On June 10, 2025, the U.S. Court of Appeals for the Ninth Circuit reversed the dismissal of a securities class action after finding the plaintiff sufficiently alleged a real estate investment fund and its managing executive misled investors by exaggerating potential investment returns and failing to disclose a SEC staff comment letter that instructed the fund to remove the overstated projections from its offering materials. Notably, the court viewed the fund's decision to comply with the SEC's directive and remove exaggerated projections as evidence that the fund and its manager knew the projections were false. The court's decision in Pino v. Cardone Capital, LLC provides cautionary guidance regarding the legal significance of SEC comments—namely, that a company's failure to dispute a comment letter could be construed as an implicit admission of falsity, potentially exposing it to liability under Section 12(a)(2) of the Securities Act of 1933 (the "Act").
Background & Alleged Misstatements and Omissions
The lawsuit originated out of a Regulation A offering in which Cardone Capital, LLC (the "Company") and its founder, Grant Cardone ("Cardone") solicited retail investors to purchase interests in real estate investment funds.
The plaintiff filed suit against both the Company and Cardone—alleging Cardone and the Company (i) made misleading social media statements to investors, promising them they could expect a 15% internal rate of return ("IRR") and (ii) misled investors by failing to disclose an SEC comment letter asking Cardone to remove the IRR and distribution projections from the offering circular, as the projections were unsubstantiated.
The complaint alleged that Cardone not only made lofty IRR projections in the initial offering circular, but also continued to repeat the inflated claims to investors, even after the SEC issued a comment letter indicating the projections lacked support. The SEC noted the Company had "commenced only limited operations" and "[had] not paid any distributions" and accordingly asked the Company to remove the IRR and related distribution expectations from its offering materials.
The Company heeded the SEC's guidance and removed the challenged projections language, replying to the agency's letter with a confirmation that it had revised its offering statement. However, Cardone—in social media posts on various platforms—continued to promote the attractive returns. Moreover, the Company failed to disclose the SEC's concerns or the existence of the comment letter itself to investors.
9th Circuit's Analysis
The Ninth Circuit concluded that the plaintiff's claims were adequately pled under Section 12(a)(2) of the Act, which enables investors to bring a claim against a person who offers or sells securities by means of a prospectus or oral communication that contains material false statements or omissions. Section 12(a)(2) plaintiffs must plead "subjective falsity," which means the speaker did not actually believe what he said, as well as "objective falsity," meaning the statement is simply not true.
The court emphasized the Company's incongruous response to the SEC's comment letter in determining the plaintiff properly alleged Cardone's subjective disbelief: while Cardone responded to and disputed other critiques from the SEC in the letter, he removed the IRR "without any rebuttal or comment." Accordingly, the court reasoned, a reasonable investor could interpret Cardone's acquiescence as an implicit acknowledgement that the projections were indeed false.
Further, the court explained that because the investment funds had not previously performed in line with the 15% IRR, nor had any properties even been purchased for the funds at the time of Cardone's comments, the plaintiff had plausibly shown the projections were objectively false.
Finally, the court examined Cardone's failure to disclose the SEC comment letter and its request that the projected IRR be removed. Because Cardone did not mention the letter in his subsequent social media communications—thereby omitting a material fact necessary to make his investment predictions—the court found the plaintiff sufficiently pled a Section 12(a)(2) violation. And while Cardone argued investors had "constructive knowledge" of the SEC's letter because it was publicly available on the EDGAR filing database, the court concluded that the letter's mere availability did not relieve the defendant from liability for his misleading omission.
Ultimately, the court determined that the Company's lack of supporting data for the projections, its willful removal of those projections from offering materials, and failure to disclose the SEC's objection was satisfactory evidence to give rise to the plaintiff's Section 12(a)(2) claims.
Responding to SEC Comment Letters Going Forward
Acknowledging and acquiescing to the staff's comment letter is not, by itself, an admission of guilt. However, in light of the Ninth Circuit's decision, issuers should be aware that courts may evaluate their response—or non-response—when making liability determinations under Section 12(a)(2) of the Act. To shield itself from potential legal action, a company could consider adding a statement in its response to a comment letter that effectively disclaims any agreement with, or admission of, the SEC staff's position. In other words, a company could clarify that its response is not meant to be construed as an acknowledgement of any wrongdoing or misstatement.
Additionally, issuers conducting securities offerings should be mindful of the following:
- Issuers should avoid continued dissemination of information that is the subject of an SEC comment letter until the matter is resolved.
- All public-facing statements, including social media posts, must be consistent with offering documents and accurately reflect any known regulatory concerns. Social media can be treated as a form of official communication by a company or individual.
- Public availability of SEC comment letters does not satisfy an issuer's disclosure obligations under the Act.
The Ninth Circuit's reversal of the lower court's dismissal of the case sets the stage for this matter to be tried further. KMK will continue to monitor this ongoing litigation and provide updates as they arise.
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