§ 5.1.9.1 Prohibited Conduct
Through three distinct subsections,895 § 44-1991(A) makes it a fraudulent practice to:
Employ any device, scheme or artifice to defraud.
? Make any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.
? Engage in any transaction, practice or course of business that operates or would operate as a fraud or deceit.
Subsections (1) and (3) reach a broader range of conduct than subsection (2).896 A scheme to defraud, which is prohibited by subsection (1), may embrace conduct in which the defendant painted a false picture without making a specific representation.897 The defendant's participation in a scheme is a violation independent of liability for misstatements and omissions.898
Subsection (3) focuses on the effect the defendant's conduct has on the plaintiff.899 Once again, no requirement exists under subsection (3) that the defendant make a specific misstatement or omit an identifiable material fact.900
In contrast to subsections (1) and (3), subsection (2) is directed at misleading statements and omissions.901 It operates as a rule of completeness. A statement that is misleading because other information is omitted violates subsection (2).902 Thus, promising performance while secretly intending not to perform may violate subsection (2).903 On the other hand, the wording of subsection (2) is not broad enough to embrace a pure omission, although the language of subsections (1) and (3) is.904
Prior to 2019, a substantial line of federal cases held that "scheme liability"—i.e., conduct prohibited by Rule 10b-5(a) and (c)—requires something more than false or misleading statements.905 These courts reasoned that a "defendant may only be liable as part of a fraudulent scheme based upon misrepresentations and omissions under Rules 10b-5(a) or (c) when the scheme also encompasses conduct beyond those misrepresentations or omissions."906 Some Arizona district courts applied this reasoning to claims under § 44-1991(A)(1) and (3).907 According to these courts, "[t]o permit liability under § 44-1991(A)(1) or (3) solely on the basis of misstatements and omissions would conflate [§ 44-1991(A)'s] three subsections."908 The law changed in 2019 when the U.S. Supreme Court decided Lorenzo v. Securities & Exchange Commission.909
In Lorenzo, the Court rejected the argument that Rule 10b-5(a) and (c)'s provisions are violated only when conduct other than misstatements is involved.910 The Court reasoned that Rule 10b-5's subsections are not mutually exclusive.911 To the contrary, considerable overlap exists among these subsections and related securities laws.912 The Court framed the issue before it as whether "someone who is not a 'maker' of a misstatement under Janus[913] can nevertheless be found to have violated the other subsections of Rule 10b-5 and related provisions of the securities laws, when the only conduct involved concerns a misstatement."914 The Court answered the issue affirmatively and held that "dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5, as well as the relevant statutory provisions."915
As settled Supreme Court precedent, Lorenzo's reasoning will be persuasive in interpreting Arizona's securities statutes. It is doubtful that pre-Lorenzo district-court decisions interpreting § 44-1991(A)(1) and (3) to require deceptive conduct in addition to a misrepresentation or misleading omission will be followed in future cases.916
In construing protective statutes similar to § 44-1991(A), Arizona's courts have adopted an expansive view of when a representation is misleading or deceptive.917 Under these statutes, statements with a tendency to mislead are actionable if they convey a misleading impression.918 This is so even if other interpretations that would not be misleading are possible.919 Technical correctness is not a defense if the fact finder could reasonably find that the statements had the capacity to mislead.920 Because of the broad, investor-protective policy animating Arizona's securities statutes,921 decisions under these similarly worded protective statutes should provide guidance in identifying prohibited conduct.
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Notes:
[895] See Grand I, 214 Ariz. at 26 ¶ 57, 147 P.3d at 780 ("The subsubsections [sic] of § 44-1991(A) address different violations, and it is not...
