Grand v. Nacchio, et al. – 9/29/2009

October 20, 2009

Arizona Court of Appeals Division Two Holds That A Private Plaintiff Brining Claims for Secondary Liability Under the Arizona Securities Act Must First Establish Primary Liability Under A.R.S. § 44-2003(A).

Plaintiff filed a securities fraud action against Defendants, seeking to rescind its stock purchases pursuant to A.R.S. § 44-2001(A) of the Arizona Securities Act (the “Act”), under theories of direct and secondary liability.  Defendants separately moved to dismiss the complaint, and the trial court granted the motions but only as to the allegations regarding the purchase of shares outside the initial public offering (“IPO”).  Plaintiff ultimately agreed to dismiss with prejudice the remaining claims concerning the IPO shares.  Plaintiff timely appealed, alleging all three claims asserted in the complaint were sufficiently pled.

The Arizona Appeals Court affirmed the dismissal.  The Court first discussed Plaintiff’s claim of direct liability under A.R.S. §§ 44-1991(A), 44-2001(A), and 44-2003(A). Under § 44-1991(A)(3), it is a fraudulent practice to “engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit” in connection with the sale or purchase of securities.  Section 44-2001(A) allows a purchaser of securities injured by a violation of § 44-1991(A) to bring a private cause of action for rescission or damages.  Section 44-2003(A) identifies the individuals against whom an action pursuant to § 44-2001 may be brought, limiting such actions to persons who “made, participated in or induced the unlawful sale or purchase” of securities.  Plaintiff argued that the complaint sufficiently alleged that Defendants had “participated in” the stock purchases by providing Plaintiff with written communications including misleading press releases, favorable analyst reports and other information regarding market conditions, and by providing Plaintiff with information about a broker.  The Court held that the complaint failed to sufficiently demonstrate that Defendants had participated in Plaintiff’s purchases of stock for purposes of § 44-2003(A).  The Court noted that Plaintiffs disclaimed any reliance on inducement liability, though many of the allegations made in the complaint seemed more akin to inducement liability than participation liability.

Turning to the claims of secondary liability under control person and aiding and abetting theories, the Court similarly held that Plaintiff had failed to sufficiently plead these claims.  The Court upheld the trial court’s determination that the requirements of § 44-2003(A) apply to both control persons and aiding and abetting liability.  The Court explained that to be entitled to relief under a control person theory of liability, a private plaintiff must establish liability under the “Fraudulent Practices” portion of the Act (which includes §§ 44-1991 and 44-1999) as well as comply with the “Civil Remedies” portion of the Act (which includes § 44-2003).  Thus, a plaintiff must allege that the controlled person “participated in” the purchases of stock, an allegation missing in this case.  With regard to the aiding and abetting claim, the Court declined to decide whether Arizona law continues to recognize such a cause of action because Plaintiff had failed to adequately plead the cause of action. The Court explained that like control person liability, aiding and abetting liability requires a showing of primary liability under § 44-2003(A).  Because the complaint failed to sufficiently allege that the primary violator “participated in” the purchase, the claim for aiding and abetting also failed.       

Judge Espinosa authored the opinion, Judges Eckerstrom and Vásquez concurred.