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Hanson v. Berthel Fisher & Co. Fin. Servs Re: California Securities Law - This Ruling Appears To “Unravel The Very Fabric Of The Space-time Continuum”

In prior posts, I’ve cast a jaundiced eye on last year’s amendment of California’s general securities fraud statute, Corporations Code Section 25401.  See Die Verwandlung: How The Legislature Likely Raised The Bar On Securities Fraud Actions and California Creates Complete Chaos By Rewriting Anti-Fraud Statute, But “We Are Against Fraud Aren’t We?”.  The amendment took effect on January 1, 2014 and the proverbial chickens are now coming home to roost (as someone who has kept chickens, I can vouchsafe that chickens actually do come home to roost).

Hanson v. Berthel Fisher & Co. Fin. Servs., 2014 U.S. Dist. LEXIS 72940 (N.D. Iowa May 29, 2014) involved note offering that ultimately raised over $26 million from over 200 investors, including the plaintiffs.  The offering was conducted from 2008 to 2010.  The plaintiffs filed suit on November 4, 2013 alleging violations of, among other things, Section 25401.  The defendants are the underwriter of the note offering and its chief executive officer.

The Court dismissed the plaintiffs’ claim under Section 25401 because the plaintiffs failed to allege privity.  What I found interesting was the fact that the Court quoted Section 25401 in its entirety not as it existed at the time of offer and sale or even the filing of the complaint, but as now in effect.  This is particularly odd because the Court in another part of the opinion acknowledges that Section 25401 is modeled after Section 12(2) of the Securities Act of 1933 (citing Moreland v. Dep’t of Corps., 194 Cal. App. 3d 506 (Cal. Ct. App. 1987) (“The California Corporate Securities Law was patterned after the federal Securities Act of 1933.”).  Last year’s amendment, however, changed that entirely by amending Section 25401 to conform to Rule 10b-5 under the Securities Exchange Act of 1934, thereby suggesting that the the jurisprudence of Rule 10b-5 should now be applied to Section 25401.  The ruling, however, does not mention the 2013 amendment or discuss why the Court seemingly applied the amended version of the statute to acts that occurred and a complaint that was filed before the amendments took effect.

Shakespeare, John Calvin, horology and the space-time continuum

In a recent conversation, I happened to mention a line from Shakespeare’s The Tempest:

Look he’s winding up the watch of his wit; by and by it will strike.

Act II, scene 1, line 718.  My auditor asked whether watches actually existed in Shakespeare’s time.  After doing a bit of research, I found that watches were invented before Shakespeare’s birth.  According to The Fondation de la Haute Horlogerie, the first watches made their appearance around 1492 (Shakespeare was baptized on April 26, 1564, and died on April 23, 1616 (his exact date of birth is unknown).  John Calvin gave Swiss watchmaking a boost in 1541 when he banned jewelry thereby encouraging Swiss jewelers to turn their talents to timepieces.

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IV, Number 160
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About this Author

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

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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