The R.M. Grand Revocable Living Trust (“Trust”) purchased shares of stock from KPNQwest (“KPNQ”) in the initial public offering. The Trust then purchased additional shares from other sellers in the aftermarket. After KPNQ went under, the Trust filed a complaint against Qwest, Nacchio (Qwest’s CEO and Chairman of KPNQ’s supervisory board) and McMaster (Qwest’s former Executive Vice President and KPNQ’s CEO) for violations of state and federal securities fraud and common law claims. In its second amended complaint, the Trust sought rescission of the stock purchases along with compensatory and punitive damages. The trial court granted partial summary judgment to the defendants, holding that the Trust could not seek rescission or damages with respect to shares it sold before learning of the alleged fraud. The Trust then dismissed all claims related to the stock sold after the alleged fraud was discovered. The court of appeals reversed with respect to rescission but affirmed the trial court’s ruling on damages. The Trust then filed a third amended complaint seeking only rescission damages. Defendants filed motions to dismiss and in response the Trust acknowledged that the third amended complaint did not include any claim that the defendants “induced” the aftermarket stock purchases; rather, it relied entirely on the theory defendants had “participated in” the sale of the stocks pursuant to A.R.S. § 44-2003(A). The trial court granted the motions to dismiss with respect to all aftermarket purchases and the court of appeals affirmed, finding that no defendant had participated in the aftermarket sales of stock.
The Arizona Supreme Court affirmed the judgment of the superior court and the opinion of the Arizona Appeals Court. A.R.S. § 44-2003(A) applies the private right of action for rescission damages to “any person, including any dealer, salesman or agent, who made, participated in or induced the unlawful sale or purchase.” On appeal, the Trust argued that because defendants induced its purchase of securities, they necessarily also participated in the sale of those securities. Disagreeing with the Trust, the Court explained that the terms “made,” “participated in,” and “induced” in § 44-2003(A) involve separate factors, and an individual can violate the statute by engaging in any one of these behaviors. The Court concluded that while the third amended complaint alleged inducement by the defendants, the Trust had expressly disavowed any reliance on this theory, and the third amended complaint did not sufficiently allege participation in the sale of the aftermarket stocks by the defendants.
The Court went on to hold that Nacchio and McMaster could not be liable to the Trust under a “control person” theory pursuant to A.R.S. § 44-1991(B) because the entity they are alleged to have controlled, KPNQ, was not liable because it did not participate in the sale of the aftermarket stocks. The Court then addressed the Trust’s argument that the defendants aided and abetting KPNQ’s violations of the Arizona Securities Act. The defendants argued on appeal that no such cause of action exists, relying on Central Bank v. First Interstate Bank, 511 U.S. 164 (1994), but the Court declined to decide the issue because aiding and abetting liability can only exist if a primary violation exists, and the Court had already concluded that no defendant was liable for participating in the sale of the securities (the only basis for primary liability alleged in the third amended complaint).
Justice Hurwitz authored the opinion, Justices Berch, Ryan, and Pelander, and Judge Swann concurred. Justice Bales did not take part in the decision of this case.
Posted By: Kristin L. Windtberg