Exploring Unexplored Frontiers: The Private Right of Action Under the Louisiana Securities Law

• Author: Stephen Miles
• Position: Mr. Miles has devoted much of his practice to representing individuals and corporations in claims arising under the Louisiana Securities Law and federal securities laws. The views and opinions expressed herein are not necessarily the views and opinions of any other person or entity and should not be viewed as such.
• Pages: 801-828

Exploring Unexplored Frontiers: The Private Right of Action Under the Louisiana Securities Law Stephen Miles  INTRODUCTION In early 2007, an increase in subprime mortgage defaults caused some softness in the financial markets. Later in 2007, that softness spread and intensified, causing a liquidity and credit crisis affecting even prime mortgages. Still later, in 2008, the crisis expanded further, resulting in the collapse of one of the most venerated investment banks on Wall Street—Lehman Brothers. The crisis continued with an economic recession that some say was the worst since the Great Depression in the 1930s. 1 During this period of economic turmoil, stock market indices, such as the Dow Jones Industrial Average and the S&P 500, tumbled. The multi-trillion dollar market for fixed-income investments, such as asset-backed securities, lost even more value. Not surprisingly, investments of both institutional investors and individuals saving for retirement declined in value. In the wake of these losses, investors sued either their financial advisors or others involved in the sale of the securities that turned out to be poor investments. Louisiana was not immune to the poor conditions in the financial markets, and many Louisiana investors whose investments lost value, like those in other states, brought lawsuits seeking to recoup their losses. Such investors often invoked the Louisiana Securities Law, which was originally enacted in 1920 2 and was later re-enacted in 1985. 3 These investors, or their attorneys, likely Copyright 2015, by STEPHEN MILES.  Mr. Miles has devoted much of his practice to representing individuals and corporations in claims arising under the Louisiana Securities Law and federal securities laws. The views and opinions expressed herein are not necessarily the views and opinions of any other person or entity and should not be viewed as such. 1. See Lawrence Mishel & Heidi Sheirholz, The Worst Downturn Since the Great Depression , ECON. POLICY INST. (June 2, 2009), http://www.epi.org/publi cation/jobspict_200906_preview/, archived at http://perma.cc/GYD6-GTN3. 2 . State v. Powdrill, 684 So. 2d 350, 353 (La. 1996) (“Louisiana enacted its first blue sky law in 1920.”). State securities laws, including Louisiana’s, are often referred to as “blue sky laws.” See id. The Louisiana Supreme Court offers that this moniker is derived from a United States Supreme Court decision describing the purpose of state securities laws “as the prevention of ‘speculative schemes which have no more basis than so many feet of blue sky.’” Id. (citing Steven M. Axler, Comment, The Blue Sky Laws of Louisiana , 41 LOY. L. REV. 1 (1995) (quoting Hall v. Geiger-Jones Co., 242 U.S. 539, 550 (1917))). 3. LA. REV. STAT. ANN. §§ 51:701–724 (2003) . 802 LOUISIANA LAW REVIEW [Vol. 75 found that, despite being on the books for years, the Louisiana Securities Law had infrequently been interpreted by Louisiana courts, leaving investors with little guidance on certain important issues. This Article explores the private right of action under the Louisiana Securities Law, noting interpretations of that law provided recently by courts in the wake of the financial crisis and recession. 4 It also examines those provisions of the law that have not often been interpreted by the courts, offering comparisons of the language of Louisiana’s private right of action to that of its federal analogue, section 12(2) of the Securities Act of 1933, which may be utilized to fill the gap left by the dearth of Louisiana Securities Law cases that exists even after the 2008–2009 financial crisis. I. THE FEDERAL SECURITIES ANTIFRAUD PROVISIONS An understanding of the private right of action under the Louisiana Securities Law requires a review of the federal securities private right of action on which the Louisiana Securities Law is based. 5 There are at least two provisions of federal securities laws that have relevance here: section 12(2) of the Securities Act of 1933 and section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b–5 promulgated thereunder. A. Section 12(2) of the Securities Act of 1933 In the wake of the stock market crash of 1929, Congress undertook to regulate transactions in securities. 