d at 1130. Thus we believe Levine has pleaded sufficient proximity between defendants’ alleged misrepresentations and Investia’s securities. 4. Conclusion Taking Levine’s allegations as true, he has alleged both transactional causation and loss causation, as well as sufficient connections between the alleged damages and the purchase or sale of a security, and between the security at issue and the defendants’ alleged misrepresentations. The triangle is complete.11 The complaint is sufficiently pleaded as to the “in connection with” requirement for primary liability under Rule 10b-5. IV Whether Levine will prevail on his causes of action, or whether he can survive a motion for summary judgment, are questions to be determined by the district court. In light of the content of the complaint, however, the district court prematurely dismissed the action. Accordingly, the judgment is reversed, and the case remanded — 1489 — for further proceedings not inconsistent with this opinion. REVERSED and REMANDED. Footnotes [1] Wilmington indicates on appeal that the diamonds could he insured for no more than their actual value. Appellee Wilmington Trust Company’s Brief at 27-28. Yet, according to Levine, the confirmations issued by the trust company indicated inflated “insured” values. [2] Levine premises Wilmington’s Rule 10b-5 liability in part on the trust company’s failure to disclose to investors the basis on which Investía compensated the trust company for its services. Wilmington responds that investors were informed of the means by which Wilmington was compensated. Wilmington’s response, however, is based on evidence not in the record. Because Levine makes a plausible argument that the evidence does not support the trust company’s position, Appellants’ Reply at 18 n. 9, we decline Wilmington’s invitation to supplement the record on appeal. See Karmun v. Commissioner, 749 F.2d 567, 570 (9th Cir.1984), cert. denied, 474 U.S. 819, 106 S.Ct. 66, 88 L.Ed.2d 53 (1985). [3] Wilmington argues it could not have discovered the fraud because it was legally obligated to leave the diamond cassettes intact. However, this argument does not address the allegation that Wilmington, with knowledge of the ever-increasing values attributed to the diamonds by Investía, still decided to issue confirmations that might be misunderstood by investors. [4] The district court did not consider Wilmington’s duty to disclose; we do not discuss the issue because Wilmington’s aiding and abetting liability is premised in part not on silence, but on actual misrepresentations. Cf. Roberts, 857 F.2d at 652-53 (discussing prerequisites for aiding and abetting liability based on silence and inaction of alleged aider and abettor); Woodward v. Metro Bank, 522 F.2d 84, 96-97 (5th Cir.1975) (same). Unless Levine proves Wilmington had actual knowledge of Investia’s Rule 10b-5 violations, it may be necessary to revisit the question of Wilmington’s duty to disclose if aiding and abetting liability is ultimately to be premised only on the appearance of Wilmington’s name in Investia’s promotional materials. See Roberts, 857 F.2d at 653 (discussing alleged aider and abettor’s duty when liability premised only on “the use of its name in offering memoranda”); Woodward, 522 F.2d at 97 (“When it is impossible to find any duty of disclosure, an alleged aider-abettor should be found liable only if scienter of the high ‘conscious intent’ variety can be proved. Where some special duty of disclosure exists, then liability should be possible with a lesser degree of scienter.’’) (footnote omitted); see also Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1045 n. 7 (11th Cir.1986), cert. denied, 480 U.S. 946, 107 S.Ct. 1604, 94 L.Ed.2d 790 (1987). But see Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 799 (3d Cir.) (indicating knowledge requirement less strictly applied when aider and abettor derived benefits from the wrongdoing), cert. denied, 439 U.S. 930, 99 S.Ct. 318, 58 L.Ed.2d 323 (1978). [5] The district court also did not consider Security Pacific’s duty to disclose. We do not discuss the issue because, as with Wilmington, Security Pacific’s aiding and abetting liability is premised in part not on silence, but on actual misrepresentations. Cf. Roberts, 857 F.2d at 652-53. We note, in any event, that Levine’s allegations of Security Pacific’s actual knowledge of Investia’s Rule 10b-5 violations sufficiently state a duty to disclose in the context of aiding and abetting liability. See id. [6] While a defendant’s duty to disclose is frequently discussed as an element in Rule 10b-5 