Filed 5/29/13
                            CERTIFIED FOR PUBLICATION

                IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                              FIRST APPELLATE DISTRICT

                                     DIVISION THREE


                                                       A130447
                                                       (JCCP No. 4730)
AREI II CASES.
                                                       (Los Angeles County
                                                       Super. Ct. No. BC403385)

        Plaintiffs are investors who purchased tenant in common (TIC) ownership
interests in a senior housing facility from Asset & Real Estate Investment Company.
(AREI). AREI allegedly violated state securities law by failing to disclose that its sole
owner was a convicted felon and by concealing the existence of a second loan that
grossly overleveraged the property. Plaintiffs sued various parties associated with the
transaction, including the defendant investment bankers, who structured joint ventures
between AREI and various lenders but had no involvement in the sales of TIC interests to
plaintiffs. According to plaintiffs, the investment bankers knew that AREI did not
disclose its owner‟s felony conviction or the second loan to potential investors. Plaintiffs
alleged causes of action against the investment bankers for materially assisting in AREI‟s
violation of securities law and for fraud based upon a conspiracy. On appeal, plaintiffs
contend the trial court erred in sustaining the investment bankers‟ demurrer.
        We conclude the operative second amended complaint (the complaint) does not
state a cause of action against the investment bankers for materially assisting in a
securities law violation under Corporations Code section 25504.1.1 However, we also
conclude the facts as pleaded are minimally sufficient to state a cause of action against


1
    All further statutory references are to the Corporations Code unless otherwise specified.

                                              1
the investment bankers for common law fraud based upon a conspiracy to defraud the
investors.
                      FACTUAL AND PROCEDURAL BACKGROUND
       Because this appeal is from an order sustaining a demurrer, we take the facts from
the complaint, the allegations of which are deemed true for the limited purpose of
determining whether plaintiffs have stated a viable cause of action. (See Stevenson v.
Superior Court (1997) 16 Cal.4th 880, 885.)
       As set forth in the complaint, defendant James Koenig was the founder and sole
owner of AREI, which promoted senior housing facilities to potential investors as secure
and profitable investment opportunities.2 AREI was in operation for about 10 years
starting in the late 1990‟s. Koenig is a convicted felon who was sentenced in 1986 to
serve two years in prison after suffering a conviction for fraud in a gold-selling scam.
AREI was allegedly little more than a criminal operation that acquired senior housing
facilities through Ponzi schemes and other forms of investor fraud. In June 2008, the
California Attorney General raided AREI‟s offices and shut down its operations.
       In 2004, AREI developed a structured transaction to acquire and manage senior
housing facilities throughout the country. Ari Weinberger, vice-president of Shattuck
Hammond Partners, a division of Morgan Keegan & Co., Inc. (collectively Morgan
Keegan) assisted AREI in structuring the transaction. Morgan Keegan, which is a
defendant below and the respondent in this appeal, is described as an investment bank.
AREI‟s plan was to solicit lenders to invest in the senior housing facilities, which were to
be managed by AREI‟s captive management company. A broker-dealer agreed to
perform due diligence on AREI and to sell TIC interests in the properties to individual
investors.
       Morgan Keegan‟s role in the overall transaction was to structure joint ventures
between AREI and various lenders, and it took primary responsibility for drafting an

2
   The complaint refers to the types of properties acquired by AREI as either assisted
living facilities or senior housing facilities. We shall use the term senior housing
facilities to encompass both types of facilities.

                                              2
offering memorandum to prospective joint venture partners. In response to efforts to
secure partners in the joint venture, defendants CapitalSource, Inc. and CapitalSource
Finance, LLC (collectively CapSource) agreed to enter into a $50 million joint venture
with AREI for the purchase and management of senior housing facilities. Morgan
Keegan negotiated the terms of the joint venture, which called for the sale of TIC
interests to investors, with the remaining financing to be provided by CapSource in the
form of first mortgages secured by the properties.
       A senior housing facility in Roseville, California (the Roseville property) was one
of the properties AREI marketed to potential investors through various broker-dealers
and their agents. In or around August 2005, AREI circulated a private placement
memorandum (PPM) to potential investors seeking approximately $17.2 million for the
purchase of TIC interests in the Roseville property. The PPM disclosed that the
Roseville property would be subject to a first mortgage from CapSource of approximately
$7 million. The purchase price of the Roseville property was $18.8 million. The PPM
also disclosed that AREI could seek additional financing for the Roseville property, if
necessary, with the unanimous approval of the TIC investors. The PPM failed to disclose
that Koenig, the sole owner of both AREI and the proposed management company, is a
convicted felon.
       In reliance on the representations in the PPM, over 30 investors purchased TIC
interests in the Roseville property and invested a total of over $17 million in cash in the
venture. In order to effectuate the purchase, the investors formed limited liability
companies and entered into operating agreements, a master TIC agreement, and a master
lease agreement providing for the management and operation of the Roseville property.
The limited liability companies that invested in the Roseville property are the plaintiffs in
the action below.
       In furtherance of the transaction described in the PPM, representatives of AREI
signed a promissory note, a deed of trust, and various other lending agreements with
CapSource allowing it to record its $7 million first mortgage against the Roseville
property. As noted above, AREI disclosed this loan in the PPM. In addition, while

