Ginzkey v. National Securities Corporation

• Court: District Court, W.D. Washington
• Decided: April 27, 2021
• Docket: 2:18-cv-01773
• Status: Unknown

Opinion

6 UNITED STATES DISTRICT COURT 7 WESTERN DISTRICT OF WASHINGTON 8 AT SEATTLE

9 JAMES GINZKEY, RICHARD Case No. C18-1773RSM 10 FITZGERALD, CHARLES CERF, BARRY 11 DONNER, and on behalf of the class members ORDER GRANTING MOTION FOR described below, CLASS CERTIFICATION 12 13 Plaintiffs,

14 v.

15 NATIONAL SECURITIES CORPORATION, 16 a Washington Corporation,

17 Defendant.

19 I. INTRODUCTION 20 This matter comes before the Court on Plaintiffs’ Motion for Class Certification, Dkt. 21 #53. Defendant National Securities Corporation (“NSC”), opposes. The Court has determined 22 that oral argument is unnecessary. For the reasons stated below, the Court GRANTS this 23 Motion. 24 25 II. BACKGROUND 26 Defendant NSC is a registered securities broker-dealer headquartered in Seattle. Dkt. 27 #62 (“Troccoli Decl.”), ¶ 11. Plaintiffs James Ginzkey, Richard Fitzgerald, Charles Cerf, and 28 Barry Donner used NSC’s services to purchase investments in a company called Beamreach 1 2 that produced solar panels for residential and commercial use. Dkt. #1. Plaintiffs allege that 3 Beamreach failed to conduct proper due diligence as required by rules set forth by the Financial 4 Industry Regulatory Authority (“FINRA”). Id. 5 As NSC understood it, Beamreach purported to be a high efficiency solar panel 6 manufacturer based out of California that was looking to raise funds to continue its development 7 8 of high yield solar panels. Dkt. #53-2 (“Troccoli Dep.”) at 99:5-9. Beamreach was looking to 9 raise money from “anybody and anyone that would invest.” Id. at 102:8-10. Beamreach 10 enlisted NSC as a placement agent to help it raise additional capital by introducing prospective 11 investors to the company. Id. at 48:4-6. 12 13 NSC is required to follow FINRA rules. Id. at 60:15-17. Under FINRA’s suitability 14 rule, NSC was required to have a reasonable basis to conclude the investment at issue is suitable 15 for at least some investors, and NSC was required to conduct reasonable due diligence to 16 provide it with an understanding of the risks and rewards associated with recommending a 17 security. Id. at 64:9-18. NSC has adopted and implemented this FINRA rule into its internal 18 19 policies and procedures. Id. at 64:19-22. 20 Pursuant to FINRA Rule 2111.05(a), NSC is required to perform reasonable due 21 diligence on a private placement prior to offering it for sale to its customers. FINRA Rule 22 2111.02 explicitly states that a broker-dealer cannot disclaim any responsibilities under the 23 suitability rule. 24 25 Of great interest to this litigation, but not necessarily this Motion, Plaintiffs have 26 detailed many “red flags,” they allege NSC should have noticed about Beamreach. See Dkt. 27 #14 at 13–17. 