§ 5.1.9.8 Investor Negligence
Behavioral research has shown that the typical investor is not a careful investor.1109 Investors tend to overestimate their investment abilities and to minimize the risk associated with their investments.1110 They commonly fail to read offering materials and other disclosure documents.1111 They rely much more on verbal assurances.1112 They "do not even want to inspect [the business]; they seek to be passive recipients of an income stream, not to be private investigators."1113 It is no surprise then that investors, even those who can be described as sophisticated through traits like education, business background, and investment experience, are behaviorally vulnerable to fraud.1114
The securities laws recognize this vulnerability. They were enacted to deter fraud and protect the public.1115 As explained by the Arizona Court of Appeals, "[t]he securities laws are designed to protect less-than-prudent investors from giving their money to irresponsible or unscrupulous businessmen."1116 Nothing in the language of the securities statutes imposes a duty of care on the part of investors. Nor is there anything in the text of the statutes that allows a defendant to use the plaintiff's negligence as a defense. On the contrary, Arizona's securities laws impose an affirmative duty not to mislead,1117 which cannot be overcome by proving the plaintiff's contributory negligence1118 or failure to investigate before investing.1119 Consequently, in Arizona the availability in the public domain of material information like a cease-and-desist order that an investor could have discovered does not trump a defendant's affirmative duty to disclose such information.1120
For example, assume that a prospectus or other disclosure document that the plaintiff negligently fails to read reveals facts contrary to oral misstatements that persuade the plaintiff to invest. Does the prospectus trump the verbal misrepresentations?1121 It may in a Rule 10b-5 action.1122 But a plaintiff under § 12(a)(2) of the 1933 Act (upon which civil liability for violations of § 44-1991(A) is modeled) is held to a lesser standard. "[I]t is a firmly entrenched principle of § 12(2) [now § 12(a)(2)] that the '[a]vailability elsewhere of truthful information cannot excuse untruths or misleading omissions' by the seller."1123 Consequently, sending a prospectus to an investor does not shield the seller from oral misstatements that would have been detected if the investor read the prospectus.1124 Conversely, because of the affirmative duty not to mislead,1125 the seller is charged with constructive knowledge of the risks and other information the prospectus provides.1126
The rules on contributory fault by plaintiffs remain unchanged under the provisions on proportionate liability that were added to § 44-2003 in 1996. In that year, the Arizona legislature enacted a modified version of the proportionate-liability provisions of the Private Securities Litigation Reform Act of 1995 (PSLRA).1127 Under the proportionate-liability regime, only those defendants who knowingly or recklessly violate § 44-1991(A) are jointly and severally liable.1128 For those defendants whose violations are neither knowing nor reckless (i.e., negligent or strict-liability violations),1129 the defendant's liability is based upon a complicated set of rules on fault apportionment.1130 These rules provide for fault apportionment among defendants and nonparties who (1) violate § 44-1991(A)1131 and (2) whose violation caused or contributed to the plaintiff's loss.1132 Both requirements¾a securities violation and causation¾must be shown before fault can be allocated.1133 No provision exists for reducing the defendant's liability on the basis of the plaintiff's fault1134¾a result that advances the Arizona policy of public protection and tracks prior law rejecting contributory negligence as a defense.1135
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Notes:
[1109] See, e.g., Stephen J. Choi & A.C. Pritchard, Behavioral Economics and the SEC, 56 Stan. L. Rev. 1, 2 (2003) ("Not all investors are rational. Quite apart from the obvious examples of credulity in the face of the latest Ponzi scheme, there is no shortage of evidence that many investors' decisions are influenced by systematic biases that impair their ability to maximize their investment returns. . . . These biases are not merely isolated quirks, rather, they are consistent, deep-rooted, and systematic behavioral patterns." (footnote omitted)).
[1110] See David A. Hoffman, The "Duty" to Be a Rational Shareholder, 90 Minn. L. Rev. 537, 555-56 (2006) (discussing the overconfidence bias in investor behavior); Robert Prentice, Whither Securities Regulation? Some Behavioral Observations Regarding Proposals For Its Future, 51 Duke L.J. 1397, 1457-62 (2002) [hereinafter Prentice, Whither Securities Regulation?] (same); see also Thaler & Sunstein, supra note 947, at 33 ("Unrealistic optimism is a pervasive feature of human life; it characterizes most people in most social categories.").
[1111] Langevoort, Selling Hope, supra note 947, at 681-85 (explaining that investment relationships are based upon trust that causes investors to forego reading prospectuses and other disclosure materials); cf. Robert Prentice, Contract-Based Defenses in Securities Fraud Litigation: A Behavioral Analysis, 2003 U. Ill. L. Rev. 337, 361 (2003) [hereinafter Prentice, Contract-Based Defenses] ("Typically it is simply not worth the commitment of time and mental energy for an investor to master all the details of a complex contract...
