The Arizona Supreme Court recently held that the Arizona Securities Act (“ASA”) does not allow a claim for aiding and abetting securities fraud and the Court expressly overruled a previous case, State v. Superior Court (Davis).1 Specifically, the Court reasoned that it would be improper to extend common law tort remedies over an issue that was extensively covered by statute. In reaching this decision, the Court relied on the legislative history of the ASA and on the U.S. Supreme Court precedent disallowing federal aiding and abetting liability.2
In 2008, the plaintiff in this case, James C. Sell, sued Lewis and Roca, LLP, a law firm, and Squire and Company, an accounting firm, for aiding and abetting an allegedly fraudulent investment scheme.3 This claim was disposed of on summary judgment in favor of the defendants, and the plaintiff appealed. The Arizona Supreme Court took the appeal in order to settle the issue of whether or not Davis was still good law.4
The ASA ”is almost identical to”5 a portion of the 1933 Securities Act (“FSA”) which makes it illegal to perpetrate fraud or to make misleading statements of material fact in connection with the sale or purchase of securities.6 The ASA differs from the FSA in that it allows a private cause of action for such fraudulent sales.7 In Davis, the Arizona Supreme Court interpreted the ASA to allow a claim for aiding and abetting securities fraud.8 In reaching that holding, the Arizona Court relied on then valid federal precedent which interpreted the FSA to recognize a form of aiding and abetting liability.9 This federal precedent had since been overruled by the U.S. Supreme Court ruling, Central Bank of Denver v. First Interstate Bank of Denver (“Central Bank”),10 which held that the FSA did not, in fact, allow liability for aiding and abetting securities fraud.11
The Arizona Supreme Court chose to directly rely on Central Bank in overruling Davis, because the Legislature noted its intent to allow Arizona courts to follow federal courts where they had interpreted federal statutes that are substantially similar to the ASA.12 The Court noted that the FSA and the ASA do not substantially differ in their provisions or underlying policies, and for that reason chose to follow federal precedent.13 Further, when the ASA was amended in 1996, the Arizona Legislature “expressly declined to specify whether aiding and abetting liability exists under the ASA.”14 The Court reasoned, “[m]uch of the [U.S.] Supreme Court’s reasoning in Central Bank regarding the federal statute and congressional intent applies with equal force to the ASA and the Arizona Legislature’s intent.”15
Turning to its own analysis, the Arizona Supreme Court rejected the aiding and abetting cause of action primarily because the legislature has been silent on the issue.16 The Court noted that the terms “aiding” and “abetting” do not appear anywhere within the ASA.17 The Court contrasted this lack of express recognition in the ASA with other Arizona statutes that do expressly impose liability for aiding and abetting.18 Because the Legislature was willing and able to impose aiding and abetting liability in some cases, the Court stated that the Legislature’s silence in this case was not an implicit intent to impose such liability.19 Rather, the Legislature’s silence in both the legislative history and in the express language of the statute indicated no intent to impose such liability.20
In delivering its holding, the Court considered and rejected a number of the plaintiff’s arguments. First, the Court rejected the argument that the underlying policies between the FSA and the ASA were sufficiently different.21 Sell argued that “the ASA was intended to be remedial, protective of the public, and liberally construed” while the FSA was primarily intended to “ensure full disclosure and honest markets.”22 The Court disposed of this argument by noting that because it provided a private cause of action, it was exactly the place of the Legislature to define liability.23 Second, Sell argued that the language found in the ASA which allows an action to be brought against anyone who “participated in or induced the unlawful sale or purchase [of securities]” justifies liability for aiding and abetting.24 The Court resolved this contention by noting that this language supported a claim for primary liability—which precluded the need to recognize an aiding and abetting liability claim.25 Finally, Sell argued that the Court should apply common law principles in recognizing an aiding and abetting claim.26 To this, the Court replied that a common law extension of aiding and abetting liability in both criminal and tort law contexts was not compelling or persuasive.27 The ASA states how, why and on whom liability is to be imposed, and therefore the Court was unwilling to extend common law principles over a carefully constructed statutory scheme.28
For these reasons, the Arizona Supreme Court no longer allows liability for aiding and abetting securities fraud. It is also important to note that the Court only overruled Davis “to the extent that it recognizes a cause of action for aiding and abetting liability under the ASA.” Thus, Davis can still be read as good law except for where it authorizes aiding and abetting liability or requires scienter as an element for securities fraud.
1 Sell v. Gama, No. CV-12-0211-PR, 2013 WL 645938, ¶1 (Ariz. May 10, 2012) (citing State v. Superior Court (Davis), 123 Ariz. 324, 599 P.2d 777 (1979)).
2 Sell, 2013 WL 645938 at ¶ 19.
3 Id. at ¶ 2. Plaintiff also claimed that Defendants were primarily liable for securities fraud, but that claim was dismissed in an earlier proceeding and was not the subject of the appeal in Sell. Id. at ¶ 2-3.
4 Id. at ¶¶ 1, 5.
5 Id. at ¶ 7 (citing Davis, 123 Ariz. at 331).
6 Sell, 2013 WL 645938 at ¶¶ 6-7.
7 Id. at ¶ 7 (citing Grand v. Nacchio, 225 Ariz. 171, 174, ¶ 12 (2010)); Ariz. Rev. Stat. § 44-2001(A).
8 Sell, 2013 WL 645938 at ¶ 9.
9 Id. at ¶ 9.
10 Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994).
11 Sell, 2013 WL 645938 at ¶ 19.
12 Id. at ¶¶ 17-18 (citing 1996 Ariz. Sess. Laws, ch. 197 § 11(C) (2nd Reg. Sess.)).
13 Id. at ¶ 18.
14 Id. at ¶ 15.
15 Sell, 2013 WL 645938 at ¶ 19.
16 Id. at ¶¶ 19-20.
17 Id. at ¶ 20.
18 Id. at ¶ 21. For example, the Court referenced Arizona’s public nuisance obscenity statutes, insurance fraud statutes, collection agency statutes, and welfare fraud statutes. Id. at ¶ 21.
19 Id. at ¶ 21.
20 Id. at ¶¶ 20-21.
21 Sell, 2013 WL 645938 at ¶ 22.
22 Id. at ¶ 22.
23 Id. at ¶ 23.
24 Id. at ¶ 24 (citing A.R.S. § 44-2003(A)).
25 Sell, 2013 WL 645938 at ¶ 25.
26 Id. at ¶ 26.
27 Id. at ¶ 28.
28 Id. at ¶¶ 28-29.