28 As outlined in the Complaint, in February 2015, NSC began acting as a placement agent 1 2 for Breamreach’s Series D securities offering. The securities purchased by Plaintiffs and Class 3 Members in the Series D round consisted of preferred stock, beginning in February 2015 (the 4 “Series D Offering”). A secondary offering in June 2016, the Series D-1 preferred stock round, 5 was initially an equity offering (the “Series D-1 Offering”) then was switched to a 9% 6 convertible promissory note offering a 300% “principal step up” in the event of an acquisition, 7 8 in November 2016 (the “Series D-2 Offering”). NSC acted as both the primary placement agent 9 and exclusive broker/dealer for the Beamreach Offerings. The total capital raised by NSC in the 10 Beamreach Offerings was approximately $34.5 million. In the case of the Beamreach Series D 11 round, in which Plaintiffs participated, NSC earned a fee of 10% cash and 10% warrants for its 12 13 role as placement agent. Id. at 48:25-49:1. The brokers selling Beamreach to NSC clients earned 14 an allocation of the placement agent fee. Id. at 49:9-14. 15 The Beamreach Offerings were only made to “a limited group of sophisticated 16 ‘accredited investors’ within the meaning of Rule 501(a) under the Securities Act of 1933 as 17 amended (the ‘Securities Act’), in a private placement designed to be exempt from registration 18 19 under the Securities Act, and other applicable securities laws.” Dkt. #20-1 at 2; Dkt. #20-2 at 2; 20 Dkt. #20-3 at 4. “Accredited investors” are defined by law as investors whose individual net 21 worth, or joint net worth with that person’s spouse, exceeds $1,000,000 or they have an annual 22 income exceeding $200,000 in each of the two most recent years or joint income with their 23 spouse during those years in excess of $300,000. See 17 C.F.R. §230.501(a)(5), (6). 24 25 The Series D and D-1 Offerings were presented to investors through private placement 26 memoranda (“PPMs”). Dkts #20-1 and #20-2. The Series D-2 Offering was presented as a 27 supplement to the Series D-1 Offering PPM (collectively, the PPMs and its supplements are 28 identified as the “Beamreach PPMs”). Dkt. #20-3. In each PPM, NSC made warnings to 1 2 investors about the high-risk nature of investing in Beamreach. 3 Plaintiffs allege they relied on NSC’s “approval of the Beamreach Offerings for sale” to 4 make their investments in Beamreach. Dkt. #1 at 25. On November 15, 2016, Plaintiff 5 Ginzkey invested $89,214.75 in the Series D2 Offering. On April 30, 2015, Plaintiff Fitzgerald 6 invested $175,000 in the Series D offering; on October 28, 2016, Fitzgerald invested $12,745 in 7 8 the Series D-2 offering. On February 9, 2016, Plaintiff Cerf invested $52,479 in the Series D 9 offering. On April 10, 2015, Plaintiff Donner invested $149,940 in the Series D offering; on 10 October 20, 2016, Donner invested another $100,459 in the Series D-1 offering. 11 On February 9, 2017, Beamreach filed for Chapter 7 bankruptcy citing a “catastrophic 12 13 cash flow situation” and “loans due.” Plaintiffs’ investments resulted in a total loss. See In re: 14 Beamreach Solar, Inc. 17-bk-50307, (N.D. Cal. Feb. 9, 2017). 15 Plaintiffs filed this putative class action on December 10, 2018, asserting claims of 16 negligence and unjust enrichment. Dkt. #1. 17 Plaintiffs request certification of the Class and Sub-Classes as follows: 18 19 Beamreach Class

