2020 Georgia Code
Title 10 - Commerce and Trade
Chapter 5 - Georgia Uniform Securities
Article 5 - Violations, Penalties, and Civil Liability

- For article examining interface between law and business in regards to marketing of thrift notes, see 26 Mercer L. Rev. 311 (1974). For article, "Uniformity Under the Securities Laws: Regulation D and the New Georgia Uniform Limited Offering Exemption," see 19 Ga. St. B. J. 74 (1982). For article, "Statutes of Limitation: Counterproductive Complexities," see 37 Mercer L. Rev. 1 (1985). For annual survey of administrative law, see 38 Mercer L. Rev. 17 (1986). For article, "The Civil Jurisdiction of State and Magistrate Courts," see 24 Ga. St. B. J. 29 (1987). For article, "Start Making Sense: An Analysis and Proposal for Insider Trading Regulation," see 26 Ga. L. Rev. 179 (1992). For article, "Common Fact Patterns of Stock Broker Fraud and Misconduct," see 7 Ga. St. B. J. 14 (2002). For article, "Theories of Stockbroker and Brokerage Firm Liability," see 9 Ga. St. B. J. 12 (2004). For annual survey of law of business associations, see 56 Mercer L. Rev. 77 (2004). For article, "Georgia Securities Act - Let the Buyer Beware," see 10 Ga. St. B. J. 14 (2005). For survey of 11th Circuit securities regulation cases, see 56 Mercer L. Rev. 1341 (2005). For annual survey of cases discussing business associations, see 57 Mercer L. Rev. 49 (2005). For article, "The Georgia Uniform Securities Act of 2008: An Analysis of Significant Changes to Georgia's Blue Sky Law," see 14 (No. 6) Ga. St. B. J. 18 (2009). For comment, the purchase of all the shares of stock of a business is not the purchase of a "Security" within the meaning of the Federal Securities Act of 1933 or the Georgia Securities Act of 1973, see 30 Emory L.J. 1212 (1981).

ANALYSIS

• General Consideration
• Schemes to Defraud
• Liability of Controlling Persons, Partners, Executive Officers, and Directors
• Statute of Limitations

General Consideration

Editor's notes.

- In light of the similarity of the statutory provisions, decisions under former Ga. L. 1957, p. 134, former Code 1933, §§ 97-112, 97-113, 97-114, and former O.C.G.A. §§ 10-5-12,10-5-13, and10-5-14, as amended, which were subsequently repealed but were succeeded by provisions in this article, are included in the annotations for this article.

- Although the defenses available may differ between this section and federal Rule 10(b)-5, the resemblance goes beyond each requiring an element of culpability, as this section bears a close resemblance to Rule 10(b)-5 and shares a commonality of purpose with that rule. Osterneck v. E.T. Barwick Indus., Inc., 79 F.R.D. 47 (N.D. Ga. 1978) (decided under former Ga. L. 1957, p. 134, as amended).

As there was no dispute that agreements and notes defendant provided the victims in exchange for money were investments and that the victims relied on defendant to manage the investments and to provide a return on the investments, the instruments were "securities" within the meaning of Georgia's blue sky law; that the amount of expected return was fixed was immaterial. Rasch v. State, 260 Ga. App. 379, 579 S.E.2d 817 (2003) (decided under former O.C.G.A. § 10-5-12).

- Because plaintiff's injuries did not flow directly from the commission of predicate acts by defendant, the plaintiff did not have standing to bring a RICO action. Longino v. Bank of Ellijay, 228 Ga. App. 37, 491 S.E.2d 81 (1997) (decided under former O.C.G.A. § 10-5-12).

- Two-year statute of limitations was applicable to an action alleging violations of 15 U.S.C. §§ 78j(b) and 78g, 17 C.F.R. 240.10b-5, and the common law of Georgia, in that plaintiffs were induced to trade their stock in a corporation for stock in another by misrepresentations in the latter's financial statements. Osterneck v. E.T. Barwick Indus., Inc., 79 F.R.D. 47 (N.D. Ga. 1978) (decided under former Ga. L. 1957, p. 134, as amended).

Georgia Blue Sky Law are most analogous to § 10(b) of the federal Securities Exchange Act, and federal Rule 10b-5, and thus the two-year statute of limitations applies to § 10(b) and Rule 10b-5 claims. Friedlander v. Troutman, Sanders, Lockerman & Ashmore, 788 F.2d 1500 (11th Cir. 1986) (decided under former O.C.G.A. §§ 10-5-12 and10-5-14).

- Since under the securities law defrauded sellers have no remedy, the applicable statute of limitations for federal 10b-5 cases brought in Georgia by allegedly defrauded sellers is the four-year limitation associated with Georgia's fraud remedy (see O.C.G.A. §§ 9-3-31,51-6-1 et seq.) and not the two-year period found in the securities law. Kirk v. First Nat'l Bank, 439 F. Supp. 1141 (M.D. Ga. 1977) (decided under former Ga. L. 1957, p. 134, as amended).

- Four-year period of limitations applicable to actions under Georgia's general fraud statute (see O.C.G.A. §§ 9-3-31,51-6-1 et seq.), and not the two-year limitation applicable to actions brought under former Code 1933, § 97-114, was applicable to causes of action alleged under both 15 U.S.C. § 78j(b) and 15 U.S.C. § 78g. McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888 (5th Cir. 1979) (Action not against principal in securities transaction for rescission; decided under former Ga. L. 1957, p. 134, as amended).

- In a federal security case, the state statute of limitations was looked to as it existed when the cause of action accrued, for example, when the alleged churning by a broker took place. McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888 (5th Cir. 1979) (decided under former Ga. L. 1957, p. 134, as amended).

