I. Introduction Securities are an excellent way for any entity to generate revenue. The traditional security of a stock certificate costs little more than the expense of paper and printing to produce, yet can be sold for fantastic sums of money, especially when millions of certificates are made. The ease with which such devices can be abused prompted the Florida legislature to create various securities and investor protection statutes under chapter 517. This discussion addresses fraudulent transactions and the penalties associated with fraud; explanations on the methods of and rationale behind registrations or exemptions of securities and the pitfalls for failing to do so are beyond our scope. II. Penalties of Fraudulent Conduct The first thing to consider in contemplating any action that could verge on securities fraud is that the penalties for fraud are criminal with penalties beyond those remedies usually available to the plaintiff in a civil fraud case. The penalties are listed under Florida Statutes §517.302. The basic penalty for a securities fraud conviction is a third degree felony. If the aggregate amount gained through fraud exceeds $50,000 obtained from five or more people than this increases to a first degree felony. Instead of the fine normally associated with either of these felonies, a person convicted of fraud, or even having merely plead no contest, might be required to pay up to treble the gross amount gained through fraudulent action or up to treble the gross loss caused to victims. The gross amount of the fraud was chosen so that the expenses of perpetrating fraud would not be deducted from this total like the expense of a legitimate business. One of the few saving graces available to those who commit state securities fraud is that the act cannot form the basis of a class action filed under the Securities Litigation Uniform Standards Act. Riley v. Merill Lynch, Pierce, Fenner, & Smith, Inc., 168 F.Supp. 2d 1352 (M.D. Fla. 2001). Any monies gained from successful convictions are placed into an anti-fraud trust. The money in this trust is used exclusively to fund fraud awareness campaigns and to investigate and prosecute possible fraudulent abuses. The net effect of this trust is to make prosecutors hungrier for victory as money gained subsidizes future state action. III. Methods of Fraud The application of fraud in connection with securities is at times both broader than or more limited than the classic definition of fraud. A security constitutes an investment of money, in common enterprise with expectations for profit, derived solely from others efforts. Stottler Stagg and Associates, Inc. v. Argo, 403 So.2d 617 (Fla. 5th DCA 1981); Rudd v. State, 386 So.2d 1216 (Fla. 5th DCA 1980). Moreover, a potential plaintiff need not identify a particular security purchased. Grippo v. Perazzo, 375 F.3d 1218 (11th Cir. 2004). The only securities related activities exempted from the rules of fraudulent transactions under Florida Statutes §517.301 are investments consisting of commitments of money for purchases of businesses and real property from those licensed under chapter 475 or registered under chapter 498 and through what are effectively door to door sales. This exception only applies to sales of personal property to be delivered in 30 days or less, accompanied by a 10 day from date of delivery refund option, have representations of economic benefits to be gained in purchase, and are not conducted over the phone. Basically, this exempts a door to door encyclopedia sales and scout cookie sales. In practice, employing a scheme that obtains money for another entity with investment advice, sale, or purchase, even of securities exempted under §517.051 and §517.061, through deception is committing one or more acts of securities fraud. Similarly, employing false documents or assisting an activity by omitting information are all acts of fraud. Promoting the sale of a security or promoting the existence of a security are fraudulent acts if the promoter does not disclose all compensation the promoter has received or will receive in connection with the promotion. Ward v. Atlantic Sec. Bank, 777 So.2d 1144 (Fla. 3d DCA 2001). Additionally, the Florida statutes are similar to Federal 10b-5 rules so Florida courts will look to similar federal cases for guidance in how to best decide a case.
Key Cases - Securities Fraud
1. Riley v. Merill Lynch, Pierce, Fenner, & Smith, Inc., 168 F.Supp.2d 1352 (M.D. Fla. 2001). The court held that the 1998 Securities Litigation Uniform Standards Act (SLUSA) preempted a portion of the state law under which the investors' claims were based. Namely, SLUSA preempted state law to the extent that it provided for recovery for a "covered class action" through the state courts. The subject matter of the investors' suit had conflicted with the provisions of SLUSA prohibiting the pursuit of "covered class actions" in state or federal court. The investors' claims were brought pursuant to statutory law and alleged misrepresentations of material fact in connection with the purchases and sales of fund shares. Moreover, applying SLUSA to the investors' claims did not run contrary to the provisions of the Rules Enabling Act. The courts must conform their rules to the acts of Congress, not vice versa. Finally, the assertion that the fraudulent or deceptive promotion and sales of nationally traded securities was outside the reach of the commerce clause was without merit.
2. Stottler Stagg and Associates, Inc. v. Argo, 403 So.2d 617 (Fla. 5th DCA 1981).
The trial court held that the agreement was not enforceable because it was an investment contract and, therefore a security as defined by the Securities Act of 1933 (the Act).On appeal, the court held that appellee was not within the class of persons the statute and Act were designed to protect. Appellee was knowledgeable; he participated in all negotiations; it was he who first interested appellant in the overseas operation; and appellee's offer to participate was a motivating force in appellant's decision to enter the venture. Accordingly, the court reversed, and remanded for entry of judgment in favor of appellant.