                                              3
escrow on the transaction was still open, Koenig, CapSource, and lender Meecorp Capital
Markets (Meecorp) entered into confidential negotiations to further leverage the
nationwide joint venture with a $75 million “mezzanine” loan from Meecorp. These
same parties also secretly agreed that Meecorp would provide an additional mezzanine
loan of $5.1 million to help fund the acquisition of the Roseville property. Although the
PPM specified that the investors in the Roseville property were required to unanimously
approve any additional loans secured by the property, the Meecorp loan was not disclosed
to plaintiffs and the loan documentation was executed without their authorization. In
October 2005, Meecorp recorded a $5.1 million deed of trust against the Roseville
property, purportedly without plaintiffs‟ authorization. Morgan Keegan assisted in the
structuring of the joint venture with Meecorp and the $5.1 million mezzanine loan
secured by the Roseville property.
       Koenig allegedly embezzled the loan proceeds and investor capital for his own
personal use or to fund other projects. Further, AREI‟s management companies
mismanaged the Roseville property and skimmed over $1 million from a capital account
provided by plaintiffs. The facility fell into disrepair, its licensure lapsed, vendors went
unpaid, and regulatory complaints were issued for health and safety violations. After
plaintiffs learned that the CapSource and Meecorp loans had fallen into default, they
removed the management company and attempted to refinance the property with another
lender to avoid losing their investments. Despite plaintiffs‟ efforts, Meecorp issued a
notice of default on the $5.1 million mezzanine loan and pursued a nonjudicial
foreclosure on the Roseville property.
       Plaintiffs filed suit in Los Angeles County Superior Court against Koenig, AREI,
CapSource, Meecorp, and numerous other individuals and entities associated with the
sale of TIC interests in the Roseville property. Plaintiffs added Morgan Keegan as a
defendant in a first amended complaint. The action was transferred to Marin County and
coordinated for trial with other, similar complaints against AREI in Judicial Council
Coordination Proceeding No. 4579, Asset Real Estate and Investment Company and
Advisors (AREI) Cases). The trial court sustained Morgan Keegan‟s demurrer to the first

                                              4
amended complaint with leave to amend, noting that plaintiffs offered to include further
allegations supporting causes of action against Morgan Keegan.3
       In the operative second amended complaint (which we refer to herein as the
complaint), plaintiffs assert various causes of action against Koenig and AREI, including,
as relevant here, the first cause of action for material misrepresentation or omission in a
securities transaction and the ninth cause of action for common law fraud. Plaintiffs
allege they were induced to purchase the TIC interests in the Roseville property based on
misrepresentations contained in the PPM. According to plaintiffs, the PPM contained
two major misrepresentations or omissions of material fact in that it failed to disclose
Koenig‟s felony conviction and the existence of the $5.1 million Meecorp mezzanine
loan. Plaintiffs assert secondary securities liability claims against lenders CapSource and
Meecorp as well as the broker-dealers who marketed and sold the TIC interests to
plaintiffs.
       Plaintiffs assert two causes of action against Morgan Keegan—the third cause of
action for joint and several liability of persons who materially assist in a securities
violation, in violation of section 25504.1, and the tenth cause of action for fraud based
upon a conspiracy. As support for their claims, plaintiffs allege that Morgan Keegan
structured the debt financing for the joint ventures and gained detailed, insider knowledge
about AREI‟s operations and Koenig‟s background, including knowledge of Koenig‟s
felony conviction. It is further alleged that Morgan Keegan reviewed PPM‟s for several
of AREI‟s senior housing facilities and thereby learned that a fraud was being committed
upon potential investors due to the failure to disclose the fact Koenig is a convicted felon.
Plaintiffs assert that Morgan Keegan took primary responsibility for preparing an offering
memorandum directed to prospective joint venture partners that failed to disclose
Koenig‟s criminal background. Plaintiffs allege that Morgan Keegan initially agreed
with AREI to conceal Koenig‟s criminal conviction from potential joint venture partners,

3
 While this matter was on appeal, the action was transferred back to Los Angeles
County and coordinated for trial there with other, related complaints in Judicial Council
Coordination Proceeding No. 4730, AREI II Cases.

                                              5
although plaintiffs acknowledged that CapSource learned of Koenig‟s felony conviction
before funding the joint venture. Morgan Keegan purportedly knew the information
contained in the offering memorandum would be used to complete several securities
offerings and would provide the basis for a due diligence report. Further, Morgan
Keegan allegedly acted as a “go-between” for background checks on Koenig and the
potential viability of AREI‟s projects. Morgan Keegan assisted in the structuring of the
Meecorp mezzanine loan and allegedly knew the loan was not disclosed to plaintiffs.
Plaintiffs further allege that Morgan Keegan knew AREI intended to conceal Koenig‟s
criminal background from the investing public, including plaintiffs. Morgan Keegan
charged over $500,000 for its work structuring and closing the joint venture transactions.
       Morgan Keegan demurred to the complaint, arguing the cause of action for
violating section 25504.1 failed to state a claim because there were no allegations that
Morgan Keegan had knowledge of the securities violation, intended to defraud plaintiffs,
or took any action materially assisting in the violation. Regarding the cause of action for
fraud, Morgan Keegan contended the complaint failed to plead knowledge of the fraud,
the existence of an agreement to engage in a conspiracy to defraud, or that Morgan
Keegan engaged in any illegal actions in furtherance of the conspiracy.
       The trial court sustained Morgan Keegan‟s demurrer without leave to amend. In
its order sustaining the demurrer, the trial court concluded the complaint did not state a
cause of action for materially assisting in a securities violation, reasoning as follows:
“The only acts [Morgan Keegan] is alleged to have committed are to arrange the original
and mezzanine financing between the seller/owner AREI and the lenders, CapitalSource
and Meecorp, respectively. Playing an instrumental role in these legitimate transactions
between seller and lenders did not involve [Morgan Keegan] in materially assisting AREI
in the violation, i.e., selling or offer[ing to sell] securities by means of untrue statements
or omissions of material fact.” In sustaining the demurrer to the cause of action for fraud
and conspiracy, the court concluded that plaintiffs had failed to plead specific facts
showing either an agreement to defraud plaintiffs or Morgan Keegan‟s knowledge of the


