Southern District Of New York Dismisses Claim That Underwriter Of Regulation A+ Offering Was A Seller Of Unregistered Securities, But Allows Securities Fraud Claim To Proceed Past The Pleading Stage
On April 11, 2019, Judge Denise Cote of the United States District Court for the Southern District of New York granted in part and denied in part an underwriter’s motion to dismiss a putative class action lawsuit filed against a financial and technological services company (the “Company”), its executives, and the lead underwriter (“Underwriter”) of the Company’s Regulation A+ (“Reg A+”) offering in 2017 (the “Offering”). In re Longfin Corp. Securities Class Action Litigation, 1:18-cv-02933 (DLC) (S.D.N.Y. Apr. 11, 2019). Reg A+ was created to exempt certain categories of offerings from registration requirements and is an alternative to a traditional initial public offering. Plaintiffs alleged that all defendants sold unregistered securities in violation of Section 12(a)(1) of the Securities Act of 1933 (“Securities Act”) in order to list on the NASDAQ, and committed fraud in violation of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and that certain of the individual defendants were liable under Section 20(a) of the Exchange Act and/or engaged in insider trading in violation of Section 20A of the Exchange Act. The gravamen of plaintiffs’ claims is that the Company fraudulently issued more than 400,000 Class A shares to 24 individuals for $0 consideration in order to meet the NASDAQ’s listing requirement that the Company has issued 1,000,000 publicly held shares. With respect to the Underwriter’s motion to dismiss, the Court dismissed the Securities Act claim, finding that it was not a “seller” of securities, but held that the Exchange Act claim could proceed because plaintiffs’ amended complaint adequately alleged, for the purpose of the motion to dismiss, the Underwriter’s knowledge and participation in a “scheme” under Rule 10b-5.
Supreme Court Hears Argument On “Scheme Liability” Under Section 10(b) And Rule 10b-5
On December 3, 2018, the Supreme Court heard argument on an appeal in a case where a divided panel of the D.C. Circuit held that a defendant who did not “make” a misstatement within the meaning of Janus Capital Group v. First Derivative Traders, 564 U.S. 135, 142 (2011), nonetheless could be liable for participating in a “scheme” to defraud under Section 10(b) of the Exchange Act, SEC Rule 10-b5 promulgated thereunder, and Section 17(a) of the Securities Act, by disseminating with fraudulent intent a misstatement made by someone else. See Lorenzo v. S.E.C., No. 17-1077.