Hanson v. Berthel Fisher and Company Financial Services, Inc et al
Filing
32
ORDER granting in part and denying in part 22 Motion to Dismiss The First Amended Class Action Complaint. Motion is granted with respect to Plaintiffs' claims against Thomas Joseph Berthel and Counts I through XI are dismissed against Thomas Joseph Berthel. The Clerk of Court is directed to dismiss Thomas Joseph Berthel from this case. Motion is granted with respect to Counts II, IV and IX, and Counts II, IV and IX are dismissed. With respect to Counts I, III, V, VI, VII, VIII, X and XI, the Motion is denied. Signed by Chief Judge Linda R Reade on 5/29/2014. (skm)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF IOWA
CEDAR RAPIDS DIVISION
JON HANSON, individually and on
behalf of all others similarly situated,
Plaintiffs,
No. 13-CV-67-LRR
vs.
ORDER
BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC. and
THOMAS JOSEPH BERTHEL,
Defendants.
____________________
TABLE OF CONTENTS
I.
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
II.
PROCEDURAL HISTORY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
III.
SUBJECT MATTER JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . 4
IV.
STANDARD OF REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
V.
FACTUAL BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
A.
B.
C.
D.
E.
VI.
Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The TNP 2008 Participating Notes Program. . . . . . . . . . . . . . . . . . 9
TNP’s Deteriorating Financial Condition. . . . . . . . . . . . . . . . . . . 10
TNP 2008 Participating Notes Program Private Placement
Memorandum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Plaintiffs Invest in the TNP 2008 Participating Notes Program. . . . . 13
SECURITIES LAW VIOLATIONS (COUNTS I, II ,VII AND VIII).. . . . . 14
A.
B.
C.
Did Berthel Fisher Have a Duty to Disclose and/or Investigate?. . . .
1.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.
Applicable law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Is Berthel Fisher the “Maker” of the Alleged Misrepresentations?.. .
The Bespeaks Caution Doctrine. . . . . . . . . . . . . . . . . . . . . . . . .
1.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
15
17
20
21
25
25
D.
E.
F.
G.
VII.
2.
Applicable law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Count I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
1.
Are Defendants liable under California Corporations Code section
25401?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . 34
b.
Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.
Are Defendants liable under California Corporations Code section
25504?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
a.
Privity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
i.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . 36
ii.
Applicable law. . . . . . . . . . . . . . . . . . . . . . . 37
iii.
Application. . . . . . . . . . . . . . . . . . . . . . . . . 39
b.
Materially aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
i.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . 41
ii.
Applicable law. . . . . . . . . . . . . . . . . . . . . . . 42
iii.
Application. . . . . . . . . . . . . . . . . . . . . . . . . 43
c.
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Count II.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
1.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.
Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Count VII.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
1.
Iowa Code section 502.501. . . . . . . . . . . . . . . . . . . . . . . . 50
2.
Iowa Code section 502.509. . . . . . . . . . . . . . . . . . . . . . . . 51
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . 51
b.
Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Count VIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
FRAUD AND AIDING AND ABETTING FRAUD
(COUNTS III, VI AND XI). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
A.
B.
Count III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.
Applicable law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counts VI and XI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.
Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
59
60
62
63
64
64
VIII. NEGLIGENCE AND NEGLIGENT MISREPRESENTATION
(COUNTS IV, V, IX AND X). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
2
A.
B.
IX.
CONTROL PERSON LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
A.
B.
C.
X.
Negligent Misrepresentation.. . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Negligence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Applicable law.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
I. INTRODUCTION
The matter before the court is Defendants Berthel Fisher and Company Financial
Services, Inc. (“Berthel Fisher”) and Thomas Joseph Berthel’s (collectively,
“Defendants”) “Motion to Dismiss” (“Motion”) (docket no. 22).
II. PROCEDURAL HISTORY
On November 4, 2013, Plaintiff Jon Hanson, individually and on behalf of all others
similarly situated (“Plaintiffs”), filed an Amended Class Action Complaint (“Complaint”)
(docket no. 16) against Defendants. The Complaint asserts the following eleven claims
against Defendants: (1) Count I asserts that Defendants violated California Corporations
Code section 25401, or, in the alternative, California Corporations Code section 25504;
(2) Count II asserts that Defendants violated California Corporations Code section 25400;
(3) Count III asserts that Defendants unlawfully induced a contract by knowing
misrepresentations, in violation of California Corporations Code section 1572 and
California common law; (4) Count IV asserts that Defendants made negligent
misrepresentations in violation of California common law; (5) Count V asserts that
Defendants were negligent in violation of California common law; (6) Count VI asserts
that Defendants aided and abetted fraud in violation of California common law; (7) Count
VII asserts that Defendants violated Iowa Uniform Securities Act section 502.501; (8)
Count VIII asserts that Defendants violated Iowa Uniform Securities Act section
502.501A; (9) Count IX asserts that Defendants made negligent misrepresentations in
3
violation of Iowa common law; (10) Count X asserts that Defendants were negligent in
violation of Iowa common law; and (11) Count XI asserts that Defendants aided and
abetted fraud in violation of Iowa common law.
On November 13, 2013, Defendants filed the Motion. On December 3, 2013,
Plaintiffs filed a Resistance (docket no. 25). On December 13, 2013, Defendants filed a
Reply (docket no. 26). On December 19, 2013, Plaintiffs filed a Sur-Reply (docket no.
29). Neither party requests oral argument on the Motion, and the court finds that oral
argument is unnecessary. The Motion is fully submitted and ready for decision.
III. SUBJECT MATTER JURISDICTION
The court has subject matter jurisdiction over Plaintiffs’ claims in the class-action
Complaint against Defendants pursuant to 28 U.S.C. § 1332(d). See 28 U.S.C. §
1332(d)(2) (“The district courts shall have original jurisdiction of any civil action in which
the matter in controversy exceeds . . . $5,000,000 . . . and is a class action in which . . .
any member of a class of plaintiffs is a citizen of a State different from any defendant.”).
In the Complaint, the proposed class is defined as “[a]ll persons and entities that
purchased, subscribed and paid for, or otherwise acquired securities in the [Thompson
National Properties, LLC 2008 Participating Notes Program, LLC, (“TNP 2008
Participating Notes Program”)] pursuant to the TNP 2008 [Participating Notes Program]
offering between December 2008 and March 2010.” Complaint ¶ 108.
Plaintiff Jon Hanson is a citizen of Colorado. Defendant Berthel Fisher is an Iowa
company with its principal place of business in Marion, Iowa. Defendant Thomas Joseph
Berthel was Berthel Fisher’s chief executive officer and chairman of its board of directors
and an indirect owner of Berthel Fisher at all times relevant to the instant action.
IV. STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of a complaint
on the basis of “failure to state a claim upon which relief can be granted.” Fed. R. Civ.
4
P. 12(b)(6). To survive a Rule 12(b)(6) motion to dismiss, “a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its
face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007)); accord B & B Hardware, Inc. v. Hargis Indus., Inc., 569 F.3d
383, 387 (8th Cir. 2009). A claim satisfies the plausibility standard “when the plaintiff
pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Bell Atl.,
550 U.S. at 556). “The plausibility standard is not akin to a ‘probability requirement,’ but
it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id.
(quoting Bell Atl., 550 U.S. at 556).
Although a plaintiff need not provide “detailed” facts in support of his or her
allegations, the “short and plain statement” requirement of Federal Rule of Civil Procedure
8(a)(2) “demands more than an unadorned, the-defendant-unlawfully-harmed-me
accusation.” Id. (quoting Bell Atl., 550 U.S. at 555) (internal quotation marks omitted);
see also Erickson v. Pardus, 551 U.S. 89, 93 (2007) (“Specific facts are not necessary
[under Rule 8(a)(2)].”). “A pleading that offers ‘labels and conclusions’ or ‘a formulaic
recitation of the elements of a cause of action will not do.’” Iqbal, 556 U.S. at 678
(quoting Bell Atl., 550 U.S. at 555). “Where the allegations show on the face of the
complaint [that] there is some insuperable bar to relief, dismissal under Rule 12(b)(6) is
appropriate.” Benton v. Merrill Lynch & Co., 524 F.3d 866, 870 (8th Cir. 2008) (citing
Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir. 1997)).
With respect to claims alleging fraud, Federal Rule of Civil Procedure 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.” Fed. R. Civ. P. 9(b). The plain
language of Rule 9(b) “requires a plaintiff to allege with particularity the facts constituting
5
the fraud.” Indep. Bus. Forms, Inc. v. A-M Graphics, Inc., 127 F.3d 698, 702 n.2 (8th
Cir. 1997). A plaintiff may not make “conclusory allegations.” Roberts v. Francis, 128
F.3d 647, 651 (8th Cir. 1997). Conclusory allegations are insufficient because “[o]ne of
the primary purposes of this rule is to facilitate a defendant’s ability to respond to and to
prepare a defense to a plaintiff’s [fraud] charges.” Greenwood v. Dittmer, 776 F.2d 785,
789 (8th Cir. 1985).
“To satisfy the particularity requirement of Rule 9(b), the complaint must plead
such facts as the time, place, and content of the defendant’s false representations, as well
as the details of the defendant’s fraudulent acts, including when the acts occurred, who
engaged in them, and what was obtained as a result.” United States ex rel. Joshi v. St.
Luke’s Hosp., Inc., 441 F.3d 552, 556 (8th Cir. 2006). In other words, Rule 9(b)
demands that plaintiffs “identify who, what, where, when, and how.” United States ex.
rel. Costner v. United States, 317 F.3d 883, 888 (8th Cir. 2003).
The Eighth Circuit Court of Appeals has cautioned that Rule 9(b) is to be
interpreted “‘in harmony with the principles of notice pleading.’” Schaller Tel. Co. v.
Golden Sky Sys., Inc., 298 F.3d 736, 746 (8th Cir. 2002) (quoting Abels v. Farmers
Commodities Corp., 259 F.3d 910, 920 (8th Cir. 2001)). “Although a pleading alleging
fraud need not provide anything more than notice of the claim, it must contain ‘a higher
degree of notice, enabling the defendant to respond specifically, at an early stage of the
case, to potentially damaging allegations of immoral and criminal conduct.’” Id. (quoting
Abels, 259 F.3d at 920). For example, when alleging fraudulent misrepresentation, Rule
9(b) requires a plaintiff to plead the circumstances constituting the fraud with particularity,
while knowledge and intent may be pled generally. See Bennett v. Berg, 685 F.2d 1053,
1062 n.12 (8th Cir. 1982).
V. FACTUAL BACKGROUND
Accepting all factual allegations in the Complaint as true and drawing all reasonable
6
inferences in favor of the Plaintiffs, the facts are as follows:
A. Parties
Berthel Fisher was the underwriter, promoter and managing broker-dealer of the
TNP 2008 Participating Notes Program. Thomas Joseph Berthel was, at times relevant
to the instant action, Berthel Fisher’s chief executive officer and chairman of the board,
supervising and/or directing its securities business and overseeing its compliance with
securities rules and regulations. Thompson National Properties, LLC (“TNP”) is a
Delaware limited liability company whose purpose is to “organize real estate investment
programs, raise funds for such programs from investors nationwide through public or
private offerings, and thereafter manage such programs and provide other services to
them.” Complaint ¶ 3. “To accomplish its purpose, TNP, directly and through wholly
owned and/or controlled affiliates, purported to engage in real estate transactions, organize
real estate programs, promote such programs, and/or conduct private or public offerings
to recruit investors in such programs . . . .” Id. ¶ 27. However, in reality, TNP
commingled investor funds from various programs and used the investor money to make
distribution payments to other investors “in Ponzi-scheme fashion.” Id. ¶ 4. The TNP
2008 Participating Notes Program was a Delaware limited liability company with its
principal place of business in Irvine, California. Id. ¶¶ 47-48. TNP was the parent
company of the TNP 2008 Participating Notes Program. Id. ¶ 39.
In the Complaint, Plaintiffs assert that Berthel Fisher, under the direction and
supervision of Thomas Joseph Berthel, was the underwriter, promoter and managing
broker-dealer for several of TNP’s private placement offerings, including in the TNP 2008
Participating Notes Program, the real estate investment program at issue in the instant
matter. TNP commenced a private placement offering of promissory notes in the TNP
2008 Participating Notes Program on or about December 9, 2008. Id. ¶ 38. TNP
organized the TNP 2008 Participating Notes Program to “offer investors nationwide the
7
opportunity to participate in investments in the real estate market.” Id. ¶ 2. Berthel
Fisher played a key role recruiting investors to participate in the TNP 2008 Participating
Notes Program, preparing and disseminating the TNP 2008 Participating Notes Program’s
Private Placement Memorandum (“Memorandum”) (docket no. 22-2)1 and overseeing the
preparation and execution of the TNP 2008 Participating Notes Program securities
offering. See Memorandum at 5 n.1. Specifically, the Memorandum states that:
The Notes will be offered and sold on a “best efforts” basis by
broker-dealers, or the Selling Group, who are members of the
Financial Industry Regulatory Authority, Inc. [(“FINRA”)].
Berthel Fisher . . . , a member of FINRA, will act as
managing broker-dealer, or Managing Broker-Dealer, and will
receive a managing broker-dealer fee of 2.0% of the gross
proceeds of the Offering, or Gross Proceeds, selling
commissions of up to 7.0% of the Gross Proceeds and a
nonaccountable marketing and due diligence allowance of
1.0% of the Gross Proceeds.
Id.
The Memorandum included several material misrepresentations and omissions.
Berthel Fisher helped raise $26,224,903 in investments through the TNP 2008
Participating Notes Program. Complaint ¶ 11.
Berthel Fisher was involved in other TNP programs as well. On approximately
June 3, 2008, TNP initiated a private placement offering of promissory notes in the TNP
12% Notes Program, LLC, which purported to fund loans to or equity investments in TNP
or its affiliates. Id. ¶ 33. Berthel Fisher helped promote the TNP 12% Notes Program.
Id.
1
Although “‘matters outside the pleading’ may not be considered in deciding a Rule
12 motion to dismiss, documents ‘necessarily embraced by the complaint’ are not matters
outside the pleading.” Enervations, Inc. v. Minn. Mining and Mfg. Co., 380 F.3d 1066,
1069 (8th Cir. 2004) (quoting BJC Health Sys. v. Columbia Cas. Co., 348 F.3d 685, 687
(8th Cir. 2003)). The court finds, and the parties do not dispute, that the Memorandum
is “necessarily embraced by the complaint” and the court may properly consider it in
addressing the Motion.
8
¶ 35. In addition, on approximately June 23, 2008, TNP initiated a private placement
offering in TNP Vulture Fund III, LLC, a real estate investment fund that purported to
invest in real estate opportunities. Id. ¶ 36. Berthel Fisher helped promote the TNP
Vulture Fund. Id. ¶ 37.
The class of Plaintiffs includes “[a]ll persons and entities that purchased, subscribed
and paid for, or otherwise acquired securities in the TNP 2008 [Participating Notes
Program] pursuant to the TNP 2008 [Participating Notes Program] offering between
December 2008 and March 2010.” Id. ¶ 108. Hanson invested $75,000 in the TNP 2008
Participating Notes Program. Id. ¶ 100.
B. The TNP 2008 Participating Notes Program
On December 9, 2008, TNP initiated a private placement offering of promissory
notes related to the TNP 2008 Participating Notes Program. Id. ¶ 38. The TNP 2008
Participating Notes Program offered investors the opportunity to invest their funds in real
estate and real estate-related debt. Id. Berthel Fisher was a promoter of the TNP 2008
Participating Notes Program and was “instrumental” in preparing and disseminating the
Memorandum and oversaw the preparation and execution of its securities offering. Id. ¶
6. The TNP 2008 Participating Notes Program “issued three classes of notes, which
purported to pay between 10 [and] 13% interest” on investments. Id. ¶ 51.
Berthel Fisher helped TNP raise approximately $26,224, 903 from public investors,
including Plaintiffs, in the offering related to the TNP 2008 Participating Notes Program.
Id. ¶ 11. Berthel Fisher’s relationship with TNP, along with the fact that Berthel Fisher
had participated in prior TNP offerings, “gave it extensive access to TNP . . . [,]
allow[ing] Berthel Fisher to gain knowledge of the misconduct and red flags indicating
misconduct that surrounded TNP and its offerings.” Id. ¶ 9. TNP conducted the offerings
for the TNP 2008 Participating Notes Program, the TNP 12% Notes Program, LLC and
the TNP Vulture Fund III, LLC at the same time, id. ¶44, and “used investor money to
9
pay distributions to investors in other TNP programs in Ponzi-scheme fashion,” id. ¶ 46.
As the managing broker-dealer and underwriter of the TNP 2008 Participating
Notes Program, Berthel Fisher, directly and through its agents, distributed the
Memorandum to investors, including Plaintiffs, “and offered and sold them securities
issued by the TNP 2008 [Participating Notes Program].” Id. ¶ 92.
C. TNP’s Deteriorating Financial Condition
As of April 2008, TNP had lost $444,421. Id. ¶ 53. By September 2008, those
losses escalated to $4,058,000. Furthermore, from April 2008 to September 2008, TNP’s
equity fell from $8,505,897 to $5,393,188. Id. As of November 2008, two TNP real
estate operations had defaulted on financial obligations of approximately $1,300,000. Id.
