Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—D. Mass.: Questionable Peruvian investments lead to litigation, (Oct 18, 2022)

By R. Jason Howard, J.D.

There are genuine issues of material fact as to whether defendant solicited the plaintiff’s investments and whether the defendant omitted material information related to those investments.

The Massachusetts District Court has denied in part, and granted in part, a defendant’s motion for summary judgment in a case arising from allegations of violations of Massachusetts securities law and breach of fiduciary duty surrounding investments made by the plaintiff in a Peruvian company controlled by the defendant’s brother-in-law (Bergus v. Florian, October 13, 2022, Woodlock, D.).

Peruvian investment opportunity. The defendant, a Peruvian doctor, practicing U.S. surgeon, and former colleague of the plaintiff, was the translator between his Spanish-speaking brother-in-law, the president of a Peruvian company named Esperapal Juliaca Caracoto, S.A., which operates a water and sewer project in Peru, and the English-speaking plaintiff, concerning a business opportunity. The discussions led to the plaintiff signing two contracts to invest $125,000 in September 2012, and $250,000 in May 2014.

As part of the discussions, the defendant told the plaintiff that he had personally invested $1 million in the project and that Esperapal had secured exclusive government contracts “to supply water and sewer services to one locale and [they] own the land on which the water treatment plant and sewer treatment plant would be developed.” The plaintiff invested without any due diligence because of his trust in the defendant.

According to the plaintiff, the defendant failed to inform him that the project had been shelved by 2012, and the plaintiff further claimed that Esperapal did not own any of the land specified in the September 2012 contract, and thus the defendant made a misrepresentation when approaching the plaintiff. As evidence, the plaintiff produced eight negative certificates of real property issued by the Peruvian registry, which show no deeds of land ownership “registered or provisionally registered” in the name of Esperapal at any time from December 2010 to 2018.

In early 2014, the defendant told the plaintiff that Esperapal’s project had expanded and now had contracts with two cities, both Juliaca and Caracoto, and sought the second $250,000 investment. According to the plaintiff, the defendant once again misrepresented the scope of the project and the land ownership when this investment was made in May 2014, as Esperapal’s president conceded that as of May 2014, Esperapal did not own the land referenced in the contract.

Claims. The plaintiff claimed that the defendant was liable to him under the Massachusetts Uniform Securities Act because the defendant solicited him to make the two investments in 2012 and in 2014, by misrepresentation. Under Massachusetts law, a plaintiff must establish: “(1) the defendant offer[ed] or [sold] a security; (2) in Massachusetts; (3) by making any untrue statement of a material fact or by omitting to state a material fact; (4) the plaintiff did not know of the untruth or omission; and (5) the defendant knew, or in the exercise of reasonable care [would] have known, of the untruth or omission.”

Statutory seller. The defendant’s argument was that the undisputed evidence showed, as a matter of law, that he was not a statutory “seller” who offered or sold a security to the plaintiff. The court thus turned to the legal standard for “seller” status and explained that a defendant has offered or sold a security if he: (1) “successfully solicits the purchase” and (2) is “motivated at least in part by a desire to serve his own financial interests or those of the securities owner.”

In examining the defendant’s role in the September 2012 investment, the court stated that “there is evidence from which a reasonable jury could conclude that the defendant solicited the investment. Here, the defendant argued that Esperapal’s president solicited the investment, and he offered immigration documents, a passport entry stamp, and additional submissions which showed that Esperapal’s president was in the U.S., to solicit the plaintiff. The court, however, noted that the documents did not show the purpose of the visit and noted that the record supported an alternative reason for the visit—his mother’s birthday. The testimony of the parties, the court stated, “underscores that a genuine dispute exists with the plaintiff over material facts” concerning the solicitation.

The court also explained that there is evidence that supports the contention that the defendant was motivated, at least in part, by his financial interests. Here, the court explained that the defendant was a shareholder in Esperapal and the capital investments from the plaintiff were reasonably expected to improve Esperapal’s performance. Genuine issues of material fact exist as to whether the defendant solicited the plaintiff to invest in 2012 and was motivated in part to serve his own financial interests, the court stated.

As for the 2014 investment, the court noted that the undisputed record showed that Esperapal’s president was the primary person who solicited the plaintiff’s additional investment during their meeting in April 2014, but the defendant, according to the court, updated the plaintiff regarding Esperapal’s progress, negotiated contract terms with him, and restated information conveyed at the meeting. Accordingly, the court found that there are genuine issues of material fact as to whether the defendant was a statutory “seller” with respect to both of the plaintiff’s investments.

Turning to whether the defendant made misrepresentations to the plaintiff, the court stated that there is a clear dispute in the record as to whether the defendant omitted material information about the scope of the project in both 2012 and 2014, and as to whether Esperapal actually owned the land at issue.

In addressing the plaintiff’s fiduciary duty claim, the court explained that the record did not reveal a fiduciary relationship between the plaintiff and the defendant.

Ruling. The defendant’s motion for summary judgment was granted as to the fiduciary duty claim but denied with respect to the Massachusetts securities law claim.

The case is No. 18-10323-DPW.

Attorneys: Richard A. Goren (Law Office of Richard Goren) for Boris O. Bergus. Ryan C. Siden (Siden & Associates, PC) for Agustin M. Florian.

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