67-NOV JKSBA 16

(Cite as: 67-NOV J. Kan. B.A. 16)

Journal of the Kansas Bar Association

November, 1998

*16 CAVEAT PLAINTIFF

Congress has Defederalized Private Securities Litigation

Steven A. Ramirez [FNa1]

In the depths of the Great Depression, an economic catastrophe that slashed gross domestic product in the United States by 33 percent, Franklin Delano Roosevelt sent Congress historic financial market regulatory initiatives as part of his New Deal. Among these initiatives were the Securities Act of 1933 (the "33 Act") [FN1] and the Securities Exchange Act of 1934 (the "34 Act"). [FN2] Roosevelt intended these acts to heighten the fiduciary obligations of those selling investments and to thereby restore confidence in the nation's financial markets, which had recently degenerated into an historic panic. [FN3] In this regard, the federal government was following the lead of a number of progressive states such as Kansas, which had enacted similar securities regulatory schemes as early as 1911. [FN4] All of this legislative activity, at both the state and federal level, was designed to remedy common law deficiencies in dealing with inappropriate conduct in connection with the sale and purchase of securities. [FN5]

*17 Shortly after the enactment of the federal securities laws, [FN6] federal law became the primary source of remedies for plaintiffs suffering damages from the sale or purchase of securities. [FN7] The U.S. Supreme Court (initially at least), along with the lower federal courts, broadly interpreted the federal securities laws to effectuate their fundamental remedial purposes. The courts held that the federal securities laws extended remedies to victims of: fraudulent proxies, [FN8] misrepresentations made in the purchase or sale of small businesses, [FN9] insider trading [FN10] and even mere negligent misrepresentations in connection with the sale of securities. [FN11]

During the 1970s and 1980s most plaintiffs viewed federal law as the best means for pursuing securities-related claims of misconduct unless significant reasons to the contrary existed. In particular, most damaged securities investors rightfully viewed Rule 10b-5 [FN12] (promulgated by the Securities and Exchange Commission under rulemaking authority granted by Congress in Section 10(b) of the 34 Act) as the most beneficial and most broadly available remedy. In addition to the antifraud provisions of Rule 10b-5, the federal securities laws extended generous remedies for misconduct in connection with the sale or distribution of securities, misconduct in connection with proxy solicitations, and misconduct in connection with other securities-related activities. [FN13]

More recently, the judiciary and Congress have dramatically restricted the remedies available under thefederal securities laws. [FN14] Now it appears the law has come full circle: Kansas law generally provides superior remedies to those that exist under federal law. This article will demonstrate that ordinarily practitioners are well-advised to pursue claims on behalf of injured investors under Kansas law rather than under federal law. Further, securities industry sponsored arbitration forums, available with respect to certain claims against those who agree to arbitrate (most notably registered broker-dealers), also provide a superior remedy to that available under federal law. The article concludes that unless there are compelling reasons to the contrary, practitioners should carefully consider the remedies available under state law and arbitration rules rather than assume the federal courts and the federal securities laws provide the best means of protecting investors damaged because of the purchase or sale of securities. Simply stated investors are usually well-advised to forgo federal remedies and seek state remedies. [FN15]

I. Introduction to securities litigation

Securities transactions often can be quite complex, but fundamentally they involve a buyer, a seller and information. [FN16] Information is key to assessing the ability of a given security to yield profits. Information suppliers in the context of securities transactions may include the seller, a broker or investment adviser, an attorney, an accountant or other professionals. Depending upon the specific type of securities transaction at issue and the specific nature of the professional relationship at issue, a number of federal and state claims may be triggered. For example, those in the business of providing information for the guidance of others involved in business transactions may be held liable for negligent misrepresentation. Those who stand in a fiduciary relationship with a party to securities transaction may be held to answer for breach of fiduciary duty. Similarly, the type of securities transaction also determines which claims are available. For example, sellers of securities in public offerings may be "strictly liable" under federal or state law for material misrepresentations made in connection with the public distribution of securities. [FN17] And, insiders who trade *18 based upon non-public information may be held liable under the misappropriation theory recently adopted under federal law. Basically, securities litigation arises in three general contexts: [FN18] first, a customer may pursue claims against a broker, investment adviser or some other professional regarding management of an investment account or advice given with respect to a specific securities transaction; [FN19] second, investors who hold stock in a publicly held corporation may complain that material information was denied to them or misstated in connection with an investment decision; [FN20] and third, a dispute may center upon private securities transactions such as in a sale of a privately held business. [FN21]