¶ 54. From January 2009 to September 2009, TNP incurred approximately $16,000,000
in operating losses and for the year ending on December 31, 2009, TNP incurred
approximately $25,839,000 in operating losses, resulting in a negative net equity of
approximately $13,580,000. Id. ¶ 55.
On approximately April 26, 2010, TNP initiated a private placement offering in
connection with the TNP Profit Participating Program, LLC. Id. ¶ 42. This program was
organized to operate similarly to the TNP 2008 Participating Notes Program, with the
proceeds of this offering to go towards investments in real estate and real estate-related
debt. Id. The Profit Participating Program, LLC Private Placement Memorandum
“disclosed that ‘TNP has suffered losses since its inception,’ and that since 2008, TNP had
guaranteed the unsecured debt obligations of the TNP 12% Program and the TNP 2008
[Participating Notes Program], which together had raised almost $50,000,000.” Id. ¶ 43.
D. TNP 2008 Participating Notes Program Private Placement Memorandum
The Memorandum required each investor in the TNP 2008 Participating Notes
Program, including Plaintiffs, to acknowledge in writing that he or she based his or her
decision to invest in the TNP 2008 Participating Notes Program on the Memorandum and
10
relied only on the information in the Memorandum, and not upon any representations made
by any other person. Id. ¶ 97.
Plaintiffs allege that the Memorandum contained several material misrepresentations
and omissions. Id. ¶ 8. Specifically, Plaintiffs allege that the Memorandum contained the
following misrepresentations and omissions: (1) the Memorandum stated that “investors’
money would be used to fund or invest in real estate and real-estate related debt”; (2) the
Memorandum stated that, if “$25,000,000 is raised, of 100% of the investors’ proceeds,
11% would be used for offering-related expenses and commissions and the remaining 89%
would be used for ‘investments’”; (3) the Memorandum omitted “that investor proceeds
would be used for Ponzi-like payments of ‘distributions’ to earlier TNP 2008 [Participating
Notes Program] investors, commingled with funds from other TNP programs, and/or
transferred to TNP affiliates in related party transactions that were not in [the] TNP 2008
[Participating Notes Program]’s best interest”; (4) the Memorandum “emphasized the role
that TNP played in organizing the TNP 2008 Offering,” but omitted any statements as to
“TNP’s rapidly deteriorating financial situation”; (5) the Memorandum “assured investors
that their investment and the interest on that investment would be guaranteed by TNP”; (6)
a September 30, 2008 TNP financial statement, attached to the Memorandum (“TNP
Balance Sheet”), showed $21,801,019 in assets, which included $6,430,966 in Notes
Receivable from a related party that “were uncollectible loans to TNP founder Tony
Thompson and/or entities controlled by him”; (7) the Memorandum omitted any
disclosures “that the TNP Balance Sheet did not accurately reflect TNP’s finances”; (8)
the “Risks” section of the Memorandum did not disclose that TNP’s losses were increasing
and did “not mention possible risks to [the] TNP 2008 [Participating Notes Program]’s
operations and success arising out of TNP’s growing . . . financial problems”; (9) the
Memorandum “emphasized . . . TNP management’s ‘extensive experience’ in real estate”;
(10) the Memorandum “failed to disclose that TNP was conducting other offerings through
11
misrepresentations and omissions . . . and was converting funds invested in such offerings
by misusing such funds and commingling them without disclosure to, and permission from,
investors”; (11) and the Memorandum specified several “Events of Default” that would
provide investors with remedies and trigger the acceleration of their notes, including “[a]n
event of insolvency or other similar event with respect to TNP” and “[b]reaches of
[Memorandum] ‘Covenants’ such as violations of the ‘Use of Proceeds’ clause, which
mandated that investors’ money be used to fund or invest in real estate and real estaterelated debt,” however, the Memorandum did not state that “Events of Default had already
occurred as a result of TNP’s insolvency or similar events and because of the violation of
the Use of Proceeds clause.” Id. ¶¶ 66-68, 70, 72-80.
Plaintiffs further allege that Berthel Fisher was aware of TNP’s deteriorating
financial condition and knew that the Memorandum failed to disclose the true state of
TNP’s financial condition to potential investors because Berthel Fisher served as a brokerdealer for other TNP-sponsored programs.
Berthel Fisher was also aware of the
“concomitancy of the multiple offerings for TNP programs, designed to raise funds for the
same types of investments” and of evidence that TNP was commingling funds. Id. ¶ 86.
However, “Berthel Fisher failed to conduct adequate due diligence as to TNP and
the TNP 2008 [Participating Notes Program].” Id. ¶ 84. This failure was in part because
Berthel Fisher made commissions as high as 9% and received a 1% due diligence fee for
its role in relation to the TNP 2008 Participating Notes Program. Id. ¶ 88. In addition,
Berthel Fisher entered into an indemnification agreement with the TNP 2008 Participating
Notes Program, providing that the TNP 2008 Participating Notes Program would
indemnify Berthel Fisher from civil liabilities, including liabilities under the Securities Act,
arising out of or in relation to the TNP 2008 Participating Notes Program. Id. ¶ 89.
Finally, “Berthel Fisher’s ability to conduct adequate due diligence was further impaired
by the conflict of interest in which Berthel Fisher put itself when it, in effect, became an
12
equity partner in the TNP 2008 [Participating Notes Program],” since it was “promised
10% of the TNP 2008 [Participating Notes Program]’s profits” “[f]or its role in promoting
the TNP 2008 [Participating Notes Program].” Id. ¶¶ 89-90.
E. Plaintiffs Invest in the TNP 2008 Participating Notes Program
The Memorandum required every investor in the TNP 2008 Participating Notes
Program, including Plaintiffs, “to acknowledge in writing that he [or she] had based his
[or her] decision to invest in the TNP 2008 [Participating Notes Program] on the
[Memorandum] and had relied ‘only on the information contained in said [Memorandum]
and ha[d] not relied upon any representations made by any other person.’” Id. ¶ 97.
From December 2008 to March 2010, over 200 investors, including Plaintiffs, invested
in the TNP 2008 Participating Notes Program and relied on the Memorandum. The TNP
2008 Participating Notes Program raised $26,224,903 from investors through the use of
the misleading Memorandum. Hanson invested $75,000 in the TNP 2008 Participating
Notes Program. Prior to making his investment, Hanson received the Memorandum and
made his investment in reliance on the information in the Memorandum, which he believed
to be true and accurate. Id. ¶ 100.
In 2012, the TNP 2008 Participating Notes Program defaulted on payments owed
to investors. In the Memorandum, TNP guaranteed the investment and the interest on that
investment, but it failed to honor that guarantee. On June 5, 2013, FINRA filed an “Order
Accepting Offer of Settlement” between the Department of Enforcement of FINRA and
Wendy Worcester. Order Accepting Offer of Settlement (docket no. 1-1).2 Worcester was
the chief administrative officer at TNP and the co-chief compliance officer of TNP
Securities, LLP, a wholly owned subsidiary of TNP whose purpose was to “act as a
2
The court notes that plaintiffs attached the Order Accepting Offer of Settlement
to their original complaint (docket no. 1). However, the amended Complaint supersedes
the original complaint and the Order Accepting Offer of Settlement, although referenced
in the Complaint, was not reattached.
13
wholesale broker-dealer for offerings of TNP and its affiliated entities.” Id. at 3. In the
Order Accepting Offer of Settlement, FINRA sanctioned Worcester for several violations,
including for failing to adequately investigate the TNP 2008 Participating Notes Program,
among other programs, before promoting them to investors. Id. at 8-10. Furthermore,
FINRA found that Worcester failed to conduct adequate due diligence with respect to the
TNP 2008 Participating Notes Program offering because “the representations in the
[Memorandum] regarding the financial condition of TNP had become materially
misleading in that they failed to disclose adequately the true deteriorating financial
condition of TNP and its ability to fulfill its obligations regarding guaranty of principal and
interest.” Id. at 9.
VI. SECURITIES LAW VIOLATIONS (COUNTS I, II ,VII AND VIII)
A. Did Berthel Fisher Have a Duty to Disclose and/or Investigate?
In the Complaint, Plaintiffs allege that Berthel Fisher “assisted in the promotion of
several TNP programs as a [m]anaging [b]roker-[d]ealer, underwriter, and/or retail
broker.” Complaint ¶ 31. With respect to the TNP 2008 Participating Notes Program,
Plaintiffs allege that “Berthel Fisher oversaw the securities offering for the TNP 2008
[Participating Notes Program] to investors, as [m]anaging [b]roker-[d]ealer and
underwriter.” Id. ¶ 40; see also id. ¶ 83 (“As the underwriter and [m]anaging [b]roker[d]ealer for the TNP 2008 [Participating Notes Program], Berthel Fisher received a 1%
‘due diligence’ fee of the TNP 2008 offering proceeds, which proceeds totaled over $26
million.”); id. ¶ 92 (“In its capacity of [m]anaging [b]roker-[d]ealer and underwriter of
the TNP 2008 [Participating Notes Program] offering of securities to investors, including
Plaintiff, Berthel Fisher, directly and/or through its agents, approached the TNP 2008
[Participating Notes Program] investors, including Plaintiff, distributed the . . .
[Memorandum] to them, and offered and sold them securities issued by the TNP 2008
[Participating Notes Program].”). In addition, the Memorandum states that the TNP 2008
14
Participating Notes Program
[n]otes will be offered and sold on a ‘best efforts’ basis by
broker-dealers, or the Selling Group, who are members of . . .
FINRA. Berthel Fisher . . . , a member of FINRA, will act
as managing broker-dealer, and will receive a managing
broker-dealer fee of 2.0% of the gross proceeds of the
Offering . . . selling commissions of up to 7% of the Gross
Proceeds and a nonaccountable marketing and due diligence
allowance of 1.0% of the Gross Proceeds.
Memorandum at 5 n.1. According to Plaintiffs, Berthel Fisher failed to conduct adequate
due diligence and failed “to adequately investigate . . . red flags” “surrounding both TNP
and the TNP 2008 [Participating Notes Program].” Complaint ¶¶ 87, 85.
1.
Parties’ arguments
In the Motion, Defendants contend that the court should dismiss Plaintiffs’ claims
in Counts I, II, III, IV, V, VII, VIII, IX and X3 because they owed no duty to Plaintiffs.
Defendants assert that they were under no duty to disclose to Plaintiffs because, although
a duty to disclose may arise “as a result of prior statements—i.e., as necessary to ensure
that prior statements are ‘not misleading,’” or when there is a fiduciary relationship
between the parties, neither of these situations is present in the instant case because
Defendants did not make the alleged misrepresentations in the Memorandum—TNP
did—and because Plaintiffs failed to sufficiently plead that Defendants oversaw the offering
or acted as an underwriter. Brief in Support of the Motion (docket no. 22-1) at 18-19.
Defendants further contend that an underwriter refers to “those who purchase securities
from an issuer with a view to the distribution of any security, as well as anyone who
participates directly or indirectly in any such undertaking.” Id. at 19 n.3 (citing In re
Lehman Bros. Sec. & ERISA Litig., 681 F. Supp. 2d. 495, 499 (S.D.N.Y. 2010), aff’d,
3
Accordingly, this defense applies to several Plaintiffs’ claims that do not assert
securities law violations. Nonetheless, the court finds it appropriate to discuss this defense
here and will refer back to this section when it addresses those claims infra.
15
In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011)).
According to Defendants, Berthel Fisher was not an underwriter because the TNP 2008
Participating Notes Program notes were solely issued by TNP and/or the TNP 2008
Participating Notes Program, not Defendants. In the Reply, Defendants further argue that
Berthel Fisher is not an underwriter because this case involves a private securities offering,
not a public offering, and, thus, Berthel Fisher cannot qualify as an underwriter.
Furthermore, Defendants argue that, even if Berthel Fisher was an underwriter to the TNP
2008 Participating Notes Program, Defendants were not required to conduct a due
diligence investigation on the offering. Rather, Berthel Fisher “was the [m]anaging
[b]roker-[d]ealer for the [TNP 2008 Participating Notes Program]. There is no ‘special
relationship’ arising out of this role.” Id. at 20.
In the Resistance, Plaintiffs contend that Berthel Fisher acted as the underwriter for
the TNP 2008 Participating Notes Program securities offering and that Defendants’ attempt
to distinguish a “managing broker-dealer” from an “underwriter” is a “distinction without
a difference” because the terms “are used interchangeably in the securities industry in
connection with the issuance of securities.” Resistance at 12. Plaintiffs argue that
“Berthel Fisher meets or exceeds the ‘broad’ definition of underwriter with respect to the
TNP 2008 [Participating Notes Program] offering” because the Memorandum “explicitly
states that” the notes would be offered on a best efforts basis with Berthel Fisher acting
as the managing broker-dealer and because Berthel Fisher’s actual role in the TNP 2008
Participating Notes Program indicated that it acted as an underwriter because: (1)“it
undertook to offer and sell the TNP 2008 securities ‘on a best efforts basis’”; (2) “it was
paid a managing broker-dealer fee, a marketing allowance, due diligence fees, and
organizational and offering expenses”; and (3) “it recruited, organized, [and] managed a
selling group of broker-dealers that helped it promote the [TNP 2008 Participating Notes
Program] to” investors and “negotiated their selling agreements.” Id. at 13. In light of
16
its underwriter status, then, Plaintiffs contend that Berthel Fisher owed investors due
diligence and disclosure duties.
Plaintiffs also argue that Berthel Fisher owed Plaintiffs a duty because: (1) Plaintiffs
“were the foreseeable victims of the harm arising out of the TNP 2008 [Participating Notes
Program], which Berthel Fisher promoted to them”; (2) Plaintiffs “were the third-party
beneficiaries of the due diligence duties Berthel Fisher undertook for the TNP 2008
[Participating Notes Program] offering”; and (3) the shingle theory imposes a duty on
Berthel Fisher. Resistance at 20. In the Reply, Defendants argue that Plaintiffs are not
third-party beneficiaries under the Memorandum because Berthel Fisher “is not a party to,
and has no obligations under” the Memorandum. Reply at 2. Defendants also argue that
the shingle theory does not apply to this case because “Hanson was not [Berthel Fisher]’s
customer, and [Berthel Fisher] made no recommendations to Hanson.” Id. at 4.
2.
Applicable law
The Securities Act of 1933 defines an “underwriter” as:
[A]ny person who has purchased from an issuer with view to,
or offers or sells for an issuer in connection with, the
distribution of any security, or participates or has a direct or
indirect participation in any such undertaking, or participates
or has a participation in the direct or indirect underwriting of
any such undertaking; but such term shall not include a person
whose interest is limited to a commission from an underwriter
or dealer not in excess of the usual and customary distributors’
or sellers’ commission. As used in this paragraph the term
“issuer” shall include, in addition to an issuer, any person
directly or indirectly controlling or controlled by the issuer, or
any person under direct or indirect common control with the
issuer.
15 U.S.C. § 77b(11); see also In re Lehman Bros. Sec. & ERISA Litig., 681 F. Supp. 2d.
at 499 (holding that two rating agencies, Moody’s and Standard & Poor’s, were not
underwriters within the meaning of the 1933 Securities Act because the rating agencies did
17
not “participate[] in the relevant ‘undertaking’—that of purchasing the securities . . . at
issue . . . ‘from the issuer with a view to their resale’” (quoting 15 U.S.C. § 77b(11)));
Cal. Corp. Code § 25022 (“‘Underwriter’ means a person who has agreed with an issuer
or other person on whose behalf a distribution is to be made (a) to purchase securities for
distribution or (b) to distribute securities for or on behalf of such issuer or other person or
(c) to manage or supervise a distribution of securities for or on behalf of such issuer or
other person.”). For the purposes of the Securities Act of 1933, an underwriter includes
those who conduct both firm commitment and best efforts underwritings.
Dale v.
Rosenfeld, 229 F.2d 855, 857 (2d Cir. 1956) (stating that the definition of an
“underwriter” pursuant to 15 U.S.C. § 77b(11) “includes a best efforts underwriting as
well as a firm commitment” (internal quotation marks omitted)). “In a ‘best efforts’
underwriting, the underwriter undertakes to sell the offering to the public but assumes no
responsibility for any shares not sold.” SEC v. Coven, 581 F.2d 1020, 1022 n.2 (2d Cir.
1978) (citing Jennings & Marsh, Securities Regulation 75 (3d ed. 1972)). In comparison,
a “firm commitment” underwriting is where “the underwriter assumes the risk of loss on
the unsold portion of the distribution.” Id.
Federal courts recognize that underwriters have an obligation to investigate an
issuer. SEC v. Dain Rauscher, Inc., 254 F.3d 852, 858 (9th Cir. 2001) (holding that the
underwriter “had a duty to make an investigation that would provide him with a reasonable
basis for a belief that the key representations in the statements provided to the investors
were truthful and complete” (citing Sanders v. John Nuveen & Co., 554 F.2d 790, 793
(7th Cir. 1977) (recognizing that an underwriter has a duty to investigate an issuer, and
that a reckless failure to do so may give rise to 10b-5 liability)). “An underwriter must
investigate and disclose material facts that are known or ‘reasonably ascertainable.’”
Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634, 641 (D.C. Cir. 2008) (quoting
Municipal Securities Disclosure, Exchange Act Release No. 26,100, 41 SEC Docket 1131
18
(Sept. 22, 1988), 1988 WL 999989, at *20). “[T]he securities laws impose a special duty
on underwriters to perform a so-called ‘due diligence’ investigation of the issuer of any
securities they underwrite.” Bass v. Janney Montgomery Scott, Inc., 210 F.3d 577, 587
(6th Cir. 2000).
A private placement offering, although exempt from the registration requirements
under Section 5 of the Securities Act of 1933, is not exempt from the anti-fraud provisions
of the federal securities laws. See FINRA Regulatory Notice 10-22, Obligation of BrokerDealers to Conduct Reasonable Investigations in Regulation D Offerings (April 2010),
available
at
http://www.finra.org/web/groups/ industry/@ip/@reg/
@notice/documents/notices/p121304.pdf.
The [SEC] and federal courts have long held that a [brokerdealer] that recommends a security is under a duty to conduct
a reasonable investigation concerning that security and the
issuer’s representations about it. This duty emanates from the
[broker dealer’s] “special relationship” to the customer, and
from the fact that in recommending the security, the [brokerdealer] represents to the customer “that a reasonable
investigation has been made and that [its] recommendation
rests on the conclusions based on such investigation.”
Id. at 3 (footnotes omitted) (quoting Hanly v. SEC, 415 F.2d 589, 597 (2d Cir. 1969)); see
also Bass, 210 F.3d at 582 (“As underwriter of the private placement of securities . . . [the
underwriter] was required to perform a ‘due diligence’ investigation of [the issuer].”); id.
at 587 (“[B]ecause [the defendant] was the lead underwriter for the private placement of
[the securities] . . . [the defendant] was under a statutorily imposed duty to perform due
diligence on [the issuer].”); Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d
940, 950 (9th Cir. 2005) (reversing the district court’s dismissal of a complaint alleging
securities fraud pursuant to Rule 10b-5 against defendants, who helped the issuer of the
securities arrange a private placement of $25 million of its stock).
19
3.
Application
The court finds that Plaintiffs have alleged sufficient facts in the Complaint to
support a finding at this stage of the litigation that Berthel Fisher acted as an underwriter
for the TNP 2008 Participating Notes Program and owed Plaintiffs a duty to investigate
and/or a duty to conduct due diligence as to TNP and/or the TNP 2008 Participating Notes
Program. Plaintiffs have alleged that Berthel Fisher “participate[d] or ha[d] a direct or
indirect participation in . . . [the] undertaking” of “purchas[ing] from [TNP] with a view
to, or offer[ed] or s[old] for [TNP] in connection with, the distribution of” the TNP 2008
Participating Notes Program notes. 15 U.S.C. § 77b(11). Moreover, the court finds
Defendants’ argument that a private placement offering disposes of any potential liability
for Berthel Fisher to conduct an investigation into the TNP 2008 Participating Notes
Program offering and/or TNP as well as liability for the alleged misrepresentations in the
Memorandum to be without merit. See FINRA Regulatory Notice 10-22 (providing that
a broker dealer in a private offering is still obligated to conduct a reasonable investigation).
Defendants rely on the Eighth Circuit Court of Appeals’s analysis in Ackerberg v.
Johnson, 892 F.2d 1328, 1335 (8th Cir. 1989) to support their argument that Berthel
Fisher is not liable as an underwriter. Reply at 2. However, in Ackerberg, the Eighth
Circuit found that the defendant was not an underwriter for registration purposes (i.e.,
pursuant to §§ 4(1) and (5) of the Securities Act of 1933, 15 U.S.C. §§ 77d(a)(1) and 77e)
because no distribution occurred. Ackerberg, 892 F.2d at 1335. The Eighth Circuit noted
in its discussion on whether the defendant was an underwriter that it was not addressing
the plaintiff’s “§ 12(2) 1933 Act claim against [the defendant] . . . . The § 4(1) exemption
is irrelevant to the [§ 12(2)] claim, which is based on misrepresentation.” Id. at 1334 n.3.
In other words, the Eighth Circuit’s holding that the defendant was not an underwriter
pursuant to § 4(1) was irrelevant for purposes of the anti-fraud provisions of the Securities
Act of 1933. Id. Furthermore, as discussed above, the anti-fraud provisions apply to
20
securities transactions that do not involve a public offering. See, e.g., Bass, 210 F.3d at
582.
In addition, the court is not persuaded by the authority that Defendants rely on to
support their claim that, even if Berthel Fisher was an underwriter, Defendants owed no
duty to Plaintiffs. See Brief in Support of the Motion at 19 n.3 (citing In re Enron Corp.
Securities, Derivative & ERISA Litig., 761 F. Supp. 2d 504, 571-73 (S.D. Tex. 2011)
(finding that a defendant bank was not liable for securities fraud, in part, because it owed
the plaintiffs no duty to disclose, where the defendant was not an underwriter and the
plaintiffs “[did] not even plead that they saw or read” an analyst report authored by the
defendant, “[n]or did one of [the defendant’s] analysts address, no less recommend,” the
securities at issue, and because the plaintiffs did not allege that the defendant made or
participated in the preparation of the allegedly misleading offering documents)).
Accordingly, the court is satisfied that, for purposes of the Motion seeking dismissal under
Rule 12(b)(6), Berthel Fisher acted as an underwriter for the TNP 2008 Participating Notes
Program and owed Plaintiffs a duty to investigate and/or a duty to conduct due diligence
as to TNP and/or the TNP 2008 Participating Notes Program. In light of this finding, the
court finds it unnecessary to address whether Berthel Fisher owed any duties to Plaintiffs
as third-party beneficiaries or pursuant to the shingle theory. However, the court notes
that Plaintiffs’ additional arguments on these grounds bolster the court’s finding that
dismissal is not warranted because Plaintiffs sufficiently alleged that Berthel Fisher owed
Plaintiffs a duty to investigate and/or to conduct due diligence as to TNP and/or the TNP
2008 Participating Notes Program.
B. Is Berthel Fisher the “Maker” of the Alleged Misrepresentations?
In the Motion, Defendants argue that the court should dismiss Plaintiffs’ claims in
21
Counts I, II, III, IV, VII, VIII and IX4 of the Complaint because Defendants are not liable
for the alleged misrepresentations in the Memorandum because, “[a]s a matter of law, all
of the alleged misrepresentations contained in the [Memorandum] are attributed to TNP
and the [TNP 2008 Participating Notes Program], and not to Defendants.” Motion at 17.
According to Defendants, such liability falls solely on TNP and the TNP 2008
Participating Notes Program. Defendants further argue that the court should rely on the
United States Supreme Court’s analysis in Janus Capital Grp., Inc. v. First Derivative
Traders, __ U.S. __, 131 S. Ct. 2296 (2011). Defendants recognize that, in Janus, the
Supreme Court considered a claim pursuant to federal securities laws and regulations, but
contend that “[t]he federal securities laws are materially similar” to California
Corporations Code sections 25401 and 25400 and Iowa Code sections 502.501 and
502.501A and, accordingly, the court should be persuaded by the Supreme Court’s
analysis in Janus. Motion at 16. Plaintiffs do not specifically address this argument.
Rather, Plaintiffs assert that Defendants are liable pursuant to alternative legal theories that
impose a duty on Defendants to disclose and to perform due diligence.
As a preliminary matter, the court agrees with Defendants’ assertion that federal
cases construing federal securities laws are persuasive authority when interpreting
California and Iowa securities laws. See Viterbi v. Wasserman, 123 Cal. Rptr. 3d 231,
239 (Cal. Ct. App. 2011) (“[F]ederal cases construing federal securities laws are
persuasive authority when interpreting [California] state securities law.”). Furthermore,
California courts have recognized that California Corporations Code sections 25401 and
25504 “are modeled after section 12(2) of the Securities Act of 1933 (15 U.S.C. § 77L et
seq.).” Id.; see also Moreland v. Dep’t of Corps., 239 Cal. Rptr. 558, 561 (Cal. Ct. App.
4
Accordingly, Defendants assert that this defense applies to all of Plaintiffs’ claims
pursuant to the securities laws as well as Plaintiffs’ fraudulent inducement and negligent
misrepresentation claims. The court finds it appropriate to address this defense before
addressing those specific claims, and will refer back to this section, infra, as needed.
22
1987) (“The California Corporate Securities Law was patterned after the federal Securities
Act of 1933.”).
Similarly, Iowa courts look to federal courts’ interpretation of federal securities
laws for guidance in interpreting Iowa securities laws. See State ex rel. Miller v. Pace,
677 N.W.2d 761, 767 n.2 (Iowa 2004) (“Because [Iowa’s] securities law is somewhat
patterned after federal securities law, we look to federal decisions for guidance in
interpreting our state statute.”); State ex rel. Goettsch v. Diacide Distribs., Inc., 561
N.W.2d 369, 372 (Iowa 1997) (“[Iowa’s] securities statute is modeled somewhat after the
Securities Exchange Act of 1934. Therefore, cases interpreting the 1934 Securities
Exchange Act are persuasive.” (citation omitted)). This reliance is somewhat tempered
“by the differing purposes of federal and state securities laws.” State ex rel. Miller, 677
N.W.2d at 767 n.2. “‘The suppression of fraudulent practices and the protection of the
public from their own gullibility are commonly accepted as the primary purposes of Blue
Sky Laws.’” Id. (quoting Lolkus v. Vander Wilt, 141 N.W.2d 600, 603 (Iowa 1966)); see
also Midwest Mgmt. Corp. v. Stephens, 291 N.W.2d 896, 901 (Iowa 1980) (“The general
purpose of [Iowa’s securities laws] is to protect the public from deceit perpetrated in the
sale of securities . . . [and] should be liberally construed to effectuate their purpose.”).
However, the federal securities laws “have the ‘broader purpose of protecting the integrity
of the increasingly nationalized [securities] market.’” State ex rel. Miller, 677 N.W.2d
at 767 n.2 (alteration in original) (quoting King v. Pope, 91 S.W.3d 314, 320 (Tenn.
2002)). In light of the foregoing, the court will consider other federal courts’ application
of the federal securities laws in construing the California and Iowa securities laws in the
instant case.
In Janus, the plaintiffs, a class of stockholders in Janus Capital Group, Inc.
(“JCG”), sued JCG and its wholly owned investment advisor subsidiary, Janus Capital
23
Management LLC (“JCM”), pursuant to SEC Rule 10b-55 for alleged misstatements in a
prospectus that Janus Investment Fund, a separate entity owned by mutual fund investors,
issued. Janus, 131 S. Ct. at 2299. The issue in Janus was whether JCM “made” the
statements in the prospectus, rendering it liable under Rule 10b-5. Id. at 2301. The
Supreme Court reasoned that, under Rule 10b-5, “the maker of a statement is the entity
with authority over the content of the statement and whether and how to communicate it.”
Id. at 2303. Although the Supreme Court recognized that JCM may have helped draft the
prospectus, it held that JCM was not the “maker” of the statements because the prospectus
was not attributed to JCM and JCM’s “assistance” in drafting the prospectus was “subject
to the ultimate control of Janus Investment Fund.” Id. at 2305. Rather, Janus Investment
Fund filed the prospectus and ultimately controlled the content of the prospectus and was
therefore liable for any misstatements therein. Id.
In the Complaint, Plaintiffs assert that “Defendants participated in the preparation
of the [Memorandum].” Complaint ¶ 64. Plaintiffs do not assert, in the Complaint or in
their briefs, that Defendants had the ultimate authority over the content in the
Memorandum. Moreover, the Memorandum states that TNP “shall have full, exclusive
and complete discretion to manage and control the business and affairs of the [TNP 2008
Participating Notes Program].” Memorandum at 90.
The court finds that, to the extent that the laws under which Plaintiffs assert their
5
Rule 10b-5 makes it unlawful “[t]o make any untrue statement of a material fact
or to omit to state a material fact necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b5(b). Cf. Cal. Corp. Code § 25400(d) (making it unlawful for “a broker-dealer or other
person selling or offering for sale” a security “to make . . . any statement which was, at
the time and in the light of the circumstances under which it was made, false or misleading
with respect to any material fact, or which omitted to state any material fact necessary in
order to make the statements made, in the light of the circumstances under which they
were made, not misleading”). Rule 10b-5, promulgated under §10(b) the Securities
Exchange Act of 1934, is one of the primary ways the SEC targets securities fraud.
24
claims require that Defendants made the misrepresentations in the Memorandum, the
Supreme Court’s analysis in Janus is persuasive. Defendants’ alleged “participation in the
preparation,” Complaint ¶ 64, of the Memorandum is not sufficient to support an
allegation that Defendants made the misrepresentations in the Memorandum. See Janus,
131 S. Ct. at 2303 (“[T]he maker of a statement is the entity with authority over the
content of the statement and whether and how to communicate it.”). However, the court
finds this does not, on its own, necessarily support dismissal of Counts I, II, III, IV, VII,
VIII and IX. Rather, the court will bear this analysis in mind as it addresses each claim
and, to the extent that a claim requires a finding that Defendants were the makers of the
misrepresentations in the Memorandum, the court will dismiss that claim.
C. The Bespeaks Caution Doctrine
1.
Parties’ arguments
Defendants argue that the court should dismiss each of Plaintiffs’ claims alleging
securities law violations in Counts I, II, VII and VIII pursuant to the “bespeaks caution
doctrine.”6
Brief in Support of the Motion at 21.
According to Defendants, the
Memorandum “is replete with disclosures about the issuer ([the TNP 2008 Participating
Notes Program]) and its guarantor (TNP). . . .
Those disclosures rendered the
misrepresentations alleged in the [Complaint] immaterial as a matter of law.” Id. at 21-22.
The disclosures that Defendants assert render any alleged misrepresentations or omissions
immaterial
addressed risks attendant to the investment, the guarantor, and
6
Because Defendants argue that this defense applies to each of Plaintiffs’ claims
alleging a violation of the securities laws, the court shall address it before addressing those
claims specifically. Plaintiffs claims under the securities laws are pursuant to both
California and Iowa law, however, because it appears that the bespeaks caution doctrine
applies in the same way to claims brought under either California or Iowa securities laws,
and the parties do not contend otherwise, the court will analyze the bespeaks caution
doctrine generally.
25
disclosed TNP’s sole and absolute discretion concerning the
operation of the business. Those disclosures indicated that the
financial statements included with the [Memorandum] were not
verified by an independent third party. Those disclosures
advised, and all investors agreed as a condition of their
participation, to rely upon their own examination (not [Berthel
Fisher’s]) in deciding whether to invest in the [TNP 2008
Participating Notes Program].
Id. (emphasis omitted). It then follows, according to Defendants, that since materiality is
an essential element of Plaintiffs’ securities law claims, the court should dismiss them.
Defendants address the disclosures and cautionary statements in the Memorandum
more specifically in the Brief in Support of the Motion at 12-14. Defendants cite the
following cautionary language and risk factors in the Memorandum: (1) “[F]orwardlooking statements [in the Memorandum] are subject to risks, uncertainties and
assumptions about the [TNP 2008 Participating Notes Program’s] operations and
investments.” Memorandum at 17; (2) “An investment in the Notes is speculative and is
suitable only for persons who are able to evaluate the risks of the investment . . . [and]
bear the risk of and withstand the total loss of their investment.” Id. at 18; (3) “There is
no assurance that the cash flow, profits or capital of the [TNP 2008 Participating Notes
Program] will be sufficient to pay all interest and repay principal on the Notes in a timely
manner or at all or that the [TNP 2008 Participating Notes Program] will be profitable.”
Id.; (4) “If TNP is required to perform on [a guarantee related to an affiliate program] or
future guarantees on other debt obligations or otherwise experiences an adverse financial
event, it is possible that TNP may not have sufficient funds or resources to manage TNP
or perform under its guaranty of the Notes.” Id.; (5) The Memorandum states that the
Balance Sheet is “unaudited.” Id.; (6) Neither TNP nor the TNP 2008 Participating Notes
Program are “obligated to refrain from engaging in activities or transactions that involve
a conflict of interest, which favor the interests of [TNP] over the interests of the
Noteholders or which are otherwise adverse to Noteholders, unless such activities or
26
transactions are specifically prohibited.” Id. at 20; and (7) The TNP 2008 Participating
Notes Program has the power to “fund loans to or equity investments in [TNP] or its
Affiliates.” Id. at 88.
In the Resistance, Plaintiffs argue that the bespeaks caution doctrine does not apply
to the alleged securities violations because the misrepresentations and material omissions
in the Memorandum “pertain[] to contemporary facts and not forward-looking statements,
and the supposedly cautionary statements and risk disclosures were too general, did not
adequately disclose the risks, and did not directly address the substance of the
misrepresentations alleged in the” Complaint. Resistance at 17. Specifically, according
to Plaintiffs, “the proffered guarantee was worthless when given[ because] TNP’s default
had already occurred, TNP’s financials were already deteriorating, and TNP’s financial
statement attached to the [Memorandum] was already outdated and misleading.” Id. at 1718 (footnotes omitted). Thus, Plaintiffs contend that the court should deny the Motion to
the extent that it requests that the court dismiss their claims brought under the securities
laws pursuant to the bespeaks caution doctrine.
