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Private Placement Memorandum Saves The Day For Defendants

Do you ever wonder whether the time and expense of preparing a private placement memorandum is really worth it?  Does anyone ever escape liability because of a well drafted PPM?  A recent opinion by the California Court of Appeal provides one, albeit unexpected, reason for preparing and delivering a PPM.  WA Southwest 2, LLC v. First American Title Ins. Co., 2015 Cal. App. LEXIS 782 (Cal. App. 4th Dist. Sept. 4, 2015).

Citing Fox v. Ethicon Endo-Surgery, Inc.  35 Cal. 4th 797, 808 (2005), Justice Raymond J. Ikola found that the discovery rule requires a plaintiff to plead facts demonstrating a reasonable diligence.  This was a problem for the plaintiffs because they had signed purchase agreements:

By signing their purchase agreements, plaintiffs acknowledged their receipt and review of the confidential private placement memorandum, which made clear the investment was only being offered to accredited investors.  The confidential private placement memorandum repeatedly warned potential investors about the risks inherent to an investment in the Property.  We quote a few representative examples. “THE INTERESTS AND INVESTOR UNITS OFFERED HEREBY ARE HIGHLY SPECULATIVE. AN INVESTMENT IN THE INTERESTS OR INVESTOR UNITS INVOLVES SUBSTANTIAL INVESTMENT AND TAX RISKS.” “THE PURCHASE OF INTERESTS AND INVESTOR UNITS INVOLVES SIGNIFICANT RISKS. INVESTORS MUST READ AND CAREFULLY CONSIDER THE DISCUSSION SET FORTH BELOW IN ‘RISK FACTORS.’” “PURCHASE OF THE INTERESTS AND INVESTOR UNITS IS SUITABLE ONLY FOR PERSONS OF SUBSTANTIAL MEANS WHO HAVE NO NEED FOR LIQUIDITY IN THEIR INVESTMENT.”

Thus, the Court found that reasonable diligence did not include "ignoring a private placement memorandum received prior to making an investment".  Accordingly, the discovery rule did not apply.

Why Memoranda?

"Memorandum" is derived from the Latin memorandum est.  Grammatically, the Latin phrase is a passive periphrastic, which is a gerundive (memorandum) joined with the verb "to be" (est).  A gerundive is a verbal adjective.  Thus, memorandum est means "it must be remembered".  Because memorandum is a first/second declension, neuter adjective, its plural form in Latin is memoranda.  English has carried over the Latin plural form without change.

Perhaps the most famous passive periphrastic (also known as the gerundive of obligation) in Latin is Carthago delenda est! (Carthage must be destroyed!).  Cato the Elder was said to have frequently ended his speeches to the Senate with some form of this call for the obliteration of Rome's rival across the Mediterranean Sea.

For more on Latin plurals, see The Latin Lawyer – How To Write Like Cicero!

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
Partner at Allen Matkins
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