Articles Posted in Securities Law

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Black called Knarr to suggest a real estate investment. Knarr gave Black $124,456, documented by a May 2006 promissory note. Knarr testified that he would not have invested without a promised 10 percent return if sale or development of the property failed. The parties modified the note in May 2007 to reflect Knarr’s additional investment of $155,474 and extended the maturity date of the note several times, through mid-January 2012. Knarr obtained information inconsistent with what Black had told him and asked Black for his money. Receiving no response, Knarr initiated an investigation. In 2013, Black was charged with five counts (there were other investors) of using false statements in the offer or sale of a security (Corp. Code, 25401, 25540(b)). The trial court set aside two counts, finding that the note was not a security. The court of appeals affirmed, holding that the promissory notes offered for Knarr’s investment in the real estate development scheme were not securities within the meaning of the Corporate Securities Law. The evidence of other investors was insufficient to meet the public offering prong of the risk-capital test and there was insufficient evidence that Knarr was “led to expect profits solely from the efforts of the promoter.” View "People v. Black" on Justia Law

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Plaintiff filed a qui tam suit on behalf of himself and the State under the California False Claims Act (CFCA), Gov. Code, 12650 et seq., alleging that ClubCorp had defrauded the State by failing to escheat the unclaimed initiation deposits of ClubCorp’s members and former members. The trial court granted the State's motion to dismiss, concluding that plaintiff's qui tam action was based on business practices ClubCorp had previously disclosed in publicly available filings with the SEC and thus precluded by CFCA's public disclosure bar. The court concluded that the trial court erred in dismissing the qui tam complaint as barred by the public disclosure provision in former subdivision (d)(3)(A) where an SEC filing is not one of the disclosures identified in that subdivision as barring a qui tam action. Accordingly, the court reversed and remanded for further proceedings. View "State of California ex rel. Bartlett v. Miller" on Justia Law

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Customers of a securities firm made claims against that firm based on real estate investments the firm’s broker-dealers recommended. An entity that had an interest in and operated each of the real estate investments filed for bankruptcy, and at least some of the real estate investments became debtors in that bankruptcy proceeding. The appointed examiner in the bankruptcy proceeding found that the entity was engaged in a fraudulent “Ponzi scheme.” When the securities firm applied for professional liability insurance, it disclosed one of the customer claims but not the facts that would support other potential customer claims arising out of investments through the same entity as that involved in the disclosed claim. The insurer refused to defend against undisclosed claims because the policy’s application included an exclusion for nondisclosure of facts that might lead to a claim. The court of appeal affirmed judgment in favor of the insurer: There was no insurance coverage because all of the undisclosed claims arose out of the same events as the disclosed claim. The securities firm was aware of facts and circumstances that might result in a claim or claims being made against it, which awareness it was required to disclose. View "Crown Capital Secs., L.P. v. Endurance Am. Specialty Ins. Co." on Justia Law

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Overstock.Com alleged that defendants intentionally depressed the price of Overstock stock by effecting “naked” short sales: sales of shares the brokerage houses and their clients never actually owned or borrowed to artificially increase the supply and short sales of the stock. The trial court dismissed claims under New Jersey Racketeer Influence and Corrupt Organizations (RICO) Act without leave to amend and rejected California market manipulation claims on summary judgment. The appeals court affirmed dismissal of the belatedly raised New Jersey RICO claim and summary judgment on the California claim as to three defendants, but reversed as to Merrill Lynch. The evidence, although slight, raised a triable issue this firm effected a series of transactions in California and did so for the purpose of inducing others to trade in the manipulated stock. The court concluded that Corporations Code section 25400, subdivision (b), reaches not only beneficial sellers and buyers of stock, but also can reach firms that execute, clear and settle trades; such firms face liability in a private action for damages only if they engage in conduct beyond aiding and abetting securities fraud, such that they are a primary actor in the manipulative trading.View "Overstock.com, Inc. v. Goldman Sachs Grp., Inc." on Justia Law

