Judge Finds No Privity Required For Control Persons

Last May, I wrote about U.S. District Court Judge Arthur D. Spatt's ruling in Hatteras Enters. v. Forsythe Cosmetic Grp., Ltd., 2018 U.S. Dist. LEXIS 68792.  That post concerned Judge Spatt's decision to apply California's Corporate Securities Law of 1968 in lieu of New York's Martin Act.  In ruling to dismiss a claim based on Section 25401 of the California Corporations Code, Judge Spatt found: 

"The Court need not address whether California law requires privity, because the Plaintiffs' statutory claims for fraud fail for the same reasons as their common law fraud claims. They have failed to identify which Defendants made which statements, and when and where those statements were made."

Thereafter, the plaintiffs sought to amend their complaint with respect to Section 25401 and Judge Spatt was forced to address the question of privity.  In a January 14, 2019 ruling, he concluded that the statute requires privity between the plaintiff and defendant.  This is consistent with Section 12(a)(2) of the Securities Act of 1933 upon which the once and current text of Section 25401 is modeled (except that Section 12(a)(2) is limited only to sellers).  Judge Spatt did find that control persons could be liable under Section 25401 by virtue of Section 25504.   Thus, it is sufficient if privity exist between the plaintiff and the controlled person and the plaintiff need not have direct privity with the control person.