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 the securities-registration requirement)
• Sold securities while not registered as a broker-dealer or agent (violation of the person-registration requirement). An agent who sells for an unregistered firm, or an unregistered person who sells at all, falls here
• Sold or offered securities in violation of a rule that requires the Administrator's approval of sales literature before use, or of a condition the Administrator attached to a registration or exemption
• Told a prospective buyer that registration or an exemption means the Administrator has approved the securities or the person, which the Act forbids
• Sold securities through fraud or material misstatements/omissions, but only if the buyer did not know of the untruth or omission. A buyer who already knew the true facts at the time of purchase has no fraud claim, because the buyer's lack of knowledge is part of the claim itself

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 Else Is Liable Besides the Seller or Adviser?

The Act names several groups of people who are also liable. Two reasons put a person in the group: control, or material aid.

• Control: every person who directly or indirectly controls a liable person, including that person's partners, officers, and directors, and anyone in a similar status
• Material aid: every employee of a liable person who materially aids the violating conduct, and every broker-dealer or agent who materially aids it. An aider does not need to control anyone
• All of these persons are liable jointly and severally with the primary violator
• Defense: did not know and could not have known through reasonable care
• Right of contribution: a jointly liable person who pays more than their share of a judgment can seek reimbursement from the other jointly liable persons
• Not on the list: the buyer. The buyer is the person who sues under this section, so a buyer is never liable here merely for buying in the same transaction

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

The Act words the tender as "the security and any income received on it." The buyer gives both back, or has the income taken off the recovery. The dollar result is the same: the buyer ends up with no income 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. Accepting gets the buyer the refund the offer promises, which settles the claim
• A buyer who rejects the offer, or does not respond within 30 days, loses 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. Silence is not treated as accepting the offer. The Act instead bars the suit when no written rejection arrives, so silence costs the claim, 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
• Buyer knowledge (fraud claims): the claim exists only if the buyer did not know of the untruth or omission when buying
• Two different "knowledge" questions: buyer knowledge decides whether the claim exists at all; seller knowledge is the reasonable-care defense once the claim exists
• 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 (as a person or as to the 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 while unregistered, selling an unregistered security, breaking a sales-literature approval rule, or fraud. Fraud claims need a buyer who did not know. A fee above a commission schedule is no trigger
• Advisers are liable for registration violations or defrauding clients. Controlling persons and employees, broker-dealers, or agents who materially aid are jointly and severally liable, with a reasonable-care defense and a right of contribution
• Buyer remedies differ by ownership: tender-back-and-recover if the buyer still owns the security, recover-the-difference if sold. The limit is the earlier of 3 years from the transaction or 2 years from discovery
• 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 strict liability; reasonable care defends only fraud
• Causes of action survive death, violating contracts are unenforceable by the violator, and waivers of compliance are void. Judicial review needs a written petition within 60 days, and an appeal does not automatically stay the order