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Court Finds Section 12(a) Claim Fails For Failure To Plead Scienter?

I recently covered liability under Sections 11 and 12 of the Securities Act of 1933 in the securities regulation course that I teaching at the University of California, Irvine School of Law.  Thus, I was interested to read a recent ruling by U.S. District Judge Morrison C. England, Jr. in  Wong v. Tomaszewski, 2018 U.S. Dist. LEXIS 166916. The plaintiffs brought some sixteen causes of action, including claims for, inter alia, professional negligence, breach of fiduciary duty, the sale of unregistered securities, and various state law claims sounding in fraud.   According to Judge England, the plaintiffs' fourth cause of action alleged that "Plaintiffs' [sic] conduct amounted to the unregistered offer and sale of securities in violation of Section 12(a) the Securities Act of 1933 and its corresponding state-law statute, California Corporations Code § 25110".  The defendants countered that "the Fourth Cause of Action fails because in order to state a viable Section 12(a) claim, Plaintiffs must demonstrate scienter on the part of Defendants at the time they marketed the subject investment opportunity to Plaintiffs".  Judge England ruled that the Plaintiff's Fourth Cause failed because "have not pled sufficient facts to show scienter on Defendants' part at the time Defendants obtained their investment"

This might have been a plausible result had the Plaintiff's Fourth Cause of Action alleged violation of Rule 10b-5.  Section 12, however, does not require that the plaintiff allege or prove scienter.

The Defendants also advanced the argument that "as a claim sounding in fraud, Plaintiffs must also satisfy the heightened pleading standard inuring to a fraud claim under Federal Rule of Civil Procedure 9(b)".  Section 12, however, encompasses two different violations.  Section 12(a)(1) liability is based on violation of the registration requirement of Section 5 of the Securities Act and there is no requirement that a plaintiff allege a misstatement of a material fact.  Section 12(a)(2) imposes liability on sellers for false and misleading statements in a prospectus.  Judge England describes the Fourth Cause of Action as involving the unregistered sale of securities.  Thus, it would appear to have been a claim under Section 12 (a) (1).

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...