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Strong v. Cochran

United States District Court, D. Utah, Central Division

September 23, 2019

D. RAY STRONG, as Liquidating Trustee of the Consolidated Legacy Debtors Liquidating Trust, the Castle Arch Opportunity Partners I, LLC Liquidating Trust, and the Castle Arch Opportunity Partners II, LLC Liquidating Trust, Plaintiff,



         Castle Arch Real Estate Investment Company (CAREIC) declared bankruptcy in 2011. In 2013, the bankruptcy court appointed Plaintiff Ray D. Strong as trustee of multiple liquidation trusts, and the trusts were then assigned all claims that CAREIC had against its former officers and directors, as well as the claims that third-party investors had against those same officers and directors. Mr. Strong brought this action to pursue those claims.

         Two cross-motions for partial summary judgment are now before the court, which address six of the complaint's nine claims.[1]

         Mr. Strong moves for summary judgment on his second claim. (See ECF No. 221.)[2] In the second claim, Mr. Strong argues that Defendants Jeff Austin, Robert Clawson, William Davidson, and Robert Geringer[3] violated the securities fraud laws of California and Utah by selling securities that contained material misrepresentations or omissions. Defendants oppose the motion on the merits and argue alternatively that Mr. Strong's claims are time barred.

         Mr. Geringer, on the other hand, moves for summary judgment on Mr. Strong's claims for breach of fiduciary duty (first claim), violations of securities laws (second claim), civil conspiracy (fourth claim), RICO violations (fifth claim), constructive trust (eighth claim), and unjust enrichment (ninth claim). (See ECF No. 244.) He contends that each of these claims are barred by the statute of limitations.

         For the reasons stated below, Mr. Strong's motion is denied because triable issues of fact exist. The court grants Mr. Geringer's motion in part on portions of the second and fourth claims, denies the motion on the first, eighth, and ninth claims, and reserves ruling on the fifth claim.

         I. Background

         CAREIC was formed in 2004 with Mr. Kirby Cochran as its CEO and initial member. (SAppx. v.2 at 367 (Ex. 6).)[4] Eventually, Mr. Geringer became CAREIC's president and a member of the board of directors; Mr. Davidson became chairman of the board of directors; and Mr. Austin became president of worldwide development and a member of the board of directors. (SAppx. v.2 at 048 (Ex. 2).) Additionally, Mr. Clawson-who initially introduced Mr. Cochran and Mr. Geringer, which led to CAREIC's founding-became “Managing Director [for] Business Development.” (SAppx. v.2 at 495 (Ex. 35); CAppx. Op. v.1 at 021 (Ex. 3), Clawson Decl. ¶ 43).)

         CAREIC was created to “invest in several real estate market segments, including land development, property development, residential, multifamily, and commercial.” (SAppx. v.2 at 30 (Ex. 2).) In the course of its operation, CAREIC formed a No. of purpose- and project-specific entities, two of which are relevant here. CAREIC formed Castle Arch Smyrna (CAS) in 2007 “to purchase and develop approximately 615 out of 640 acres of land in the Smyrna, Tennessee area into a residential community.” (SAppx. v.2 at 176 (Ex. 3).) In 2008, it formed an investment fund, Castle Arch Secured Development Fund (CASDF), “to invest money into projects involving raw land, distressed properties and other valuable opportunities with underdeveloped real estate assets.” (SAppx. v.2 at 281 (Ex. 4).) Except where necessary to distinguish between them, the court refers to CAREIC, CAS, and CASDF collectively as CAREIC.

         CAREIC raised capital by selling securities through private security offerings. Three of those offerings (also referred to as “Private Placement Memoranda” or “PPMs”) are relevant here: (1) an offering of investment units by and in CAS (CAS PPM); (2) an offering of 12% Series A redeemable preferred units by and in CASDF (CASDF PPM); and (3) an offering of Series E member units by and in CAREIC (Series E PPM). (SAppx. v.2 at 023, 173, 363 (Exs. 2-4).)

