On December 21, 2022, the United States Court of Appeals for the Ninth Circuit affirmed in part and denied in part the dismissal of a purported class action suit against a real estate property management company (the “Company”) alleging the Company made material misstatements or omissions in social media posts, in violation Sections 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”). Pino v. Cardone Capital, LLC
, No. 21-55564, 2022 WL 17826876 (9th Cir. Dec. 21, 2022). Plaintiff alleged that the Company misrepresented the returns investors could make by investing in the Company’s investment funds in videos posted on social media sites. The district court found that the Company was not a “statutory seller” under Section 12 and dismissed the suit in its entirety. In a unanimous opinion, the Ninth Circuit disagreed, finding that the Company did qualify as a statutory seller. In a memorandum disposition filed on the same day, the Ninth Circuit held that some of the alleged misstatements were not actionable under the Securities Act and affirmed dismissal of claims based on those statements.
Plaintiff alleged that the Company indicated in a YouTube video, “you’re gonna walk away with a 15% annualized return” and asked prospective investors in an Instagram post if they would like to double their money, stating that an investor “could receive $480,000 in cash flow after investing $1,000,000,” achieve “north of 15% returns after fees,” and obtain a “118% return amounting to 19.6% per year.” Plaintiff alleged that the Company failed to caution investors that its promises were speculative, causing them to make investments without being fully informed of the risks involved. The district court dismissed the complaint, reasoning that the Company could not be held liable as a “seller” under Section 12(a)(2) because it did not “directly and actively solicit” the specific plaintiff’s investment and because plaintiff did not allege that he relied on any solicitation by the Company.
The Ninth Circuit reversed. The Ninth Circuit began its analysis with the Supreme Court’s holding in Pinter v. Dahl
that a person may be liable as a statutory seller for purposes of Section 12(a)(2) if they (1) pass title to the security to plaintiff, or (2) “engage in solicitation,” i.e., “solict the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner.” Because there was no claim the Company passed title to the securities, only the second prong was at issue. And because there was no question that the Company had financial interests in the sale, the specific issue considered by the Ninth Circuit was whether the Company “engaged in solicitation” even though it not directly target plaintiff.
The Ninth Circuit acknowledged that neither the Supreme Court nor the Ninth Circuit had addressed this issue. However, the Court considered a recent decision, covered here
, involving videos uploaded on YouTube in which the Eleventh Circuit held that the Securities Act “contains no requirement that a solicitation be directed or targeted to a particular plaintiff, and . . . that a person can solicit a purchase, within the meaning of the Securities Act, by promoting the sale of a security in a mass communication.” The Ninth Circuit further explained that the definition of “Prospectus,” which is the source of liability under Section 12(a)(2), includes communications “written or by radio or television.” According to the Ninth Circuit, this demonstrated Congress’s intent to cover “broadly disseminated, mass communications.”
Defendants argued that more targeted solicitation is required based on language in Pinter
suggesting that a “buyer-seller relationship not unlike traditional contractual privity” is required. The Ninth Circuit disagreed, observing that Pinter
“did not answer what types of communications qualify as solicitation.” The Court also noted that “the advertisements at issue in this case—Instagram posts and YouTube videos—are the types of potentially injurious solicitations that are intended to command attention and persuade potential purchasers to invest in the [Company] during the ‘most critical’ first stage of a selling transaction” and that “the nature of social media presents dangers that investors will be persuaded to purchase securities without full and fair information.”
Although the Ninth Circuit revived the suit, the Court issued a separate memorandum disposition that addressed the district court’s alternative finding that the alleged misstatements were not actionable under the Securities Act. Because the Court found that at least some of the Company’s alleged misstatements were actionable, while others were not, the Ninth Circuit affirmed in part and reversed in part that portion of the district court’s decision.