Investment Bankers Sealed Their Lips, And Now They Are Defendants.

Investors purchased a tenant in common ownership interest in a senior housing facility from a real estate investment company. The company did not disclose to the investors that its sole owner is a convicted felon, a violation of state securities law; nor did it disclose the existence of a second loan that grossly overleveraged the property. Consequently, the investors brought an action against the real estate investment company for violating state securities law and for fraud.  Also named as defendants in the action are the investment bankers who structured the joint ventures between the investment company and various lenders, but which bankers had no involvement in the tenant in common ownership interest sale to plaintiffs.  According to the pleading, the bankers knew the investment company did not disclose its owner’s felony conviction or the second loan, and, thus, materially assisted in violating securities law and fraud by conspiring with the other defendants. The trial court sustained the demurrer of the investment bankers. The appellate court affirmed in part and reversed in part, stating: “We conclude the operative second amended complaint does not state a cause of action against the investment bankers for materially assisting in a securities law violation under Corporations Code section 25504.1.  However, we also conclude the facts as pleaded are minimally sufficient to state a cause of action against the investment bankers for common law fraud based upon a conspiracy to defraud the investors.” AREI II Cases (Cal. App. First Dist., Div. 3; May 29, 2013.) 216 Cal.App.4th 1004.