Esg Capital Partners v. Venable LLP
828 F.3d 1023
9th Cir.2016Background
- ESG Capital Partners (investor group) negotiated to buy pre-IPO Facebook shares from a person using the alias “Ken Dennis” (actually Troy Stratos). ESG wired $11.25 million but never received shares.
- Venable LLP and partner David Meyer represented Stratos/Soumaya Securities in the transactions; Meyer prepared Soumaya’s formation documents, opened bank accounts, handled client-trust accounts, and communicated directly with ESG’s managing agent.
- Meyer made assurances to ESG that “Dennis” was legitimate, affiliated with Carlos Slim, and that funds/deal documentation were secure; ESG wired $2.8M the day after Meyer’s assurances.
- Funds were placed into accounts controlled by Stratos (and disbursed), not held as ESG believed; Venable later denied knowledge and Meyer was terminated.
- ESG sued (federal §10(b)/Rule 10b-5 and multiple state-law claims). The district court dismissed the FAC with prejudice; the Ninth Circuit affirmed in part, reversed in part, and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Meyer made material misrepresentations/omissions under §10(b) | Meyer personally vouched for the deal, represented he represented "Dennis"/Soumaya, and made affirmative assurances and omissions that induced payments | Meyer was merely a messenger attributing statements to Soumaya/Stratos and not the "maker" of false statements | Meyer was the maker of some statements and also had actionable omissions; §10(b) misrepresentation/omission adequately pled |
| Whether Meyer had a duty to disclose to ESG under §10(b) (third‑party duty) | An attorney who undertakes to make representations to prospective purchasers must tell the truth; Meyer did so and thus owed ESG a duty | Duty exists only to sellers or to clients; Meyer did not represent Facebook (alleged true seller) | Thompson governs: duty can extend to nonclients; Meyer’s representations to ESG triggered a duty to disclose truthful information |
| Whether scienter was sufficiently pled for §10(b) (PSLRA/Tellabs) | Allegations of >100 contacts, all‑day meeting after deposit, control over accounts, authorization of disbursements, and copying on emails give strong inference of knowledge/recklessness | Facts show routine legal work and account assistance, not conscious deception; no single smoking‑gun showing intent | Taken together the allegations give a strong and cogent inference of scienter sufficient at pleading stage |
| Whether state claims are time‑barred or immune (Cal. Civ. Proc. §340.6 & Cal. Civ. Code §1714.10) | Most state claims are independent torts (conversion, unjust enrichment, UCL, aiding/abetting, conspiracy) and not necessarily dependent on breach of a professional obligation; aiding/conspiracy fall within independent‑duty exception to agent immunity | §340.6’s one‑year statute covers attorney wrongful acts in performance of legal services; Agent’s Immunity bars claims where attorney acted only as agent of another | Breach of fiduciary duty is barred by §340.6 (time‑bar). Other state claims (conversion, unjust enrichment, UCL, aiding/abetting, conspiracy) survive pleading challenges and are not barred by the Agent’s Immunity Rule |
Key Cases Cited
- Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135 (on who is the "maker" of a statement for §10(b))
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standard for pleading scienter: "strong inference")
- In re Daou Sys., Inc., 411 F.3d 1006 (Ninth Circuit standard for pleading securities fraud/PSLRA context)
- Thompson v. Paul, 547 F.3d 1055 (attorney duty to nonclient purchasers under §10(b))
- Rubin v. Schottenstein, Zox & Dunn, 143 F.3d 263 (Sixth Circuit on attorney duty to prospective investors)
- Lee v. Hanley, 61 Cal.4th 1225 (Cal. Supreme Court on scope of §340.6 and when claims necessarily depend on professional obligations)
- Prakashpalan v. Engstrom, Lipscomb & Lack, 223 Cal. App. 4th 1105 (application of §340.6 to attorney‑related claims)
- Astiana v. Hain Celestial Grp., Inc., 783 F.3d 753 (treatment of unjust enrichment as quasi‑contract in Ninth Circuit)