Series 66

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.


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