The retirement boards for the cities of Brockton and Quincy sued Oppenheimer Global Resource Private Equity Fund I, L.P. (OGR Fund), a closed-end fund of private equity funds with a 10-plus-year life, alleging actionable mis-statements in the materials used to solicit investments in the fund. The U.S. District Court for the District of Massachusetts ruled that the retirement boards failed to state a claim because they invested in the OGR Fund through private transactions, so Section 12(a)(2) of the Securities Act does not apply.  

According to the court’s opinion, section 12(a)(2) makes liable any person who “offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact.” The court cited Gustafson v. Alloyd Co., in which the U.S. Supreme Court held that the statutory term “prospectus” refers only to “a document soliciting the public to acquire securities.” That case involved a private transaction in which three sole shareholders sold their entire interests in a privately held corporation to a corporate buyer. The buyer later argued that the private stock purchase agreement was a “prospectus,” and so the sellers should be liable under section 12(a)(2) for material mis-statements therein.  

However, the Supreme Court disagreed, looking to Section 10 of the Securities Act, which requires every “prospectus” to include “the information contained in the registration statement” for the security being offered or sold. 

In the present case, the complaint alleges that the limited partnership units the plaintiffs purchased “were not registered under applicable securities laws and were offered privately, pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933.Because the limited partnership units were purchased through a private placement rather than a public offering, Section 12(a)(2) does not apply, the Massachusetts court concluded.  

The retirement boards alleged that the OGR Fund used its inflated figures to aggressively solicit potential investors, misleading them into believing that the fund was showing a profit when in fact it was operating at a loss. They sued the defendants under Section 12(a)(2) of the Securities Act, claiming that the defendants’ solicitation materials contained material mis-statements. They also alleged that the defendants are liable as “controlling persons” under Section 15 of the Securities Act.  

The court found that since Section 12(a)(2) does not apply, the boards’ Section 15 claims also do not apply.  

The court’s opinion is here.

Oppenheimer & Co. is not associated with OppenheimerFunds Inc.