         In 2011, CAREIC declared bankruptcy. In 2013, the bankruptcy court entered its Order Confirming Chapter 11 Trustee's First Amended Plan of Liquidation Dated February 25, 2013 as Modified (see SAppx. v.1 at 1229 (No. 13)[5]), which, among other things, assigned to Mr. Strong, as trustee, all claims that either CAREIC itself, or investors in CAREIC, had against Mr. Austin, Mr. Clawson, Mr. Davidson, and Mr. Geringer. In October 2013, the parties agreed to toll the relevant statutes of limitation so that the parties could engage in settlement negotiations. After those efforts failed, Mr. Strong filed the complaint against Mr. Austin, Mr. Clawson and Mr. Davidson on October 30, 2014 (see ECF No. 2), and filed the complaint against Mr. Geringer on November 24, 2015 (see 837 ECF No. 2).[6]

         II. Objections to Evidence

         In their oppositions, Defendants raise numerous objections to the evidence relied upon by Mr. Strong. (See ECF No. 254 at 4-9; ECF No. 248 at 9-17; ECF No. 250 at 8-34; and ECF No. 254 at 4-22.) Similarly, Mr. Strong, in opposition to Mr. Geringer's motion, objects to some of Mr. Geringer's evidence. (See ECF No. 265 at 12-15.) Additionally, Mr. Clawson and Mr. Geringer filed objections to evidence offered in support of Mr. Strong's reply. (See ECF Nos. 293-294.)

         In most instances, these objections are simply argument (such as an objection that a statement was taken out of context, that the proponent of the statement gives too much weight to it, or that the inferences drawn from the evidence are wrong). Such objections are overruled as improper, though the court considers the parties' arguments as it addresses the evidence below. Additionally, some of the objections-most notably, Mr. Clawson and Mr. Geringer's objections to new evidence submitted in support of Mr. Strong's reply-relate to evidence that ultimately proved unnecessary to the court's conclusions, and so the objections are moot.

         But because the court does rely on two documents to which Defendants object-a letter from CAREIC's auditors (SAppx. v.2 at 528 (Ex. 43) and the SEC's order against Mr. Clawson (SAppx. v.1 at 1248-53 (Exs. 14-15))-the court explicitly overrules those objections for the reasons stated below in footnotes 13 and 16.

         III. Legal Standard

         “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56. “A fact is ‘material' if, under the governing law, it could have an effect on the outcome of the lawsuit. A dispute over a material fact is ‘genuine' if a rational jury could find in favor of the nonmoving party on the evidence presented.” Tabor v. Hilti, Inc., 703 F.3d 1206, 1215 (10th Cir. 2013) (internal quotation omitted)).

         “If the movant meets this initial burden, the burden then shifts to the nonmovant to set forth specific facts from which a rational trier of fact could find for the nonmovant.” Talley v. Time, Inc., 923 F.3d 878, 893-94 (10th Cir. 2019) (internal quotation omitted). Should the nonmovant bear the burden of persuasion at trial, “[t]hese facts must establish, at a minimum, an inference of the presence of each element essential to the case.” Id. (quoting Savant Homes, Inc. v. Collins, 809 F.3d 1133, 1137 (10th Cir. 2016)).

         When evaluating a motion for summary judgment, the court must view the facts and draw all reasonable inferences in favor of the non-moving party. Tabor, 703 F.3d 1215. But this is only true insofar as “there is a ‘genuine' dispute as to those facts.” Scott v. Harris, 550 U.S. 372, 380 (2007). “Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.'” Id. (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-587 (1986)).

         IV. Mr. Strong's Partial Motion for Summary

         On March 13, 2018, Mr. Strong filed a motion for summary judgment on his second claim against Defendants. Mr. Strong argues that Defendants violated the securities fraud laws of California and Utah[7] by making material misrepresentations or omissions in the CAS, CASDF, and Series E PPMs.

         Defendants raise four arguments in opposition to the motion: (1) the transactions are not subject to California or Utah law; (2) there were no misrepresentations or omissions and, even if there were, they were not material; (3) Defendants may not be held personally liable for the alleged misrepresentations; and (4) affirmative defenses preclude summary judgment.

         A. Applicability of California and Utah Securities Laws

         1. California

         Mr. Strong argues that the investments were subject to California law because the offers originated from California. The court agrees.

         Under the relevant California statute, “It is unlawful for any person to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.” Cal. Corp. Code § 25401 (West 2019). “An offer to sell or to buy is made in this state when the offer either originates from this state or is directed by the offeror to this state and received at the place to which it is directed.” Cal. Corp. Code § 25008(b) (West 2019).

