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What You Need to Know About Securities Fraud in Arizona

Richard G. Himelrick,  |  September 7, 2017

When handling an Arizona securities fraud case, research often starts with the common law. This is a mistake for two reasons: 1) Arizona has statutes that specifically determine liability in a securities case, and 2) the common law is malleable, whereas statutory law is more permanent, being created only after in-depth consideration. A full analysis of securities law demands understanding the text of the law, legislative notes and history, its purpose, and both administrative and judicial interpretations. To illustrate, consider scienter.

Securities Fraud and Scienter

Scienter means intent to defraud. Intent is required in every case of fraud. The Securities and Exchange Commission (SEC) Rule 10b-5 offers three instances wherein intent is assumed, though not specifically stated. For instance, subsection 3 of the rule states that no one may run a “business which operates…as a fraud.” This statement assumes intent, but only discusses the outcome of such a business. An assumption is not always fact. The Arizona statute (A.R.S. § 44-1991(A)(3)) largely mirrors the SEC rule meaning that again, the statute contains only the assumption of intent.

For proper clarification of the securities fraud rules, the courts consider legislative statements and interpretations such as that provided by the Arizona Corporation Commission (ACC). One key element in the Arizona statute is protection of the public. Grand v. Nacchio, Eastern Vanguard Forex, Ltd. v. Arizona Corp. Commission, and Siporin v. Carrington show that the courts consistently look to this element in cases of securities fraud. Grand showed that intent plays a key role in how the court will interpret that element — Grand approved using substitute shares for the tender required for rescission, a remedy the Court of Appeals agreed furthered the public interest.

So the best place to start preparing for a securities fraud case is the statutes themselves combined with legislative notes. Notes are especially important when the law is less than specific. This is well-illustrated in five areas not directly addressed by Arizona’s fraud statutes, which are described next.

Unauthorized Trading

Unauthorized trading occurs when a broker buys or sells securities for a client without consent. Although the Arizona statutes do not specifically mention unauthorized trading, the ACC and courts have consistently held that the practice is within the purpose of the law. A.R.S. § 44-1991(A)(3) refers to a “transaction” or “practice” which results in defrauding a customer as a violation. Certainly, an unauthorized trade is such a transaction or practice and as such, it becomes a securities fraud. This was partially discussed in Washington National Corp. v. Thomas (1977).

Reliance

When a broker misrepresents an investment to an investor, there is usually a clear case of reliance. Most common-law cases require reliance as an element of proof. Yet not all investment transactions occur directly through a broker; some are handled through portfolio arrangements such as occurred with Enron. In such cases, the element of reliance will be missing. Because the Arizona statutes do not address this element, the courts have held that reliance is not a required element in fraud cases. A good example of this can be found in Aaron v. Fromkin (2000).

Contributory Fault by Investors

Recognizing that investors may contribute in some way to their own defrauding, the Arizona legislature passed the Private Securities Litigation Reform Act of 1995 (PSLRA). The purpose of the act is to ensure that brokers take a proactive position to protect investors, but if the broker can prove the investor acted in a way that caused the harm, PSLRA provides a complex formula for calculating shared liability.

Participant Liability

Section 44-2003(A) of the Arizona Securities Act recognizes that there can be other participants to a fraud not directly involved in the act of buying and selling. Participant liability advances public protection by providing that anyone who knowingly or recklessly participates in, or induces a sale through misleading information is culpable. In that way, not only direct sellers but persons who participate in, encourage, or induce a fraudulent sale are subject to liability.

Non-statutory Defenses

Some attorneys have attempted to apply nonstatutory defenses permitted under SEC Rule 10b-5 in Arizona securities-fraud cases. But Arizona’s Securities Act specifies the defenses that may be used. These are:

  • Statute of limitations of two-years
  • Loss causation (sections 44-1991(B) and 44-2082(E))
  • Proportionate fault if no intentional or reckless behavior occurred
  • Reasonable care as determined under section 44-1991(A)
  • Good faith by control persons
  • Non-inducement by control persons
  • The duty to tender before receiving damages

Common Law v. Codified Law: Pay Attention to Arizona Statutes and Legislative Notes for a Successful Defense

If a defense is to be successful in an Arizona securities-fraud case, reliance on common law and federal rulings must be considered in light of statutes and legislative notes. While federal securities law was developed using a common-law approach, Arizona statutes were enacted with the public interest in mind. This means that securities cases in Arizona are statutory cases and must be treated as such.

For more reading on Arizona securities law, download “The Importance of Statutory Text: From Scienter to Nonstatutory Defenses Under Arizona Securities Law,” by Tiffany & Bosco attorney Richard G. Himelrick, first published by Arizona State Law Journal, Volume 41, Issue 49.

Richard G. Himelrick is an attorney whose practice concentrates on securities litigation and civil and commercial litigation.

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