Motion To Dismiss - Securities Regulation Section

Motion To Dismiss

Pacific Continental Bank And Century Bank’s

Motion to Dismiss Plaintiffs’ Second Amended Complaint

Cox v. Holcomb Family Limited Partnership

Case No. 1308-12201 Hon. Youlee Yim You

October 28, 2015

STOLL BERNE Pacific Continental Bank Motion to Dismiss

1

Summary of Argument

• No Participation or Material Aid in a Sale of Berjac Securities

• No ORS 59115(1)(a) Cause of Action for Violation of ORS 59.135(2)

• Inadequate pleading of scienter as required for ORS 59.135(1)-(3) Violations

• No Specific Sales Identified in Complaint—Alternative: Request to Make More Definite and Certain


2

ORS 59.115(3) Claim Elements

• In order for plaintiffs to assert a valid claim against Pacific Continental under ORS 59.115(3) must allege the following elements to prove the claim:

• (1) Berjac sold a security to the plaintiff, AND

• (2) the sale by Berjac to the plaintiff was made:

• (a) in violation of ORS 59.135(1)

• (b) in violation of ORS 59.135(3); OR

• (c) by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, the plaintiff not knowing of the untruth or omission; AND

• (3) Pacific Continental participated or materially aided in the sale by Berjac to the plaintiffs.


3

No Participation or Material Aid in a SALE

Pacific Continental Bank Motion to Dismiss

4

• Plaintiffs’ Argument: • No requirement of participation or material aid in a SALE • Only need participation in the MEANS or SCHEME • “The important thing is to evaluate the means . . . [leading

to sales], and then evaluate . . . participation or material aid in those means [or scheme].” Ps’Brief, p 46

• 59.115(3): “Every person who participates or materially aids in the SALE is also liable.”

• Plaintiffs: “Every person who participates or materially aids in the MEANS OR SCHEME is also liable.”

STOLL BERNE

Scheme Liability Addressed Elsewhere


5

• Control Persons • Liability under 59.115(3): Every person who directly or

indirectly CONTROLS a seller is liable • Participation in SALE not required • Control persons face SCHEME liability

• Participants/Material Aiders • No scheme liability under 59.115(3) • Scheme liability under common law for aiding and abetting

a fraud or fraudulent scheme • There is liability for participation in a scheme—just not

under 59.115(3)

STOLL BERNE

No Participation or Material Aid in a SALE


6

• Allegations concerning Pacific Continental and Century Bank, paras 14 & 15 of the SAC:

• No action or involvement at all by PCB or Century in

connection with any Sale of Berjac securities • No tie of loans and lines of credit to any Sale of securities • Pacific Continental is not even alleged to have loaned

money directly to Berjac

• Plaintiffs rely entirely on Scheme liability not participation in a Sale

STOLL BERNE

No Participation or Material Aid in a SALE National Century Case—Three Key Points


7

In re National Century Financial Enterprises, 846 F.Supp.2d 828 (S.D. Ohio 2012) • National Century—undisputed that it committed massive fraud • Credit Suisse (CS) provided lines of credit to National Century • CS agreed to purchase the loan of another bank when that bank

declined to renew its loan to National Century • Oregon plaintiff—no contact with CS nor did it review any materials

prepared by CS in making its purchase of National Century notes • CS was sued for participant liability and aiding and abetting fraud

STOLL BERNE

National Century Case—Point One


8

• No participant liability under 59.115(3) • CS was too far removed to have aided in or participated in a sale • 59.115(3) is “limited to those who participate in or materially aid the

sale and does not encompass all who assist in the overall fraud.” Id. at 908.

• Summary judgment granted for CS—did not participate in sale

STOLL BERNE

National Century Case—Point Two


9

• CS supplied MetLife directly with a PPM • MetLife “produced evidence that Credit Suisse materially aided the

sale by directly communicating information for that particular note issuance to MetLife.” Id. at 909.

