Summary
In Sugarman a bank's former board president and chief executive officer sued the bank's lead auditor, among others, contending the auditor's fraudulent misrepresentations attached to the bank's 10-K annual report filed with the Securities and Exchange Commission (SEC) had induced him to hold onto his bank securities.
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B308318
12-27-2021
Steven A. SUGARMAN et al., Plaintiffs and Appellants, v. Christopher L. BROWN, Defendant and Respondent; J. Francisco Turner, Defendant and Appellant.
Anderson Kill California, Los Angeles, Bridget B. Hirsch, Erik I. Jackson ; Anderson Kill, Los Angeles, and Cozen O'Connor, Jeremy E. Deutsch and Christian V. Cangiano for Plaintiffs and Appellants. O'Melveny & Myers, Los Angeles, William K. Pao and David L. Iden for Defendant and Appellant. Foley & Lardner, Samuel J. Winer, Adrian L. Jensen, Kathryn Shoemaker and Tony Tootell, Los Angeles, for Defendant and Respondent.
Certified for Partial Publication.
Pursuant to California Rules of Court, rule 8.1110, this opinion is certified for publication with the exception of part 2 of the Discussion.
Anderson Kill California, Los Angeles, Bridget B. Hirsch, Erik I. Jackson ; Anderson Kill, Los Angeles, and Cozen O'Connor, Jeremy E. Deutsch and Christian V. Cangiano for Plaintiffs and Appellants.
O'Melveny & Myers, Los Angeles, William K. Pao and David L. Iden for Defendant and Appellant.
Foley & Lardner, Samuel J. Winer, Adrian L. Jensen, Kathryn Shoemaker and Tony Tootell, Los Angeles, for Defendant and Respondent.
GRIMES, Acting P. J.
SUMMARY
Plaintiff Steven A. Sugarman sued Banc of California, several individual directors and Banc executives, and Banc's lead auditor, in the wake of a scandal that led to plaintiff's resignation from his positions at Banc in January 2017. All the defendants filed anti-SLAPP (strategic lawsuits against public participation, Code Civ. Proc., § 425.16 ) motions to strike various of the 12 causes of action plaintiff alleged. (Further statutory references are to this section of the Code of Civil Procedure unless otherwise specified.)
These appeals are from rulings on two of the motions: one by the auditor, defendant Christopher L. Brown (the Brown order), and one by defendant J. Francisco A. Turner, Banc's interim president and chief financial officer (CFO) until he too left Banc, and the banking industry, in June 2017 (the Turner order). Banc, and the other individual directors and executives as a group, also filed anti-SLAPP motions that are the subject of a separate appeal. ( Sugarman v. Benett (Dec. 27, 2021, B307753) 73 Cal.App.5th 165, 288 Cal.Rptr.3d 174.)
In the published portion of our opinion, we affirm the Brown order granting defendant Brown's motion in part. We hold statements in an annual 10-K report filed with the Securities and Exchange Commission (SEC) constitute statements "made in connection with an issue under consideration or review by [an] official proceeding" under section 425.16, subdivision (e)(2). In the nonpublished portion of our opinion, we affirm the Turner order in part and reverse it in part, concluding the trial court should have granted defendant Turner's motion in its entirety.
FACTS
1. The Parties
Plaintiff is the former chairman of the board, president and chief executive officer (CEO) of defendants Banc of California, Inc., and Banc of California, N.A. (Banc). He resigned his positions at Banc on January 23, 2017. The Steven and Ainslie Sugarman Living Trust, a revocable living trust and stockholder in Banc, is also a plaintiff. For convenience, we refer to both Mr. Sugarman and the trust in the singular as plaintiff.
Plaintiff sued defendants in connection with their conduct after plaintiff's resignation. Mr. Turner was interim CFO of Banc, and also became interim president when plaintiff resigned. (He was not a director.) He resigned and left the banking industry on June 12, 2017. Mr. Brown was employed by the accounting firm KPMG, Banc's outside auditor, and was the lead audit partner for Banc's 2016 fiscal year.
