Other Penalties and Liabilities

The whole unit on one sheet: who can bring each action, the money math, and the time limits the exam loves.

What Is the Buyer's Private Right of Action?

• A seller is civilly liable for selling while unregistered, selling unregistered securities, or selling by means of an untrue statement or a material omission that the buyer did not know about.
• On a fraud claim the burden flips onto the seller, who must prove they did not know and with reasonable care could not have known. On a registration violation liability is strict, and reasonable care is irrelevant.
• Rescission (buyer still owns): purchase price plus interest, minus income received, plus court costs and reasonable attorneys' fees. The buyer tenders the security back.
• Damages (buyer already sold): the rescission amount minus the sale proceeds and the interest on them from the sale date.
• A rescission offer can cut off the suit before it is filed. An owner accepts within 30 days; a non-owner rejects in writing within 30 days. Silence forfeits the right to sue either way.
• Adviser liability: a client harmed by an adviser's fraud, unregistered activity, or sales-literature violation recovers the consideration paid for the advice, plus any loss, interest, costs, and fees, less income received, whether or not the advice caused a loss.
• Control persons are jointly and severally liable with the same no-knowledge-plus-reasonable-care defense. A signed waiver of the buyer's rights is void, but an arbitration clause is valid because it changes the forum, not the rights.

What Are the Criminal Penalties?

• Willful means the person intended the act, not that they intended to break the law.
• Maximums are a $5,000 fine and 3 years imprisonment, either or both.
• Filing a false or misleading statement adds the element that the person knew it was false in a material respect.
• Defense to imprisonment: no jail for violating a rule or order the person proves they did not know about, though fines still apply.
• The Administrator investigates and refers evidence but cannot prosecute; only the attorney general or district attorney brings charges.

Which Remedies Require a Court?

• On a proper showing a court must grant an injunction, restraining order, or writ of mandamus, and may appoint a receiver or conservator or order rescission, restitution, or disgorgement.
• The Administrator requests these and need not post a bond, but cannot issue them alone.

How Does SIPC Fit In?

• SIPC is not a USA remedy. It comes from the federal Securities Investor Protection Act of 1970, and the USA names it once as a body the Administrator may cooperate with.
• It is triggered by a member firm failing with customer assets missing, never by a securities violation. A violation at a solvent firm never reaches SIPC.
• $500,000 total per customer, per capacity, including a $250,000 cash sublimit that sits inside the $500,000. Accounts in the same capacity are combined; a different capacity gets its own limit.
• SIPC covers nothing where nothing is missing: not market losses, not worthless stock actually sold, not bad advice. A court-appointed trustee runs the federal-court liquidation.

Which One-Liners Win Points?

• If it involves money or managing assets, it requires a court, never the Administrator alone.
• A cease and desist order is administrative and needs no prior hearing; injunctions are judicial.
• Causes of action survive death, so the estate can continue the suit.

Which Numbers Matter Most?

Memory Aid: $5-3

• $5,000 maximum fine
• 3 years maximum imprisonment

Which Gotchas Trip Students Up?

• The optional Model Act provision barring an indictment more than 5 years after the violation is bracketed language for states without a general criminal statute of limitations, not a nationwide rule.
• A written rescission offer kills the later suit if the buyer does nothing within 30 days, whether or not they still own the security.
• The civil SOL has two prongs and the earlier deadline wins: compare the 2-years-from-discovery date against the 3-years-from-sale date, do not just pick the shorter period.

One-Breath Recap

A securities violation opens four doors. Administrative: the Administrator issues cease and desist with no prior hearing. Judicial: only a court grants injunctions, receivers, rescission, restitution, and disgorgement, and the Administrator posts no bond. Criminal: willful violations carry a $5,000 fine and up to 3 years imprisonment, with a no-knowledge-of-the-rule defense that blocks prison but not fines. Civil: the buyer sues for price paid plus interest and fees, less income received, with the burden flipped onto the seller on fraud but strict liability on a registration violation, within 2 years of discovery or 3 years of the sale, whichever comes first. SIPC is federal, not a USA remedy, restoring up to $500,000 per customer per capacity with a $250,000 cash sublimit inside it.

Need more than the recap? Read the full Other Penalties and Liabilities unit.