Securities Law Prof Blog

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

Friday, May 20, 2011

Caveat Emptor Prevails in Georgia

I blogged yesterday afternoon about the Investment News report on Brown v. J.P. Turner & Co. (N.D. Ga. May 17,2011)( Download J P TURNER) in which the federal district court dismissed all claims brought by investors in Provident Royalties LLC against the broker-dealer that marketed the securities to them through purported "private placement" offerings.  Provident went bankrupt, the SEC filed suit for fraud and obtained a freeze on Provident's assets.  I have now read the opinion and can report that it is every bit as bad as I feared.

Plaintiffs filed the class action and alleged that defendants (1) failed to comply with the notice and registration requirements of the Georgia Securities Act (GSA); (2) committed fraud in violation of the GSA; (3) committed common law negligence and (4) made negligent misrepresentations.   The court dismissed all counts for failure to plead fraud with the requisite specificity.  More disturbingly, it also, with respect to counts (3) and (4), dismissed for failure to state a claim, because the court agreed with defendant that the negligence claims were deficient because defendant did not have a duty to discover or disclose Provident's fraud.

It's hard to know how much of this horrendous opinion is attributable to strategic errors on the part of plaintiffs' attorneys and how much to judicial hostility.  Much of the opinion is devoted to the court's addressing the inadequacies of the pleading, especially pleading "on information and belief," and the plaintiffs' failure to plead with the requisite specificity a misstatement/omission of material fact and scienter.  Plaintiffs' negligence counts were also, according to the court, "essentially generic recitations of the elements of each claim" and therefore did not meet the pleading requirements.  Plaintiff also, at least according to the court, did not argue that the firm acted as an underwriter, but conceded it was the broker. 

The result, however, is a decision where the federal district court, as an alternative ground for granting the MTD, finds that the complaint did not state negligence claims under Rule 12(b)(6), because the plaintiff did not show that the defendant owed them a legal duty.  Specifically,

"Plaintiffs did not allege any facts, or cite any Georgia authority, to support their conclusionary statement that defendant owed a duty to confirm the accuracy of Provident's statements in the PPMs.  Neither has the Court found any Georgia authority that imposes a duty on a broker to conduct due diligence concerning the investment materials it provides to clients."

Remember that J.P. Turner was marketing these securities.  What about the duty of a broker-dealer to "know the security" it is marketing to investors?  What about the duty to have a "reasonable basis" for recommending a security?  J.P. Turner was not filling unsolicited orders here.  Do the FINRA rules have no applicability in the great state of Georgia?

As if the above weren't bad enough, the court goes on to state that plaintiffs did not allege any reliance on defendant's efforts and that even if they had, the reliance would be unreasonable, "as the PPMs expressly advise potential investors that they should only rely on information provided by Provident itself."  What's the point of a broker-dealer's recommendation if the investors have to read the PPMs themselves.

Caveat emptor, all you investors in Georgia!

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