## Facts

- Investors purchased interests tied to loans made by Mortgages, Ltd. (ML), funded in part through Radical Bunny, LLC (RB), which sold pass-through interests marketed as secured investments.
- Plaintiffs alleged ML and RB raised over $900 million from more than 2,000 investors from roughly 2005 to 2008 through unlawful, misleading securities offerings.
- Plaintiffs alleged the investments were unregistered and unsecured and were sold by unlicensed persons, and that proceeds from new investors were used to satisfy existing obligations as ML became insolvent.
- After a market collapse, ML filed for bankruptcy in 2008; RB followed months later.
- Greenberg Traurig LLP served as outside counsel to ML and allegedly provided legal services connected to the offerings, including drafting and revising private offering memoranda (POMs).
- Plaintiffs alleged a Greenberg attorney knew of securities-law violations and ML’s insolvency yet continued preparing solicitation materials that omitted material risks and helped the offerings continue.
- Plaintiffs sued under the Arizona Securities Act, alleging Greenberg “participated in” or “induced” unlawful securities sales under A.R.S. §§ 44-1991(A) and 44-2003(A).
- Greenberg moved to dismiss under Rule 12(b)(6), arguing its conduct amounted to ordinary legal services and was insufficiently pleaded.

## Issues

1. Whether the complaint plausibly alleged Greenberg “participated in” or “induced” unlawful securities sales under A.R.S. § 44-2003(A).
2. Whether the alleged conduct exceeded routine legal representation such that a law firm could face statutory liability.
3. Whether the pleadings satisfied Rule 12(b)(6) plausibility and Rule 9(b) particularity standards for fraud-based allegations.

## Decision

- The court denied Greenberg’s motion to dismiss.
- The court held plaintiffs plausibly alleged Greenberg’s knowing involvement in preparing and maintaining misleading offering materials used to solicit investments, supporting “participation” or “inducement” under A.R.S. § 44-2003(A).
- The court concluded the complaint alleged sufficient detail about Greenberg’s role, knowledge, and connection to the sales to meet Rule 12(b)(6) and Rule 9(b) at the pleading stage.

## Legal Principles

- A.R.S. § 44-1991(A) prohibits material misstatements, misleading omissions, and fraudulent schemes in connection with the offer or sale of securities.
- A.R.S. § 44-2003(A) permits civil liability against any person who “made, participated in or induced” an unlawful securities sale; the provision is construed broadly and remedially in favor of investors.
- Professionals are not strictly liable for client fraud, but they may be liable under § 44-2003(A) when alleged facts show active facilitation of the sale process (including preparing solicitation documents used to sell securities) rather than merely providing internal or routine advice.
- On a motion to dismiss, allegations must be plausible under Rule 12(b)(6); fraud-based allegations must also state the circumstances with particularity under Rule 9(b), including the defendant’s role in the alleged misrepresentations or omissions.

## Conclusion

The court allowed Arizona Securities Act claims to proceed against a law firm where investors plausibly alleged the firm knowingly drafted and maintained misleading offering documents used to solicit investments, constituting participation in or inducement of unlawful securities sales under A.R.S. § 44-2003(A).


Facciola v. Greenberg Traurig LLP, No. CV-10-1025-PHX-FJM, 2011 WL 2268950 (D. Ariz. June 9, 2011)