All I Want Is a Remedy: The Black Crowes Argument Against a HAJMM Sandwich
Section 75-1.1 claimants find themselves stuck in a HAJMM sandwich when their complaint arises out of conduct that occurs in a securities transaction, but for which the securities laws provide no remedy. In these circumstances, the securities exemption based on HAJMM Co. v. House of Raeford Farms, Inc. will bar the section 75-1.1 claim—regardless of whether a remedy can be found in the securities laws.
A recent North Carolina Business Court decision, Bucci v. Burns, addressed the plight of litigants caught in a HAJMM sandwich. The plaintiffs argued that section 75-1.1 must provide them with a remedy if the securities laws did not. All they wanted was a remedy, so we’ll call this The Black Crowes Argument. The Business Court did not find The Black Crowes Argument hard to handle.
The Black Crowes Argument originated in Skinner v. E.F. Hutton & Co., a securities-exemption case decided a few years before HAJMM. In support of its holding, Skinner explained that securities transactions “were already subject to pervasive and intricate regulation under the [Securities Act]” and that reading section 75-1.1 to apply to securities transactions could subject defendants to “overlapping supervision and enforcement.”
From this language, courts have excluded other pervasively regulated conduct from the scope of section 75-1.1. (We’ve discussed these cases here and here.) Conversely, citing the broad remedial purpose of section 75-1.1, commentators have questioned whether the securities exemption should apply where the securities regulation would leave the plaintiff without a remedy.
HAJMM, however, foreclosed this argument. The plaintiff in HAJMM did not have a clear remedy under the securities laws—a point that Justice Harry C. Martin considered an important distinction from Skinner in his HAJMM dissent. Nevertheless, HAJMM reasoned that the securities exemption applied not because securities laws provide a remedy, but rather because securities transactions relate to “the creation, transfer, or retirement of capital.” These activities are not “business activities” or “in or affecting commerce,” as those terms are used in the statute, because they are outside “the manner in which businesses conduct their regular, day-to-day activities.”
The Bucci Case
Bucci is a lawsuit brought by a group of seven investors in a failed business. The business—Predictify.me—sought to commercialize a predictive analytic technology originally designed to predict and prevent terrorist activities. The technology sounded promising—and even caught the attention of the United Nations, which proposed to use it in a safe-schools initiative. Ultimately, however, the business was dogged by questions about who owned the technology and what strategic direction to take. Despite different management groups’ attempts to salvage the business, Predictify.me ended in bankruptcy.
The investor-plaintiffs sued three individuals involved in the founding and promotion of Predictify.me. They alleged that the defendants induced their investments in Predictify.me with two misrepresentations: (1) that Predictify.me had acquired certain proprietary technology from one of the founders, and (2) that Predictify.me had entered into a formal agreement with the UN concerning its safe-schools initiative. Based on these allegations, the Bucci plaintiffs brought claims for fraud, negligent misrepresentation, conspiracy, primary and secondary liability under the North Carolina Securities Act, and violation of section 75-1.1.
Bucci considered the defendants’ motions for summary judgment. The opinion contains a detailed, element-by-element and party-by-party analysis of each claim. In the end, the Bucci court granted summary judgment on most of the claims. It did, however, deny the motions as to the fraud and negligent-misrepresentation claims of four Bucci plaintiffs against one of the defendants. It also denied one of the plaintiff’s claims for primary liability under the Securities Act as brought against the same defendant.
You probably did not need Predictify.me’s special technology to anticipate that we will focus on the Court’s disposition of the Securities Act and section 75-1.1 claims.
The Securities Act Claims
Before addressing the particular claims of the Bucci plaintiffs, the Court provided necessary background on the Securities Act. The Securities Act provides for two different types of liability: “primary” liability under section 78A-56(a) and “secondary” liability under section 78A-56(c).
Primary Liability. Two “antifraud provisions” of the statute impose primary liability for fraud (comparable to common law fraud) and for sales of a security “by means of any untrue statement of a material fact.” As the Business Court previously explained and the North Carolina Court of Appeals affirmed in NNN Durham Office Portfolio 1, LLC v. Highwoods Realty Limited Partnership, though, only “sellers” or “offerors” of securities can be primarily liable under the Securities Act.