         The California Supreme Court has affirmed the breadth of this definition:

Section 25008 provides, inter alia, that a sale of a security is made in California when the offer to sell is made “in this state” or an offer to buy is accepted in California. (§ 25008, subd. (a).) An offer to sell is made “in this state” if the offer originates from California. (§ 25008, subd. (b).) Thus, a sale occurs “in this state” even if the purchaser is in, and communicates acceptance of the offer to sell from, New York. Thus, while aftermarket out-of-state purchases and sales might not qualify as purchases and sales induced “in this state, ” a California corporation which offered its shares for sale on a nationwide basis would be liable to out-of-state purchasers who accepted the offer. This follows because under section 25008, a sale occurs in California if the offer emanates from this state.

Diamond Multimedia Sys., Inc. v. Super. Ct., 19 Cal.4th 1036, 1050-51 (1999) (emphasis added).

         CAREIC is a California limited liability company. (SAppx. v.2 at 367 (Ex. 6).) As such, it is “a California corporation which offered its shares for sale on a nationwide basis” (Diamond Multimedia, 19 Cal.4th at 1051), and the Series E PPM would be subject to California law.

         The rule is not as clear-cut for CAS and CASDF, which by contrast, are Nevada limited liability companies. (SAppx. v.2 at 173, 281 (Exs. 3-4).) Still, in those PPMs, the only business address identified for either CAS or CASDF is in Beverly Hills, California (the same address as CAREIC). (Id. at 173, 274 (Exs. 3-4).) The PPMs identify CAREIC as the manager of CAS and CASDF, and request that all communications with CAS and CASDF be directed to CAREIC at its office in California. (Id. at 185, 276, 281, 285 (Exs. 3-4).) The PPMs also indicate that CAREIC was, at the outset, the sole member of CAS and CASDF and that, even after units were sold through the PPMs, CAREIC would continue to hold the majority interest. (Id. at 185, 285 (Exs. 3-4).) Given CAREIC's apparent total control over the CAS and CASDF PPMs, in its role as manager, in its role as sole member, and through the information provided to investors in the PPMs, the court concludes the offers to sell these securities also “originate[d] in California” for purposes of Section 24501.

         Mr. Austin[8] argues California law does not apply, based on jurisdictional requirements included in other provisions of California law, such as Section 25004 and 25505.1. But these provisions, and their requirements, are irrelevant, as neither section is part of Mr. Strong's second claim.

         Mr. Clawson asserts that California law does not apply because the position of the investors here is significantly different from the position of the plaintiffs in Diamond Multimedia. But that is to be expected: The Diamond Multimedia plaintiffs were suing under Section 25400, which addresses the use of securities fraud to manipulate the market, while Mr. Strong here is suing under Section 25401, which addresses fraudulent misrepresentations made to the purchasers of securities themselves. But both statutes apply to conduct arising “in this state [California].” Diamond Multimedia is relevant because the California Supreme Court defined this phrase for purposes of its securities fraud law. Mr. Clawson does not explain why the phrase “in this state” in Section 25400 should be interpreted differently in Section 25401, even if the type of plaintiff suing under each statute has been harmed by the alleged fraud in different ways.

         Next, Mr. Clawson says there are issues of fact as to whether the PPMs originated in California, because although CAREIC was registered in California, CAREIC's CEO, CFO, and general counsel were all actually based in Utah. (See ECF No. 177, Declaration of Mr. Strong in Opposition to Motion to Dismiss, at 2-3.) In support of this argument, Mr. Clawson cites two Ninth Circuit cases, two interpretive opinions from the California Department of Corporations, and one district court opinion. See Parvin v. Davis Oil Co., 524 F.2d 112 (9th Cir. 1975); Robinson v. Cupples Container Co., 513 F.2d 1274 (9th Cir. 1975); Cal. Dep't of Corp., Interpretive Opinion No. 69/122, 1969 WL 1939 (Nov. 21, 1969); Cal. Dep't of Corp., Commissioner's Opinion 81/10C, 1981 WL 15161 (Nov. 12, 1981); Siegal v. Gamble, No. 13-cv-03570-RS, 2016 WL 1085787 (N.D. Cal. March 21, 2016).

