OTLA Trial Lawyer Spring 2021

19 Trial Lawyer • Spring 2021 See Securities Law p 20 Seller liability The first defendant most investors think of when they’ve been fleeced is the person who sold them the securities at issue. That makes sense, as this person is usually the head of the scheme (Ponzi in a typical Ponzi scheme, for example, or Kniss in the case of Iris Capital). How- ever, the seller is rarely the best target of a civil suit. They have usually squandered all their ill-gotten gains before they are found out, encumbered their assets with third-party loans, or otherwise rendered themselves judgment-proof or its practi- cal equivalent (as was the case with Kniss). Nonetheless, if the seller is worth go- ing after, then Oregon law is better than federal law in multiple respects. Among other things, Oregon law defines a “seller” more broadly than federal law (to include those who solicit sales), it gives investors greater ability to challenge the seller’s false projections of future eco- nomic performance and allows the inves- tor to recover attorney fees (on top of getting money back with interest). Secondary participant liability Who is the best target for a securities claim? Secondary participants: the at- torneys who prepare the seller’s offering documents, the accountants who prepare the seller’s tax returns, the commercial bankers who lend the seller money, and others who help the seller get their invest- ment scheme up and running, and who help keep it afloat often even long after the “storm warnings” have given way to a full hurricane of securities law viola- tions. Under Oregon law, “[e]very person who…participates or materially aids in the sale [of a security] is also liable jointly and severally with and to the same extent as the seller.” ORS 59.115(3). This is significant because these profes- sionals often have significant insurance policies and other assets that can make investors whole. Moreover, while a secondary participant can be exonerated by a showing that they “did not know, and, in the exercise of reasonable care, could not have known” about the seller’s misconduct, the participant bears the burden of proving it. The investor does not need to prove the opposite (the par- ticipant’s knowledge). Id. This secondary liability provision alone makes Oregon law far more inves- tor-friendly than federal law and the law of many states. Those states either have no private right of action against second- ary participants, or, if they do, they require that the plaintiff prove the par- ticipant knew of the seller’s misconduct or that the participant was a manager or employee of the seller. But even com- pared to those few states that do have statutory provisions similar to Oregon’s, Oregon’s case law has taken secondary liability further than anywhere else, by broadly defining what constitutes “par- ticipation” and “material aid.” Where other jurisdictions have defined those terms not to include routine services provided by lawyers, accountants and other professionals, Oregon has held that the professional judgment exercised by such actors is exactly why they are liable. Prince v. Brydon , 307 Or 146, 149-51 (1988) (“[I]t is a drafter’s knowledge, judgment, and assertions reflected in the contents of the documents that are ‘ma- terial’ to the sale.”). Oregon’s legislative policy choice makes sense for many reasons, not least of which is because it reflects the reality of how these schemes operate. The seller hires the professionals to do the due diligence and passes that cost onto inves- tors. Having effectively paid for the professionals’ services, investors ought to be able to hold the professionals to ac- count. Moreover, these professionals give credibility to the seller’s solicitations, create an illusion of financial strength and enable the seller to continue selling securities illegally to investors. Indeed, even if a participant eventually ceases