The federal securities laws have traditionally had no pre-emptive effect on state law remedies. [FN22] Therefore, state common law remedies and state statutory remedies (frequently codified as a state "blue sky law") are cumulatively available along with any remedies available under federal law. Ordinarily, these cumulative state claims may be brought in federal court, pursuant to the court's supplemental jurisdiction. [FN23] For the most part, however, federal claims must be brought in federal court. [FN24] Nevertheless, a plaintiff may always forgo federal claims and seek relief under state law; thus, a plaintiff has wide discretion over which claims to pursue. [FN25]

The thesis of this article is that generally state law, or arbitration, provides a more generous substantive basis for recovery than federal law, for most relationships and types of transactions giving rise to securities litigation. Under certain circumstances certain federal claims may continue to be the best available. This article argues that those circumstances are now far more narrow than was traditionally the case.

II. An overview of private federal securities litigation: 1998

This article first illustrates the legislative and judicial retrenchment of federal remedies for misconduct in connection with the purchase or sale of securities. Next this article examines what is left of federal remedies for injured investors under the federal securities laws.

A. The incredible shrinking private federal securities remedies

In the past 10 years the courts and Congress have hacked away at traditional federal remedies available under the federal securities law for injured investors. Most recently, Congress enacted the Private Securities Litigation Reform Act of 1995 (the "95 Act"). [FN26] This act had far reaching consequences on the private remedies available under the federal securities laws. Even before the 95 Act the judiciary had already dramatically reduced the scope of federal remedies available to injured investors. In a series of decisions beginning in 1990, for example, the Supreme Court greatly restricted the availability of private remedies.

1. Statute of limitations

In 1991, the Supreme Court determined that the appropriate limitations period for claims brought under Rule 10b-5 is one year "after the discovery of the facts constituting the violation" and in no event more than three years from the date of the violation. [FN27] This is far more restrictive than prior federal law. [FN28] Before the Court's decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, the circuit courts had looked to state law to define the statute of limitations for claims under Rule 10b-5 for nearly 40 years. [FN29] Invariably these statutes of limitations were more generous to injured investors in terms of the statutory periods in which claims must be brought. [FN30] This is because the Supreme Court in Gilbertson basically ingrafted a strict liability, recision-based statute of limitations upon a fraud-based remedy. [FN31] *19 Additionally lower courts, such as the U.S. 10th Circuit Court of Appeals, have interpreted this limitations period in a restrictive fashion, by starting the statutory period based upon constructive discovery. [FN32] Because of the great divergence between state and federal statutes of limitations, the Gilbertson decision had the effect of shifting many claims out of federal court and into state court. For example, as discussed later, Kansas has a far more generous statute of limitations for securities-related claims than that which is provided for Rule 10b-5 claims under Gilbertson.

In any event, because Rule 10b-5 is the broadest private remedy available under the federal securities laws, the Court in Gilbertson struck a hard blow for the defederalization of private securities actions.

2. Limitation of recision remedies

Section 12(a)(2) of the 33 Act provides a negligence-based recision remedy for purchasers of securities when material misstatements or omissions are made by securities sellers. [FN33] For decades the federal courts had interpreted the plain language of section 12(a)(2) to provide a remedy for any injured investor purchasing any securities from any seller. [FN34] Nevertheless in Gustafson v. Alloyd Company Inc. [FN35] the Supreme Court held that section 12(a)(2) could only extend remedies to purchasers in initial public offerings of securities and not to private securities transactions nor to after-market transactions (i.e. transactions over a stock exchange after an initial public offering). [FN36] In other words, section 12(a)(2) only applies to full-blown initial public offerings of securities. Section 12(a)(2), which imposes recision liabilities upon any "seller" who is negligent in selling securities through material misstatements or omissions, thus is now available only to a more narrow universe of purchasers of securities. This is in contrast to most state blue sky laws which provide similar recision remedies to any purchaser of securities. [FN37] Again, by narrowing the scope of section 12(a)(2), the Court in Gustafson effectively shifted injured securities purchasers out of federal claims and into state claims and significantly narrowed what had been the broadest remedy extended to securities purchasers under the 33 Act.