2.
Applicable law7
The Eighth Circuit has described the bespeaks caution doctrine as follows:
[W]hen an offering document’s forecasts, opinions or
7
In discussing the relevant law on the bespeaks caution doctrine, the parties cite
cases applying federal and state securities laws within the 8th and 9th Circuit Courts of
Appeals interchangeably. It appears to the court, and the parties do not dispute, that the
relevant law is substantially the same. See Sitrick v. Citigroup Global Mkts., Inc., No. CV
05-3731 AHM (PJWx), 2009 WL 1298148, at *8 n.18 (C.D. Cal. April 30, 2009)
(quoting Employers Teamsters Local Nos. 175 and 505 Pension Trust Fund v. Clorox Co.,
353 F.3d 1125, 1132 (9th Cir. 2004), and applying the bespeaks caution doctrine to
allegations pursuant to California Corporations Code sections 25400 and 25401, noting that
“[t]he [b]espeaks [c]aution doctrine is not restricted to federal securities laws”). The court
is unaware of any cases, and the parties cite none, applying the bespeaks caution doctrine
to a claim pursuant to Iowa Code sections 502.501 or 502.501A.
27
projections are accompanied by meaningful cautionary
statements, the forward-looking statements will not form the
basis for a securities fraud claim if those statements did not
affect the “total mix” of information the document provided
investors. In other words, cautionary language, if sufficient,
renders the alleged omissions or misrepresentations immaterial
as a matter of law.
Parnes v. Gateway 2000, Inc., 122 F.3d 539, 548 (8th Cir. 1997) (quoting In re Donald
J. Trump Casino Sec. Litig.–Taj Mahal Litig., 7 F.3d 357, 371 (3d Cir. 1993)) (applying
the bespeaks caution doctrine to alleged violations of federal securities laws). “The
cautionary language must ‘relate directly to that which plaintiffs claim to have been
misled.’” Id. (quoting Kline v. First W. Gov’t Sec., Inc., 24 F.3d 480, 489 (3d Cir.
1994)).
Similarly, the Ninth Circuit Court of Appeals has stated that “‘[t]he bespeaks
caution doctrine provides a mechanism by which a court can rule as a matter of law
(typically in a motion to dismiss . . . ) that defendants’ forward-looking representations
contained enough cautionary language or risk disclosure to protect the defendant against
claims of securities fraud.’” Employers Teamsters Local Nos. 175 and 505 Pension Trust
Fund v. Clorox Co., 353 F.3d 1125, 1132 (9th Cir. 2004) (quoting In re Worlds of Wonder
Sec. Litig., 35 F.3d 1407, 1413 (9th Cir. 1994)) (addressing a plaintiff’s claims pursuant
to sections 25400 and 25401). “[T]he ‘bespeaks caution’ doctrine has developed to address
situations in which optimistic projections are coupled with cautionary language—in
particular, relevant specific facts or assumptions—affecting the reasonableness of reliance
on and the materiality of those projections.” In re Worlds of Wonder Sec. Litig., 35 F.3d
at 1414 (quoting Rubinstein v. Collins, 20 F.3d 150, 167 (5th Cir. 1994)). “‘Blanket
warnings that securities involve a high degree of risk [are] insufficient to ward against a
federal securities fraud claim.’” Provenz v. Miller, 102 F.3d 1478, 1493 (9th Cir. 1996)
(alteration in original) (quoting In re Worlds of Wonder Sec. Litig., 35 F.3d at 1414).
28
“A dismissal of a securities fraud complaint under Rule 12(b)(6) should be granted
under the bespeaks caution doctrine only where ‘the documents containing defendants’
challenged statements include enough cautionary language or risk disclosure that
reasonable minds could not disagree that the challenged statements were not misleading.’”
Parnes, 122 F.3d at 548 (quoting Fecht v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995));
see also Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097 (1991) (“[N]ot every
mixture with the true will neutralize the deceptive. If it would take a financial analyst to
spot the tension between the one and the other, whatever is misleading will remain
materially so, and liability should follow.”); Livid Holdings Ltd., 416 F.3d at 947
(“Dismissal on the pleadings under the bespeaks caution doctrine . . . requires a stringent
showing . . . .”); Fecht, 70 F.3d at 1082 (“Inclusion of some cautionary language is not
enough to support a determination as a matter of law that defendants’ statements were not
misleading.”).
3.
Application
As noted above, “[a] dismissal of a securities fraud complaint under Rule 12(b)(6)
should be granted under the bespeaks caution doctrine only where ‘the documents
containing defendants’ challenged statements include enough cautionary language or risk
disclosure that reasonable minds could not disagree that the challenged statements were not
misleading.’” Parnes, 122 F.3d at 548 (quoting Fecht, 70 F.3d at 1082). The court finds
that, at the very least, “reasonable minds” could disagree as to whether the “total mix” of
information in the Memorandum is misleading. But cf. Parnes, 122 F.3d at 548 (affirming
the district court’s dismissal of the plaintiffs’ securities fraud claims pursuant to the
bespeaks caution doctrine where the defendant company’s cautionary statements, which
stated that, “[i]n the future, the [c]ompany may be required to collect sales and use taxes
or to pay state income tax and franchise taxes in states other than South Dakota” directly
addressed the substance of the plaintiffs’ allegation that the company faced potential tax
29
liability in states other than South Dakota); McGonigle v. Combs, 968 F.2d 810, 817 (9th
Cir. 1992) (affirming the district court’s grant of summary judgment in favor of the
defendants where the offering documents contained “specific disclaimers” and the alleged
misrepresentations were “openly hypothetical [in] nature”).
Unlike in Parnes, the
cautionary language that Defendants point to does not directly and specifically address the
substance of each of the misrepresentations and omissions that Plaintiffs allege. Unlike
in McGonigle, the alleged misrepresentations and omissions are not hypothetical in nature.
Furthermore, the alleged misrepresentations that Plaintiffs point to contain more than
merely “optimistic projections” that the bespeaks caution doctrine was developed to
address. In re Worlds of Wonder Sec. Litig., 35 F.3d at 1414 (quoting Rubinstein, 20 F.3d
at 167); see, e.g., Complaint ¶¶ 72, 75 (alleging that the Memorandum failed to disclose
“TNP’s rapidly deteriorating financial situation” and “that the TNP Balance Sheet did not
accurately reflect TNP’s finances”).
In the Complaint, Plaintiffs allege the existence of numerous material misstatements
and omissions in the Memorandum. See Complaint ¶¶66-82.8 The language from the
Memorandum that the Defendants cite is broad and is not specific enough to render the
alleged misrepresentation immaterial at this point in the litigation. Furthermore, when
considered in its entirety, at least some of the language that Defendants rely on conflicts
with other portions of the Memorandum. Compare Memorandum at 12 (asserting that the
TNP 2008 Participating Notes Program “will use the net proceeds from the Offering
primarily to fund or invest, directly or indirectly, in real estate and real-estate related
debt”), with id. at 88 (providing that the TNP 2008 Participating Notes Program has the
power to “fund loans to or equity investments in [TNP] or its Affiliates”). Thus, a factual
8
The court notes that “[t]he bespeaks caution doctrine is, as an analytical matter,
equally applicable to allegations of both affirmative misrepresentations and omissions.”
In re Donald J. Trump Casino Sec. Litigation, 7 F.3d at 371.
30
question exists as to whether the “total mix” of the language in the Memorandum is
materially misleading. See Parnes, 122 F.3d at 548 (quoting In re Donald J. Trump
Casino Sec. Litig., 7 F.3d at 357). Moreover, Plaintiffs allege that “the proffered
guarantee was worthless when given, TNP’s default had already occurred, TNP’s
financials were already deteriorating, and TNP’s financial statement attached to the
[Memorandum] was already outdated and misleading.” Resistance at 17-18 (footnotes
omitted). Therefore, Plaintiffs assert that some of the alleged misrepresentations were
false when made. See In re First Am. Ctr. Sec. Litig., 807 F. Supp. 326, 333 (S.D.N.Y.
1992) (holding that the disclaimers in a private placement Memorandum that bespeak
caution “do not necessarily shield a defendant from liability and are insufficient to sustain
a motion to dismiss, if plaintiffs allege particular facts demonstrating the defendant knew
that such statements were false at the time they were made”).
After reviewing the entire record, including the Memorandum, the court finds that
the disclosures and cautionary language contained therein are not sufficient to render the
alleged misrepresentations and omissions immaterial as a matter of law. See Provenz, 102
F.3d at 1493 (“‘Blanket warnings that securities involve a high degree of risk [are]
insufficient to ward against a federal securities fraud claim.’” (alteration in original)
(quoting In re Worlds of Wonder Sec. Litig., 35 F.3d at 1414)); Fecht, 70 F.3d at 1082
(“Inclusion of some cautionary language is not enough to support a determination as a
matter of law that defendants’ statements were not misleading.”). Furthermore, the
alleged misstatements, including the allegedly inaccurate Balance Sheet, the failure to
disclose TNP’s deteriorating financial conditions and the failure to disclose that proceeds
would be used to pay distributions to earlier investors in the TNP 2008 Participating Notes
Program, rather than for real estate investments, are not the “optimistic projections” that
the bespeaks caution doctrine seeks to address. See In re Worlds of Wonder Sec. Litig.,
35 F.3d at 1414 (quoting Rubinstein, 20 F.3d at 167). Accordingly, the Motion is denied
31
to the extent that it seeks dismissal of Plaintiffs’ claims in Counts I, II, VII and VIII
pursuant to the bespeaks caution doctrine.
D. Count I
In Count I of the Complaint, Plaintiffs claim that Defendants violated California
Corporations Code section 25401, which states:
It is unlawful for any person, in connection with the offer,
sale, or purchase of a security, directly or indirectly, to do any
of the following:
(a) Employ a devise, scheme, or artifice to defraud.
(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.
(c) Engage in an act, practice, or course of business that
operates or would operate as a fraud or deceit upon another
person.
Cal. Corp. Code § 25401. Plaintiffs contend that Defendants violated this provision
because they “offered for sale and sold TNP 2008 Notes to Plaintiff[s] . . . through
numerous untrue statements of material fact[] as well as omissions of material fact[] in the
[Memorandum] regarding the use of investment proceeds and TNP’s history and financial
condition.” Complaint ¶ 122. Alternatively, and to the extent that Defendants are not
sellers within the scope of California Corporations Code section 25401, Plaintiffs contend
that Defendants violated California Corporations Code section 25504, which provides:
Every person who directly or indirectly controls a person
liable under Section 25501[9] or 25503, every partner in a firm
9
Section 25501 provides that “[a]ny person who violates Section 25401 shall be
liable to the person who purchases a security from him or sells a security to him . . .
(continued...)
32
so liable, every principal executive officer or director of a
corporation so liable, . . . every employee of a person so liable
who materially aids in the act or transaction constituting the
violation, and every broker-dealer or agent who materially
aids in the act or transaction constituting the violation, are
also liable jointly and severally with and to the same extent as
such person, unless the other person who is liable had no
knowledge of or reasonable grounds to believe in the existence
of the facts by reason of which the liability is alleged to exist.
Cal. Corp. Code § 25504 (emphasis added). Plaintiffs assert that Defendants violated this
provision because they “knowingly and materially aided in the acts or transactions
constituting violations of [section] 25401.” Complaint ¶ 126.
In the Motion, Defendants argue that the court should dismiss Count I because
Defendants are not sellers within the meaning of California Corporations Code section
25401, Defendants are not liable for any alleged misstatements in the Memorandum,
Defendants are not the makers of the misrepresentations at issue, Defendants did not have
a duty to disclose information to Plaintiffs or investigate, there is no privity between
Plaintiffs and Defendants and Defendants did not materially aid in any securities law
violation.10
9
(...continued)
unless the defendant proves that the plaintiff knew the facts concerning the untruth or
omission or that the defendant exercised reasonable care and did not know . . . of the truth
or omission.” Cal. Corp. Code § 25501.
10
Because the court ultimately concludes that Plaintiffs’ claim in Count I can go
forward pursuant to section 25504, for reasons more fully explained herein, Defendants’
arguments that Defendants are not the “makers” of the misrepresentations at issue and that
Defendants did not have a duty to disclose information to Plaintiffs are inapplicable to this
claim, because section 25504 imposes liability on “every broker-dealer or agent who
materially aids in the act or transaction constituting [a] violation” of section 25501. Cal.
Corp. Code § 25504. Plaintiffs do not have to allege that Defendants had a duty to
disclose with respect to a claim alleging that Defendants materially aided in a violation of
(continued...)
33
1.
Are Defendants sellers under California Corporations Code section 25401?
a.
Parties’ arguments
In the Motion, Defendants contend that only sellers are liable pursuant to California
Corporations Code section 25401 and that strict privity is required between a plaintiffpurchaser and defendant-seller for a seller to be liable under section 25401. Defendants
further contend that they are not sellers because the Memorandum states that TNP is the
issuer of the TNP 2008 Notes and investors sent subscription agreements directly to the
TNP 2008 Participating Notes Program, which had the right to reject any investor
application. Furthermore, Defendants contend that, even if Defendants were sellers, they
“did not sell any notes to Hanson[,] Hanson was not [Berthel Fisher’s] customer[,] . . .
there is no privity . . . and [section] 25501 does not apply.” Brief in Support of the
Motion at 23. In the Resistance, Plaintiffs contend that there is no privity requirement to
state a claim pursuant to California Corporations Code section 25400 and 25500.11
Notably, Plaintiffs do not refute Defendants’ argument that Defendants did not sell any
notes to Plaintiffs.
b.
Analysis
As provided above, section 25401 states that
[i]t is unlawful for any person, in connection with the offer,
sale, or purchase of a security, directly or indirectly, to . . .
[m]ake an untrue statement of material fact or omit to state a
10
(...continued)
the securities laws. Accordingly, the court finds it unnecessary to discuss these arguments
pursuant to Count I.
11
In their Resistance, Plaintiffs do not claim that there is no privity requirement
under section 25401, the provision under which Plaintiffs assert primary liability in their
claim in Count I. Furthermore, although the case law that Plaintiffs rely on provides that
there is no privity requirement under section 25400, it does not suggest that privity is not
required under section 25401.
34
material fact necessary to make the statements made, in light
of the circumstances under which they were made, not
misleading.
Cal. Corp. Code § 25401.
The enforcement provision for this section is found in California Corporations Code
section 25501, which provides that “[a]ny person who violates [s]ection 25401 shall be
liable to the person who purchases a security from him or sells a security to him, who may
sue either for rescission or for damages.” Cal. Corp. Code § 25501 (emphasis added).
“Section 25501 on its face requires privity between the plaintiff and the defendant.”
Apollo Capital Fund, LLC v. Roth Capital Partners, LLC, 70 Cal. Rptr. 3d 199, 221 (Cal.
Ct. App. 2007) (holding that the defendant broker-dealer was not liable for a violation of
section 25401 because the investors did not purchase their securities from the brokerdealer). The Ninth Circuit has also held that liability under section 25401 requires strict
privity, stating that “liability [is] limited to actual sellers.” SEC v. Seaboard Corp., 677
F.2d 1289, 1296 (9th Cir. 1982); see also Scognamillo v. Credit Suisse First Boston LLC,
No. C03-2061 TEH, 2005 WL 2045807, at *9 (N.D. Cal. Aug 25, 2005) (“Unlike
section[] 25401 . . . sections 25400 and 25500 do not require direct privity—i.e., a sale
from defendant to plaintiff.”).
The court finds the California Court of Appeals’s analysis of section 25401 in
Apollo Capital Fund, LLC, persuasive. Furthermore, a plain reading of section 25501, the
enforcement provision associated with 25401, supports a finding that privity is required
between Plaintiffs and Berthel Fisher to state a claim pursuant to section 25401. In the
Resistance, Plaintiffs do not refute Defendants’ assertion that Berthel Fisher did not sell
any TNP 2008 Participating Notes Program notes to Plaintiffs.12 Accordingly, it appears
12
The court is not making a finding that Defendants did not sell or offer to sell the
notes to any investor. The court acknowledges that in the Complaint, Plaintiffs assert that
(continued...)
35
that Plaintiffs have elected to pursue their claim in Count I pursuant to section 25504 rather
than section 25401. The court shall grant the Motion to the extent that it requests the court
to dismiss Plaintiffs’ claim in Count I pursuant to 25401. However, this does not end the
inquiry into Plaintiffs’ claim in Count I, as Plaintiffs argue that, in the alternative, and
“[t]o the extent that Defendants are deemed not to be sellers of the TNP 2008
[Participating Notes Program] notes, Defendants are nonetheless liable for the
misrepresentations and omissions made in connection with those securities pursuant to
California Corporations Code [section] 25504.” Complaint ¶ 126.
2.
Are Defendants Liable Under California Corporations Code Section 25504?
a.
Privity
i.
