Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Sunday, September 2, 2007

Ninth Circuit Finds Securities Registered under Form S-8 Were Invalidly Sold to Raise Capital

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.

http://lawprofessors.typepad.com/securities/2007/09/ninth-circuit-f.html

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