3. Aiding and abetting liability

Through aiding and abetting liability federal courts had historically permitted plaintiffs to recover against those who aided or abetted the securities violations of others. [FN38] Recognition of aiding and abetting liability under the federal securities laws was often crucial in providing investors with meaningful remedies against so-called "deep pockets" such as lawyers or accountants; after all, the presence of such professionals could well have advanced frauds perpetrated by impecunious actors. In Central Bank of Denver v. First Interstate Bank of Denver, [FN39] the Supreme Court abolished aiding and abetting liability under Rule 10b-5. [FN40] The Court did this even in the face of decades of lower court opinions that had uniformly recognized the aiding and abetting cause of action and in the face of longstanding congressional acquiescence in these decisions. [FN41] Many state causes of action permit recovery against those who aid or abet the fraud, negligent misrepresentation or breach of fiduciary duty of another. [FN42] Therefore, this decision had a further restrictive effect on the scope of federal remedies now available to injured securities investors.

Aiding and abetting liability is often particularly important to remedying the losses caused by securities fraud-feasors. Often investors would refrain from investing but for the aura of respectability lent to securities transactions by accountants, lawyers, investment bankers and others. Thus, in cases where the primary wrongdoers may be insolvent, the Court in Central Bank of Denver created another reason for considering the benefits of state law.

B. The Private Securities Litigation Reform Act of 1995

Congress has joined the judiciary in restricting private federal securities claims. The provisions of the Private Securities Litigation Reform Act of 1995 are more widely applicable than the retrenchments implemented by the Court, as discussed above. [FN43] The 95 Act generally addresses private federal securities claims regardless of the particular section of the federal securities laws at issue. The 95 Act restricts federal securities claims through the following means:

*21 1. Sanctions

Although it is fraught with controversy, it appears the 95 Act approaches the implementation of a loser pays regime for any claims pursued under the federal securities laws. [FN44] Specifically, the 95 Act greatly expands the degree to which plaintiffs can be sanctioned for bringing claims that are ultimately unsuccessful. Previously, the federal courts had been very active in sanctioning unsuccessful securities plaintiffs. In fact, 45.5 percent of plaintiffs who failed to prevail in pursuing federal securities and RICO claims were sanctioned according to one study undertaken before the 95 Act. [FN45] Congress imposed a more stringent sanctions regime specifically to increase the number of securities claims subject to sanctions. [FN46] Under the 95 Act courts are required to scrutinize pleadings, upon "final adjudication," to determine compliance with the federal sanctions provision, Rule 11(b), of the Federal Rules of Civil Procedure, and must impose sanctions (i.e., courts are deprived of discretion to forgo sanctions) if a violation is found. To ensure that sanctions imposed under the 95 Act will be collectible, courts may require parties and their counsel to post a bond. [FN47]

Moreover, the presumed sanction for a complaint violating Rule 11(b) is an award of all of the defendant's attorneys fees incurred in the action. [FN48] The act does not treat defendants so harshly. [FN49] Compared with most state sanctions provisions, the 95 Act can, at least, be expected to put plaintiffs in great hazard of being sanctioned should they ultimately not prevail in any claims they may pursue. [FN50]

2. Heightened pleading standards

The 95 Act provides that all private claims brought under the 34 Act comply with heightened pleading standards with regard to scienter. [FN51] Federal courts have traditionally been very lenient in pleading requirements for state of mind, as the Federal Rules of Civil Procedure have long provided that state of mind may be averred generally. [FN52] The 95 Act requires very specific pleading with respect to scienter: a plaintiff must now plead "facts giving rise to a strong inference that the defendant acted" fraudulently. [FN53] This departure from the Federal Rules of Civil Procedure was one reason President Clinton vetoed the 95 Act. So far, federal courts have had only a limited opportunity to address the impact of this provision of the 95 Act. But, initial decisions have been decidedly unfavorable to plaintiffs. It appears that compliance with this provision of the 95 Act may be nearly impossible, as pleading mere motive and opportunity for fraud is not sufficient. Instead, it appears that no set of facts other than explicit admissions of fraudulent intent may satisfy this test according to some courts. [FN54] This too will have a very inhibitive effect on those pursuing claims against securities wrongdoers under federal law.

