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Blue Sky Laws: Defending State-level Securities Violations

December 21, 2021
Lens on blue skies

When to present and mount a defense in resistance to actions by the state Securities Commissioner. 

By Paul Vorndran  

Blue Sky laws are the anti-fraud security statutes in all 50 states in the United States. Most states adopted some variation of a uniform Securities Act back in the 1950s and the earliest of these were adopted in the 1920s. The laws vary by state and typically require issuers to register their offerings and provide financial details of the deal and the entities involved.

These security statutes generally prohibit certain conduct in connection with the offer and sale of securities. There are three main categories of prohibitions in most of the states’ securities statutes. One is the sale of securities that are not registered. The second category is the sale of securities by people who are not licensed to sell securities. And, the third category is fraud in connection with the offer and sale of securities.

Most states have an individual who administers the securities laws and carries the title of Securities Commissioner. The Securities Commissioner is vested with broad authority to conduct investigations into potential violations of the security statutes. Those investigations are carried out through the issuance of subpoenas for documents and subpoenas for testimony.

State securities investigation defense

When notified of a state securities investigation, comply. There are few arguments that can be raised to avoid compliance with a state securities subpoena, making it difficult to defend against the issuance of a subpoena by the Securities Commissioner for documents or testimony. Any challenge to quash the subpoena in state court is largely likely to fail.

In the event that a person does not comply with the state securities Commissioner’s subpoena, the Commissioner’s remedy will typically be to hold the person in contempt for non-compliance. These individuals who refuse to comply with the subpoena issued by the Securities Commissioner are likely to end up in state court charged with contempt.

Possible outcomes

There are several possible outcomes from a state securities investigation. The Securities Commissioner may determine that there has been a securities law violation and recommend pursuing an administrative cease and desist proceeding. In that proceeding, the Commissioner is looking for an order that prohibits continued and future violations of the securities laws.

Another possible outcome of a state securities investigation is the filing of an enforcement action in the state district court. These actions can seek money damages for investor losses and potential penalties and fines.

In most jurisdictions, these actions can also lead to an order prohibiting future conduct that violates state securities laws in the form of an injunction or being barred from the industry.

Further actions

In a state securities investigation, criminal violations can result in referrals by the Commissioner to various state prosecution authorities, but they are rare. Criminal prosecution most often happens only when there is evidence of theft or improper use of investor funds, which is unlikely to come through a securities commission investigation.

More likely, the Commissioner will approach the target after the investigation to identify the securities statutes the Commissioner believes have been violated and recommend enforcement action, either through the cease and desist proceedings mentioned before or through an alternative enforcement action.

At the state level, there is no formal process like the Securities and Exchange Commission’s “Wells Process,” whereby potential targets are informed of planned recommendations for further action. Instead, the state Commissioner typically recommends that action be pursued for an identified violation in one of the forums previously mentioned.

This notification is the first opportunity to present and mount a defense in resistance to the state Securities Commissioner. It is a critical time for advocacy. It is a time when, if a target does not have experienced securities defense representation, they should get it.

Paul Vorndran, Esq., is a securities litigation and enforcement defense attorney with Jones & Keller in Denver. Paul defends individuals and entities in investigations and enforcement actions brought by the SEC, FINRA and state securities commissioners. He can be reached at pvorndran@joneskeller.com.

This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the matters addressed above.