         As an initial matter, the court notes that four of these five sources predate the California Supreme Court's decision in Diamond Multimedia, so their continued applicability is questionable. More importantly, two of the sources cited actually support Mr. Strong's position. In Parvin v. Davis Oil Company, the Ninth Circuit stated that California securities laws applied “where any statutory element of a sale takes place in California, ” and held that where a sale was completely negotiated in Denver, but a check was then mailed to California as payment, the standard was satisfied. Parvin, 524 F.2d at 116. And in the 1981 Commissioner's Opinion, after agreeing that certain other conduct did not constitute an offer originating in California, the Commissioner warned that inviting “potential subscriber[s] . . . [to] telephone the individual general partner in California to obtain responses to questions” would likely be an offer under California securities law, because “California courts have extended the concept of ‘offer' to encompass any activity of persons aiding in the sale of a security.” Commissioner's Opinion 81/10C, supra, 1981 WL 15161 at *2-3. Here, as noted above, the PPMs explicitly indicated that the entities were principally headquartered in California, and urged potential investors to contact their California offices with questions. The court concludes that under both Parvin and the Commissioner's Opinion, the PPMs would constitute offers originating from California.

         Finally, the court concludes that the only post-Diamond Multimedia case put forward by Mr. Clawson is distinguishable. In Siegal v. Gamble, the district court dismissed a complaint where a plaintiff alleged that two people had failed to register as broker-dealers under California's security laws. The court held that the plaintiff had failed to allege that any of the broker-dealers' conduct had occurred in California, and that the fact that they were citizens of California, without more, was insufficient. Siegal, 2016 WL 1085787 at *7. But the evidence here goes beyond the allegations in Siegal, because CAREIC was registered in California, sent out PPMs that identified California as its headquarters, and urged interested buyers to contact its offices in California. That conduct is sufficient to apply California's securities laws to these PPMs, even if many of the leaders of CAREIC were actually situated outside of California.

         2. Utah

         Mr. Strong also argues the investments were subject to Utah law because the offers were both made and accepted in Utah. The court concludes triable issues of fact exist on this issue.

         In Utah, “[i]t is unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly to: . . . (2) make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.” Utah Code Ann. § 61-1-1 (West 2019). This section applies “to persons who sell or offer to sell [securities] when: . . . (b) an offer to buy is made and accepted in this state.” Utah Code Ann. § 61-1-26(1)(b) (West 2019). The statute defines when an offer to sell or buy is made and accepted in Utah:

(3) For the purposes of this section, an offer to sell or to buy is made in this state whether or not either party is then present in this state, when the offer:
(a) originates from this state; or
(b) is directed by the offeror to this state and received at the place to which it is directed, or at any post office in this state in the case of a mailed offer.
(4) For the purposes of this section, an offer to sell or to buy is accepted in this state when acceptance:
(a) is communicated to the offeror in this state; and
(b) has not previously been communicated to the offeror, orally or in writing, outside this state, and acceptance is communicated to the offeror in this state, whether or not either party is then present in this state, when the offeree directs it to the offeror in this state reasonably believing the offeror to be in this state and it is received at the place to which it is directed or at any post office in this state in the case of a mailed acceptance.

Utah Code Ann. § 61-1-26(3)-(4) (West 2019).

         The court briefly notes that the PPMs, as sent out by the entities, were not actually “offers.” Rather, they were solicitations for offers. It was the investors who were making offers to purchase securities when they signed and returned the PPMs, and these offers were then accepted by CAREIC when it countersigned the offers.[9]

         Mr. Strong argues that the investors made offers to buy securities by signing purchase agreements and returning them to CAREIC's office in Kaysville Utah.[10] This means the offers to buy securities were “made” in Utah because the offer was “directed by the offeror to this state and received at the place to which it is directed.” Utah Ann. Code § 61-1-26(3)(b) (West 2019).

         But for Utah law to apply, the offers must also have been accepted in Utah. Under the terms of the agreement, the offers were accepted once an authorized agent of CAREIC cross-signed the agreement. (SAppx. v.2 at 116, 254, 352 (Exs. 2-4).) Mr. Strong argues that each agreement was cross-signed in Kaysville, Utah, by CAREIC's CFO, Doug Child, and that this means the agreements were also accepted in Utah.

