Civil Liability in Securities Cases

Corporations Code Title 4, Division 1, Part 6, Chapter 1 deals with civil liability in the enforcement of the Corporate Securities Law of 1968.

Section 25500 provides that any person who willfully participates in any act or transaction is liable to any other person who purchases or sells any security at a price which was affected by the act or transaction for the damages sustained by the latter as a result of the act or transaction.

Section 25501 makes any person who violates specified laws liable to the person who purchases a security from, or sells a security to, that person, who may sue either for rescission or for damages (if the plaintiff or the defendant, as the case may be, no longer owns the security), unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission or that the defendant exercised reasonable care and did not know (or if the defendant had exercised reasonable care, would not have known) of the untruth or omission.

Upon rescission, a purchaser may recover the consideration paid for the security, plus interest at the legal rate, less the amount of any income received on the security, upon tender of the security. Upon rescission, a seller may recover the security, upon tender of the consideration paid for the security plus interest at the legal rate, less the amount of any income received by the defendant on the security.

Section 25501.5 specifies that a person who purchases a security from or sells a security to a broker-dealer that is required to be licensed and has not, at the time of the sale or purchase, applied for and secured from the commissioner a certificate, that is in effect at the time of the sale or purchase authorizing that broker-dealer to act in that capacity, may bring an action for rescission of the sale or purchase or, if the plaintiff or the defendant no longer owns the security, for damages.

Damages recoverable under this section by a purchaser is an amount equal to the difference between the specified price and value. Damages recoverable under this section by a seller is an amount equal to the difference between the specified price and value. The court may award reasonable attorney’s fees and costs to a prevailing plaintiff under this section.

Section 25502 makes any person liable to the person who purchases a security from him or sells a security to him, for damages equal to the difference between the price at which the security was purchased or sold and the market value which the security would have had at the time of the purchase or sale under specified circumstances.

Section 25502.5 provides that any person other than the issuer who violates the law is liable to the issuer of the security purchased or sold for damages in an amount up to three times the difference between the price at which the security was purchased or sold and the market value which the security would have had at the time of the purchase or sale if the information known to the defendant had been publicly disseminated.

The amounts recoverable under this section by the issuer is reduced by any amount paid by the defendant in a proceeding brought by the SEC with respect to the same transaction or transactions under the federal Insider Trading Sanctions Act of 1984 or any other act regardless of whether the amount was paid pursuant to a judgment or settlement or paid before or after the filing of an action by the plaintiff against the defendant.

Section 25503 provides that any person who violates specified laws, or a condition of qualification, or an order suspending trading, is liable to any person acquiring from them the security sold in violation of that section, who may sue to recover the consideration they paid for that security with interest at the legal rate, and reasonable attorney’s fees.

Damages, if the consideration given for the security is not capable of being returned, are  equal to the value of that consideration plus interest at the legal rate from the date of purchase, provided the security is tendered, plus reasonable attorney’s fees.

Section 25504 states that every person who directly or indirectly controls a person, every partner in a firm so liable, every principal executive officer or director of a corporation so liable, are also liable jointly and severally with and to the same extent as such person.

Section 25504.1 specifies that any person who materially assists in any violation of of specified laws, with intent to deceive or defraud, is jointly and severally liable with any other person liable under this chapter for such violation.

Section 25504.2 provides that any accountant, engineer, appraiser, or other person whose profession gives authority to a statement made by that person, who pursuant to rule of the commissioner has given written consent to be and has been named in any prospectus or offering circular distributed in connection with the offer or sale of securities as having prepared or certified in such capacity either any part of such document or any written report or valuation which is distributed with or referred to in any document is jointly and severally liable with any other person liable if two specified conditions are met.

Section 25505 provides that a corporation which is liable under this chapter must have a right of indemnification against any of its principal executive officers, directors, and controlling persons whose willful violation of any provision of this law gave rise to such liability.

Section 25506 states that no action can be maintained to enforce any liability created under specified sections insofar as they related to those sections unless brought before the expiration of five years after the act or transaction constituting the violation or the expiration of two years after the discovery by the plaintiff of the facts constituting the violation, whichever first expires.

Section 25506.1 prohibits any action from being maintained to enforce any liability unless brought within one year after the discovery of the facts constituting the violation, or after discovery should have been made by the exercise of reasonable diligence.

Section 25507 prohibits any action from being maintained to enforce any liability unless brought before the expiration of two years after the violation upon which it is based or the expiration of one year after the discovery by the plaintiff of the facts constituting the violation, whichever first expires.

No buyer may commence an action if, before suit is commenced, the buyer has received a written offer approved as to form by the commissioner stating the respect in which liability under the section may have arisen, offering to repurchase the security for a cash price payable upon delivery of the security or offering to pay the buyer an amount in cash equal in either case to the amount recoverable by the buyer.

Section 25508 prohibits an action from being maintained to enforce any right of indemnification or contribution, unless brought before the expiration of one year after final judgment based upon the liability for which the right of indemnification or contribution exists.

Section 25508.5 states that, in addition to the other rights provided for under this division, a person who purchases a viatical or life settlement contract or a fractionalized or pooled interest therein may rescind or cancel the purchase for any reason, generally within seven days.

Section 25509 specifies that every cause of action under this chapter survives the death of any person who might have been a plaintiff or defendant.

Section 25510 states that no civil liability in favor of any private party arises against any person by implication from or as a result of the violation of any provision of this law or any rule or order hereunder.