The harsher sanctions provisions now applicable to claims under the 34 Act may operate in a particularly oppressive manner when combined with the 95 Act's heightened pleading requirements. To avoid sanctions, under Rule 11(b), a party may allege facts that are "likely to have evidentiary support after a reasonable opportunity for ... discovery." Still, under the 95 Act, such allegations will not be sufficient to "specifically" allege facts that give rise to a strong inference of fraud. A plaintiff must choose between protection from sanctions or dismissal for deficient pleading. [FN55]

3. Loss causation

The 95 Act also requires that plaintiffs prove loss causation in all claims brought under the 34 Act. [FN56] Similarly, defendants may now avoid recision liability under section 12(a)(2) of the 33 Act, if they can prove an absence of loss causation. [FN57] Loss causation is a form of proximate cause which requires a plaintiff to allege and prove that but for the defendant's wrongdoing the plaintiff would not have incurred the harm complained of. Thus, if a plaintiff invested because a securities promoter did not disclose their criminal background, but the plaintiff suffers damages because of a crash in oil prices, the plaintiff probably can show only transaction causation and not loss causation. [FN58] This provision of the 95 Act directly overrules many federal decisions that had held that "but for" *22 causation or "substantial factor" causation was all that was required for all claims under the federal securities laws. [FN59] For example, under the proxy rules the courts have long held that materiality satisfied causation requirements for private litigants under the proxy rules. [FN60] Loss causation generally is a form of proximate cause that allows for a policy-laden analysis to cut off claims for injuries that are deemed too remote from the alleged misconduct. In the securities context, courts will now find more and more claims of securities fraud to be the remote cause of the ultimate injury suffered by the plaintiff under the 95 Act. State courts have generally been far more lenient in dealing with causation concepts in the securities area, leaving questions of causation to the jury. [FN61]

4. Limiting class actions

The 95 Act also attempts to restrict securities class actions. [FN62] For example, the act attempts to diminish the use of "professional plaintiffs" to sponsor class actions as proxies for lawyers with no real economic stake in the company subject to the suit. The act creates a "lead plaintiff" with ultimate control over any class action and presumed to be the plaintiff with the greatest financial stake in the litigation. [FN63] The lead plaintiff must certify that the action was not instituted at the direction of counsel, she has read and authorized the filing of the complaint, and that she will receive no extra benefit for serving as lead plaintiff. A lead plaintiff can only serve in such a capacity five times every three years. In an effort to reduce class counsel fees, the 95 Act limits the amount that can be paid to class counsel to a "reasonable percentage" of any recovery. These limitations on class actions apply to any action under the federal securities laws. [FN64]

5. Safe harbor for forward looking frauds

One of the most controversial provisions of the 95 Act is the safe harbor it extends to otherwise fraudulent "forward looking statements." [FN65] Specifically, the act protects specified individuals from liability for such statements if the statement is accompanied by "meaningful cautionary statements" that identify important factors that could cause actual results to diverge from projections. Individuals who enjoy this insulation from liability include, issuers, underwriters and representatives and reviewers of information provided by issuers. [FN66] The 95 Act provides various exemptions from the applicability of the safe harbor and limits the application of the safe harbor to statements relating to issuers that are required to register under the 34 Act. [FN67]

6. Other provisions designed to restrict private claims

The 95 Act also ends the use of securities violations as predicate acts to support private RICO claims. [FN68] The act restricts a plaintiff's ability to commence discovery once a motion to dismiss is filed. [FN69] Finally, the 95 Act greatly restricts the operation of joint and several liability, except in the case of knowing misconduct. Combined with other "reforms" these provisions can be terminal to a federal claim; for example, often a fraud simply will not be uncovered without the use of discovery but discovery is not available until the fraud can be pleaded with particularity and in accordance with the 95 Act's heightened pleading standards.

