Court Rules Law Firm That Drafted Documents Was Not A Seller Of Securities

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Section 25400(d) of the California Corporations Code declares it unlawful for any broker-dealer or “other person selling or offering for sale” to make a false or misleading statement for the purpose of inducing the purchase or sale of a security if that person knew or had reason to know that the statement was false or misleading. Corporations Code Section 25500, which is modeled on Section 9(e) of the Securities Exchange Act of 1934, imposes liability on any “person who willfully participates in any act or transaction in violation of Section 25400″. The statute prescribes damages as “the difference between the price at which such other person purchased . . . and the market value which such securities would have had at the time of his purchase . . . in the absence of such act or transaction, plus interest at the legal rate”.

In a ruling handed down late last month, U.S. District Court Judge William Alsup ruled that allegations that a law firm had prepared corporate formation and securities offering documents were insufficient to state a claim because liability only attaches to sellers under Section 25400. Wright v. Bloom, 2012 U.S. Dist. LEXIS 170679 (N.D. Cal. Nov. 30, 2012). Judge Alsup’s ruling should come as no surprise to those who have read Kamen v. Lindly, 94 Cal. App. 4th 197 (2001) in which California’s Sixth District Court of Appeal held that “that civil liability pursuant to section 25500 applies only to a defendant who is either a person selling or offering to sell . . . a security.” Id. at 206.

I was surprised to see no mention of privity in Judge Alsup’s opinion. The federal courts in California have ruled inconsistently on whether privity is required. Judge Jeffrey S. White has held that it is, citing Securities & Exchange Comm’n v. Seabord Corp., 677 F.2d 1289 (9th Cir. 1982). Louisiana Pacific Corp. v. Money Mkt. 1 Institutional Inv. Dealer, Fed. Sec. L. Rep. (CCH) P96,262 (March 28, 2011). Judge Susan Y. Illston has held that it is not, citing California Amplifier Inc. v. RLI Ins. Co., 94 Cal. App. 4th 102, 109 (2001). In re Nuveen Funds/City of Alameda, 2011 U.S. Dist. LEXIS 52135 (N.D. Cal. May 16, 2011).

For more on Section 25400, see the following posts:

Lutefisk Shortage Hits Japan, Oh No!
Lutefisk is a Christmas favorite with many Americans of Scandinavian descent. Thus, I was distressed to see that one restaurant in Tokyo had sold out of lutefisk dinners (see photo below). If you ever happen to be looking for Scandinavian food in Tokyo, I highly recommend Aquavit in Kita-Aoyama.