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Ginzkey v. National Securities Corp.

United States District Court, W.D. Washington, Seattle

June 6, 2019

JAMES GINZKEY, RICHARD FITZGERALD, CHARLES CERF, BARRY DONNER, and on behalf of the class members described below, Plaintiffs,
NATIONAL SECURITIES CORPORATION, a Washington Corporation, Defendant.




         This matter comes before the Court on Defendant National Securities Corporation (“NSC”)'s Motion to Dismiss under Rule 12(b)(6). Dkt. #27. Plaintiffs oppose. For the reasons stated below, the Court DENIES Defendant NSC's Motion.


         For purposes of this Motion, the Court will accept all facts in the Complaint as true. The Court will briefly summarize these facts as necessary for ruling on this Motion.

         Defendant NSC is a registered broker-dealer headquartered in Seattle. Plaintiffs James Ginzkey, Richard Fitzgerald, Charles Cerf, and Barry Donner used NSC's services to purchase investments in a company called Beamreach that produced solar panels for residential and commercial use.

         Beamreach was founded in 2007 and, according to the Complaint, “burned through more than $200 million in funds raised from large institutional investors, venture capital firms, and grants from the United States Department of Energy.” Dkt. #1 at 2.

         On December 9, 2014, Beamreach and Opus Bank reached a senior debt financing deal where Opus Bank agreed to provide Beamreach with a $15 million line of credit with $10 million available to draw from if the initial line of credit was exhausted. Opus Bank was granted a security interest in all of Beamreach's assets. This loan was at 8% and was to be repaid on an interest-only basis until June 2016 at which point principal payments would also be required.

         In February 2015, NSC began acting as a placement agent for Breamreach's Series D securities offering. The securities purchased by Plaintiffs and Class Members in the Series D round consisted of preferred stock, beginning in February 2015 (the “Series D Offering”). A secondary offering in June 2016, the Series D-1 preferred stock round, was initially an equity offering (the “Series D-1 Offering”) then was switched to a 9% convertible promissory note offering a 300% “principal step up” in the event of an acquisition, in November 2016 (the “Series D-2 Offering”). NSC acted as both the primary placement agent and exclusive broker/dealer for the Beamreach Offerings. NSC was paid a commission of 10% of whatever it sold. The total capital raised by NSC in the Beamreach Offerings was approximately $34.5 million.

         The Beamreach Offerings were only made to “a limited group of sophisticated ‘accredited investors' within the meaning of Rule 501(a) under the Securities Act of 1933 as amended (the ‘Securities Act'), in a private placement designed to be exempt from registration under the Securities Act, and other applicable securities laws.” Dkt. #20-1 at 2; Dkt. #20-2 at 2; Dkt. #20-3 at 4. “Accredited investors” are defined by law as investors whose individual net worth, or joint net worth with that person's spouse, exceeds $1, 000, 000 or they have an annual income exceeding $200, 000 in each of the two most recent years or joint income with their spouse during those years in excess of $300, 000. See 17 C.F.R. §230.501(a)(5), (6).

         The Series D and D-1 Offerings were presented to investors through private placement memoranda (“PPMs”). Dkts #20-1 and #20-2.[1] The Series D-2 Offering was presented as a supplement to the Series D-1 Offering PPM (collectively, the PPMs and its supplements are identified as the “Beamreach PPMs”). Dkt. #20-3. In each Beamreach PPM, NSC made warnings to investors about the high-risk nature of investing in Beamreach. In all of the Beamreach Offerings, NSC described the Beamreach investments as having a “high degree of risk.”

         Plaintiffs allege they relied on NSC's “approval of the Beamreach Offerings for sale” to make their investments in Beamreach. Dkt. #1 at 25. On November 15, 2016, Plaintiff Ginzkey invested $89, 214.75 in the Series D2 Offering. On April 30, 2015, Plaintiff Fitzgerald invested $175, 000 in the Series D offering; on October 28, 2016, Fitzgerald invested $12, 745 in the Series D-2 offering. On February 9, 2016, Plaintiff Cerf invested $52, 479 in the Series D offering. On April 10, 2015, Plaintiff Donner invested $149, 940 in the Series D offering; on October 20, 2016, Donner invested another $100, 459 in the Series D-1 offering.

         On October 19 and October 24, 2016, Beamreach paid its bankruptcy counsel, Pachulski Stang Ziehl & Jones, LLP, for services in connection with restructuring or bankruptcy of the company.

         On February 9, 2017, Beamreach filed for Chapter 7 bankruptcy citing a “catastrophic cash flow situation” and “loans due.” ...

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