By way of background, the Securities and Exchange Commission has the power to bring civil lawsuits against defendants who allegedly violate US securities laws.
Section 17(a) is part of the Securities Act of 1933. You can find it codified at 15 USC Section 77q. The SEC has brought a number of high-profile Section 17 cases in the past few years. For example, the SEC sued Citigroup, Inc. pursuant to Section 17(a) following the 2008 financial crisis.
The relevant part of the statute states that it is illegal, in connection with any offer or sale of a security:
“(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.”
Here are two key points about Section 17(a):
1. Only the SEC – – (usually) not private investors – – can bring a Section 17 action. Courts (but there is some contrary case law) hold that private investors do not have a “private right of action” – – meaning they are not allowed to sue – – based on violations of Section17.
2. The SEC only has to prove negligence in a Section 17 case. Keep in mind that Section 10(b) and Rule 10b-5 of the US securities laws require proof that the defendant knowingly or recklessly made a false statement in connection with the offer, sale or purchase of a security. The SEC does not have to prove that a speaker knew or was reckless in not knowing that a statement was false in a case brought under Section 17(a)(2). The SEC need only prove that the defendant was negligent in making money from a false statement in connection with the offer or sale of securities.
