An emerging tool for plaintiff-side securities litigators is the use of state claims under the Uniform Securities Act, such as Massachusetts’ so-called “Blue Sky” statute, Mass. Gen. L. c. 110A, § 410. The reason is simple — an extraordinarily favorable burden of proof and a guaranteed award of attorney’s fees if the investor prevails. Indeed, the Massachusetts Supreme Judicial Court has acknowledged that the extremely investor-friendly burden of proof and protections afforded buyers by the Uniform Securities Act approach almost “strict liability” for sellers. Marram v. Kobrick Offshore Fund, 442 Mass. 43, 50-51 (2004). For example, the Act does not require investors to establish reliance on any alleged misrepresentation or that any alleged misrepresentation be the cause of any loss. In addition, the investor’s sophistication is not a defense to a claim; nor does he have any duty to investigate the accuracy of a statement.
However, sellers with the right strategy can defeat these claims. The Massachusetts Appeals Court recently affirmed a jury defense verdict in favor of a hedge fund manager who had been falsely accused of misrepresenting the nature of the fund to induce the investment, and making misrepresentations to keep the plaintiff invested afterwards. See Crown v. Kobrick Offshore Fund, 85 Mass. App. Ct. 214 (April 24, 2014). Mintz Levin represented the hedge fund manager both at trial and on appeal.
While the Appeals Court affirmed the verdict, noting that the plaintiff’s claims had been thoroughly impeached through information obtained through discovery, it affirmed the dismissal of the hedge fund manager’s counter-claims for his attorney’s fees under a provision in the subscription agreement. Under that provision, the plaintiff agreed to reimburse the fund manager its attorney’s fees if he brought an unsuccessful securities claim. While recognizing “the dearth of appellate guidance,” the Appeals Court nonetheless ruled that such “loser-pays” provisions were void as against public policy under the Uniform Securities Act.
Given the cost and burden imposed by unmeritorious securities claims, such indemnification provisions are of obvious importance to sellers. Indeed, under freedom of contract principles, parties are generally held to the terms of their agreements, particularly where both parties are sophisticated, wealthy business entities. It is for this reason that the fund manager has sought further review by the Massachusetts Supreme Judicial Court. Perhaps the Blue Sky will shine a little brighter for sellers of securities. Stay tuned…..