         Mr. Clawson responds that this is insufficient because the statute is not concerned with where acceptance occurs, but rather with where communication of the acceptance occurs. See Utah Code Ann. § 61-1-26(4)(a) (West 2019) (acceptance must be “communicated to the offeror in this state.”). Mr. Strong points out that the parties contractually agreed for acceptance to occur as soon as Mr. Child cross-signed the agreements so the acceptance was immediately finalized in Utah, and any subsequent communication of that acceptance is irrelevant.

         Neither party cites any clearly applicable case law, and it does not appear the Tenth Circuit has squarely addressed the issue. But this provision was adopted by Utah as part of its adoption of the Uniform Securities Act, and an identical provision has been enacted by Missouri. In analyzing Missouri's statute, the Eighth Circuit has addressed this specific question.

         In Kreis v. Mates Investment Fund, Inc., 473 F.2d 1308 (8th Cir. 1973), the plaintiff in Missouri mailed an offer to buy securities, along with a check, to a firm in New York. The firm registered the sale in its books and mailed the plaintiff a confirmation letter in Missouri. The plaintiff subsequently sought to rescind his purchase under Missouri law. The firm defended on the ground the securities were not subject to Missouri law because the plaintiff's offer had not been accepted in Missouri. Rather, the firm maintained that under common law contract principles, acceptance occurred in New York when the firm entered the plaintiff's purchase on its books.

         The Eighth Circuit disagreed on the ground the Uniform Securities Act had displaced such common law contract principles.

With regard to acceptance, again it is to be stressed that the Act does not speak in terms of general contract law, with all of the complexities and subtleties acquired over years of classroom hypothetical questions . . ., but solely as to “acceptance in this state” . . . . In the subsection devoted to acceptance, Section 409.415(d), the stress is upon communication. Substantially, an offer is accepted here in Missouri when it is “communicated to the offeror in this state” (and has not theretofore been communicated outside the state). And it is “communicated to the offeror in this state” when the offeree directs it to him here and it is received where directed. At that point, for the purpose of the new Act, the offer has been accepted in Missouri.
. . .
[W]hether there has been a prior acceptance under orthodox contracts principles in New York, or whether acceptance is accomplished by the precise contents of some communication relating thereto, is not material to the resolution of the applicability of the new Act to the transaction. For, in either event, it is communication to the Missouri offeror that is the critical requirement. When that takes place the offer “is accepted in this state[.]”

Id. at 1312-13.

         The Eighth Circuit's reading of the statute is persuasive. Mr. Strong may well be correct that, for purposes of general contract law, acceptance of the offers occurred as soon Mr. Child signed the agreements. But for Utah's securities laws to apply, that acceptance had to be communicated to the offerors in Utah. Mr. Strong has submitted no evidence regarding whether or how Mr. Child communicated his acceptance of the agreements to the investors after he signed them. Absent such evidence, Mr. Strong has not carried his burden to show that Utah securities law applies to these claims.

         Accordingly, in the following subsections, the court only addresses Mr. Strong's claim that Defendants violated California's securities laws.

         B. Alleged Misrepresentations and Omissions

         Mr. Strong argues that Defendants violated California law by issuing PPMs that “include[d] an untrue statement of a material fact or omit[ted] to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.” Cal. Corp. Code § 25401 (West 2019). Mr. Strong focuses on four issues: (1) CAREIC management's real estate experience; (2) concerns voiced in an internal audit; (3) Mr. Clawson's previous federal securities law violations; and (4) the use of unregistered brokers to sell securities. Defendants argue that there were no misrepresentations or omissions and that, even if there were any, they were not material.

         “Under both state and federal securities law, a fact is material if there is a substantial likelihood that, under all the circumstances, a reasonable investor would consider it important in reaching an investment decision.” People v. Butler, 151 Cal.Rptr.3d 352, 367 (Cal.Ct.App. 2012) (internal quotations omitted). Although the analysis frequently involves disputed facts, “[t]he issue of materiality may be characterized as a mixed question of law and fact.” TSC Ind., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976).

The determination requires delicate assessments of the inferences a “reasonable shareholder” would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact. Only if the established omissions are “so obviously important to an investor, that reasonable minds cannot differ on the question of materiality” is the ultimate issue of materiality appropriately resolved “as a matter of law” by summary judgment.

