Court Rules "Thoughtful," "Disciplined," and "Dynamic" Are But Short Blasts Of Wind

Allen Matkins
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Allen Matkins

Semper Midas Fund, Ltd was formed for to invest primarily in mortgage-related instruments.  Five months after investing over $300,000 in the fund, the Alan Kalin was told that that the fund had lost over 50% of its value.  Mr. Kalin filed a lawsuit in the U.S. District Court alleging violations of Section 25401 of the California Corporations Code.  That statute declares it unlawful for any person to offer or sell a security in California, or to buy or offer to buy a security in California, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.  Kalen v. Semper Midas Fund, Ltd, 2021 U.S. Dist. LEXIS 239179.  Among other things, Mr. Kalin alleged that alleges that the fund's offering memorandum  assured safety and security by highlighting statements such as "thoughtful qualitative analysis," "disciplined investment management," and "dynamic cross risk allocation."  

Judge Yvonne Gonzalez Rogers disagreed.  She found that "thoughtful," "disciplined," and "dynamic" are vague, generalized, and unspecified assertions that constitute mere puffery and in turn are not actionable.  The concept of "puffery" is well developed under the federal securities laws.  In general, courts have given two reasons why puffery is not actionable.  Some courts have explained that puffery is not actionable because it involves statements that cannot be objectively determined to be true or false.  Other courts point out that no reasonable person would rely on puffery.   Interestingly, I could find only two published California decisions discussing Section 25401 and puffery, Apollo Capital Fund LLC v. Roth Capital Partners, LLC, 158 Cal. App. 4th 226, 70 Cal. Rptr. 3d 199 (2007) and People v. Holder, 165 Cal. App. 3d 998, 212 Cal. Rptr. 198 (1985).  While neither of these cases holds that puffery is not actionable under Section 25401, the California statute is modeled upon Section 12(a)(2) of the Securities Act of 1933 and many federal courts have found that puffery is not actionable under the federal securities laws.

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