Sedaghat v. Roth Capital Partners LLC, No. B226749 (Cal. App., 2Dist., 3/23/12). Fiduciary Standards (Brokers) * Misrepresentations/Omissions * Capital Formation Issues (Underwriting Issues) * Culpability Issues (Malice & Oppression) * Remedies (Punitive Damages) * Damage Calculations (Collateral Sources; Double Recovery) * Transaction Causation/Reliance. *A fiduciary owes the highest duty of loyalty and can fall short of those obligations without misrepresenting or concealing facts. **A fiduciary's attempt to mislead a client supports a finding of malice or oppression and thus a punitive damages award. ***If a plaintiff recovers an amount from one defendant that is less than the post-judgment interest on the judgment against that defendant, the amount cannot be credited toward a judgment owed by a second defendant.

Plaintiff made a bridge loan to a start-up, eNucleus, on the alleged representation of Roth Capital, who was both plaintiff's stockbroker and eNucleus' underwriter, that a proposed stock offering by eNucleus was "a done deal" and that the loan would be repaid from the proceeds of the offering. Plaintiff alleged that Roth failed to tell him that the offering was contingent on a capital infusion from a strategic investor and a merger with SJI Corporation. Neither condition occurred, the stock offering was never made, and eNucleus declared bankruptcy after repaying only $40,000 on the loan. Plaintiff obtained a $960,000 default judgment against John and Henry Paulsen, who controlled eNucleus, settled with two law firms for $265,983 and recovered an additional $290,907 by levying on a malpractice award that the Paulsens obtained against their lawyer. Plaintiff also sued Roth Capital for, inter alia, breach of fiduciary duty, and a jury awarded him $500,000 in compensatory damages and $75,000 in punitive damages on that claim. The trial court declined to credit the funds that plaintiff obtained by virtue of the levy toward the judgment against Roth, but credited the funds paid by the attorneys toward the judgment obtained against the Paulsens. Roth appeals and the judgment against it is affirmed. Roth contended that there was no substantial evidence that it concealed or misrepresented facts about eNucleus or the bridge loan in its dealings with plaintiff, citing the jury's rejection of plaintiff's causes of action other than for breach of fiduciary duty. The jury did find that Roth intended to deceive plaintiff by intentionally failing to disclose an important fact that plaintiff did not know and could not reasonably have discovered, but that plaintiff either did not rely on Roth's deception or that his reliance was unreasonable. The Court holds that concealment and reliance are not essential elements of breach of a fiduciary duty; a fiduciary owes the highest duty of loyalty and care and can fall short of these obligations without misrepresenting or concealing facts. Roth also contended that there was no substantial evidence supporting the punitive damages award. However, the Court rules, it intentionally failed to disclose an important fact regarding the loan with the intent to deceive plaintiff because its own financial interests were in line with the deal going forward and, given the highest duty of loyalty that the law imposes on a fiduciary, Roth’s attempt to mislead its client, whether or not successful, supports a finding of malice and oppression and, thus, a punitive damages award. Finally, Roth argued that the failure to credit it with the monies that plaintiff obtained from its co-defendants gave plaintiff a double recovery. However, the trial court had discretion to reduce the amount owed to plaintiff by the Paulsens by crediting the monies paid by the attorneys toward the Paulsen judgment, rather than the Roth judgment, and it is doubtful if plaintiff will recover the balance of that judgment. The monies obtained from the Paulsens, through the levy, did not even fully compensate plaintiff for post-judgment interest, let alone the outstanding principal or prejudgment interest owed pursuant to plaintiff's default judgment against the Paulsens.

(P. Dubow) (SLC Ref. No. 2012-18-08, 5/7/12)