Id. (quoting Johns Hopkins Univ. v. Hutton, 422 F.2d 1124, 1129 (4th Cir. 1970)).

         1. Misrepresentation Regarding CAREIC Management Experience

         Mr. Strong first argues that the PPMs materially misrepresented the real estate experience of three of CAREIC's four managers: Mr. Cochran, Mr. Austin, and Mr. Child.[11]

         Two of the PPMs make representations about the experience of the management team in general. The Series E PPM represents that CAREIC is a “real estate investment company that employs several managers experienced in land development and property management.” (SAppx. v.2 at 026 (Ex. 2).) It also states, “We have a skilled management team to seek out properties to finance, purchase, entitle, and resale.” (Id. at 067 (Ex. 2).) The CAS PPM says, “Our manager CAREIC retains a group of officers and consultants experienced in land development who are able to direct each development project from beginning to end.” (Id. at 176 (Ex. 3).)[12]

         The PPMs also make representations about the experience of the three individually named managers.

         The Series E PPM states that Mr. Cochran has “invested in and developed many real estate projects, and has focused largely upon projects involving raw land.” (Id. at 049 (Ex. 2).) The CASDF PPM contains the identical statement. (Id. at 303 (Ex. 4).) And the CAS PPM claims that he has “bought and sold millions of dollars of real estate throughout his career, with a primary focus on raw land including a 70-acre development in Wyoming.” (Id. at 193 (Ex. 3).)

         The PPMs also tout Mr. Austin. The Series E PPM states that he “has over 27 years of experience in real estate, sales, marketing and business infrastructure. His industry experience ranges from real estate to high-tech hardware and software services corporations.” It then details his efforts to develop software to manage real estate portfolios. (Id. at 050 (Ex. 2).) The CASDF PPM makes the identical representation. (Id. at 304 (Ex. 4).) On the other hand, the CAS PPM notably omits any reference to Mr. Austin working in real estate, stating only that he has “over 25 years of experience in sales and marketing, ” before detailing his work developing real estate portfolio software. (Id. at 194 (Ex. 3).)

         Finally, the Series E PPM describes Mr. Child as “the managing member of two other real estate and holding company LLC's, he is experienced in a broad array of real estate areas, including residential development and real estate taxation.” (Id. at 050 (Ex. 2).) The CASDF PPM makes the same statement. (Id. at 304 (Ex. 4).) And the CAS PPM states that he “is experienced in a broad array of real estate areas including: residential development, residential foreclosures of both conventional and HUD mortgages and real estate taxation.” (Id. at 194 (Ex. 3).)

         Mr. Strong argues that Mr. Austin, Mr. Child, and Mr. Cochran did not have as much real estate experience as these PPMs would have led a reasonable investor to believe. But Mr. Strong has submitted insufficient evidence to demonstrate that these statements were misrepresentations at all, let alone that they were material as a matter of law.

         First, as noted by Defendants, the date at which the PPMs were issued is highly relevant. Mr. Strong's argument is based primarily on depositions and trial transcripts from the bankruptcy proceeding in which Mr. Cochran, Mr. Austin, Mr. Child, and Mr. Geringer all affirmed that, at the time CAREIC was founded in 2004, only Mr. Geringer had significant real estate experience. (SAppx. v.1 at 251-52, 276, 485, 718, 938-39, and 995-96 (Nos. 5, 7, 9, & 10).) But the CAS PPM was not issued until June 2007, the CASDF PPM was not issued until February 2008, and the Series E PPM was not issued until June 2008. (SAppx. v.2 at 023, 173 & 274 (Exs. 2-4).) Even if Mr. Austin, Mr. Child, and Mr. Cochran had no real estate experience in 2004, when CAREIC was founded, there is at least an issue of fact about whether it would be appropriate to represent themselves as having real estate experience in 2007 and 2008, after three years of working in real estate development through CAREIC.

