S.D.N.Y. Holds No Section 25400 Liability If Securities Aren’t The Same


The 2008 collapse of Lehman Brothers Holdings, Inc. resulted in seven California public entities and a California-based insurance company suing Lehman’s former directors, officers, and auditors for, among other things, violations of the California Corporate Securities Law of 1968. These cases were consolidated before U.S. District Court Judge Lewis A. Kaplan in the Southern District of New York.  Last month, Judge Kaplan issued his memorandum opinion addressing the defendants’ motion to dismiss.  In re Lehman Bros. Securities & ERISA Litigation, Case No. 09 MD 2017 (LAK) (Oct. 15, 2012).

Sections 25400 and 25500

California Corporations Code Section 25400 makes it unlawful for a broker-dealer or “other person selling or offering for sale or purchasing or offering to purchase the security” to make false or misleading statements for the purpose of “inducing the purchase and sale of such security by others”.  Section 25500 provides a remedy for willful violations of Section 25400.  In this case, the defendants dealt only in Lehman common stock while the plaintiffs dealt in various debt instruments.  Thus, the question for Judge Kaplan was whether a Section 25400 violation requires that the parties dealt in exactly the same securities.

Judge Kaplan agreed with the defendants and dismissed the Section 25400 claims.  He did so based on a California Court of Appeal decision which held that a corporation that had purchased its own shares of common stock could not be liable under Sections 25400/25500 to sellers of put options.  McMahon v. Marsh & McLennan Cos., Inc., Ct. of Appeal Case No. No. B216003 (June 10, 2010).

Precedent Everywhere But California?

Notice that I’ve not given a citation to any official report for the Marsh opinion.  The reason is that the opinion was not certified for publication.  While the California Rules of Court are not binding on a U.S. District Court sitting in New York, Rule 8.115 provides that an unpublished opinion “must not be cited or relied on by a court or a party in any other action”.  The rule admits only two exceptions:

  • When the opinion is relevant under the doctrines of law of the case, res judicata, or collateral estoppel; or
  • When the opinion is relevant to a criminal or disciplinary action because it states reasons for a decision affecting the same defendant or respondent in another such action.

The anomalous result is that the California Court of Appeal’s decision in Marsh is treated as binding precedent in New York even though it can’t be cited or relied upon by a California court!


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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