C. Federal claims of continued viability

Federal law still appears to provide superior remedies in specific areas such as insider trading. Recently, the Supreme Court held, for example, in United States v. O'Hagan [FN70] that Rule 10b-5 provides an expansive remedy for insider trading against those who "misappropriate" non-public information. Most state laws do not have modern case law addressing insider trading liability because the area has been dominated by federal adjudications under Rule 10b-5. Although Kansas has traditionally provided for more expansive common law liability against inside traders than most jurisdictions, it is at best unclear that Kansas provides any remedy as broad as federal law. [FN71] Indeed, there is a specific federal statute that generously extends remedies to individuals who trade contemporaneously with traders violating Rule 10b-5. This provision also provides a special statute of limitations period for insider trading claims of five years. [FN72] In short, most state law, and particularly Kansas law, does not generally provide a more certain and expansive remedy against those who trade based upon material non-public information.

Another such area involves claims arising from misconduct in connection with proxy solicitations. For publicly held companies, subject to proxy regulation under the 34 Act, state law does not generally provide a detailed and comprehensive body of law that can compare with the private actions that *23 federal law provides. The Supreme Court has allowed private actions under the proxy rules of the 34 Act since 1964. [FN73] Further, the SEC has enacted Rule 14a-9, which broadly prohibits material misrepresentations in proxy materials. [FN74]

II. Litigating securities related claims in Kansas

Generally speaking, Kansas law provides far more generous rights of recovery in comparison with those available under the federal securities laws. Kansas provides both statutory and common law bases for recovery that are relevant in securities transactions.

A. Kansas common law

Kansas common law provides a number of important causes of action that may, in particular circumstances, extend remedies to damaged securities purchasers or sellers. The most important of these are fraud, negligent misrepresentation, breach of fiduciary duty and breach of contract.

1. Fraud

When a seller or purchaser of securities makes a knowing misstatement of material fact to the party on the other side of the transaction, common law fraud has traditionally operated to provide remedies for damages suffered in justifiable reliance upon the misstatement. [FN75] This cause of action has been recognized in a wide range of securities transactions, ranging from deceptive conduct in connection with the sale of securities to the "churning" of customer accounts by securities professionals. The fraud cause of action suffers from some notable limitations. For example, the cause of action traditionally has not been generally available in the context of insider trading undertaken in an impersonal transaction through the facility of national or regional securities exchange. [FN76] In this scenario, a trader normally does not have any common law duty to disclose material non-public information the trader may possess.

Additionally, fraud requires a showing of scienter, or an intent to deceive. Procedurally, fraud must be pleaded with particularity and proven by clear and convincing evidence. [FN77] Nevertheless, a common law claim for fraud is no less onerous than the federal claim. Federal securities fraud has always been essentially the same claim as common law fraud, [FN78] although securities fraud under Rule 10b-5 need only be proven by the preponderance of evidence. [FN79] Thus, with notable exceptions the Kansas fraud claim is substantially the same as the federal securities fraud claim. On the other hand, in Kansas a cause of action appears to be available against these who aid and abet fraud, and defendants who commit fraud may be found liable for punitive damages, unlike securities fraud-feasors found liable under federal law. [FN80] Many procedural aspects of the Kansas claim are far more generous than the right provided under the federal securities laws for fraud, given the restrictions imposed by the 95 Act, as will be discussed later in this article.

2. Negligent misrepresentation

Kansas follows the approach of the Restatement (Second) of Torts in allowing a cause of action against individuals who negligently make material misrepresentation or omission in the course of providing advice as part of their business. [FN81] This is an important remedy against investment advisers, brokers, financial planners, lawyers or accountants who negligently provide investment advice or analysis for investment decisions in the course of their business. [FN82] Although negligent misrepresentation is generally applicable to a much narrower group of potential defendants, negligent misrepresentation does not require proof of an intent to deceive. Consequently, the common law right of recovery recognized in Kansas for negligent misrepresentation is much easier to prove than federal securities fraud, in those situations where the cause of action is available.

