A complaint alleging securities fraud under Rule 10b-5 must meet the stringent pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure as well as the requirements of the Private Securities Litigation Reform Act.  In re Verifone Holdings Securities Litig., 704 F. 3d 694, 701 (9th Cir. 2012).  These are the twin rocks on which many a poorly drafted securities fraud complaint have come to grief.  Rule 9(b) provides:

In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.  Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.

In a recent ruling, U.S. District Court David O. Carter decided that FRCP Rule 9(b) does not apply to claims alleging violations of Corporations Code Section 25401.  Cutler v. Rancher Energy Corp., 2014 U.S. Dist. LEXIS 34622 (C.D. Cal. Mar. 11, 2014).  Almost a year ago, Judge Jesus G. Bernal reached the opposite conclusion in Yee v. NIVS Intellimedia Tech. Group, Inc., 2013 U.S. Dist. LEXIS 46128 (C.D. Cal. Mar. 25, 2013).

Judge Carter’s opinion quotes Section 25401 as follows:

It is unlawful for any person, in connection with the offer, sale, or purchase of a security, directly or indirectly, to . . . (b) Make an untrue statement of 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.

The statute is quoted accurately, but I’m nonetheless surprised.  I’m surprised for two reasons.

First, the complaint in the Cutler case was filed in June of last year - before the statute was amended and the amendments took effect.  Cal. Stats. 2013, c. 335, § 6.

Second, I’m surprised because the legislative history states that the change was “to ensure consistency with more comprehensive, federal anti-fraud statutes”.  SB 538 (Hill) Assembly Floor Analysis, Sept. 3, 2013.  If Rule 9(b) applies to Rule 10b-5 claims and Section 25401 was amended to be consistent with Rule 10b-5, doesn’t it follow that Rule 9(b) should now apply to claims under Section 25401?