United States District Court, N.D. Iowa, Cedar Rapids Division
JON HANSON, individually and on behalf of all others similarly situated, Plaintiffs,
BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. and THOMAS JOSEPH BERTHEL, Defendants.
LINDA R. READE, District Judge.
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 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.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 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 inferences in favor of the Plaintiffs, the facts are as follows:
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 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) 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. ¶ 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 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 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 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 estate-related 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 broker-dealer 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 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). 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 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 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 X 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, 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 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 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 (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 Broker-Dealers 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 [broker-dealer] 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 [broker-dealer] 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).
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 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 Counts I, II, III, IV, VII, VIII and IX 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. 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 Management LLC ("JCM"), pursuant to SEC Rule 10b-5 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 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." 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 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 ...