On June 10, 2025, the U.S. Court of Appeals for the Ninth Circuit issued a ruling that reverberates through the world of securities law. In Pino v. Cardone Capital, LLC, the court reversed the dismissal of a securities class action lawsuit, holding that plaintiffs sufficiently alleged misstatements and omissions stemming from a real estate investment fund's handling of an SEC comment letter. This decision serves as a cautionary tale for companies navigating securities offerings and highlights the potential legal significance of silence in response to regulatory scrutiny.
The case revolved around Cardone Capital, LLC and its founder Grant Cardone, who solicited investments in real estate funds through a Regulation A offering. Plaintiffs alleged that Cardone and the Company misled investors by: (1) promising unrealistic 15% internal rates of return (IRR) on social media platforms; and (2) failing to disclose an SEC comment letter questioning the basis for these IRR projections.
The SEC had flagged the IRR claims as unsubstantiated, noting the fund's limited operations and lack of prior distributions. While Cardone complied with the SEC directive to remove the IRR language from offering materials, he continued to promote the inflated returns on social media. Furthermore, neither Cardone nor the Company disclosed the existence or content of the SEC comment letter to potential investors.
The Ninth Circuit found that these omissions constituted actionable misrepresentations under Section 12(a)(2) of the Securities Act of 1933[1]. The court reasoned that Cardone's acquiescence to the SEC's directive, without rebuttal or explanation, could be interpreted as an implicit admission of falsity regarding the IRR projections.
Moreover, the court concluded that the projected 15% IRR lacked factual basis given the fund's nascent stage and lack of prior performance. Finally, Cardone's failure to disclose the SEC comment letter was deemed a material omission, further strengthening the plaintiff's case.
Navigating the Silence: Practical Implications for Issuers
While responding to an SEC comment letter does not automatically equate to admitting guilt, this ruling underscores the importance of a thoughtful and transparent approach. Companies should consider including language in their response explicitly disclaiming any agreement with or admission of the SEC staff's position. This can help mitigate potential liability by clarifying that the company's actions are not indicative of wrongdoing.
Furthermore, issuers conducting securities offerings should adopt the following best practices:
- Cease Dissemination: Avoid further dissemination of information subject to an SEC comment letter until the matter is resolved.
- Consistency
Across Channels: Ensure all public-facing statements, including social media
posts, are consistent with offering documents and accurately reflect any known
regulatory concerns. Remember that social media can be considered a form of
official communication.
- Direct Disclosure: Public availability of SEC comment letters does not fulfill an issuer's disclosure obligations under the Act.
The Pino v. Cardone Capital case serves as a potent reminder that silence
can speak volumes in securities litigation. By proactively addressing SEC
concerns and maintaining transparency with investors, companies can minimize
their exposure to legal risk.
[1] Section 12(a)(2) creates liability for any person who
offers or sells a security through a prospectus or an oral communication
containing a material misstatement or omission . The person is liable to the
purchaser for rescission of the purchase or damages, provided that the
purchaser did not know about the misstatement or omission at the time of the
purchase. Court holdings imply that the cause of action only applies to
purchasers in the initial offering, not secondary purchases, but this is not
settled law yet. Investors suing under 12(a)(2) can only recover from sellers. https://www.law.cornell.edu/wex/securities_act_of_1933#:~:text=Section%2012(a)(2)%20creates%20liability%20for,the%20time%20of%20the%20purchase