Secondary Liability Under Securities Act Section 12

• Publication year: 1983
• Pages: 916
• Citation: Vol. 12 No. 6 Pg. 916

12 Colo.Law. 916 Colorado Lawyer 1983.

1983, June, Pg. 916. Secondary Liability Under Securities Act Section 12

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916

Vol. 12, No. 6, Pg. 916

Secondary Liability Under Securities Act § 12

by Mark E. Haynes

In the recent "boom-bust" cycle of the Denver securities market, more and more disgruntled purchasers are bringing action against their seller. Now, Securities Act § 12(2)(fn1) is in several respects an attractive alternative to Exchange Act § 10(b) and C.F.R. Rule 10b-5(fn2) for the purchaser of securities who is contemplating bringing an action for fraudulent conduct in connection with the transaction. The § 12 plaintiff need not prove that the defendant seller acted with scienter,(fn3) nor is he required to establish that he relied upon the defendant's misrepresentation or omission in entering into that transaction.(fn4) He also has a lesser burden of proof with respect to causation(fn5) (although Supreme Court precedent is sparse, at best, with respect to these issues).

Section 12(2) is the Securities Act provision which provides for civil liabilities for fraudulent communications in connection with securities sales. It extends liability to any person who

offers or sells a security (whether or not exempted by the provisions of § 3 other than Paragraph (2) of subsection (a) thereof), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statement, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission,...(fn6)

Limitations

Section 12(2) contains three disadvantages which probably explain why it was relatively little used during the period of growth of Rule 10b-5 litigation: (1) a § 12 action may only be brought by a purchaser or offeree; (2) the action is subject to the short statute of limitations contained in § 13, which requires § 12(2) actions to be brought within one year after the discovery of the untrue statement or omission and no more than three years after the sale;(fn7) (3) the statute requires strict privity of contract between purchaser and seller. The privity requirement is the most significant obstacle confronting the § 12(2) plaintiff.

The statute literally provides, "Any person who ... offers or sells a security [to the plaintiff by prohibited means] shall be liable to the person purchasing such security from him ..." (emphasis added). The statute's own terms require strict privity of contract between the plaintiff and defendant before liability will attach. Thus, an individual who parts with title to a security in exchange for consideration will be considered a seller.(fn8) However, the courts have employed four doctrines to bring persons not in strict privity with the buyer within the scope of the statutory prohibition.

Controlling Persons:

First, the "controlling person" provision of the Securities Act is available to the § 12(2) plaintiff, just as Exchange Act § 20(a) is available to the Rule 10b-5 plaintiff.(fn9) The controversial decisions concerned are those which have expanded § 12(2) liability beyond sellers in privity with the plaintiff and "controlling persons." These decisions must be re-evaluated in the light of recent Supreme Court cases which clearly hold that the standard of liability created by a particular section of the federal securities laws must begin with and rest primarily on the language of the statute.(fn10)

Respondeat Superior:

The second doctrine employed by the courts in reaching defendants not in strict privity with the seller is the easiest to justify---respondeat superior. Section 12, as well as other provisions of the federal securities laws, seems to contemplate at least a limited application of the doctrine.(fn11) At a minimum, a principal whose agent sells a security in a manner proscribed by § 12 within the scope of his agency should be subject to liability.(fn12) An open question today concerns the extent to which common law agency principles may be engrafted onto the securities laws.

Aiding and Abetting:

The third doctrine utilized by some courts in subjecting collateral participants to § 12 liability is the concept employed in Rule 10b-5 litigation---aiding and abetting (and conspiracy). Both the Fifth and Ninth Circuits have ruled that no aider and abettor liability exists with respect to § 12.(fn13) Other courts have stated, primarily in dicta, that such liability may exist.(fn14) The Fifth and Ninth Circuit result is bolstered by the statutory scheme of the 1933 Act. Section 11, which contains no privity requirement, provides for liability on account of false registration statements, and is directed to every person who signed the registration statement, directors, accountants, and other professionals, and underwriters.(fn15) On the other hand, § 12 applies to any seller, but requires privity between the plaintiff and defendant.(fn16)

Moreover, as Professor Bromberg observed, § 12 differs fundamentally from the other provisions to which the concept of aiding and abetting has been applied. Section 17(a) and Rule 10b-5 define unlawful conduct, while §§ 11 and 12 merely impose a liability. Aiding and abetting and conspiracy are concepts which have been imported from criminal law and are more relevant to those sections which define a violation.(fn17) These...