Joint And Several Liability

An agent at Whitfield Brokerage sells securities in violation of the Uniform Securities Act. The purchaser sues the agent and also names Whitfield itself, which employed and supervised the agent. Under the Act, Whitfield is:

1. A.Liable jointly and severally with the agent as a controlling person, unless it proves it could not reasonably have known of the violationCorrect. Employing and controlling firms share liability, subject to the reasonable-care defense they must prove.
2. B.Not liable, because a broker-dealer's responsibility for its agents is enforced only through Administrator sanctionsAdministrative sanctions exist in addition to, not instead of, the purchaser's private civil remedy.
3. C.Not liable, because civil liability under the Act attaches only to the individual who made the saleThe Act expressly extends liability to controlling persons and to those who materially aid.
4. D.Liable only for the portion of the purchaser's loss that exceeds what the agent personally can payJoint and several liability means the purchaser may recover the full amount from either defendant.

Why: A person who directly or indirectly controls a seller, including an employing broker-dealer, is liable jointly and severally with the seller to the same extent, unless the controlling person proves it did not know and in the exercise of reasonable care could not have known of the facts constituting the violation.

A general partner in Sable Basin Drilling Associates holds a working interest in the program's wells, alongside a limited partner investor who holds an overriding royalty interest in the same wells. Which feature distinguishes the general partner's working interest from the limited partner's overriding royalty interest?

1. A.The general partner's interest is exempt from dry hole costs.Wrong. It is the opposite: the working interest bears dry hole costs; the overriding royalty is exempt.
2. B.The general partner's interest shares in both production revenue and operating and development costs.Correct. That combined exposure to revenue and cost is the defining feature of a working interest.
3. C.The general partner's interest converts automatically to an overriding royalty once the well pays out.Wrong. Payout-triggered conversion describes a reversionary working interest, not this fact pattern.
4. D.The general partner's interest receives revenue only after the overriding royalty holder is paid.Wrong. Priority of payment is not the tested distinction; the defining difference is cost exposure, not payment order.

Why: A working interest owner shares proportionately in both production revenue and the program's operating and development costs, including dry hole costs on unsuccessful wells. An overriding royalty interest is the opposite: a cost-free share of revenue with no obligation to fund costs. The working interest also carries operating control and, for a general partner, unlimited and joint and several liability for program obligations. The revenue-versus-cost-and-revenue split is the tested distinction, not the identity of who holds each interest.

An agent at Dunmore Securities sells unregistered nonexempt securities to a customer. The customer sues the agent, the branch manager who approved the trade tickets, and a Dunmore compliance analyst who reviewed the file and raised no objection. The analyst proves she reviewed only the trade's suitability documentation, had no information suggesting a registration problem, and could not have discovered it with reasonable care. Under the Uniform Securities Act, the analyst is:

1. A.Not liable, because only the person who actually sold the securities may be sued under the ActThe Act expressly reaches controlling persons, partners, officers, directors, and employees who materially aid.
2. B.Jointly and severally liable, because anyone who reviews a file containing a violation has materially aided itMaterial aid can create liability, but the reasonable-care defense is available and was established here.
3. C.Jointly and severally liable, because the reasonable-care defense is available only to the employing broker-dealerThe defense is available to any person sued under the material-aid provision, not just the firm.
4. D.Not liable, because she carried her burden of proving she did not know and could not reasonably have known of the facts constituting the violationCorrect. The Act's affirmative defense excuses a person who meets that burden, which the stem says she did.

Why: Persons who materially aid a violation are jointly and severally liable with the primary violator, but the Act provides an affirmative defense for one who sustains the burden of proof that she did not know, and in the exercise of reasonable care could not have known, of the facts constituting the violation.

An agent at Brentmoor Securities sells unregistered, nonexempt securities to a dozen customers. The branch manager approved each trade after a cursory glance, and the firm's president had received two internal memos warning that the product was not registered. The defrauded customers sue. Under the Uniform Securities Act's civil liability provisions, who may be held liable?

1. A.The branch manager and the president only if they personally received commissions on the salesLiability turns on control and material aid, not on whether the person shared in the compensation.
2. B.The broker-dealer alone, because a firm is responsible for the acts of its associated personsThe firm is liable, but the statute does not make it the exclusive defendant.
3. C.The agent, the branch manager, and the president, jointly and severally, unless they prove they neither knew nor reasonably could have knownCorrect. Control persons, officers, and materially aiding employees are jointly and severally liable subject to that affirmative defense.
4. D.The agent alone, because he is the only person who dealt directly with the customersThe Act reaches well beyond the individual who executed the sale.

Why: The Act imposes liability on the seller and, jointly and severally with the seller, on every person who directly or indirectly controls the seller, every partner, officer, and director, and every employee who materially aids in the sale. Those persons escape liability only by proving they did not know, and in the exercise of reasonable care could not have known, of the facts giving rise to the liability. The two warning memos make that defense very difficult for the president, and the manager's approval of each trade is material aid.