Opinion ID: 77664
Heading Depth: 2
Heading Rank: 3

Heading: Omission of cease and desist order

Text: 93 Finally, the SEC alleges that it was materially misleading to omit the existence of a contemporaneous cease and desist order that prohibited Merchant from selling identical unregistered securities in California. Beasley admitted receiving the order in October 2002, and Merchant continued selling the partnership interests at issue here until November 2002. 22 The district court did not specifically consider this argument, though it was made in the district court. 94 We find that it was clear error not to count this as a material misrepresentation. The existence of a state cease and desist order against identical instruments is clearly relevant to a reasonable investor, who is naturally interested in whether management is following the law in marketing the securities. See, e.g., SEC v. Physicians Guardian Unit Inv. Trust, 72 F.Supp.2d 1342, 1351 (M.D.Fla.1999) (allegation that promoter failed to disclose existence of state cease and desist order supported securities fraud claim); SEC v. Paro, 468 F.Supp. 635, 646 (N.D.N.Y.1979) (material omission when failed to disclose cease and desist orders entered by federal and state courts against similar predecessor interests); see also Breard v. Sachnoff & Weaver, Ltd., 941 F.2d 142, 143-44 (2d Cir.1991) (failure to disclose that key financier and guarantor had pled guilty to fraud in connection with similar scheme, if proven, was material); Zell v. InterCapital Income Sec., Inc., 675 F.2d 1041, 1046 (9th Cir.1982) (proxy statement might be materially misleading if failed to disclose lawsuits charging violations of state and federal securities laws and if those lawsuits bore on investment advisor's management ability). The omission was all the more misleading because Merchant's partnership materials specifically and repeatedly represented that the RLLP interests were not securities.