Chapter 15 - § 15.11 •ANTI-FRAUD LIABILITY; IS THERE A PRIVATE RIGHT OF ACTION?

• Jurisdiction: Colorado

§ 15.11 •ANTI-FRAUD LIABILITY; IS THERE A PRIVATE RIGHT OF ACTION?

Section 17(a) of the 1933 Act is generally equivalent to § 10(b) of the 1934 Act. However, based on a number of cases, it does not appear that there is a private right of action under § 17(a).¹⁵⁵

A principal argument against there being a private right of action under § 17(a) is that, if there is a private right of action, scienter (required to prove liability under 1934 Act § 10(b) and Rule 10b-5) would not be required as a result of the U.S. Supreme Court's decision in Aaron v. SEC.¹⁵⁶ While Aaron was an enforcement action brought by the SEC, if there is a private right of action under § 17(a), it is likely that the same standard — no scienter required under §§ 17(a)(2) and 17(a)(3) — would apply.

If there is a private right of action under § 17(a), the elements, in addition to the required jurisdictional allegations, are that the defendant must have offered or sold securities, and:

• The defendant employed a device, scheme, or artifice to defraud;
• The defendant obtained money or property by means of an untrue statement of material fact or an omission of material fact necessary to make statements not misleading; or
• The defendant engaged in any transaction, practice, or course of business that operated or would operate as a fraud or deceit upon the purchaser.

To the extent there is a private right of action under § 17(a), there are several defenses to claims under § 17(a) in addition to denial.

• The defendant can claim that the plaintiff was not a purchaser of securities.
• If the defendant acted in good faith, he or she could defeat the showing of scienter.
• Defendants probably cannot defeat a § 17(a) action by showing that the plaintiffs did not rely on the misleading statements or omissions. In United States v. Ashdown,¹⁵⁷ the Fifth Circuit held: "Specific reliance by the investor need not be shown in a prosecution under 15 U.S.C.A. § 77q(a) [§ 17(a)]. Rather, what must be shown is that the scheme had an impact on the investor . . . ."¹⁵⁸

It is clear that the SEC can use § 17(a) as an enforcement tool. In a Rule 102(e) proceeding against an attorney, the SEC enjoined him from violating § 17(a) as well as § 10(b) of the 1934 Act.¹⁵⁹

In another proceeding, the Fifth Circuit affirmed the SEC's holding that a registered representative who encouraged friends and clients to buy shares in two new companies in which he was also a shareholder could be liable as a "seller" under §...