By John Filar Atwood
Cardone Capital argues in a reply brief that the Supreme Court should resolve lower court disagreements over the bespeaks caution doctrine and the interpretation of “statutory seller” under the 1933 Act. The brief reiterates Cardone’s views initially set forth in its April 2021 petition for certiorari, and counters respondent Luis Pino’s argument that case is a poor vehicle for review. Cardone believes the Ninth Circuit’s holding widens the Circuit Courts’ split over bespeaks caution, a split that it contends should be resolved by the Supreme Court, and directly conflicts with other Circuits’ and the Supreme Court’s prior interpretations of “statutory seller” (Cardone Capital, LLC v. Pino, September 5, 2023).
Case history. In 2019, Pino invested in two real estate investment funds launched by Cardone. The funds’ offering circulars laid out the risks of investing, including such that the business may never be profitable or generate significant revenue, and that investors might lose their investments.
Pino sued in 2020, alleging that Cardone made, mostly on social media, misrepresentations about the projected return rate of the funds, the likelihood and amount of cash distributions, and the acquisition and financing of properties by the funds. The district court dismissed the complaint with prejudice, ruling that the statements were protected by the bespeaks caution doctrine and that Cardone was not a “seller” under 1933 Act Section 12(a)(2) because Pino did not allege that Cardone passed title to Pino or directly solicited his investment.
The Ninth Circuit affirmed in part, reversed in part, and remanded, ruling that the district court erred in holding that the bespeaks caution doctrine warranted dismissal of all of the alleged misstatements. The court assumed that cautionary language does not necessarily need to appear in the same document as the alleged misstatement, but still found that the warnings in the offering circulars did not insulate statements made in social media posts. It also concluded that Cardone was a statutory seller because even though it did not target Pino with direct solicitations, it was a significant participant in the selling transaction.
Bespeaks caution. In its reply brief, Cardone noted that the Circuits are split over the bespeaks caution doctrine, which protects projections and other forward-looking statements from liability when cautionary warnings and risk disclosures render those projections immaterial as a matter of law. The Ninth Circuit’s decision conflicts with the decisions of other courts over both when those warnings must be issued and what they must say, according to Cardone.
Cardone contends that other courts have found the cautionary statements that the Ninth Circuit thought too broad to be sufficiently specific. It cites the Tenth Circuit ruling in Grossman v. Novell, Inc., which held that the bespeaks caution doctrine insulated a defendant from liability even though the defendant provided cautionary language in registration statements issued well before the allegedly false statements. Grossman relied in part on the fact that, as in this case, the warnings were in a formal registration statement and the challenged statements in informal press releases, Cardone notes.
Cardone argues that Grossman cannot be reconciled with the Ninth Circuit’s conclusion that cautionary language that preceded the alleged misstatements was necessarily “too attenuated” because it came before, rather than at the same time as or after those statements. Pino’s attempt to distinguish Grossman by arguing that it is a fraud on the market case does not alter the application of the bespeaks caution doctrine, Cardone adds.
Cardone further argues that application of the bespeaks caution doctrine does not hinge on whether Pino relied on it, but whether a reasonable investor deciding whether to subscribe in the funds would read the cautionary language before subscribing. In Cardone’s view, the Ninth Circuit and Pino overlook that fact, which misuses the bespeaks caution doctrine, ignores the well-established rule that the “total mix” of information be considered, and ignores Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund’s emphasis on the significance of more formal offering-related documents.
Cardone also addressed Pino’s reliance on the Second Circuit’s decision in Luce v. Edelstein to contend that the warnings were in the same document as the challenged misstatements. Cardone notes that the Ninth Circuit found the warnings inadequate for two reasons: timing and substance. It believes that the Ninth Circuit’s decision conflicts with Grossman and others on timing, and with Luce, which found cautionary language materially indistinguishable from the language the panel considered below to bespeak caution, on substance.
Statutory seller. On the issue of the “statutory seller” definition, Cardone notes that in contrast with the Ninth Circuit’s decision, courts have generally found that a plaintiff satisfies the statutory seller element only if the defendant actively and directly solicited a plaintiff’s investment. In expanding statutory liability to include “significant participants in the selling transaction,” Cardone argues, the Ninth Circuit goes against the Supreme Court’s concern in Pinter v. Dahl that the statute not be broadly expanded beyond buyer-seller relationships.
The Ninth Circuit’s test, which aligns it with the Eleventh Circuit but not the other circuits, relied on social-media engagement alone to extend statutory liability beyond those who affirmatively “offer” or “sell” to “significant participants in the selling transaction.” Cardone believes that is not consistent with the statutory language, or with prior Supreme Court case law. Even if it is defined narrowly, Cardone argues, Section 12 liability for social media posts is an important issue that merits the Supreme Court’s attention.
Cardone notes that in the Wildes v. BitConnect International PLC decision, the Eleventh Circuit held that someone could “solicit a purchase, within the meaning of the Securities Act, by promoting a security in a mass communication,” even without alleging that the communication was directed at a plaintiff-purchaser, thereby rejecting a distinction between broadly disseminated communications and individually targeted ones. The Ninth Circuit went even further, Cardone said, by extending liability to any “significant participant,” a definition that Cardone argues is akin to the substantial-factor test that the Supreme Court rejected in Pinter.
As to Pino’s argument that the Second Circuit’s Capri v. Murphy found the defendants’ general partners liable as sellers even though they communicated with the plaintiffs through a third party, Cardone points out that Capri emphasized that the general partners prepared and circulated the prospectus and the third party “provided no information to the investors other than what was supplied by defendants.” Pino did not invest through the social media posts, Cardone notes, but through the offering circular and by executing a subscription agreement directly with the Funds.
Finally, Cardone argues that since Pino never actually saw any of the social media posts, the Ninth Circuit’s approach stretches the statutory language even further and ignores Pinter’s holding that there must be some relationship like contractual privity between the solicitation and the buyer. Pino’s argument that such an expansion on the statutory language is warranted by the risks of social media marketing is one that should be directed to Congress, not the courts, Cardone concludes.
The brief is No. 22-1016.