Civil Remedies Under the Florida Securities and Investor Protection Act
Chapter 517 of the Florida Statutes, titled the Florida Securities and Investor Protection Act, is a comprehensive statutory scheme designed to protect the public from fraudulent and deceptive practices in connection with the sale of securities.1 Section 5 17.301 of the act, known as the “antifraud” provision, describes the activities deemed unlawful. It declares that it shall be a violation of the provisions of the act to directly or indirectly engage in any device, scheme, artifice to defraud, misrepresentation, act or practice which operates as a fraud in connection with the purchase or sale of a security.2 The text of §517.301 is, for all intents and purposes, identical to Rule 10b-5 promulgated under the Federal Securities and Exchange Act of 1934.3
Sections 517.211 and 517.241(3) of the act set forth express civil remedies available to a party aggrieved by a violation of §517.301. The former provides that any person purchasing or selling a security in violation of §517.301, and every director, officer, partner, or agent for the purchaser or seller who personally participated or aided in the sale or purchase, is jointly and severally liable in an action for rescission if the plaintiff still owns the security, or for damages if the plaintiff has sold the security.4
Section 5 17.241(3) provides that “the same civil remedies provided by the laws of the United States for the purchasers or sellers of securities, under such laws, in interstate commerce extend also to purchasers or sellers of securities under this chapter.” The remedies available under these two provisions are cumulative.5
Because §517.301 tracks the language of Rule lOb-5, judges and lawyers generally assumed that the two provisions should be similarly construed and that the elements of a cause of action under both were identical. As a result, a party alleging a violation of §517.301 traditionally has been required to prove all of lOb-5’s elements: namely, a misrepresentation, omission or other fraudulent device in connection with the purchase or sale of securities; the materiality of the misrepresentation, omission or other device; justifiable reliance; proximate causation; and damages.6 In essence, it was simply taken for granted that §517.301 was a Rule lob-5 analogue, and in addressing issues in cases alleging a violation of §517.301, courts routinely looked to federal decisions interpreting Rule lOb-5;7 & #x2014; that is, until the Florida Supreme Court issued its decision in El. Hutton & Company v. Rousseff, 537 So.2d 978 (Fla. 1989), a case which will undoubtedly have a dramatic impact upon civil proceedings brought under the Florida act.
In Rousseff the Florida Supreme Court was asked to decide whether a §517.211 plaintiff must show that his loss (the decline in value of the investment) resulted directly 4rom the defendant’s conduct, as opposed to some other source such as independent market forces—in other words, whether proximate cause, or what is referred to as “loss causation,” is an element of a cause of action under §517.211.8 In resolving this narrow question, the Rousseff court looked to two federal statutes which regulate the sale of securities. The first was §12(2) of the Securities Act of 1933. The second was, not surprisingly, Rule lob-5 of the 1934 Exchange Act.9
Section 12(2) of the federal 1933 Act provides that any person who offers or sells a security by means of a prospectus or oral communication which includes an untrue statement of a material fact, or omits to state a material fact necessary to make statements not misleading under the circumstances, shall be liable to the person purchasing the security for the consideration paid plus interest, if the purchaser still owns the security, or for damages if he no longer owns the security. 15 U.S.C. §771 (2), Rule lOb-5, as previously mentioned, is virtually identical to §517.301. It provides that it shall be unlawful for any person, in connection with the purchase or sale of a security, to directly or indirectly: employ any device, scheme, or omission, artifice to defraud; make any untrue statement or omission of material fact; or engage in any act, practice, or course of business which operates or would operate as a fraud or deceit. Although both §12(2) and Rule lob-5 were enacted to redress securities fraud, their differences, some of which were highlighted by the Rousseff court, are extremely significant.
While §12(2) expressly imposes liability only upon “sellers”10 of a security, the implied right of action under Rule 10b-5 reaches “any person” who violates the provision. Rule lob-5 also reaches a far broader spectrum of conduct than does § 12(2). Specifically, §12(2) imposes liability only when a plaintiff can demonstrate a misrepresentation or omission of material fact. In contrast, Rule 10b-5 activities can be actionable even though they are not “precisely and technically sufficient to sustain a common law action for fraud and deceit.”11 All that is required is that the activity constitute a misleading or deceptive practice in what has been described as the “special Rule 10b-5 sense of the word fraud.”12 Rule 10b-5 is, therefore, much more expansive than § 12(2) with respect. to both the class of defendants within its reach and the scope of the conduct which is actionable.
