CHAPTER ONE: INTRODUCTION TO STATE AND FEDERAL SECURITIES LAWS

Because the securities laws are potentially applicable to any commercial transaction involving the purchase or sale of property or contract rights in which the purchaser relies upon others to handle the actual management of the investment, this area of law represents a significant and pervasive intrusion into the commercial market place. An understanding of the rules of the road required under both the state and the federal securities laws is, therefore, essential for any lawyer practicing in the commercial arena. During the last ten years I have spent a considerable amount of time researching the challenging issues which arise under the securities laws and have prepared three legal articles dealing with the subject matter. One of the articles was published by the Texas Bar Journal in 2003 (Ravkind, We New Wizards of Wall Street, 66 Tex.B.J. 120 (2003)), one was selected in 2004 for publication by The Houston Lawyer (Liability of Third Party Professionals: Federal v. State Securities Laws), and one was prepared for publication in one of the popular and highly regarded text books (A Practical Guide to the Texas Securities Act). As to the latter, the article was not ultimately included because it could not be sufficiently simplified. As to The Houston Lawyer, the article has not yet been published. I have added one additional article to this booklet dealing with the ever popular “fraud by proxy.”
What is amazing is the misunderstanding of the law reflected in court decisions. An example of this misunderstanding is the limitation of the term “seller” imposed in Frank v. Bear, Stearns & Co., Inc., 11 S.W. 3d 380, 393 (Tex.App. Hou. (14th) 2000, review denied). There the court restricted the term “seller” to those who were in privity with the purchaser, relying on a purported Comment to the 1977 amendments of the Texas Securities Act (TSA). That comment, however, was not part of the materials provided the legislature. Indeed, the actual Comment provided the legislature refers to federal law for interpretive guidance which at that time used proximate cause as the determinative factor. Bromberg pointed this out in 1978, but because the edition of the particular journal in which the article appeared was not made part the materials available on Lexis-Nexis or Westlaw it has been overlooked by both the courts and the lawyers. See Bromberg, Civil Liability Under Texas Securities Act ' 33 (1977) and Related Claims, 32 S.W. L. J. 867, 891 (1978). Another example is the division in the authorities over “control liability.” One line of cases requires the purported controlling person to actually participate in the wrongful conduct. See Tex. Cap. Mgmt, Inc. v. Sandefer, 80 S.W. 3d 260, 267 (Tex.App. Texarkana 2002, no petition). The other line imposes no such requirement. See Barnes v. SWS Finacial Services, Inc., 97 S.W. 3d 759 (Tex.App. -Dallas 2003, no petition). But, if federal law is an appropriate source for interpretation, both decisions are wrong. See Gonzalez v. Morgan Stanley Dean Witter, Inc., 2004 U.S. Dist. Lexis 26709 (W.D. Tex. 2004). As a last example, many courts have bungled the “material fact” required to support a finding of a “misrepresentation of material fact.” This error is predicated on certain federal cases that in this instance are inapplicable to the Texas definition. Federal law requires scienter to establish liability for a misrepresentations, while the Texas statute imposes no such requirement. Thus, including elements of foreseeablity and causation in the definition of “material fact” is plain error. This issue is discussed at length in A Practical Guide to the Texas Securities Act.