On December 21, 2022, the United States Court of Appeals for the
Ninth Circuit affirmed in part and denied in part the dismissal of
a purported class action suit against a real estate property
management company (the "Company") alleging the Company
made material misstatements or omissions in social media posts, in
violation Sections 12(a)(2) and 15 of the Securities Act of 1933
(the "Securities Act"). Pino v. Cardone Capital,
LLC, No. 21-55564, 2022 WL 17826876 (9th Cir. Dec. 21, 2022).
Plaintiff alleged that the Company misrepresented the returns
investors could make by investing in the Company's investment
funds in videos posted on social media sites. The district court
found that the Company was not a "statutory seller" under
Section 12 and dismissed the suit in its entirety. In a unanimous
opinion, the Ninth Circuit disagreed, finding that the Company did
qualify as a statutory seller. In a memorandum disposition filed on
the same day, the Ninth Circuit held that some of the alleged
misstatements were not actionable under the Securities Act and
affirmed dismissal of claims based on those statements.
Plaintiff alleged that the Company indicated in a YouTube video,
"you're gonna walk away with a 15% annualized return"
and asked prospective investors in an Instagram post if they would
like to double their money, stating that an investor "could
receive $480,000 in cash flow after investing $1,000,000,"
achieve "north of 15% returns after fees," and obtain a
"118% return amounting to 19.6% per year." Plaintiff
alleged that the Company failed to caution investors that its
promises were speculative, causing them to make investments without
being fully informed of the risks involved. The district court
dismissed the complaint, reasoning that the Company could not be
held liable as a "seller" under Section 12(a)(2) because
it did not "directly and actively solicit[]" the specific
plaintiff's investment and because plaintiff did not allege
that he relied on any solicitation by the Company.
The Ninth Circuit reversed. The Ninth Circuit began its analysis
with the Supreme Court's holding in Pinter v. Dahl
that a person may be liable as a statutory seller for purposes of
Section 12(a)(2) if they (1) pass title to the security to
plaintiff, or (2) "engage[] in solicitation," i.e.,
"solict[] the purchase, motivated at least in part by a desire
to serve his own financial interests or those of the securities
owner." Because there was no claim the Company passed title to
the securities, only the second prong was at issue. And because
there was no question that the Company had financial interests in
the sale, the specific issue considered by the Ninth Circuit was
whether the Company "engaged in solicitation" even though
it not directly target plaintiff.
The Ninth Circuit acknowledged that neither the Supreme Court nor
the Ninth Circuit had addressed this issue. However, the Court
considered a recent decision, covered here, involving videos uploaded on YouTube
in which the Eleventh Circuit held that the Securities Act
"contains no requirement that a solicitation be directed or
targeted to a particular plaintiff, and . . . that a person can
solicit a purchase, within the meaning of the Securities Act, by
promoting the sale of a security in a mass communication." The
Ninth Circuit further explained that the definition of
"Prospectus," which is the source of liability under
Section 12(a)(2), includes communications "written or by radio
or television." According to the Ninth Circuit, this
demonstrated Congress's intent to cover "broadly
disseminated, mass communications."
Defendants argued that more targeted solicitation is required based
on language in Pinter suggesting that a "buyer-seller
relationship not unlike traditional contractual privity" is
required. The Ninth Circuit disagreed, observing that
Pinter "did not answer what types of communications
qualify as solicitation." The Court also noted that "the
advertisements at issue in this case—Instagram posts and
YouTube videos—are the types of potentially injurious
solicitations that are intended to command attention and persuade
potential purchasers to invest in the [Company] during the
'most critical' first stage of a selling transaction"
and that "the nature of social media presents dangers that
investors will be persuaded to purchase securities without full and
fair information."
Although the Ninth Circuit revived the suit, the Court issued a
separate memorandum disposition that addressed the district
court's alternative finding that the alleged misstatements were
not actionable under the Securities Act. Because the Court found
that at least some of the Company's alleged misstatements were
actionable, while others were not, the Ninth Circuit affirmed in
part and reversed in part that portion of the district court's
decision.
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