Fines, Penalties and Liabilities for Violating Arizona Securities Law


Fines, Penalties and Liabilities for Violating Arizona Securities Laws

Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.
The purpose of this article is to analyze: (1) the administrative penalties and restitution orders possible in an action by the Arizona Corporation Commission (the “Commission”) for violating the state’s securities laws; (2) criminal penalties for violation of Arizona’s securities laws; and (3) civil liability that can be imposed for violation of Arizona’s securities laws.

The Arizona Securities Act (the “Act”) is codified at A.R.S. § 44-1801, et seq. The Commission has also promulgated rules related to the Act. Arizona’s securities laws are far-reaching and unique; “they do not track the laws of any state or federal statutory scheme . . . [and] [t]he growth of Arizona’s laws has been distinct to this state.” Richard G. Himelrick, Arizona Securities Fraud Liability: Statutory and Common-Law Remedies 1 (2003 ed.)(hereinafter “Himelrick”). Therefore, it is imperative that individuals in the securities industry both in and outside of Arizona familiarize themselves with the nuances of Arizona’s securities law framework to avoid the consequences discussed below.

I. Restitution and Penalties in Commission Actions.

A.R.S. § 44-2032 expressly provides the Commission with the power to order that restitution be made for violations of Arizona’s securities laws:

If it appears to the commission, either on complaint or otherwise, that any person has engaged in, is engaging in or is about to engage in any act, practice or transaction that constitutes a violation of [Arizona’s securities laws], or any rule or order of the commission under this chapter, the commission may, in its discretion, issue an order directing such person to cease and desist from engaging in the act, practice or transaction, or doing any other act in furtherance of the act, practice or transaction, and to take appropriate affirmative action within a reasonable period of time, as prescribed by the commission, to correct the conditions resulting from the act, practice or transaction including, without limitation, a requirement to provide restitution as prescribed by the rules of the commission.

The amount of restitution will be determined by adding the “[c]ash equal to the fair market value of the consideration paid, determined as of the date such payment was originally paid by the buyer,” with the “[i]nterest at a rate pursuant to A.R.S. § 44-1201 [currently 10%] for the period from the date of the purchase payment to the date of repayment,” and subtracting out the “[t]he amount of any principal, interest, or other distributions received on the security for the period from the date of purchase payment to the date of repayment.”

The Commission can also issue a rescission order, compelling a violator to repurchase securities for an amount equal to “[c]ash equal to the fair market value of the consideration paid, determined as of the date such payment was originally paid by the buyer,” plus “[i]nterest at a rate pursuant to A.R.S. § 44-1201 [currently 10%] for the period from the date of the purchase payment to the date of repayment,” less the “[t]he amount of any principal, interest, or other distributions received on the security for the period from the date of purchase payment to the date of repayment.” Id. at Section B(1).

If a violator does not have the cash to make restitution or to repurchase the securities, the Commission can require the violator to offer “other identified assets in lieu of cash” to investors. Id. at Section B(6), C(5).

If a cease and desist or restitution/rescission order is not complied with, the Commission can:

(1) Apply to the Maricopa County Superior Court to have an order to show cause issued, and if the Court finds the Commission’s order has been violated, the Court can: (1) hold the violator in contempt and impose a civil penalty of up to $20,000 per violation; (2) award costs and attorneys’ fees to the Commission;

(2) Apply to the Maricopa County Superior Court or any federal court have an injunction ordered, and upon the Commission’s showing of a violation, have a temporary restraining order, preliminary injunction or permanent injunction granted without bond;

(3) Apply to the Maricopa County Superior Court or any federal court to have an order entered “restoring to any person in interest any monies or property, real or personal, that may have been acquired or transferred” in connection with a violation of Arizona’s securities laws;

(4) Petition the Maricopa County Superior Court, or have the Attorney General petition, for the appointment of a conservator or a receiver to take control over the affairs of the violator; or

(5) Turn over evidence to a County Attorney, Attorney General, or United States Attorney who may institute criminal proceedings.

Id.; see also A.R.S. § 44-2011 through -2017.

Additionally, the Commission can assess an administrative penalty of up to $5,000.00 for each violation of the Act pursuant to A.R.S. § 44-2036(A). The proceeds from the assessment of administrative penalties are deposited into the state’s general fund. A.R.S. § 44-2036(B).

Certified copies of any order of the Commission for restitution, rescission or administrative penalties can be filed with the Clerk of the Superior Court of any county in Arizona. A.R.S. § 44-2036(C). “A commission order so filed has the same effect as a judgment of the superior court and may be recorded, enforced or satisfied in like manner.” Id. (emphasis added).

