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SoMoLend and General Solicitation in Ohio

Later this month the Ohio Division of Securities is expected to conduct a hearing regarding the Division’s allegations that SoMoLend Holdings, LLC improperly sold securities using general solicitation and advertising (among other claims including securities fraud). SoMoLend is a peer-to-peer lending platform that allows businesses to borrow from other businesses or lenders in exchange for an interest-rate return on the loan amount.

The Division’s Notice of Intent to Issue Cease and Desist Order for SoMoLend alleges SoMoLend raised money for itself by improperly engaging in general solicitation of investors. Interestingly, as of September 23, 2013, general solicitation is now permitted by new SEC Rule 506(c), but additional SEC rules expected for compliance with Rule 506(c) have not yet been finalized, including advance filing requirements of Form D and written solicitation materials.

The Division’s SoMoLend Notice describes some activities that many entrepreneurs consider standard fare, such as participating in investor presentations and pitch events, and some activities that are more questionable, including publishing such presentations to the internet and press releases soliciting investment. The SEC has consistently stated that issuers relying on Rule 506 should have a preexisting relationship with the accredited investors solicited. There is no safe harbor list of what constitutes a preexisting relationship. Many of the allegations in the SoMoLend Notice, if true, go beyond what most counsel would consider appropriate for a 506(b) offering.

Ironically, now that general solicitations are permitted, the rules for what constitutes a general solicitation are more important than ever. Issuers that …

Ohio Supreme Court Vacates Lower Court Decision Which Limited the Ability of the Director of the Ohio Department of Commerce to Recover Proceeds From a Ponzi Scheme

In a per curiam Opinion issued this morning, the Ohio Supreme Court ruled that the beneficiaries of life insurance policies purchased by Roy Dillabaugh, who operated a Ponzi scheme, did not have standing to appeal a trial court’s order which ruled that that the Director of the Ohio Department of Commerce ("the Director") was entitled to seek recovery of the insurance premiums paid for life insurance policies, but not the entire amount paid out under the policy. Significantly, the Supreme Court vacated the portion of the ruling of an intermediate appellate court that the Director lacked the authority to sue third-parties, such as the beneficiaries of the policy, and that the Director lacked the authority to seek an injunction against them to prevent them from disposing of the proceeds of the insurance policy. In short, because the trial court had not ordered any relief imposed on the beneficiaries, they lacked standing to appeal and therefore the subsequent intermediate decision never should have occurred and was vacated.…

Ohio Supreme Court to Hear Argument on Whether the Director of the Ohio Department of Commerce Can Recover the Proceeds of Life Insurance Policies Purchased By a Ponzi Scheme Operator

On November 1, 2011, the Ohio Supreme Court is scheduled to hear oral argument in an unusual case where the Director of the Ohio Department of Commerce has sued to recover the proceeds of insurance policies from the family of Roy Dillabaugh, who operated a Ponzi scheme. The Second District Court of Appeals for Montgomery County previously held (in an Opinion available here) that the Director cannot seek to recover the proceeds, but a court-appointed Receiver has the authority to file such a suit (although the Court did not address any potential limits to the Receiver’s authority on the grounds that the issue was not ripe for decision).…

Ohio Federal Judge Allows Say-on-Pay Lawsuit to Proceed

In a September 20, 2011 Opinion, Judge Timothy Black of the Southern District of Ohio ruled that a lawsuit brought against senior executives and directors of Cincinnati Bell, Inc. alleging a breach of fiduciary duty regarding compensation would be allowed to proceed. The lawsuit focuses on the "say-on-pay" provisions of the Dodd-Frank Act: specifically, attacking the Board’s decision to increase 2010 executive compensation in light of the nonbinding vote by 66% of the voting shareholders to reject that increase. Although the defendants argued that they are entitled to rely upon the business judgment rule in proceeding with the increase in compensation, the Court held that the issue of whether defendants properly exercised that judgment or, as plaintiff claimed, acted with deliberate intent to injure the company (or reckless disregard for the company) would be an issue based on the evidence (at trial or summary judgment) and not decided at the pleading stage.…

Dann at Odds with US Solicitor General over Securities Litigation

Ohio Attorney General Mark Dann has criticized US Solicitor General Paul Clement for filing an amicus brief with the US Supreme Court that argues against liability for certain forms of securities fraud. As mentioned here, Dann filed an amicus brief earlier this year along with 31 other state AGs arguing the opposite position. The SEC had asked the federal government to take the position of the state AGs in support of the defrauded investors but the Bush administration demurred.

At the heart of the case is Section 10(b) of the Securities Exchange Act which essentially prohibits the use of any manipulative or deceptive device in connection with the purchase or sale of a security. The Eighth Circuit has held that fraud is not deceptive under Section 10(b) unless the defrauding party made a misstatement or failed to disclose information despite a duty to disclose. Defrauded investors argue that such a ruling protects accountants, lawyers, banks, and other third parties who perpetuate fraud but who don’t actually make misleading statements to investors. Oral argument is set for this fall. …

Dann Spurs Ohio on Securities Law Enforcement

Last week the N.Y. Times reported here that Ohio Attorney General Marc Dann is bringing Ohio to the national stage regarding securities law enforcement and responsible corporate governance.

Since taking office in January, Mr. Dann has received national attention for persuading 23 state attorneys general to join in an amicus brief opposing the SEC’s position in a case before the U.S. Supreme Court about the Private Securities Litigation Reform Act of 1995. When enacted, the law created stricter standards for bringing private securities litigation against issuers of securities. Mr. Dann opposes the SEC’s contention that investor-plaintiffs should have to show “a high likelihood” that the defendant intended to violate the law.

The amicus brief—combined with Mr. Dann’s focus on stock option backdating by Ohio executives, state antitrust laws, and the obligations owed by directors to investors—has the N.Y. Times suggesting that Mr. Dann is emulating former New York Attorney General Eliot Spitzer. …