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.