- Defendant's conviction for misstating a material fact to a victim in connection with the sale of a security for an indictment dated December 22, 2004, was properly proven by the state to have occurred within the four year statute of limitations period by the state establishing that the victim invested in the stock by two checks, dated November 28 and December 13, 2001, and the victim testified that the investment was made based on conversations with defendant during the months of October and November of 2001; as a result, the evidence was sufficient to show that defendant's violative acts as to the sale of securities occurred within the period provided by the statute of limitations. Haupt v. State, 290 Ga. App. 616, 660 S.E.2d 383 (2008) (decided under former O.C.G.A. § 10-5-12).

Shares of stock are "securities" which it is unlawful to sell in violation of subsection (a) of former Code 1933, § 97-103 and former Code 1933, § 97-112. DeBoard v. Schulhofer, 156 Ga. App. 158, 273 S.E.2d 907 (1980) (decided under former Code 1933, § 97-112).

Demand promissory note and option to purchase shares of corporation given in exchange for checks for $12,500,000 was a transaction to which requirements of subsection (a) of former Code 1933, § 97-112 and former Code 1933, § 97-103 applied. DeBoard v. Schulhofer, 156 Ga. App. 158, 273 S.E.2d 907 (1980) (decided under former Code 1933, § 97-112).

Cause of action is expressly provided by former O.C.G.A. § 10-5-14(a) in favor of purchasers for the violation of paragraph (a)(2) of former O.C.G.A. § 10-5-12. Diamond v. Lamotte, 709 F.2d 1419 (11th Cir. 1983) (decided under former O.C.G.A. § 10-5-12).

- Under counts charging the defendants with representations to the effect that the securities commissioner had passed upon the merits of the stock, an intent to deceive is not an essential element of the crime charged; the criminal act is complete upon the making of the representation. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

- Trial court did not err in charging a jury that scienter was an element of securities fraud under former O.C.G.A. §§ 10-5-12(a)(2) and10-5-14(a); further, the trial court properly charged the jury that justified reliance was an element of securities fraud. Keogler v. Krasnoff, 268 Ga. App. 250, 601 S.E.2d 788 (2004) (decided under former O.C.G.A. § 10-5-12).

Two types of crimes are prohibited by this section: (1) the making of an intentional representation that by the filing of a registration statement, the commissioner of securities had passed upon the merits of the security and (2) the use of a device, scheme, or artifice to defraud, or the commission of any act, practice, or course of business which would operate as a fraud on the purchaser. In the former instance the making of the representation completes the criminal act, whereas in the latter instance an intent to defraud has to be shown. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

- If the jury finds defendants conspired to sell stock by means of practices and misrepresentations inhibited by this section, and pursuant to such conspiracy stock was in fact offered and the misrepresentations made in Hall County, the fact that the defendants were not physically present in the county at the time their agents put the scheme into operation does not operate to relieve the agents from being tried and convicted in such county. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

- When a plaintiff, a Georgia resident, and a defendant, a Tennessee resident, discussed by telephone an arrangement whereby the defendant's company would serve as plaintiff's investment advisor in trading of commodity futures, and the defendant mailed to the plaintiff two letter agreements setting out the contract terms, and the plaintiff signed the letters and returned the letters for signature of the other party, under Georgia law the transaction did not take place in Georgia. Rasmussen v. Thomson & McKinnon Auchincloss Kohlmeyer, Inc., 608 F.2d 175 (5th Cir. 1979) (decided under former Code 1933, § 97-112).

- With regard to defendant's convictions on two counts of making an untrue material statement of fact and omitting other material facts in selling stock, the state unequivocally proved venue in Chatham County, Georgia, by establishing, via a victim's testimony, that the offense occurred within the Chatham County area and the evidence otherwise showed that the victim executed a relevant stock purchase agreement that included the language in the "State of Georgia, County of Chatham." Haupt v. State, 290 Ga. App. 616, 660 S.E.2d 383 (2008) (decided under former O.C.G.A. § 10-5-12).

- Former Code 1933, § 97-114 imposed liability upon controlling officer of corporation for transaction executed by corporate treasurer administering affairs in the officer's absence, which transaction violated subsection (a) of former Code 1933, § 97-112 and former Code 1933, § 97-103, if the officer directly or indirectly controlled treasurer, unless the officer sustained burden of proof that the officer did not know, and in exercise of reasonable care could not have known, of existence of facts by reason of which liability was alleged to exist. DeBoard v. Schulhofer, 156 Ga. App. 158, 273 S.E.2d 907 (1980) (decided under former Code 1933, § 97-112).

To hold an individual to be an agent who has participated or aided in making sales of securities, the court must find that the individual was so entangled in the actual sale of securities that the individual's activities were at least a substantial factor in the purchaser's decision to buy the security and that the individual's activities were either authorized or ratified by the issuer. In re N. Am. Acceptance Corp. Sec. Cases, 513 F. Supp. 608 (N.D. Ga. 1981) (decided under former O.C.G.A. § 10-5-12).

- While Ga. L. 1973, p. 1202 now provides for express civil liability for anyone who violates its general anti-fraud provisions, former Code 1933, §§ 97-104, 97-112, 97-114, which apply to transactions occurring before April 1, 1974, provide for civil liability only as provided for in former Code 1933, § 97-114. In re N. Am. Acceptance Corp. Sec. Cases, 513 F. Supp. 608 (N.D. Ga. 1981) (decided under former O.C.G.A. § 10-5-12).

Prosecution did not abate due to the 1986 repeal and reenactment of former O.C.G.A. § 10-5-12 since the conduct with which the defendant was charged and convicted was not decriminalized at any time during the various redefinitions of the statute. Greenhill v. State, 199 Ga. App. 218, 404 S.E.2d 577, cert. denied, 199 Ga. App. 906, 404 S.E.2d 557 (1991) (decided under former O.C.G.A. § 10-5-12).

- As a claim under former O.C.G.A. § 10-5-12 could not be characterized as a federally created remedy, federal equitable tolling principles did not apply, and such a claim, brought over two years after the purchase of stock, was time-barred by former O.C.G.A. § 10-5-14. Wilkinson v. Paine, Webber, Jackson & Curtis, Inc., 585 F. Supp. 23 (N.D. Ga. 1983) (decided under former O.C.G.A. § 10-5-12).

