Civil Liability

The Uniform Securities Act (USA) civil liability provision imposes liability on sellers of securities, investment advisers, and their controlling persons when securities laws are violated.

Who Can Be Sued?

When Are Sellers of Securities Liable?

Sellers face civil liability when they:

• Sold unregistered, non-exempt securities (violation of registration requirements)
• Sold securities through fraud or material misstatements/omissions

When Are Investment Advisers Liable?

Investment advisers face civil liability when they:

• Provided advice in violation of registration requirements
• Used any device, scheme, or artifice to defraud clients
• Engaged in acts that operate as fraud or deceit on clients

Who Counts as a Controlling Person?

Every person who directly or indirectly controls a liable person is also liable, including:

• Partners, officers, directors
• Employees who materially aid in the violating conduct
• Broker-dealers or agents who materially aid
• Liable jointly and severally with the primary violator
• Defense: did not know and could not have known through reasonable care
• Right of contribution: a controlling person who pays more than their share of a judgment can seek reimbursement from the other jointly liable persons

What Can a Buyer Recover?

What Can They Recover If They Still Own the Security?

Tender the security back and recover:

• The purchase price paid
• Plus interest
• Plus costs and reasonable attorney's fees
• Minus any income received on the security

What Can They Recover If They Sold the Security?

Recover damages equal to:

• What they could have recovered by tendering (purchase price + interest + costs and reasonable attorney's fees - income received)
• Minus the value of the security when it was sold
• Minus interest from the date of disposition

What Can an Investment Adviser's Client Recover?

Recover:

• The consideration paid for the advice
• Plus any losses caused by the advice
• Plus interest
• Plus costs and reasonable attorney's fees
• Minus any income received from the advice

What Is the Statute of Limitations for Civil Suits?

Two-part test, whichever expires first:

• 3 years after the contract of sale or the rendering of investment advice, OR
• 2 years after discovery of the facts constituting the violation
• Whichever comes first (the earlier deadline controls)

Exam Tip: Gotchas

• If a client discovers fraud 2.5 years after the sale, they have only 6 months left (until the 3-year mark), not a full 2 years. If they discover it after 3 years, they are time-barred entirely regardless of the 2-year discovery rule.

How Does a Rescission Offer Limit Liability?

A seller or adviser may limit liability by making a written rescission offer before the buyer files suit.

• The offer must include: refund of consideration paid + interest - income received

What If the Buyer Still Owns the Security?

• Buyer must accept the offer within 30 days of receipt or lose the right to sue

What If the Buyer No Longer Owns the Security?

• Buyer must reject the offer in writing within 30 days to preserve the right to sue

Tender of the security may be made at any time before entry of judgment.

Exam Tip: Gotchas

• If a buyer who still owns the security fails to respond to a rescission offer within 30 days, they lose the right to sue.
• If the buyer already sold the security, they must affirmatively reject in writing within 30 days to preserve the right to sue. This is a statutory exception to the ordinary rule that silence isn't acceptance: here, silence DOES bar the right to sue, just like the still-owns scenario above.

What Other Civil Liability Rules Apply?

• A cause of action (a party's legal right to sue) survives the death of any plaintiff or defendant
• Contracts made in violation of the act are unenforceable by the violator, and a person who knowingly acquires purported rights under such a contract is equally barred from suing on it
• Any contract provision requiring a client to waive compliance with the act is void
• Rights under the USA are in addition to other rights at law or equity, but the act does not create any cause of action beyond those specified in this civil-liability section
• Burden of proof (fraud claims): the seller must prove they did not know and could not have known of the untruth or omission; the buyer need only show the violation occurred
• Registration violations are strict liability: the reasonable-care defense applies to "the untruth or omission," which exists only in a fraud case. A seller who sold while unregistered, or sold an unregistered security, is liable no matter how careful they were

How Does Judicial Review of Administrative Orders Work?

Exam Tip: Gotchas

• Filing for judicial review does NOT stop the Administrator's order from taking effect. Unless the court specifically grants a stay, the order remains in full force during the appeal. A suspended person cannot continue operating just because they filed an appeal.

What Should You Check on Exam Day?

• Sellers are liable for selling unregistered, non-exempt securities or for fraud/material misstatements; advisers are liable for registration violations or defrauding clients
• Controlling persons, including partners, officers, directors, and materially aiding employees or broker-dealers, are jointly and severally liable, with a reasonable-care defense; a controlling person who pays more than their share has a right of contribution from the others
• Buyer remedies differ by whether the security is still owned: tender-back-and-recover vs. recover-the-difference
• The civil statute of limitations is the earlier of 3 years from the transaction or 2 years from discovery, not a full 2 years in every case
• A rescission offer requires the still-owns buyer to accept within 30 days, and the already-sold buyer to reject in writing within 30 days; silence bars the suit either way
• Registration violations are treated as strict liability, while the reasonable-care defense applies only to fraud claims (untruth or omission)
• Causes of action survive death, violating contracts are unenforceable by the violator or by a knowing acquirer of rights under such a contract, and any waiver of USA compliance is void; USA remedies add to other legal or equitable rights but do not create any new cause of action beyond what the civil-liability section specifies
• Judicial review requires a written petition within 60 days, and filing an appeal does not automatically stay the Administrator's order