Apollo Capital Fund, LLC v. Roth Capital Partners, LLC

• Decision Date: 20 December 2007
• Docket Number: No. B182089.,B182089.
• Citation: 70 Cal.Rptr.3d 199,158 Cal.App.4th 226
• Court: California Court of Appeals Court of Appeals
• Parties: APOLLO CAPITAL FUND, LLC et al., Plaintiffs and Appellants, v. ROTH CAPITAL PARTNERS, LLC, Defendant and Respondent.

70 Cal.Rptr.3d 199

158 Cal.App.4th 226

APOLLO CAPITAL FUND, LLC et al., Plaintiffs and Appellants, v. ROTH CAPITAL PARTNERS, LLC, Defendant and Respondent.

No. B182089.

Court of Appeal, Second District, Division 8.

December 20, 2007.

The Rosen Law Firm and Laurence Rosen; and Law Office of Brian Barry and Brian Barry, Los Angeles, for Plaintiffs and Appellants Scott L. Zimmerman; Delta Capital Partners; Spiga Ltd.; Target Growth Fund, Ltd.; Next Level Capital Investments, Inc.; Shawn Sadeghat; Norman Tulchin; and Milton and Rosemary Okun.

The Dressier Law Group and Thomas W. Dressier, Los Angeles, for Plaintiffs and Appellants Apollo Capital Fund, LLC and Mernoush Mahjobi.

Morgan Lewis & Bockius, Paul A. Richler and David S. Cox, Los Angeles, for Defendant and Respondent Roth Capital Partners, LLC.

SUMMARY

RUBIN, J.

When their investments in an internet services company's bridge notes became worthless, the plaintiffs in this suit for corporate securities fraud, common law fraud and related claims sued the broker-dealer who was "the placement agent for the bridge note offering. The investors asserted numerous causes of action arising from the transaction, two of them based on failure to register or qualify the securities under federal and state law, and the remainder premised on allegations that the broker-dealer collaborated with others in preparing offering documents for the company's bridge note offering that contained materially false and misleading statements. When the broker-dealer demurred to the third amended complaint, the trial court sustained its demurrers to all causes of action without leave to amend and dismissed the complaint. We hold that:

(1) The complaint sufficiently alleges common law fraud and negligent misrepresentation claims against the broker-dealer based on both oral misrepresentations and written misrepresentations in the offering documents.

(2) The broker-dealer was the placement agent for the company in the securities offerings and had no fiduciary duty to investors who were not its customers. However, because a stockbroker always has a fiduciary duty to his or her customers, the single investor who alleged he had an account with the broker-dealer may amend the complaint, if he can, to allege the existence and nature of the account and his relationship with the broker-dealer at the time of the bridge note offering.

(3) The statute of limitations bars the investors' cause of action for the sale of unregistered securities under federal law.

(4) The investors' cause of action for the sale of securities not qualified in accordance with state law requirements is not preempted by federal law.

(5) The broker-dealer is not liable as a seller of the securities under the statutory provisions making it unlawful to offer or sell a security by means of untrue or misleading statements. (Corp.Code, §§ 25401 & 25501.)¹

(6) No private right of action exists under a statutory provision making it unlawful to knowingly provide substantial assistance to another person in violation of any provision of the corporate securities law. (§ 25403.)

(7) The complaint alleged facts sufficient to support the broker-dealer's liability under a statutory provision making a broker-dealer or agent who materially aids in the sale of securities by means of false or misleading statements jointly and severally liable with the primary violator. (§ 25504.)

(8) The complaint alleged facts sufficient to support liability of the broker-dealer under a statutory provision making any person who materially assists in the sale of securities by means of false or misleading statements, with intent to deceive or defraud, jointly and severally liable with the primary violator. (§ 25504.1.)

FACTUAL AND PROCEDURAL BACKGROUND

In March 2000, 11 individuals and investment companies (collectively, investors) invested funds totaling $2.84 million in privately-offered bridge notes (bridge notes or securities) issued by eNucleus, Inc., a company providing software and internet services designed to facilitate e-commerce by middle market companies. The company defaulted on the securities and slid into bankruptcy. Under a confirmed plan of reorganization in November 2001, the investors in eNucleus's bridge notes received new common stock for their investment, which was then and remains essentially worthless.