II. Civil Liability and Penalties.

The Act also provides a private cause of action for individual investors to sue in civil court for the damages they suffered as a result of violations of the Act. See also A.R.S. § 44-2005 (“Nothing in this article shall limit any statutory or common law right of any person in any court for any act involved in the sale of securities.”). The primary civil liability statute is A.R.S. § 44-2001:

A. A sale or contract for sale of any securities to any purchaser in violation of section 44-1841 [sale of unregistered securities] or 44-1842 [transactions by unregistered dealers or salesman] or article 13 [anti-fraud provisions] of this chapter is voidable at the election of the purchaser, and the purchaser may bring an action in a court of competent jurisdiction to recover the consideration paid for the securities, with interest, taxable court costs and reasonable attorney fees, less the amount of any income received by dividend or otherwise from ownership of the securities, on tender of the securities purchased or the contract made, or for damages if the purchaser no longer owns the securities.

B. A person against whom an action for violation of section 44-1991 is brought is not liable under subsection A of this section if the person sustains the burden of proof that the person did not know and in the exercise of reasonable care could not have known of the untrue statement or misleading omission.

In addition to the aforementioned remedies, punitive damages are also available, as are lost profits. See Himelrick at 32-33. The seller of securities who has been damaged by violations of the Act can also bring a civil action. See A.R.S. § 44-2002.

Pursuant to A.R.S. § 44-1999, “controlling persons” are liable for violations of the Act made by those under their control:

A. Every person who, by or through stock ownership, agency or otherwise or who pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency or otherwise controls any person liable under this article, other than section 44-1991 or 44-1992, is liable jointly and severally with and to the same extent as the controlled person to any person to whom the controlled person is liable, unless the controlling person had no knowledge of or reasonable grounds to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.

B. Every person who, directly or indirectly, controls any person liable for a violation of section 44-1991 or 44-1992 is liable jointly and severally with and to the same extent as the controlled person to any person to whom the controlled person is liable unless the controlling person acted in good faith and did not directly or indirectly induce the act underlying the action.

Additionally, the provision of the Act that not only gives rise to joint and several liability, but also to broad liability for anyone involved in a violation of the Act is A.R.S. § 44-2003(A):

Subject to the provisions of this section, an action brought under section 44-2001, 44-2002 or 44-2032 may be brought against such person, including any dealer, salesman or agent, who made, participated in or induced the unlawful sale or purchase, and such persons shall be jointly and severally liable to the person who is entitled to maintain such action. No person shall be deemed to have participated in any sale or purchase solely by reason of having acted in the ordinary course of that person’s professional capacity in connection with that sale or purchase.

Further, if violations of the Act are found by a civil court, civil penalties of up to $5,000.00 for each violation of the Act or Commission rule or order can be imposed. A.R.S. §44-2037 (A),(B). If, however, administrative penalties under § 44-2036 have previously been paid, “the court shall reduce the civil penalty by the amount of the administrative penalty paid.” Id. at Section C. If a violation of a court order imposing a civil penalty is found, “in addition to any other penalty or remedy for contempt of court, [the violator] shall pay to [the state] a civil penalty of not more than twenty thousand dollars for each violation as the court deems just and proper.” Id. at Section D.

Finally, the Commission or Attorney General who brings a civil action for violations of the Arizona Securities Act is entitled to recover its costs, including attorneys’ fees and investigative expenses. See A.R.S. § 44-2038.

III. Criminal Liability.

In addition to the administrative and civil remedies available to individuals and to the state of Arizona as described above, violations of the Act can also lead to criminal liability. Like the Commission, a criminal court can also order restitution for economic loss. A.R.S. § 13-804.

Violations of A.R.S. § 44-1841 (sale of unregistered securities), § 44-1842 (transactions by unregistered dealers and salesmen), are considered class 4 felonies. A class 4 felony carries a penalty of a minimum of 1.5 years imprisonment and/or a fine of no more than $150,000.00. See A.R.S. § 13-702(D), § 13-801(A). This minimum term of imprisonment is for first-time offenders; sentences for repetitive offenders carry higher minimum periods of imprisonment. See A.R.S. § 13-703(H).

Violations of the Act’s anti-fraud provisions, codified at A.R.S. §§ 44-1991 to -2000, are also considered class 4 felonies. A.R.S. § 44-1995.

A.R.S. § 44-2040 is a catch-all statute creating criminal liability for all other violations of the Act, stating that a “person who knowingly violates any provision of this chapter or any rule, regulation or order of the commission thereunder for which a penalty is not provided is guilty of a class 1 misdemeanor.” A class 1 misdemeanor in Arizona carries a penalty of a maximum of six months imprisonment, see A.R.S. §13-707(A)(1), and/or a fine of up to $2,500.00. See A.R.S. § 13-802(A).

Conclusion. IIf you have questions regarding a possible violation of Arizona’s securities laws, or if you have been named in a regulatory action brought by the Arizona Corporation Commission, Securities Division, we would be happy to discuss your current circumstances with you. To arrange for a consultation concerning your legal matter, please contact Robert Mitchell at rdm@tblaw.com, or at (602) 452-2730.
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