2021 Colorado Code
Title 11 - Financial Institutions
Article 51 - Securities
Part 6 - Enforcement and Civil Liability
§ 11-51-604. Civil Liabilities

1. Any person who sells a security in violation of section 11-51-301 is liable to the person buying the security from such seller for the consideration paid for the security, together with interest at the statutory rate from the date of payment, costs, and reasonable attorney fees, less the amount of any income received on the security, upon the tender of the security, or is liable for damages if the buyer no longer owns the security. Damages are deemed to be the amount that would be recoverable upon a tender, less the value of the security when the buyer disposed of it, and interest at the statutory rate from the date of disposition. No person is liable under this subsection (1) for a violation of section 11-51-301 due solely to a failure to file the prescribed notification of exemption or to pay the required exemption fee for an exemption under section 11-51-308 (1)(p).
2. 1. Except as provided in paragraph (b) of this subsection (2), any broker-dealer or sales representative who sells a security in violation of section 11-51-401 is liable to the person buying the security from such seller for the consideration paid for the security, together with interest at the statutory rate from the date of payment, costs, and reasonable attorney fees, less the amount of any income received on the security, upon the tender of the security, or is liable for damages if the buyer no longer owns the security. Damages are deemed to be the amount that would be recoverable upon a tender, less the value of the security when the buyer disposed of it, and interest at the statutory rate from the date of disposition.
   2. No broker-dealer or sales representative is liable under this subsection (2) for a sale of a security exempt from registration under section 11-51-307 (1)(g) to (1)(j) or for a sale of a security in a transaction exempt from registration under section 11-51-308 (1)(a), (1)(e) to (1)(l), (1)(o), or (1)(p); but this paragraph (b) does not apply if at the time of such sale:
      1. In the case of a violation of section 11-51-401 arising from the failure of a broker-dealer to be licensed under this article, such broker-dealer was registered as a broker-dealer under the federal “Securities Exchange Act of 1934”, licensed as a broker-dealer or its equivalent under the laws of another state, or held a limited license under this article; or
      2. In the case of a violation of section 11-51-401 arising from the failure of a sales representative to be licensed under this article, such sales representative was licensed as a sales representative or its equivalent under the laws of another state, held a limited license under this article, or in connection with such sale was acting for a broker-dealer which was registered as a broker-dealer under the federal “Securities Exchange Act of 1934”, licensed as a broker-dealer or its equivalent under the laws of another state, or licensed under this article. (2.5) An investment adviser or investment adviser representative who violates section 11-51-401 is liable to each person to whom investment advisory services are provided in violation of such section in an amount equal to the greater of one thousand dollars or the value of all the benefits derived directly or indirectly from the relationship or dealings with such person prior to such time as the violation may be cured, together with interest at the statutory rate from the date of receipt of such benefits, costs, and reasonable attorney fees. (2.6) An investment adviser or investment adviser representative who provides investment advisory services to another person but who recklessly, knowingly, or with an intent to defraud fails to furnish to that person a written disclosure statement as required by section 11-51-409.5 is liable to such other person in an amount equal to one thousand dollars, the value of all benefits derived directly or indirectly from the relationship or dealings with such person, or for actual damages suffered by such other person, whichever is greatest, plus interest at the statutory rate, costs, reasonable attorney fees, or such other legal or equitable relief as the court may deem appropriate.

