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When tiptoeing around the securities exemption to North Carolina’s Unfair and Deceptive Trade Practices Act, take each step carefully

Ellis Winters

Ellis & Winters

North Carolina law prohibits unfair and deceptive trade practices, but not if those practices concern securities transactions.

The state supreme court announced this exemption in 1985 in Skinner v. E.F. Hutton & Co. The court expanded on the exemption’s reach in a 1991 decision called HAJMM Co. v. House of Raeford Farms, Inc. Thanks to these decisions, a plaintiff who alleges a violation of N.C. Gen. Stat. § 75-1.1 about a securities transaction better have a sound argument on why SkinnerHAJMM, and their progeny don’t bar the claim.

This post concerns a recent North Carolina Business Court case called Beam v. Sunset Financial Services, Inc., in which the plaintiffs faced this situation and thought they had a winning game plan to sidestep these decisions.

Spoiler alert: it wasn’t a winning game plan.

Plaintiff David Beam and his late wife placed their life savings in real estate holdings and stock in Beam’s former employer, Duke Energy. In 2008, they shifted that money into various high-risk investments. The complaint alleges that they did so on the advice of an investment advisor named Jeffrey Lipscomb. Lipscomb worked for Sunset Financial Services.

Sunset fired Lipscomb shortly thereafter. But Sunset didn’t tell that to the Beams. And no one from Sunset talked to the Beams about the state of their investments or other options.

The complaint further alleges that, even after Sunset fired Lipscomb, Sunset allowed Lipscomb to remain involved in the Beams’ investments. Lipscomb continued to give them assurances about the investments.

In 2016, the Beams learned that some of their investments had failed or were depleted. The complaint says that they’re currently unaware of the status of the investments or who has been managing them. They sued Sunset on multiple theories, including alleged violations of the North Carolina Securities Act and section 75-1.1.

As to be expected, Sunset moved to dismiss the section 75-1.1 claim based on Skinner and HAJMM. The plaintiffs then invoked their game plan. They argued that, given the state of affairs, they simply don’t know the nature of the investments that hold their money, so the Court should postpone assessing whether the securities exemption applies until after discovery.

Judge Michael L. Robinson characterized this argument as proposing “a very narrow view of the securities exemption.” This is because the argument rested on the proposition that the securities exemption applies only to securities regulated by the North Carolina Securities Act.

As Judge Robinson explained, that argument isn’t faithful to HAJMM. The alleged 75-1.1 violation in HAJMM concerned investments known as revolving-fund certificates that weren’t governed by the same statutory regime as most securities. Still, the certificates—like traditional securities—were capital-raising devices. The HAJMM court interpreted section 75-1.1 as applying to an enterprise’s traditional business activities—that is, business activity that the issuing enterprise was organized to conduct. Raising capital is better characterized as a means by which an enterprise can conduct its desired business activity.

This reasoning doomed the plaintiffs’ game plan. Even if the plaintiffs didn’t know at the pleadings stage the true nature of the investments to which Lipscomb shifted their money, those investments are fundamentally capital-raising devices under HAJMM. No amount of discovery will change that characterization.

The plaintiffs’ 75-1.1 claim suffered from another infirmity as well: the complaint did not plead the claim with sufficient particularity. A 75-1.1 claim must be pleaded with particularity when it’s based on allegations of deceptive conduct. Both federal courts and state courts have reached this conclusion.

Beam, then, is an important reminder about the rationale of the securities exemption—not only that securities are already the subject of an extensive regulatory scheme, but also that capital-raising devices aren’t the sort of “business activities” that the General Assembly was concerned about regulating via section 75-1.1.

This is an important point if you’re thinking of sidestepping the exemption. And it’s a point that can’t be evaded by saying that you’re not yet fully aware of the facts.

Author: Stephen Feldman

November 12, 2019
Posted in  75-1.1 Exemptions