3. Breach of Fiduciary Duty

Kansas courts impose fiduciary duties upon those who voluntarily undertake a relationship of trust and confidence. [FN83] Such a relationship typically exists in the context of *24 the following relationships: attorney-client; broker-client; investment adviser-client; agent-principal; partner-partner; and director/officer-corporation. [FN84] A fiduciary is charged with a duty of loyalty, duty of care, duty of other disclosure and duty of obedience, with respect to matters within the scope of the fiduciary relationship. [FN85] In the context of securities transactions, this means that professionals subject to fiduciary duties may be liable for dispensing negligent investment advice, self-dealing, unauthorized trading or disclosure deficiencies. [FN86] Under the doctrine of constructive fraud, disclosure deficiencies may have all the consequences of fraud, even if made without scienter; indeed in the case of a fiduciary an intent to defraud is presumed. [FN87]

With respect to the specific issue of the fiduciary duty of stock brokers, Kansas has several important decisions defining the fiduciary duty in that context. A broker-client relationship is generally a fiduciary relationship, like other agent-principal relationships. [FN88] Still, fiduciary duties will be limited by the scope of the fiduciary relationship; the mere provision of investment advice, without the exercise of control by the broker over an account, does not create a fiduciary duty to only execute trades considered "suitable." [FN89] Fiduciary relationships generally must be proven by clear and convincing evidence. [FN90]

4. Breach of Contract

In Kansas, if a breach of contract results from conduct that is essentially tortious, there is little point to bringing a breach of contract claim because for the most part courts will treat the claim as a tort. Still, if a specific promise is broken as a result of misconduct, a separate breach of contract claim may be pursued, giving rise to a longer statute of limitations and obviating the need to show scienter. [FN91] This would most typically be available in a claim against a securities broker involving a written account agreement providing that the broker comply with the rules of a self-regulatory organization (such as the New York Stock Exchange or National Association of Securities Dealers), or an asset management agreement. [FN92]

B. Procedural aspects of Kansas common law claims

The statute of limitations in Kansas for fraud-based claims (including negligent misrepresentation and breach of fiduciary duty [FN93]) is two years from the date of discovery, with a statute of repose of 10 years from the date of the transaction. [FN94] Obviously these are far more generous time periods than those available under federal law. However, the Kansas tolling doctrines are even more favorable. [FN95] For example, Kansas appears to have accepted that professionals such as security brokers and others owing fiduciary duties are subject to the tolling doctrine of continuous representation. [FN96] Continuous representation operates to delay the commencement of the running of the statute of limitations until a professional relationship is terminated. In addition, Kansas recognizes the doctrine of fraudulent concealment, which operates to toll both the statutory period and any statute of repose. [FN97] Moreover, if a claim is a contract-based claim then Kansas may recognize a longer statute of limitation for contract claims. [FN98]

Kansas also recognizes a cause of action against those who aid and abet the tortious misconduct of others. [FN99] Kansas imposes neither the heightened pleading standards nor the stricter sanctions provisions of federal law. [FN100] While it is true that the federal securities laws provide for nationwide service of process, [FN101] in most cases this will make little difference as the Kansas long-arm statute operates to assert personal jurisdiction to the full extent permitted by the due *26 process clause. [FN102] All in all, Kansas is far more favorable with respect to these procedural issues than federal courts would be in light of the above discussed judicial and legislative retrenchments.

Kansas courts rarely impose sanctions upon a party who fails to prevail in pursuing claims. In fact, there is no reported decision in Kansas where a securities plaintiff has been sanctioned. [FN103] Generally, attorneys are only liable for sanctions in Kansas if they proceed to press claims that have no reasonable basis and not asserted in good faith. [FN104]

Kansas has no case on point dealing with the doctrine of loss causation. Instead, Kansas courts appear to approach causation as a fact question left to the common sense of the jury, rather than relying upon judicial assumptions to foreclose claims on a wholesale basis. [FN105]

C. Kansas statutory remedies

1. Kansas Blue Sky Law

In addition to the more generous common law doctrines available to a securities plaintiff in Kansas, the Kansas Blue Sky Law also provides more generous remedies than those that are available under the federal securities laws. [FN106]

The key provision of the Kansas Blue Sky Act in terms of remedies afforded to damaged investors is K.S.A. §17-1268. This section imposes liability upon merely negligent actors for selling securities by means of any material misrepresentation. Additionally, this section imposes liability upon sellers of securities who violate the registration provisions of the Kansas Securities Act. [FN107] Unlike remedies under the 33 Act, the Kansas Act operates to extend remedies to investors in private securities transactions as well as public distributions of securities. For example, in Kelly v. Primeline Advisory Inc., the Kansas Supreme Court applied K.S.A. § 17-1268 to an investment advisor who gave faulty investment advice. [FN108]

