Northridge and the Sale of Unregistered Securities

The New Jersey State Attorney Generals recent press release pertaining to Northridge made one thing absolutely clear. New Jersey was taking the sale of unregistered securities to investors or acting and an unregistered agent marketing the sale of securities as a top priority. The securities law firm of Lubiner, Schmidt & Palumbo has been tracking on the actions of Northridge securities for some time in connection with an unrelated matter with similar allegations, such as sale of unregistered securities. As stated in our post on Northridge, New Jersey along with the states of Illinois, Massachusetts, and New Hampshire are filing complaints in connection with Northridge and its sale of unregistered securities.
The state actions against Northridge of course leads to the obvious question of what qualifies as a “security” under the New Jersey uniform securities laws. Do all real estate deals have to be registered as securities or can exemptions to registration be used? First to define a security, pursuant to Title 49 Chapter 3 subsection 49(m) – N.J.S.A. 49:3-49(m) for short, security means any note; stock; treasury stock; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement, including, but not limited to, certificates of interest or participation in real or personal property. There is no bright line rule for determining whether an instrument is a security under the New Jersey Uniform Securities Law. Whether a particular investment constitutes a security depends upon the facts and circumstances of each case. The term “security” has been interpreted broadly, encompassing unusual financial instruments as well as these commonly considered to be securities. Federal and state definitions of “securities” include the term “investment contract.” The definition of an investment contract is “an investment of money in a common enterprise, with an expectation of profits based solely on the efforts of the promoter” (Securities and Exchange Commission v. W.J. Howey Co., 328 U.S. 293—1946). Under the Howey Test as it is known, State examiners look to whether investors are investing money in a common venture with the expectation of profits based solely on promoters’ efforts. A major factor is the degree of control and authority retained by the investors over the joint venture. A review of the joint venture agreement indicating that substantial authority was retained by the investors may lead to the offering as being considered exempt from registration. General Partnerships are a prime example of this and are usually held not covered under the securities laws. This is because general partnerships usually consist of entrepreneurs, not investors, who have the ability to take care of their own interests because of the inherent powers available to them. General partners may act on behalf of the partnership, can bind their partners by their actions, may dissolve the partnership and are personally liable for all liabilities of the partnership. There are, however, instances in which even a general partnership interest may be considered a security. Whether a general partner’s or joint venture’s interest may be considered a security is a fact sensitive inquiry.
With the determination that Northridge was marketing unregistered securities the state of New Jersey in its complaint is seeking civil monetary penalties and other remedies against the firm. Imposition of civil monetary penalties against Northridge pursuant to NJSA 49:3-70.1 has been brought. As stated in the Northridge complaint, each sale of Northridge Securities to investors constitutes a cause for the imposition of civil monetary penalties for each separate violation. As stated in paragraph 1, of the complaint Northridge is looking at 62 separate violations for the sale of $10.46 million of Northridge to 62 individual New Jersey Investors. In addition to the penalities New Jersey is seeking restitution to each New Jersey Investor who purchased Northridge. New Jersey Bureau of Securities has also issued a cease and desist order against Northridge pursuant to its authority un N.J.S.A. 49:3—69(a). If you’re an investor who has purchased Northridge the securities lawfirm of Lubiner, Schmidt & Palumbo please contact the lawfirm of Lubiner, Schmidt and Palumbo for a free consultation.

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