What is Securities Fraud in Arizona?

Richard Himelrick,  |  September 7, 2017

Securities fraud under Arizona’s statutes is much different than the federal statutes enforced by the Securities and Exchange Commission. One of the key differences is that whereas SEC Rule 10b-5 merely implies civil liability, A.R.S. § 44-1991 creates express liability for violations. Another key difference is that Arizona law leans more toward protecting investors and calls for a liberal approach when pursuing civil liability. Perhaps most striking is the fact that while impediments have increasingly developed within federal law to proving civil liability, Arizona law has moved in the opposite direction. This is clearly seen in the legislative origins of the Arizona Revised Statutes, title 44, section 1991, the legislative notes, and the statutory text as it relates to causation, reliance, state of mind (intent), secondary liability, and remedies.

Legislative Origins and Arizona’s Antifraud Rules

Securities fraud law in Arizona has developed both in conjunction with and independent of federal antifraud rules. The SEC’s federal rule 10b-5 dates to 1934 and lacks civil-liability enforcement, but section 101 was added to the Uniform Securities Act in 1956. Section 101 provided much needed remedial relief to the law. Arizona largely mirrored Rule 10b-5 when creating criminal liability for securities fraud in § 44-1991 in 1951.  But recognizing the need to also provide civil remedies to the statute, Arizona remedied the situation by adding sections 2001(A) and 2002(A) to title 44. These sections provide that anyone violated under the Arizona antifraud statutes “may bring an action in a court of competent jurisdiction to recover the consideration paid for the securities” plus interest and attorney fees, less any income received.

Over time, SEC Rule 10b-5 has been narrowed by U.S. Supreme Court rulings while Arizona’s securities statutes have been more liberally applied in accordance with the legislative intent. Taking a remedial view, Arizona legislative notes stress in section 20 of the 1951 Act that “the intent and purpose of this Act is for the protection of the public.” In addition, the stated purpose includes the preservation of sound business practices, suppressing securities fraud, and a liberal prosecution of those engaging in fraudulent securities practices.

Hence, while federal law provides relief for many securities violations, Arizona’s legislature has been more aggressive in combatting securities fraud.

Title 44, Section 1991 v. Federal SEC Rule 10b-5

This distinction between federal securities law and Arizona’s fraud statutes is no better seen than in the way the state handles reliance, causation, and scienter.

While reliance plays an important role in federal securities law, allowing liability to be limited, it plays no role under section 44-1991. Likewise, causation is not always required under Arizona Revised Statutes title 44, section 1991 and is not necessarily needed to prove civil liability. Scienter, or intent to defraud, is another area of sharp departure from federal securities fraud. As the Arizona Court of Appeals noted in Rosier v. First Fin. Capital Corp. (1994), the law holds that even an unintentional misstatement by a broker or other person who encourages a securities purchase is a violation of the statute.

Yet another advantage of Arizona law for fraud victims, is that victims need not prove that they relied on the fraudulent conduct.  All that must be proved is that a material misstatement or omission of fact occurred.  On the other hand, SEC Rule 10b-5 requires the victim to prove actual reliance on the misstatement or omission.

Clearly, then, Arizona’s securities-fraud statutes provide a stronger approach to protecting the public than federal law, but then, that is the intent of the law. Securities fraud in Arizona is serious and the law is clearly on the side of the victim.

The preceding is based on an extensive examination of Arizona securities fraud law by Richard G. Himelrick. For a more in-depth understanding of antifraud statutes in Arizona, download and read, “The Importance of Statutory Text” here. Contact Mr. Himelrick for more information about securities fraud.