§ 5.1.2.4 INDIRECT FRAUD

• Jurisdiction: Arizona

§ 5.1.2.4 Indirect Fraud

By its terms, § 44-1991(A) prohibits conduct which "directly" violates its provisions as well as conduct which "indirectly" does. The same "directly or indirectly" language appears in § 17(a) of the 1933 Act and § 10(b) of the 1934 Act. In Central Bank the U.S. Supreme Court rejected a theory of aiding-and-abetting liability predicated on the "directly or indirectly" language in § 10(b).¹⁸¹⁰ The court did, though, implicitly acknowledge a statutory basis for imposing liability on those who engage "indirectly . . . in a proscribed activity" by contrasting the scope of aiding-and-abetting liability with indirect violations of Rule 10b-5.¹⁸¹¹

The Arizona Supreme Court examined liability for indirect fraud in Barnes v. Vozack.¹⁸¹² Through misstatements, a salesman sold stock in a fledgling company, Budget Control, to a widow.¹⁸¹³ The salesman was directly liable under § 44-1991.¹⁸¹⁴ But the plaintiff went a step further and argued that three additional defendants, who controlled Budget Control through stock ownership and a management contract, were liable for indirectly violating § 44-1991.¹⁸¹⁵ There was insufficient evidence that any of the three personally solicited the plaintiff's investment.¹⁸¹⁶ The Arizona Supreme Court nevertheless upheld liability because "the three [individual] defendants indirectly fraudulently sold stock to" the plaintiff.¹⁸¹⁷ Decisions in other states reach similar conclusions.¹⁸¹⁸

The 2010 Grand II decision also recognized the possibility of liability for indirect fraud. In explaining the scope of liability under § 44-1991(A)(3), the Court stated that the statute "makes it illegal for any person 'directly or indirectly' to '[e]ngage in any transaction, practice or course of business which operates or would operate as a fraud or deceit.'"¹⁸¹⁹ Because a statutory cause of action exists for violations of § 44-1991,¹⁸²⁰ a person who indirectly engages in statutory fraud is among those persons who may be held liable.¹⁸²¹

In a 2011 district-court case, the defendants argued that they could not be liable under § 44-1991(A) because the plaintiffs' allegations were insufficient to show that the plaintiffs had any contact with the defendants.¹⁸²² The court disagreed and pointed out that even if no contact existed, "direct contact with the Defendants is not necessary to support allegations under Arizona's fraud statute."¹⁸²³

To be liable for indirect fraud the defendant must of course in some way, if only indirectly...