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Mark v. FSC Sec. Corp. - 870 F.2d 331 (6th Cir. 1989)

Rule:

Section 4(2) of the Securities Act of 1933 (Act), 15 U.S.C.S. § 77d(2), exempts from registration with the Securities and Exchange Commission transactions by an issuer not involving any public offering. Although not defined in the Act, a "non-public offering" is an offering to those who are shown to be able to fend for themselves. The focus of inquiry should be on the need of the offerees for the protections afforded by registration.

Facts:

In 1984, IBC Arabian Investments, Inc., A. T. McColgan, Jr., and Laurence C. Leafer, (collectively "IBC") as "General Partner," issued for sale limited-partnership interests in Malaga Arabian Limited Partnership. The Malaga limited-partnership offering was one in a series of limited partnerships IBC issued to solicit investors in the then-lucrative Spanish Arabian horse industry. Appellees, Financial Services Corp. and its wholly-owned subsidiary, FSC Securities Corp. (collectively "FSC"), were the broker-dealers that sold the partnership interest to the Marks, appellants in the case at bar. Significantly, Mrs. Mark was employed by FSC as a registered representative and made the sale to herself and her husband. In their class action complaint, in addition to various securities fraud claims, the Marks sought to rescind their purchase of the Malaga limited-partnership interest pursuant to § 12(1) of the Securities Act of 1933, 15 U.S.C. § 77l(1), on the grounds that the transaction violated the registration requirements of 15 U.S.C. § 77e. The Marks also stated a claim for rescission and refund of the purchase price pursuant to the analogous provisions of Ohio's Blue Sky Law, Ohio Rev. Code § 1707.43. At trial, the district court concluded that the Marks' rescission claim under § 12(1) of the 1933 Act was barred by the applicable one-year statute of limitations, 15 U.S.C. § 77m, and directed a verdict for FSC on that issue. The jury returned a verdict in favor of FSC on all the remaining claims. The Marks' motions for judgment notwithstanding the verdict and for a new trial were subsequently denied. On appeal, the Marks claim that the evidence was insufficient to support the jury's verdict that the Malaga offering was exempt from registration under Ohio's Blue Sky Law.

Issue:

Did the evidence sufficiently support the jury’s verdict that the Malaga offering was exempt from registration under Ohio's Blue Sky Law?

Answer:

No.

Conclusion:

The Court held that the evidence did not satisfy the requirements for exemption under Ohio's Blue Sky Law, Ohio Rev. Code Ann. § 1707.43. Rather, the Court ruled that the evidence indicated a wide-ranging sales effort and suggested a public, rather than a private, offering. The evidence concerning sales procedures did not warrant a Regulation D (Rule 506), 17 C.F.R. § 230.506, safe harbor exemption, because no reasonable juror could determine from the evidence what the issuer actually believed about the nature of each purchaser. Accordingly, the case was remanded to determine the recovery to which appellants were entitled.

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