On May 10, 2002, the investors filed a lawsuit against Roth Capital, Partners, LLC, a licensed broker-dealer and investment banker which acted as eNucleus's "placement agent" for the sale of the bridge notes.² The lawsuit alleged violations of the Corporate Securities Law of 1968 (§§ 25000 et seq.), as well as claims for common law fraud and negligent misrepresentation. After demurrers were sustained with leave to amend as to previous iterations of the complaint, the investors filed a third amended complaint (the complaint). The complaint alleged four causes of action under California securities fraud statutes:

• A claim for violation of section 25401, which makes it unlawful to sell or offer to sell a security by means of a written or oral communication containing an untrue statement of a material fact, or omitting a material fact necessary to make the statement not misleading.

• A claim for violation of section 25403, under which a person who knowingly provides substantial assistance to another in violation of any provision of the corporate securities law is deemed to be in violation of that provision.

• A claim for violation of section 25504, which provides that a broker-dealer or agent who materially aids in an act or transaction violating section 25401 (prohibiting the sale of securities by means of untrue or misleading statements) is liable jointly and severally with the primary violator.

• A claim for violation of section 25504.1, which makes a person who materially assists in any violation of section 25401, with intent to deceive or defraud, jointly and severally liable for the violation.

The investors also alleged claims for fraud and deceit, negligent misrepresentation, breach of fiduciary duty, and the sale of unregistered securities under federal law. Roth again demurred, and this time its demurrer was sustained without leave to amend.

We describe first the background information alleged in the complaint, and then turn to the particular misrepresentations and omissions alleged and the trial court's ruling.

A. The background of the dispute.

The lawsuit arises from the bridge note transaction, which closed on or around March 21, 2000. In addition to Roth, other persons and firms who played a role included (1) Shelly Singhal and Kimberley Wilson, managing directors who acted for Roth, and (2) Ignite Capital, a company with which eNucleus initially intended to contract to raise funds through the sale of bridge notes (but which was not a registered broker-dealer and therefore could not legally sell securities for eNucleus).

Prior to the bridge note offering that is the subject of this lawsuit, on January 24, 2000, eNucleus and Roth executed a "placement agent agreement" under which Roth was to raise $7 million in an offering of eNucleus convertible preferred stock (the preferred stock offering). A portion of the proceeds of the preferred stock offering was to be used to pay off the bridge notes. The placement agent agreement provided, "as a condition to Roth raising the financing," that:

• "Up to $2,000,000 of proceeds shall be used to payoff the bridge financing."

• "A minimum investment of $2-$3 million by a strategic investor acceptable to [Roth] to close simultaneously with this transaction."

The written misrepresentations alleged in the complaint are contained in the bridge note offering documents (offering documents) with which Roth "offered the [bridge notes] for sale to the [investors] ...." These documents were "collaboratively drafted and redrafted" by Roth (through Singhal and Wilson) and the law firms representing eNucleus and Roth, and were distributed to the investors by Roth. Roth's "express purpose" in drafting the offering documents was that the documents be transmitted to the investors and others, who were invited to rely on the documents in determining whether to invest in the bridge notes. The offering documents included a summary of terms of the bridge notes and a "private placement memorandum" for the preferred stock offering that was to follow the bridge note offering. Specifically, the offering documents included:

• A confidential offering memorandum specifically related to the bridge notes. This memorandum (hereafter, February 8 bridge note summary) was negotiated and drafted by the lawyers representing Roth and eNucleus on or about February 8, 2000. It stated that the bridge notes "shall be subject to mandatory prepayment prior to the Maturity Date ... out of all net proceeds, if any, received by [eNucleus] from any one or more subsequent private placements or public offerings of securities of [eNucleus]."

• A February 7, 2000 private placement memorandum (February 7 PPM) for the proposed placement of Series A preferred stock that was to follow the bridge note offering. The February 7 PPM was negotiated and drafted by Singhal and the lawyers representing Roth and eNucleus, all of whom specifically intended that it be provided to, read by and relied on by the investors in evaluating the bridge notes.

• A "Securities Purchase Agreement" for the bridge notes.

• A form of promissory note to be executed by eNucleus.

B. The alleged misrepresentations and omissions.

The oral and written misrepresentations alleged in the complaint may be summarized as follows:

• That the bridge notes could and would be repaid in full by eNucleus from the proceeds of the planned series A preferred stock offering. This representation was made orally by Roth (Singhal) to several investors in telephone solicitations between February 10 and March 2, 2000. Roth told certain of the investors the...