         Second, the words used in the PPMs are sufficiently vague and ambiguous that a trier of fact, rather than the court, should resolve whether they were misrepresentations. For example, is it misleading to say that Mr. Austin had twenty-seven years of real estate experience, when, to be more precise, he actually had twenty-seven years of real estate software experience? Is it misleading to say Mr. Child had real estate experience, when he actually had real estate tax experience? Is it misleading to say that the management team, as a whole, had significant real estate experience, when in fact, one member was experienced in real estate procurement and development, while the other members were experienced in more ancillary roles such as marketing, portfolio management, business management, and taxes? While it is certainly possible that a reasonable trier of fact could answer “yes” to the foregoing questions, it is equally possible that a reasonable trier of fact would answer “no.” The court simply cannot determine whether a reasonable investor would view these statements as misrepresentations.

         Assuming they were misrepresentations, the court also cannot resolve the issue of materiality as a matter of law. The court agrees with Mr. Strong that, generally, misrepresentations about a firm's experience would be a material misrepresentation. See, e.g., Schaffer Family Inv'rs LLC v. Sonnier, No. 2:13-cv-05814-SVW-JEM, 2016 WL 6917269 at *5-6 (C.D. Cal. July 5, 2016) (misrepresentation that defendant was a retired attorney was material as a matter of law); Commodity Futures Trading Comm'n v. Int'l Fin. Serv. (New York), Inc., 323 F.Supp.2d 482, 500-501 (S.D.N.Y. 2004) (“Without question, reasonable investors would consider the experience and training of the [independent contractors] . . . important in making an investment decision.”). But the court also agrees with Mr. Strong that materiality must be determined based on reviewing the PPM as a whole, rather than viewing piecemeal excerpts. See McMahan & Co. v. Wherehouse Entm't, Inc., 900 F.2d 576, 579 (2d Cir. 1990) (“The central issue . . . is not whether the particular statements, taken separately, were literally true, but whether defendants' representations, taken together and in context, would have mislead a reasonable investor about the nature of the debentures.”) The court is faced with the possibility that a trier of fact could conclude that some statements were misrepresentations and some were not. Depending on which statements were misrepresentations, a reasonable trier of fact could reach different conclusions about materiality. For example, a misrepresentation about a single manager's experience might not be material if the trier of fact otherwise concludes that, on the whole, investors had obtained an accurate approximation of the overall management team's level of experience.

         Accordingly, the court concludes there are genuine issues of material fact about whether the PPMs contained material misrepresentations regarding the real estate experience of CAREIC's management.

         2. Omission Regarding an Audit of Internal Controls

         On May 12, 2008, CAREIC's auditors submitted a report to CAREIC management identifying a single “reportable condition”:

During our audit we noted instances where ultimate control over multiple critical functions such as accounting, finance, legal, operational, and executive approval are held by only one individual in material transactions including financing arrangements and property acquisitions. Of particular notability is the way property is tied up and acquired by the Company. Specifically, Robert D. Geringer, the Company's President, appears to negotiate contract terms independently and outside of the Company. The result is that neither the Company nor its other executives have significant, if any, input on the terms or the structure of certain deals or their purchase price. . . .
Also noted in relation to this point is the way the property closings are structured. There appears to be no review of HUD closing documents and disclosures by parties other tha[n] Mr. Geringer prior to closing.
The Company should thoughtfully design and implement processes and procedures that ensure the involvement and approval of all members of the executive team in all significant transactions. . . . This will ensure that the Company's best interests are always addressed and not the interests of any other parties. Such limited oversight and executive concentration is not appropriate and is not conducive to investor confidence.

(SAppx. v.2 at 528 (Ex. 43).)[13]

         According to Mr. Strong, the Series E PPM should have disclosed the auditors' concerns because this information would have been material to potential investors.[14] Mr. Strong cites only one case for the proposition that failing to disclose this information was a material omission. See Spatz v. Borenstein, 513 F.Supp. 571 (N.D.Ill. 1981). But that case is not analogous. In Spatz, the defendant sold security interests in a single apartment complex, but misrepresented the No. of occupants and the cost of upkeep, while also failing to inform investors that twenty-five of the units were uninhabitable. The court found these misrepresentations and omissions to be material because they had “a direct bearing on the value, profitability and risk which could be assumed and expected by the investors.” Id. at 581.

         The omissions in Spatz were directly related to the value of the sole object of the investment. The omission here, by contrast, involves more abstract risks relating to the existence of checks and balances within corporate management. Whether these risks would have a “direct bearing” on investors' willingness to invest, in the ...

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