Civil liabilities arise when a violation of the USA has occurred and the person harmed wishes to sue in order to recover any losses incurred.
All securities professionals are liable for civil actions if the USA is violated. Purchasers of securities (where there is an infraction of the USA) can sue for recovery of losses.
There are several instances in which a client may sue:
- A direct violation of the USA occurred, where a securities transaction ensued.
- An agent, broker-dealer or investment adviser sold securities in violation of a direct rule of the Administrator.
- Securities were sold by an unregistered person.
- Misleading statements or omitted facts led to the sale of a security.
- The securities sold were misrepresented - as either approved (as recommended) by the Administrator or another governing body; or misrepresented as being listed on an exchange (or to be listed), when, in fact, the information was false.
- There was a violation of the state's sales literature requirements.
If a violation occurs, a purchaser can then sue for damages. There is a simple formula relating to recovery:
Purchasers can sue for:
Reasonable attorney fees and other costs
+ The purchase price of the securities
- Any income (e.g., dividend or interest) received
Exam Tips and Tricks
If you look closely at the above formula, you will notice that we have created the acronym RITA as a mnemonic device. (Just imagine RITA is a little upset at her broker today and she is ready to sue!)
While civil penalties are no laughing matter, the humor should help you remember the damages formula for the test!
Bob's broker lied to him about a stock -- stating that the state Administrator had approved (and recommended) the stock for purchase. Bob's broker further contended that Bob should buy the stock and that, given the Administrator's listing endorsement, it was a sure thing. Consequently, Bob bought $1,000 of the stock. Three weeks after his investment, he received a dividend payment for $15, which he was extremely pleased with. Shortly thereafter, the company issued a negative press release that triggered a sharp sell-off where the stock's value was cut in half. Bob sold the stock for $500. Soon after, Bob decided to sue his broker - even though legal costs were going to run around $300. What can Bob potentially recover?
Reasonable attorney fees, and other costs $300
+ Interest $0
+ The purchase price of the securities $500*
- Any income (dividend, or interest) received $15
= Total potential award under the USA $785
*The original purchase price is $500 because Bob sold the investment, thereby recovering $500 (half) of his original investment.
Any investment advice in violation of the USA is also liable for civil penalties, so long as the advice was dispensed for a fee.
Those harmed by fraudulent investment advice can sue for:
+ Cost of the advice
+ Loss resulting from the advice (recovery of the investment)
+ Attorney fees (reasonable) and other costs (e.g., court costs)
+ Interest (at the state's legal rate)________________________
- Money (e.g., dividend or interest) received
= Total liability payment.
Exam Tips and Trcicks
In this case, remember the acronym CLAIM. If the investment advice received violated the USA, you\'re going to CLAIM your money back.
Statute of Limitations
Under the USA, the statute of limitations for civil actions is either:
- three years after the sale, or
- two years from discovery of the unlawful transaction.
If you've referred to the most recent version of the Uniform Securities Act (which was revised in 1995 by the NCCUSL, and recommended for enactment in all states in 2002), you may have noticed that the statute of limitations for civil actions is stated as being "the earlier of two years after discovery of the facts constituting the violation and five years after the violation", rather than two years after discovery of the facts and three. years after the sale.
Consequently, to date the NASAA has not yet adopted many of the items updated within this Act, and still closely follows most aspects of the Uniform Securities Act of 1956, (with NASAA amendments).
Therefore, when studying for your upcoming Series 63 exam, use the aforementioned "three years after the sale, or two years from discovery of the unlawful transaction" when determining the statute of limitations for civil actions under the USA.
The seller is always liable to the purchaser for any transaction that violates the provisions of the USA.
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