AREI II Cases
157 Cal. Rptr. 3d 368
Cal. Ct. App.2013Background
- Investors purchased TIC interests in a senior housing facility from AREI, which was controlled by James Koenig, a convicted felon.
- Koenig’s felony and the Meecorp mezzanine loan were not disclosed in AREI’s offering materials (PPM).
- Morgan Keegan structured the joint venture financing and drafted the offering memorandum, with knowledge of Koenig’s background, but allegedly did not disclose it to investors.
- The Roseville property was heavily leveraged by a CapSource first mortgage and a Meecorp mezzanine loan, with Meecorp’s loan later defaulting and foreclosing; plaintiffs allege lack of authorization for the mezzanine loan.
- Plaintiffs sued Morgan Keegan for aiding in a securities violation and for fraud-based conspiracy; the trial court sustained demurrers without leave to amend.
- The appellate court reversed in part, ruling Morgan Keegan could be liable for common law fraud based on conspiracy, but not for §25504.1 aiding in a securities violation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Morgan Keegan materially assisted a securities violation under §25504.1 | Keegan aided the violation by structuring the deal and preparing pledging documents | No substantial participation in selling securities or drafting false statements | No material assistance pleaded; §25504.1 fails against Keegan |
| Whether plaintiffs adequately plead a conspiracy to defraud | Allegations show Keegan knew of and participated in concealment and scheme | Bare allegations insufficient to show agreement or knowledge | Fraud/conspiracy claim against Keegan sufficiently pled |
| Whether the claim for rescission under §25504.1 requires privity | Privity not necessary to pursue damages; rescission may require privity | Privity required for rescission under §25504.1 | Privity not decisive here; court would remand for potential damages, but claim viability not resolved on appeal |
| Whether the trial court abused its discretion in denying leave to amend | New evidence could cure defects; amendment viable | No allegations showing cure; no abuse of discretion | No abuse; discretionary denial upheld, but remand possible for newly discovered evidence |
Key Cases Cited
- Apollo Capital Fund LLC v. Roth Capital Partners, LLC, 158 Cal.App.4th 226 (Cal. Ct. App. 2007) (a broker-dealer must materially aid in the violation itself)
- California Amplifier, Inc. v. RLI Ins. Co., 94 Cal.App.4th 102 (Cal. Ct. App. 2001) (act’s civil liability balances expanded liability with restrictions)
- Moss v. Kroner, 197 Cal.App.4th 860 (Cal. Ct. App. 2011) (secondary liability scope under §25504/25504.1)
- In re Rexplore Inc. Securities Litigation, 685 F.Supp.1132 (N.D. Cal. 1988) (federal aiding-and-abetting context pre-dates 1994 Supreme Court ruling)
- Viterbi v. Wasserman, 191 Cal.App.4th 927 (Cal. Ct. App. 2010) (privity for rescission under §25504.1 discussed)
- Choate v. County of Orange, 86 Cal.App.4th 312 (Cal. Ct. App. 2000) (conspiracy requires concerted act and mutual understanding)
- Wyatt v. Union Mortgage Co., 24 Cal.3d 773 (Cal. 1979) (conspiracy liability standards through tacit agreement)