On the other hand, while §U(2) may not be as far reaching as Rule lOb-5, when available it provides a plaintiff with a much easier burden of proof to carry. Unlike a Rule 10b-5 plaintiff, a party proceeding under §12(2) is not required to prove reliance or proximate cause (loss causation). In fact, because reliance and causation are not elements of a §12(2) claim, a plaintiff is not even required to show that he received the misleading prospectus used to market the securities.13 It is simply presumed that because of thei(wide dissemination, written statements issued in connection with the sale of securities determine the market price which, in the last analysis, motivates the particular purchase, notwithstanding whether the purchaser relied upon or even received the offending material.14 Additionally, § 12(2) does not require a showing of scienter as a prerequisite to recovery. Rather, §12(2) places upon a defendant who seeks to escape liability the burden of demonstrating that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.15 Section 12(2) is, therefore, somewhat of a strict liability statute, whereas Rule 10b-5 is generally patterned after the common law cause of action for fraud.
In Rousseff the defendant, E.F. Hutton, advanced the argument that, because §517.301 tracks Rule 10b-5, the elements required under Rule lOb-5, including loss causation, should apply equally to claims under the Florida act. The plaintiff, however, contended that §5l7.3O1 and 517.211, when read together, were similar to §12(2) which again does not require a showing of loss causation. The plaintiff, therefore, reasoned that loss causation should likewise not be a required element in a §517.211 claim.
In determining whether proof of loss causation should be required under §517.21 1, the Rousseff court highlighted the fact that Rule 10b-5 was wide ranging in the sense that it covered a broad spectrum of fraud and applied to any person who is deceitful in connection with the purchase or sale of a security. In the court’s opinion, proof of loss causation was deemed necessary in Rule 10b-5 cases in order to balance and fairly restrict liability under such a wide ranging statute. The Rousseff court then described the Florida statutes as “far more restrictive” than Rule 10b-5. In particular, the court opined that §517.211 applied to a far more narrow group of activities than does Rule lOb-5; that “buyer/seller privity is required”; and that the remedies afforded were restricted. The court also noted that §517.211. like § 12(2) of the 1933 Act, seemed to be patterned after the common law contract cause of action for rescission which requires only a showing of a misrepresentation of material fact on which the buyer justifiably relied. These various factors led the court to conclude that the effect of §517.211 is similar to that of § 12(2), and that §12(2) was in fact the federal law comparable to §517.211 and §517.301. The court thus answered the certified question in the negative, holding that loss causation is not an element of a cause of action under §517.211.
In the author’s opinion the Rousseff court was correct in concluding that loss causation is not required in a civil proceeding brought under §517.2l1 and 517.301. There is simply nothing in the statutes which imposes such a requirement. The court was also correct in analogizing the remedy provided in §517.211 to that contained within §12(2) of the federal 1933 Act. Each of these provisions reaches a narrow class of defendants, and neither is punitive in the sense that both contain an express and exclusive remedy of either rescission or rescissionary damages. Moreover, as the Rousseff court insightfully observed, the two sections resemble the common law cause of action for rescission which, like §12(2), also does not require a showing of scienter. To the contrary, in a common law rescission action, where the only consequence is to place the parties back in their precontract positions, even an innocent misrepresentation will provide a basis for relief.16 There is no reason why a plaintiff pursuing the rescissionary remedies under §517.211 should be put to any greater task. Nor is there any reason to require that a §517.211 plaintiff prove reliance, notwithstanding the fact that it is an element of a common law rescission action, Nothing in §517.211 suggests that reliance is an element of a claim brought under the statute, any more than the provision, in the words of the Rousseff court, mentions proof of loss causation. Furthermore, in securities cases the elements of reliance and causation are so integrally related that it would be pointless to require a showing of one without the other.