6 As part of this effort, Congress enacted the Securities Act of 1933. Section 12(2) of that Act provides a private remedy for purchasers of securities in an initial distribution of securities where the sale is made by 4. To the author’s knowledge, no such examination of the provisions of the Louisiana Securities Law has appeared in any publication since 1995 when a helpful piece was published in the Loyola Law Review. See Axler, supra note 2, at 1. This Article provides an update in light of the recent financial crisis, with a focus on the private right of action available under the Louisiana Securities Law. 5. See Powdrill , 684 So. 2d at 353 (Louisiana courts “look to the federal law and jurisprudence interpreting the securities law for guidance in interpreting the Louisiana provisions.”); see also Heck v. Triche, 775 F.3d 265, 282 (5th Cir. 2014) (“Because there is a dearth of law interpreting the definition of a seller under the state statute, we look to federal law interpreting the Louisiana law’s model.”). 6. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 (1976). 2015] EXPLORING UNEXPLORED FRONTIERS 803 means of “an untrue statement of a material fact” or an omission. 7 The cause of action may be brought against “[a]ny person who”: Offers or sells a security . . . 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 statements, 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. 8 The cause of action is a narrow one. It is only available to securities purchasers—not securities sellers—and may only be brought against so-called statutory sellers. 9 Although the law applies to oral communications as well as prospectuses, 10 it is directed primarily at the initial distribution of securities, rather than at secondary market transactions. 11 Purchasers also need not prove scienter 12 or reliance, 13 but instead must merely prove that they did not know of the untruth or omission. 14 Purchasers, however, must prove that the untruth concerned a material fact or that an omitted fact was material. 15 The text of section 12(2) offers a statutory seller two defenses in addition to the common law defenses that have been recognized by various courts. 16 The seller can offer evidence “that he did not know, and in the exercise of reasonable care could not have 7. See Securities Act of 1933, § 12(2) (as amended), 15 U.S.C. § 77 l (a)(2) (2012). 8. Id. 9. Pinter v. Dahl, 486 U.S. 622, 641–42, 647–54 (1988). See also Cortec Indus. v. Sum Holding, 949 F.2d 42, 50 (2d Cir. 1991) (finding that section 12 liability extends to sellers, but not purchasers). 10. § 12(2). 11. See Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 578 (1995). 12. Scienter generally means acting “with intent to deceive, manipulate, or defraud.” Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983). 13. See Gustafson , 513 U.S. at 576 (stating that section 12(2) provides “buyers a right to rescind without proof of reliance”); Schlesinger v. Herzog, 2 F.3d 135, 141 (5th Cir. 1993) (holding that scienter and reliance are not elements of a section 12(2) claim). 14. § 12(2). 15. See, e.g. , Simpson v. Se. Inv. Trust, 697 F.2d 1257, 1258 (5th Cir. 1983) (describing materiality standard for Section 12(2) claims); TSC Indus. v. Northway, Inc . , 426 U.S. 438, 444–47 (1976) (discussing materiality standard for claim brought pursuant to section 14(a) of the Securities Exchange Act of 1934). 16. See infra note 131. 804 LOUISIANA LAW REVIEW [Vol. 75 known, of such untruth or omission.” 17 The seller can also reduce the damage recoverable by showing that the damages sought were not caused by the untruth or omission. 18 The damages recoverable by a purchaser under section 12(2) are significant. A purchaser may obtain from a statutory seller found liable rescission or damages calculated based upon the consideration paid if the purchaser no longer owns the security. 19 B. Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 The second relevant federal remedy was not expressly created by Congress but rather is an implied remedy long ago recognized by the United States Supreme Court. For many years, the Court has recognized that securities market participants have a private right of action under section 10(b) of the Securities Exchange Act of 193420 and Rule 10b–5 21 promulgated thereunder. 22 Rule 10b–5 states: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or 17. § 12(2); Junker v. Crory, 650 F.2d 1349, 1361 (5th Cir. 1981) (“Section 12(2) provides the seller a defense if he sustains ‘the burden [of] proof that he did not know, and in the exercise of reasonable care could not have known, of (the) untruth or omission . . . .’” (quoting section 12(2)). 18. § 12(2). 19. Id. An aggrieved purchaser may sue “to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.” Id. 20. 15...