3. Rudd v. State, 386 So.2d 1216 (Fla. 5th DCA 1980). The court reversed and remanded the judgment with directions to discharge defendant, holding that there was no sale of a security within the contemplation of the Sale of Securities Act. The court determined that the touchstone was the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Under the facts presented, the state failed to prove that the transaction was an investment and not a loan.
4. Ward v. Atlantic Sec. Bank, 777 So.2d 1144 (Fla. 3d DCA 2001). Appellant alleged common law fraud, securities fraud under the Florida Securities and Investor Protection Act, and breach of fiduciary duty claims. Appellant placed an oral order to sell his investment. Instead of making the sale, appellee called appellant and advised him appellee had a positive outlook on the investment. Appellant further alleged appellee had long had knowledge of significant negative information about the investment that pointed to it being in financial jeopardy, but neglected to inform appellant about what it knew. The trial court granted appellee's summary judgment motion on all three counts. Appellant challenged that holding. The court reversed and remanded the cause. Appellant showed evidence that raised genuine issues of material fact that appellee committed fraud, violated the state securities law, and that it breached a fiduciary duty it owed appellant.
5. Maliner v. Wachovia Bank, N.A., 2005 U.S. Dist. LEXIS 5985 (S.D. Fla. 2005). This case arose after investors lost more than $650,000 in their investment portfolio. The bank contended that the losses were due to an overall decline in the stock market and that it never guaranteed the investors any return on their investment. With respect to the securities fraud count, the court found that a genuine issue of material fact existed regarding whether the bank had a financial incentive to recommend higher risk equity funds over more conservative fixed income funds. Similarly, an issue of fact existed regarding whether the bank made material misrepresentations or omissions which were reasonable for the investors to rely on and whether the investors satisfied their obligation of due diligence. Finally, the court also found that a genuine issue of fact existed regarding whether the general decline of the stock market was an intervening cause of the portfolio losses. The court also held that the economic loss rule did not bar the common law claims because they fell within the exceptions to that rule. However, the court noted that to prevail the investors would have to show bad faith, gross negligence, or willful misconduct.
6. E.F. Hutton & Co. v. Rousseff, 537 So. 2d 978 (Fla. 1989). Claimant in securities action was not required to prove that loss was proximately caused by defendant's fraud because such requirement was not found in state statutes and was not required under federal law or under common law. Plaintiff buyer purchased shares in oil and gas venture. Plaintiff buyer was only given one of two projections and was unsatisfied with investment when gas well became productive. Plaintiff buyer sued the gas company and defendant trading company in a federal trial court under federal and state law. The gas company and general partner settled. The federal trial court entered judgment allowing rescission of the purchase. Defendant trading company appealed and the federal appellate court reversed as to federal and common law claims, finding that the federal trial court failed to submit to jury question of whether loss was proximately caused by fraud. The state claim was certified to the Florida supreme court, which held that proof of loss causation was not required since it is not mentioned in Fla. Stat.§§ 517.211 and 517.301 (1981), not required under 15 U.S.C. § 771, or under common law cause of action from which state and federal laws derived
7. Allen v. Oakbrook Secs. Corp., 763 So. 2d 1099 (Fla. 4th DCA 1999). The trial court had jurisdiction over blue sky claims, but sales of securities occurred in other states, and plaintiffs alleged violations of Florida statutes, so claims dismissed for failure to state cause of action.
8. Kashner Davidson Secs. Corp. v. Desrosiers, 689 So. 2d 1106 (Fla. 2d DCA 1997). Appellees filed a complaint against appellants for damages arising from securities fraud by misrepresentation based on a stock purchase appellees made through appellants, a securities corporation and others. The material misrepresentation set out in the complaint was that appellants told appellees they were unable to sell appellees' shares of a particular stock. Appellees claimed they relied on this misrepresentation by foregoing the opportunity of contacting another broker to sell the stock for them. The trial court found appellants liable for statutory securities fraud in contravention of Fla. Stat. ch. 517.301 (1987). The court reversed and held that the evidence at trial simply did not prove that appellants made the misrepresentation alleged, or that appellees in any way relied on the statements of appellants. Even assuming appellants' statements were misrepresentations, the court held that appellee husband, an experienced investor, should not have relied on the statements to his detriment.
9. Raymond James & Assoc., Inc. v. Wieneke, 556 So. 2d 800 (Fla. 2d DCA 1990). Arbitrators could not award attorney's fees to appellee customers because Florida law had taken the authority to award attorney's fees from arbitrators; thus, the trial court would assess fees when the case was confirmed.
10. Whigham v. Muehl, 500 So. 2d 1374 (Fla 1st DCA 1987). The wife to a member of a partnership was liable for securities fraud because she was a partner and as such was charged with knowledge of the partnership's affairs, and she aided in making a fraudulent sale in violation of state securities laws.
11. Weinberg v. Pennington, 462 So. 2d 862 (Fla. 3d DCA 1985).A judgment in favor of securities sellers was improper where the sale of securities to purchaser did not conform with the requirements for exemption from the registration requirement due to failure to provide full disclosure of material information.Because appellant was not provided information of the existence of a highly unfavorable report by an accounting firm concerning the corporation's financial status, the transaction was not entitled to the exemption from the registration requirement.