3. Any person who recklessly, knowingly, or with an intent to defraud sells or buys a security in violation of section 11-51-501 (1) or provides investment advisory services to another person in violation of section 11-51-501 (5) or (6) is liable to the person buying or selling such security or receiving such services in connection with the violation for such legal or equitable relief that the court deems appropriate, including rescission, actual damages, interest at the statutory rate, costs, and reasonable attorney fees.
4. Any person who sells a security in violation of section 11-51-501 (1)(b)(the buyer not knowing of the untruth or omission) and who does not sustain the burden of proof that such person did not know, and in the exercise of reasonable care could not have known, of the untruth or omission is liable to the person buying the security from such person, who may sue to recover the consideration paid for the security, together with interest at the statutory rate from the date of payment, costs, and reasonable attorney fees, less the amount of any income received on the security, upon the tender of the security, or is liable for damages if the buyer no longer owns the security. Damages are deemed to be the amount that would be recoverable upon a tender, less the value of the security when the buyer disposed of it, and interest at the statutory rate from the date of disposition.
5. 1. Every person who, directly or indirectly, controls a person liable under subsection (1), (2), (2.5), (2.6), or (3) of this section is liable jointly and severally with and to the same extent as such controlled person, unless the controlling person sustains the burden of proof that such person did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.
   2. Every person who, directly or indirectly, controls a person liable under subsection (3) or (4) of this section is liable jointly and severally with and to the same extent as such controlled person, unless such controlling person sustains the burden of proof that such person acted in good faith and did not, directly or indirectly, induce the act or acts constituting the violation or cause of action.
   3. Any person who knows that another person liable under subsection (3) or (4) of this section is engaged in conduct which constitutes a violation of section 11-51-501 and who gives substantial assistance to such conduct is jointly and severally liable to the same extent as such other person.

6. Any tender specified in this section may be made at any time before entry of judgment.
7. Every cause of action under this article survives the death of any individual who might have been a plaintiff or defendant.
8. No person may sue under subsection (1), (2), (2.5), or (2.6) or paragraph
   1. of subsection (5) of this section more than two years after the contract of sale, or, as those provisions pertain to investment advisers, federal covered advisers, investment adviser representatives, and persons who provide investment advisory services, more than two years after the date of the violation. No person may sue under subsection (3) or (4) or paragraph (b) or (c) of subsection (5) of this section more than three years after the discovery of the facts giving rise to a cause of action under subsection (3) or (4) of this section or after such discovery should have been made by the exercise of reasonable diligence and in no event more than five years after the purchase or sale, or, as those provisions pertain to investment advisers, federal covered advisers, investment adviser representatives, and persons who provide investment advisory services, more than five years after the date of the violation.

9. No buyer or seller of securities or recipient of investment advice may sue under this section if:
   1. The buyer or seller of securities or recipient of investment advice receives, before the action is commenced, documentation of:
      1. An offer stating how liability under this section may arise and fairly advising the buyer or seller of securities or recipient of investment advice of that person's rights in connection with the offer and any information necessary, including financial, to correct any material misrepresentation or omission in the information that was required by this article to be furnished to the person at the time of the purchase, sale, or rendering of investment advice;
      2. If the basis for relief under this subsection (9) is for a violation of subsection (1), (3), or (4) of this section and the person seeking recision is a buyer of securities:
         1. An offer to repurchase the security for cash, payable on delivery of the security, in an amount equal to the consideration paid plus interest at the statutory rate from the date of the purchase less the amount of any income received on the security; or
         2. If the buyer no longer owns the security, an offer to pay the purchaser, upon acceptance of the offer, damages in the amount that would be recoverable upon tender of the security less the value of the security when the buyer disposed of the security plus interest at the statutory rate from the date of the purchase, in cash, equal to the damages computed in the manner provided in this subparagraph (II);

      3. If the basis for relief under this subsection (9) is for a violation of subsection (1), (3), or (4) of this section and the person seeking recision is a seller of securities:
         1. An offer to tender the security, on payment by the seller of an amount equal to the purchase price paid, less income received on the security by the buyer, and interest at the statutory rate after the date of sale of the security to the buyer; or
         2. If the buyer no longer owns the security, an offer to pay the seller of the security upon acceptance of the offer, in cash, damages in the amount of the difference between the price at which the security was purchased and the value the security would have had at the time of the purchase in the absence of the buyer's conduct that may have caused liability and interest at the statutory rate after the date of sale of the security by the seller to the buyer;