Finally, engrafting a scienter or reliance element onto §517.211 would, in the author’s opinion, run counter to both the Supreme Court’s admonition that the act be given a broad and liberal interpretation to effectuate its purpose of protecting the public, as well as to the legislative directive that the act extend to purchasers and sellers of securities the same remedies provided by the federal securities laws. A plaintiff proceeding under §517.211, therefore, should be required to prove nothing more than a plaintiff proceeding under §
12(2) of the 1933 Act, and the Rousseff court was correct in taking the first step toward that result by refusing to read into §517.211 an element of loss causation. Nevertheless, some of the statements made by the Rousseff court in reaching its conclusion are somewhat troubling, and although the holding in Rousseff expands the use of §517.211, if interpreted incorrectly, the case ironically could severely impair the act’s effectiveness.
For instance, in its opinion the court described the Florida statutes in general as “far more restrictive” than Rule 10b-5 and commented that §517.211 “applies to a far more narrow group of activities than does Rule 10b-5.” The court also noted that under §517.211 “buyer/seller privity is required.” While it is true that §517.211 imposes liability upon only a specific class of persons, it certainly does not require privity in the contractual sense. Rather, every director, officer, partner or agent17 of the purchaser or seller who personally participates in or aids in making the sale or purchase is jointly and severally liable to plaintiff. Additionally, §517.211 does not set forth the “group of activities” which are proscribed under the act; it merely provides certain remedies available to a person injured by a violation of §
517.3O1. The list of activities prohibited by §517.301 is, without question, as comprehensive as that contained in Rule 10b-5. It is, therefore, difficult to discern how the Rousseff court concluded that §517.211 applies to a far more narrow group of activities than does the federal rule.
Equally difficult to justify is the court’s blanket statement that the Florida statutes are far more restrictive than Rule 10b-5. While §517.211 itself may be more restrictive than Rule 10b-5 with respect to the scope of those within its reach, §517.241(3) of the act expressly provides that the same civil remedies provided by the laws of the United States to purchasers or sellers of securities in interstate commerce shall likewise extend to purchasers or sellers of securities under this chapter.18 The Florida Supreme Court has noted that the purpose of §517.241(3) is to grant Florida investors the full range of civil remedies offered by the federal securi
ties laws.19 As one commentator has observed, the section in effect is a “codification of federal law as an addition to state law,” which “insures that the state provision will always protect investors to the limit of federal development.”20 Consequently, any conduct deemed unlawful under the federal securities laws is unlawful under the Florida act.21 Likewise, a party who could incur liability for violating the federal securities laws, including Rule lOb-5, could be held equally accountable under the Florida act.
In the opinion of the author, the statements made by the Rousseff court should not be interpreted to mean that the Florida act (as opposed to §517.211 itself) is more restrictive than its federal counterparts, nor should the opinion be read to stand for the proposition that §517.211 provides the exclusive means by which a defrauded investor can seek relief for a violation of §517.301. Rather, in pursuing a claim based upon a violation of §517.301, a plaintiff should be permitted to proceed under §517.211, §517.241, or both. If the defendant is within the narrow class of persons described in §517.211, the plaintiff’s burden should be simply to show that the defendant purchased or sold a security in violation of §517.301, and that the plaintiff had no knowledge of the violation. The elements would be identical to a § 12(2) claim; the only exception being that, unlike §12(2), §517.211 does not provide the defendant with a so-called due diligence defense. If, however, the defendant is not within the reach of §517.211, there is no reason why the plaintiff should not be entitled to utilize §517.241(3) in pursuing a 10b-5 type claim in state court. A plaintiff asserting a 10b-5 type claim under §517.241(3) should be required to prove traditional 10b-5 elements, including scienter, reliance and loss causation. The road under §517.241(3), therefore, will be tougher to travel, as it should be since a §517.241(3) defendant will likely be a collateral participant in the transaction.22
Construing the provisions of the act in the manner suggested above is consistent with the long-standing principle that the act be given a broad and liberal interpretation to effectuate the purpose of protecting the public against fraud. It will also ensure that a person defrauded in connection with the sale of securities sold wholly within this state (i.e., a transaction not involving interstate commerce) will not be deprived of remedies that would have been available had the transaction involved interstate commerce and thus fallen within the purview of the federal securities laws. Finally, implementation of the approach suggested above will harmonize the federal and Florida securities laws which, as the Supreme Court of Florida has acknowledged, were designed to operate hand-in-glove.23
In contrast, if a defrauded investor’s sole remedy is to proceed under §517.211, the act will be reduced to nothing more than a codified common law rescission action available against only the small class of persons referenced in that particular provision. Others who are not a seller or purchaser of securities, or an officer, director or agent of the seller or purchaser, will be immune from liability under the act without regard to the extent of their participation in the transaction or, more importantly, their degree of culpability.24 Such a result would render the act an extremely limited tool in preventing securities fraud and would thwart its primary purpose. The effectiveness of the act also would be severely undermined if courts were to conclude that the conduct it prohibits is not as wideranging as that deemed unlawful under Rule 10b-5.
