United States District Court, D. Utah, Central Division
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,
KIRBY D. COCHRAN; JEFF AUSTIN; AUSTIN CAPITAL SOLUTIONS; WILLIAM H. DAVIDSON; ROBERT CLAWSON; HYBRID ADVISOR GROUP; ROBERT D. GERINGER, ROBERT D. GERINGER, P.C.; FINE ARTS ENTERTAINMENT; and DOES 1-50, Defendants.
ORDER AND MEMORANDUM OF DECISION
CAMPBELL U.S. DISTRICT COURT JUDGE.
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.
cross-motions for partial summary judgment are now before the
court, which address six of the complaint's nine
Strong moves for summary judgment on his second claim. (See
ECF No. 221.) In the second claim, Mr. Strong argues
that Defendants Jeff Austin, Robert Clawson, William
Davidson, and Robert Geringer 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.
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.
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.
was formed in 2004 with Mr. Kirby Cochran as its CEO and
initial member. (SAppx. v.2 at 367 (Ex. 6).) 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).)
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.
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
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)), 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).
Objections to Evidence
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.)
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
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.
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)).
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)).
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
Strong's Partial Motion for Summary
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 by making material misrepresentations or
omissions in the CAS, CASDF, and Series E PPMs.
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.
Applicability of California and Utah Securities Laws
Strong argues that the investments were subject to California
law because the offers originated from California. The court
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
California Supreme Court has affirmed the breadth of this
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).
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.
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.
Austin 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
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.
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,
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.
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
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.
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).
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.
Strong argues that the investors made offers to buy
securities by signing purchase agreements and returning them
to CAREIC's office in Kaysville Utah. 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
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.
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.
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
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.
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.
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
in the following subsections, the court only addresses Mr.
Strong's claim that Defendants violated California's
Alleged Misrepresentations and Omissions
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.
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)).
Misrepresentation Regarding CAREIC Management Experience
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.
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).)
PPMs also make representations about the experience of the
three individually named managers.
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).)
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).)
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).)
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.
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.
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
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.
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
Omission Regarding an Audit of Internal Controls
12, 2008, CAREIC's auditors submitted a report to CAREIC
management identifying a single “reportable
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).)
to Mr. Strong, the Series E PPM should have disclosed the
auditors' concerns because this information would have
been material to potential investors. 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.
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 ...