20 All persons who invested in Beamreach Offerings (as defined above) through the Defendant, at any time between February 6, 21 2015 and February 9, 2017 inclusive (the “Class Period”). 22 Series D Sub-Class 23 All persons who invested in Beamreach Series D (as defined 24 above) through the Defendant, at any time between February 6, 25 2015 and December 31, 2016 inclusive (the “Sub-Class D Period”). 26 Series D-1 Sub-Class 27

28 All persons who invested in Beamreach Series D-1 (as defined 1 above) through the Defendant, at any time between June 1, 2016 2 and February 9, 2017 inclusive (the “Sub-Class D-1 Period”).

3 Series D-2 Sub-Class

4 All persons who invested in Beamreach Series D-1 (as defined 5 above) through the Defendant, at any time between October 1, 2016 and February 9, 2017 inclusive (the “Sub-Class D-2 Period”). 6 Dkt. #53 at 7–8. 7 8 III. LEGAL ANALYSIS 9 A. Legal Standard 10 Federal Rule of Civil Procedure 23 governs class certification. Wal-Mart Stores, Inc. v. 11 Dukes, 564 U.S. 338, 345 (2011). Under Rule 23(a), the party seeking certification must 12 13 demonstrate “(1) the class is so numerous that joinder of all members is impracticable; (2) there 14 are questions of law or fact common to the class; (3) the claims or defenses of the 15 representative parties are typical of the claims or defenses of the class; and (4) the 16 representative parties will fairly and adequately protect the interests of the class.” FED. R. CIV. 17 P. 23(a). After satisfying the Rule 23(a) requirements, the proposed class must also satisfy at 18 19 least one of the three requirements listed in Rule 23(b). Dukes, 564 U.S. at 345; see also Leyva 20 v. Medline Indus. Inc., 716 F.3d 510, 512 (9th Cir. 2013). In this case, Plaintiffs seek to certify 21 a class under Rule 23(b)(3). Dkt. #53 at 25. This Rule requires Plaintiffs to demonstrate “that 22 the questions of law or fact common to class members predominate over any questions 23 affecting only individual members, and that a class action is superior to other available methods 24 25 for fairly and efficiently adjudicating the controversy.” FED. R. CIV. P. 23(b)(3). 26 Rule 23 “does not set forth a mere pleading standard.” Dukes, 564 U.S. at 350. Instead, 27 the party seeking certification must “affirmatively demonstrate his compliance with the Rule— 28 that is, he must be prepared to prove that there are in fact sufficiently numerous parties, 1 2 common questions of law or fact, etc.” Id. “Certification is proper only if the trial court is 3 satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.” Id. 4 at 350–51 (internal quotation omitted). “[I]t may be necessary for the court to probe behind the 5 pleadings before coming to rest on the certification question.” Gen. Tel. Co. of Sw. v. Falcon, 6 457 U.S. 147, 160 (1982). This is because “the class determination generally involves 7 8 considerations that are enmeshed in the factual and legal issues comprising the plaintiff’s cause 9 of action.” Id. (internal quotation omitted). Nonetheless, the ultimate decision regarding class 10 certification “involve[s] a significant element of discretion.” Yokoyama v. Midland Nat'l Life 11 Ins. Co., 594 F.3d 1087, 1090 (9th Cir. 2010). 12 13 B. Rule 23(a) Analysis 14 1. Numerosity 15 Plaintiffs argue that the there are over 170 investors who purchased Beamreach through 16 NSC and it would be “highly impracticable and cost prohibitive to join all of these investors in 17 a single action.” Dkt. #53 at 20–21. Defendant NSC does not dispute this. See Dkt. #60. The 18 19 Court agrees and finds that this factor is satisfied. 20 2. Commonality 21 Plaintiffs argue that “[n]ot all questions of fact and law need to be common to satisfy 22 Rule 23(a)(2). Dkt. # 53 at 21 (citing In re Wash. Mut. Mortgage-Backed Secs. Litig., 276 23 F.R.D. 658, 665 (W.D. Wash. 2011) ( “[p]laintiff must allege a common contention of such a 24 25 nature that it is capable of class-wide resolution—which means that determination of its truth or 26 falsity will resolve an issue that is central to the validity of each one of the claims in one 27 stroke.”). Plaintiffs list the following common questions of fact and law: 28 (1) whether NSC breached its duty to conduct reasonable due 1 diligence on Beamreach; (2) whether NSC failed to understand the 2 risks and rewards of offering securities in Beamreach in considering whether to approve Beamreach for sale to NSC 3 customers; (3) whether NSC was negligent in approving each of the Beamreach Offerings for sale to its customers; (4) whether 4 NSC failed to act as a reasonably prudent broker-dealer would 5 have under the same or similar circumstances in connection with its due diligence and approval of the Beamreach offerings; and (5) 6 whether NSC was unjustly enriched thereby.