Parties’ arguments
In the Motion, Defendants assert that the court should dismiss Plaintiffs’ alternative
argument in Count I, which seeks to impose liability on Defendants pursuant to section
25504, because section 22504 derives its liability from section 25501, which derives its
liability from section 25401 and, accordingly, privity is still required to state a claim
pursuant to section 25504.13 Thus, Defendants assert that “[b]ecause [Berthel Fisher] did
not sell any notes to Hanson (Hanson was not [Bertherl Fisher’s] customer), [section]
25504 does not apply.” Brief in Support of the Motion at 24.
In the Resistance, Plaintiffs assert that privity is not a requirement under section
12
(...continued)
“Berthel Fisher, directly and/or through its agents, approached the TNP 2008 Participating
Notes Program investors, including Plaintiff[s], distributed the TNP 2008 [Participating
Notes Program Memorandum] to them, and offered and sold them securities issued by the
TNP 2008 [Participating Notes Program].” Complaint ¶ 92.
13
As discussed above, privity is required to state a claim pursuant to section 25401,
as made clear by section 25501, the enforcement provision for section 25401. See Apollo
Capital Fund, LLC, 70 Cal. Rptr. 3d at 221 (“Section 25501 on its face requires privity
between the plaintiff and the defendant.”).
36
25504. Rather, Plaintiffs contend that, to state a claim under section 25504, Plaintiffs
must show that “Defendants (1) materially aided in the TNP 2008 [Participating Notes
Program] offering’s fraud; and (2) had knowledge of such false or misleading
representations or knew facts giving them reasonable grounds to know the statements were
false or misleading.” Resistance at 7.
ii.
Applicable law
As discussed above, section 25504 provides that “every employee of a person so
liable who materially aids in the act or transaction constituting the violation [of section
25501], and every broker-dealer or agent who materially aids in the act or transaction
constituting the violation [of section 25501]” is jointly and severally liable with the person
liable under section 25501. Cal. Corp. Code § 25504. Section 25504 “imposes ‘control
person’ liability or secondary liability on those who assist others in primary violations
under the California Securities Act.” Jackson v. Fischer, C 11-2753 PJH, 2013 WL
6732872, at *14 (N.D. Cal. Dec. 20, 2013). Stated differently, section 25504 “imposes
liability on a broker-dealer or agent who materially aids in the act or transaction.” Apollo
Capital Fund, LLC, 70 Cal. Rptr. 3d at 222; see also id. (contrasting section 25504 with
other securities statutes, including section 25401, that restrict liability to sellers and noting
that section 25504, “by contrast, defines liability of various participants”). “‘[N]o
occasion or justification exists for a court to impose liability based on [a participation]
theory on anyone other than the actual vendor of that security under . . . [section] 25401
and 25501 . . . because [section] 25504 . . . precisely set[s] forth the extent to which
persons other than the vendor may also be liable.’” Id. at 253-54 (second alteration in
original) (quoting 1 Marsh & Volk, Practice Under the California Securities Laws (rev.
ed. 2006) § 14.03, at 14-23). Accordingly, although privity is required to state a claim
pursuant to section 25401, privity is not required to state a claim pursuant to section
25504. Rather, section 25504 imposes liability on participants who materially aid in
37
another party’s violation of section 25401. See id.
In support of their assertion that strict privity is required to assert a claim under
section 25504, Defendants cite In re Diasonics Securities Litigation, 599 F. Supp. 447
(N.D. Cal. 1984). In that case, the plaintiffs alleged securities law violations against the
issuer of the securities, certain officers and directors and the underwriters, who
participated in the issuance of an allegedly materially misleading registration statement and
prospectus. Id. at 450. That court held that the plaintiffs failed to allege a claim pursuant
to section 25401 because they did not show privity with any of the defendants, including
the issuer, and therefore also failed to allege a claim under section 25504, stating that
“[s]ection 25504, by its terms, applies to violations of section 25501. Hence, strict privity
is still required.” Id. at 459.
In turn, Plaintiffs contend that privity is not required under section 25504 and that
Defendants reliance on and analysis of In re Diasonics Securities Litigation is improper.
Rather, Plaintiffs assert that the court should rely on the California Court of Appeals’s
analysis in Moss v. Kroner, 129 Cal. Rptr. 3d 220 (Cal. Ct. App. 2011). In Moss, the
California Court of Appeals observed that “[n]umerous courts have recognized that strict
privity is required only for claims of primary liability under section 25401 . . . and not for
secondary liability suits alleging joint and several liability for a violation of 25401.” Id.
at 228. That court went on to state that
as long as primary liability is stated or established with the
privity required by section 25501 and a violation of section
25401, secondary liability may also exist under section[] 25504
. . . for others who participated in the violation in the specific
roles listed in those sections without any further need for
privity between these secondarily liable actors and the
plaintiff.
Id. at 229; see also Apollo Capital Fund, LLC, 70 Cal. Rptr. 3d at 223 (holding that,
although the investor-plaintiff failed to allege a claim under section 25401 against the
38
broker-dealer-defendant, the plaintiff stated a claim under section 25504 against the
broker-dealer when the plaintiff alleged that the broker-dealer materially aided the
securities’ issuer by serving as a broker-dealer for the offering and actively soliciting
investors’ purchases by means of false or misleading statements).
iii.
Application
The court finds that privity between Berthel Fisher and Plaintiffs is not required for
Plaintiffs to state a claim pursuant to section 25504. So long as Plaintiffs alleged: (1) strict
privity between Plaintiffs and TNP or the TNP 2008 Participating Notes Program; and (2)
that TNP or the TNP 2008 Participating Notes Program violated section 25401, they can
state a cause of action against Berthel Fisher without alleging privity between Berthel
Fisher and Plaintiffs if they alleged that Berthel Fisher “participated in the violation in the
specific roles listed in [section 25504] without any further need for privity” between
Plaintiffs and Berthel Fisher. See Moss, 129 Cal. Rptr. 3d at 229.
Furthermore, the court is not persuaded by the United States District Court for the
Northern District of California’s analysis in In re Diasonics Securities Litigation because
the facts of that case are distinguishable from those in the instant matter. First, as
Plaintiffs point out, there is more recent case law that makes it clear that privity is
not required to show secondary liability against a broker-dealer pursuant to section 25504.
See, e.g., Moss, 129 Cal. Rptr. 3d at 229. Second, in In re Diasonics Securities
Litigation, the plaintiffs failed to allege a primary violation of 25401 because they failed
to allege privity between the plaintiffs and the issuer. It was because of this lack of privity
that the United States District Court for the Northern District of California found that the
plaintiffs’ claim pursuant to section 25504 failed. Such is not the case here. The court
finds that Plaintiffs have satisfied the plausibility standard required to survive a Rule
12(b)(6) motion with respect to this portion of their claim in Count I—primary liability as
to TNP and/or the TNP 2008 Participating Notes Program, the issuer of the notes that
39
Plaintiffs purchased,14 pursuant to section 25401. The court finds that the allegations as
to TNP and/or the TNP 2008 Participating Notes Program’s primary liability are sufficient
to allege a violation of section 25401, which states that
[i]t is unlawful for any person, in connection with the offer,
sale, or purchase of a security, directly or indirectly, to . . .
[e]mploy a devise, scheme, or artifice to defraud . . . [,]
[m]ake 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 . . . [,] [or] [e]ngage in an act, practice, or course
of business that operates or would operate as a fraud or deceit
upon another person.
Cal. Corp. Code § 25401. There is no dispute that the TNP 2008 Participating Notes
Program issued the securities and, thus, the court finds that the privity requirement with
respect to this claim is satisfied.
The allegations in the Complaint of material
misrepresentations and omissions in the Memorandum, which was used to promote the
TNP 2008 Participating Notes Program, that the TNP 2008 Participating Notes Program
commingled investors’ funds and operated in a Ponzi-scheme-like fashion, are sufficient
to allege primary liability against TNP and/or the TNP 2008 Participating Notes Program
in violation of section 25401.15 However, this does not end the inquiry because Plaintiffs
14
Defendants acknowledge that the TNP 2008 Participating Notes Program was the
issuer of the notes at issue. Brief in Support of Motion at 13 (“The [TNP 2008
Participating Notes Program] (not [Berthel Fisher]) was the ‘issuer’ of the notes.” (quoting
Memorandum at 4)).
15
To the extent that Defendants contend that the Complaint fails to allege that TNP
and/or the TNP 2008 Participating Notes Program violated section 25401, the court finds
such argument unavailing. The plain language of section 25401 imposes liability on a
seller of securities, such as TNP and/or the TNP 2008 Participating Notes Program, who
“[m]ake[s] an untrue statement of material fact or omit[s] . . . a material fact necessary to
make the statements made, in light of the circumstances under which they were made, not
(continued...)
40
must also allege that Berthel Fisher “materially aided” in TNP and/or the TNP 2008
Participating Notes Program’s primary violation under section 25501 for their claim in
Count I to go forward pursuant to section 25504. See Cal. Corp. Code § 25504.
b.
Materially aid
i.
Parties’ arguments
In the Reply, Defendants further contend that the court should dismiss Plaintiffs’
claim pursuant to section 25504 in Count I because the Complaint does not sufficiently
allege that Berthel Fisher materially aided in the violation. Defendants point out that
Plaintiffs “must sufficiently allege that [Berthel Fisher] ‘materially aided, not simply in the
transaction, but in the violation.’” Reply at 6 (quoting Apollo Capital Fund, LLC,70 Cal.
Rptr. 3d at 223). Defendants argue that Plaintiffs failed to allege material assistance
because the Complaint does not allege that the Memorandum “contains an actionable false
statement or omission” and because Berthel Fisher did not use the Memorandum to sell
securities to Plaintiffs. Reply at 6-7.
Plaintiffs contend that they sufficiently alleged that Defendants materially aided in
the violation because they allege that Defendants promoted the TNP 2008 Participating
15
(...continued)
misleading.” Cal. Corp. Code § 25401. Defendants contend that Plaintiffs do not allege
that the Memorandum contains an “objectively false statement” and that the Ninth Circuit’s
analysis in Brody v. Transitional Hosps. Corp., 280 F.3d 997 (9th Cir. 2002) supports
their assertion that the Memorandum must contain an “objectively false” statement. Reply
at 6. However, in Brody, in applying § 10(b) of the Securities and Exchange Act of 1984
and Securities and Exchange Commission (“SEC”) Rule 10b-5, 16 C.F.R. § 240.10b-5,
the Ninth Circuit stated that the securities laws “prohibit only misleading and untrue
statements, not statements that are incomplete.” Brody, 280 F.3d at 1006. For an
omission to be actionable, it “must be misleading; in other words it must affirmatively
create an impression of a state of affairs that differs in a material way from the one that
actually exists.” Id. Material misrepresentations and omissions such as those
contemplated by the Ninth Circuit in Brody are precisely the actionable conduct that
Plaintiffs allege in the Complaint.
41
Notes Program and solicited investors as the managing broker-dealer of the TNP 2008
Participating Notes Program, “contributed to the Memorandum, organized the selling
group of broker-dealers for the offering, oversaw the offering, compensated other brokerdealers for recruiting investors to [the] TNP 2008 [Participating Notes Program],
conducted due diligence as to [the] TNP 2008 [Participating Notes Program], and
exercised control over the bank account from which the investor funds were transferred”
to the TNP 2008 Participating Notes Program. Resistance at 8. In addition, Plaintiffs
argue that the Complaint sufficiently alleges that Defendants knew or should have known
of the alleged misrepresentations and omissions in the Memorandum “because of their role
in preparing the [Memorandum], their positions as underwriter of the [TNP 2008
Participating Notes Program], and their role in promoting other TNP-sponsored
programs.” Id. at 8-9.
In the Sur Reply, Plaintiffs contend that Defendants materially aided in TNP and/or
the TNP 2008 Participating Notes Program’s primary violations related to the TNP 2008
Participating Notes Program offering because “they knew the [Memorandum] whose
distribution they planned, oversaw, and executed was materially misleading.” Sur Reply
at 2. Plaintiffs further state that they “pled primary violations by TNP and the TNP 2008
[Participating Notes Program] by citing to numerous material misrepresentations and
omissions in the [Memorandum].” Id.
ii.
Applicable law
To show that a defendant “materially aided” in the violation, a plaintiff must show
that the defendant did more than play an active role in the offering. Apollo Capital Fund,
LLC, 70 Cal. Rptr. 3d at 223-24. However, a plaintiff is not required to go so far as to
show that the defendant “actual[ly] participat[ed] in drafting the false or misleading
statements” by which the notes were sold. Id. at 224. Rather,
[t]o plead that [a broker-dealer-defendant] materially aided [the
issuer] in the latter’s sales of the . . . notes by false or
42
misleading representations, the investor[-plaintiffs] were
required to plead facts showing [the broker-dealer’s]
knowledge of the false or misleading nature of the
representations in the offering documents (or that [the brokerdealer] knew facts giving it reasonable grounds to know the
statements were false or misleading).
Id. In Apollo Capital Fund, LLC, the California Court of Appeals held that a brokerdealer was liable pursuant to section 25504 where the investor-plaintiffs showed that the
issuer sold the securities by means of an untrue or misleading statement in the offering
document. The court held that the broker-dealer materially aided in that violation because,
although the broker-dealer did not actually draft the offering documents, the broker-dealer
“had actual knowledge of the false or misleading nature of the representations in the
offering documents” that it used to solicit purchases. Id.
Accordingly, in order to assert that a broker-dealer-defendant is liable under section
25504, the plaintiff must allege that the broker-dealer knew of the false or misleading
representations in the offering documents and that the broker-dealer materially aided in the
violation, which requires an allegation that the broker-dealer did more than play an active
role in the offering, such as an allegation that the broker-dealer “solicited the purchase of
the . . . notes with [materially misleading] offering documents” with knowledge that the
documents were materially misleading. Id.
iii.
Application
The court finds that the Complaint sufficiently alleges that Berthel Fisher materially
aided TNP and/or the TNP 2008 Participating Notes Program’s violation under section
25401 and is liable pursuant to section 25504.
The Complaint contains sufficient
allegations that Berthel Fisher knew of the misleading statements and material omissions
in the Memorandum.
See, e.g., Complaint ¶¶ 58-59.
In addition, the Complaint
sufficiently alleges that Berthel Fisher materially aided in TNP and/or the TNP 2008
Participating Notes Program’s violations of section 25401. See id. ¶¶ 64-65 (alleging that
43
Defendants participated in the preparation of the Memorandum, which contained material
misrepresentations and omissions); id. ¶¶ 83-91 (alleging that Defendants failed to conduct
adequate due diligence for the TNP 2008 Participating Notes Program); ¶¶ 92-96 (alleging
that Defendants offered and sold securities issued by the TNP 2008 Participating Notes
Program to Plaintiffs and oversaw and managed the TNP 2008 Participating Notes
Program). In addition, the Memorandum states that the role of the Broker-Dealer (Berthel
Fisher) is to “recommend[] a purchase of the Notes.” Memorandum at 47. Therefore,
Plaintiffs have pled sufficient allegations to support their claim in Count I pursuant to
section 25504.
c.
Summary
In light of the foregoing, the court finds that Plaintiffs have sufficiently pled a claim
against Defendants in Count I of the Complaint. As discussed above, it appears that
Plaintiffs decided to forego their claim pursuant to section 25401 in the Resistance.
Therefore, the court grants the Motion to the extent that it requests the court dismiss
Plaintiffs’ claim in Count I pursuant to section 25401. However, the court finds that
Plaintiffs’ alternative argument in Count I—that Defendants are liable pursuant to section
25504—was sufficiently pled in the Complaint because Plaintiffs alleged a primary
violation pursuant to section 25501 against TNP and/or the TNP 2008 Participating Notes
Program and that Defendants had knowledge of the alleged misrepresentations in the
Memorandum and materially aided in the act or transaction constituting such violation.
Furthermore, because there is no requirement in section 25504 that Defendants “made”
the misleading statements, Defendants argument on that ground does not apply to this
claim. Accordingly, the court shall deny the Motion to the extent that it requests that the
court dismiss Plaintiffs’ claim pursuant to section 25504 in Count I of the Complaint.
E. Count II
In Count II of the Complaint, Plaintiffs assert that Defendants violated California
44
Corporations Code section 25400, which states that it is unlawful for any person,
[i]f such person is a broker-dealer or other person selling or
offering for sale or purchasing or offering to purchase the
security,[16] to make, for the purpose of inducing the purchase
or sale of such security by others, any statement which was, at
the time and in the light of the circumstances under which it
was made, false or misleading with respect to any material
fact, or which omitted to state any material fact necessary in
order to make the statements made, in the light of the
circumstances under which they were made, not misleading,
and which he knew or had reasonable ground to believe was so
false or misleading.
Cal. Corp. Code § 25400(d).
California Corporations Code section 25500 is the
enforcement provision for section 25400, and states that “[a]ny person who willfully[17]
participates in any act or transaction in violation of [s]ection 25400 shall be liable to any
other person who purchases or sells any security at a price which was affected by such act
or transaction for the damages sustained by the latter as a result of such act or
transaction.”18
Cal. Corp. Code § 25500. In the Complaint, Plaintiffs assert that
Defendants violated section 25400 because they “made numerous untrue statements of
16
The court notes that the parties do not dispute whether the TNP 2008 Participating
Notes Program notes qualify as a security. The definition of a security under California
law includes “any note [or] stock.” Cal. Corp. Code § 25019. It appears that the notes
fall comfortably within this definition.
