Civil Liabilities

Section 410 of the Uniform Securities Act (USA) gives buyers a private right of action when securities laws are violated. This is the most frequently tested topic in this unit.

Seller Liability for Unlawful Sales (Section 410(a))

Any person who offers or sells a security is civilly liable to the buyer when the sale violates:

• Section 201(a): selling while unregistered as a person (broker-dealer or agent)
• Section 301: selling unregistered securities
• Section 405(b): making unlawful representations about registration
• Any rule or order under Section 403 requiring pre-approval of sales literature
• Any condition imposed under Sections 304(d), 305(g), or 305(h) (conditions on registration)

Liability also attaches when a seller uses:

• An untrue statement of a material fact, or
• An omission of a material fact necessary to make statements not misleading

For fraud-based liability (untrue statement or omission), the buyer must not have known of the untruth or omission at the time of purchase.

Burden of Proof

The USA flips the normal legal standard:

• The seller bears the burden of proof: they must show they did not know, and in the exercise of reasonable care could not have known, of the untruth or omission
• This is a defense of lack of knowledge plus due diligence; the seller must prove both elements
• The buyer does not need to prove the seller's knowledge; the seller must disprove it

Think of it this way: In most lawsuits, the person suing has to prove the other side did something wrong. Under Section 410, the seller is presumed at fault and must prove they were careful. The buyer just has to show the sale was unlawful or the statement was false.

Exam Tip: Gotchas

The burden of proof is on the seller to prove innocence, not on the buyer to prove fraud. This reversal of the normal burden is a favorite exam topic. If the seller cannot show they exercised reasonable care, they are liable.

Remedies Available to the Buyer (Section 410(a))

The buyer may sue at law or in equity and recover:

• The consideration paid for the security (purchase price)
• Plus interest from the date of payment
• Plus court costs and reasonable attorneys' fees
• Less any income received on the security (dividends, interest payments)

The buyer must tender (offer to return) the security and any income received on it.

Think of it this way: Rescission is an "undo" button. The buyer gives back the security and gets their money back, plus interest, minus whatever income the security already paid them. If the buyer already sold, they cannot undo the sale, so they get damages instead (the difference between what they paid and what they got).

If the buyer no longer owns the security, the remedy is damages: the amount recoverable upon tender, minus the value of the security when disposed of, plus interest from the date of disposition.

• Still owns the security (Rescission): Purchase price + interest - income received
• Already sold the security (Damages): (Purchase price + interest - income) minus (sale proceeds + interest from sale date)

Exam Tip: Gotchas

The exam tests whether the buyer can rescind or must seek damages. If the buyer sold the security at a loss, they recover the difference. The tender must occur before entry of judgment (Section 410(d)).

Adviser Liability (Section 410(b))

Any person who provides investment advice for compensation and either:

1. Violates Section 102 (fraudulent advisory practices), Section 201(c) or (d) (unregistered advisory activity), Section 405(b) (unlawful representations), or any rule/order under Section 403, or
2. Employs any device, scheme, or artifice to defraud a client, or engages in any act that operates as a fraud or deceit on a client

Is liable to the client, who may recover:

• The consideration paid for the advice
• Plus any loss due to the advice
• Plus interest from the date of payment
• Plus costs and reasonable attorneys' fees
• Less any income received from the advice

Control Person Liability (Section 410(c))

Every person who directly or indirectly controls a person liable under Sections 410(a) or (b) is jointly and severally liable. This includes:

• Every partner, officer, or director of the liable person
• Every person occupying a similar status or performing similar functions
• Every employee who materially aids in the conduct giving rise to liability
• Every broker-dealer or agent who materially aids in the conduct

Defense available: Control persons must prove they did not know, and in the exercise of reasonable care could not have known, of the facts giving rise to the liability.

There is a right of contribution among jointly and severally liable persons (as in cases of contract).

Exam Tip: Gotchas

"Materially aids" is the key phrase. A back-office employee who processes paperwork for a fraudulent sale could be liable. But the employee has the same "no knowledge + reasonable care" defense available to them.

Statute of Limitations (Section 410(f))

No person may sue under Section 410 more than:

• From date of sale or advice: 3 years maximum
• From discovery of violation: 2 years maximum
• Controlling limit: whichever expires first

Exam Tip: Gotchas

The statute of limitations has two prongs and the shorter one wins. A buyer who discovers a violation 2.5 years after the sale has only 6 months left (the 3-year absolute limit). A buyer who discovers a violation after 3 years cannot sue at all, regardless of the 2-year discovery rule.

Rescission Offers as a Defense (Section 410(g))

A seller can cut off the buyer's right to sue by making a written rescission offer before the lawsuit is filed. The rules depend on whether the buyer still owns the security:

Exam Tip: Gotchas

The 30-day response rules flip depending on ownership. If the buyer still owns the security and does nothing, the right to sue is lost. If the buyer does not own the security and does nothing, the right to sue is also lost. In both cases, silence = giving up the right to sue. The exam frequently tests this distinction.

Illegal Contracts (Section 410(h))

• A person who makes or performs a contract in violation of any provision of the Act cannot base any suit on that contract
• A person who acquires rights under such a contract with knowledge of the violation also cannot enforce it
• The contract is voidable by the innocent party

Waiver Provisions Void (Section 410(i))

• Any condition, stipulation, or provision that would bind a person to waive compliance with any provision of the Act is void
• A buyer cannot be forced to waive their rights under the USA, even if they sign such an agreement
• Pre-dispute arbitration clauses do not waive compliance with the Act; they change the forum, not the rights

Exam Tip: Gotchas

A client who signs a waiver agreeing not to sue under the USA can still sue. The waiver is void. However, an arbitration clause is valid because it changes where the dispute is resolved, not whether the client has rights.

Non-Exclusive Remedies (Section 410(j))

• The rights and remedies under Section 410 are in addition to any other rights or remedies at law or in equity
• However, the Act does not create any cause of action not specified in Section 410 or Section 202(e)
• Buyers may pursue both USA civil remedies and common-law fraud claims simultaneously

Survivorship (Section 410(e))

• Every cause of action under Section 410 survives the death of any person who might have been a plaintiff or defendant
• The estate of a deceased buyer (or seller) can continue the action