7 Id. at 22. 8 NSC responds that commonality is lacking “because NSC was continually conducting 9 due diligence over time, making different offerings at different times, with different brokers 10 11 doing their own analysis for their own investors (each of whom had their own risk tolerance, 12 knowledge of investing, and appreciation of risks).” Dkt. #60 at 24–25 (citing Dukes, 564 U.S. 13 at 350). While such may be true, it does not negate the value to the whole proposed class in 14 determining whether NSC breached its duty to conduct reasonable due diligence on Beamreach 15 16 prior to approving it for sale. There is an important common question here with a common 17 answer even if there are other more individualized questions and answers to be addressed later. 18 NSC contend elsewhere in briefing that the Court cannot apply Washington law to all of 19 the claims of various Plaintiffs located in different states. See Dkt. #60 at 17–18. Plaintiffs 20 respond by arguing that Defendants have previously admitted to the applicability of 21 22 Washington law, and that even if they had not, the only other applicable law would be New 23 York law because that is where the “firm-level due diligence” occurred. Dkt. #64 at 10–13 24 (citing, inter alia, Dkt #20 at 12 n.3 (NSC arguing that Washington law applies); Johnson v. 25 Spider Staging Corp., 87 Wn.2d 577, 580-81 (1976) (setting forth test for determining choice 26 of law)). The Court agrees with Plaintiffs that either Washington of New York law would 27 28 apply; either way the conflict of law issue is a red herring and will not defeat commonality. Both parties cite the quote, “[w]hat matters to class certification… is not the raising of 1 2 common ‘questions’—even in droves—but, rather, the capacity of a classwide proceeding to 3 generate common answers apt to drive the resolution of the litigation.” Dukes, 564 U.S.at 350 4 (emphasis in original) (citation omitted). Having found no significant conflict of law issues in 5 this case, the Court finds that this proceeding has the capacity to generate at least some 6 common answers to the above questions and this element is met. 7 8 3. Typicality 9 For this element, the Court asks: “whether other members have the same or similar 10 injury, whether the action is based on conduct, which is not unique to the named plaintiffs, and 11 whether other class members have been injured by the same course of conduct.” Hanon v. 12 13 Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992). 14 Plaintiffs maintain that “each of the Plaintiffs invested in Beamreach through NSC after 15 NSC conducted due diligence,” and that “the Plaintiffs each suffered a complete loss of the 16 Beamreach investments they made as a result of Beamreach’s bankruptcy” like the rest of the 17 proposed class. Dkt. #53 at 23. 18 19 Defendants respond that “typicality is not met because class members all have injuries 20 different from the named Plaintiffs,” and that “every class member’s injury will vary depending 21 on what would have been a suitable investment to them, their risk tolerance, the disclosure to 22 them, the brokers they worked with, and their own diligence…” Dkt. #60 at 25. 23 The Court finds that the injury is nearly identical for the members of the proposed class, 24 25 even if different members invested different amounts, and that NSC’s course of conduct at 26 issue occurred prior to any kind of customer-specific analysis of risk tolerance. Typicality is 27 therefore satisfied. 28 4. Adequacy 1 2 Plaintiffs present evidence that proposed class counsel has experience with this kind of 3 case. See Dkt. #54, ¶ 2; Dkt. #55, ¶¶ 2–8; Dkt. #56, ¶¶ 3–7; Dkt. #57, ¶¶ 4–12. Plaintiffs argue 4 that they each are actively involved in this litigation and that their interests are aligned with the 5 proposed class. Defendants do not contest this element. The Court finds that the representative 6 parties will fairly and adequately protect the interests of the class. 7 8 C. Rule 23(b)(3) Analysis 9 This Rule requires Plaintiffs to demonstrate “that the questions of law or fact common 10 to class members predominate over any questions affecting only individual members, and that a 11 class action is superior to other available methods for fairly and efficiently adjudicating the 12 13 controversy.” FED. R. CIV. P. 23(b)(3). Pertinent matters include: “(A) the class members’ 14 interests in individually controlling the prosecution or defense of separate actions; (B) the 15 extent and nature of any litigation concerning the controversy already begun by or against class 16 members; (C) the desirability or undesirability of concentrating the litigation of the claims in 17 the particular forum; and (D) the likely difficulties in managing a class action.” Id. 18 19 Plaintiffs argue that “common questions surrounding NSC’s due diligence on 20 Beamreach and its subsequent approval of the Beamreach securities for sale to NSC customers 21 predominates the Class, and can be handled in a single adjudication. Once this common 22 liability question is adjudicated, the damages can easily and efficiently be calculated based on 23 NSC’s books and records which indicate investor name, address, date of investment, and 24 25 investment amount.” Dkt. #53 at 26 (citing Dkt. # 54, ¶ 10)). A class action is superior here, 26 according to Plaintiffs, because: 27 Given the large number of class members, the geographic 28 dispersion of the class members, and the multitude of common issues present, the use of the class device is the most efficient and 1 fair means of adjudicating the claims that arise out of NSC’s 2 negligence and unjust enrichment with regard to the Beamreach offerings. Absent class treatment, each investor would be forced to 3 bring an individual arbitration claim through FINRA’s arbitration forum. (Dkt. # 55, ¶ 8). Class treatment is superior to multiple 4 individual suits or piecemeal arbitration proceedings because it 5 conserves judicial resources (individual FINRA arbitration proceedings are extremely expensive for both investors and NSC), 6 promotes consistency as each FINRA arbitration panel is of different composition, and efficiency of adjudication as various 7 FINRA arbitration panels may rule differently on the common 8 issues presented in this case.