17
Thus, section 25400 requires “intent to defraud through a knowingly false
statement.” Calif. Amplifier, Inc. v. RLI Ins. Co., 113 Cal. Rptr. 2d 915, 923 (Cal. Ct.
App. 2001).
18
The court notes that section 25500 does not require privity like section 25501
does. Rather, section 25500 is more broad. “‘Under section 25501 the defendant is only
liable to the person with whom he deals; whereas, under Section 25500 the defendant may
be liable to any person trading in the market.’” Mirkin v. Wasserman, 858 P.2d 568, 581
(Cal. 1993) (alterations omitted) (quoting 1 Marsh & Volk, Practice Under the California
Securities Law (1993) §14.05[2][e], at 14-50).
45
material facts as well as omissions of material facts” in the Memorandum as to the TNP
2008 Participating Notes Program’s use of investment proceeds and TNP’s financial
condition, “and adopted such statements when they distributed, and/or directed and
oversaw the distribution of, the misleading [Memorandum] to investors.” Complaint ¶
135. Plaintiffs further assert that “Defendants knew and/or had reasonable grounds to
know of such misrepresentations and omissions in such offering documents,” id. ¶ 139,
and that “[t]he price of the securities purchased by Plaintiff[s] . . . were affected by
Defendants’ violations of [section] 25400 and thus, such violations were the proximate
cause of the losses suffered by Plaintiff[s].” Id. ¶ 141.
1.
Parties’ arguments
In addition to the Defendants’ bespeaks caution doctrine argument and their
argument that Defendants are not the makers of any alleged misrepresentations in the
Memorandum, Defendants contend that the court should dismiss Plaintiffs’ claim in Count
II of the Complaint because Plaintiffs’ allegations in Count II “rest[] on alleged omissions
. . . [and] a person is not liable for an omission unless there is a duty to disclose.” Brief
in Support of the Motion at 18 (emphasis omitted). Defendants opine that, although “[a]
duty to disclose may arise as a result of prior statements—i.e., as necessary to ensure that
prior statements are ‘not misleading,’” id., such is not the case here because “Defendants
were not the makers of any representations, truthful or otherwise. No duty to speak arose
out of anything [Berthel Fisher] said to [Plaintiffs] because [Berthel Fisher] did not say
anything to [Plaintiffs],” id. at 19. In addition, Defendants state that a duty to disclose
may arise where there is a particular relationship between the parties, but “there is no
‘special relationship’ between [Berthel Fisher] and [Plaintiffs] giving rise to an independent
duty to speak.” Id. Finally, Defendants contend that Plaintiffs failed to plead sufficient
facts to allege that Berthel Fisher’s oversight role with respect to the offering or its role
as an underwriter created a duty to disclose. See id. (citing Fed. R. Civ. P. 9(b)).
46
In the Resistance, Plaintiffs contend that Defendants owed Plaintiffs a duty to
disclose and to exercise due diligence because “Berthel Fisher acted as an underwriter of
the TNP 2008 [Participating Notes Program] . . . [and] certain duties flow from
underwriting a securities offering such as [the] TNP 2008 [Participating Notes Program]
and the breach of such duties give[s] rise to primary liability for the underwriter.”
Resistance at 11-12. Pursuant to its status as an “underwriter,” Plaintiffs argue that
Berthel Fisher owed a duty to conduct due diligence and a “duty to disclose material
information to” Plaintiffs. Id. at 13. Plaintiffs contend that Berthel Fisher was an
underwriter with respect to the TNP 2008 Participating Notes Program offering because
the Memorandum states that “the Notes will be offered and sold on a ‘best efforts’ basis
by broker-dealers, or the Selling Group . . . Berthel Fisher . . . will act as managing
broker-dealer.” Memorandum at 5. Plaintiffs further contend that
Berthel Fisher’s actual role makes it clear that it acted as a
“best efforts” underwriter: it undertook to offer and sell the
TNP 2008 [Participating Notes Program] securities on a best
efforts basis; it was paid a managing broker-dealer fee, a
marketing allowance, due diligence fees, and organizational
and offering expenses; and it recruited, organized, [and]
managed a selling group of broker-dealers and helped it
promote the [TNP 2008 Participating Notes Program] to the
investing public, and negotiated their selling agreements.
Resistance at 13 (footnotes and quotation marks omitted) (quoting Memorandum at 5, 22,
25, 32, 34 and 92).
In the Reply, Defendants contend that Berthel Fisher was not an underwriter
because there was no public offering in the instant case. Defendants opine that the
authorities that Plaintiffs rely on in the Resistance are inapplicable to the instant case,
which involves a private offering of securities. Alternatively, Defendants argue that, even
if Berthel Fisher were an underwriter for the TNP 2008 Participating Notes Program,
“there is ‘no statutory requirement that an underwriter conduct a due diligence
47
investigation into a proposed public or private offering.’” Reply at 3 (quoting In re Enron
Corp. Sec., Derivative & ERISA Litig., 761 F. Supp. 2d at 572).
In addition, Plaintiffs contend that Berthel Fisher owed Plaintiffs “a duty to . . .
deal fairly, reasonably, and with integrity under the ‘shingle theory.’” Resistance at 15.
In the Reply, Defendants contend that the shingle theory is not applicable to this case
because Plaintiffs were not Berthel Fisher’s customers and Berthel Fisher did not
recommend investing in the TNP 2008 Participating Notes Program to Plaintiffs.
2.
Analysis
Section 25400 makes it unlawful for “a broker-dealer . . . to make, for the purpose
of inducing the purchase or sale of such security by others, any statement which was . . .
false or misleading with respect to any material fact.” Cal. Corp. Code § 25400(d)
(emphasis added). As more fully discussed above, pursuant to the Supreme Court’s
analysis in Janus, Defendants did not make the alleged misleading statements in the
Memorandum because TNP and the TNP 2008 Participating Notes Program had the final
authority over the content in the Memorandum, not Defendants. See Janus, 131 S. Ct. at
2303 (“[T]he maker of a statement is the entity with authority over the content of the
statement and whether and how to communicate it.”). Based on a plain reading of section
25400(d), it follows that Berthel Fisher cannot be liable under this provision because it did
not make the allegedly misleading statements. Accordingly, the Motion is granted to the
extent that it requests that the court dismiss Plaintiffs’ claim in Count II of the Complaint.
F. Count VII
In Count VII of the Complaint, Plaintiffs claim that Defendants violated Iowa Code
section 502.501, which states:
It is unlawful for a person, in connection with the offer, sale,
or purchase of a security, directly or indirectly . . . [t]o make
an untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not
48
misleading . . . .
Iowa Code § 502.501.19
Plaintiffs contend that Defendants violated this provision
“[b]ecause of their role in preparing the [Memorandum], their position of underwriter and
[m]anaging [b]roker-[d]ealer of the TNP 2008 [Participating Notes Program], and their
role in promoting certain other TNP-sponsored programs, Defendants knew and/or had
reasonable grounds to know of such misrepresentations and omissions” in the
Memorandum. Complaint ¶ 181.
Alternatively, and “[t]o the extent that Defendants are deemed not to be sellers of
the TNP 2008 [Participating Notes Program] notes,” id. ¶ 182, Plaintiffs assert that
Defendants violated Iowa Code section 502.509(7)(d),20 which imposes liability, jointly
and severally, upon certain broker dealers, among others, and sellers of a security who sell
in violation of section 502.30121 or
by means of an untrue statement of a material fact or an
omission to state a material fact necessary in order to make the
statement made, in light of the circumstances under which it
was made, not misleading, the purchaser not knowing the
untruth of omission and the seller not sustaining the burden of
proof that the seller did not know and, in the exercise of
19
Iowa law defines a security, in part, as a “note [or] stock.” Iowa Code §
502.102(28). The parties do not dispute that the TNP 2008 Participating Notes Program
notes qualify as securities.
20
The court notes that in the Complaint, Plaintiffs cite Iowa Code section 501.509,
a provision that does not exist in the Iowa Code. In the Reply, Defendants contend that,
in light of this typographical error, Plaintiffs have failed to state a claim. See Reply at 7.
The court finds that, in light of the context, it is clear that Plaintiffs intended to cite Iowa
Code section 502.509, rather than 501.509, and will consider Plaintiffs’ claim pursuant
to the appropriate section.
21
Section 502.301 makes it unlawful to sell a security in Iowa unless the security
is registered, exempted from registration or a covered federal security. This provision is
not relevant to the instant matter.
49
reasonable care, could not have known the untruth or
omission.
Iowa Code § 502.509(2). “A person that is a broker-dealer[22] . . . that materially aids in
the conduct giving rise to the liability under” section 502.509(2) is liable “unless the
person sustains the burden of proof that the person did not know and, in the exercise of
reasonable care could not have known, of the existence of conduct by reason of which
liability is alleged to exist.” Id. § 502.509(7)(d). Similarly, section 502.509(7)(a) imposes
joint and several liability on “[a] person that directly or indirectly controls a person liable
under” section 502.509(2) and section 502.509(7)(b) imposes joint and several liability on
“[a]n individual who is a managing partner, executive officer, or director of a person liable
under” section 502.509(2). Plaintiffs claim that Defendants violated section 502.509(7)
because they “materially aided in the violation of [section] 50[2].509 by TNP and the TNP
2008 [Participating Notes Program], and knew or should have known of such violations.”
Complaint ¶ 182.
1.
Iowa Code section 502.501
Iowa Code section 502.501 makes it unlawful “[t]o make an untrue statement of
material fact.” Iowa Code § 502.501 (emphasis added). As discussed above, in light of
the Supreme Court’s analysis in Janus, Defendants did not make the alleged misleading
statements in the Memorandum because TNP and the TNP 2008 Participating Notes
Program had the final authority over the content in the Memorandum, not Defendants. See
Janus, 131 S. Ct. at 2303 (“[T]he maker of a statement is the entity with authority over
the content of the statement and whether and how to communicate it.”). In addition, as
the court found with respect to Plaintiffs’ claim in Count I, it appears that Plaintiffs have
22
Section 502.102(4) defines “Broker-dealer” as “a person engaged in the business
of effecting transactions in securities for the account of others or for the person’s own
account. The term does not include . . . [a]n agent . . . [or] [a]n issuer.” Iowa Code §
502.102(4).
50
elected to forego their argument that Defendants are “sellers” of the TNP 2008
Participating Notes Program notes under the securities laws and, instead, pursue this claim
under their alternative argument. Accordingly, the Motion is granted to the extent that it
requests that the court dismiss Plaintiffs’ claim in Count VII pursuant to section 502.501.
However, this does not end the inquiry into Count VII and the court will next discuss
Plaintiffs’ alternative argument in Count VII—that Defendants violated section 502.509.
2.
Iowa Code section 502.509
a.
Parties’ arguments
In the Motion and Reply, Defendants argue that the court should dismiss Plaintiffs’
claim pursuant to section 502.509 in Count VII for the following reasons: (1) pursuant to
the bespeaks caution doctrine, which the court has already found does not foreclose
Plaintiffs’ securities-law claims; (2) because Defendants did not “make” any alleged
misrepresentations, however, section 502.509 imposes liability on one who “materially
aids” one who made the misrepresentation and, thus, a showing that Defendants made the
alleged misrepresentations is not necessary; (3) because Defendants had no duty to
disclose, however, Plaintiffs do not have to establish that Defendants had a duty to disclose
with respect to a claim alleging that Defendants materially aided in a violation of the
securities laws; (4) because Defendants did not materially aid TNP or the TNP 2008
Participating Notes Program in a violation of section 502.509(2); and (5) because Plaintiffs
have not alleged that the TNP 2008 Participating Notes Program notes were offered for
sale or purchased in Iowa. The court will discuss (4)23 and (5), as it has addressed
Defendants’ assertions (1) through (3) above.
23
The court notes that it already determined that Plaintiffs provided sufficient facts
to allege that Defendants materially aided TNP and/or the TNP 2008 Participating Notes
Program in a primary violation under California law. Although the analysis is similar
under Iowa law, the court will analyze and apply Iowa law with respect to Count VII.
51
b.
Analysis
The court’s analysis of a claim under Iowa Code section 502.509(7) is comparable
to that under California Corporations Code section 25504. To allege liability upon
Defendants for “materially aid[ing]” TNP and/or the TNP 2008 Participating Notes
Program in their primary violation of section 502.509(2), Plaintiffs must first have alleged
a primary violation of section 502.509(2) by TNP or the TNP 2008 Participating Notes
Program. Section 502.509(2) states that
[a] person is liable to the purchaser if the person sells a
security . . . by means of an untrue statement of a material fact
or an omission to state a material fact necessary in order to
make the statement made, in light of the circumstances under
which it is made, not misleading, the purchaser not knowing
the untruth or omission and the seller not sustaining the burden
of proof that the seller did not know and, in the exercise of
reasonable care, could not have known of the untruth or
omission.
Iowa Code § 502.509(2).
The court finds that Plaintiffs’ allegations in the Complaint: (1) of the existence of
material misrepresentations and omissions in the Memorandum, which was used to
promote the TNP 2008 Participating Notes Program and for which TNP and the TNP 2008
Participating Notes Program is responsible; (2) that the TNP 2008 Participating Notes
Program commingled investors’ funds; and (3) that the TNP 2008 Participating Notes
Program operated in a Ponzi-scheme-like fashion, are sufficient to allege primary liability
against TNP and/or the TNP 2008 Participating Notes Program in violation of section
502.509(2).
Next, to allege a violation of section 502.509(7), Plaintiffs must allege that
Defendants materially aided in the conduct giving rise to TNP and/or the TNP 2008
Participating Notes Program’s primary violation.
Plaintiffs must also allege that
Defendants had or should have had knowledge of the violation. See Pender State Bank v.
52
Remington, 777 N.W.2d 128 (Table), No. 08-1799, 2009 WL 3775094, at *5 (Iowa Ct.
App. 2009) (discussing the additional knowledge requirement under section 502.509(7) and
stating that “‘a person who merely aids and abets the violation has no liability if he or she
can prove a reasonable lack of knowledge of such facts’”) (quoting State ex rel. Miller,
677 N.W.2d at 769). The court finds that Plaintiffs have sufficiently alleged Defendants’
knowledge “in light of [Defendants’] role in promoting certain other TNP-sponsored
programs.” Complaint ¶ 181 (“Because of their role in preparing the [Memorandum],
their position of underwriter and [m]anaging [b]roker-[d]ealer of the TNP 2008
[Participating Notes Program], and their role in promoting certain other TNP-sponsored
programs, Defendants knew and/or had reasonable grounds to know of such
misrepresentations and omissions in [the Memorandum].”).
Plaintiffs contend that they sufficiently alleged that Defendants materially aided in
the violation because they alleged that Defendants promoted the TNP 2008 Participating
Notes Program and solicited investors as the managing broker-dealer of the TNP 2008
Participating Notes Program, “contributed to the Memorandum, organized the selling
group of broker-dealers for the offering, oversaw the offering, compensated other brokerdealers for recruiting investors to [the] TNP 2008 [Participating Notes Program],
conducted due diligence as to [the] TNP 2008 [Participating Notes Program], and
exercised control over the bank account from which the investor funds were transferred”
to the TNP 2008 Participating Notes Program. Resistance at 8. In addition, Plaintiffs
argue that the Complaint sufficiently alleges that Defendants knew or should have known
of the alleged misrepresentations and omissions in the Memorandum “because of their role
in preparing the [Memorandum], their positions as underwriter of the [TNP 2008
Participating Notes Program], and their role in promoting other TNP-sponsored
programs.” Id. at 8-9.
Plaintiffs rely on the Iowa Supreme Court’s analysis in State ex rel. Goettsch, 561
53
N.W.2d 369, to support their argument that Defendants materially aided TNP and/or the
TNP 2008 Participating Notes Program in the violation. In State ex rel. Goettsch, the state
brought a case alleging securities fraud pursuant to Iowa Code chapter 502 on behalf of
investors. Id. at 370. The Iowa Supreme Court found that the district court erred in
dismissing the plaintiffs’ claim asserting secondary liability for securities fraud against a
defendant who allegedly aided and abetted in the primary violation.24 Id. at 384. The
Iowa Supreme Court held that the language in section 502.503 “is broad enough to include
persons who are not affiliates of primary violators nor partners” and that it “imposes
secondary liability on any person who ‘materially aid[s] and abet[s] in the act or
transaction constituting’ the securities fraud.” Id. at 374 (alterations in original) (quoting
§ 502.503). The Iowa Supreme Court held that, to establish secondary liability, the
plaintiff must show “that the alleged aider and abettor . . . provided substantial assistance
in the achievement of the primary violation.” Id. at 382. The Iowa Supreme Court further
stated that “substantial assistance requires a showing (1) of a ‘substantial causal connection
between the culpable conduct of the alleged aider and abettor and the harm to the plaintiff’
or (2) that ‘the encouragement or assistance is a substantial factor in causing the resulting
tort.’” Id. (quoting Metge v. Baehler, 762 F.2d 621, 624 (8th Cir. 1985)). In addition,
the Iowa Supreme Court stated that “substantial assistance can take the form of positive
deeds of manipulation or deception or it can take the form of inaction” where the alleged
24
The statutes at issue in State ex rel. Goettsch were section 502.401, which is
similar to current section 502.501, and section 502.503 (imposing liability on “persons
. . . who materially aid and abet in the act or transaction constituting the violation [of
section 502.501, 502.502 or 502.401] and broker-dealers or agents who materially aid and
abet in the act or transaction constituting the violation”), which is similar to current section
502.509. The language of the statute has changed so that, where it imposed secondary
liability on one who “materially aid[s] and abet[s] in the act or transaction constituting the
violation,” State ex rel. Goettsch, 561 N.W.2d at 374, it now imposes secondary liability
on one who “materially aids in the conduct giving rise to the liability,” Iowa Code §
502.509(d).
