In This Case, Placement Agent Status Was Better Than Underwriter Status


As a general matter, California Corporations Code Section 25401 declares it unlawful to make an untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading in connection with the offer or sale of a security.  Section 25401, however, does not establish a civil remedy.  For this, plaintiffs must look to Section 25501.  As I mentioned in this post, not every plaintiff can recover under Section 25501.  To recover, a plaintiff must establish privity.

In Lord Abbet Mun. Income Fund, Inc. v. Asami, 2014 U.S. Dist. LEXIS 94796 (N.D. Cal. July 11, 2014), a purchaser of municipal bonds sued, among others, the placement agent under Sections 25401/25501.  The placement agent moved for summary judgment on the basis that it was a placement agent and the plaintiff had failed to establish a triable issue of fact regarding the existence of privity.  The plaintiff argued that the defendant was an underwriter.  What’s the difference?  The court explained the difference as follows:

In other words, placement agents “place” the security with an investor, while underwriters actually “purchase” or own the security, then resell it.

Thus, if the defendant acted as a placement agent, privity would not have existed.  If, on the other hand, the defendant acted as an underwriter, privity would have been a possibility.

Notwithstanding the fact that numerous documents referred to the defendant as an “underwriter”, the court granted summary judgment on the basis that none of these documents evidenced a purchase of the bonds by the defendant.

Court Bends Space-Time Continuum

I continue to be surprised but the fact that courts fail to recognize the fact that Section 25401 was amended effective January 1, 2014.  See Die Verwandlung: How The Legislature Likely Raised The Bar On Securities Fraud Actions.  The Court quotes the current version of the statute even though the plaintiff’s purchases occurred in 2007 and 2010.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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