The other seven named defendants are or were members of Banc's board of directors or officers of Banc. The parties refer to these defendants (and Mr. Turner) as the Banc individuals, and to Banc and these defendants collectively as the Banc defendants.
2. The Complaint
The operative complaint spans 166 pages, plus more than 600 pages of attached exhibits. Plaintiff alleged 12 causes of action. The seven causes of action at issue in these appeals fall into four categories: (1) fraudulent inducement and negligent misrepresentation to induce holder to hold securities (the inducement claims); (2) preventing subsequent employment by misrepresentation (blacklisting) and tortious interference with prospective economic advantage; (3) unfair competition and conspiracy to engage in unfair competition (the UCL claims; Bus. & Prof. Code, § 17200 et seq. ); and (4) defamation.
The complaint alleges that plaintiff reported wrongdoing and self-dealing by defendant Halle Benett and others at Banc, and then he resigned, after the director defendants refused to address the wrongdoing (described at length in the complaint). A separation agreement provided severance payments in exchange for mutual releases of all potential claims that existed as of January 23, 2017. Defendants immediately launched a campaign to attack plaintiff in order to conceal their wrongdoing, dissuade him from selling his Bank stock, and harm his ability to compete with defendants.
In addition to concealing "numerous illegal acts" and breaching various contracts, defendants "also have hidden from [plaintiff] the true state of Banc's business including its cratering financial performance since his departure," and took various actions "to obscure the devastating effects their illegal actions had on Banc's business, financial performance and prospects. Defendants made their false representations in order to harm [plaintiff] including in order to induce [plaintiff] to hold his Banc securities in reliance on the false information, promises, and disclosures." The complaint alleges defendants "have conducted a coordinated campaign ... to further their Cover Up, to damage [plaintiff's] reputation with a barrage of vindictive, untrue, and harmful actions; to publish and distribute false and misleading information intended to present [plaintiff] in a negative light; and to scapegoat [plaintiff] for their wrong-doing and [m]isconduct which has resulted in tens of millions of dollars of damages to [plaintiff]."
We will describe the allegations in more detail in our legal discussion.
3. Background Facts
As might be expected, plaintiff and defendants paint a very different picture of the circumstances surrounding plaintiff's resignation and the aftermath. Some background facts are not open to dispute.
Plaintiff is a prominent businessman and entrepreneur in California and headed Banc from 2013 until January 2017.
On October 18, 2016, an anonymous blogger made allegations of wrongdoing against Banc and senior officers and directors at Banc, claiming they had extensive ties to notorious fraudster Jason Galanis, who was known for secretly gaining control of financial institutions and other public companies and looting their assets. The blog post concluded Banc was "simply un-investible." Plaintiff was prominent among the officers and directors named in the blog post.
That same day, Banc published a press release announcing it was aware of the allegations posted; the board, acting through its disinterested directors, had previously begun a thorough independent investigation of claims of an affiliation between Galanis and company personnel; the board had received regular reports over the last year from the law firm leading the investigation; and certain claims of affiliations made by Galanis concerning a company in which plaintiff had an interest were fraudulent.
Three months later, on January 23, 2017, Banc issued two more press releases. One announced a new chairman of the board (defendant Sznewajs) and plaintiff's resignation. The other provided an update on the independent investigation into the blog post allegations. It stated that, in response to the allegations in the blog post, the board formed a special committee that began a process to review the allegations. On October 27, 2016, Banc's independent auditor, KPMG, sent a letter "raising concerns about allegations of ‘inappropriate relationships with third parties’ and ‘potential undisclosed related party transactions.’ " On October 30, 2016, the special committee hired a law firm with no prior relationship with Banc to conduct an independent investigation of the issues raised by the blog post and questions raised by the KPMG letter.
