United States:
Court Rules “Thoughtful,” “Disciplined,” And “Dynamic” Are But Short Blasts Of Wind
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Semper Midas Fund, Ltd was formed for to invest primarily in
mortgage-related instruments. Five months after investing
over $300,000 in the fund, the Alan Kalin was told that that the
fund had lost over 50% of its value. Mr. Kalin filed a
lawsuit in the U.S. District Court alleging violations of Section
25401 of the California Corporations Code. That statute
declares it unlawful for any person to offer or sell a
security in California, or to buy or offer to buy a security in
California, by means of any written or oral communication that
includes an untrue statement of a material fact or omits to state a
material fact necessary to make the statements made, in the light
of the circumstances under which the statements were made, not
misleading. Kalen v. Semper Midas Fund,
Ltd, 2021 U.S. Dist. LEXIS 239179. Among other
things, Mr. Kalin alleged that the fund’s offering
memorandum assured safety and security by highlighting
statements such as “thoughtful qualitative analysis,”
“disciplined investment management,” and “dynamic
cross risk allocation.”
Judge Yvonne
Gonzalez Rogers disagreed. She found that
“thoughtful,” “disciplined,” and
“dynamic” are vague, generalized, and unspecified
assertions that constitute mere puffery and in turn are not
actionable. The concept of “puffery” is well
developed under the federal securities laws. In general,
courts have given two reasons why puffery is not actionable.
Some courts have explained that puffery is not actionable because
it involves statements that cannot be objectively determined to be
true or false. Other courts point out that no reasonable
person would rely on puffery. Interestingly, I could
find only two published California decisions discussing Section
25401 and puffery, Apollo Capital Fund LLC v. Roth Capital
Partners, LLC, 158 Cal. App. 4th 226, 70 Cal. Rptr. 3d
199 (2007) and People v. Holder, 165 Cal. App.
3d 998, 212 Cal. Rptr. 198 (1985). While neither of these
cases holds that puffery is not actionable under Section 25401, the
California statute is modeled upon Section 12(a)(2) of the
Securities Act of 1933 and many federal courts have found that
puffery is not actionable under the federal securities laws.
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