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.