Opinion ID: 76433
Heading Depth: 2
Heading Rank: 1

Heading: Failure to Allege the Purchase of a Security

Text: 16 Section 517.301 of the Florida Securities and Investor Protection Act makes it unlawful for any person in connection with the offer, sale, or purchase of any investment or security: 17
18 2. To obtain money or property by means of any untrue statement of a material fact or any 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; or 19 3. To engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a person. 20 Fla. Stat. ch. 571.301(1). 21 In discussing Grippo's federal securities claims, the district court found that Grippo could not plead securities claims because he failed to allege and could not prove that any securities were actually purchased with the funds that he invested with Perazzo. Thus, the district court found that Grippo failed to establish that any alleged fraud was in connection with the purchase or sale of any security. 22 The district court failed to discuss the elements of Grippo's state securities claims, merely stating that Grippo had to plead fraud in connection with the purchase or sale of a security. Assuming that such a requirement is an element of all of Grippo's state securities claims, we conclude that the district court erred in finding that Grippo failed to properly allege state securities claims on the ground that Grippo had not alleged that he actually purchased any securities. 23 The elements of a cause of action under § 517.301 are identical to those under the Federal Rule 10b-5, except that the scienter requirement under Florida law is satisfied by showing of mere negligence. Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1046 (11th Cir. 1987). Because Florida law does not answer the question that we examine today, we look to federal law for guidance. 24 Subsequent to the district court's order dismissing Grippo's second amended complaint, the Supreme Court made clear that a plaintiff does not need to identify a specific security, or demonstrate that his money was actually invested in securities, to be a purchaser of securities within the meaning of section 10b and Rule 10b-5. SEC v. Zandford, 535 U.S. 813, 819-21, 122 S.Ct. 1899, 1903-04, 153 L.Ed.2d 1 (2002). In Zandford, a New York broker persuaded William Wood, an elderly man, to open a joint investments account for himself and his mentally retarded daughter. Id. at 815, 122 S.Ct. at 1901. Wood entrusted Zandford with over $400,000 to invest, with the objective for the account to be the safety of principal and income. Id. Zandford then sold securities in the Wood's account and made personal use of the proceeds. Id. After Zandford was convicted of thirteen counts of wire fraud, the SEC filed a civil complaint alleging that Zandford violated section 10(b) and Rule 10b-5 by engaging in a scheme to defraud the Woods and by misappropriating the Woods' securities without their knowledge or consent. Id. at 816, 122 S.Ct. at 1901. The district court entered summary judgment in favor of the SEC, and Zandford appealed, arguing that his fraud did not have the requisite connection with the purchase or sale of a security. Id. The Fourth Circuit reversed, concluding that the complaint did not sufficiently allege the necessary connection because Zandford's scheme was simply to steal the Woods' assets rather than to engage in manipulation of a particular security. Id. at 816, 122 S.Ct. at 1901-02. 25 The Supreme Court reversed, construing the statute not technically and restrictively, but flexibly to effectuate its remedial purpose, which is to achieve a high standard of business ethics in the securities industry. Id. at 819, 122 S.Ct. at 1903 (internal quotations omitted). The Court stated that the statute's language in connection with the purchase or sale of any security is ambiguous, and looked to the SEC's construction of the phrase, which maintains that a broker who accepts payment for securities that he never intends to deliver, or who sells customer securities with intent to misappropriate the proceeds, violates § 10(b) and Rule 10b-5. Id. The Court found reasonable and deferred to the SEC's broad construction and, accordingly, reversed the Fourth Circuit, concluding that the securities sales and Zandford's fraudulent schemes were not independent events and thus his breaches of fiduciary duty were in connection with securities sales within the meaning of section 10(b). Id. at 820, 122 S.Ct. at 1903. 26 Although Zandford is factually distinguishable from the instant case, the Supreme Court's deference to the SEC's reasonable construction of the phrase in connection with offers us guidance in determining whether Grippo may state a claim for securities fraud. In Zandford, only the portion of the SEC's interpretation dealing with a broker who ... sells customer securities with intent to misappropriate the proceeds applied to the facts presented. In this case, however, no proof exists that a security was actually bought or sold. The defendants engaged in an allegedly fraudulent scheme involving an investment contract, which is a security, and at least purported to buy and sell other securities. Thus, this case falls within the other portion of the SEC's interpretation: a broker who accepts payment for securities that he never intends to deliver. Nonetheless, the Supreme Court clearly stated that the SEC's broad interpretation of the phrase in connection with, which includes the factual scenario presented in this case, was reasonable and worthy of deference. Id. at 819, 122 S.Ct. at 1903. 27 Accordingly, pursuant to Zandford, we conclude Grippo adequately pled fraud in connection with the purchase or sale of any security, even though he failed to identify any particular security purchased, because Perazzo accepted and deposited Grippo's monies as payment for securities. Therefore, Grippo may maintain state securities claims against Perazzo, and the district court erred in finding that Grippo failed to state a claim under state law based on his inability to prove that his money was actually used to purchase any security.