• Summary judgment denied to CS—it did participate in the sale • Open market aspect was irrelevant

STOLL BERNE

National Century Case—Point Three


10

• Oregon plaintiff asserted aiding and abetting fraud against CS • Oregon plaintiff “established Credit Suisse’s actual knowledge and

substantial participation in the scheme.” Id. at 916. • Summary judgment denied to CS—participation actionable under

common law of aiding and abetting fraud • Confirming SCHEME liability—just not under 59.115(3) SALE liability • Why does this make sense?

• Participation in a SALE—more direct connection required - lower burden of proof • Participation in a SCHEME—less direct connection required - higher burden of proof

STOLL BERNE

Plaintiffs’ Cases—All Required Participation in the SALE


11

• Gonia v. EI Hagen Co • Non-seller visited prospective purchasers with a rep of the seller re sale

• Adamson v. Lang • Non-seller’s loan specifically to facilitate the sale

• Black & Co. v. Nova-Tech, Inc. • Lawyer prepared legal papers to complete sale

• Adams v. American Western Securities, Inc. • Lawyer prepared docs for sale and filed documents to register securities

STOLL BERNE

Plaintiffs’ Cases—All Required Participation in the SALE


12

• Ainslie v. First Interstate Bank • Non-seller participated in sale by holding and distributing proceeds in escrow

• Prince v. Brydon • Lawyer prepared offering statement for sale of securities and legal documents

necessary to create the entity for which the securities were sold

• McDonough v. Jones • Defendant authorized seller, in connection with sale of securities, to make

specific reps re financial condition, validity and safety of notes

• Ainslie v. Spoylar • Lawyer prepared docs and was deeply involved in sale

STOLL BERNE

Practical Effects of Participant Liability for MEANS or SCHEME and not SALE


13

• No Oregon court has found participant liability based only on participation in a SCHEME and not a SALE

• Under Plaintiffs’ framework:

• Must a bank undertake extensive due diligence to extend LOC? • Not just on borrower but on all of borrower’s businesses, contacts,

relationships, investors, etc. • How does borrower finance business? • Does borrower issue securities? Racehorses? Salmon Ranches? • Are securities registered or exempt? • Are investors all accredited? Interview all investors? • What representations were/are made to each investor? • How does Bank evaluate all of this?

STOLL BERNE

Key Decision for Court: Participation in a SCHEME or a SALE


14

• Plaintiffs: “Every person who participates or materially

aids in the SCHEME is also liable.”

• ORS 59.115(3): “Every person who participates or materially aids in the SALE is also liable.”

STOLL BERNE

ORS 59.115(1)(a) —No Cause of Action for ORS 59.135 Key Points


15

• Legislature’s clear intent to provide for 59.135 (1) & (3) violations through 59.115(1)(b)

• Legislature’s clear intent to remove 59.135(2) from 59.115

• 59.115(1)(b)’s good faith defense would be irrelevant

• Statutory Construction—unaddressed by plaintiffs

• Oregon v. Marsh (II)—59.135 violations require scienter

• If 59.115(1)(a) allows a cause of action, scienter must be required

STOLL BERNE

Legislature Initially Allows 59.135 Violations to be Brought Through New 59.115(1)(c)


16

In 2003, SB 609 was signed into law. Added 59.115(1)(c).

59.115(1) A person who offers or sells a security is liable as provided in subsection (2) of this section to a purchaser of the security if the person: . . . (b) Offers or sells a security by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading (the buyer not knowing of the untruth or omission), and who does not sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the untruth or omission; or (c) Offers or sells a security in violation of ORS 59.135(1), (2) or (3).

STOLL BERNE

Legislature Amends and Clarifies in Two Ways


17

Later in 2003, 59.115 was amended again

59.115(1) A person [who offers or sells a security] is liable as provided in subsection (2) of this section to a purchaser of [the] a security if the person: . . . (b) [Offers or] Sells or successfully solicits the sale of a security in violation of ORS 59.135 (1) or (3) or by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading (the buyer not knowing of the untruth or omission), and who does not sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.[; or] [(c) Offers or sells a security in violation of ORS 59.135(1), (2) or (3).]