                                              6
fraud. Following entry of a judgment of dismissal as to Morgan Keegan, plaintiffs filed a
timely appeal.
                                        DISCUSSION
1.     Standard of Review
       On review of an order sustaining a demurrer without leave to amend, we exercise
independent judgment in assessing whether the complaint states a cause of action as a
matter of law. (Walgreen Co. v. City and County of San Francisco (2010) 185
Cal.App.4th 424, 433.) “ „ “We treat the demurrer as admitting all material facts properly
pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We
also consider matters which may be judicially noticed.” ‟ ” (Zelig v. County of Los
Angeles (2002) 27 Cal.4th 1112, 1126.) “We affirm if any ground offered in support of
the demurrer was well taken but find error if the plaintiff has stated a cause of action
under any possible legal theory. [Citations.] We are not bound by the trial court‟s stated
reasons, if any, supporting its ruling; we review the ruling, not its rationale.” (Mendoza
v. Town of Ross (2005) 128 Cal.App.4th 625, 631.) When a demurrer is sustained
without leave to amend, we reverse if there is a reasonable possibility an amendment
could cure the defect. (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865.)
2.     Materially Assisting in a Securities Law Violation
       Plaintiffs contend the trial court erred in sustaining the demurrer to the cause of
action under section 25504.1 for materially assisting in a securities law violation. As we
explain, because there are no allegations that Morgan Keegan materially assisted in the
securities law violation itself, the complaint does not state a cause of action under section
25504.1.
       a.     Statutory Framework
       Section 25504.1 is part of the Corporate Securities Law of 1968 (§ 25000 et seq.)
(the Act). The Act includes several sections describing fraudulent or prohibited practices.
(§§ 25400-25404.) Of particular importance to this dispute is section 25401 of the Act,
which prohibits misrepresenting or omitting material facts in connection with the


                                              7
purchase or sale of securities.4 Sections 25401 is considered “penal in nature” because a
person who violates the statute may be imprisoned or fined. (California Amplifier, Inc. v.
RLI Ins. Co. (2001) 94 Cal.App.4th 102, 109.)
       Section 25501 establishes civil liability for a violation of section 25401. The
liability created by section 25501 is sometimes referred to as primary or direct because it
applies to a person who is directly or primarily responsible for violating section 25401 as
a consequence of selling or buying securities by means of misrepresentations or
omissions of material fact. (See Moss v. Kroner (2011) 197 Cal.App.4th 860, 873.)
       In addition to primary civil liability established in section 25501, the Legislature
has extended civil liability for a violation of section 25401 to specified secondary actors
who assist in the primary violation. (Moss v. Kroner, supra, 197 Cal.App.4th at p. 873.)
Section 25504 extends secondary liability to certain agents, associates, and affiliates of
the primary violator, including persons who control the primary violator as well as
broker-dealers and employees of the primary violator who materially aid in the
transaction constituting the violation. (§ 25504.) As relevant here, secondary liability is
also created under section 25504.1, which provides in pertinent part that “[a]ny person
who materially assists in any violation of Section . . . 25401 . . . with intent to deceive or
defraud, is jointly and severally liable with any other person liable under this chapter for
such violation.” Section 25504.1 imposes what is sometimes referred to as aider and
abettor liability. (See 1 Marsh & Volk, Practice Under the Cal. Securities Laws (rev. ed.
2012) § 14.03[4][d], p. 14-26 (Marsh & Volk).)
       The purpose of the Act‟s civil liability provisions “is to create statutory liability
that eliminates some of the elements of common law fraud, but balances this expansion
of liability by placing other restrictions on recovery.” (California Amplifier, Inc. v. RLI
Ins. Co., supra, 94 Cal.App.4th at p. 109.) “While intending to minimize securities fraud,

4
  Section 25401 provides: “It is unlawful for any person to offer or sell a security in this
state by means of any written or oral communication which includes an untrue statement
of a material fact or omits to state a material fact necessary in order to make the statement
made, in the light of the circumstances under which they were made, not misleading.”

                                               8
the drafters of the Act were also cognizant of the dangers of casting the net of civil
liability too broadly.” (Department of Corporations v. Superior Court (2007) 153
Cal.App.4th 916, 929.) According to the principal drafters of the Act,5 the Legislature
chose to specify the elements of a statutory cause of action in detail and “decided to make
it clear that the judiciary is not authorized to invent causes of action inconsistent with or
additional to those provided in the statute.” (Marsh & Volk, supra, § 14.02[1], p. 14-15.)
Thus, in section 25510 the Legislature provided that, “Except as explicitly provided in
this chapter, no civil liability in favor of any private party shall arise against any person
by implication from or as a result of the violation of any provision of this law or any rule
or order hereunder.” “The purpose of this provision is to prevent the courts from using
other provisions of the statute to create implied causes of action, as has happened in the
federal courts in connection with the developments under Rule 10b-5 . . . .” (Marsh &
Volk, supra,§ 14.02[1], p. 14-15, fn. omitted.) However, the same section also clarifies
that the Act does not limit any common law or statutory liability that would exist if the
Act were not in effect. (§ 25510.)
       b.     Scope of Aiding and Abetting Liability
       Section 25504.1 makes a person jointly and severally liable for a violation of
section 25401 if that person “materially assists in [the] violation of Section . . . 25401 . . .
with the intent to deceive or defraud.” In this case, the parties have divergent views on
what constitutes material assistance in the violation. To determine the meaning of the
“material assistance” component of section 25504.1, we turn to well settled rules of
statutory construction.


