Last week, the Department of Corporations filed a civil complaint in the Los Angeles Superior Court that accuses several companies and individuals of, among other things, failing to qualify the offer and sale of operating agreements, bridge loans, promissory notes, Class A Membership interests, and convertible debentures in at least 215 transactions that totaled more than $23 million.  According the Department, the defendants represented to investors that “the money raised by the sale of securities would be used to finance and produce various entertainment projects, including the development and production of independent motion pictures, such as ‘Not Forgotten’ and a staged musical, ‘Twist! An American Musical.’”

It, of course, remains to be seen whether the Department will be able to prove its case and at least one defendant’s lawyer has called the complaint “riddled with errors”.  See Simon Baker Film Used for Ponzi, State Says.  Nonetheless, the case is as reminder that more than just shares of stock constitute securities under the California Corporate Securities Law.  The Department’s complaint contends that several types of debt instruments constitute securities within the meaning of Corporations Code Section 25019.  The complaint also asserts that ”operating agreements” were securities.  It is hard to know what to make of this allegation. Usually, it is the membership interest created by the operating agreement, not the operating agreement itself, that constitutes the security.

The Big Red Bear Chose Honor

In light of the Seahawks, controversial 14 – 12 victory over the Green Bay Packers, I am reminded of a most unwonted gesture of sportsmanship by Cornell University’s football team.  According to this story by Leslie Avery in The Pittsburgh Press, Cornell gave up its undefeated record in 1940 by conceding victory to Dartmouth after a referee admitted that he had mistakenly awarded a fifth down to Cornell.  In response, Dartmouth’s Athletic Director, William H. McCarter, telegraphed Cornell:

Thank-you for your wire, Dartmouth accepts the victory and your congratulations, and salutes the Cornell team – the honorable and honored opponents of her longest unbroken football rivalry.

The Seahawks may have victory or they may have honor, but they can’t have both.