54
aider and abettor owes the plaintiff an independent duty to disclose. Id. The Court went
on to hold that the alleged aider-and-abettor defendant provided substantial assistance to
the defendant-issuer of promissory notes in the perpetration of a “fraudulent Ponzi
scheme,” id. at 382, when the aider and abettor covered bad checks and provided checking
accounts, loans, free accounting services, fax machine services, secretarial support and
business phones. Id. at 383. Thus, “without [the aider and abettor’s] assistance, the Ponzi
scheme would have collapsed long before it did.” Id.
The court finds that Plaintiffs’ allegations are sufficient for this claim to go forward.
Specifically, Plaintiffs allege that Defendants “knew the [Memorandum][,] whose
distribution they planned, oversaw, and executed was materially misleading.
They
intended that investors rely on that [Memorandum] to invest their money, of which a
significant percentage went to Defendants as payment for their key role in the
distribution.” Sur Reply at 2; see also Complaint ¶¶ 64-65 (alleging that Defendants
participated in the preparation of the Memorandum, which contained material
misrepresentations and omissions); id. ¶¶ 83-91 (alleging that Defendants failed to conduct
adequate due diligence for the TNP 2008 Participating Notes Program); ¶¶ 92-96 (alleging
that Defendants offered and sold securities issued by the TNP 2008 Participating Notes
Program to Plaintiffs and oversaw and managed the TNP 2008 Participating Notes
Program); Memorandum at 47 (stating that the role of the Broker-Dealer (Berthel Fisher)
is to “recommend[] a purchase of the Notes”). Plaintiffs have sufficiently alleged that,
“without [Berthel Fisher’s] assistance, the [TNP 2008 Participating Notes Program] would
have collapsed long before it did.” See State ex rel. Goettsch, 561 N.W.2d at 382.
The court also finds that Defendants’ argument that Plaintiffs’ claim pursuant to
section 502.509 fails because Plaintiffs have not alleged that the TNP 2008 Participating
Notes Program notes were offered for sale or purchased in Iowa is without merit. Iowa
Code section 502.610 states that “section 502.509 . . . do[es] not apply to a person that
55
sells or offers to sell a security unless the offer to sell or the sale is made in [Iowa] or the
offer to purchase or the purchase is made and accepted in [Iowa].” Iowa Code §
502.610(1). Similarly, this provision also provides that “section 502.509 . . . do[es] not
apply to a person that purchases or offers to purchase a security unless the offer to
purchase or the purchase is made in [Iowa] or the offer to sell or the sale is made and
accepted in [Iowa].” Id. § 502.610(2). This provision clarifies that “an offer to sell or
to purchase a security is made in [Iowa], whether or not either party is then present in this
state, if . . . the offer originates from within [Iowa].” Id. § 502.610(4). An “offer to
sell” “includes every attempt or offer to dispose of, or solicitation of an offer to purchase,
a security or interest in a security for value.” Id. § 502.102(26).
According to Defendants, section 502.509 does not apply because there is no
allegation in the Complaint that the sale or offer took place in Iowa and “Hanson is a
Colorado resident who purchased securities from an issuer in California.” Reply at 7.
However, the Complaint states that “[a]ll of the violations of the Iowa Uniform Securities
Act complained of herein took place in Iowa, where Berthel Fisher’s headquarters are
located . . . because the conduct giving rise to such violations by Defendants took place
in, or was directed or overseen from, Berthel Fisher’s headquarters.” Complaint ¶ 175.
The court finds that Plaintiffs’ allegations in the Complaint are sufficient for their claim
pursuant to section 502.509(7) to go forward in view of the jurisdictional requirements
under section 502.610, particularly in light of the broad definition of “offer to sell” under
502.102(26).
Plaintiffs have alleged that Berthel Fisher offered the TNP 2008
Participating Notes Program notes for sale and that such offer originated from their Iowabased headquarters. Therefore, Plaintiffs have pled sufficient allegations to support their
claim in Count VII pursuant to section 502.509(7) and the Motion is denied to the extent
that it requests that the court dismiss Plaintiffs’ claim in Count VII of the Complaint.
56
G. Count VIII
In Count VIII of the Complaint, Plaintiffs claim that Defendants violated Iowa Code
section 502.501A, which states:
A broker-dealer or agent shall not effect a transaction in, or
induce or attempt to induce the purchase or sale of, any
security in this state by means of any manipulative, deceptive,
or other fraudulent scheme, device, or contrivance, fictitious
quotation, or in violation of this chapter. A broker-dealer or
agent shall not recommend to a customer the purchase, sale,
or exchange of a security without reasonable grounds to
believe that the transaction or recommendation is suitable for
the customer based upon reasonable inquiry concerning the
customer’s investment objectives, financial situation and
needs, and other relevant information known by the brokerdealer.
Iowa Code § 502.501A. Plaintiffs assert that “Defendants violated [section] 502.501A
because [they] effected transactions in, and/or induced or attempted to induce the purchase
of TNP 2008 [Participating Notes Program] notes by Plaintiff[s] . . . , through material
misrepresentations and omissions, in violation of the Iowa Uniform Securities Act.”
Complaint ¶ 191.
In the Motion, Defendants argue that the court should dismiss Plaintiffs’ claim in
Count VIII of the Complaint: (1) because Berthel Fisher did not make the alleged
misrepresentations, TNP did; (2) because Berthel Fisher did not owe a duty to disclose to
Plaintiffs; (3) pursuant to the bespeaks caution doctrine; and (4) because section 502.501A
does not apply because Plaintiffs did not allege that the sale, offer or acceptance of the
TNP 2008 Participating Notes Program notes took place in Iowa.
The court has discussed each of Defendants arguments above. Although the court
agrees with Defendants’ contention that, pursuant to the Supreme Court’s analysis in
Janus, Berthel Fisher did not make the alleged misrepresentations in the
Memorandum—TNP did—this does not dispose of Plaintiffs’ claim pursuant to section
57
502.501A, which prohibits a broker-dealer from “recommend[ing] to a customer the
purchase, sale, or exchange of a security without reasonable grounds to believe that the
transaction or recommendation is suitable for the customer based upon reasonable
inquiry.” Iowa Code § 502.501A. There is no requirement that Berthel Fisher made any
allegedly misleading statements for this claim to go forward. With respect to Defendants’
additional arguments as to this claim, the court has already found that they are without
merit. After reviewing the Complaint and the factual allegations therein, the court finds
that Plaintiffs have sufficiently alleged a claim pursuant to section 502.501A.
Accordingly, the Motion is denied to the extent that it requests that the court dismiss
Plaintiffs’ claim in Count VIII of the Complaint.
VII. FRAUD AND AIDING AND ABETTING FRAUD (COUNTS III, VI AND XI)
A. Count III
In Count III of the Complaint, Plaintiffs contend that Defendants induced a contract
by knowing misrepresentations in violation of California Civil Code section 1572 and
California common law. Plaintiffs assert that Defendants committed fraud because they
made “numerous misrepresentations of material fact” and “[b]ecause of their role in
preparing the . . . [Memorandum], their position of underwriter and [m]anaging [b]roker[d]ealer of the TNP 2008 [Participating Notes Program], and their role in promoting
certain other TNP-sponsored programs, Defendants knew and/or had reasonable grounds
to know of such misrepresentations and omissions.” Complaint ¶¶ 144, 146. According
to Plaintiffs, Defendants “made . . . representations with the intent to induce reliance on
them” to investors in the TNP 2008 Participating Notes Program, including Plaintiffs, “to
cause them to invest in the TNP 2008 [Participating Notes Program].” Id. ¶ 147.
Plaintiffs further allege that they “justifiably relied on the statements” in the
Memorandum, the “very purpose” of which was “to advise Plaintiff[s] . . . of the risks
posed by investing in the TNP 2008 [Participating Notes Program] and to inform them of
58
TNP’s background and management ability.” Id. ¶ 148. Finally, Plaintiffs contend that
“Defendants’ misrepresentations were the proximate cause of the losses suffered by
Plaintiff[s]” because “[i]f the complete facts regarding these topics had been disclosed to
investors . . . no reasonable investor would entrust their funds to the TNP for the TNP
2008 [Participating Notes Program].” Id.¶ 149.
Section 1572 states:
Actual fraud . . . consists in any of the following acts,
committed by a party to the contract, or with his connivance,
with intent to deceive another party thereto, or to induce him
to enter into the contract:
1. The suggestion, as a fact, of that which is not true, by one
who does not believe it to be true;
2. The positive assertion, in a manner not warranted by the
information of the person making it, of that which is not true,
though he believes it to be true;
3. The suppression of that which is true, by one having
knowledge or belief of the fact;
4. A promise made without any intention of performing it; or,
5. Any other act fitted to deceive.
Cal. Civil Code § 1572.
1.
Parties’ arguments
Defendants argue that the court should dismiss Plaintiffs’ claim in Count III for the
following reasons: (1) because Defendants were not the makers of any alleged
misrepresentations in the Memorandum; (2) because Defendants did not have a duty to
disclose information to Plaintiffs; (3) pursuant to the bespeaks caution doctrine; and (4)
because Plaintiffs did not rely on Defendants in deciding whether to invest in the TNP
2008 Participating Notes Program. Defendants contend that Plaintiffs cannot show the
59
reliance element of a negligent misrepresentation claim because Plaintiffs “understood and
agreed that [they] relied on [their] ‘own examination of the [TNP 2008 Participating Notes
Program] and the terms of the [o]ffering, including the merits and risks involved.’” Reply
at 5 (quoting Memorandum at 5).
In the Resistance, Plaintiffs argue that Defendants are liable for fraud by virtue of
Berthel Fisher’s duty to disclose to Plaintiffs that exists: (1) in light of its role as the
underwriter for the TNP 2008 Participating Notes Program offering; (2) pursuant to the
shingle theory; (3) by virtue of its agreement to serve as the managing broker-dealer of the
TNP 2008 Participating Notes Program offering, to which Plaintiffs were third-party
beneficiaries; and (4) because it recruited investors to the TNP 2008 Participating Notes
Program while knowing of adverse facts that were not known or reasonably accessible to
the investors.
2.
Applicable law
“The elements of . . . actual fraud[] are: ‘(1) misrepresentation (false
representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3)
intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting
damage.’” Anderson v. Deloitte & Touche, 66 Cal. Rptr. 2d 512, 515 (Cal. Ct. App.
2007) (quoting Molko v. Holy Spirit Ass’n for the Unification of World Christianity, 762
P.2d 46, 53 (Cal. 1988)); see also Warren v. Merrill, 49 Cal. Rptr. 3d 122, 132 (Cal. Ct.
App. 2006) (“To prove a cause of action for actual fraud requires evidence of (1)
representation; (2) falsity; (3) knowledge of falsity; (4) intent to deceive; and (5) reliance
and resulting damage (causation).” (quoting Vega v. Jones Day, Reavis & Pogue, 17 Cal.
Rptr. 3d 26, 32 (Cal. Ct. App. 2004) (internal quotation marks omitted))). “[T]o establish
fraud through nondisclosure or concealment of facts, it is necessary to show the defendant
‘was under a legal duty to disclose them.’” OCM Principal Opportunities Fund v. CIBC
World Markets Corp., 68 Cal. Rptr. 3d 828, 840 (Cal. Ct. App. 2007) (quoting Lingsch
60
v. Savage, 29 Cal. Rptr. 201, 204 (Cal. Ct. App. 1963)); see also Lingsch, 29 Cal. Rptr.
at 206 (The elements of a cause of action for “fraud based on mere nondisclosure and
involving no confidential relationship” are: (1) nondisclosure by the defendant; (2)
defendant’s knowledge of such facts and that such facts are unknown to the plaintiff; (3)
defendant’s intention to induce action by the plaintiff (4) inducement of the plaintiff to act
by reason of the nondisclosure; and (5) resulting damages.).
There are four circumstances in which nondisclosure or
concealment may constitute actionable fraud: (1) when the
defendant is in a fiduciary relationship with the plaintiff; (2)
when the defendant had exclusive knowledge of material facts
not known to the plaintiff; (3) when the defendant actively
conceals a material fact from the plaintiff; and (4) when the
defendant makes partial representations but also suppresses
some material facts.
OCM Principal Opportunities Fund, 68 Cal. Rptr. 3d at 851 (quoting LiMandri v. Judkins,
60 Cal. Rptr. 2d 539, 543 (Cal. Ct. App. 1997)) (internal quotation marks omitted).
In transactions which do not involve fiduciary or confidential
relations, a cause of action for non-disclosure of material facts
may arise in at least three instances: (1) the defendant makes
representations but does not disclose facts which materially
qualify the facts disclosed, or which render his disclosure
likely to mislead; (2) the facts are known or accessible only to
defendant, and defendant knows they are not known to or
reasonably discoverable by the plaintiff; (3) the defendant
actively conceals discovery from the plaintiff.
Warner Constr. Corp. v. City of L.A., 466 P.2d 996, 1001 (Cal. 1970) (footnotes omitted).
Where . . . there is no fiduciary relationship, the duty to
disclose generally presupposes a relationship grounded in
“some sort of transaction between the parties. Thus, a duty to
disclose may arise from the relationship between seller and
buyer, employer and prospective employee, doctor and patient,
or parties entering into any kind of contractual agreement.”
OCM Principal Opportunities Fund, 68 Cal. Rptr. 3d at 851 (citations omitted) (quoting
61
LiMandri, 60 Cal. Rptr. 2d at 543).
To establish reliance in a fraudulent omission case, a plaintiff must establish that
“‘had the omitted information been disclosed, [the plaintiff] would have been aware of it
and behaved differently.’” Boschma v. Home Loan Ctr., Inc., 129 Cal. Rptr. 3d 874, 892
(Cal. Ct. App. 2011) (alteration in original) (quoting Mirkin, 858 P.2d at 574). With
respect to the resulting damages requirement, “a party asserting fraud must establish that
its damages are the ‘proximate’ or ‘legal’ result of fraudulent conduct.” OCM Principal
Opportunities Fund, 68 Cal. Rptr. 3d at 860 (citing Goehring v. Chapman Univ., 17 Cal.
Rptr. 3d 39, 47 (Cal. Ct. App. 2004)). Proximate causation requires “a causal link
between the losses and the ‘facts misrepresented.’” Id. at 862 (quoting Restatement
(Second) of Torts § 548A).
3.
Application
As discussed above, pursuant to the Supreme Court’s analysis in Janus, Berthel
Fisher is not the maker of any alleged misrepresentations in the Memorandum. Janus, 131
S. Ct. at 2303 (“[T]he maker of a statement is the entity with authority over the content
of the statement and whether and how to communicate it.”). Thus, this cannot form the
basis of liability under Plaintiffs’ fraud claim. However, as also discussed above, the court
finds that Plaintiffs have pled sufficient facts to allege that Berthel Fisher owed Plaintiffs
a duty to investigate and disclose, in part, because of its underwriter status. See Dolphin
& Bradbury, Inc., 512 F.3d at 641 (“An underwriter must investigate and disclose material
facts that are known or ‘reasonably ascertainable.’” (quoting Municipal Sec. Disclosure,
1988 WL 999989, at *20)); Municipal Sec. Disclosure, 1988 WL 999989, at *20 (“[A]
broker-dealer recommending securities to investors . . . [must] ha[ve] an adequate basis
for the recommendation. . . . [The broker-dealer] must disclose facts which he knows and
those which are reasonably ascertainable. By his recommendation he implies that a
reasonable investigation has been made and that his recommendation rests on the
62
conclusions based on such investigation.”). Moreover, the court finds that the Complaint
sufficiently alleges that Berthel Fisher had knowledge of the omissions, in light of the
allegations that Berthel Fisher worked with TNP in programs prior to the TNP 2008
Participating Notes Program, Berthel Fisher intended to induce Plaintiffs to invest in the
TNP 2008 Participating Notes Program and Berthel Fisher did in fact induce Plaintiffs to
invest in the TNP 2008 Participating Notes Program, to their detriment. In light of the
foregoing, the court finds that Plaintiffs have adequately pled that the Defendants
committed fraud and the Motion is denied to the extent that it requests that the court
dismiss Count III of the Complaint.
