California Court Of Appeal Holds That Privity Of Contract Is Necessary To Maintain An Action For Rescission Under California Corporations Code Sections 25504 And 25504.1

In Viterbi v. Wasserman, 2011 Cal. App. LEXIS 25 (Cal. App. Jan. 11, 2011), the Court of Appeal for the Fourth Appellate District of the State of California affirmed the judgment of the Superior Court of San Diego County holding that privity between the purchaser and seller of a security is necessary to maintain an action for rescission under Sections 25504 and 25504.1 of the California Corporations Code. This decision, which follows persuasive authority in the federal courts construing analogous federal law, confirms the limits of the remedy of rescission under the California Corporations Code.

This action arises out of plaintiffs Audrey Viterbi and Dan Smargon’s purchase of $200,000 worth of securities of Economic Inventions, LLC (“EI”), which held patents on “expirationless options,” a type of derivative security. Plaintiffs sued EI, its president and two of its board members, as well as Geneva Wasserman, an analyst Viterbi hired to advise her regarding at potential investments.

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