5
  “Our Supreme Court has referred to former Commissioner Volk and Professor Marsh
as the Act‟s „principal drafters‟ and relied on their treatise interpreting the Act as
authoritative.” (Department of Corporations v. Superior Court, supra,153 Cal.App.4th at
p. 930, fn. 8; citing Mirkin v. Wasserman (1993) 5 Cal.4th 1082, 1103, fn. 10 [ [relying
on Marsh & Volk treatise for interpretation of the Act and noting that “Professor Harold
Marsh, Jr., was the reporter for the committee that drafted the California Corporate
Securities Law of 1968” and that “Robert H. Volk was Commissioner of Corporations at
that time”].)

                                               9
       Our fundamental task is to ascertain the Legislature‟s intent. “ „We begin with the
plain language of the statute, affording the words of the provision their ordinary and
usual meaning and viewing them in the statutory context, because the language employed
in the Legislature‟s enactment generally is the most reliable indicator of legislative
intent.‟ [Citations.] The plain meaning controls if there is no ambiguity in the statutory
language.” (People v. Cornett (2012) 53 Cal.4th 1261, 1265.) If the statute is susceptible
to more than one interpretation, we may consider various extrinsic aids, such as the
legislative history, public policy concerns, and the statutory scheme of which the statute
is a part. (Ibid.) We construe the statute according to its purpose and by harmonizing it
with related sections of the Act to the extent possible. (California Amplifier, Inc. v. RLI
Ins. Co., supra, 94 Cal.App.4th at pp. 107-108.)
       The plain language of section 25504.1 makes clear that a person must have
materially assisted in the securities law violation. Therefore, for purposes of section
25504.1, it is not enough that a person provided material assistance in a larger scheme to
defraud if that person had no role or involvement in the part of the scheme that
constituted a violation of the securities laws. Here, the primary violation is selling or
offering to sell a security by means of false and misleading statements, in violation of
section 25401. To support liability under section 25504.1 for such a violation, the
complaint must include allegations demonstrating how the defendant assisted in the act of
selling or offering to sell securities by means of false and misleading statements. Such
assistance may take the form of aiding in the preparation of offering documents relied
upon by investors, communicating misrepresentations directly to investors, or otherwise
playing a material, facilitating role in the act of selling or attempting to sell the securities
by means of misrepresentations or omissions of material fact. There may be other acts
that constitute material assistance under the statute, but they must involve some aspect of
the securities law violation.
       A review of the statutory scheme governing civil liability under the Act supports
our interpretation of the material assistance component of section 25504.1. In section
25504, secondary liability is imposed upon broker-dealers and employees of the primary

                                               10
violator who “materially aid in the act or transaction constituting the violation” if they
have knowledge of, or reasonable grounds to know, of the facts giving rise to the
statutory violation. In Apollo Capital Fund LLC v. Roth Capital Partners, LLC (2007)
158 Cal.App.4th 226 (Apollo), the Court of Appeal considered whether a complaint
stated a cause of action under section 25504 against a broker-dealer. The court held that
merely playing an active role in a securities offering was insufficient for purposes of the
material aid requirement of section 25504. (Apollo, supra, at p. 256.) Instead, the
broker-dealer must have materially aided in the violation, which in that case was the
primary violator‟s sales of securities by means of false or misleading statements in the
offering documents. (Ibid.) Plaintiffs seize on the court‟s statement in Apollo that it was
unnecessary to allege the broker-dealer actually participated in drafting the false or
misleading statements. It was unnecessary to include such an allegation because there
were other allegations demonstrating the broker-dealer actively solicited investors using
an offering document the broker-dealer knew contained false or misleading statements.
(Ibid.) Thus, even though the broker-dealer did not draft the misleading statements, the
allegations of the complaint were sufficient to state a claim the broker-dealer materially
aided in the transaction constituting the violation.
       Unlike section 25504, which requires some sort of control person, employee, or
agency relationship with the primary violator, section 25504.1 imposes collateral liability
upon persons who materially assist in a violation of section 25401 regardless of their
business or legal relationship to the primary violator. (See Marsh & Volk, supra,
§ 14.03[4][d], p. 14-26.) While section 25504.1 expands the reach of secondary liability
to persons not otherwise liable under section 25504, it also requires a greater showing to
impose joint and several liability upon aiders and abettors. For example, section 25504.1
requires that an aider and abettor must have acted with “intent to deceive or defraud.” By
contrast, an employee or broker-dealer may be liable under section 25504 merely if they
knew or had reason to know of the facts constituting the violation. Further, whereas
section 25504 requires that a person “materially aid[] in the act or transaction constituting


                                             11
the violation,” section 25504.1 is arguably even more stringent because it requires
material assistance in the actual violation.
        The requirements for aider and abettor liability are understandably stricter than for
control person or agent liability because of the potential to impose joint and several
liability upon persons with a more attenuated relationship with the primary violator.
When the statutory scheme is viewed as a whole, therefore, it cannot be the case that
aider and abettor liability in section 25504.1 applies to a broader spectrum of aid or
assistance than secondary liability applicable to control persons, employees, and agents in
section 25504. As the court held in Apollo, section 25504 requires that a person
materially aid not just in the transaction but in the violation itself. (Apollo, supra, 158
Cal.App.4th at p. 223.) Section 25504.1 requires no less.
        Plaintiffs contend the “material assistance” requirement of section 25504.1 is
satisfied if it is shown that, “absent defendant‟s acts, the violation would not have taken
place.” In essence, they argue that material assistance has been established if there would
have been a securities law violation “but for” the defendant‟s role. Plaintiffs contend
this standard is met here because AREI could not have pursued its scheme to violate
securities laws but for Morgan Keegan‟s role in structuring the overall transaction and
securing debt financing. We are not persuaded. A “but for” approach to assessing
material assistance would potentially extend liability to persons who have no
involvement whatsoever in the actual securities law violation. Because the approach
advocated by plaintiffs is inconsistent with the plain language of section 25504.1, we
reject it.
        Plaintiffs also rely on federal case law, which is largely unhelpful. As an initial
matter, in 1994 the United States Supreme Court held there is no aiding and abetting
liability under section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78a et
seq.), because the language of the statute does not create such liability. (Central Bank of
Denver v. First Interstate Bank of Denver (1994) 511 U.S. 164, 177-178.) The court
rejected a policy argument in favor of imposing aider and abettor liability, noting that the
rules for determining aiding and abetting liability were unclear and that decisions were