The Kelly court further determined that K.S.A. § 60-512(2) provides the appropriate statute of limitations period, and that the three-year statutory period provided by that section runs from the time that the plaintiff discovers (or reasonably should have discovered) the facts establishing the plaintiff's rights to recovery. [FN109] K.S.A. Section 17-1268 extends generous remedies. A plaintiff is entitled to interest of 15 percent from the date of investment. A plaintiff has a choice between recision or damages. A plaintiff who pursues recision may recover attorney fees. [FN110] K.S.A. Section 17-1268 also codifies a liberal aiding and abetting type of liability: sellers, directors of sellers, officers of sellers, partners of sellers and employees and brokers who materially aid sales, are liable, jointly and severally, with the seller unless they prove they exercised due care in their conduct. Indeed, courts have termed the liability of directors under the Kansas Securities Act as "strict liability." [FN111] Moreover, common law doctrines, including civil conspiracy and aiding and abetting, are available to ensnare those who agree to jointly accomplish unlawful acts with primary violators or those who knowingly render substantial assistance to unlawful conduct. [FN112]

Notably, however, K.S.A. § 17-1268 provides remedies only to securities purchasers. While K.S.A. § 17-1253 is a broader, catch-all, anti-fraud provision, no Kansas state court has addressed whether that section provides a private right of action, although in the case of a defrauded securities seller a strong argument can be made that a private right of action should be implied under this section. [FN113]

2. Kansas Consumer Protection Act

The Kansas Consumer Protection Act may also be available in certain situations to provide additional remedies to securities plaintiffs in Kansas. [FN114] It appears that securities transactions are not excluded from the application of the Kansas Consumer Protection Act, although the Kansas Comment to K.S.A. § 50-624, written in 1973, indicates that securities are excluded from the act. The Kansas Consumer Protection Act originally excluded securities. However, K.S.A. § 50-624 was amended in 1983 to remove the securities exclusion from the definition of a "consumer transaction" in the Kansas Consumer Protection Act. [FN115]

It is unclear whether the intent of the Kansas Legislature was to include or exclude securities litigation from the Kansas Consumer Protection Act. A representative from the office of the attorney general stated to the House Committee on Judiciary in 1983: "the bill amends the definition of 'consumer transactions' to delete securities from the consumer protection act because there is a separate securities act." This suggests the House members thought they were voting *27 to exclude securities actions from the Kansas Consumer Protection Act. In fact, they were deleting securities from the exclusionary provision under the act. [FN116]

The apparent confusion of the effect of this change to the act is irrelevant to the plain meaning of this statute. In Tompkins v. Bise the Kansas Supreme Court stated: "If the meaning of a statute is plain, the sole function of the court is to enforce it according to its terms. [FN117] Here, the plain meaning could not be more clear: securities transactions are within the scope of the Consumer Protection Act. Consequently, it appears that the Consumer Protection Act does apply to securities transactions in accordance with its terms."

The Consumer Protection Act applies to consumer transactions involving a sale of personal property (including intangible property) or services for value. [FN118] The act prohibits suppliers who in the ordinary course of business supply services or property, directly or indirectly, to consumers, from engaging in deceptive acts or practices. [FN119] The act includes a list of illustrative deceptive acts or practices, the most significant of which, for securities transactions, is the willful use of any oral or written falsehood as to a material fact or the failure to state a material fact. [FN120] Potential suppliers, within the scope of the act, would appear to include securities sellers, such as brokers, investment advisers and securities issuers, at least those engaged in public distributions of securities. It would also appear, that in appropriate circumstances, attorneys, accountants and other professionals, who supply, indirectly, information to consumers in connection with securities transactions, would also be within the scope of the act. [FN121]

The act provides that consumers injured by violations of the act may recover either damages or civil penalties of $5,000.00 per violation. [FN122] Successful plaintiff-consumers under the act may also recover attorney fees. [FN123] It appears that K.S.A. § 60-512(2) provides a three-year statute of limitations for claims brought under the Kansas Consumer Protection Act. [FN124]

