Watkins Development, LLC v. C. Delbert Hosemann, Jr.
214 So. 3d 1050
| Miss. | 2017Background
- David Watkins and Watkins Development, LLC participated in preparing a private placement memorandum (PPM) and related loan/bond documents for taxable revenue bonds issued by the Mississippi Business Finance Corporation to finance renovation at Metrocenter mall.
- Retro Metro, LLC (a Watkins entity) borrowed bond proceeds placed in a construction account; Watkins submitted requisitions representing funds would be used for Metrocenter construction.
- Shortly after a requisition, $587,084.34 was wired and used to purchase property for an unrelated Meridian police-station project tied to a separate Watkins entity.
- The Mississippi Secretary of State found four violations of Miss. Code § 75-71-501 (securities fraud): Count I (failure to disclose development agreement), Count II (device/scheme to defraud by misrepresenting use of proceeds), Count III (untrue statement/omission of material fact), and Count IV (act/practice operating as fraud by misusing proceeds). Penalties and restitution were imposed.
- The chancery court vacated Count I and affirmed Counts II–IV; the Secretary did not cross-appeal Count I. The Court of Appeals reversed the chancery court on Count I (despite no cross-appeal) and affirmed the Secretary on Counts II–IV. The Mississippi Supreme Court granted certiorari.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Court of Appeals could reverse chancery court on Count I without a Secretary cross-appeal | Watkins: Court of Appeals lacked authority; Secretary didn’t cross-appeal | Secretary: (did not pursue) | Reversed Court of Appeals; chancery court’s vacatur of Count I reinstated because appellee must cross-appeal to obtain reversal |
| Whether alleged misrepresentations/omissions occurred "in connection with" sale of the bonds | Watkins: Misuse of proceeds was separate and not in connection with bond sale | Secretary: Watkins helped draft PPM and was party to purchase/loan documents, so misrepresentations coincided with sale | Held that fraud must coincide with offer/sale/purchase; substantial evidence showed misrepresentations and misuse were part of the same scheme, satisfying the "in connection with" requirement |
| Whether Counts II & III (device/scheme and untrue statement/omission) satisfied scienter/materiality elements | Watkins: Purchaser Duncan Williams would not necessarily have decided differently; challenge to materiality/scienter | Secretary: Substantial evidence supports scheme and objective materiality that a reasonable investor would care about use of proceeds | Held: Subsection (1) requires intent for device/scheme; subsection (2) requires only materiality (no scienter). Court affirms Secretary’s findings as supported by substantial evidence |
| Whether Count IV (misuse/misappropriation of proceeds) constitutes securities fraud under §75-71-501(3) | Watkins: Misappropriation after sale is not "in connection with" the sale; alternatively funds may have been legitimately owed under development agreement | Secretary: Misappropriation was part of a larger scheme tied to misrepresentations; requisition forms misrepresented purpose; trustee was not informed of debt claim | Held: Misappropriation here was tied to the scheme and therefore satisfies the statute; substantial evidence supports finding of misuse and restitution order |
Key Cases Cited
- Sec. & Exch. Comm’n v. Zanford, 535 U.S. 813 (explains when fraudulent conduct is "in connection with" a securities sale)
- Harrington v. Office of the Miss. Sec'y of State, 129 So. 3d 153 (Miss. 2013) (agency-review standard and discussion equating Mississippi subsections with federal counterparts)
- Dunn v. Dunn, 853 So. 2d 1150 (Miss. 2003) (appellee must cross-appeal to obtain reversal of unchallenged trial-court findings)
- Aaron v. Sec. & Exch. Comm’n, 446 U.S. 680 (establishes scienter requirement for certain federal securities provisions)
- Rubinstein v. Collins, 20 F.3d 160 (5th Cir.) (materiality defined by reasonable-investor objective standard)