      4. If the basis for relief under this subsection (9) is a violation of subsection (2) of this section:
         1. If the person is a buyer, an offer to pay pursuant to subparagraph (II) of this paragraph (a); or
         2. If the person is a seller of securities, an offer to tender or to pay as specified in subparagraph (III) of this paragraph (a);

      5. If the basis for relief under this subsection (9) is a violation of subsection (2.5) of this section, an offer to reimburse, in cash, the consideration paid for the advice and interest at the statutory rate from the date of the payment;
      6. If the basis for relief under this subsection (9) is a violation of subsection (2.6) of this section, an offer to reimburse, in cash, the consideration paid for the advice, the amount of any actual damages that may have been caused by the conduct, and interest at the statutory rate from the date of the violation causing the loss;

   2. The offer pursuant to paragraph (a) of this subsection (9) states that the offer must be accepted by the buyer or seller of securities or recipient of investment advice within thirty days after the offer is mailed by the buyer or seller of securities or recipient of investment advice. The party seeking recision may request that the securities commissioner authorize a time period for acceptance that is less than thirty days but not less than three days. The securities commissioner shall have the authority to grant such change in the acceptance period.
   3. The offeror has the ability to pay the amount offered or to tender the security under paragraph (a) of this subsection (9) at the time the offer is made;
   4. The offer pursuant to paragraph (a) of this subsection (9) is delivered to the buyer or seller of securities or recipient of investment advice, or sent in a manner that ensures receipt by the buyer or seller of securities or recipient of investment advice; or
   5. The buyer or seller of securities or recipient of investment advice who accepts the offer made pursuant to paragraph (a) of this subsection (9) is paid in accordance with the terms of the offer.

10. No person who has made or engaged in the performance of any contract in violation of any provision of this article or any rule or order under this article or who has acquired any purported right under any such contract with knowledge of the facts by reason of which the making or performance of any such contract was in violation may base any suit on the contract.
11. Any condition, stipulation, or provision binding any person acquiring or disposing of any security to waive compliance with any provision of this article or any rule or order under this article is void.
12. The rights and remedies provided by this article may be pleaded and proved in the alternative and are in addition to any other rights or remedies that may exist at law or in equity, but this article does not create any cause of action not specified in this section or section 11-51-602.
13. Any person liable under this section may seek and obtain contribution from other persons liable under this section, directly or indirectly, for the same violation. Contribution shall be awarded by the court in accordance with the actual relative culpabilities of the various persons so liable.
14. In the case of a willful violation of or a willful refusal to comply with or obey an order issued by the securities commissioner to any person pursuant to section 11-51-410 or 11-51-606, the district court of the city and county of Denver, upon application by the securities commissioner, may issue to the person an order requiring that person to appear before the court regarding such violation or refusal. If the securities commissioner establishes by a preponderance of the evidence that the person willfully violated or willfully refused to comply with or obey the order, the court may impose legal and equitable sanctions as are available to the court in the case of contempt of court and as the court deems appropriate upon such person.

History. Source: L. 90: Entire article R&RE, p. 731, § 1, effective July 1. L. 94: (14) added, p. 1840, § 6, effective July 1. L. 98: (2.5) and (2.6) added and (3), (5)(a), and (8) amended, p. 564, § 18, effective January 1, 1999. L. 2004: (9) amended, p. 515, § 4, effective July 1.

This section is similar to former § 11-51-125 as it existed prior to 1990.

For the applicability of this section, see § 11-51-102 (7) ; for the “Securities Exchange Act of 1934”, see Pub.L. 73-291, codified at 15 U.S.C. § 78a et seq.