cases, we find no need to do so here because the district court did not reach that issue, and because Levine’s allegations tire premised in part on active misrepresentations rather than on silence. Cf. Chiarella v. United States, 445 U.S. 222, 227-28, 100 S.Ct. 1108, 1114, 63 L.Ed.2d 348 (1980) ("At common law, misrepresentation made for the purpose of inducing reliance upon the false statement is fraudulent. But one who fails to disclose material information prior to the consummation of a transaction commits fraud only when he is under a duty to do so.”); id. at 232-33, 100 S.Ct. at 1116-17 (applying same rule in context of Rule 10b-5 liability). [7] This requirement, in turn, breaks down into two sub-elements: transaction causation (i.e., "that the violations in question caused the plaintiff to engage in the transaction”), and loss causation (i.e., “that the misrepresentations or omissions caused the harm”). Hatrock v. Edward D. Jones & Co., 750 F.2d 767, 773 (9th Cir.1984); see Elias v. Arthur Andersen & Co. (In re Fin. Corp. of Am. Shareholder Litig.), 796 F.2d 1126, 1130 (9th Cir.1986). In a Rule 10b-5 action, a private plaintiff usually must prove both sub-elements. See id.; see also Securities Investor Protection Corp. v. Vigman, 908 F.2d 1461, 1467 (9th Cir.1990), cert. granted on other grounds sub nom. Holmes v. Securities Investor Protection Corp., — U.S. -, 111 S.Ct. 1618, 113 L.Ed.2d 716 (1991) (for questions presented in petition for certiorari, see 59 U.S.L.W. 3425 (Dec. 11, 1990)); Casella v. Webb, 883 F.2d 805, 808 n. 8 (9th Cir.1989). It has been said, however, that a plaintiff need not prove loss causation "where the evil is not the price the investor paid for a security, but the broker's fraudulent inducement of the investor to purchase the security.” Hatrock, 750 F.2d at 773. Levine urges that we apply this exception here. We decline to do so because the exception appears capable of swallowing the rule. We therefore view the Hatrock exception as limited to the facts of that case, which involved churning of trading accounts by brokers. [8] At one point during a hearing on defendants’ motion to dismiss, the district court indicated "it’s very clear ... that a reasonable person reading [Wilmington’s confirmation] would have no reason to believe Wilmington Trust ... was in any way [verifying] the amount or the value of [the diamonds].” Reporter's Transcript of Oct. 31, 1988, at 21. We disagree. Wilmington appears to have been more than a messenger for Investía. Instead, Levine's allegations indicate the trust company saw fit to associate its business reputation with the content of messages delivered directly to investors. Furthermore, by stating the "insured value" of the diamonds, Wilmington may have represented that its own potential liability to investors was covered, and that this liability could extend to the full amount indicated on the confirmation. Such an admission against interest reasonably may have been perceived as a statement by Wilmington of the diamonds’ actual value. The possibility that investors knew Wilmington could not open the diamond cassettes does not change this perception or its reasonableness. Thus, given the generous standard of review applied to a dismissal for failure to state a claim, we are unable to say with assurance that Levine could not prove Wilmington’s confirmation to be misleading. We therefore consider the "in connection with" requirement. Cf. Hollinger, 914 F.2d at 1570 n. 12 (disagreeing with district court’s assessment of materiality, thereby prompting a decision on requisite scienter). [9] Levine could still plead and prove facts showing that the purchase of the Investía securities was not consummated at the time the confirmation was received from Wilmington. Cf. Lewelling, 564 F.2d at 1279-80. However, Levine's complaint as alleged contains few, if any, facts in support of this conclusion. [10] As with Wilmington, many of Levine's allegations concerning Security Pacific may be better addressed in the context of aiding and abetting liability. For example, it is unclear whether there are any material misrepresentations or omissions directly attributable to Security Pacific among the allegations that investors were informed by Investía that a trust fund would be opened in their name at Security Pacific, that at least one representative from Security Pacific attended Investía sales seminars, and that Inves-tía listed the bank as a reference. [11] Curiously, Levine’s allegations regarding the disappearance of investors’ monies include reference to a Bermuda corporation.