RECENT HOLDING CONCLUDES OFFICERS AND DIRECTORS ARE PRESUMPTIVELY LIABLE FOR ISSUANCE OF UNQUALIFIED SECURITIES
Recently, the California Court of Appeal ruled on an appeal from a case involving allegations against outside directors for the improper issuance of unqualified securities. In Hellum v. Breyer, the plaintiffs were a class of investors who had invested in Prosper Marketplace, Inc. (“Prosper”). Prosper was a closely held corporation based out of San Francisco. It was an online lending program that connected potential borrowers to lenders through Prosper’s website.
In a class action lawsuit, the plaintiffs filed suit against Prosper, its corporate officers, and outside directors based upon alleged violations of California and federal securities laws. The outside directors demurred to the complaint, a pleading which attacked the complaint based solely upon the allegations on the face of the complaint. The outside directors argued that in order to state a cause of action, the plaintiffs were required to plead and later prove that the outside directors had control over Prosper. The trial court agreed with the defendants and sustained the demurrer. However, the court of appeal disagreed and overturned the decision.
The Court of Appeal concluded that unlike Federal securities laws, under the California Corporations Code Section 25504, officers and directors are presumptively liable for their businesses’ issuance of unqualified securities regardless of whether or not they participated in the transactions or controlled the business that issued the securities. The structure of the statute shows a legislative intent to impose liability in a broader fashion than its federal counterpart.
This decision should be noted by securities attorneys in Los Angeles and throughout California. It impacts the potential liability of officers and directors of corporations that issue unqualified securities to investors. The decision demonstrates that officers and directors are not shielded from liability just because they are not in control of the corporation that issues the securities.
CHRISTIAN HELLUM et al., Plaintiffs and Appellants,
JAMES W. BREYER et al., Defendants and Respondents.
Court of Appeals of California, First District, Division Four.