Law reviews. For article, “Recent Developments Affecting Securities Litigation in Colorado”, see 13 Colo. Law. 1161 (1984). For article, “An Update of Appendices from Collecting Pre- and Post-Judgment Interest in Colorado”, see 15 Colo. Law. 990 (1986). For article, “Securities Litigation in the 1990s”, see 19 Colo. Law. 2045 (1990). For article, “A Comparison of Rule 10b-5 and the Colorado Securities Act of 1990”, see 20 Colo. Law. 41 (1991). For article, “Protecting the Professional: Contribution Bar Orders in Securities Cases”, see 24 Colo. Law. 775 (1995). For article, “Contribution Rights in Colorado Securities Fraud Cases”, see 29 Colo. Law. 51 (June 2000). For article, “Control Person Liability in Colorado”, see 33 Colo. Law. 43 (March 2004).

Annotator's note. The following annotations include cases decided under former provisions similar to this section.

This section appears to be the analogue of § 12 of the federal securities act of 1933. Kerby v. Commodity Res. Inc., 395 F. Supp. 786 (D. Colo. 1975 ).

Section 11-51-125 (2) provides for a private right of action for violations of this section. Noland v. Gurley, 566 F. Supp. 210 (D. Colo. 1983 ).

This section does not void forum selection clauses in contracts. While the section gives purchasers a cause of action when securities are bought in Colorado, this does not imply that the parties cannot agree to litigate disputes in another forum. Cagle v. Mathers Family Trust, 2013 CO 7, 295 P.3d 460 .

The provisions of this section were adopted intact from the text of the uniform securities act and are almost identical to 15 U.S.C. § 77 (2). Lowery v. Ford Hill Inv. Co., 192 Colo. 125 , 556 P.2d 1201 (1976); Ohio v. Peterson, Lowry, Rall, Barber & Ross, 472 F. Supp. 402 (D. Colo. 1979 ), aff'd, 651 F.2d 687 (10th Cir.), cert. denied, 454 U.S. 895, 102 S. Ct. 392, 70 L. Ed. 2d 209 (1981).

This section permits rescission. Andrews v. Blue, 489 F.2d 367 (10th Cir. 1973).

Provisions of subsection (1) concerning the allowance of attorney fees are permissive and not mandatory. Andrews v. Blue, 489 F.2d 367 (10th Cir. 1973).

Persons are not allowed to violate the securities acts under the guise of the contractual provisions. A contract cannot be used as a shield for wrongdoing amounting to statutory fraud. Andrews v. Blue, 489 F.2d 367 (10th Cir. 1973).

No liability where offerees had equal access to information. Transactions by which defendant shareholder was issued all authorized common stock of corporate defendant and subsequently without filing registration statement caused corporate defendant to offer some of that stock to several different persons who were personal friends, acquaintances, or business associates of defendant, or president of corporate defendant, under restriction of first refusal agreement in favor of defendant where each of the offerees by virtue of their relationship had access to any information which would have been revealed by a registration statement, did not give rise to liability under statutes providing for registration of securities. Lively v. Hirschfeld, 308 F. Supp. 612 (D. Colo. 1970 ).

When plaintiff is entitled to relief as to misrepresentation. Whenever the elements of misrepresentation under the statute are proven, and the defendant fails to establish the affirmative defense of lack of knowledge, the plaintiff is entitled to relief. Lowery v. Ford Hill Inv. Co., 192 Colo. 125 , 556 P.2d 1201 (1976).

Such claim is not dependent on exemption status of security. The claim of misrepresentation under the Colorado securities act does not depend upon the exempt or nonexempt status of the security. Lowery v. Ford Hill Inv. Co., 192 Colo. 125 , 556 P.2d 1201 (1976).

This section does not require intentional deception for plaintiff to prevail. Pottern v. Bache Halsey Stuart, Inc., 41 Colo. App. 451, 589 P.2d 1378 (1978).

Where misrepresentation may occur. Misrepresentation may occur in the context of the registration statement for a nonexempt security or in the promotion or negotiations for sale of an exempt or nonexempt security. Lowery v. Ford Hill Inv. Co., 192 Colo. 125 , 556 P.2d 1201 (1976).

