Burden Of Proof

Halverton Reach Securities sold unregistered, nonexempt securities to Dorotea Pisani. She sues the firm and also names Ambrose Lyle, a director of the firm, who signed nothing connected with the offering and testifies that he never heard of it. Under the Uniform Securities Act's civil liability provisions, the question whether Lyle knew or could have known of the facts giving rise to the liability is resolved by:

1. A.requiring Pisani to prove that Lyle actually knew of the violationThe plaintiff does not have to prove the control person's knowledge. Status plus the primary violation is enough to state the claim.
2. B.requiring Pisani to prove that Lyle was negligent in failing to discover the violationNegligence is not an element the plaintiff must plead. The reasonable-care question arises only as the defendant's affirmative defence.
3. C.requiring Lyle to prove that he did not know, and in the exercise of reasonable care could not have known, of the facts giving rise to the liabilityCorrect. The Act places the burden of that defence squarely on the partner, officer, director or material aider.
4. D.treating Lyle's liability as absolute, with no defence available to himThe statute does supply a defence. It is simply his to prove rather than hers to disprove.

Why: The Act extends joint and several liability to every partner, officer and director of a seller, every person occupying a similar status or performing similar functions, every employee who materially aids in the sale, and every broker-dealer or agent who materially aids. Each such person is liable TO THE SAME EXTENT AS the seller UNLESS that person sustains the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which liability is alleged. The burden sits on the defendant. Pisani proves the primary violation and Lyle's status; Lyle then has to prove himself out.

In an enforcement proceeding, a seller claims his sales were exempt private placements. Regarding the exemption, the burden of proof rests on:

1. A.The seller claiming the exemptionCorrect. The claimant must establish the exemption's elements.
2. B.The Administrator, who must disprove all exemptionsWrong-but-tempting. Requiring the state to negate exemptions inverts Sec. 402(d).
3. C.The investors who purchased the securitiesWrong. Purchasers bear no burden on the seller's exemption claims.
4. D.A neutral court-appointed examinerWrong. No examiner mechanism exists for exemption proof.

Why: In any proceeding under the Act, the party claiming an exemption or an exception from a definition bears the burden of proving it; the state need not negate every possible exemption. Citation: Uniform Securities Act Sec. 402(d). Takeaway: claim the exemption, carry the burden.