Securities Act - Liability

Section 12(a)(1)

• Strict liability

• “Statutory sellers”

(last updated 19 Feb 13)

Liability for selling “unregistered, non-exempt”

securities?

§ 12  Civil liabilities arising in connection with prospectuses and    communications  

(a) In general Any person who-- (1) offers or sells a security in violation of section 5 of this act, .... shall be liable, subject to subsection (b) of this section, to the person  purchasing such security from him, who may sue either at law or in equity in  any court of competent jurisdiction, to recover the consideration paid for such  security with interest thereon, less the amount of any income received thereon,  upon the tender of such security, or for damages if he no longer owns the  security.

Compare this to 10b-5 and §11 liability …

Rule 10b-5 §11 §12(a)(1) §12(a)(2)

Transactional nexus

“icw” purch/ sale security

Part of RSViolation of

§5

PlaintiffPurchaser or

sellerPurchaser (tracing)

Purchaser

Defendant Primary violatorList (I, Ds, Os, UWs, expert)

“statutory seller”

(1) Material misrepresentation

Pl BOP (or duty to speak)

Pl BOP (or omission)

n/a

(2) ScienterPl BOP (facts /

strong E)Def BOP (“due

diligence”)n/a

(3) ReliancePl BOP (unless

FOM)Def BOP (Pl

“knew”) *n/a !!!

(4) CausationPl BOP (prox

cause)Def BOP

(“other than”)n/a

(5) DamagesPl BOP (O/P or

rescission)Rescission (up to offering $)

Rescission

Court FederalFederal or

stateFederal or

state

Limitations 2 yrs + 5yrs 1 yr + 3 yrs 1 yr

Pinter v. Dahl (US 1988)

Pinter v. Dahl (sung to the tune of “The Ballad of the Beverly Hillbillies”)

Come and listen to my story bout that guy Maurice,California boy just a-waitin’ to be fleeced.Then one day put some money in with BillOut in Oklahoma where the wildcatters drill.

Oil, that is, black gold. Texas tea.Well, the next thing you know Maurice is on the dole,Askin’ lots of friends he knows to throw cash down the holeSaid Beej Pinter is the guy you wanna seeAnd they each put some money in without an SEC

Filing, that is. Form S-1.Well, now it’s time to figure out if anyone can claimThat someone not the issuer can bear part of the blame

For selling shares unregistered with no gratuity,To share a heapin’ helpin’ of some liability.

Section 12(a)(1) that is. 33 Act. Write a check.Y’all invest now, hear?

© Jeffrey Lipshaw 2007. All rights reserved.

Pinter v. Dahl (US 1988)

Black Gold Oil Company (what a name) is in the oil and gas business.  One B.J. Pinter runs the business and is the principal shareholder.  Pinter looks for more investors and finds Maurice Dahl, a California real estate developer.  Dahl looks at Pinter's drilling logs and exclaims:  "This can't lose!"  Dahl tell his friends, who invest in Black Gold Oil. 

InvestorsPinter

Dahl

sue

counterclaim

Is Pinter liable, though he neverpassed title?

§ 12  Civil liabilities arising in connection with prospectuses and    communications  

(a) In general Any person who-- (1) offers or sells a security in violation of section 5 of this act, .... shall be liable, subject to subsection (b) of this section, to the person  purchasing such security from him, who may sue either at law or in equity in  any court of competent jurisdiction, to recover the consideration paid for such  security with interest thereon, less the amount of any income received thereon,  upon the tender of such security, or for damages if he no longer owns the  security.

§ 15 Liability of controlling persons   

Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under section 11 or 12, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.

Pinter v. Dahl (US 1988)

Black Gold Oil Company (what a name) is in the oil and gas business.  One B.J. Pinter runs the business and is the principal shareholder.  Pinter looks for more investors and finds Maurice Dahl, a California real estate developer.  Dahl looks at Pinter's drilling logs and exclaims:  "This can't lose!"  Dahl tell his friends, who invest in Black Gold Oil. 

InvestorsPinter

Dahl

sue

counterclaim

Is Dahl liable to theinvestors, though he never passed title?

§ 12  Civil liabilities arising in connection with prospectuses and    communications  

(a) In general Any person who-- (1) offers or sells a security in violation of section 5 of this act, .... shall be liable, subject to subsection (b) of this section, to the person  purchasing such security from him, who may sue either at law or in equity in  any court of competent jurisdiction, to recover the consideration paid for such  security with interest thereon, less the amount of any income received thereon,  upon the tender of such security, or for damages if he no longer owns the  security.

Pinter v. Dahl (US 1988)

“The language and purpose of § 12(1) suggest that liability extends only to the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner.”

Justice HarryBlackmun

§2(a) Definitions

 (3) The term "sale" or "sell" shall include every contract of sale or disposition of a security or interest in a security, for value. The term "offer to sell," "offer for sale," or "offer" shall include every attempt or offer to  dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.

And now let’s apply this Court-made law …

Hypothetical #1

Your law firm represents Saintine Drilling & Exploration, which raised money in a private placement. 

Your firm prepared the private placement memo and, at the client’s request, you sent a cover letter and copies of the memo to certain investors -- along with the drilling logs (see side panel). 

Your firm was paid handsomely for its work, a fact disclosed in the

offering memo.

Pinter v. Dahl (US 1988)

“Indeed, [the substantial-factor test] might expose securities professionals, such as accountants and lawyers, whose involvement is only  the performance of their professional services, to § 12(1) strict liability for rescission.  The buyer does not, in any meaningful sense, "purchas[e] the security from" such a person.” 

Justice HarryBlackmun

Hypothetical #2

Oil & Gas Ltd. sells unregistered common shares at $15 per share to 45 purchasers in violation of § 5. 

Alice is one of the purchasers.  Two months after the Oil & Gas offering, Alice sells her 1,000 shares to Bob for $10/share.  The value of the shares declines further to $7.

Oil & Gas

BobAlice

The end