A recent article in the Wall Street Journal reported that “Securities and Exchange Commission [SEC] officials are trying to make it easier on themselves to hold more individuals responsible for wrongdoing during the financial crisis.”1 The Journal’s story focused on the availability of negligence-based charges that can be brought both against individuals and companies where the SEC cannot find evidence of intentional wrongdoing or is otherwise willing to settle a case based on negligence charges. This article will discuss the provisions of the securities laws, §§17(a)(2) and 17(a)(3) of the Securities Act, which can be used to charge negligently deceptive conduct relating to the sale of securities, as well as administrative proceedings under §21C of the Exchange Act that can also be used for negligently “causing” a substantive securities violation.

Section 17(a)

Section 17(a) of the Securities Act applies to various sorts of misleading statements or conduct in connection with the “offer or sale” of securities. It has three separate subsections.2 The first subsection, §17(a)(1), has generally been held to require proof of scienter comparable to that necessary for a violation of Rule 10b-5. However, it has long been held that the second and third subsections, §§17(a)(2) and 17(a)(3), can be satisfied by proof of negligence, rather than scienter as is necessary for fraud liability.3 While it is not unusual for an SEC complaint to allege a violation of subsection 17(a)(1) with scienter and then allege in the alternative merely negligent violations of §§17(a)(2) and (a)(3), there are recent cases in which no 17(a)(1) claim has been brought.

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