                                               12
being made on an “ „ad hoc‟ ” basis. (Id. at p. 188.) In an analysis that preceded the
Supreme Court‟s 1994 decision, one commentator characterized the “majority” view of
the elements of a cause of action for aiding and abetting a federal securities law violation
as follows: “(1) the existence of a securities law violation by the primary (as opposed to
the aiding and abetting) party; [¶] (2) „knowledge‟ of this violation on the part of the
aider and abettor; and [¶] (3) „substantial assistance‟ by the aider and abettor in the
achievement of the primary violation.” (Bromberg & Lowenfels, Aiding and Abetting
Securities Fraud: A Critical Examination (1988) 52 Albany L.Rev. 637, 662; see K & S
Partnership v. Continental Bank, N.A. (8th Cir. 1991) 952 F.2d 971, 977.)
       The body of case law predating the abolition of liability for aiding and abetting a
federal securities law violation provides little insight here because it turns on definitions
of aiding and abetting that are markedly different from the statutory elements of an action
under section 25504.1. Among other things, the requirement under section 25504.1 that a
person materially assist in the securities law violation is narrower in scope than a
requirement that a person substantially assist in the achievement of the violation.
Assisting in a violation is not the same as assisting someone achieve a violation, which
can presumably be accomplished without having any involvement in the violation itself.
Although liability under section 25504.1 may be referred to colloquially as aiding and
abetting liability, we are not free to apply definitions of aiding and abetting derived from
common law or other sources. We are bound to interpret and apply the language of the
statute.
       Plaintiffs place particular emphasis on the decision of a federal trial court in In re
Rexplore Inc. Securities Litigation (N.D. Cal. 1988) 685 F.Supp. 1132 (Rexplore), which
predates the 1994 decision of the United States Supreme Court in which it abolished
aiding and abetting liability for a federal securities law violation. The reliance on
Rexplore is misplaced. There, the court applied a three-part test to assess whether the
complaint adequately stated a cause of action for aiding and abetting a federal securities
law violation. (Id. at p. 1135.) Because the analysis turned on a definition of aiding and


                                              13
abetting that is different from the statutory elements under section 25504.1, the
discussion of aiding and abetting liability is inapposite.
       Further, to the extent the decision in Rexplore discusses section 25504.1, it is
consistent with our analysis. Plaintiffs characterize the Rexplore decision as holding that
a complaint against a bank adequately alleged material assistance under section 25504.1
based on the bank‟s funding of limited partnerships that were sold to investors. That
characterization is correct insofar as it relates to liability under federal rule 10b-5 (17
C.F.R. § 240.10b-5). In the discussion of aiding and abetting liability, which we have
pointed out is not based on the language of section 25504.1, the court applied a “but for”
analysis and concluded the “substantial assistance” prong of aiding and abetting liability
under federal Rule 10b-5 was satisfied because there could have been no fraud without
the bank‟s funding of the limited partnerships. (Rexplore, supra, 685 F.Supp. at p. 1136.)
However, in assessing liability under section 25504.1, the court relied on its analysis
under section 12(2) of the Securities Act of 1933 (15 U.S.C. § 77L et seq.), which is the
statute on which section 25504.1 is modeled. (See Viterbi v. Wasserman (2011) 191
Cal.App.4th 927, 937.) In its discussion of the section 12(2) violation, the court noted
that plaintiffs alleged the bank participated in the review, drafting, and approval of the
offering materials provided to investors that purportedly contained misrepresentations
and omissions. (Rexplore, at p. 1137.) Thus, consistent with our interpretation of the
material assistance requirement of section 25504.1, the plaintiffs alleged the bank
materially assisted in the securities law violation itself. It was the bank‟s “participation
in the sale of the unregistered securities” that allowed the complaint to survive a motion
to dismiss the claim under section 25504.1. (Rexplore, at p. 1139.)
       Plaintiffs also contend their position is supported by In re First Alliance Mortgage
Co. (9th Cir. 2006) 471 F.3d 977. We disagree. The case does not involve a section
25504.1 claim but instead considers a cause of action for aiding and abetting common
law fraud. (471 F.3d at pp. 992-995.) For the reasons we have discussed, our analysis
turns on the language of section 25504.1 and not on the common law definition of aiding
and abetting.

