Evening star., 1933-06-12
STIFF PENALTIES
IN SECURITIES ACT
Liability Provisions of New
Statute Are of Far-Reach-
ing Character.

The folLoipinq is the second of q
series of fpe articles dndlyzirig the
nep Federal act regulating the mar
ketinQ and sales of securities and
dealing NTH plans for adDiinistrd-
ton OF the laU.
Liability provisions Of the new Sc
curities act are of far-reaching char
acter. Study Of the half dozen differ
ert sections in which responsibility In
one form or another is placed upon is
suers, underwriters and dealers in Sc
curities makes II apparent why there
has been an abrupt slowing up of their
activities pending the issuance of rules
and regulations by the Federal Trade
Commission.
while no registration OF new securi-
tias can take place until 40 days after
May 81, when the act was signed by
President Roosevelt, two sections relat-
already effective.
Damage Claims Regulated.
One Of these is section IL (2), while
the other Is section II. The first re-
1ates to civil proceedings for damages
which may be brought by purchasers
of securities on the basis of an un-
true or inadequate prospectus, including
securities heretofore issued which do
not come under the registration pro-
visions of the law. The second relates
to criminal proceedings which may be
instituted by the Government, its ap-
plication also being to securities here
tofore issued as well as those which
must be registered hereafter.
Section IL % provides for damage
suits in connection with securities sold
after registration. The second clause
of the section is broad enough to cover
securities already on the market.
Under section IL CD civil proceed
tngs may be brought against person
or corporation selling security through
the mails or in interstate commerce by
means of prospectus or oral commupi-
cation which includes an untrue state
f1ent of q material fact or omits to state
b material fact necessary In order to
make the statements, in the lights of
the circumstances under which they
were made, not misleading (the pur-
chaser not knowing of such untruth or
OlniSsion), and who shall not sustain
the burden of proof that he did not
know, and in the exercise of reasonable
care could not have known of such un-
truth or omission
Obviously the section places a broad
responsibility upon the dealer in seeuri-
ties. II applies not only to the clauses
of securities heretofore issued and which
II issued hereafter viii be subject to the
registration provisions of the law, but
also to exempted classes such as rail-
road securities and those of building
and loan associations and benevolent
societies. The only class TO which it
does not apply are obligations of the
Federal State and local governments.
Income to Be Deducted.
The person purchasing the security
may sue either at law or in equity In
any court or competent jurisdiction to
recover the consideration paid with
interest thereon, less the amount of in
come received, upon the tender of such
security, or for damages II he no longer
owns the security.
Section II makes IL unlawful for any
person or corporation In the sale Of Sc
cHrftses by the use of any means or in
strHments of transportation or com
munication In interstate commerce, or
by the use OF the mails, to employ any
device, scheme or artifiee to defraud, to
obtain money or property by means of
any untrue statement of q material
fsct, or any omission to state material
fact necessary In order to make the
statements made, IN the light of the
circumstances under which they were
made, not misleading, or to engage in
any transaction, practice or course of
business which operates or would op-
crate as fraud or deceit upon the pur-
chaser
This section also makes it unlawful to
publish In newspapers, circulars or In
yesment services information describ-
4ng any security which does not pufport
20 be published by a dealer, but for
Emch the writer has received compen-
cation, unless the fact and the amount
are fully disclosed. This is aimed at
tipsters who are promoting the sale of
. security without disclosing their per-
sopai interest.
All OF the classes of securities exempt
from registration as well as those in
cluded come under this criminal lia-
bility section.
The penalty for violation of the Sec
ton and OF sections relating to regis
Ifatlon OF securities is q fine of not
more than 5000 or imprisonment for
not more than five years, or both.
: The provisions OF the act relating to
civil liability in connection with reg
istration statements are very broad
The statements filed with the Federal
Trade Commission in registering new
Issues OF securities must be signed by
Inc lssuer, by its principal executive
omeer or officers, its principal finan-
clai ofhcer, its controller or principal
accounting officer and the majority of
US poaro OF directors or persons per-
forming similar functions.
Section 2 provides for civil liabili-
ues- on account of false registration
statements. In case any part of a reg
astration statement contains an untrue
statement OF material fact or onlits
10 state a material fact required to be
stated therein or necessary to make the
statements therein not misleading, the
person acquiring the security, unless it
rs proved that at the time of such
acquisition he knew of such untruth or
omission, may bring suit either at law
or In equity in any court of competent
jurisdiction.
Those who may be made defendants
anclude every person who signed the
registration statement every person
VINO was a director or partner in the
assuer at the time of the filing of the
statement, every person who with his
consent was named as being or about
TO become director, every accountant.
engineer or appraiser. or any person
whose profession gives authority to a
statement made by him, who has with
his consent been named as having pre-
pared or certified any report or valua-
fion which is used in connection with
The registration statement, with respect
20 such portion Of the statement as has
been prepared or certified by them, and
every underwater with respect to the
security.
Persons in this list can relieve them