In This “Unreliable” Opinion, Court Requires Privity For Action Against Unlicensed Broker-Deale

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Since California Corporations Code Section 25501.5 was enacted ten years ago, I’ve been repeatedly asked “What do it mean?“.  The statute provides that a person who purchases a security from, or sells a security to, an unlicensed broker-dealer may bring an action for rescission of the sale or purchase or, if the plaintiff or the defendant no longer owns the security, for damages.  The question has always been whether the statute requires privity of contract.  See Section 25501.5 – What Do It Mean?

Now, there is a judicial answer; just not one that can be relied upon (more about that below).  In Alpinieri v. Tgg Mgmt. Co., 2014 Cal. App. Unpub. LEXIS 3177 (Cal. App. 4th Dist. May 5, 2014), the Fourth District Court of Appeal concluded:

The Legislature’s use of the commonplace phrases “purchases a security from” and “sells a security to” demonstrates it intended a civil action for rescission or damages under section 25501.5 be available only to a person who transacts directly with an unlicensed broker-dealer, that is, who is in privity with that unlicensed broker-dealer.  We see no indication in section 25501.5's language any intent other than to restrict a claim for rescission or damages against one who is directly responsible for violating the statute by virtue of selling the security.  Because no contrary legislative intent appears in the statute, there is no basis to disregard literal construction.

(citation omitted).  The Court distinguished two other decisions involving the privity requirement under the Corporate Securities Law of 1968, Moss v. Kroner, 197 Cal. App. 4th 860 (2011) and Viterbi v. Wasserman, 191 Cal. App. 4th 927 (2011), on the basis that those cases did not involve Section 25501.5.  See Second DCA Takes Issue With Fourth DCA Over Privity.

Why is this an “unreliable” holding?  The opinion, which was penned by Associate JusticeTerry B. O’Rourke, was not certified for publication.  Under Rule 8.115(a) of the California Rules of Court, an unpublished opinion, with certain exceptions ”must not be cited or relied on by a court or a party in any other action”.

Topics:  Broker-Dealer, Privity of Contract

Published In: General Business Updates, Finance & Banking Updates, Securities Updates

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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