- Motion to dismiss a complaint alleging violations of the Georgia Securities Act, the Uniform Limited Partnership Act, and common-law fraud was granted on the ground that the complaint did not show an intent to defraud. Currie v. Cayman Resources Corp., 595 F. Supp. 1364 (N.D. Ga. 1984), aff'd in part, rev'd in part on other grounds, 835 F.2d 780 (11th Cir. 1988) (decided under former O.C.G.A. § 10-5-12).

- Trial court erred in granting the defendant broker's motion to dismiss plaintiff's claim of securities fraud for failure to state a claim upon which relief can be granted because a statement of the broker made in connection with the sale of stock was possibly sufficient to warrant a grant of the relief sought. GCA Strategic Inv. Fund, Ltd. v. Joseph Charles & Assocs., 245 Ga. App. 460, 537 S.E.2d 677 (2000) (decided under former O.C.G.A. § 10-5-12).

- When the return to be expected from the purchase of securities depended in part upon the purchaser's own efforts and not solely from the efforts of others, the purchaser has no claim under subsections (a)(2) or (d)(1) of former O.C.G.A. § 10-5-12. Nicholson v. Harris, 179 Ga. App. 35, 345 S.E.2d 63 (1986) (decided under former O.C.G.A. § 10-5-12).

- Defendant's convictions for theft by taking under O.C.G.A. § 16-8-2 and for violating the Georgia Securities Act of 1973, former O.C.G.A. § 10-5-12 et seq., did not merge for sentencing purposes because the language of the statutes indicated that the offenses were separate offenses as a matter of law and because while theft required that the victim sustain a loss, a securities violation did not. Branan v. State, 285 Ga. App. 717, 647 S.E.2d 606 (2007) (decided under former O.C.G.A. § 10-5-12).

- Trial court did not err by failing to charge the jury that the reckless representation of facts as true without knowledge was actionable as a species of fraud without scienter; the proposed charge was an incorrect statement of law because it obviated the necessity to prove that the party making the alleged reckless misrepresentation intended to deceive the party relying thereon and the proposed charge was not precisely tailored or adjusted to the evidence. Keogler v. Krasnoff, 268 Ga. App. 250, 601 S.E.2d 788 (2004) (decided under former O.C.G.A. § 10-5-12).

- Trial court did not err, with regard to the defendant's convictions on two counts of making an untrue material statement of fact and omitting other material facts in selling stock, by failing to sua sponte charge the jury on the statutory definition of the word "security" and other specifics as the record showed that the trial court properly charged the jury that the term security meant any stock or share or any other instrument commonly known as a security, which was in consonance with the evidence and the Georgia Securities Act of 1973, former O.C.G.A. § 10-5-12(a)(1) and (2)(B); further, since the defendant made no request to charge, the trial court had no sua sponte duty to give a charge. Haupt v. State, 290 Ga. App. 616, 660 S.E.2d 383 (2008) (decided under former O.C.G.A. § 10-5-12).

- Scienter, for purposes of former O.C.G.A. § 10-5-12(a)(2), even if based on a reckless misrepresentation, contemplates the intent to deceive. Keogler v. Krasnoff, 268 Ga. App. 250, 601 S.E.2d 788 (2004) (decided under former O.C.G.A. § 10-5-12).

It is not essential that criminal proceedings be instituted, but the commissioner has the right to issue an order to prohibit sales people from continuing the sale of questionable securities and also to apply for an injunction to restrain such acts and, further, to turn over any evidence to the district attorney, who may institute the necessary criminal proceedings. Cohen v. State, 101 Ga. App. 23, 112 S.E.2d 672 (1960) (decided under former Ga. L. 1957, p. 134).

- This section is permissive in character and provides for a manner of initiating criminal proceedings through the commissioner and Attorney General, but the statute is by no means intended to be exclusive, and the fact that the district attorney rather than the Attorney General appears before the grand jury, or that warrants are sworn out in the first instance and prior to the grand jury proceedings by affidavit of the individual prosecutors, in no way renders the indictment illegal. Curtis v. State, 99 Ga. App. 732, 109 S.E.2d 868 (1959) (decided under former Ga. L. 1957, p. 134).

- Court of Appeals of Georgia, First Division, concludes that the term "willfully" in former O.C.G.A. § 10-5-13(a)(1)(A)(iv) has the same meaning that it has been construed to have in former O.C.G.A. § 10-5-24. Before any of the civil penalties of up to $50,000 for single violations and up to $500,000 for multiple violations can be imposed under former O.C.G.A. § 10-5-13(a)(1)(A)(iv), there must be a knowing and intentional violation of the Georgia Securities Act of 1973, former O.C.G.A. § 10-5-1 et seq. Garvin v. Sec'y of State, 266 Ga. App. 66, 596 S.E.2d 166 (2004) (decided under former O.C.G.A. § 10-5-13).

- Seller of investment contracts, whereby the seller sold an investment venture of payphones to a purchaser, who then leased back the phones for an expected fixed monthly return, was not properly sanctioned with a fine by the Commissioner of Securities pursuant to former O.C.G.A. § 10-5-13(a)(1)(A)(iv) since it was found that the seller had acted willfully, but there was no showing that the seller had acted in knowing and intentional violation of the Georgia Securities Act of 1973, former O.C.G.A. § 10-5-1 et seq.; the Commissioner's issuance of a cease and desist order which was not limited solely to the willful acts of the seller was proper under former O.C.G.A. § 10-5-13(a)(1). Garvin v. Sec'y of State, 266 Ga. App. 66, 596 S.E.2d 166 (2004) (decided under former O.C.G.A. § 10-5-13).

