Arizona Court of Appeals Division One upholds administrative penalties levied for violations of the Arizona Securities Act, holding that loss causation need not be proved for administrative securities law enforcement.

This appeal arose from an enforcement action brought by the Securities Division of the Arizona Corporation Commission against the managing members of Radical Bunny, LLC.  The managers offered and sold to investors fractional interests in loans that Radical Bunny made to Mortgages Limited, a private mortgage lender that would later file for bankruptcy.  When Mortgages Limited filed for bankruptcy in 2008, Radical Bunny had approximately $197 million in outstanding loans to the company. 

The Commission found that the interests sold by Radical Bunny were unregistered, non-exempt securities under the Arizona Securities Act, A.R.S. § 44-1801 to -2126, (“ASA”).  In addition to the registration violations, the Commission also found that the managing members had violated the anti-fraud provisions of the ASA by misleading investors.  They provided inaccurate information about the collateral securing the loans and failed to tell investors that Radical Bunny was operating in violation of state securities laws.  The Commission levied administrative penalties totaling $4.65 million and ordered nearly $190 million in restitution.

The Arizona Court of Appeals upheld the administrative penalties and restitution.  The managers raised several issues concerning the sufficiency of the evidence and the Commission’s calculation of the restitution and penalties, all of which the Court rejected.

First, the managers argued that the Commission was required to prove loss causation in every securities case and for each type of securities violation.  The Court, however, held that the loss causation requirement does not apply in enforcement actions.  In Arizona, the loss causation requirement is codified at A.R.S. § 44-2082(E), and the clear statutory text limits the requirement to private actions.   

Second, the managers challenged the sufficiency of the evidence supporting the 900 violations of A.R.S. § 44-1991(A)(2).  This statute provides that a person commits fraud in connection with the offer or sale of securities if that person “[m]ake[s] any untrue statement of material fact, or [fails] to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”  Only five participants testified during the enforcement action regarding the materiality of the managers’ misrepresentations.  The managers argued that the testimony of five participants was insufficient to support the 900 violations found by the Commission.  The Court, however, disagreed.  Noting that materiality is an objective standard, the Court held that there was substantial evidence in the record to support the Commission’s finding that the managers’ misstatements and omissions were a substantial factor in a reasonable buyer’s decision to invest in Radical Bunny. 

Third, the managers challenged the administrative penalties imposed by the Commission.  The Court, however, found no abuse of discretion.  The undisputed evidence that the managers were responsible for 1,800 separate violations of the ASA’s registration provisions supported a maximum penalty of $9 million.  The Commission acted within its authority to impose administrative penalties totaling only $4.65 million.

Lastly, the managers challenged the restitution imposed by the Commission.  They argued that restitution should be calculated by the profits they earned rather than by the investors’ losses.   The Court rejected this interpretation of restitution, holding that it was unsupported by the language of A.R.S. § 44-2032 and the ordinary meaning of restitution.  Again, the Court held that the Commission did not abuse its discretion.

Judge Jones authored the opinion; Judges Downie and Thompson joined.