                                              14
       Likewise, plaintiffs are mistaken in relying on Forslund v. Rein (C.D. Cal. 2003)
2003 U.S. District Lexis 16832, an unpublished decision of the federal district court. As
plaintiffs interpret the federal court‟s ruling on a motion for summary judgment, a lawyer
that reviewed and revised documents setting up a company that ran a Ponzi scheme was
potentially liable under section 25504.1, even though the lawyer and his firm did not
make any misrepresentations to investors or conspire to do so. However, plaintiffs‟
characterization of the lawyer‟s role is incomplete. The court found the plaintiff had
produced evidence raising a triable issue as to whether the lawyer had made direct
misrepresentations to the victims of the fraud. One victim emphasized the lawyer‟s
“personal involvement” in the scheme and stated he was induced to invest based on the
lawyer‟s claim that he personally reviewed and revised the documents. (Forslund v.
Rein, supra, at p. *5.) Thus, it was not enough that the lawyer provided assistance
making it possible for the primary violator to carry out its Ponzi scheme. Summary
judgment was denied because there was a triable issue as to whether the lawyer
materially assisted in the securities law violation itself.
       Here, the underlying securities violation involved two key misrepresentations or
material omissions of fact in the PPM distributed to plaintiffs. The complaint does not
support a claim that Morgan Keegan materially assisted in the alleged securities law
violation. There are no allegations that Morgan Keegan had any involvement in selling
or offering to sell TIC‟s by false and misleading statements in the PPM or any other
documents relied upon by plaintiffs. In fact, Morgan Keegan is not alleged to have had
any communications whatsoever with plaintiffs, let alone to have made false or
misleading statements to them. Nor is Morgan Keegan alleged to have played any role in
the preparation, drafting, or distribution of the PPM. At most, plaintiffs allege Morgan
Keegan prepared an offering memorandum directed at lenders AREI sought as joint
venture partners. However, plaintiffs do not allege they relied on the offering
memorandum prepared by Morgan Keegan or were even aware of its existence. In short,
there are no allegations that Morgan Keegan provided material assistance in some aspect
of the alleged violation of section 25401.

                                               15
       Plaintiffs‟ cause of action against Morgan Keegan under section 25504.1 fails at
the threshold because the allegations of the complaint do not support a claim that Morgan
Keegan materially assisted in a violation of section 25401. Therefore, it is unnecessary to
consider the scienter component of the statute and decide whether plaintiffs adequately
alleged that Morgan Keegan acted with an intent to deceive or defraud.
       c.     Privity
       As a separate basis for affirming the trial court‟s decision, Morgan Keegan argues
that a cause of action for rescission under section 25504.1 is not viable without an
allegation that there was privity of contract between plaintiffs and Morgan Keegan.
Morgan Keegan raises the issue for the first time on appeal in reliance on a decision
published after the trial court issued its decision. (See Viterbi v. Wasserman, supra, 191
Cal.App.4th 927.) In Viterbi, the court held that rescission is unavailable as a remedy
under section 25504.1 unless there was privity of contract between the person holding the
security and the defendant. (191 Cal.App.4th at pp. 941-943.) As plaintiffs point out,
another Court of Appeal came to the opposition conclusion in Moss v. Kroner, supra, 197
Cal.App.4th 860.
       We need not weigh in on whether section 25504.1 requires a showing of privity to
support a rescission remedy. Our conclusion that plaintiffs have failed to allege that
Morgan Keegan materially assisted in a violation of section 25401 is sufficient to dispose
of the cause of action under section 25504.1. Perhaps more importantly, our resolution of
the issue would ultimately have no bearing on the case below in light of circumstances
plaintiffs have brought to our attention. Plaintiffs point out that, since the complaint was
filed, they have been dispossessed of their TIC interests after defendant Meecorp
foreclosed on the Roseville property. Although plaintiffs sought rescission when they
still held their TIC interests, they would now be entitled to amend their complaint to seek
damages. (See § 25501 [providing for rescission but allowing recovery of damages if the
plaintiff no longer owns the security].) Because there is no need to establish privity to
pursue a damages claim, it would serve no purpose for this court to take a position on
whether section 25504.1 requires a showing of privity to support a rescission remedy.

                                             16
       d.     Leave to Amend
       The remaining question is whether the trial court abused its discretion in denying
plaintiffs leave to amend their complaint. As explained in Rakestraw v. California
Physicians’ Service (2000) 81 Cal.App.4th 39, 44, “The burden of showing that a
reasonable possibility exists that amendment can cure the defects remains with the
plaintiff; neither the trial court nor this court will rewrite a complaint. [Citation.] Where
the appellant offers no allegations to support the possibility of amendment and no legal
authority showing the viability of new causes of action, there is no basis for finding the
trial court abused its discretion when it sustained the demurrer without leave to amend.”
       In the proceeding before the trial court, plaintiffs did not offer any new allegations
supporting the possibility of amendment or any legal authority establishing the viability
of new causes of action. They complain that they were not allowed to take discovery
before the demurrer was sustained and ask to pursue discovery to develop specific facts
that may support amendments to the complaint. However, a vague suggestion that
additional facts might be uncovered through discovery is insufficient to justify allowing
plaintiffs further leave to amend their complaint. (Rice v. Center Point, Inc. (2007) 154
Cal.App.4th 949, 959.) The trial court already granted plaintiffs one opportunity to
amend their complaint after a demurrer was sustained. In the absence of a showing by
plaintiffs that they were capable of curing the defects in the complaint after a demurrer
was sustained a second time, the trial court acted well within its discretion in denying
further leave to amend as to the cause of action under section 25504.1.
       At oral argument on appeal, counsel for plaintiffs claimed he now has in his
possession a document describing the scope of Morgan Keegan‟s involvement in the
transaction. Counsel argued that this document supports an allegation that Morgan
Keegan assisted in the preparation of the PPM or otherwise materially assisted in the
statutory securities violation. Counsel urged this court to allow plaintiffs an opportunity
to amend their complaint as a matter of equity in light of the representations made at oral
argument. We decline to do so.