Construction with O.C.G.A. § 13-6-11. - Ancillary award of attorney fees and expenses in favor of a seller was ordered struck, pursuant to O.C.G.A. § 9-12-8, as: (1) the jury failed to find the buyers liable on the seller's underlying substantive claims; (2) the award was based on O.C.G.A. § 13-6-11, not former O.C.G.A. § 10-5-14; and, as a result, (3) the lack of a damages award in favor of the seller did not support the award. Davis v. Johnson, 280 Ga. App. 318, 634 S.E.2d 108 (2006) (decided under former O.C.G.A. § 10-5-14).

Remedy afforded by section is not sole remedy which a purchaser of securities is entitled to pursue. Turpin v. Wilson, 133 Ga. App. 239, 211 S.E.2d 316 (1974) (noting subsection (e) of former Code 1933, § 97-114 preserves former Ga. L. 1957, p. 134, § 13(c)).

Although former O.C.G.A. § 10-5-14 prevented a purchaser of unregistered securities from pursuing civil damages arising from their sale, this statute of limitation did not otherwise prevent the purchaser from arguing that the contract remained unlawful and unenforceable because the passage of two years did not erase the unlawful nature of the underlying contract, but merely limited the remedies available. Carter v. Moody, 236 Ga. App. 262, 511 S.E.2d 520 (1999) (decided under former O.C.G.A. § 10-5-14).

Cause of action is expressly provided by subsection (a) of former O.C.G.A. § 10-5-14 in favor of purchasers for the violation of former O.C.G.A. § 10-5-12(a)(2). Diamond v. Lamotte, 709 F.2d 1419 (11th Cir. 1983) (considering sales made before April 1, 1974, the effective date of this chapter, but noting two-year limitation appears in both Ga. L. 1957, p. 134, § 13(a), and subsection (c) of former O.C.G.A. § 10-5-14).

- This section limits the civil remedy to the buyer of a security. Kirk v. First Nat'l Bank, 439 F. Supp. 1141 (M.D. Ga. 1977) (decided under former Ga. L. 1957, p. 134, as amended).

It is clear that only buyers of security shall have a remedy for fraud. Kirk v. First Nat'l Bank, 439 F. Supp. 1141 (M.D. Ga. 1977) (decided under former Ga. L. 1957, p. 134, as amended).

Party who was both attorney for the transfer and a transferee of the stock was a purchaser and had standing to sue the sellers under subsection (a) of former O.C.G.A. § 10-5-14. Bell v. Sasser, 238 Ga. App. 843, 520 S.E.2d 287 (1999) (decided under former O.C.G.A. § 10-5-14).

- Legislative intent under the securities laws has been to give the right of action against the party transferring the title to the unregistered stock, whether the title was transferred by the original issuance of the stock or a transfer of stock already issued. Such an intent provides protection for different transferees who might have paid various prices for the stock. Utzman v. Caribbean & S.E. Dev. Corp., 107 Ga. App. 56, 129 S.E.2d 62 (1962) (decided under Ga. L. 1957, p. 134, as amended).

- This section provides that any sale of securities in violation of the securities law shall be voidable at the election only of the purchaser. Collins v. Norton, 136 Ga. App. 105, 220 S.E.2d 279 (1975) (decided under former Code 1933, § 97-114).

§ 10-5-12(d). - Although the Georgia Securities Act does have a provision tracking the language of Securities and Exchange Rule 10b-5, former O.C.G.A. § 10-5-12(d), no cause of action was expressly provided for its violation. Diamond v. Lamotte, 709 F.2d 1419 (11th Cir. 1983) (decided under former O.C.G.A. §§ 10-5-12 and10-5-14).

- Purchaser of securities sold without compliance with the prescribed regulations, who is not in pari delicto with the seller, may, within a specified or reasonable time, rescind the transaction and recover the money or other compensation paid therefore. Nash v. Jones, 224 Ga. 372, 162 S.E.2d 392 (1968) (decided under former Ga. L. 1957, p. 134, as amended).

Purported offers of rescission, stating that "you have the opportunity to rescind your subscription ... by letter notice to us within 72 hours after receipt of this letter," did not meet the specific requirements of paragraph (d)(1) of former O.C.G.A. § 10-5-14 in that they did not (1) offer repayment of consideration; (2) within 30 days from the date of acceptance with (3) accrued interest thereon. Binder v. Gordian Sec., Inc., 742 F. Supp. 663 (N.D. Ga. 1990) (decided under former O.C.G.A. § 10-5-14).

Action for money had and received is substitute for suit in equity and, while founded on causes of action arising out of application of equitable principles, is an action at law by reason of its origin as a mode of action in the common-law courts. Turpin v. Wilson, 133 Ga. App. 239, 211 S.E.2d 316 (1974) (decided under former Ga. L. 1957, p. 134, as amended).

- It is not inappropriate for a purchaser to pursue recovery on a theory of assumpsit or money had and received when the defendant fails to deliver the securities contracted for and refuses to refund the moneys received from the purchaser. Turpin v. Wilson, 133 Ga. App. 239, 211 S.E.2d 316 (1974) (decided under former Ga. L. 1957, p. 134, as amended).

Trial court did not err in charging a jury that scienter is an element of securities fraud under former O.C.G.A. §§ 10-5-12(a)(2) and10-5-14(a); further, the trial court properly charged the jury that justified reliance is an element of securities fraud. Keogler v. Krasnoff, 268 Ga. App. 250, 601 S.E.2d 788 (2004) (decided under former O.C.G.A. § 10-5-14).

Tender of security into court is sufficient tender, even though no other tender has been made. Rushing v. Williams, 125 Ga. App. 601, 188 S.E.2d 437 (1972) (decided under former Ga. L. 1957, p. 134, as amended).

Purchaser was not required to tender the original stock certificates when the purchaser tendered certificates equal to the number of shares purchased. Bell v. Sasser, 238 Ga. App. 843, 520 S.E.2d 287 (1999) (decided under former O.C.G.A. § 10-5-14).

