Securities and Investment Disputes in Texas and Federal Forums

Two bodies of law usually apply at once: the Texas Securities Act, with its own remedies and deadlines, and federal law through the Securities Exchange Act of 1934 and Rule 10b-5. Which one a claim is built on decides the court, the proof and the deadline.

The Texas Securities Act, now in the Government Code

Effective January 1, 2022, the Texas Securities Act was moved from the civil statutes into Title 12 of the Texas Government Code. Its civil liability provisions are in Chapter 4008. Section 4008.051 makes a seller liable to the buyer for selling a security in violation of the registration requirements, with no need to prove fraud. Section 4008.052 makes a seller liable for selling by means of an untrue statement of a material fact, or an omission that makes the statements made misleading, unless the seller proves that the buyer knew of it, or that the seller did not know and could not have known with reasonable care.

The remedies are rescission under Section 4008.056 (the price paid plus interest at the legal rate, less income received, on tender of the security), or damages under Section 4008.057 if the investor no longer holds it.

Who else can be liable

Section 4008.055 extends liability to anyone who directly or indirectly controls a seller, buyer or issuer, jointly and severally and to the same extent, unless the control person proves it did not know and could not reasonably have known the facts. It also reaches anyone who, with intent to deceive or defraud or with reckless disregard for the truth or the law, materially aids the sale. This is why sponsors, managers and officers are named personally in investor suits.

Deadlines under the Texas act

Section 4008.062 sets the limits: three years from the sale for a registration claim; for a misrepresentation claim, three years from when the untruth or omission was or should have been discovered, and never more than five years after the sale. A rescission offer that meets the statute's requirements ends the claim unless the investor rejects it in writing within 30 days and expressly reserves the right to sue.

Federal law: Rule 10b-5 and FINRA

Rule 10b-5, 17 C.F.R. § 240.10b-5, makes it unlawful, in connection with the purchase or sale of any security, to employ a device, scheme or artifice to defraud, to make an untrue statement of a material fact or omit a fact needed to make a statement not misleading, or to engage in any act or practice that operates as a fraud. Courts read the rule to require a private plaintiff to prove intent, reliance and a loss caused by the misstatement, and the claim belongs in federal court. Federal claims carry their own, generally shorter, deadlines.

Customer claims against FINRA-member brokerage firms and their registered representatives generally go to FINRA arbitration under the customer agreement: faster and more private, with limited discovery and almost no review of the award.