Opinion ID: 3030145
Heading Depth: 3
Heading Rank: 3

Heading: Plaintiffs’ claims under section 12(a)(2)

Text: Section 12(a)(2) of the 1933 Securities Act imposes civil liability on any person for use of any instrumentality of interstate commerce to offer or sell securities by means of a prospectus or oral communication that includes “an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading . . . .” 15 U.S.C. § 77l(a)(2). To establish liability under section 12(a)(2), a plaintiff must allege that the defendants did more than simply urge another to purchase a security; rather, the plaintiff must show that the defendants solicited purchase of the securities for their own financial gain: The person who gratuitously urges another to make a particular investment decision is not, in any meaningful sense, requesting value in exchange for his suggestion or seeking the value the titleholder will obtain in exchange for the ultimate sale. The lan- guage and purpose of § 12(1) suggest that liability extends only to the person who successfully solicits IN RE DAOU SYSTEMS, INC. 1421 the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner. If he had such a motivation, it is fair to say that the buyer “purchased” the security from him . . . . Pinter v. Dahl, 486 U.S. 622, 647 (1988) (emphasis added). The purchaser must also demonstrate damages to recover under section 12. Because section 12 provides that a person who sells a security through use of material misstatements or omissions “shall be liable . . . to the person purchasing such security from him . . . [for] the consideration paid for such security with interest thereon, less the amount of any income received thereon, . . . or for damages if he no longer owns the security,” 15 U.S.C. § 77l(a), there can be no recovery unless the purchaser has suffered a loss. In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201, 1205 (9th Cir. 2002). “That is to say, what the purchaser is entitled to is ‘a return of the consideration paid, reduced by the amount realized when he sold the security and by any “income received” on the security.’ ” Id. (citing Randall v. Loftsgaarden, 478 U.S. 647, 656 (1986) (citation omitted)). Causation, however, is not a necessary element of a prima facie case under section 12 of the Securities Act. See Casella v. Webb, 883 F.2d 805, 808 & n.8 (9th Cir. 1989) (holding that if the alleged misrepresentations are material, a plaintiff is entitled to recovery whether or not the misrepresentations caused the alleged damage). [18] The district court failed to reach the issue of whether Daou and the individual defendants were “directly involved” in the actual solicitation of a securities purchase because it had determined that “Plaintiffs’ 12(a)(2) claim necessarily fails for lack of adequate allegations that Defendants made any false or misleading statements or omissions of material fact.” Because we hold that plaintiffs adequately averred material misrepresentations on the part of defendants’ statements in their various periodic disclosures, the district court 1422 IN RE DAOU SYSTEMS, INC. must revisit the remaining elements of plaintiffs’ section 12(a)(1) claim to determine whether they are sufficient to survive dismissal under Rule 12(b)(6). d. Plaintiffs’ claims under sections 15(a) of the 1933 Securities Act and 20(a) of the 1934 Exchange Act Section 15(a) of the 1933 Securities Act imposes joint and several liability upon every person who controls any person liable under sections 11 or 12. 15 U.S.C. § 77o. Such section provides: Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock owner- ship, agency, or otherwise, controls any person liable under sections 77k or 771 of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reason- able ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist. Id. To state a claim under this section, a plaintiff must allege that the individual defendants had power or influence over the company and that the individual defendants were culpable participants in the company’s alleged illegal activity. Durham v. Kelly, 810 F.2d 1500, 1504 (9th Cir. 1987). Similarly, section 20(a) of the 1934 Exchange Act provides that “[e]very person who, directly or indirectly, controls any person liable under any provision of [chapter 2B] or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person . . . .” 15 U.S.C. § 78t. “Controlling person” under both IN RE DAOU SYSTEMS, INC. 1423 of the above acts is given the same interpretation because “section 20(a) [of the Exchange Act] is an analogue of section 15 of the Securities Act.” Durham, 810 F.2d at 1503 (citation omitted) (alteration in original). [19] Because the district court did not find that Daou or the individual defendants had engaged in anything but “an exercise of Defendants’ business judgment,” it also rejected plaintiffs’ contention that defendants should be liable under sections 15(a) or 20(a). Again, because we conclude that plaintiffs have adequately set forth a claim of accounting fraud, the district court must reassess the viability of plaintiffs’ sections 15 and 20 claims as well.