§ 2.6.2

• Jurisdiction: Arizona

§ 2.6.2 Judicially Created Remedies

The 1912 Act did not include a statutory-damage remedy. Instead, like contemporaneous legislation in other states, the Arizona statutes sought to prevent abuses by screening securities sales through licensing and permit requirements.²⁷⁸

The absence of express, private actions was typical of the first wave of blue-sky laws.²⁷⁹ But civil remedies soon emerged. The earliest forms of statutory liability were through statutes that required surety bonds.²⁸⁰ For instance, § 4 of Mississippi's 1916 Securities Act required an investment company to post a bond payable to the state.²⁸¹ The bond was to provide security that the statements in the company's permit application were true and that the company and those promoting its stock would comply with the provisions of the act.²⁸² Section 6 of the Mississippi Act provided that anyone "induced to purchase" the corporation's stock by a material misrepresentation could bring suit on the bond for the money invested with interest.²⁸³ The statute was interpreted to allow a suit against the corporate issuer with or without joining the surety as a party.²⁸⁴

It was not until 1919 that legislation providing for express civil remedies began to emerge.²⁸⁵ At the end of 1920, only three states—Georgia, Illinois, and Utah—had civil liability statutes.²⁸⁶ Legislation in other states sometimes made the sales that violated the statutes voidable without defining a remedy,²⁸⁷ or more commonly, simply provided criminal penalties for violations.²⁸⁸

From these criminal penalties, civil remedies were judicially implied.²⁸⁹ Arizona's courts allowed purchasers to rescind sales that violated statutory requirements and to refuse payment on illegal-stock subscriptions.²⁹⁰ Arizona decisions also recognized the right to sue for damages when a sale violated the 1912 Act's criminal provisions.²⁹¹

The courts created remedies as a matter of course without discussing whether, as is the practice today, it was appropriate to imply a private cause of action.²⁹² During the years between 1912 and 1950, the principle that a criminal violation of a blue-sky law deserved a remedy was an easy one for courts in Arizona and most states.²⁹³ The remedy that was created could be more complicated. This required a common-law analysis on which clear-cut rules like those in modern remedies' statutes did not exist.²⁹⁴ When the opinion's analysis becomes complicated, it is usually because of issues concerning the remedy or the measure of damages rather than whether a remedy should exist.²⁹⁵

Although the issue did not arise in any reported Arizona decision, case law in other jurisdictions recognized a right to join responsible officers and directors in an action for either damages or rescission against the issuer or seller.²⁹⁶

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Notes:

^[278]See id. §§ 5, 7, 1912 Ariz. Sess. Laws at 340-43.

^[279]See Dykstra, supra note 264 (describing the Kansas statutes and other proposed blue-sky legislation, none of which included civil-liability provisions); Clarence D. Laylin, The Ohio "Blue Sky" Cases, 15 Mich. L. Rev. 369, 370 (1917) (describing the 26 blue-sky laws that existed as of 1917 as being based on...