In conclusion, it is the author’s opinion that all causes of action and remedies available under the federal securities laws should be equally available under the Florida act. But, until and unless courts interpret the act in the manner suggested herein, practitioners would be prudent to bring Rule 10b-5 claims in federal district court against any defendant who does not clearly fall within the scope of §517.211.
1 Stottler Stagg & Associates, Inc. v. Argo, 403 So.2d 617 (FIa. 5th D.C.A. 1981); O’Neill v. State, 336 So.2d 669 (Fla. 4th D.C.A. 1976).
2 The statute, in pertinent part, reads as follows:
“(1) It is unlawful and a violation of the provisions of this chapter for a person:
“(a) In connection with the offer, sale or purchase of any investment or security, including any security exempted under the provisions of §
517.05l and including any security sold in a transaction exempted under the provisions of §517.061, directly or indirectly:
“1. To employ any device, scheme, or artifice to defraud;
“2. To obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
“3. To engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a person.”
3 Rule lOb-5, which was promulgated under 15 U.S.C. §78j(b), is contained at 17 C.F.R. §240.lOb-5.
STAT. §517.211. Under §517.211 the remedies of rescission and money damages are mutually exclusive. Fallani v. America Water Corp., 574 F.Supp. 81 (S.D. Fla. 1983). The provision also allows the prevailing party in a Suit to recover attorneys’ fees. See §517.211(6).
5 See Nichols v. Yandree, 151 Fla. 87,9 So.2d 157 (1942).
6 See, e.g., Alna Capital v. Wagner, 758 F.2d
562(11th Cir. 1985). The only difference between a Rule 10b-5 claim and a §517.301 claim was that, while a federal 10b-5 claim requires a showing of scienter (i.e., intent on the part of the defendant to deceive), under the Florida act mere negligence sufficed. See Alna Capital v. Wagner, 758 F.2d (11th Cir. 1985); Merrill Lynch, Pierce, Fenncr & Smith v. Byrne, 320 So.2d 436 (Fla. 3d D.C.A. 1975).
7 See, e.g., Whigham v. Muehl, 500 So.2d 1374 (Fla. 1st D.C.A. 1987). Interestingly, the court in Whigham allowed a Rule 10b-5 claim to proceed in state court despite the fact that exclusive jurisdiction to decide 1934 Act claims is vested in federal district courts. This fact apparently was never brought to the Whigham court’s attention.
8 Rousseff reached the court by way of the following question certified by the U.S. Court of Appcals for the
“In an action under the Florida Securities and Investor Protection Act, FLA. STAT . §~517.301,
is the claimant required to prove that his loss was proximately caused by the defendant’s fraud?”
9 The Securities Act of 1933 governs the initial issuance of securities. 15 U.S.C. S 77(a)-(bbbb) (1982). The 1934 Exchange Act governs subsequent trading.