The press release further stated the inquiry had determined that Banc's initial October 18, 2016 press release contained inaccurate statements. While an investigation had been conducted before the blog post appeared, "it appears to have been directed by Company management rather than any subset of independent directors," and the press release did not disclose that the law firm conducting the investigation had previously represented both Banc and plaintiff individually. (A declaration from a lawyer for the Banc individuals states that plaintiff ordered the October 18 press release to be published; plaintiff's declaration states others at Banc drafted and disseminated the release.)
The press release reported that on January 12, 2017, the SEC "issued a formal order of investigation directed at certain of the issues that the Special Committee is reviewing," and subpoenaed documents from Banc, "primarily relating to the October 18, 2016 press release and associated public statements."
The January 23, 2017 press release also announced changes in corporate governance policies, including separating the roles of board chair and CEO, and indicated Banc was "in the process of preparing a more rigorous policy to govern review and approval of proposed related party transactions."
Also on January 23, 2017, the first of several class action complaints was filed, alleging violation of federal securities laws, naming Banc, plaintiff, and two other defendants. The complaint described the blog post and ensuing events, and alleged false or misleading communications to investors and failures to disclose material information relating to the blog post investigation.
On February 9, 2017, the law firm conducting the independent investigation for the special committee reported that its inquiry found no evidence Jason Galanis had any control or undue influence over Banc.
More than two and a half years later, on September 15, 2019, the lead plaintiff in the securities litigation agreed to dismiss Mr. Sugarman with prejudice. The agreement states the class action plaintiff found no proof Galanis had any control over Mr. Sugarman or affected his actions, and the October 18, 2016 press release reflected information provided to Mr. Sugarman. The agreement provided the dismissal with prejudice was to become effective upon approval of the agreement as well as a settlement with Banc. A month later, plaintiff filed the complaint in this case. Several weeks after that, plaintiff was voluntarily dismissed, without prejudice, from Banc stockholder derivative litigation.
On December 20, 2019, the SEC concluded its investigation of plaintiff, with no action being taken.
4. The Anti-SLAPP Motions and Rulings
This appeal concerns only the separate anti-SLAPP motions brought by Mr. Turner and Mr. Brown. We will describe the motions, relevant facts and rulings in the separate legal discussions of the Brown and Turner motions.
The trial court granted Mr. Brown's motion to strike allegations that concerned Mr. Brown's sign-off representation as lead auditor in Banc's 2016 audit report. The court granted Mr. Turner's motion to strike plaintiff's fraudulent inducement and reputational harm causes of action, and denied Mr. Turner's motion to strike plaintiff's UCL causes of action.
Plaintiff appealed from the Brown order, and from the Turner order striking the inducement and reputational harm claims. Mr. Turner appealed from the Turner order denying his motion to strike the UCL claims.
DISCUSSION
The anti-SLAPP statute and procedures have been described many times.
A defendant may bring a special motion to strike any cause of action "arising from any act of that person in furtherance of the person's right of petition or free speech under the United States Constitution or the California Constitution in connection with a public issue ...." ( § 425.16, subd. (b)(1).) When ruling on an anti-SLAPP motion, the trial court employs a two-step process. The moving defendant bears the initial burden of establishing that the challenged allegations or claims " ‘ "aris[e] from" protected activity in which the defendant has engaged. [Citations.] If the defendant carries its burden, the plaintiff must then demonstrate its claims have at least "minimal merit." ’ [Citation.] If the plaintiff fails to meet that burden, the court will strike the claim." ( Wilson v. Cable News Network, Inc. (2019) 7 Cal.5th 871, 884, 249 Cal.Rptr.3d 569, 444 P.3d 706.)
