A Criminal Waste Of Space Foments Securities Law Problem

California Court of Appeal Justice William W. Bedsworth writes the popular syndicated column "A Criminal Waste of Space".  In this month's column, Justice Bedsworth expounds on the highly improbable case of a man who purchased a Pick-9 ticket at the track and somehow managed to pick all nine winners.  Szadolci v. Hollywood Park Operating Company, 14 Cal. App. 4th 16 (1993).  This would be a success story, but the protagonist had little faith in his own ability or luck.  Rather than let the ticket ride, he bribed a track clerk to cancel it.  He then sold shares in the cancelled ticket to unsuspecting "investors".  The investors were understandably upset when they learned that rather than investing in a winning ticket worth over $1.3 million dollars, they had invested in a cancelled ticket that was presumably worth nothing.  The investors were not only benighted, they were unsuccessful in court as well.  They lost their case because the bets that they were trying to enforce were illegal.

Being a securities lawyer, I'm pondering whether California's securities laws would have helped the plaintiffs.  A "security" includes an "investment contract".  Cal. Corp. Code § 25019.  The U.S. Supreme Court has explained that an investment contract is an investment of money in a common enterprise with the expectation of a profit solely through the efforts of the promoter or of some one other than themselves.  S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298 (1946).  Here, the plaintiffs invested money with the the promoter in the expectation of profit through the efforts of others (i.e., the promoter in picking the horses, and secondarily the horses and jockeys).  Of course, the plaintiffs would need to allege (and eventually prove) that a security was involved.  They would need to plead and prove that some violation of the Corporate Securities Law had occurred.

At this remove, it is difficult to know whether the plaintiffs would have prevailed on a securities claim.  There were only three investors.  Thus, it is possible that the offering would have been exempt under Section 25102(f).  The plaintiffs conceivably could have claimed that the promoter violated Section 25401 by making an untrue statement of a material fact (i.e., that the shares were legal) or omitted to state that material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading (i.e., that the shares were illegal).  Even if they had prevailed, they may not have been satisfied with the remedy.  Under California Corporations Code Section 25501, the plaintiffs would likely not be entitled to more than they paid (plus interest) whether that took the form of rescission or damages.