10 In determining who constituted a statutory seller under § 12(2), courts initially developed the substantial factor test. Under this approach a party was a “seller” if his participation in the buy-sell transaction was a “substantial factor in causing the transaction to take place.” Pharo v. Smith 621 F.2d 656 (5th Cir. 1980). However, in Pinter v. Dahl, ___U.S.,
108 S. Ct. 2063 (1988), a case arising under 12(1) of the 1933 Act, the U.S.
Supreme Court rejected the substantial factor test and held that liability extends only to persons who successfully solicit the purchase, motivated at least in part by a desire to serve their own financial
-interests or those of the securities owner. The holding in Pinter has been extended to §12(2) cases and has, in effect, eliminated the ability of plaintiffs to bring §12(2) claims against collateral participants in an offering such as professionals retained by the issuer (i.e., lawyers and accountants).
11 Woodward v. Metro Bank of 522
F.2d 84 (5th Cir. 1975).
12 Messer v. E.F. Hutton, 833 F.2d 909 (11th Cir. 1987).
13 The courts have reasoned that such a requirement would introduce an element of reliance not contained within the Statute. See DeMarco v. Edens, 390 F.2d 836 (2d Cir. 1968).
14 Sanders v. Nuveen & Co., Inc., 619 F.2d 1222 (7th Cir. 1980).
15 This has been referred to as the so-called due diligence defense.
16 See, e.g., Robson Link & Co. v. Lecdy Wheeler R. Co., 18 So.2d 523 (Fla. l944).
17 Under Ch. 517 “agent” is a defined term which does not encompass any person who could be deemed a common law agent of the seller or purchaser. See §517.021(3). Thus, like §12(2), §517.211 operates to impose liability upon avery narrow class. See Pinter v. DahI, _U.S._, 108 S.Ct. 2063 (1988).
18 FLA. STAT. §517.241(3).
19 Oppenheimer & Co., Inc. v. Young, 456 So.2d 1175 (Fla. 1986).
20 Note, Action under State Law: Florida’s Blue Sky and Common Law Alternatives to Rule 10b-5 for Relief in Securities Fraud, XXXII, FLA. L. REV.
636, 654 n. 139 (1980).
21 In Community National Bank v. Vigman, 330 So.2d 211 (Fla. 3d D.C.A. 1976), the court suggested that Florida state courts do not have jurisdiction to adjudicate claims which allege conduct that would be violative of the Securities Exchange Act of 1934 (i.e., lOb.5); the apparent reasoning being that federal district courts have exclusive jurisdiction to hear 10b5 claims. See also Shearson Haydon Stone, Inc. v. Sather, 365 So.2d 187 (FIa. 3d D.C.A. 1978). Vigman involved allegations of “churning.” In the author’s opinion the court was clearly incorrect. The fact that federal courts have exclusive jurisdiction to decide Rule 10b-5 claims does not mean that conduct violative of Rule 10b-5 cannot form the basis for a claim brought under the Florida act. To the contrary, FLA. STAT. §517.301 prohibits the same conduct deenied unlawful under the federal rule. Thus, just as ‘churning’ constitutes a violation of Rule lOb-5, it constitutes a violation of §517.301. As a result, a party injured by “churning” should be permitted to proceed in federal court under Rule 10b-5 or in state court under §5l7.2ll or 517.241. They could also bring their state claims together with a Rule 10b-5 claim in federal court, as is commonly done.
22 If the defendant is the direct seller or purchaser of the security, or a director, officer or agent of the seller or purchaser who personally participates in the sale, the plaintiff will presumably proceed under §517.211.
23 Oppenheimer & Co., Inc., v. Young, 456 So.2d 1175 (Fla. 1986). In fact, the court went so far as to say that, in enacting the Florida act, it was the intent of the legislature to rely on federal laws in the enforcement of securities violations.
24 This is precisely what occurred in the recent case of Beltram v. Shackleford, Farrior, Stallings & Evans, 3 F.L.W. Fed. D51O (M.D. Fla. 1989), when the court, citing Rouseff, entered summary judgment on a claim alleging that the defendant law firm engaged in conduct violative of §517.301. The court simply concluded that the defendant was beyond the reach of the act because it was “not in privily with the plaintiff.”
Michael A. Hanzman is a shareholder in the Miami law firm of Floyd Pearson Richman Greer Weil Zack & Brumbaugh, P.A. He received his J.D. with honors from the University of Florida in 1985 where he was a member of Law Review and the moot court team. He practices commercial litigation with an emphasis on securities matters.