B. Counts VI and XI
In Counts VI and XI of the Complaint, Plaintiffs allege that Defendants aided and
abetted fraud pursuant to California and Iowa common law, respectively. Plaintiffs assert
that TNP and the TNP 2008 Participating Notes Program committed fraud in light of: (1)
the allegedly material misrepresentations and omissions in the Memorandum; (2) the
allegation that TNP and the TNP 2008 Participating Notes Program knew of the material
misrepresentations and intended that Plaintiffs rely on such misrepresentations; (3) the
allegation that Plaintiffs justifiably relied on such representations; and (4) the allegation
that Plaintiffs incurred damages as a direct and proximate result. Plaintiffs claim that
Defendants aided and abetted this fraud “[b]ecause of their role in preparing the
[Memorandum], their position of underwriter and [m]anaging [b]roker-[d]ealer of the TNP
2008 [Participating Notes Program], and their role in promoting certain other TNPsponsored programs,” Defendants had knowledge of TNP and the TNP 2008 Participating
Notes Program’s fraud. Complaint ¶ 170. Plaintiffs further allege that Defendants
provided essential, substantial assistance to such fraud “by playing the leading role in the
promotion of the TNP 2008 [Participating Notes Program] to the investing public, as
underwriter and [m]anaging [b]roker-[d]ealer of the TNP 2008 [Participating Notes
63
Program].” Id. ¶ 171.
1.
Parties’ arguments
In the Motion, Defendants argue that the court should dismiss Plaintiffs’ aiding and
abetting claims because Plaintiffs have only alleged that Defendants had constructive
knowledge of TNP and the TNP 2008 Participating Notes Program’s fraud, and
constructive knowledge is not enough to support an aiding and abetting claim. In addition,
Defendants argue that Plaintiffs have not offered any “factual detail to support [their]
allegations” that Berthel Fisher was involved in the preparation of the Memorandum and
that Berthel Fisher had oversight and due diligence responsibilities arising out of its role
as the managing broker-dealer and underwriter of the TNP 2008 Participating Notes
Program offering. Brief in Support of the Motion at 26.
In the Resistance, Plaintiffs contend that the allegations in the Complaint are
sufficient to support their aiding and abetting claims. Specifically, Plaintiffs assert that
they “pled actual knowledge in the [Complaint],” not merely constructive knowledge,
“which more than satisfies the required pleading standard.” Resistance at 11.
2.
Analysis
Iowa and California have both adopted the common law rule subjecting a defendant
to liability for aiding and abetting a tort. This rule states that
[l]iability may . . . be imposed on one who aids and abets the
commission of an intentional tort if the person (a) knows the
other’s conduct constitutes a breach of duty and gives
substantial assistance or encouragement to the other to so act
or (b) gives substantial assistance to the other in accomplishing
a tortious result and the person’s own conduct, separately
considered, constitutes a breach of duty to the third person.
Casey v. U.S. Bank Nat’l Ass’n, 26 Cal. Rptr. 3d 401, 405 (Cal. Ct. App. 2005)
(alteration in original) (quoting Saunders v. Superior Court of L.A. Cnty., 33 Cal. Rptr.
2d 438, 446 (Cal. Ct. App. 1994)) (internal quotation marks omitted); see also Reilly v.
64
Anderson, 727 N.W.2d 102, 115 (Iowa 2006) (providing that aiding and abetting a tort
“simply requires [the defendant] to know [the other’s] actions were tortious and that [the
defendant] gave substantial assistance” (citing Restatement (Second) of Torts §876 cmt.
d)).
The court finds that Plaintiffs have pled sufficient facts to allege aiding and abetting
fraud in Counts VI and XI.
The Complaint alleges that Berthel Fisher had actual
knowledge of TNP and the TNP 2008 Participating Notes Program’s fraud, that is, of the
material misrepresentations that TNP and the TNP 2008 Participating Notes Program made
in the Memorandum. Additionally, the Complaint alleges that Berthel Fisher provided
TNP and the TNP 2008 Participating Notes Program substantial assistance in carrying out
the fraud because Berthel Fisher allegedly oversaw the offering of the TNP 2008
Participating Notes Program notes, distributed the notes, acted as an underwriter and acted
as the managing broker-dealer of the offering. In light of the foregoing, the Motion is
denied to the extent that it requests that the court dismiss Plaintiffs’ aiding and abetting
fraud claims in Counts VI and XI of the Complaint.
VIII. NEGLIGENCE AND NEGLIGENT MISREPRESENTATION (COUNTS IV,
V, IX AND X)
A. Negligent Misrepresentation
Count IV alleges negligent misrepresentation pursuant to California common law
and Count IX alleges negligent misrepresentation pursuant to Iowa common law. These
claims assert that Defendants are liable because they “made misrepresentations of material
facts and omitted to disclose material information . . . in the [Memorandum].” Complaint
¶¶ 154, 199.
The Iowa Supreme Court has stated that it relies on the Restatement (Second) of
Torts section 552 to define the tort of negligent misrepresentation. Sain v. Cedar Rapids
Cmty. Sch. Dist., 626 N.W.2d 115, 123 (Iowa 2001). Section 552 of the Restatement
(Second) of Torts provides that:
65
One who, in the course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the guidance
of others in their business transactions, is subject to liability
for pecuniary loss caused to them by their justifiable reliance
upon the information, if he fails to exercise reasonable care or
competence in obtaining or communicating the information.
Restatement (Second) of Torts § 552(1). The person who supplies the information to the
person must owe that person a duty to be liable for negligent misrepresentation. Sain, 626
N.W.2d at 124.
Similarly, “[t]he elements of a cause of action for negligent misrepresentation”
under California law are: (1) “[t]he defendant must have made a representation as to a past
or existing material fact”; (2) “[t]he representation must have been untrue”; (3) “the
defendant must have made the representation without any reasonable ground for believing
it to be true”; (4) “[t]he representation must have been made with the intent to induce
plaintiff to rely upon it”; (5) “[t]he plaintiff must have been unaware of the falsity of the
representation, he must have acted in reliance upon the truth of the representation and he
must have been justified in relying upon the representation”; and (6) “as a result of his
reliance upon the truth of the representation, the plaintiff must have sustained damage.”
Friedman v. Merck & Co., 131 Cal. Rptr. 2d 885, 900 (Cal. Ct. App. 2003) (internal
quotation marks omitted) (quoting Cal. Civil Jury Instruction 12.45, Fraud and
Deceit—Negligent Misrepresentation).
In the Motion, Defendants argue that the court should dismiss Plaintiffs’ claims
asserting negligent misrepresentation because any alleged misrepresentations in the
Memorandum are attributable to TNP and the TNP 2008 Participating Notes Program, not
Defendants. A claim for negligent misrepresentation requires Defendants to have made
a misrepresentation. As more fully discussed above, pursuant to the Supreme Court’s
analysis in Janus, Defendants did not make the alleged misrepresentations in the
66
Memorandum because TNP and the TNP 2008 Participating Notes Program had the final
authority over the content in the Memorandum, not Defendants. See Janus, 131 S. Ct. at
2303 (“[T]he maker of a statement is the entity with authority over the content of the
statement and whether and how to communicate it.”). Accordingly, the court finds that
Plaintiffs have not pled a claim asserting negligent misrepresentation and the Motion is
granted to the extent that it requests the court to dismiss Plaintiffs’ negligent
misrepresentation claims in Counts IV and IX of the Complaint.
B. Negligence
Count V alleges negligence pursuant to California common law and Count X alleges
negligence pursuant to Iowa common law. These claims assert that Defendants owed
Plaintiffs “a duty to conduct adequate due diligence as to the TNP 2008 [Participating
Notes Program],” Complaint ¶¶ 162, 208, and “to act as a reasonable broker-dealer . . .
under the same or similar circumstances,” id. ¶¶ 164, 21. Plaintiffs further assert that
Defendants were negligent because they breached that duty by “failing to perform adequate
due diligence” as to the TNP 2008 Participating Notes Program before underwriting the
TNP 2008 Participating Notes Program offering and overseeing the distribution of the
Memorandum, and by “failing to warn Plaintiff[s] . . . that Defendants did not have a
reasonable basis to offer and promote and had not adequately vetted the TNP 2008
[Participating Notes Program] notes.” Id. ¶¶ 165, 211. According to Plaintiffs, they
relied on the Memorandum in deciding to invest in the TNP 2008 Participating Notes
Program and suffered damages as a direct result of Defendants’ negligence.
In the Motion, Defendants argue that the court should dismiss Plaintiffs’ negligence
claims because Defendants owed no legal duty to Plaintiffs, an argument that the court has
fully addressed and rejected above. The court reiterates its finding that Plaintiffs have put
forth sufficient facts in the Complaint to allege that Berthel Fisher acted as an underwriter
for the TNP 2008 Participating Notes Program and owed Plaintiffs a duty to disclose, a
67
duty to investigate and/or a duty to conduct due diligence as to TNP and/ or the TNP 2008
Participating Notes Program.
To prevail on a negligence claim under Iowa law, a “plaintiff must establish that the
defendant owed the plaintiff a duty of care, the defendant breached that duty, the breach
was the actual and proximate cause of the plaintiff’s injuries, and the plaintiff suffered
damages.” Novak Heating & Air Conditioning v. Carrier Corp., 622 N.W.2d 495, 497
(Iowa 2001). Similarly, under California law, “‘[a]n action in negligence requires a
showing that the defendant owed the plaintiff a legal duty, that the defendant breached that
duty, and that the breach was a proximate or legal cause of injuries suffered by the
plaintiff.’” Mintz v. Blue Cross of Calif., 92 Cal. Rptr. 3d 422, 434 (Cal. Ct. App. 2009)
(quoting Ann M. v. Pac. Plaza Shopping Ctr., 863 P.2d 207, 211 (Cal. 1993)). The court
finds that Plaintiffs have alleged sufficient facts to support a finding that Berthel Fisher was
negligent and that its negligence caused Plaintiffs’ injuries, namely, the loss of their
investment with the TNP 2008 Participating Notes Program. Accordingly, the Motion is
denied to the extent that it requests that the court dismiss Plaintiffs’ negligence claims in
Counts V and X of the Complaint.
IX. CONTROL PERSON LIABILITY
In the Complaint, Plaintiffs assert each claim against both Thomas Joseph Berthel
and Berthel Fisher. Thomas Joseph Berthel was Berthel Fisher’s Chief Executive Officer,
Chairman of the Board, and one of its indirect owners at all relevant times. Complaint ¶
22. Plaintiffs assert that “[b]ecause of his position of control and authority . . . [Thomas
Joseph Berthel] was able to and did control Berthel Fisher’s activities, including its
preparation and dissemination of misleading offering documents for TNP offerings
including the TNP 2008 [Participating Notes Program] and its management and oversight
of the TNP 2008 [Participating Notes Program] Offering.” Id. ¶ 23; see also id. ¶¶ 91,
96.
68
A. Parties’ Arguments
In the Motion, Defendants contend that the court should dismiss each of Plaintiffs’
claims against Thomas Joseph Berthel for the following reasons: (1) because Plaintiffs did
not plead a viable claim asserting a securities law violation, and a “claim for ‘control
person’ liability first requires a primary violation by the principal wrongdoer”; (2) because
“control person liability” is only statutorily imposed and, thus, is not available as to
Plaintiffs’ claims asserting common law violations; and (3) because Thomas Joseph Berthel
did not participate in the alleged activities that constitute securities law violations. Brief
in Support of the Motion at 24.
In the Resistance, Plaintiffs contend that they have adequately stated their claims
asserting control person liability against Thomas Joseph Berthel “under both California and
Iowa Blue Sky Laws, not under common law as Defendants assert.” Resistance at 22
(footnote omitted). Plaintiffs further argue that only notice pleading is required to assert
a claim for control person liability.
B. Applicable law
Pursuant to California Corporations Code section 25504, a control person may be
liable where a plaintiff has shown an underlying violation of the California securities laws.
Specifically, section 25504 provides:
Every person who directly or indirectly controls a person
liable under Section 25501 or 25503 . . . [is] also liable jointly
and severally with and to the same extent as such person,
unless the other person who is so liable had no knowledge of
or reasonable grounds to believe in the existence of the facts
by reason of which the liability is alleged to exist.
Cal. Corp. Code § 25504.
Similarly, Iowa Code section 502A.7 provides:
A person who directly or indirectly controls another person
liable under this chapter, a partner, officer, or director of the
other person, a person occupying a similar status or
69
performing similar functions, and an employee of such other
person who materially aids in the violation, is liable jointly and
severally with and to the same extent as the other person,
unless the person who is liable by virtue of this provision
sustains the burden of proof and the person did not know, and
in exercise of reasonable care could not have known, of the
existence of the facts by reason of which the liability is alleged
to exist.
Iowa Code § 502A.7(2).
To assert control person liability, a plaintiff must first establish an underlying
violation of the securities laws. See In re Hutchinson Tech., Inc. Sec. Litig., 536 F.3d
952, 961 (8th Cir. 2008) (affirming the district court’s dismissal of the plaintiff’s control
person claims pursuant to the federal securities laws because a control person claim is a
derivative claim that requires an underlying violation of the 1934 Securities Exchange Act,
and the plaintiffs had not made a submissible claim as to the underlying violation); Jackson
v. Fischer, 931 F. Supp. 2d 1049, 1064 (N.D. Cal. 2013) (holding that a plaintiff could
not assert control person liability pursuant to section 25504 where the plaintiffs failed to
state “a viable claim for primary liability” against the defendants).
C. Application
At the outset, the court notes that it appears that, despite Plaintiffs’ use of
“Defendants” throughout the Complaint, Plaintiffs are only asserting that Thomas Joseph
Berthel is liable under the securities law claims asserted in Counts I, II, VII and VIII.
Furthermore, control person liability is statutorily imposed and does not exist at common
law, and Plaintiffs provide the court with no basis for imposing control person liability on
Thomas Joseph Berthel in their claims pursuant to the common law in Counts III,25 IV, V,
25
The court notes that Plaintiffs’ claim in Count III is pursuant to California
Corporations Code section 1572 as well as the common law. However, Plaintiffs do not
provide the court with an accompanying statute imposing control person liability with
(continued...)
70
VI, IX, X and XI. Moreover, the court already dismissed Plaintiffs’ claim in Count II,
so there can be no control person liability as to that claim. Accordingly, Thomas Joseph
Berthel could only be liable as a control person with respect to Plaintiffs’ claims in Counts
I, VII and VIII.
As to Count I, the court finds that Thomas Joseph Berthel is not liable as a control
person because Plaintiffs have not adequately pled that Berthel Fisher is liable for a
primary violation under sections 25501 or 25503. See Cal. Corp. Code § 25504. Rather,
as the court found above, Plaintiffs’ claim in Count I may proceed pursuant to section
25504 as a “broker-dealer or agent who materially aids in [TNP and/or the TNP 2008
Participating Notes Program’s] act or transaction constituting the [primary] violation.”
See id. Because Plaintiffs failed to pursue their claim against Berthel Fisher pursuant to
section 25401, electing instead to pursue their claim in Count I pursuant to section 25504,
they did not plead a primary violation against Berthel Fisher pursuant to California
securities law. Accordingly, the court finds that Thomas Berthel Fisher is not liable as a
control person in Count I.
As to Counts VII and VIII, Plaintiffs adequately pled violations of the Iowa
securities laws against Berthel Fisher. Furthermore, they adequately pled that Thomas
Joseph Berthel “directly or indirectly controls another person liable under [Chapter
502A].” Iowa Code § 502A.7(2). However, the primary violations that Plaintiffs pled are
pursuant to Chapter 502, entitled the “Uniform Securities Act (Blue Sky Law),” not
Chapter 502A, entitled the “Commodities Code.” Plaintiffs have not provided the court
with an alternative statute imposing control person liability on Thomas Joseph Berthel
under Iowa law, and the court is aware of none. Accordingly, based on a plain reading
of the statute providing for control person liability under Iowa law, section 502A.7, the
25
(...continued)
respect to section 1572, so this does not affect the court’s analysis.
71
court finds that Plaintiffs have failed to assert control person liability against Thomas
Joseph Berthel in Counts VII and VIII. In light of the foregoing, Plaintiffs have failed to
state a claim against Thomas Joseph Berthel and the Motion is granted to the extent that
it requests that the court dismiss Plaintiffs’ claims against Thomas Joseph Berthel.
X. CONCLUSION
In light of the foregoing, Defendants Berthel Fisher and Company Financial
Services, Inc. and Thomas Joseph Berthel’s Motion to Dismiss (docket no. 22) is
GRANTED IN PART AND DENIED IN PART. With respect to Plaintiffs’ claims
against Thomas Joseph Berthel, the Motion is GRANTED and Counts I through XI are
DISMISSED against Thomas Joseph Berthel. The Clerk of Court is DIRECTED to
DISMISS Thomas Joseph Berthel from this case. With respect to Counts II, IV and IX,
the Motion is GRANTED and Counts II, IV and IX are DISMISSED. With respect to
Counts I, III, V, VI, VII, VIII, X and XI, the Motion is DENIED.
IT IS SO ORDERED.
DATED this 29th day of May, 2014.
72
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?