STOLL BERNE


18

• One: 59.135(1) & (3) actionable through 59.115(1)(b): “Sells or successfully solicits the sale of a security in violation of ORS

59.135 (1) or (3)”

• Two: 59.135(2) language remains in 59.115(1)(b) but continues to allow a good faith defense:

“Sells or successfully solicits the sale of a security . . . by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading . . . and who does not sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the untruth or omission”

Legislature Amends and Clarifies in Two Ways

STOLL BERNE

59.115(1)(b)’s Good Faith Defense Would be Irrelevant


19

• Both 59.115(1)(b) and 59.135(2) prohibit untrue statements or omissions of material fact

• Good faith provision prohibits strict liability for innocent misrepresentations

• If plaintiffs could avoid the good faith defense by proceeding under 59.115(1)(a)—59.115(1)(b) would be irrelevant

STOLL BERNE

59.115(1)(b) Would be Irrelevant


20

• Accepting plaintiffs’ position, 59.115(1)(b) is irrelevant • If all 59.135 violations are actionable under 59.115(1)(a),

why ever proceed under 59.115(1)(b)? • Accepting plaintiffs’ position would create strict liability

beyond 59.115(1)(b) • Or Ct App recognizes this cannot be the case:

• When holding that a violation of ORS 59.135(2) requires scienter, the Court in Marsh II said:

“[W]e are not aware of anything in the legislative history of 59.137 that suggests that the legislature intended to create a kind of strict liability that encompasses innocent misstatements, thereby expanding a seller’s liability for misstatements beyond what is contemplated in ORS 59.115(1)(b).”

STOLL BERNE

Two Conclusions


21

• 59.135(1) & (3) violations are only actionable through 59.115(1)(b)

• 59.135(2) violations, actionable through similar language in 59.115(1)(b), allow for a good faith defense

STOLL BERNE

Scienter—What Are the Issues Presented?


22

• Scienter required for actions of participants? • No, not an issue raised by defendants • Defendants have good faith defense, 59.115(3)

• Scienter required for violations of 59.135? • Yes, Oregon v Marsh (II) is clear: • “. . . the legislature understood violations of all three provisions to

refer to similar types of conduct involving scienter.” • “. . . the legislature intended a ‘violation of ORS 59.135(1), (2) or

(3)’ to refer to conduct that was committed with scienter . . ..” • If 59.115(1)(a) provides a cause of action for violations of 59.135,

scienter must be required

STOLL BERNE

Why is Scienter Important?


23

• Plaintiffs cannot plead facts supporting scienter

• Plaintiffs allegations of scienter are conclusory and often merely recite the language of the elements of the claim

STOLL BERNE

Alternative: Make More Definite and Certain


24

• Plaintiffs need to specifically allege:

• Each specific sale of securities

• The misrepresentation or fraud in connection with each sale

—Including scienter

• The participation of PCB in each specific sale of securities, not scheme

STOLL BERNE

Issues for the Court to Decide


25

• Did PCB participate or materially aid in the SALE of securities?

• Do ORS 59.135 violations require proof of scienter?

• Does ORS 59.115(1)(a) provide a claim for violations of 59.135?

• Have plaintiffs adequately plead facts showing scienter?

• Have plaintiffs plead facts showing specific sales, misreps and participation in sales by PCB?

STOLL BERNE



26

• Did PCB participate or materially aid in the SALE of securities?

-No, case dismissed.

• Do ORS 59.135 violations require proof of scienter?

-Yes, must plead specifically.

• Does ORS 59.115(1)(a) provide a claim for violations of 59.135?

-No, but if yes, then must replead as above.

STOLL BERNE



27

• Have plaintiffs adequately plead facts showing scienter?

-No, plaintiffs must replead.

• Have plaintiffs plead facts showing specific sales, misreps and participation in sales by PCB?

-No, plaintiffs must replead.

STOLL BERNE

Documents

Motion To Dismiss - Securities Regulation Section