§ 4.1.9.3 Standing to Sue: Purchasers, Sellers, and Holders
Arizona's statutes create remedies for persons who are defrauded when they buy or sell a security.865 But the statutes do not expressly state whether a person who is induced by post-sale fraud to hold a security has a remedy.866 The existence of a remedy can be important because of the difficulty investors have in accepting losses.867 Investors are predisposed to hold losing investments too long and sell winners too soon.868 Because of this predisposition, investors are especially vulnerable to false assurances intended to persuade them to hold their investments.
The courts have reached mixed results on whether defrauded holders are entitled to sue. The Restatement869 and several courts870 recognize common-law holder claims, although in the class-action context, holder claims involving nationally traded securities are federally preempted.871 And in 1975 the U.S. Supreme Court rejected the concept of a holder action under Rule 10b-5.872
In Blue Chip Stamps v. Manor Drug Stores,873 the Supreme Court adopted what had become known as the Birnbaum rule874 and held that only those investors who actually purchase or sell a security have standing under Rule 10b-5. The decision was a debatable one that divided the Court six to three. The majority acknowledged that the text of Rule 10b-5 and § 10(b) did not definitively answer who had standing.875 The SEC opposed the Birnbaum rule as too restrictive,876 as did most commentators.877 The Court reached a contrary decision based largely on what it described as "policy considerations."878 It reasoned that securities litigation presents special dangers of vexatious litigation filed merely to extort a settlement.879 It also expressed concern about the uncertainties of proof that depend on testimony about what investors would have done if the true facts had been known.880 This policy analysis provoked a dissent by Justice Blackmun accusing the majority of exhibiting "a preternatural solicitousness for corporate well-being and a seeming callousness toward the investing public."881
Blue Chip has not been considered by any decision in Arizona. But differences in Arizona's statutory text, legislative history, and administrative precedent point toward a rule allowing holder claims.
The text of § 44-2003(A) imposes liability not only upon direct sellers but upon all persons who make, participate in or induce a sale that violates § 44-1991.882 As originally enacted, § 44-2003(A) was worded to impose this extended range of liability on behalf of "the purchaser or seller entitled to maintain such action."883 But in 2002 the "purchaser-or-seller" language was broadened to create liability in favor of "the person who is entitled to maintain such an action."884 Although a holder would not qualify as a purchaser or seller, a holder does fall within the more expansive class of investors denoted by the word "person."
The remedial objectives of Arizona's statutes885 and the legislature's directive to avoid narrow or restrictive interpretations886 also favor including holders within the class of persons entitled to recover for deceptive conduct that violates § 44-1991(A). The policy considerations that drove the majority opinion in Blue Chip are foreign to Arizona law. In contrast to the majority's perceived need to narrow Rule 10b-5 to avoid vexatious litigation, Arizona's courts have focused on the need for investor protection that led to enactment of the state's securities statutes.887 Rather than narrow the securities statutes, our courts have been guided by the legislature's directive to promote investor protection by avoiding restrictive definitions.888 No Arizona decision has expressed the skeptical view of the securities laws that drove the Blue Chip opinion.
On the contrary, a decision by the Corporation Commission concerning a holder claim articulated opposite concerns, expressing the need for an expansive, remedial interpretation. The case involved a husband and wife who were fraudulently induced to hold a nonperforming bond.889 Although the bond had stopped paying interest, the husband and wife were falsely told, "it's doing fine. . . . Don't worry about it."890 The bond was sold in 1984. The false representations began two years later and continued for six years. The Commission was thus confronted with a case that required it to decide whether deceptive conduct occurring years after the sale violated § 44-1991. It concluded it did. It quoted the 1951 statement of legislative intent in which the drafters mandated that the securities laws be given a liberal construction891 and concluded: "Given this legislative mandate, we find that A.R.S. § 44-1991.3 [now § 44-1991(A)(3)] supports the interpretation that a practice or course of business which operates as a fraud or deceit upon an investor that occurs after the sale of a security may give rise to a separate violation."892
A 1982 Court of Appeals decision, State v. Barber,893 reached a similar interpretation of post-sale securities fraud. Barber was a criminal case in which the charges included 14 securities-fraud counts. Evidence at trial showed that the defendant engaged in a fraudulent scheme in which the defendant and his co-conspirators sold stock in companies that were described as stable, growth companies and then paid fictitious dividends to the investors by falsely...
