by John McDermott, Larry Treece, Van Aaron Hughes
and David Meschke
Brownstein Hyatt Farber Schreck
A recent 48-page opinion by Judge Gregory G. Lyman of the La Plata County District Court sheds significant light on defending securities law claims in Colorado. Although few securities cases proceed to trial in Colorado, this case demonstrates that a comprehensive approach to attacking materiality maximizes the likelihood of a defense verdict.
In states like Colorado with investor-friendly securities laws, defendants lack options to challenge certain securities claims because plaintiffs need not prove reliance, intent or causation. In these situations, where the claim essentially imposes strict liability for any material misrepresentation or omission, disputing materiality is often the principal weapon to attack the plaintiff’s claim. Yet there is a tendency for defendants and their counsel to resist mounting a vigorous challenge to materiality for a host of reasons, including: (1) the understandable tendency to believe that investors want and are entitled to all information and thus the alleged misrepresentation or omission must be material to them; (2) the natural propensity to assess materiality based on hindsight; and (3) the inclination to view the information in isolation.
A team from Brownstein Hyatt Farber Schreck that included John McDermott, Larry Treece, Van Aaron Hughes and David Meschke, and assisted by Tom Dugan of Durango, represented a national brokerage and investment banking firm. The plaintiffs were four banks that had purchased over $4 million dollars of municipal bonds that Brownstein’s client had underwritten. The bonds were issued to assist with the financing of infrastructure for a real estate development project. In addition to the bond proceeds, the developers also utilized a $12.5 million bank line of credit. The bonds later defaulted and the plaintiff banks sued Brownstein’s client. The plaintiffs alleged, among other allegations, that the offering memorandum used to market the bonds overstated by $3.3 million the amount of money that remained available to the developers on the credit line to construct infrastructure.
In its successful defense, Brownstein sought advice from and worked closely with its expert witness in all aspects of trial preparation. The expert, who had predominantly testified on behalf of plaintiffs in securities fraud cases, provided valuable insight during all phases of the litigation and at trial, and was able to effectively explain to the court the nuances of both materiality and the standard of care in the municipal underwriting industry.