Purchaser's issuance of additional shares of stock to new investors following the sale did not affect the purchaser's entitlement to the repurchase remedy. Bell v. Sasser, 238 Ga. App. 843, 520 S.E.2d 287 (1999) (decided under former O.C.G.A. § 10-5-14).

- Purchaser of securities who became director and key employee of corporation had no claim for attorney's fees in an abortive action for violation of the Securities Act. Nicholson v. Harris, 179 Ga. App. 35, 345 S.E.2d 63 (1986) (decided under former O.C.G.A. § 10-5-14).

Former O.C.G.A. § 10-5-114 did not permit recovery of all attorney fees in a multicount action; only fees attributable to claims under the Georgia Securities Act are recoverable. Huggins v. Chapin, 233 Ga. App. 109, 503 S.E.2d 356 (1998).

Cited in Jones v. International Inventors, Inc. E., 429 F. Supp. 119 (N.D. Ga. 1976); D.K. Properties, Inc. v. Osborne, 143 Ga. App. 832, 240 S.E.2d 293 (1977); Security Branding, Inc. v. Corbitt, 144 Ga. App. 164, 240 S.E.2d 728 (1977); Freedman v. United States, 437 F. Supp. 1252 (N.D. Ga. 1977); Hamilton Bank & Trust Co. v. Holliday, 469 F. Supp. 1229 (N.D. Ga. 1979); Hirsch v. Equilateral Assocs., 245 Ga. 373, 264 S.E.2d 885 (1980); Murray v. Shearson Hayden Stone, Inc., 524 F. Supp. 304 (N.D. Ga. 1980); Martin v. T.V. Tempo, Inc., 628 F.2d 887 (5th Cir. 1980); Putnam v. Williams, 652 F.2d 497 (5th Cir. 1981); Jones v. Miles, 656 F.2d 103 (5th Cir. 1981); Cocklereece v. Moran, 532 F. Supp. 519 (N.D. Ga. 1982); Kennedy v. Tallant, 710 F.2d 711 (11th Cir. 1983); Friedlander v. Nims, 571 F. Supp. 1188 (N.D. Ga. 1983); Miller v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 572 F. Supp. 1180 (N.D. Ga. 1983); Mack v. Smith, 178 Ga. App. 652, 344 S.E.2d 474 (1986); Cook v. State, 183 Ga. App. 720, 359 S.E.2d 716 (1987); Pelletier v. Zweifel, 921 F.2d 1465 (11th Cir. 1991); Wells v. HBO & Co., 813 F. Supp. 1561 (N.D. Ga. 1992); Fuller v. Dreischarf, 238 Ga. App. 18, 517 S.E.2d 89 (1999); Garland v. Advance Med. Funding L.P., 86 F. Supp. 2d 1195 (N.D. Ga. 2000); Hafner v. Infocure Corp. (in Re Infocure Secs. Litig.), 210 F. Supp. 2d 1331 (N.D. Ga. 2002); McCondichie v. Groover, 261 Ga. App. 784, 584 S.E.2d 57 (2003).

Schemes to Defraud

Editor's notes.

- Subsection (d) was added to former O.C.G.A. § 10-5-12 by Ga. L. 1975, p. 928, § 24, and amended by Ga. L. 1979, p. 1296, § 8. As amended, it was now similar to the last paragraph of former Ga. L. 1957, p. 134, § 11, which was repealed by Ga. L. 1973, p. 1202, § 26. Most of the cases cited below were decided under the 1957 Act, as indicated.

- For purposes of a criminal conviction under the Georgia Securities Act of 1973, former O.C.G.A. § 10-5-12 et seq., a scheme whereby the defendant convinced the victims to invest in boat docks, slips, or storage docks with a return on the victims' investment in a year involved "securities" because there was an investment and a reasonable expectation of profits and the victims relied on the defendant to bring about the profits. Branan v. State, 285 Ga. App. 717, 647 S.E.2d 606 (2007) (decided under former O.C.G.A. § 10-5-12).

- Only buyers of security shall have a remedy for fraud. Kirk v. First Nat'l Bank, 439 F. Supp. 1141 (M.D. Ga. 1977) (decided under former Code 1933, § 97-112).

- Existence of the scheme, device, or artifice, and its use with an intent to defraud, regardless of outcome, constitutes the inhibited act. Curtis v. State, 99 Ga. App. 732, 109 S.E.2d 868 (1959) (decided under former Ga. L. 1957, p. 134); Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

- Under this section, which penalizes any device, scheme or artifice to defraud, it is necessary only to prove the false statement and that the statement was made with an intent to defraud, whether fraud resulted or not. Curtis v. State, 99 Ga. App. 732, 109 S.E.2d 868 (1959) (decided under former Ga. L. 1957, p. 134).

This section makes it a penal offense to do certain acts which would operate as a fraud regardless of whether a fraud was in fact successfully perpetrated or not. Cohen v. State, 101 Ga. App. 23, 112 S.E.2d 672 (1960) (decided under former Ga. L. 1957, p. 134).

This section does not require the accomplished overt act of defrauding a person, but it is the use of the scheme, trick, or artifice with an intent to deceive which is prohibited. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

- Scheme to defraud is such a scheme as is initiated by the perpetrator with an intent to defraud another and cause the other to suffer a pecuniary loss, but the intent, not the loss, is the subject matter of the crime. Curtis v. State, 99 Ga. App. 732, 109 S.E.2d 868 (1959) (decided under former Ga. L. 1957, p. 134); Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

Intent to defraud is the gist of an offense under that portion of this section which prohibits the use of a device, scheme, or artifice to defraud. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

Victim's reaction to fraudulent practice is not essential element before a conviction is authorized. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

- It is not necessary in an indictment to allege that the victim was in fact defrauded. Curtis v. State, 99 Ga. App. 732, 109 S.E.2d 868 (1959) (decided under former Ga. L. 1957, p. 134).