In making these determinations, the trial court considers "the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based." ( § 425.16, subd. (b)(2).) "As to the second step, a plaintiff seeking to demonstrate the merit of the claim ‘may not rely solely on its complaint, even if verified; instead, its proof must be made upon competent admissible evidence.’ " ( Monster Energy Co. v. Schechter (2019) 7 Cal.5th 781, 788, 249 Cal.Rptr.3d 295, 444 P.3d 97.)
Our review is de novo. ( Soukup v. Law Offices of Herbert Hafif (2006) 39 Cal.4th 260, 269, fn. 3, 46 Cal.Rptr.3d 638, 139 P.3d 30.)
1. Mr. Brown's Anti-SLAPP Motion
Plaintiff alleged two causes of action against Mr. Brown based on the same facts. Plaintiff alleged Mr. Brown made misrepresentations that induced plaintiff to hold his Banc common stock and warrants. The misrepresentations alleged were of two types.
First, plaintiff alleged misrepresentations in January 2017 (before he resigned), that Mr. Brown made directly to him, that Mr. Brown would conduct a thorough investigation of plaintiff's allegations of wrongdoing, and KPMG would not certify Banc's financials until ensuring the disclosures were accurate and truthful.
The second kind of misrepresentation was Mr. Brown's "sign-off representation" in the audit report. The complaint alleged plaintiff was "induced to hold his Banc securities because of representations by Defendant Brown including his personal sign off as lead audit partner on the Banc's 2016 fiscal year financial audit on March 1, 2017," and further referred to the "March 1, 2017 Form 10K attaching the financial statements with Defendant Brown's knowingly false audit report," all attached to the complaint.
Mr. Brown sought to strike both causes of action in their entirety. The trial court granted Mr. Brown's motion in part.
The court found Mr. Brown did not show the direct representations he made to plaintiff in January 2017 were protected activity. Mr. Brown's sign-off representation in the audit report, however, was a statement included in a 10-K annual report filed with the SEC, and thus was protected activity as a statement made "in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law" ( § 425.16, subd. (e)(2) ).
Further, the court found plaintiff did not show a probability of prevailing on his claim. Plaintiff instead argued (contrary to the allegation in his complaint just quoted) that the audit report was not the misrepresentation on which he relied; he complained only of the January 2017 personal statements made directly to him; and the audit report was merely "evidence which misled Sugarman to believe that Brown actually followed through on his January 2017 assurances." The trial court rejected this contention.
Mr. Brown does not challenge the court's ruling that he did not establish his direct statements in January 2017 were protected activity. The only issue on appeal is Mr. Brown's sign-off representation in the audit report. We conclude the representations in the audit report were protected activity, and plaintiff failed to show a probability of prevailing on his claim.
a. Protected activity
Plaintiff argues first that Banc's 10-K, containing Banc's 2016 fiscal year financial audit dated March 1, 2017—and Mr. Brown's sign-off on that audit—is not protected activity. Plaintiff cites no authority for that proposition, and instead contends the precedent the trial court relied on— Hawran v. Hixson (2012) 209 Cal.App.4th 256, 147 Cal.Rptr.3d 88 ( Hawran )—does not support it. We think otherwise.
The categories of activity protected under the statute appear in section 425.16, subdivision (e). They include any written or oral statement or writing (1) "made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law" or (2) "made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law" or (3) "made in a place open to the public or a public forum in connection with an issue of public interest," or (4) "any other conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest." ( § 425.16. subd. (e)(1)–(4).)
