Opinion ID: 1915619
Heading Depth: 1
Heading Rank: 4

Heading: Was Pace an Affiliate Rather Than an Agent?

Text: Pace argued at trial that he was an affiliate, not an agent as found by the trial court, a distinction that would affect his culpability under chapter 502. In order to understand and address this contention, it is helpful to briefly review some of the pertinent provisions of chapter 502. Section 502.201 makes it unlawful for any person to offer or sell any security ... unless ... [i]t is registered under this chapter. Iowa Code § 502.201(1). Section 502.301 makes it unlawful for any person to transact business in this state as a broker-dealer or agent unless ... [t]he person is registered under this chapter. Id. § 502.301(1)( a ) (emphasis added). Any person who violates either prohibition is liable to the person purchasing the security. Id. § 502.501. Furthermore, section 502.503 imposes liability on [a]ffiliates of a person liable under section 502.501, broker-dealers, and agents who materially aid and abet in the act or transaction constituting the violation. Id. § 502.503(1). Joint and several liability is not imposed, however, if the aider and abettor proves he or she did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability [under section 502.501] is alleged to exist. Id. § 502.503(1)( a ). An affiliate is a person who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the person specified. Id. § 502.102(2). In contrast, an agent is defined as any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. Id. § 502.102(3). A broker-dealer is any person engaged in the business of effecting transactions in securities for the account of others or for such person's own account. Id. § 502.102(5). Reading these provisions together, it is apparent that the law imposes liability on the person who actually sells an unregistered security without regard to that person's knowledge of the facts giving rise to the violation. See id. § 502.501. In contrast a person who merely aids or abets the violation has no liability if he or she can prove a reasonable lack of knowledge of such facts. See id. § 502.503(1). Pace seeks to be categorized as an affiliate who merely aided and abetted the prohibited transactions without knowledge that the investments were required to be registered. Such a conclusion is not possible under this record, however, because Pace was a primary violator: the individual who actually made the prohibited offers and sales. See generally Goettsch, 561 N.W.2d at 373 (Aiding and abetting is `a method by which courts create secondary liability' in persons other than the violator of the statute.  (Citation omitted and emphasis added.)). As previously noted, status as an affiliate is determined in reference to the person specified. Id. § 502.102(2) (defining affiliate as a person who directly, or indirectly ..., controls, is controlled by, or is under common control with, the person specified  (emphasis added)). Turning to section 502.503, the statute imposing affiliate liability, we conclude the person specified for purposes of that statute is the person who sold the unregistered security or who sold a security without being a registered agent. This conclusion is based on the language of section 502.503, which imposes joint and several liability on [a]ffiliates of a person liable under section 502.501  who aid and abet the prohibited transaction. Id. § 502.503 (emphasis added). The person liable under section 502.501 is the person who violated the registration requirements of section 502.201(1) or section 502.301. See id. § 502.501. We think that person was clearly Pace. As noted above, section 502.201 makes it unlawful for any person to sell an unregistered security. The record plainly establishes that Pace sold unregistered securities. Section 502.301 makes it unlawful for any person to transact business as an agent without being registered. An agent is a person who represents an issuer in effecting ... sales of securities. Id. § 502.102(3). Again, the record clearly establishes that Pace represented various marketing and management companies in the sale of COCOTS, which we have found to be securities. Although Pace argues that he did not represent the management companies, this contention is without merit, as he sold the sale/leaseback option as a package deal. Because Pace personally violated sections 502.201 and 502.301, Pace is the person liable under section 502.501, as referenced in section 502.503(1). Therefore, it is literally impossible for him to be an affiliate in these transactions, as an affiliate in this case is a person directly or indirectly controlled by Pace, the person specified in section 502.503(1). Id. § 502.102(2). Consequently, the district court correctly determined the defendant's liability under chapter 502 without consideration of his purported lack of knowledge of the facts giving rise to the statutory violations.