Georgia Securities Act - Let the Buyer Beware!
| Publication year | 2005 |
| Pages | 0001 |
| Citation | Vol. 10 No. 7 Pg. 0001 |
GSB Vol. 10, No. 7, Pg. 1. Georgia Securities Act - Let the Buyer Beware!
Vol. 10, No. 7, June 2005
Georgia investors beware! On Jan. 24, 2005, in a 4-3 decision, the Supreme Court of Georgia denied certiorari and let stand the decision of the Court of Appeals in Keogler v. Krasnoff.1 In that case, the court held that a chief financial officer who misrepresented his company's financial track record in connection with a securities offering was not liable to investors to whom the misrepresentations were made because the CFO did not intend to deceive the investors. The Court of Appeals imposed the common-law elements of scienter and reasonable reliance as prerequisites for recovery by a purchaser of securities. Plaintiffs now bear a significantly more difficult burden than previously assumed by many state securities lawyers based upon the language and history of the Georgia Securities Act of 19732 and dicta contained in a 1983 decision of the 11th U.S. Circuit Court of Appeals.3 As a result of Keogler, Georgia investors seeking protection pursuant to O.C.G.A. 10-5-12(a)(2)(B) and 10-5-14(a) have less protection than investors in other states whose statutes contain similar provisions. Georgia now stands as the first and only state to find a scienter requirement under a civil liability provision modeled on section 410(a)(2) of the Uniform Securities Act of 1956 (the Uniform Securities Act) and section 12(a)(2) of the Securities Act of 19334 (the '33 Act). In addition, Georgia joins Washington as the only state requiring proof of reliance,5 and joins Louisiana as the only state imposing an affirmative duty of investigation upon purchasers of securities.6 The rule of caveat emptor is therefore fully restored for investors in Georgia. Georgia's civil liability scheme, as interpreted in Keogler, is a significant departure from the pattern that emerged in the last 70 years. In 1933 Congress passed the '33 Act, which protected investors by including a provision giving them the right to rescind an investment if a material misrepresentation was made by a company or its officers or underwriters during the offering process.7 This law changed the general rule from caveat emptor (buyer beware) to caveat venditor (seller beware). States, including Georgia, followed suit by passing similar statutes as part of their Blue Sky laws. These statutory provisions forced companies and their officers and underwriters to conduct greater "due diligence," a process whereby they sought scrupulously to verify all facts presented in a prospectus in order to avoid having an investment rescinded based upon negligent or innocent misrepresentations. The result benefited everyone. While investors achieved a new level of protection, companies gained greater access to capital because the new rules created conditions that generated confidence in the disclosures. The benefits of such a system can be seen in several studies, including the one published in 2003 by the National Bureau for Economic Research. The authors of that study compared the securities regulatory system of 49 countries and identified the chief determinant of successful financial markets to be the existence of rules facilitating private recoveries by investors.8
THE KEOGLER DECISION
In 1997, William Keogler was introduced by his attorney to Robert Krasnoff, the largest investor in and chief financial officer of a mortgage company based in Tifton, Ga., known as SGE Mortgage Funding Company (SGE). SGE used capital raised from private investors to make mortgage-secured loans to homeowners.9 Krasnoff told Keogler that SGE had an excellent track record, that its investors made money, and that it was a good investment.10 Thereafter Keogler and his wife invested more than $750,000 in SGE. At no time had either of them requested SGE's financial statements to verify Krasnoff's statements regarding the company.11 In September...
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