Failure To Name Primary Violator Doesn’t Doom Class Action Against Secondary Actors
One might expect plaintiffs to always name the primary violator in a securities fraud suit. However, what if suing the primary violator is not an option because the primary violator is in bankruptcy or the subject of a court ordered stay? Can there be a finding of secondary liability when there is no finding of primary liability?
U.S. District Court Judge Jon S. Tigar recently ruled that a plaintiff can proceed without the primary violator. In Hayden v. Wang, 2013 U.S. Dist. LEXIS 161892 (N.D. Cal. Nov. 13, 2013) the plaintiff, an investor in a private placement, filed a class action in California Superior Court against the issuer, the placement agent and numerous individuals alleging violations of Corporations Code Section 25401. After the action was filed, the issuer filed a petition for relief under Chapter 11 of the Bankruptcy Code, thereby staying the action against it. The placement agent then removed the case to the federal court. The plaintiff then moved to sever the issuer and remand the claims back to the Superior Court. Three of the individual defendants argued that the action couldn’t proceed without the primary violator – the issuer.
Judge Tigar rejected this argument, stating:
The law is clear that the alleged primary violator is not required to be named as a defendant for a plaintiff to proceed against other defendants who are jointly and severally liable, or, with respect to [Corporations Code] section 25504.1, directly liable for materially assisting the primary violation.