Purpose of this section, making it unlawful in any transaction involving an offer to sell or buy securities to employ any scheme or device to defraud or engage in any act which would operate as a fraud upon a purchaser or seller, is to prevent practices in connection with the purchase or sale of such securities which are carried on with intent to defraud. An indictment alleging such a scheme or transaction is not subject to general demurrer (now motion to dismiss) although it fails to allege that the victim was in fact defrauded, since the only criminal intent necessary to be proved is the intent to defraud in the commission of the act or acts denounced by the statute. Curtis v. State, 99 Ga. App. 732, 109 S.E.2d 868 (1959) (decided under former Ga. L. 1957, p. 134).

- While this section penalizes a false statement made with intent to defraud, whether loss is sustained or not, it also provides for punishment of a scheme or artifice which "operates or would operate" as a fraud, and thus subjects the offender to punishment (a) in the event the scheme to defraud actually operates as a fraud or (b) would, if successfully consummated according to the intentions of the perpetrator, be a fraud on the purchaser, even though it did not in fact so result. Curtis v. State, 99 Ga. App. 732, 109 S.E.2d 868 (1959) (decided under former Ga. L. 1957, p. 134).

- When it is alleged that a certain act, practice, or transaction operated as a fraud and the indictment sets out the facts on which the state relies to prove this allegation, it is necessary, as against appropriate special demurrer, that the facts alleged sustain the conclusion that the transaction did in fact operate as a fraud against the named purchaser of stock. Curtis v. State, 99 Ga. App. 732, 109 S.E.2d 868 (1959) (decided under former Ga. L. 1957, p. 134).

- Indictment is defective which alleges that a certain scheme did operate as a fraud upon the person who purchased the stocks, but does not also allege that the person defrauded also suffered a pecuniary loss. Curtis v. State, 99 Ga. App. 732, 109 S.E.2d 868 (1959) (decided under former Ga. L. 1957, p. 134).

- When each count of the indictment charges the accused with defrauding a separate and distinct person in a separate and distinct transaction of a stated amount of money, each count therefore charges the commission of a separate and distinct offense, which is clearly authorized. Strauss v. Stynchcombe, 224 Ga. 859, 165 S.E.2d 302 (1968) (decided under Ga. L. 1957, p. 134).

- When a completed fraud is alleged, it is necessary to show the elements thereof, that is, that some person was in fact defrauded. Cohen v. State, 101 Ga. App. 23, 112 S.E.2d 672 (1960) (decided under former Ga. L. 1957, p. 134).

Fact that misrepresentations are occasional and isolated will not constitute defense so long as defendants direct the misrepresentations to be made, the misrepresentations are falsely made, the misrepresentations are made with intent to defraud, and are such as would operate as a fraud on the purchaser. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

- Activities occurring during the formation of the corporation, including the sale of the stock, from which transaction the alleged violation of the securities law occurred, are properly considered by the jury when determining the defendants' intentions. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

Isolated transaction might or might not be sufficient evidence of scheme to defraud, and it cannot be said that such is not contemplated by the law. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

- Considering the victim's testimony concerning representations made by defendant and the statements in the defendant's proposal regarding profitable investment portfolio applications of the victim's funds, the evidence was sufficient to prove a scheme in violation of subsection (h) of former O.C.G.A. § 10-5-12. Moss v. State, 209 Ga. App. 486, 433 S.E.2d 692 (1993) (decided under former O.C.G.A. § 10-5-12).

Evidence was sufficient to support the defendant's convictions on those securities fraud counts in which the state proved the defendant made misrepresentations to the defendant's victims that the defendant would invest the money the victims gave the defendant; but on those counts when no such evidence was presented, the defendant's convictions were reversed. Rasch v. State, 260 Ga. App. 379, 579 S.E.2d 817 (2003) (decided under former O.C.G.A. § 10-5-12).

- When the evidence discloses that sales people were instructed by the defendants to make certain representations, which were ultimately shown to be false, for the purpose of securing purchasers of stock in the corporation, a finding that an unlawful scheme was entered into by and between the defendants and was perpetrated to defraud the investors is authorized, and supports conspiracy convictions. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under Ga. L. 1957, p. 134).

- It is not error for the trial court to refuse a requested charge based on the theory that without a relationship of trust or fiduciary relationship a purchaser has no right blindly to rely on general statements and must exercise precaution to ascertain their basis of fact. Curtis v. State, 102 Ga. App. 790, 118 S.E.2d 264 (1960) (decided under former Ga. L. 1957, p. 134).

- Although the Georgia Securities Act does have a provision tracking the language of Securities and Exchange Rule 10b-5, subsection (d) of former O.C.G.A. § 10-5-12, no cause of action was expressly provided for subsection (d)'s violation. Diamond v. Lamotte, 709 F.2d 1419 (11th Cir. 1983) (decided under former O.C.G.A. § 10-5-12).

Liability under former subsection (b) was predicated on control of agent, and habit and course of dealing may be considered in determining agency. DeBoard v. Schulhofer, 156 Ga. App. 158, 273 S.E.2d 907 (1980) (decided under former Code 1933, § 97-114).

- Director or officer of a corporation is not liable, merely because of the director's official character, for the fraud or false representations of the other officers or agents of the corporation or for fraud attributable to the corporation itself, if such director or officer is not personally connected with the wrong and does not participate in the wrong. Hamilton Bank & Trust Co. v. Holliday, 469 F. Supp. 1229 (N.D. Ga. 1979) (decided under former Code 1933, § 97-114).

- Outside directors of a corporation - i.e., those who are not full-time employees of the corporation - who exercise reasonable care in carrying out their duties are exempt from liability as controlling persons. Hamilton Bank & Trust Co. v. Holliday, 469 F. Supp. 1229 (N.D. Ga. 1979) (decided under former Code 1933, § 97-114).