                                             17
       It is a fundamental rule of appellate procedure that our review is limited to the
record before the trial court at the time it made the challenged ruling. (Reserve Insurance
Co. v. Pisciotta (1982) 30 Cal.3d 800, 813; accord Vons Companies, Inc. v. Seabest
Foods, Inc. (1996) 14 Cal.4th 434, 444, fn. 3.) Although there are narrow exceptions to
this general rule that may permit consideration of extra-record evidence in limited
circumstances (see, e.g., Code Civ. Proc., § 909), no such circumstances exist here. (See
Vons Companies, Inc., supra, at p. 444, fn. 3.) Further, “it would be eminently unfair to
assess a trial court‟s exercise of discretion based on matters not before it at the time of
decision.” (Reese v. Wal-Mart Stores, Inc. (1999) 73 Cal.App.4th 1225, 1237.)
       For purposes of this appeal, we disregard counsel‟s belated representations about a
newly discovered document, which is not properly part of the record before us. While we
are not in a position as a reviewing court to grant plaintiffs leave to amend as a matter of
right, nothing prevents plaintiffs on remand from asking the trial court to allow them to
amend their complaint in order to replead the cause of action under section 25504.1 based
upon newly discovered evidence of Morgan Keegan‟s involvement in the securities law
violation. It is up to the trial court in the first instance to assess whether such an
amendment is permitted following this appeal and whether any newly pleaded allegations
allow plaintiffs to adequately state a cause of action under section 25504.1. We express
no opinion regarding the proper resolution of those issues.
3.     Fraud and Conspiracy
       The trial court sustained the demurrer to the cause of action for fraud, reasoning
that plaintiffs had failed to plead specific facts showing either an agreement between
Morgan Keegan and AREI to defraud plaintiffs, or Morgan Keegan‟s knowledge of the
fraud. For the reasons that follow, we conclude the complaint adequately states a cause
of action against Morgan Keegan for fraud based upon its role in a purported conspiracy
to defraud.
       “Conspiracy is not a cause of action, but a legal doctrine that imposes liability on
persons who, although not actually committing a tort themselves, share with the
immediate tortfeasors a common plan or design in its perpetration.” (Applied Equipment

                                              18
Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 510-511.) A civil conspiracy
“must be activated by the commission of an actual tort.” (Id. at p. 511.)
       In this case, the underlying tort is common law fraud. The elements of common
law fraud are: “(1) a misrepresentation (false representation, concealment, or
nondisclosure); (2) knowledge of falsity (or scienter); (3) intent to defraud, i.e., to induce
reliance; (4) justifiable reliance; and (5) resulting damage.” (Robinson Helicopter Co. v.
Dana Corp. (2004) 34 Cal.4th 979, 990.)
       Morgan Keegan does not dispute that the complaint adequately states a cause of
action for fraud against AREI. Instead, Morgan Keegan argues that the conspiracy
allegations are insufficient to establish that it should bear liability for the actions of
AREI. To support a conspiracy claim, a plaintiff must allege the following elements:
“(1) the formation and operation of the conspiracy, (2) wrongful conduct in furtherance
of the conspiracy, and (3) damages arising from the wrongful conduct.” (Kidron v.
Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571, 1581; see also Applied Equipment
Corp. v. Litton Saudi Arabia Ltd., supra, 7 Cal.4th at p. 511.)
       It is well settled that “ „[b]are‟ allegations and „rank‟ conjecture do not suffice for
civil conspiracy.” (Choate v. County of Orange (2000) 86 Cal.App.4th 312, 333.) A
party seeking to establish a civil conspiracy “must show that each member of the
conspiracy acted in concert and came to a mutual understanding to accomplish a common
and unlawful plan, and that one or more of them committed an overt act to further it.
[Citation.] It is not enough that the [conspirators] knew of an intended wrongful act, they
must agree—expressly or tacitly—to achieve it.” (Ibid.) It must be recognized, however,
that because of the very nature of a conspiracy, “its existence must often be inferentially
and circumstantially derived from the character of the acts done, the relations of the
parties and other facts and circumstances suggestive of concerted action.” (Schessler v.
Keck (1954) 125 Cal.App.2d 827, 833.) While a complaint must contain more than a
bare allegation the defendants conspired, a complaint is sufficient if it apprises the
defendant of the “character and type of facts and circumstances upon which she was
relying to establish the conspiracy.” (Ibid.; see also Bradley v. Hartford Acc. & Indem.

                                               19
Co. (1973) 30 Cal.App.3d 818, 825, disapproved on other grounds in Silberg v. Anderson
(1990) 50 Cal.3d 205, 217.)
       Morgan Keegan argues that plaintiffs have not pleaded specific facts establishing
that it knew of AREI‟s scheme to defraud. We disagree. While we are mindful that bare
allegations are insufficient to establish a defendant‟s knowledge, the complaint does more
than simply state that Morgan Keegan was aware of AREI‟s plan to defraud plaintiffs.
Plaintiffs have pleaded facts and circumstances that permit a reasonable inference
Morgan Keegan was aware of the plan to defraud, at least as to the plan to conceal
Koenig‟s background as a convicted felon. These facts and circumstances include
Morgan Keegan‟s close involvement over a period of several months with AREI to
develop a master deal, allowing Morgan Keegan to gain detailed insider knowledge about
AREI‟s operations and information about Koenig‟s background. Morgan Keegan also
took primary responsibility for drafting an offering memorandum that included
subsections about the background of AREI‟s officers, including Koenig, and it acted as a
go-between for AREI and prospective lenders for background checks on Koenig and the
potential viability of AREI‟s projects. In light of Morgan Keegan‟s extensive role in the
transaction and involvement with background checks, it is reasonable to infer that it was
in a position to know of Koenig‟s criminal background.
       Further, the complaint alleges that Morgan Keegan reviewed PPM‟s for several of
AREI‟s senior living facilities, thus informing it that AREI intended to defraud investors
by omitting mention of Koenig‟s prior conviction in offering materials distributed to
potential investors. It is irrelevant that Morgan Keegan may not have specifically seen
the PPM for the Roseville property. As a consequence of reviewing other PPM‟s that
were part of the overall plan to market senior living facilities, Morgan Keegan would
have been aware of AREI‟s overall plan to conceal Koenig‟s background from potential
investors. These allegations are sufficient to establish that Morgan Keegan knew of the
plan to conceal Koenig‟s criminal background from potential investors, including
plaintiffs.


