Striking Back Against Securities Fraud: Considerations in Choosing Your Legal Causes of Action
After Ponzi schemes gained national attention from the exposure of Bernie Madoff’s decades-long conspiracy, securities fraud has become a term that nearly everyone is familiar with today. Providing local flavor, Scott Rothstein’s investment fraud again brought the concern to the door-steps of Floridians. With the Internet providing an ever more critical “tool of the trade,” fraudulent conspiracies such as “pump-and-dump” schemes are a regular danger to Florida investors. While the fraudsters behind these schemes face criminal repercussions, the federal anti-fraud statutes, and often state equivalent “blue-sky laws,” provide independent civil causes of action available to victims. The Florida Securities and Investor Protection Act (“FSIPA”) is particularly noteworthy in our state, and understanding the distinctions between the causes of actions afforded under FSIPA and its federal counterparts is essential for victims as well as attorneys practicing in this area.
FSIPA employs broad language by assigning liability to nearly anyone involved in the subject fraud. In Sections 517.301 and 517.211 FSIPA provides that any person who participated in a fraudulent scheme or practice, or who obtained money or property by means of any untrue statement of material fact or omission, is jointly and severally liable in an action for rescission, allowing a purchaser to recover the full value paid for the security or investment at issue, interest, as well as attorneys’ fees and costs. Compared to its federal analogues found in Section 12(a)(2) (15 U.S. Code §77l(a)(2)) and 10b-5 (the promulgating rule of Section 10b of the Securities Exchange Act, at 17 C.F.R. 240.10b-5), FSIPA provides a cause of action with flexibility and often more attainable pleading requirements. While there are many elements of these causes of action to be aware of, we have found that there are three factors especially worth highlighting in comparing the claims: (1) who may the plaintiff bring an action against, (2) whether scienter is required, and (3) whether loss causation is required.
Looking to the first category, the most restrictive of the group is Section 12, which only allows an aggrieved purchaser to bring suit against the immediate seller of the security. To put it another way, privity is required. Although FSIPA also requires privity, Section 517.211(2) explicitly includes any agent who “personally participated or aided in making the sale.” Moreover, the breadth of conduct that constitutes a FSIPA violation entitling a purchaser to rescission is far greater than that afforded in Section 12(a)(2), which is explicitly limited to fraudulent communication by means of a prospectus or oral communication. On the other hand, 10b-5 remains the broadest of all, providing a cause of action against anyone committing fraudulent conduct “in connection with” a securities purchase or sale.
Turning to the second element listed above, scienter is another component to consider in evaluating your claim, which fundamentally begs the question of whether the defendant acted with the intent to deceive or defraud. Again, FSIPA does not provide the least restrictive option here, but this time the lowest threshold is found in Section 12(a)(2), not 10b-5. In order of restrictiveness, 10b-5 requires that a defendant acted with scienter, while FSIPA plaintiffs must satisfy the slightly more attainable requirement of scienter or reckless disregard. Finally, Section 12(a)(2) does not require scienter, and instead flips the burden of proving lack of knowledge and exercise of reasonable care to the defendant.
In the final category, FSIPA provides a clear advantage to Florida plaintiffs that is not afforded by either of the federal actions. Courts have held that a rescission action under Section 517.211 does not require any proof of loss causation, unlike the proof of loss causation expressly required by Section 12 and 10b-5. In laymen’s terms, this means that a rescission plaintiff is not required to plead or subsequently prove that the defendant’s violation actually caused the plaintiff’s injury. In fact, it has been noted that a plaintiff need not even allege that he has been damaged. Meanwhile, both Section 12 and 10b-5 require loss causation, greatly reducing the number of plaintiffs able to bring those claims.
With the above in mind, FSIPA provides an important cause of action for securities fraud that must be considered before filing such a suit in Florida. While there are certainly a great many factors to consider when comparing Section 12, 10b-5, and FSIPA, the differences highlighted above often steer victims toward certain causes of action and may prove critically important in foreseeing and avoiding a defendant’s arguments for dismissal.