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Overstock.Com alleged that defendants intentionally depressed the price of Overstock stock by effecting “naked” short sales: sales of shares the brokerage houses and their clients never actually owned or borrowed to artificially increase the supply and short sales of the stock. The parties’ discovery demands were extensive, and, pursuant to a stipulation, the trial court issued a protective order that allowed the parties to designate Protected Material, and to further classify it as “Confidential” or “Highly Confidential.” The order required the parties to exercise good faith to restrict submissions to Confidential Information reasonably necessary for deliberations. Two years later, the court extended the order to confidential information pertaining to third parties. In 2011, the court allowed plaintiffs to propose a Fifth Amended Complaint. The publicly filed document and opposing documents were heavily redacted; un-redacted versions were conditionally lodged under seal. Defendants made10 motions to seal. Plaintiffs opposed five. The media also opposed sealing. The court then denied leave to file the proposed Fifth Amended Complaint, granted the motions to seal, and entered summary judgment for the defendants. The appeals court affirmed most of the sealing decisions, with exceptions for “irrelevant materials” that never should have burdened the court.View "Overstock.com, Inc. v. Goldman Sachs Grp., Inc." on Justia Law

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Doolittle was a registered securities broker/dealer, and a registered investment advisor. He or his corporations held licenses, permits, or certificates to engage in real estate and insurance brokerage and tax preparation. Around 1990 his primary business became “trust deeds investments,” in which he “would arrange groups of investors together to buy those loans or to fund those transactions for different types of individuals and institutional borrowers.” After investors lost money, Doolittle was convicted and sentenced to 13 years in prison for three counts of theft by false pretenses; six counts of theft from an elder or dependent adult; nine counts of false statements or omissions in the sale of securities; selling unregistered securities; and sale of a security by willful and fraudulent use of a device, scheme, or artifice to defraud The appeals court reversed in part, holding that Doolittle’s challenge that the trial court’s implied finding of timely prosecution was not supported by substantial evidence required remand with respect to two of the charges. A further hearing may be necessary with respect to applicability of a sentence enhancement for aggregate losses over $500,000. Doolittle’s conviction for sale of unregistered securities and sale of securities by means of a fraudulent device did not rest on the same conduct as his convictions for fraud against specific victims; his sentence on the former counts therefore does not offend the proscription against duplicative punishment. View "People v. Doolittle" on Justia Law

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In August 2007, the initial trustee of two family trusts invested millions in the Rockwater American Municipal Fund, LLC (RAM Fund), a hedge fund engaged in municipal arbitrage. The RAM Fund was managed by Rockwater Municipal Advisors, LLC (RMA), its managing member. In November 2007, Charles Fish Investments, Inc. (CFI) transferred its assets to Rockwater CFI, LLC, a wholly owned subsidiary of RMA, in exchange for a 15 percent interest in RMA. CFI had an option to unwind the transaction, if its interest in RMA did not meet certain benchmark values. The RAM Fund was devastated by the stock market crash and the trust investments were largely wiped out by 2008. CFI exercised its option to unwind the transaction with RMA and Rockwater CFI, LLC, and obtained a return of the assets originally belonging to it. The successor trustee of the trusts sued the RAM Fund, RMA, Bryan Williams (founder of the RAM Fund and the chief executive officer of RMA), John Hapke (the chief financial officer of the RAM Fund), CFI, and Charles Fish (the chairman and chief executive officer of CFI). After it had seen clips from the movie Wall Street 2 (Twentieth Century Fox 2010) and a power point presentation with eight screens captioned "Greed," a jury awarded the successor trustee a $4.6 million judgment against the RAM Fund, RMA, Williams, and Hapke. The successor trustee was unsuccessful in obtaining a judgment against CFI and Fish. The RAM Fund, RMA, Williams, and Hapke, on the other hand, have each filed an appeal claiming the RAM Fund was simply the victim of the market crash. The successor trustee appealed too, seeking to hold liable CFI and Fish, the defendants who "got away." After review, the Supreme Court: reversed the judgment in favor of RAM, RMA and Willians, and affirmed the judgment against CFI and Fish on actual and constructive fraudulent transfer; to the extent the judgment held the Rockwater Defendants and Hapke liable on the causes of action for fraud by intentional misrepresentation, fraud by concealment, and/or negligent misrepresentation, it was reversed. The judgment in favor of CFI and Fish on those causes of action was affirmed. The judgment against the RAM Fund and Hapke for breach of fiduciary duty and professional negligence was reversed. However, the judgment against RMA and Williams on those causes of action was affirmed. The judgment in favor of CFI and Fish on the breach of fiduciary duty cause of action was affirmed. The ruling that CFI was not liable for the debts of RMA was affirmed. The ruling that Fish was not liable for the debts of CFI was moot, and the judgment in favor of CFI on all causes of action is affirmed. View "Hasso v. Hapke" on Justia Law