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The High Bar for Pleading Securities Fraud Cases – Glass & Goldberg | Financing, Property & Bankruptcy Law
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The High Bar for Pleading Securities Fraud Cases

Another federal court recently reiterated the hurdle that investors making a case for securities fraud must meet when pleading their civil complaints in court. The case involves California Business Bank which had in March of 2010 entered into a consent order with the Commissioner of Federal Deposit Insurance Corporation (“FDIC”) which, among other things, required it to raise its capital levels so as to be able to prospectively withstand unexpected losses. Later that same year, in an effort to raise necessary capital, the Bank offered for sale a minimum of 1,666,667 shares at a price of $3.00 per share.

Some investors, Investors Prime Fund, LLC and IPF Banc Servicing, LLC (collectively, “IPF”) purchased aggregately 330,000 shares of CBB common stock for $990,000. In June of 2011 regulators announced that the Bank had sustained $3 million in losses causing its share prices to fall. As a result, an appointed receiver for IPF, which was rendered insolvent and therefore, forced in to receivership, sued this bank for securities fraud claiming that the Bank failed to include material facts which would influence a potential investor’s decision whether to purchase its stock per the offering.   The United States District Court in which it was filed reviewed the elements necessary to prove a securities fraud case.  In order to state a securities fraud claim, plaintiff must plead: “(1) a material misrepresentation or omission by the defendant; (2) scienter (or knowledge by the party making the offering); (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance (by the plaintiff(s)) upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”

The Court concluded in Seaman v. California Business Bank, Case No. 13-cv-02031-JST (US Dist Ct. N.D. CA. 2014) that the plaintiffs failed to sufficiently plead that the Bank, or its officers (who were also  sued) did not make any statements of which they may have had knowledge which understated the possibility that it may suffer losses in some of its loans or other investments. The court noted that the prospectus for the offering did contain some language warning potential investors of its recent liquidity problems. Under Federal Rule of Civil Procedure 9(b), claims alleging fraud are subject to a heightened pleading requirement, which requires that a party “state with particularity the circumstances constituting fraud or mistake.” Omission of some facts regarding the condition of certain loans made by the Bank do not, in the judgment of this court, meet this higher standard for stating a securities fraud under federal law, considering the totality of the representations the Bank made in its offering circular.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law.  Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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