Secondary Liability. If (but only if) primary liability is found in a securities transaction, then secondary liability can be imposed upon individuals who “‘materially aided’ in the transaction.”
With this foundation laid, the Bucci court turned to the claims asserted against two of the defendants—Mr. Perdue and Mr. Burns.
The Bucci court held that Mr. Perdue was not a “seller” or “offeror” of securities because he had “only minimal contact” with most of the plaintiffs and “did not solicit any of their investments.” Quoting the Business Court’s decision in Atkinson v. Lackey, the Court explained its focus on “the solicitation of the buyer as the most critical stage of the selling transaction in determining who is an offeror or seller of securities.” Mr. Perdue could not be primarily liable. He did not talk to angels—or at least he did not solicit these angel investors.
The plaintiffs’ theory of secondary liability against Mr. Perdue rested on the same arguments and evidence as did their claim for civil conspiracy. Having already determined those arguments and evidence to be nothing more than “conjecture and speculation,” the Bucci court held that Mr. Perdue could not be secondarily liable, either.
Because Mr. Perdue did not sell or offer securities, the Bucci court held that Mr. Burns had no secondary liability. Mr. Burns could not materially aid Mr. Perdue in a sale or offer that Mr. Perdue didn’t make.
Sorting out Mr. Burns’s primary liability was more complicated. The Court held that Mr. Burns could not be primarily liable to six of the seven investor-plaintiffs, but for different reasons. One of the investor-plaintiffs was an officer and director of Predictify.me at the time of her investment. Accordingly, “the mix of information available to her was far different from that available to an average investor.” Viewing the evidence in a light most favorable to her, the Bucci court held that no reasonable jury could find that she had justifiably relied on any misrepresentation made by Mr. Burns. (Proving justifiable reliance would be more than twice as hard for her.) Five of the other plaintiffs failed to present evidence that Mr. Burns had directly solicited their investments. For that reason, Mr. Burns was not an “offeror” or “seller” of securities in their transactions. This left only one plaintiff who testified that Mr. Burns directly solicited her investment. She alone was able to establish a jury question.
The Section 75-1.1 Claims
This was the securities exemption’s second appearance in the case. At the pleadings stage, the Court dismissed the section 75-1.1 claims of the plaintiffs who had purchased Predictify.me stock. It allowed the section 75-1.1 claims of the plaintiffs who had purchased convertible notes to proceed, but cautioned that it “appear[ed] likely” that these were also securities transactions exempted from section 75-1.1’s reach.
The plaintiffs had two responses.
First, they argued that the convertible notes were not “securities.” The Bucci court rejected this argument. It pointed out that the North Carolina Court of Appeals had already determined otherwise in Piazza v. Kirkbride and that the statutory definition of “Security” expressly includes “any note.” (Our last post discussed Nobel v. Foxmoor Group, LLC, which tests the boundaries of this definition. Nobel applied the securities exemption to a dispute about an ordinary promissory note—apparently, not convertible to stock.)
Second, the plaintiffs made The Black Crowes Argument: “All I want is a remedy.” The plaintiffs argued that their section 75-1.1 claims were viable because the claims had been pleaded in the alternative; that is, that the defendants “should be liable under section 75-1.1 if they are not liable as offerors or sellers under the [Securities Act].”
The Bucci court rejected The Black Crowes Argument unequivocally, explaining that section 75-1.1 “is not designed to fill perceived gaps in the securities laws.” The defendants’ motion was granted on all of the remaining section 75-1.1 claims.
As our last post and the split of opinion in Nobel v. Foxmoor showed, there is room to debate the scope of section 75-1.1’s securities exemption. (Because Nobel was a split decision, the North Carolina Supreme Court may soon weigh in on the exemption’s application to ordinary promissory notes.)
This debate, however, turns on whether the transactions at issue are considered to be transactions in “securities” or otherwise outside of regular, day-to-day “business activities” as HAJMM explained. Once this threshold question is answered affirmatively, the lack of a remedy in the securities laws or regulations is irrelevant. Litigants stuck in a HAJMM sandwich might be jealous again of anyone with a viable Securities Act claim, but The Black Crowes Argument won’t help them.
Author: Tom Segars