9 Dkt. #53 at 28. 10 In Response, NSC argues that Plaintiffs are over-simplifying how due diligence checks 11 actually worked at NSC and how FINRA’s rules apply. Dkt. #60 at 15. NSC contends that the 12 13 “firm-wide” due diligence and suitability determination are only part of the analysis, which 14 continues again for individual brokers and even individual investors. Id. (citing Troccoli Decl. 15 at ¶ 5, Ex. D; Fotouhi Report at 3-6). NSC therefore concludes that “to adjudicate this matter 16 as a class action, there would need to be an analysis of what each of the 27 individual NSC 17 brokers who sold to different investors did for due diligence and how they made their 18 19 suitability determinations about Beamreach.” Id. NSC also argues that Plaintiffs’ claims fail if 20 the Beamreach investment was suitable for even one investor. Id. (citing Fernandez v. UBS 21 AG, No. 15-CV-2859 (SHS), 2018 WL 4440498, at *13 (S.D.N.Y. Sept. 17, 2018)). Finally, 22 NSC argues that damages and the affirmative defenses of assumption of risk and comparative 23 fault are individualized inquiries. Id. at 16. 24 25 On Reply, Plaintiffs stress the “valuable gate-keeping function” at issue here, arguing 26 that a “private securities offering never gets ‘past go’ without the approval of the NSC 27 28 commitment committee.” Dkt. #64 at 6. Plaintiffs distinguish Fernandez, supra from the facts 1 2 of this case. Id. at 6–7. 3 The Court has already found that there is an important common question here with a 4 common answer. Given everything presented by the parties, the Court further finds that this 5 question of due diligence prior to approval for sale predominates over any questions affecting 6 individual brokers or investors. Plaintiffs are arguing that this investment was not suitable for 7 8 any investor. If NSC violated its FINRA obligations at the outset and is found to be negligent, 9 liability will likely apply regardless of the different risk tolerances of class members. 10 Answering this question in a single class action should benefit all parties, including NSC. This 11 case is factually distinguishable from Fernandez, which involved a different type of 12 13 investment, different theories of damages, and a different breach of contract claim involving 14 individualized analysis. See Dkt. #64 at 6. 15 NSC also argues that Plaintiffs cannot satisfy Rule 23(b)(3)’s superiority requirement, 16 i.e. that a class action is a superior method here, “because potential class members have 17 substantial incentive to pursue individual claims, litigation had already begun by absent class 18 19 members, there is no reason to concentrate this litigation in Washington with its few 20 connections to this case, and the conflicts of law issues make a class action not manageable.” 21 Dkt. #60 at 22. Defendants point out that there have been three FINRA arbitrations already 22 filed against NSC about the Beamreach investment. Id. at 23 (citing Troccoli Decl. at ¶ 12). 23 This is a small number of FINRA arbitrations, relatively speaking, and such does not 24 25 outweigh the value of proceeding with a class action now. The Court sees some connection to 26 this forum, where Defendant is headquartered, this litigation has proceeded in this Court for 27 many years, and NSC has failed to demonstrate any specific problems to trying the action here. 28 The requirements of Rule 23 are met. In addition to meeting the requirements of Rule 1 2 23, a class must be ascertainable before it can be certified. Vinole v. Countrywide Home Loans, 3 Inc., 571 F.3d 935, 939-40 (9th Cir. 2009). The Court agrees with Plaintiffs that the class can 4 be easily ascertained from NSC’s books and records. 5 IV. CONCLUSION 6 Having considered the briefing from the parties and the remainder of the record, the 7 8 Court hereby finds and ORDERS: 9 1. Plaintiffs Motion for Class Certification, Dkt. #53, is GRANTED. 10 2. The Class and Subclasses, as described in Plaintiffs’ brief and above, are 11 certified under Rule 23(b)(3). Excluded from the Class or Subclasses are 12 13 Defendant and any of its officers, directors, employees, agents, parents, affiliates 14 or subsidiaries. Also excluded is any entity related to or affiliated with 15 Beamreach, and any judicial officers presiding over this matter and their 16 immediate family members. 17 3. Plaintiffs James Ginzkey, Richard Fitzgerald, Charles Cerf, and Barry Donner 18 19 are designated and appointed as representatives for the Class and the Subclasses. 20 4. Stoltmann Law Offices, P.C. and Law Offices of Joshua B. Kons, LLC are 21 appointed as counsel for the Class and Subclasses. 22 5. No later than thirty (30) days from the date of this order, Plaintiffs shall submit 23 to Defendant’s counsel the proposed Notice forms and the Plan for 24 25 disseminating Notice to the Class and Subclasses. Counsel shall then confer as 26 to the proposed Notice and Plan. The parties shall submit an agreed Notice and 27 28 Plan to the court. If the parties are not in agreement, each will submit their 1 2 proposed Notice and Plan to the court for decision. 3 4 DATED this 27th day of April, 2021. 5

6 7 A 8 RICARDO S. MARTINEZ 9 CHIEF UNITED STATES DISTRICT JUDGE 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28