§ 6.1.1.3

• Jurisdiction: Arizona

§ 6.1.1.3 Does a remedy for all § 44-1991(A) violations exist?

Until 1996, case law proceeded on the assumption that any person violating § 44-1991 was potentially liable.¹⁶⁰³ In this sense, Arizona courts proceeded much like the federal courts do in interpreting Rule 10b-5. That is, under Rule 10b-5 any person who commits an act prohibited by the Rule's language is potentially liable.¹⁶⁰⁴

Barnes v. Vozack¹⁶⁰⁵ illustrates the pre-1996 approach under which the courts assumed that all violations of § 44-1991 gave rise to a statutory remedy. In Barnes, the Supreme Court held that defendants who indirectly violated § 44-1991 were liable for damages.¹⁶⁰⁶ Without mentioning § 44-2003, the court held that the evidence was sufficient to show violations of § 44-1991 that entitled the plaintiff to damages.¹⁶⁰⁷ A year later, an Arizona district court applied Barnes and concluded that liability for violations of § 44-1991 exists when the defendant directly or indirectly participates in the fraud.¹⁶⁰⁸

In the pre-1996 cases that did cite § 44-2003, the statute was cited for one of two reasons. One was to explain why the statute covered the defendant's conduct.¹⁶⁰⁹ The second was to explain why the defendant was liable for damages even though the defendant received none of the consideration.¹⁶¹⁰ The statute was never described as one that limited the persons who could be liable for violating § 44-1991.¹⁶¹¹ Although the pre-1996 cases did not see the need to make the point, their interpretation was consistent with the statute's permissive language. That is, § 44-2003(A) says that the persons listed may be sued. It does not say that they are the only persons who may be sued.

In 1996, the Court of Appeals abruptly took a different approach. Without citing Barnes, the 1996 Standard Chartered decision held that not all violations of § 44-1991 give rise to a private action.¹⁶¹² According to the Standard Chartered court, if "the legislature intended so extensive a private remedy, it could simply have done so against any person who violated section 44-1991."¹⁶¹³ "Instead, the legislature provided a private civil remedy only against the narrower range of persons 'who made, participated in or induced the unlawful sale.'"¹⁶¹⁴ In reaching this conclusion, the court seems to have been unaware of legislative amendments earlier that year that expressly acknowledge the private remedy for which the court found no textual support.¹⁶¹⁵

A few months before Standard Chartered was decided, the legislature amended the securities statutes to reference in several places the existence of a private action for violations of § 44-1991(A). For example, § 44-1991(B), which was added in 1996, explicitly refers to a private action under § 44-1991.¹⁶¹⁶ It begins by stating that, "[i]n a private action brought pursuant to subsection A, paragraph 2 of this section [44-1991] or § 44-1992."¹⁶¹⁷ This would be strange language if a right to sue for all violations of § 44-1991 did not exist.¹⁶¹⁸

Another reference to a private action under § 44-1991 was added when § 44-2003 was amended in 1996 to include a proportionate-fault scheme.¹⁶¹⁹ This amendment provides for fault to be allocated among the defendants in "any private action under § 44-1991."¹⁶²⁰ So here again the legislature wrote the statute in a way that contemplates a private action against any person who violates § 44-1991. Still other references to the existence of a "private action arising under § 44-1991" appear in §§ 44-2082(A),¹⁶²¹ (B),¹⁶²² and (C).¹⁶²³

It seems likely that the Standard Chartered panel overlooked these private-action provisions or did not deem them relevant because the case had been tried before 1996.¹⁶²⁴ Otherwise, it is difficult to understand how the court could reason that if the legislature had intended to provide a remedy for all violations of § 44-1991, it could have wrote the statutes that way.¹⁶²⁵ The private-action language in §§ 44-1991(B), 44-2003(P)(1), and 44-2082(A)-(C) shows that the legislature did just that. Each of these statutes expressly refer to the existence of a private action under § 44-1991.

Another textual indication that the legislature contemplated remedies for all fraudulent practices under § 44-1991 exists in the Securities Act's statute of limitations. The statute of limitations provides that no civil action "to enforce any liability based on a violation of Article 13 [which includes § 44-1991]" shall be brought "unless brought within two years after discovery of the fraudulent practice on which the liability is based."¹⁶²⁶ These "fraudulent practice[s]" are listed in subsections (1), (2), and (3) of § 44-1991(A), which collectively prohibit "unlawful" schemes, misleading statements, and any act or course of business that operates as a fraud.¹⁶²⁷ The wording of the statute of limitations describes civil actions to enforce...