The Civil Liability Scheme of The Securities Act

The civil liability scheme of the Securities Act draws on and always motifies the elements for securities fraud and equitable rescission.


The elements of securities fraud

Misrepresentation of material fact
The misrepresentation must be material. That is a reasonable person would attach importance to it in deciding whether to enter into the transaction. The legislation requires that the misrepresentation is affirmative and factual. However, failing to disclose material information is not actional unless the silent party has a fiduciary or similar relationship that triggers a duty to disclose.

Scienter
The maker of the misrepresentation must have been culpable. That is, he either knew or believed the facts were otherwise or lacked a reasonable basis for the representation. Under the Securities Act, incomplete or misleading half-truths were not actionable.

Reliance
The person who seek to recover must have actually and justifiably relied on the fraudulent misrepresentation.

Causation
The pecuniary loss of the person who seeks to recover must reasonably have been expected to result from the reliance. Not only must the misinformation have induced the transaction ("transaction causation"), but the misinformation must have related to the causation of the loss.

Damages
In general, recovery includes: (1)"out of pocket" damages, that is the defference between what the person who seeks to recover received in the transaction and the purchase price, (2) any consequential damages, and (3) punitive damages in flagrant cases.


The elements of equitable rescission

Material misrepresentation
One ground for rescission is a material misrepresentation of fact, one that a reasonable person would attach importance to in desiding whether to enter into the transaction. The culpability of the person making the misrepresentation need not to be proved if the misrepresentation is material.

Fraudulent misrepresentation
Another ground for rescission is a fraudulent misrepresentation of fact, one known to be fraud and to lack a factual basis. If the misrepresentation is fraudulent with scienter, its materially need not be proved.

Reliance
The person who seeks to rescind, whether the misrepresentation is innocent or fraudulent, must have relied actually and justifiably on the material and fraudulent misrepresentation.

Damages
Recovery in a rescission action seeks to put the plaintiff in a position as through the contract had never happened. If the objective of the contract can  be returned, rescinding the transaction is the remedy. If the objective of the contract is gone, such as when a purchaser has resold the goods, the remedy is rescissionary damages equal to all the losses arising out of the contract. Consequential and punitive damages are not available.