A misrepresented or omitted fact is considered material under subsection (1) (now subsection (3)) if there is a substantial likelihood that a reasonable investor would consider the matter important in making an investment decision. Whether or not the misrepresentation or omitted fact is important turns on whether a reasonable investor would regard it as significantly altering the “total mix” of information made available. Goss v. Clutch Exch., Inc., 701 P.2d 33 (Colo. 1985).

Failure to disclose deduction amounting to one-third of ostensible profit constitutes failure to disclose a material fact. Jenkins v. Jacobs, 748 P.2d 1318 (Colo. App. 1987).

This section does not require a plaintiff to plead reliance on an untrue statement or omission of material fact. So long as plaintiff sufficiently pleads causation, plaintiff need not allege direct reliance. Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095 (Colo. 1995) (decided under former § 11-51-125 ).

At trial, when required to prove reliance or causation, plaintiff must show that defendant's omission or misstatement was a substantial factor in plaintiff's decision to take the course of action that led to plaintiff's loss. Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095 (Colo. 1995) (decided under former § 11-51-125 ).

A corporation that issues its own stock in reliance on another's deception or manipulative practice may be deemed a “seller” with standing to sue under subsection (5)(c). In re Stat-Tech Sec. Litig., 905 F. Supp. 1416 (D. Colo. 1995 ).

A corporation that is defrauded into issuing its own stock may sue under subsection (5)(c). In re Stat-Tech Sec. Litig., 905 F. Supp. 1416 (D. Colo. 1995 ).

While the facts alleged to support a nexus between the alleged fraud and outside director's state of mind are sparse, they are sufficient to state claims under this section. They permit an inference that the director knew corporation's financial condition and stock value were inflated, and that he used that knowledge for his own gain. In re Stat-Tech Sec. Litig., 905 F. Supp. 1416 (D. Colo. 1995 ).

Plaintiffs failed to plead a claim against securities dealer for primary liability under this section where plaintiffs' only attempt to connect dealer to the alleged misrepresentations was through its employment of broker. In re Stat-Tech Sec. Litig., 905 F. Supp. 1416 (D. Colo. 1995 ).

“Control” pursuant to subsection (5) may be established by showing defendant had some indirect means of discipline or influence over the primary violator. A showing of “actual” or “culpable” participation is not required. First Interstate Bank of Denver, N.A. v. Pring, 969 F.2d 891 (10th Cir. 1992), rev'd on other grounds sub nom. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S. Ct. 1439, 128 L. Ed. 2d 119 (1994); In re Stat-Tech Sec. Litig., 905 F. Supp. 1416 (D. Colo. 1995 ).

A prima facie case of control-person liability is established under subsection (5)(b) when the plaintiff demonstrates that (1) a primary violation of securities fraud occurred and (2) the defendant was a controlling person. As a general rule, a broker-dealer is statutorily in control of its registered representatives as a matter of law. When a broker is found to be a controlling person, liability is still subject to the broker-dealer's affirmative defense of good faith. Houston v. Se. Invs. N.C., Inc., 2017 COA 66 , 399 P.3d 783.

A broker-dealer is not in statutory control of its registered representative's underlying conduct when all the following factors are undisputed: (1) the plaintiff(s) did not reasonably rely on the registered representative's relationship with the broker-dealer in making their investment; (2) the plaintiff(s) invested in markets other than those promoted by the broker-dealer; (3) the registered representative did not rely on its relationship with the broker-dealer to access the securities market in order to sell the subject securities to the plaintiff(s); and (4) the broker-dealer did not know of, or have a financial interest in, the investor's business with the registered representative. Houston v. Se. Invs. N.C., Inc., 2017 COA 66 , 399 P.3d 783.

Reckless or negligent conduct does not provide a legal basis for a claim of aiding and abetting under subsection (5)(c). Stat-Tech Liquidating Trust v. Fenster, 981 F. Supp. 1325 (D. Colo. 1997 ).

