Secondary Liability of Agents, Employees, Managers and Executive Officers Under State Securities Laws

Secondary Liability of Agents, Employees, Managers and Executive Officers Under State Securities Laws

Secondary Liability of Agents, Employees, Managers and Executive Officers Under State Securities Laws

The securities laws in most States, including States that have adopted the Uniform Securities Act (2002) (“USA”), provide for civil causes of action against the agents, employees, managers, and executive officers of primary violators of the securities laws. This type of liability is often referred to as secondary liability.

The Liability of Managers and Executive Officers

The USA states that a “managing partner, executive officer, or director” of a primary violator of the securities laws is  jointly and severally liable with the primary violator. “Most courts, taking the newer approach, have held employees in managerial positions, such as general managers, production managers, and plant managers, to be executive officers even if they were not corporate officers.” See 1 ALR 5th 132, Who is an Executive Officer Within Meaning of Liability Insurance Policy; accord Black’s Law Dictionary (10th Ed, 2014) (“A general manager usu. is equivalent to a president or chief executive officer of a corporation.”).

The Liability of Employees, Agents, and Associates

To establish the secondary liability of an employee, agent, or associate under most States’ securities laws, a plaintiff must show that the employee, agent, or associate “materially aided” the primary securities law violation. A wide range of activity may suffice to show material aid. See, e.g., Michelson, 254 Mich App at 698 (trustee who administered various aspects of viatical investments, primarily by serving as escrow agent, materially aided sale of unregistered securities); McGaha v Mosley, 283 SC 268,  275 (1984) (a person may materially aid an unlawful sale without making any “offending statements”; the mere presence of a participating investor at a sales meeting was sufficient to establish material aid where such presence induced investor confidence); Connecticut Nat’l Bank v Giacomi, 242 Conn 17; 699 A2d 101, 118 (1997) (employees of bank provided material assistance to the fraudulent conduct of a seller of securities when they met with the purchasers of the securities, endorsed the seller, and expressed confidence in the investment); Young v Kwock, 474 P2d 285, 287 (Haw 1970) (rejecting argument that term “aids” means inducing the purchaser to buy and instead holding that aiding and abetting liability extends “not merely the salesmen who induced the purchase but [to] all officers, directors and agents who in any way contributed to the disposition of the securities[.]”); Foster v Jesup & Lamont Sec Co, 482 So 2d 1201, 1206-08 (Ala 1986) (despite fact that investor had no contact with best-efforts underwriter and despite fact that underwriter had already withdrawn from involvement in the investment offering at the time of the investment, the underwriter was found to have materially aided the sale because underwriter was identified in offering documents).