Kalin v. Semper Midas Fund, Ltd.

Background

Alan B. Kalin alleged that he purchased $330,000 of securities from Semper Midas Fund, Ltd. on December 1, 2019. He relied on an offering memorandum and two fact sheets prepared by Semper Capital Management, L.P. The fund invested primarily in mortgage-related instruments. Kalin alleged that the fund used substantial leverage through 30-day repurchase agreements, which were loans secured by the fund’s assets.

Kalin alleged that the fund’s value fell by more than 50 percent and later lost 93 percent of its value after a temporary lack of liquidity in the market for non-government-guaranteed mortgage-backed securities during March 2020. He sold his securities back to the fund in October 2020 for a loss of $307,323.44.

He brought individual claims under California Corporations Code sections 25401 and 25501 against the fund, alleging untrue or misleading statements. He also asserted director liability under section 25504 against Gregory A. Parsons and David Bree, and control-person liability under section 25504 against the other named defendants except the fund.

Personal Jurisdiction

David Bree, Gregory A. Parsons, Stephen C. Ellwood, Richard D. Parsons, Ronald S. Lauder, Gregory W. Ellis, Semper Capital Partners LLC, RDP I LLC, and RSL Capital LLC moved to dismiss under Federal Rule of Civil Procedure 12(b)(2) for lack of personal jurisdiction. Jurisdiction over the fund and Semper Capital Management, L.P. was not contested.

The court explained that specific personal jurisdiction requires a connection between the defendant’s forum-related conduct and the claims. It found that the complaint did not allege that the listed defendants directed actions at or within California. Instead, it relied on conclusory allegations that they controlled the fund and Semper Capital Management, L.P. The court held that ownership or control alone did not establish the necessary connection, and Kalin offered no specific allegations showing that the three corporate defendants were directly involved in the dispute. The court also rejected Kalin’s argument for nationwide personal jurisdiction based on control.

The motions to dismiss for lack of personal jurisdiction were granted with leave to amend. The court also denied Kalin’s request for additional jurisdictional discovery. The court stated that Kalin had not shown that the requested discovery was relevant to personal jurisdiction and that discovery concerning stress testing went to the merits.

Failure to State a Claim

The defendants also moved under Rule 12(b)(6), which tests whether a complaint alleges enough facts to state a legally sufficient and plausible claim. The court considered the complaint, documents incorporated into it, and documents the parties agreed could be considered.

The court held that some general descriptions in the offering memorandum—such as “thoughtful,” “disciplined,” and “dynamic”—were vague statements of opinion, or puffery, rather than actionable factual statements. It concluded, however, that the statement promising “rigorous cash flow modeling, scenario analysis and stress testing” was specific enough to potentially be a factual assertion.

The court nevertheless found that Kalin had not plausibly alleged that the disclosures about leverage, repurchase agreements, diversification, stress testing, or hedging were false or misleading when made. The offering materials disclosed that leverage could be used, that leverage could increase volatility, and that the fund could use secured financing and repurchase agreements. The fact sheets also disclosed the fund’s concentration in mortgage-related investments. The court held that a reasonable investor could not have been misled by those disclosures merely because the fund later suffered severe losses.

The court further found that Kalin’s allegations about failed stress testing and hedging were conclusory and speculative. It stated that describing the hedging strategies as a “fiction,” without supporting facts, did not meet the plausibility standard. The motions to dismiss the claims under sections 25401 and 25501 were granted with leave to amend.

Because Kalin had not stated a primary claim under section 25401, the court also held that he could not state director or control-person liability claims under section 25504. The motions to dismiss those claims were granted with leave to amend.

Disposition

The court ordered that the motions to dismiss for lack of personal jurisdiction were granted with leave to amend and that the motions to dismiss all three claims for failure to state a claim were granted with leave to amend. Kalin was required to file an amended complaint within 90 days of the order and email a redline to the court. The defendants were required to respond within 20 days after the amended complaint was filed. The order terminated docket numbers 27, 47, and 67.