- Plaintiff bears the burden of establishing that a given defendant is a "controlling person" under the provisions of subsection (c) of former O.C.G.A. § 10-5-14. Such defendant, however, may then assert the so-called "good faith" affirmative defense to "controlling person" liability. Binder v. Gordian Sec., Inc., 742 F. Supp. 663 (N.D. Ga. 1990) (decided under former O.C.G.A. § 10-5-14).

- In action seeking to impose liability under former subsection (c) of this section upon controlling officer of corporation, when there was evidence from which inference is authorized that sums from transaction were deposited in accounts controlled by such officer, the officer's failure to offer to return these amounts, if the jury believed the officer had in fact received them, estops the officer from asserting any lack of responsibility for the transaction. DeBoard v. Schulhofer, 156 Ga. App. 158, 273 S.E.2d 907 (1980) (decided under former Code 1933, § 97-114).

- Under former subsection (c) of this section, when one becomes aware of facts sufficient to put one on notice of an unauthorized act and affirms the act without further investigation, there may be an inference of willingness to assume concomitant risks. DeBoard v. Schulhofer, 156 Ga. App. 158, 273 S.E.2d 907 (1980) (decided under former Code 1933, § 97-114).

Purchaser who was given power of attorney to record the transfer of stock on the books of the corporation at the time of the sale was not thereby rendered jointly and severally liable for the sale of unregistered securities. Bell v. Sasser, 238 Ga. App. 843, 520 S.E.2d 287 (1999) (decided under former O.C.G.A. § 10-5-14).

Statute of Limitations

Common-law fraud.

- Common-law fraud claim, governed by four-year statute of limitations, was not reduced to the two-year period applicable to violations of securities laws simply because the alleged fraud involved the sale of stock. Stricker v. Epstein, 213 Ga. App. 226, 444 S.E.2d 91 (1994) (decided under former O.C.G.A. § 10-5-14).

- As a claim under former O.C.G.A. § 10-5-12 could not be characterized as a federally created remedy, federal equitable tolling principles did not apply, and such a claim, brought over two years after the purchase of stock, was time-barred. Wilkinson v. Paine, Webber, Jackson & Curtis, Inc., 585 F. Supp. 23 (N.D. Ga. 1983) (decided under former O.C.G.A. § 10-5-14).

- Cause of action for gross negligence in failing to discover and communicate the true facts and circumstances surrounding a corporation could arise solely by virtue of the securities laws as the laws exist at the time of the sales involved. No action to recover the purchase price of a security in violation of the securities law can be brought after two years from the date of such sale or contract for sale. Dehler v. Setliff, 143 Ga. App. 430, 238 S.E.2d 723 (1977) (considering sales made before April 1, 1974, but noting two-year limitation appears in both Ga. L. 1957, p. 134, § 13(a), and subsection (c) of former Code 1933, § 97-114; decided under former Code 1933, § 97-114).

- Applicable statute of limitations to be applied with respect to claims brought pursuant to § 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10(b)(5) is the two-year limitations period found in former O.C.G.A. § 10-5-14. Pidcock v. Sunnyland Am., Inc., 682 F. Supp. 1563 (S.D. Ga. 1987), rev'd on other grounds, 854 F.2d 443 (11th Cir. 1988) (decided under former O.C.G.A. § 10-5-14).

For purposes of a suit brought pursuant to § 10(b) of the federal Securities Exchange Act and Rule 10b-5 promulgated thereunder, against the actual sellers of the securities in question, Georgia's two-year statute of limitations applies. Currie v. Cayman Resources Corp., 595 F. Supp. 1364 (N.D. Ga. 1984), aff'd in part, rev'd in part on other grounds, 835 F.2d 780 (11th Cir. 1988) (decided under former O.C.G.A. § 10-5-14).

- Two-year limitation period in this section, rather than the four-year limitation period pertinent to common-law fraud actions (see now O.C.G.A. §§ 9-3-31 and51-6-1 et seq.), is applicable to federal security cases, as the state security law more nearly effectuates the goals of the federal securities laws. Osterneck v. E.T. Barwick Indus., Inc., 79 F.R.D. 47 (N.D. Ga. 1978) (plaintiffs allegedly induced to trade stock by misrepresentations in financial statements; decided under former Code 1933, § 97-114).

- Two-year state limitation applies to federal churning claims asserted under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. Miller v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 572 F. Supp. 1180 (N.D. Ga. 1983) (decided under former O.C.G.A. § 10-5-14).

- Two-year period under former O.C.G.A. § 10-5-14 begins to run at the moment plaintiff actually discovered, or in the exercise of reasonable diligence should have discovered the alleged federal securities law violation. Pidcock v. Sunnyland Am., Inc., 682 F. Supp. 1563 (S.D. Ga. 1987), rev'd on other grounds, 854 F.2d 443 (11th Cir. 1988) (decided under former O.C.G.A. § 10-5-14).

- When a state limitation period is applied in an action for violating federal securities law, federal law determines when the limitation period begins to run. Osterneck v. E.T. Barwick Indus., Inc., 79 F.R.D. 47 (N.D. Ga. 1978) (decided under former Ga. L. 1957, p. 134, as amended).

Statute of limitations in an action under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 is taken from the state law remedy which bears the closest resemblance since the federal securities laws do not establish a specific time period in which an action must be filed, but the time at which the action accrues and the statute begins to run is a question of federal law. Kennedy v. Tallant, 710 F.2d 711 (11th Cir. 1983) (decided under former O.C.G.A. § 10-5-14).

- Two-year statute of limitations was not tolled with regard to the plaintiff's claim under subsection (c) of former O.C.G.A. § 10-5-14 during arbitration proceedings against the defendants since the arbitration proceedings had been dismissed against the defendants because the defendants were never served with the time, date, and location of the arbitration proceedings. Mitcham v. Blalock, 214 Ga. App. 29, 447 S.E.2d 83 (1994) (decided under former O.C.G.A. § 10-5-14).

