Sunday, September 2, 2007
In SEC v. Phan, 2007 WL 2429365 (9th Cir. Aug. 29, 2007), the Ninth Circuit affirmed the district court's grant of summary judgment for the SEC, finding a violation of section 5 of the Securities Act (sales of unregistered securities), where the CEO of a financially troubled corporation directed a consultant to resale shares registered on Form S-8 (available for employee compensation shares) to an investor to raise capital for the corporation. Even if the shares were originally validly issued to the consultant on Form S-8 (an issue on which there were disputed issues of fact), the consultant's resale was not covered by the Form S-8 registration. The Ninth Circuit, however, reversed the district court's summary judgment in favor of the SEC on the fraud claim, holding that the one undisputed misstatement -- that the consultant would be required to pay $1.25 million in cash upon exercise of the option -- was not material as a matter of law, since there were disputed factual assertions that the consultant promised to give a promissory note in lieu of cash. The court said it could not hold as a matter of law that reasonable investors would consider the difference between cash and a promissory note material.