In Hawran , "the trial court found [the defendant company's] Form 8-K put the issues identified in the form under consideration or review by the SEC," and that the company's press release, "from which [the plaintiff's] claims arose, was thus protected as a writing ‘made in connection with an issue under consideration or review by ... any other official proceeding authorized by law,’ " quoting subdivision (e)(2). ( Hawran, supra, 209 Cal.App.4th at p. 269, 147 Cal.Rptr.3d 88.) The Court of Appeal continued: "This finding alone subjects [the plaintiff's] claims to section 425.16." ( Ibid. ) But the court went on to indicate that the plaintiff stated he would not challenge the trial court's finding that his claims fell within subdivision (e)(2) (instead contending unsuccessfully that the commercial speech exception applied). Consequently, the court stated it "need not reach the correctness of that finding." ( Hawran, at p. 270, 147 Cal.Rptr.3d 88.) Later, however, in a discussion of the fair reporting privilege, the court observed that the Form 8-K "was filed for the purpose of complying with the SEC's mandatory disclosure requirements," and "may constitute a writing before an official proceeding," citing Fontani v. Wells Fargo Investments, LLC (2005) 129 Cal.App.4th 719, 731-732, 28 Cal.Rptr.3d 833 ( Fontani ). ( Hawran, at p. 281, 147 Cal.Rptr.3d 88.)
Fontani was disapproved on other grounds in Kibler v. Northern Inyo County Local Hospital Dist. (2006) 39 Cal.4th 192, 203, footnote 5, 46 Cal.Rptr.3d 41, 138 P.3d 193.
In Fontani, the court held that the defendant's report to the National Association of Securities Dealers (NASD) on a Form U-5, describing the reasons for the plaintiff's termination, was protected activity under subdivision (e)(1) of the statute (statements made "before ... [an] official proceeding authorized by law"), and under subdivision (e)(4) (any other conduct in connection with an issue of public interest). ( Fontani, supra, 129 Cal.App.4th at pp. 725, 728, 28 Cal.Rptr.3d 833.) The court concluded the NASD was "a regulatory surrogate for the SEC," and "[b]ecause at least one purpose of a Form U-5 is to trigger a regulatory investigation where warranted [citation], the NASD requires and receives [Form U-5's] from members in its role as the primary regulatory body of the broker-dealer industry." ( Id. at p. 729, 28 Cal.Rptr.3d 833.) Further, "the NASD is the type of regulatory body before which communication is routinely protected by the anti-SLAPP law." ( Id. at p. 730, 28 Cal.Rptr.3d 833.)
In Fontani, the plaintiff argued that "not every communication related to an official body, no matter how tangential that relation may be, qualifies as being made before an official proceeding under the anti-SLAPP law." ( Fontani, supra, 129 Cal.App.4th at p. 731, 28 Cal.Rptr.3d 833.) The court said that argument did not apply in the case before it, because subdivision (e)(1) "encompasses communications designed to prompt official action," and "an NASD investigation is at least one potential consequence of a Form U-5 filing that contains allegations of improper conduct by a broker-dealer." ( Fontani, at p. 731, 28 Cal.Rptr.3d 833.) The court concluded the Form U-5 was therefore a communication made in anticipation of the bringing of an official proceeding, and "constitute[d] a communication before an official proceeding authorized by law under section 425.16, subdivision (e)(1)." ( Id. at p. 732, 28 Cal.Rptr.3d 833.)
Fontani also concluded that the defendant's statement to the NASD "concerned possible conduct capable of affecting a significant number of investors," and consequently "the Form U-5 contents concerning [the plaintiff's] purported misconduct ... concern a matter of public interest under section 425.16, subdivision (e)(4)." ( Fontani, supra, 129 Cal.App.4th at p. 733, 28 Cal.Rptr.3d 833.)
Neither Hawran nor Fontani directly addresses whether statements in an annual 10-K report filed with the SEC constitute statements "made in connection with an issue under consideration or review by [an] official proceeding" under subdivision (e)(2). But we think that is necessarily so given the SEC's mandatory disclosure and review requirements. The SEC is required by law to review disclosures made by issuers of securities, "including reports filed on Form 10-K," "on a regular and systematic basis" and no less frequently "than once every 3 years." ( 15 U.S.C. § 7266, subds. (a) & (c).) "Such review shall include a review of an issuer's financial statement." ( 15 U.S.C. § 7266, subd. (a).) In our view, this alone subjects plaintiff's claims against Mr. Brown to the anti-SLAPP statute. Moreover, in this case the audit report in the 10-K specifically addressed the October 2016 blog post and Banc's subsequent actions—matters that were, as the audit report indicated, then under investigation by the SEC. Under these circumstances, we conclude the audit report statements in the 10-K filing qualify for anti-SLAPP protection as statements "made in connection with an issue under consideration or review" by the SEC. ( § 425.16, subd. (e)(2).)