The 1990 reenactment of the aiding and abetting provision is intended to limit aiding and abetting claims to those instances where the plaintiff can demonstrate that the defendant had knowledge of the primary violation. Recklessness is no longer a sufficient basis for imposing liability. Stat-Tech Liquidating Trust v. Fenster, 981 F. Supp. 1325 (D. Colo. 1997 ).

Subsection (5) (now (8)) of this section applies a statute of limitations for actions arising under this section. Trussell v. United States Underwriters, Ltd., 228 F. Supp. 757 (D. Colo. 1964 ); Ohio v. Peterson, Lowry, Rall, Barber & Ross, 472 F. Supp. 402 (D. Colo. 1979 ), aff'd, 651 F.2d 687 (10th Cir.), cert. denied, 454 U.S. 895, 102 S. Ct. 392, 70 L. Ed. 2d 209 (1981).

Subsection (8) is a substantive element of a securities claim that does not restrict the court's jurisdiction and may be waived by the parties. The lack of specificity in the statute makes it comparable to other statutes that are also not jurisdictional. Home Health Care Prof. v. Colo. Dept. of Labor, 937 P.2d 851 (Colo. App. 1996).

Waiving the statute of repose is not contrary to public policy when there is no contention that the agreement prompted plaintiff to delay investigation or wait for more favorable securities prices to bring suit, or that additional problems of proof developed. The agreement was for the benefit of both parties to preclude unnecessary litigation while federal issues were on appeal. Home Health Care Prof. v. Colo. Dept. of Labor, 937 P.2d 851 (Colo. App. 1996).

Summary judgment was appropriate for claim filed more than two years after stock purchase. Where all of the plaintiffs' stock was purchased prior to 1975 and the plaintiffs' amended complaint asserting a claim under this section was not filed until 1978, more than two years later, summary judgment for defendant on plaintiffs' claim under this section was appropriate. Norton v. Leadville Corp., 43 Colo. App. 527, 610 P.2d 1348 (1979).

Subsection (7) (now subsection (10)) is virtually identical to 15 U.S.C. § 77n. Sandefer v. Reynolds Sec., Inc., 44 Colo. App. 343, 618 P.2d 690 (1980); Sandefer v. District Court, 635 P.2d 547 (Colo. 1981), overruled on other grounds in Sager v. District Court, 698 P.2d 250 (Colo. 1985).

Subsection (7) (now subsection (10)) applies to waiver of judicial trial and review. Sandefer v. Reynolds Sec., Inc., 44 Colo. App. 343, 618 P.2d 690 (1980), overruled on other grounds in Sager v. District Court, 698 P.2d 250 (Colo. 1985).

The nonwaiver provision of subsection (10) is void under the supremacy clause because it conflicts with the federal Arbitration Act. Sager v. District Court, 698 P.2d 250 (Colo. 1985).

If an engagement agreement is severable, this section bars any claim based on the provisions that violate securities laws but not any claim based on the agreement's debt financing provisions. CapitalValue Advisors, LLC v. K2D, Inc., 2013 COA 125 , 321 P.3d 602.

Plaintiffs are precluded from bringing an action under this section because they received and accepted a promissory note as a refund of the consideration. Tynan Volkswagen v. N. Donald and Co., Inc., 757 P.2d 153 (Colo. App. 1988).

Applicability of time limits to class actions. As long as the party seeking to act as a class representative does not commence a new, separate suit as class representative, but merely seeks to maintain the currently pending and timely filed action as a class action and act as class representative, the statute of repose does not apply. Rosenthal v. Dean Witter Reynolds, Inc., 883 P.2d 522 (Colo. App. 1994).

The language of this provision does not limit its applicability to initial offerings rather than the sale of U.S. treasury notes in the secondary market. FDIC v. First Interstate Bank of Denver, N.A., 937 F. Supp. 1461 (D. Colo. 1996 ).