IV. Another alternative: Arbitration

Virtually every securities broker-dealer, as well as each securities professional affiliated with a broker-dealer, is subject to mandatory arbitration provisions. Each broker-dealer must register with the Securities and Exchange Commission as a matter of federal law, and must also be a member of a self-regulatory organization such as the National Association of Securities Dealers, the New York Stock Exchange or some other regional stock exchange. [FN125] Universally these self-regulatory organizations provide that broker-dealers must arbitrate claims and disputes that arise with customers. [FN126] In addition, many customers are required to arbitrate disputes with broker-dealers pursuant to account agreements that include arbitration provisions. Originally some thought arbitration to be a biased pro- industry forum where plaintiffs would not stand much of a chance of having their claims impartially adjudicated. More recently, however, with the more restrictive law governing federal securities claims, arbitration can be a superior method of dispute resolution compared with the courts.

Arbitration allows an informal adjudication of any substantive claims an investor may bring under federal or state law. Procedures in arbitration are governed by the rules of the sponsoring organization, not federal or state procedural law. Procedures are designed to achieve a streamlined, efficient adjudication. Like conventional litigation, arbitration begins with the filing of petition; arbitration ends in a judgment that is specifically enforceable in court. [FN127]

A. The advantages of pursuing arbitration claims

1. Speed

Arbitration dockets are remarkably quick in resolving securities disputes. The average time from filing the claim to final disposition in arbitration is about 10.4 months at the National Association of Securities Dealers, which handles about 85 percent of securities industry arbitrations. [FN128] Additionally, arbitration decisions for the most part are not subject to further appeal; indeed, a broker-dealer is required to promptly pay arbitration awards to customers. [FN129] Thus, payment of arbitration awards frequently occurs shortly after the arbitration hearing.

2. Costs

Arbitration is an informal proceeding designed to avoid discovery disputes. It greatly circumscribes motion practice, and virtually eliminates appeals. The speed of arbitration itself greatly reduces attorneys' fees. Although depositions are authorized in arbitration, they remain somewhat uncommon and are discouraged. [FN130] Evidentiary rules are greatly relaxed and every effort is made to expeditiously hear disputes. [FN131]

*28 3. Greater focus on equity

Arbitrators are not given any guidance on the standard by which they are to resolve the disputes they are to resolve. For example, they are not directed to decide to dispose of disputes in accordance with legal principles. Nor are they directed to focus on doing justice, even if contrary to legal principles. Indeed, most arbitrators are not trained in even basic legal principles and are not required to be lawyers. Instead, each arbitrator is left to her discretion in resolving the disputes she hears, subject only to the very high standard applicable for overturning arbitration awards. This standard essentially requires that the arbitrators consciously ignore legal standards, and act "in manifest disregard of the law." [FN132]

For plaintiffs who allege damages as a result of true broker misconduct, arbitrators have the power to remedy such losses even if the claims may be barred in court based upon the statute of limitations or some other legal technicality. The arbitrators would seem to have wider latitude and more discretion than any judge, bound by law, would have.

4. Arbitrator expertise

Although arbitrators are not required to be lawyers, industry-sponsored arbitration forums do require them to have a sufficient level of expertise in the securities business. Also, arbitrators must undergo securities industry training and qualification. Thus, it is likely that fact finders in industry- sponsored arbitration have more business sophistication than typical jurors. In an area such as securities disputes this should result in a higher quality of justice.

5. Avoidance of federal restrictions

A securities investor may avoid the restrictions Congress has imposed upon private litigants under the federal securities laws through arbitration. Claims brought in arbitration are not subject to the restrictions of the 95 Act, as arbitration forums have their own procedural rules. Moreover, an arbitration claimant need not present federal claims to the arbitration panel. Although parties are subject to sanctions in arbitration, it appears that they are infrequently assessed, and there is no bias evident in how sanctions are meted out. [FN133]

As for the statute of limitations, if a dispute is within the six-year eligibility time limit it is rare for a claim to be disposed of based upon the statute of limitations. For example, in Kansas just about every federal claim is cognizable as a statutory or common law claim under Kansas law, subject to the limitations of two years from the date a plaintiff discovers facts establishing his right to relief. There are no heightened pleading standards, nor any safe-harbor for fraudulent "forward looking statements" in arbitration.