Arizona Securities Law & Equitable Defenses
| October 30, 2017
Arizona’s securities laws are among the most unique in the nation. This is illustrated in the handling of equitable defenses, especially as compared to federal law and other states’ laws. Most states refuse to accept equitable defenses in securities cases unless specifically enacted in the state’s statutes – Arizona has likewise disallowed such defenses when they are not in the Revised Statutes. But in 2014 the Arizona Court of Appeals made an odd and contradictory application to allow equitable defenses that were not statutorily recognized.
I originally wrote about this in 2015 in Arizona Summit Law Review. This is an updated summary of that article.
The Purpose of Arizona’s Securities Laws
Arizona’s key antifraud statutes are found in Revised Statutes § 44-1991(A) and § 44-2001(A). Unlike Securities and Exchange Commission Rule 10b-5, which simply implies liability, Arizona’s securities laws contain express liability. The overarching intent of these laws is to protect investors.
In the SEC rules, defenses and elements of proof are not present. This means that courts applying the SEC rules must judicially add civil-liability requirements by drawing on the rules in common-law fraud cases. For this reason, the courts have used common-law precedent to allow equitable defenses in federal securities fraud cases.
By contrast, Arizona statutory securities laws define both the elements of proof and acceptable defenses. Some of the defenses specified include reasonable care, failure to tender, and a statute of limitations. Arizona securities statutes do not include equitable defenses.
What is an Equitable Defense?
An equitable defense can arise in many ways including ratification, estoppel, waiver, and so-called unclean hands by investors (i.e., the investor has done something improper). When the parties to a securities exchange enter into a contract and both engage in activities that could constitute a violation, one often brings a lawsuit against the other. If equitable defenses are permitted, the case can be simply closed because both were at fault. In such cases, rescission, or a return of pre-contract money, may be prevented. If one bought securities for X dollars, the receiver of the money could keep the investor’s funds because inequitable conduct occurred—if, for example, the investor waited too long to request the money back or helped the securities seller recruit other investors.
Two common equitable defenses are worth noting:
- Laches – When a victim to an alleged securities violation intentionally delays bringing suit, something is amiss. Often, the intent is to gain an unfair advantage by delaying, perhaps to see if a stock’s price rises or falls. If so, the defending party may launch an equitable defense if the courts allow it.
- Unclean hands – When someone seeks legal relief from the courts for fraud, they must themselves be free of fraud or other inequitable conduct. If not, they are said to have unclean hands and may be denied judicial relief.
Other equitable defenses include hardship on the seller caused by changed circumstances, unconscionable contracts, illegal contracts, mistakes, misrepresentations, undue influence, duress, waivers, and estoppel.
An Odd History of Equitable Defense in Arizona Courts
For the better part of 60 years, Arizona courts consistently refused to recognize equitable defenses in securities cases. As stated at the outset, Arizona Revised Statutes § 44-1991(A) and § 44-2001(A) do not include equitable defenses. So many consider it odd that in 2014, the Arizona Court of Appeals allowed equitable defenses.
In Caruthers v. Underhill, the court broke with previous Arizona case law and that in most other states. The reason this occurred had to do partly with the nature of the case and likely because of the court’s view of the plaintiff’s behavior. In Caruthers, the matter had to do with a couple who decided to sell their stock to someone within the company. According to the couple, the buyer misled them regarding the stock’s value, so they sought relief from the courts.
The statute provides that a contract is “voidable at the election of the seller of the securities” and says that “the seller may bring an action in a court.” In most securities cases, the buyer is the one bringing suit, so this case turned the tables. In this case, it was the sellers who claimed fraud. The sellers of the stock were seeking a return of their securities.
The appeals court ruled on the basis of a single word in the statute, “voidable.” The Court of Appeals stated that the word “voidable” meant that the contract could be voided and that this implicitly recognized equitable defenses.
In ruling as it did, the appeals court reversed and remanded for further consideration in the trial court. In making its ruling, the appeals court failed to account for the volumes of case law that reject equitable defenses in state securities cases seeking rescission. The ruling also fails to account for the early Arizona blue-sky rulings that rejected equitable defenses outright. The court further failed to adequately clarify the reasons for the ruling. Sound reasons are vital because the statutes were rewritten in 1951 because the common law and the statutes of the day failed to protect the public.
The appeals court relied on an assumption of logic surrounding a single word. In doing so, the court created a major change in Arizona securities law. Securities laws are technical and require careful analysis. This decision on equitable defenses adds to the complexity of Arizona securities law and makes Arizona an outlier in accepting equitable defenses.
If you think you are in breach of Arizona securities laws or affected by someone else’s breach, contact us today to schedule a consultation and see how we can help you.
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