## Facts

- ESG Capital Partners, LP and its limited partners formed an investor group to purchase pre-IPO Facebook shares.
- Troy Stratos, using the alias “Ken Dennis,” represented that he headed a securities company capable of selling such shares.
- Stratos retained Venable LLP; Venable partner David Meyer served as his primary attorney in the transaction.
- Meyer assisted in creating “Soumaya Securities,” presented as an entity authorized to sell the shares, listing Stratos as sole member and “Kenneth Dennis” as CEO.
- ESG alleged Meyer and Stratos represented that Stratos had access to Facebook shares through a relationship with a wealthy individual connected to Facebook.
- ESG alleged Meyer was copied on all ESG emails to “Dennis,” and the messages were sent to the same email address Meyer used to communicate with Stratos.
- In a phone call with ESG’s managing agent, Meyer allegedly vouched that “Dennis” was legitimate, the sale was valid, and Meyer would provide documentation.
- ESG wired nearly $3 million as an initial deposit into a Venable trust account; the same day, Venable transferred the funds to Stratos’s personal client trust account.
- ESG ultimately wired $11.25 million to accounts controlled by Stratos; the shares were never delivered.
- ESG alleged it did not discover the theft until November 2012 and sued Stratos, Venable, and Meyer for federal securities fraud and related state-law claims.

## Issues

1. Whether the complaint plausibly alleged primary liability under § 10(b) and Rule 10b-5 against a lawyer and law firm based on affirmative assurances and conduct connected to a securities transaction.
2. Whether the complaint satisfied PSLRA and Rule 9(b) pleading requirements for falsity, reliance, loss causation, and scienter as to the lawyer and law firm.
3. Whether the federal securities claims were time-barred on the face of the complaint or adequately pleaded delayed discovery.
4. Whether ESG adequately pleaded related state-law claims (including fraud and negligent misrepresentation) against the lawyer and law firm.

## Decision

- The Ninth Circuit affirmed in part, reversed in part, and remanded the dismissal order.
- The court held ESG plausibly alleged that Meyer and Venable engaged in actionable misrepresentations and deceptive conduct in connection with the purchase or sale of securities, allowing key § 10(b)/Rule 10b-5 theories to proceed past the pleading stage.
- The court concluded the complaint’s allegations supported a strong inference of at least deliberate recklessness for scienter under the PSLRA as to Meyer and, derivatively, Venable.
- The court held the limitations defense was not established from the face of the complaint given ESG’s allegation of discovery in November 2012.
- The court reinstated certain related state-law misrepresentation-based claims to the extent sufficiently pleaded, while leaving other portions of the dismissal intact.

## Legal Principles

- Attorneys and law firms may face primary § 10(b)/Rule 10b-5 liability when they themselves make material misstatements or engage in deceptive acts in connection with a securities transaction, not merely by providing routine legal services.
- Private plaintiffs cannot recover under § 10(b) on an aiding-and-abetting theory alone; liability requires plausible allegations of primary misrepresentations or deceptive conduct attributable to the defendant.
- Under the PSLRA, scienter must be pleaded with particularity; allegations of an attorney’s knowledge, role in structuring the transaction, direct assurances to investors, and use of trust accounts as transactional conduits can support a strong inference of deliberate recklessness.
- At the motion-to-dismiss stage, securities-fraud claims are not time-barred unless untimeliness is clear from the complaint; pleaded delayed discovery can defeat dismissal where diligence questions are fact-dependent.
- Misrepresentation-based state-law claims may proceed where plaintiffs plausibly plead affirmative statements, reasonable reliance, and resulting loss.

## Conclusion

The Ninth Circuit held that investors plausibly stated federal securities-fraud claims against a law firm and its partner where the attorney allegedly provided direct assurances about a purported stock sale and participated in conduct that enabled the transfer of investor funds to a fraudster, warranting partial reversal of dismissal and remand for further proceedings.


ESG Cap. Partners, LP v. Stratos, 828 F.3d 1023 (9th Cir. 2016)