                                            20
       The factual support is not as clear for the allegation that Morgan Keegan knew of
the plan to conceal the existence of the $5.1 million mezzanine loan from plaintiffs.
While it is certainly the case that Morgan Keegan knew of the mezzanine loan, which it is
alleged to have structured, there is no specific allegation explaining how Morgan Keegan
would have known of the supposed failure to disclose the loan‟s existence to plaintiffs.
Instead, plaintiffs offer a bare allegation that Morgan Keegan “knew the loan was not
disclosed” to plaintiffs. That is insufficient. The PPM specified that the investors in the
Roseville property could approve additional loans secured by the property. Absent an
allegation that Morgan Keegan knew the mezzanine loan was not unanimously approved
by plaintiffs, the additional, mezzanine loan was a valid and authorized transaction as far
as Morgan Keegan was concerned. Further, although plaintiffs make much of the
overleveraging of the Roseville property with the mezzanine loan, the property was
already overleveraged in view of the fact plaintiffs‟ investment of over $17 million
together with the CapSource loan of $7 million exceeded the purchase price of $18.8
million. Consequently, the mere fact the Meecorp loan further leveraged the property
would not have signaled to Morgan Keegan that the loan was necessarily unauthorized or
concealed from investors. Accordingly, the complaint does not include sufficiently
specific allegations supporting the claim that Morgan Keegan knew of the alleged scheme
to conceal the existence of the mezzanine loan.
       Morgan Keegan also argues there is insufficient factual support for the allegation
it had an agreement with AREI to defraud plaintiffs. Again, we disagree. An agreement
may be tacit as well as express. (Choate v. County of Orange, supra, 86 Cal.App.4th at
p. 333.) A conspirator‟s concurrence in the scheme “ „ “ „may be inferred from the nature
of the acts done, the relation of the parties, the interests of the alleged conspirators, and
other circumstances.‟ ” ‟ ” (Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 785.) In
this case, Morgan Keegan‟s agreement to participate in the scheme is evidenced by
allegations that it structured the overall transaction for AREI with knowledge that AREI
intended to conceal the existence of Koenig‟s criminal background from investors.
Morgan Keegan‟s role was instrumental in furthering the scheme. Its tacit agreement to

                                              21
defraud plaintiffs can be inferred from its willingness to further a scheme that it
purportedly knew would rely on material misrepresentations and omissions. For its
alleged role in the scheme, Morgan Keegan sought to be paid over $500,000. Therefore,
Morgan Keegan did not just allegedly have knowledge of the scheme and acquiesce in its
commission, but it also played a key role for which it was compensated.
       Morgan Keegan‟s position is that it did nothing more than play a legitimate role in
a lawful transaction to arrange for debt financing. However, for purposes of imposing
liability under a conspiracy theory, it is not necessary to allege that Morgan Keegan made
any misrepresentations to plaintiffs or played an active role in the sales of TIC interests.
If plaintiffs could show that Morgan Keegan itself made false representations, there
would be no need to include conspiracy allegations. (See 5 Witkin, Cal. Procedure (5th
ed. 2008) Pleading, § 921, p. 336.) The purpose of conspiracy allegations is to establish a
conspirator‟s liability as a joint tortfeasor “regardless of whether [the conspirator] was a
direct participant in the wrongful act.” (Ibid.)
       Moreover, even if Morgan Keegan‟s role, when viewed in isolation, was part of a
legitimate business transaction, it cannot be viewed as such when the scheme is viewed
as a whole. No legitimate purpose was served by structuring a transaction hinging upon
the concealment of the felony conviction of the founder and sole owner of the business
venture. In addition, plaintiffs alleged that Morgan Keegan failed to disclose Koenig‟s
conviction in offering materials directed to lenders, including CapSource. Thus, Morgan
Keegan did not just provide ordinary business services to AREI with knowledge that its
efforts would further the scheme to defraud. It also allegedly participated in efforts to
conceal Koenig‟s conviction. Although CapSource allegedly learned of Koenig‟s
background before agreeing to provide financing, the fact remains that Morgan Keegan
purportedly attempted to conceal the prior conviction in materials it prepared. This
allegation further supports the conclusion that Morgan Keegan did not just provide
ordinary business services but actively agreed to participate in the conspiracy.
       We conclude that the allegations of the complaint, if accepted as true, are
sufficient to support a cause of action for fraud against Morgan Keegan based upon a

                                             22
conspiracy theory, at least as to the contention that Morgan Keegan conspired with AREI
in a scheme to conceal Koenig‟s felony conviction from investors.
                                        DISPOSITION
       The judgment is reversed. The trial court is directed to enter a new and different
order (1) sustaining the demurrer without leave to amend as to the third cause of action
for materially assisting in a securities violation, and (2) overruling the demurrer as to the
tenth cause of action for fraud premised on the existence of a conspiracy. The parties
shall bear their own costs on appeal.



                                                  _________________________
                                                  McGuiness, P. J.

We concur:


_________________________
Pollak, J.


_________________________
Siggins, J.




                                             23
Superior Court of Marin County, No. JCCP 4730, Verna Adams, Judge.


Counsel for Plaintiffs and Appellants:     CAPPELLO & NOȄ L LLP, A. Barry Cappello,
                                           Troy A. Thielemann, Matthew H. Fisher


Counsel for Defendants and Respondents:    WINSTON & STRAWN LLP, Neal R. Marder,
                                           Nicole L. Herft




                                          24
