Remedies and Administrative Procedures - Other Penalties and Liabilities: Civil

Civil liabilities arise when a violation of the USA has occurred and the person harmed wishes to recover any losses incurred.

All securities professionals are liable for civil penalties if the USA is violated. Where there is an infraction of the USA, purchasers of securities can sue for recovery of losses.

When a client can sue:

  • A direct violation of the USA occurred, where a securities transaction ensued.
  • An agent, broker-dealer or investment advisor 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 either misrepresented as being approved (recommended) by the Administrator or another governing body, or misrepresented as being listed (or to be listed) on an exchange, 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. The formula relating to recovery is fairly simple. Purchasers can sue for:

Reasonable attorney fees, and other costs

+ Interest
+ The purchase price of the securities
- Any income (dividend or interest) received
= Damages


Exam Tips and Tricks
You will notice that this formula can be summed up by the acronym RITA. When you write the test, it may be helpful to think, "RITA\'s a little upset with her broker, and she\'s ready to sue!" Although civil penalties are no laughing matter in real life, the humor should help you remember the damages formula for the exam.


Example
Bob's broker lied to him about a stock, telling him the state Administrator had approved (and recommended) the stock for purchase. Bob's broker further suggested that Bob should buy the stock, since the Administrator's listing endorsement made it a sure thing. Consequently, Bob bought $1,000 of the stock. Three weeks after his investment, he received a dividend payment for $15, which pleased him greatly. Shortly after, the company released a negative press release. This triggered a sharp sell-off, and the stock's price was cut in half. Bob sold the stock to retain $500 of his initial investment. Soon after, Bob decided to sue his broker, even though the legal costs would be around $300. What can Bob sue his broker for?

Answer
Reasonable attorney fees, and other costs $300
+ Interest $0.00
+ The purchase price of the securities $500
- Any income (dividend, or interest) received $15.00
= Damages $775


*The original purchase price is $500 because Bob sold the investment - holding on to $500 (half) of his original investment.

Other Penalties and Liabilities: Investment Advice and Rescission


Related Articles
  1. Professionals

    Civil Liabilities

    FINRA/NASAA Series 63: Section 5 Civil Liabilities. In this section: several instances in which a client may sue and calculation for damages, investment advice and the statute of limitations.
  2. Professionals

    Other Penalties and Liabilities: Investment Advice and Rescission

    FINRA/NASAA Series 66 - Other Penalties and Liabilities: Investment Advice and Rescission. In this section rescission and penalties for investment advice in violation with USA.
  3. Investing Basics

    Calculating Capital Appreciation

    Capital appreciation is an increase in an investment’s market price.
  4. Professionals

    Criminal Penalties and Other Provisions

    FINRA/NASAA Series 63: Section 5 Criminal Penalties and Other Provisions. In this section criminal penalties, conviction, statute of limitations and other provisions.
  5. Forex

    How Currency Forward Contracts Work

    A currency forward contract locks the exchange rate for a currency’s purchase or sale at a future date.
  6. Professionals

    The Uniform Securities Act (USA) - Definition Part 1

    FINRA/NASAA Series 63 - The Uniform Securities Act (USA) - Definition Part 1. This section explains blue sky laws, the USA and related important definitions.
  7. Professionals

    Viatical Settlements and Definition of Sale

    FINRA/NASAA Series 63 - Viatical Settlements and Definition of Sale. In this section defines and explains "sale", transactions which are not considered a "sale" and viatical settlements.
  8. Investing

    Bill of Exchange

    A bill of exchange is a document used in international trade to pay for goods or services. It is signed by the person promising to pay, and given to the person entitled to receive the money. ...
  9. Investing

    What is Contingent Liability?

    A contingent liability is an amount that might have to be paid in the future, but there are still unresolved matters that make it only a possibility. Lawsuits and the threat of lawsuits are the ...
  10. Mutual Funds & ETFs

    How To Build A Bond Ladder?

    Bond laddering is a strategy used when building a portfolio: an investor can spread out interest rate risk and create a stream of cash flows for income.
RELATED TERMS
  1. Directional Trading

    Trading strategies based on the investor’s assessment of the ...
  2. Covenant Not To Sue

    A legal agreement in which the party seeking damages agrees not ...
  3. Selling Away

    When a broker solicits you to purchase securities not held or ...
  4. Third-Party Beneficiary

    An individual who can sue parties in a contract despite not being ...
  5. Self-Dealing

    A situation in which a fiduciary acts in his own best interest ...
  6. Civil Money Penalty - CMP

    A punitive fine imposed by a civil court on an entity that has ...
RELATED FAQS
  1. A sales representative or broker-dealer that violates the Uniform Securities Act ...

    The correct answer is a. The sales representative or broker-dealer is required to pay interest, court and attorney’s fees ... Read Answer >>
  2. What happens to the fines collected by the Securities and Exchange Commission?

    When the Securities and Exchange Commission (SEC) enforces a civil action against a corporation or an individual found guilty ... Read Answer >>
  3. Can your life insurance company sue you?

    Find out when life insurance companies have the right to recover claims. Learn about the most common reasons why a life insurance ... Read Answer >>
  4. The maximum fine that can be assessed for a violation of the USA is what amount?

    The maximum fine that can be assessed for a violation of the USA is what amount? a. $3,000b. $5, 000c. $10,000d. $20,000 The ... Read Answer >>
  5. Does a broker always have to buy a stock if I want to sell it?

    There are certain times when a broker must purchase the stock that you are selling. For example, if the broker is a market ... Read Answer >>
  6. Can you sue an insurance company for not paying a claim over a waiver of subrogation ...

    Learn more about insurance and why waivers of subrogation are common with property insurance. Find out about liability risk ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center