Plaintiff contends that his claims against Mr. Brown did not arise from the audit report, and instead the audit report is merely evidence that plaintiff justifiably relied on Mr. Brown's earlier oral representations in January 2017. We disagree with plaintiff's contention, which is contradicted by his own verified complaint.
"[A] claim may be struck only if the speech or petitioning activity itself is the wrong complained of, and not just evidence of liability or a step leading to some different act for which liability is asserted." ( Park v. Board of Trustees of California State University (2017) 2 Cal.5th 1057, 1060, 217 Cal.Rptr.3d 130, 393 P.3d 905 ( Park ).) Park explained: "A claim arises from protected activity when that activity underlies or forms the basis for the claim. [Citations.] Critically, ‘the defendant's act underlying the plaintiff's cause of action must itself have been an act in furtherance of the right of petition or free speech.’ [Citations.] ... [T]he focus is on determining what ‘the defendant's activity [is] that gives rise to his or her asserted liability." ( Id. at pp. 1062–1063, 217 Cal.Rptr.3d 130, 393 P.3d 905.)
Here, the audit report in the 10-K filing clearly "forms the basis for" plaintiff's fraudulent inducement claims and " ‘gives rise to [Mr. Brown's] asserted liability.’ " ( Park, supra, 2 Cal.5th at pp. 1062, 1063, 217 Cal.Rptr.3d 130, 393 P.3d 905.) Plaintiff said so himself in his verified complaint. For example, the complaint alleges plaintiff was induced to hold his Banc securities "because of representations by Defendant Brown including his personal sign off as lead audit partner on the Banc's 2016 fiscal year financial audit on March 1, 2017." And, "[t]he March 1, 2017 Form 10K attaching the financial statements with Defendant Brown's knowingly false audit report was signed, inter alia, by Defendants Boyle, Turner, Sznewajs, Benett, Karish, Schnel and Lashley. These defendants knew that the statements in the Form 10K and attached audit report were false and misleading." We see no basis to conclude the "knowingly false audit report" did not give rise to Mr. Turner's asserted liability, or that it "merely provides evidence that supports Plaintiff[’s] fraud-based claims," particularly since plaintiff expressly alleged he was induced to hold his securities because of representations in the audit report.
b. Probability of prevailing
Plaintiff presented no evidence on the merits of his claim, simply arguing the audit report was only evidence and not the misrepresentation on which he relied—the contention we have just rejected. Plaintiff offers no other evidence to establish the elements of fraudulent inducement or negligent misrepresentation, and accordingly has not shown a probability of prevailing on the claims that Mr. Brown's audit report sign-off induced him to hold his securities. The trial court correctly struck those allegations.
[Begin nonpublished portion] 2. Mr. Turner's Anti-SLAPP Motion
See footnote *, ante .
[End nonpublished portion]
DISPOSITION
The order granting defendant Brown's anti-SLAPP motion to strike allegations of fraudulent and negligent inducement to hold securities, to the extent the allegations refer to defendant's sign-off on Banc's 2016 fiscal year financial audit, is affirmed. The order granting defendant Turner's anti-SLAPP motion to strike plaintiff's second, third, seventh and eighth causes of action is affirmed. The order denying defendant Turner's anti-SLAPP motion to strike plaintiff's fifth and sixth causes of action is reversed and the trial court is directed to grant the motion. Both defendants shall recover costs on appeal.
WE CONCUR:
STRATTON, J.
Judge of the San Diego Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.