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. Retirement

    Why Saving Early for Retirement Will Pay off

    This story illustrates the benefits of starting to save for retirement sooner rather than later.
  2. Financial Advisor

    Series 66 Exam Prep: The Broker-Dealer

    Before you take the series 66, you need to understand civil liabilities.
  3. Financial Advisor

    Do You Dare Sue Your Broker?

    A financial damages claim is not for the fainthearted, but it may be worth it in the end.
  4. 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 ...
  5. Investing

    Bob Evans Serves Its Restaurants to Private Equity

    Country-style food purveyor Bob Evans Farms (NASDAQ: BOBE) announced Tuesday it was selling off its restaurant chain to private equity, but was also bolstering its packaged food division by ...
  6. Insights

    Duck These Illegal Sales Tactics Used By Brokers

    Many unscrupulous brokers employ illegal swindling tactics to sell bad securities. Here are sales strategies that should indicate red flags to investors.
  7. Trading

    Broker or Trader: Which Career is Right For You?

    A day in the life of a broker or trader is an exciting and varied one. Find out how to decide between these two financial professions.
  8. Financial Advisor

    The Awesome Power of Compounding

    Compounding may not be sexy, but it is the surest way to accumulate wealth over time.
  9. Investing

    Explaining Initial Margin

    Initial margin is the percentage of a stock’s price an investor must have in his account to buy that stock on margin.
  10. Financial Advisor

    Tips For Resolving Disputes With Your Financial Advisor

    Before you blame your advisor for your losses, be sure you know your rights and responsibilities.
Frequently Asked Questions
  1. What are Common Examples of Monopolistic Markets?

    Discover what causes real instances of market monopoly, how it persists and where monopoly privilege is most common in the ...
  2. What is the gold standard?

    The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold, but ...
  3. What's the most expensive stock of all time?

    The most expensive publicly traded stock of all time is Warren Buffett’s Berkshire Hathaway.
  4. What is a "socially responsible" mutual fund?

    As the name suggests, socially responsible mutual funds invest exclusively in socially responsible investments.
Trading Center