- Statements made to investors to the effect that counsel were working to recover misappropriated assets, which would be used to repay the investors, were essentially opinions that did not support fraudulent concealment so as to toll the two-year limitation of subsection (d). Barton v. Peterson, 733 F. Supp. 1482 (N.D. Ga. 1990) (decided under former O.C.G.A. § 10-5-14).

- Former O.C.G.A. § 10-5-14 applied in an action brought under § 10(b) of the federal Securities and Exchange Act of 1934. Though the statute of limitations is borrowed from state law, tolling is governed by federal law. Leonard v. Stuart-James Co., 742 F. Supp. 653 (N.D. Ga. 1990) (decided under former O.C.G.A. § 10-5-14).

RESEARCH REFERENCES

Am. Jur. 2d.

- 69A Am. Jur. 2d, Securities Regulation - State, §§ 11 et seq., 80, 81, 92, 96.

- 79A C.J.S., Securities Regulation and Commodity Futures Trading Regulation, §§ 489, 532, 540 et seq., 552 et seq., 566 et seq., 577 et seq.

- Rights inter se of customers whose securities have been repledged by broker, 1 A.L.R. 664; 24 A.L.R. 479; 48 A.L.R. 803; 76 A.L.R. 794.

Liability of public corporation for money received by it for unlawfully issued instrument of indebtedness, 7 A.L.R. 353.

Measure of damages for fraud inducing the purchase of corporate securities, 57 A.L.R. 1142; 108 A.L.R. 1060.

Fraud: necessity for knowledge of falsity of representation as to value, inducing subscription to or purchase of corporate stock or other securities, 73 A.L.R. 1120.

Duty of stockbroker, in performance of obligation to deliver certificate of stock or other security, to tender identical certificate or security, 75 A.L.R. 746.

Duty of stockbroker in respect of demand for additional margins before selling securities carried on margin, 76 A.L.R. 1517.

Delay by stockbroker in executing customer's order to buy or sell, or in tendering to customer securities purchased on his account, 77 A.L.R. 308.

Liability of transferrer of corporate stock for calls or assessments as affected by insolvency, fraud, or illegality in transfer, 86 A.L.R. 57.

Personal liability of directors to holders of corporate securities because of false statements therein, 99 A.L.R. 852.

Damages for fraud inducing the purchase of corporate securities, 108 A.L.R. 1060.

Assignability or survivability of cause of action to enforce civil liability under securities Acts, 133 A.L.R. 1038.

Liability of seller to purchaser of invalid nonnegotiable public warrants, bonds, certificates, 139 A.L.R. 1426.

Personal civil liability of corporate officers and directors in case of sale of bonds or stock in violation of statutory requirements, 144 A.L.R. 1356.

Effect of fraud to toll the period for bringing action prescribed in statute creating the right of action, 15 A.L.R.2d 500.

Who, other than officers and directors of a corporation, is civilly liable under the state securities Acts (Blue Sky Laws) for purchase price of unauthorized securities, 59 A.L.R.2d 1030.

Corporate insider's nondisclosure of information to seller or purchaser of corporation's stock as manipulative or deceptive device prohibited by § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), 22 A.L.R.3d 793.

Stockbroker's liability for allegedly "churning" or engaging customer's account in excessive activity, 32 A.L.R.3d 635.

What amounts to participation by corporate officer or agent in illegal issuance of security, in order to impose liability upon him under state securities regulations, 44 A.L.R.3d 588.

Attorney's preparation of legal document incident to sale of securities as rendering him liable under state securities regulation statutes, 62 A.L.R.3d 252.

Duty to disclose material facts to stock purchaser, 80 A.L.R.3d 13.

What gives rise to right of recession under state blue-sky laws, 52 A.L.R. 5th 491.

When is it unnecessary to show direct reliance on misrepresentation or omission in civil securities fraud action under § 10(b) of Securities Exchange Act of 1934 (15 USCS § 78j(b)) and SEC Rule 10b-5 (17 CFR § 240.10b-5), 93 A.L.R. Fed. 444.

Who may be liable in civil action, under § 12(1) of Securities Act of 1933 (15 USCS § 77l(1)), for selling or offering securities for sale in violation of registration or prospectus provisions of Act - post-Pinter cases, 105 A.L.R. Fed. 725.

Who may be liable in actions under § 12(2) of Securities Act of 1933 (15 USCS § 77l (2)), on basis of false or misleading statement in prospectus or oral communication, 106 A.L.R. Fed. 753.

Defense of ignorance of untruth or omission in civil action under § 12(2) of Securities Act of 1933 (15 USCS § 771(2)), 109 A.L.R. Fed. 444.

Conduct creating civil liability, under § 12(2) of Securities Act of 1933 (15 USC § 77l(2)), based on misrepresentations in or omissions from prospectus or oral communication regarding sale of security, 112 A.L.R. Fed. 387.

Standard of liability in private actions under § 14(a) of Securities Exchange Act of 1934 (15 USCS § 78n(a)) and SEC rules thereunder, 125 A.L.R. Fed. 377.

Scienter requirement in actions under antifraud provision of Investment Advisers Act (15 USCS § 80b-6), 133 A.L.R. Fed. 549.

What constitutes "willfulness" for purposes of criminal provisions of federal securities laws, 136 A.L.R. Fed 457.

Limitations of actions with respect to actions for contribution under § 10(b) of Securities Exchange Act of 1934 (15 USCA § 78j(b)) and SEC Rule 10b-5 (17 CFR § 240.10b-5), 146 A.L.R. Fed. 643.

Assertion of double jeopardy defense based on sanction sought or imposed during civil or administrative proceeding initiated by securities and exchange commission or national securities organization or exchange, 147 A.L.R. Fed. 585.

What constitutes "inquiry notice" sufficient to commence running of statute of limitations in securities fraud action - Post-Lampf cases, 148 A.L.R. Fed. 629.